Applied Philosophy

The first shows the decline of treasuries held by the Federal Reserve Banks, while their credit has doubled:

This has a serious implication on the soundness of the dollar. The second graph shows the dependence of the US on imported goods and services:

That would is not a problem by itself, but taken in conjunction with the next graph that shows the increase in federal debt held by foreigners:

The conclusion must be ominous.

The last graph shows the death of the last profitable sector in the US, namely the financial sector:

In ancient times people had to perform labour to extract from nature the substances they needed to survive, thus direct labour resulted in direct satisfaction.

Later barter developed where people would perform labour and extract from nature more than they needed, afterwards they would exchange their surplus with a different substance extracted by someone else. Thus in this situation past labour was exchanged for past labour.

Later indirect barter through a monetary commodity developed. Now the two people bartering did not have to meet and exchange their goods in one operation, instead surplus goods are exchanged for a monetary commodity, which in turn is exchanged for needed goods. The monetary commodity, like all commodities, represented past labour and it was also the most liquid thus guaranteeing that the second exchange operation will be completed.

Later (much later) gold and silver emerged as the final monetary commodities. The direction of development went towards mined products from the moment they became abundant to fulfil the role of money. The first mined commodity to play that role was salt, which did not need refining.

A British Guinea

A piece of minted gold contain the following labour: labour to discover the gold, labour to mine the gold ore, labour to refine the gold, labour to mint the gold, labour to secure the gold through this process. When one gives up his surplus product for a piece of gold he is exchanging past labour with past labour in monetary form. The new form has many advantages: it does wear out or perish, it is much denser making it easer to store and transport and most importantly it is liquid.

“Gold is the indispensable regulator of debt in society. … Well, we have just tried [bureaucratic regulation of the level of debt] and found that whenever irredeemable promises are to be liquidated by issuing more irredeemable promises, debt proliferates beyond any limit.
…
People wake up and realize that they are surrendering real goods and real services in exchange for irredeemable promises.”

-The Anti-Gold Gospel According to Kaletsky by Antal E. Fekete

Now we live in an age where all the developments of the last ten thousand years are being thrown away and replaced by new un-tested gimmicks. We throw away monetary commodities and replace them with fiat currency, but do we really know what we are getting ourselves into?

As I tried to show in The Printing Press is a Harsh Mistress one unit of fiat currency is equivalent to one unit of public debt on the central bank balance sheet. If one accepts a fiat currency then he will not be accepting past labour but instead the promise that future labour will generate enough public income (through tax, excise, et cetera) to service the public debt. Thus selling goods for fiat currency becomes an exchange of past labour for future labour.

Imagine a farmer exchanging his surplus wheat for the hunter’s surplus winter catch. The farmer fulfils his obligation at harvest but has to wait six months for his share. What would happen if the winter’s catch were too low? This is why meat is smoked or cured and exchanged at harvest time. The farmer gets last year’s catch instead of next year’s catch.

The problem with future labour is not only unforeseen circumstances but more importantly is that before generating a surplus enough has to be generated to pay the workers, but since they too are paid with fiat currency this will only increase the amount of future promises. This cycle means that the quantity of money has to increase exponentially at a rate outpacing the economy. As more money is created its exchange value drops, the dollar has lost about 97.7% of its value (gold from $20.67/oz. to $900/oz.) since becoming a fiat currency.

A US Gold Dollar

There is no need to add the phrase “In God We Trust” to coins with intrinsic value because if you have them then your prayers have already been answered by the Almighty.

In Zimbabwe’s Monetary Policy I wrote the following:

The public in the west has completely accepted the neo-colonial narrative that blacks (and other non-Europeans) are unable to govern themselves, that not only they must adopt western ideologies but also westerners should supervise them. The most corrupt political administrations, currently under investigation, unashamedly talk about ‘teaching’ Africa ‘good governance’!

A Zimbabwean commentator sums up my sentiment when he writes:

“THE overriding principle of global politics as defined by the collective foreign policy of Western elites is centred on the vainglorious assumption that misdeeds are only performed by others while the West is only culpable for inadvertent errors or oversights.

The Western media has no problems portraying to the world the lucidity of the democracy of their own countries while they bestow upon themselves the righteous role of being the custodians of the feelings and emotions of people in far away less developed countries.

