Why Does Fiat Seemingly Work?

Fiat is a perversion of value, it may act as a medium of exchange but it is conceived in deceit, backed by violence and reliant on the apathy, ignorance and insouciance of the slave population. There are no surviving long term fiat currencies that hold or behave as a store of value, they all have a 100% mortality rate in the long term but gold and silver on the other hand…as Mark Twain said: ‘It is easier to fool someone than convince them that they have been fooled’.

To clarify Gresham’s Law below that ‘bad money’ drives ‘good money’ out. By looking to the work of Carl Menger on hoarding and marketability, one can achieve a greater understanding of the errors in Gresham’s Law and by definition, bad and good are dualisms and bad money is not money! Courtesy of Peter Tenebrarum @ Acting Man:

Introducing Money

Imagine three men living on a small island. Toni is mining the local salt mine, and apart from him there are Pete the fisherman and Tom the apple grower and their families. They have a barter trading system set up: Toni exchanges his salt for Pete’s fishes and Tom’s apples, who in turn exchange fishes and apples between each other.

One day Pete says: “I have an idea. Instead of fish, I will from now on give you pieces of papyrus with numbers marked on them”. Papyrus grows in great quantities nearby, but has so far not been of practical use to any of the islanders. Pete continues: “One papyrus mark will represent 1 fish or 5 apples or 2 bags of salt (equivalent to current barter exchange rates). This will make it easier for us to trade among ourselves. We won’t have to lug fishes, apples and salt around all the time. Instead, we can simply present the pieces of papyrus to each other for exchange on demand.”

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John Law at a young age – the world’s first Keynesian economist

Painting by Casimir Balthazar

In short, Pete wants to modernize their little island economy by introducing money – and he already has one of those new papyrus notes with him, which he is eager to trade for salt. However, the others would immediately realize that there is a problem: the papyrus per se is not of any value, since none of them have found a use for it as yet. If they were all to agree on using the papyrus as a medium of exchange, its value would rest on a promise alone – Pete’s promise that any papyrus he issues will actually be “backed” by fish, which would make Toni and Tom willing to accept it in exchange for salt and apples. Continue reading

Tiberius Used Quantitative Easing To Solve The Financial Crisis Of 33 AD

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Jean-Paul Laurens’ “La Mort de Tibere”

Tiberius did not use QE in the same way as Central Banks today do, they’re not monitising debt. He provided liquidity into the system and it is important to remember they used money, not currency back in those days so no printing presses, digital or physical were used. This article shows that it is not the first time our financial system has been intertwined and fraud is the cause of the problems. Courtesy of Business Insider; Brian Taylor Global Financial Data:

Although many people have hailed Ben Bernanke’s response to the current financial crisis for going outside of the box and using unorthodox policies to avoid a financial collapse, in reality, similar policies were used by Tiberius during the Financial Crisis of 33 AD, almost 2000 years ago.

Tiberius ruled the Roman Empire from 14 AD to 37 AD. He was frugal in his expenditures, and consequently, he never raised taxes during his reign. When Cappadocia became a province, Tiberius was even able to lower Roman taxes. His frugality also allowed him to be liberal in helping the provinces when, for example, a massive earthquake destroyed many of the famous cities of Asia, or when a financial panic struck the Roman Empire in 33 AD.

As with many financial panics, this one began when unexpected events in one part of the Roman world spread to the rest of the Empire. To quote Otto Lightner from his History of Business Depressions, “The important firm of Seuthes and Son, of Alexandria, was facing difficulties because of the loss of three richly laden ships in a Red Sea storm, followed by a fall in the value of ostrich feather and ivory. About the same time the great house of Malchus and Co. of Tyre with branches at Antioch and Ephesus, suddenly became bankrupt as a result of a strike among their Phoenician workmen and the embezzlements of a freedman manager. These failures affected the Roman banking house, Quintus Maximus and Lucious Vibo. A run commenced on their bank and spread to other banking houses that were said to be involved, particularly Brothers Pittius. Continue reading

Russell Napier Declares November 16, 2014 The Day Money Dies

Courtesy of Russell Napier @ ERIC:

It is with regret and sadness we announce the death of money on November 16th 2014 in Brisbane, Australia

‘A mark, a yen, a buck, or a pound
A buck or a pound
A buck or a pound
Is all that makes the world go ’round;
That clinking, clanking sound
Can make the world go ’round.’

“Money” from Cabaret by Kander & Ebb

In the musical Cabaret, Sally Bowles and the Emcee sing about money from the perspective of those witnessing its collapse in value in real terms in the great German hyperinflation of 1923.

Less than a decade later, and a continent away, a young lawyer from Youngstown, Ohio noted on July 25th 1932 how money’s value could also fall in nominal terms:

“A considerable traffic has grown up in Youngstown in purchase and sale at a discount of Pass-Books on the Dollar Bank, City Trust and Home Savings Banks. Prices vary from 60% to 70% cash. All of these banks are now open but are not paying out funds.”
The Great Depression – A Diary: Benjamin Roth (first published 2009)

In Youngstown the bank deposit, an asset previously referred to as “money”, had fallen by up to 40% relative to the value of cash. The G20 announcement in Brisbane on November 16th will formalize a “bail in” for large-scale depositors raising the spectre that their deposits are, as many were in 1932, worth less than banknotes. It will be very clear that the value of bank deposits can fall in nominal terms.

On Sunday in Brisbane the G20 will announce that bank deposits are just part of commercial banks’ capital structure, and also that they are far from the most senior portion of that structure. With deposits then subjected to a decline in nominal value following a bank failure, it is self-evident that a bank deposit is no longer money in the way a banknote is. If a banknote cannot be subjected to a decline in nominal value, we need to ask whether banknotes can act as a superior store of value than bank deposits? If that is the case, will some investors prefer banknotes to bank deposits as a form of savings? Such a change in preference is known as a “bank run.”

Each country will introduce its own legislation to effect the ‘ bail-in’ agreed by the G20 this coming weekend. The consultation document from the UK’s Treasury lists the following bank creditors who will rank ABOVE depositors in a ‘failing’ financial institution: Continue reading

E.U. Officially Adopts the Bank Depositors Bail-In

Almost a year ago to the day I wrote a piece called Derivatives and the Real World Implications, citing that bail-ins would be coming to the UK. This issue has been picked up by Andy Sutton @ Market Oracle.com, well here’s the proof but not all hope is lost. You can still exchange your worthless pieces of paper and digital 1’s and 0’s for gold and silver. People have foolishly put their faith in government and their ability to manage ‘money’, they have failed us but it is all by design and agenda. Fail to prepare, prepare to fail:

It has now been more than a year since that fateful weekend in the Mediterranean when everything changed. However, like most of the big changes we’ve seen lately, there is a subtlety afoot that somehow results in few noticing. This should surprise no one really. How the world can change in such dramatic ways without any type of mass awakening is a topic more for the psychologists who help pull the strings and the evil they represent than for anyone involved in the analysis of economics and events, but I say the above so that you know you’re not kidding anyone.

Even a year later, the subtlety continues and ignorance abounds. Most still don’