The furious denunciation of the crimes of others is but one specialty of many journalists in the mainstream Western media.”

-Western Double Standards Exposed by Reason Wafawarova, 22 March 2009

Here is the latest example of Western commentary on Zimbabwe’s situation:

“The currency with the never-ending string of zeroes is quickly fading into history, just two months after the latest notes were printed by the inexhaustible central bank. Also disappearing is Zimbabwe’s phenomenal level of hyperinflation, which last year reached a stunning 89.7 sextillion per cent (a number expressed with 21 zeroes), making it the most extreme hyperinflation crisis of any country in modern times.

Zimbabwe’s new coalition government has cracked both problems with an absurdly simple solution: It has abruptly switched to foreign currencies, allowing customers to pay for products with U.S. dollars or South African rand or Botswana pula.
…
Empty shelves have been filled. Prices of staples such as milk and eggs are still twice as expensive as in neighbouring South Africa, but they are half as expensive as they were in January. People are shopping again, and merchants are stocking their inventories again.

Those goods are still unaffordable for many people, of course. The unemployment rate is estimated at 94 per cent, wages are often unpaid, and the vast majority of people are dependent on donated food rations.
…
Investors, including Canadians, are watching closely. Toronto-based Caledonia Mining Corp., which suspended production at its Blanket gold mine in Zimbabwe last October, is considering a reopening of the mine within the next few weeks because the new government is promising that producers can export a much higher percentage of their production. The mine could produce up to 40,000 ounces per year.
…
As recently as the early 1990s, Zimbabwe was one of Africa’s leading economies. Its decaying infrastructure could be still be revived, especially if the government is able to halt the invasions of the dwindling white-owned commercial farms that have plagued the agricultural sector for the past nine years.

One study has predicted that the country could be self-sufficient in agriculture within a year if the invasions were reversed.”

-How Zimbabwe slew the dragon of hyperinflation, March 23, globeandmail.com [my emphasis]

One: Solving hyperinflation by dollarisation is like curing cancer by taking the patient outside and shooting him execution style. Hyperinflation in Zimbabwe has not been solved; instead Zimbabwe’s new government has relinquished the people’s sovereign right to issue money and opened the country to the barbarians.

Two: Again we must ask the same old question: What good is ‘filled shelved’ if the average consumer cannot afford to buy anything? All over the world workers do not earn enough to consume their own products forcing whole countries to depend on the export sector for growth. Now countries like Germany, Japan, South Korea and China are crashing because the world’s only consumer-market, i.e. the US, has crashed.

Three: Of course there will be foreign investment coming into Zimbabwe, if the unity government holds, and there will be a tremendous boom (relatively speaking). The question is will the economy of Zimbabwe be sound or not. Argentina crashed in 2001, after about two decades of Western-cooked neo-liberal polices, then it followed monetarist receipts and an export-boom followed for a couple of years only for Argentina to come back at exactly where it was eight years ago: at the brink of collapse!

The only thing the policies of the unity government will achieve is to re-connect Zimbabwe to the global system and turn it into another resource-exporting country with no national industry, wealth-accumulation or national currency. Russia, who is still a sovereign country, is crashing because the price of natural resources has crashed and its economy crumbling under the weight of dollar-denominated debts; does anyone believe Zimbabwe will fare better in the globalised economy?

All the world’s trade is currently being harnessed by dollar-hegemony and directed towards the only country on the face of the world that can print as much dollars as it wants: The United States.

Trade, which, like blood, should circularly flow,
Stopp’d in their channels, found its freedom lost:
Thither the wealth of all the world did go,
And seem’d but shipwreck’d on so base a coast.

-John Dryden, The Year of Wonders, 1666.

Four: This is what I like to call: Pure Knavery! I tried to put the white-owned farms in Zimbabwe in context in Zimbabwe’s Monetary Policy, this is a very complex subject and has historical roots most western readers not only ignore but also refuse to consider altogether. It suffices to say that white-owned farms were predominantly cash-crop farms growing tobacco for export and not food for the poor of Harare, self-sufficiency can only be achieved by communal farming, an anathema to neo-liberal ideologues-no wonder the world is facing a famine.

The latest news from Zimbabwe:

“Zimbabwe badly needs Western donors and foreign investors to rescue its economy but external help will depend on the creation of a democratic government and reforms such as reversing plans for nationalization.

Economists said if the Washington-based IMF really was looking at a package, it would be designed to force a switch from Mugabe policies such as the printing of money and seizure of land that have caused hyperinflation and economic collapse.

“It will be extremely fussy with the conditions,” Harare-based economist John Robertson, who has met previous IMF and World Bank delegations, said. “They will set very tough conditions, which we deserve because we have behaved badly.”"

-Zimbabwe says IMF ready to offer immediate help, Reuters [my emphasis]

The “Western donors” are already on the move:

“Australia ended a long-standing ban on non-humanitarian aid to Zimbabwe Wednesday, saying it wanted to help Prime Minister Morgan Tsvangirai relieve the suffering of his nation’s people.
…
Australia had repeatedly called on Zimbabwe President Robert Mugabe to step down, imposing financial sanctions and travel bans on members of his regime, prohibiting arms sales and cutting defence and ministerial links.”

-Australia lifts ban on Zimbabwe aid, AFP [my emphasis]

Australia was more than happy to let the people suffer until they “democratically elected” the candidate wanted by the West.

The IMF delegation to Zimbabwe is the modern day equivalent of a punitive expedition going up the Zambeze river to punish the insolent locals, who thought they could exercise sovereignty in the face of world-dominating imperial rule, helped of course by comprador politicians and self-flagellating economists.

The newly installed prime minister of Zimbabwe, Morgan Tsvangirai, is the worst kind of traitor; he has just surrendered the sovereign right of the people of Zimbabwe to issue money to the United States:

“Zimbabwe’s prime minister, Morgan Tsvangirai, has taken an important step toward establishing the new power-sharing government’s credibility by fulfilling a commitment to pay the army and other public-sector workers in dollars because the national currency is worthless.”

—Zimbabwe starts paying soldiers in US dollars, 19 Feb, The Guardian

From now on all assets in Zimbabwe will be priced in US dollars:

“Zimbabwe shares, battered by the world’s highest inflation rate and a decade-long recession, may rebound after the stock exchange reopened yesterday from a three- month suspension with listings re-denominated in U.S. dollars.
…
Reopening the exchange was one of the first steps by the coalition government formed last week as part of a power-sharing agreement between Mugabe, 84, and opposition leader Morgan Tsvangirai.
…
Zimbabwe may be forced to use a combination of the dollar, the rand and other currencies, Tsvangirai said.”

—Zimbabwe Stocks May Soar as Bourse Reopens in Dollars, 20 Feb, Bloomberg

Dollarisation of the economy is the worst kind of high treason, because it surrenders one of the most important sovereign rights of the people, giving up parts of the country (as the Germans did at the end of the Great War) is the height of honour compared to it. Even the most inflated fiat currency in the history of the world is preferable to this!

If they have any US dollars (they don’t) they should then send it all to the mint in South Africa and request the following coin:

Every one troy ounce of pure gold would make eight zimbi’s. The low weight and purity would ensure that there is no foreign demand for the coin from investors.

As to the Zimbabwean dollar, they would stop printing it but keep accepting it for public debt and taxes. People will pay the government with dollars while accepting only zimbi’s, very quickly all the dollars will be absorbed and there would be only zimbi’s.

The state can also exchange one zimbi for 4.66 gram of 22K gold (or equivalent), thus putting a 10% seigniorage on the coin; for every thousand coin given to the public the state makes a profit of a hundred zimbi.

The zimbi would have turned the monetary system of Zimbabwe from the weakest on Earth to the only one based on gold, thus ensuring that Zimbabwe becomes the world’s only country with a trustworthy currency. Capital would pour into Zimbabwe from all over the world and its economy would boom. The opposite is now happening:

“Reconstructing Zimbabwe may cost as much as five billion US dollars (four billion euros), Prime Minister Morgan Tsvangirai said Friday as he opened his hands to neighbouring countries.
…
Motlanthe said South Africa, chair of the Southern African Development Community (SADC) bloc, had directed regional finance ministers to develop a plan to help Zimbabwe, and again called for sanctions to be lifted.”

—Reconstructing Zimbabwe may cost $5bln, 20 Feb, AFP [my emphasis]

They might not have dollars ‘printed’ in the US, but they certainly do have gold mined in Africa:

“The Vice-President of Zimbabwe has been accused of trying to sell millions of dollars in gold nuggets and diamonds in defiance of international sanctions.
Joyce Mujuru used her daughter as a go-between to seek a deal for the gold, according to Firstar, a commodities trader based in Britain, which says that it was approached in November.
…
Firstar claims that Mrs Mujuru’s daughter and Spanish son-in-law, Nyasha and Pedro del Campo, offered to sell 3,700kg of gold for $90 million to Firstar Europe Ltd, a precious metal dealer. At the present market rate, one kilo of gold sells for $30,700 (£21,500). ”

—Zimbabwe’s vice-president foiled in 3,600kg gold deal, Times Online

Three tonnes of gold (let’s assume the 700kg pays all the costs) would make 771,803 zimbi’s; instead of using it in their own country they want to send to Europe in exchange of ‘paper’!

Successive Chinese dynasties built and maintained a magnificent wall to protect their empire. The Ming dynasty (an ethnic Han dynasty) maintained this great barrier and improved it to protect itself from the Manchu tribes in the northwest. The tribes were never able to overcome the wall, but a disgruntled general (Wu Sangui) decided to open the gates at Shanhai Pass and let the Manchu tribes enter.

The result was the fall of the Ming dynasty and its replacement by the Qing dynasty, a non-Han dynasty. The Qing changed China in a way that weakened it—they weakened the cultural bonds of society to bolster their domination—and laid it open to the Western powers in the nineteenth century. China has yet to restore its place in the world after four hundred years of one general’s treasonable act. Morgan Tsvangirai has just opened the gates of Zimbabwe for the barbarians.

Introduction

Today I would like to re-visit a subject that I have already covered twice. In When Gold is Worthless and Hyperinflation and Gold Bugs I argued that gold is not really the safe haven that some advertise it to be. My concern here is historical rather than economic, I am not interested in investment or wealth management; what concerns me is society and the ability of the economy to benefit all members of society.

There is a strong egotistical streak hidden behind the mask of Individualism, the predominate philosophy of gold bugs and those interested in preserving their wealth from the approaching hyperinflationary storm. Egotism is a shortsighted stance that eventually costs more at the end than what it promises at the beginning. Those who recognise that the system of fiat money is doomed are duty bound to do something about it, trying to save only themselves by buying gold is an egotistical solution that will fail at the moment it is most needed.
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In Sovereign Credit is State Usury I mentioned a post about usury, the following is what I planned as the first section of that post.

Usury Forbidden

Although usury was invented in ancient Sumer all three Abrahamic religions prohibit the taking of interest on debt. In ancient times money was extended by the temples to the farmers, secured by their land, after four years they either paid or the amount was doubled. When debts on the farmers grew too large there would be a general amnesty and all debt owed by farmers would be annulled. To this day orthodox Jews, marginal Christian sects and devout Muslims will have nothing to do with usury, neither a lender nor a borrower.

The current worldwide domination of usury is the result of the worldwide domination of Europe and Western culture in general for the last couple of centuries, thus to understand how this happened we have to review the history of usury in Europe.
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“Flow my tears, fall from your springs
Exil’d for ever: Let me mourn
where nights black bird hir sad infamy sings,
there let me live forlorn.”

-Flow my Tears, John Dowland

In The Magical Jet Engine I wrote about a war in the realm of pure thought between the deflationists and the inflationists. At that time the inflationists were attacking with waves of record high prices, gold was leading the left, while oil led the right’s charge with one thought on their mind: kill deflation.

Some deflationists turned coat and joined the inflation train, others broke rank and fled, but a few-an obstinate few-held their positions and refused to give. By September the tide had turned and inflationists dared not be seen in public, while deflationists gloated in the unprecedented bust that had swept all talk of inflation away leaving nothing but mayhem and carnage in its train.
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In Liquidating the Debt of the United States I showed how the US raised the Federal Funds Target Rate in 1980 to liquidate the debt accumulated from years of deficit spending to finance the Viet Nam war. The high interest rates also helped highly indebted companies to liquidate their past debts. Here is one example:

“The use of defeasance in modern corporate finance began in 1982 when Exxon bought and put into an irrevocable trust $312 million of US government securities yielding 14% to provide for the repayment of principal and interest on $515 million of old debt paying 5.8% to 6.7% and maturing  in 2009. Exxon removed the defeased debt from its balance sheet and added $132 million – the after tax difference between $515 million and $312 million – to its earnings in that quarter. In-substance defeasance may well the magic bullet to get out from the curse of over leverage.”

-Treasury’s “Troubled Assets Relief Program” in Trouble by Henry C. K. Liu

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Introduction

As the financial crisis went mainstream talk about the US national debt increased, the media and all kinds of commentators are discussing the huge increase in the debt during the Bush presidency and the ways to pay it off. As usual a lot of nonsense is being said on the subject. In The Humility of Uncle Scrooge I argued against those who thought the US debt could be paid back as if it is a personal overdraft.

Others, who are wise enough to see that the debt can’t just be repaid, suggest that the US should “negotiate” with its major creditors (namely China & Japan) to restructure the debt in exchange of political “concessions”. This is basically what third world countries do when they default on their debt, they get long-term financing from the IMF and in exchange open up their internal markets for foreign capital, lift all regulations on investors and cut welfare spending.

What those who make this proposal miss are the following simple truths:
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The Last Remission

Since September almost everyone has become a financial expert with opinions and plans, I had nothing to say because I have already discussed the crises back in August (see Bagehot on Money & Zimbabwe’s Monetary Policy). Now that the moment of crises has passed people are returning to the diverse issues they usually discuss, so I thought I would look ahead and chart the future to prepare for the next surprise.

“Normally, there is a lag of about a year or so between money creation and inflation but eventually, what’s recently happened will result in massive inflation, a much lower U.S. dollar and a soaring gold price.”

-Financial History in the Making, by Mary Anne and Pamela Aden

The amount of money created in the last couple of months has transformed fiat money creation from a quantity change into a quality change. Like a straw added to the pile on the back of a camel, adding one more straw above a certain limit transforms the pile into a crushing weight, only this money was more like the rock that broke the camel’s back.
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I recently heard, on a web-cast, a gold bug saying that the coming hyperinflation-due to the $700 billion Paulson plan-will be beneficial to those who have gold. Is that correct? The answer is a resounding NO.

Inflation does not increase the value of bullion it just changes its price in fiat currency. The price of a house in the US measured in gold is about the same it was in 1970, while in dollars the price has multiplied. The value of gold remained the same while the price increased twenty times.
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“Most interesting is the observation that the Euro’s slide against the US$, is the near-perfect inverse image of the US-dollar’s climb against the Russian rouble. The emergence of militarist Russia, ready to aim its nukes at Europe, and a stranglehold over Europe’s energy supply, has triggered a mini-flight of capital from the Euro and the Russian rouble. In contrast, the US-dollar, backed by the world’s most powerful military, wins by default as a safe haven.”

Gary Dorsch, “Maverick McCain” and the Resurrection of the US$ [my emphasis]

In Monetary Weapons I criticised Gary Dorsch for arguing that the ECB will force the Fed to hike rates in order to strengthen the dollar; my argument was simply that the Fed is backed by real military power while the ECB is just a central bank.

In his latest article Gary Dorsch beautifully demonstrates that the recent decline in the Euro was brought on by the Russian-Georgian conflict. I agree with his analysis and would add that in my opinion the US encouraged the Georgian leadership to invade South Ossetia in part to show the feebleness of the European position (I repeat in part). The Euro cannot and will not become a reserve currency if the Europeans are exposed to foreign powers.

In this series of posts I will be discussing Lombard Street: A Description of the Money Market By Walter Bagehot (the text is available on the Internet). The book discusses the financial system of Britain circa 1870. I will be quoting whole paragraphs, with emphasis from me, and then commenting on them. The fifth part will handle the final two chapters and the appendix.
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When third world countries that had adopted the so-called ‘socialist’ system started to collapse in the seventies and early eighties they pointed to the future of the whole socialist block, they were the canary in the mine. The imported system with its western symbols and nomenclature was grafted by force on these countries’ societies, this left them extremely weak and so they failed before the countries that exported the system to them did.

The grafting of western liberal democracy on weak third world countries-with imported symbols, nomenclature, foreign educated leaders and deadly force where resistance is encountered-has already produced several victims: eastern Europe, the Asian Tigers, Russia, Argentina and last but not least Zimbabwe.
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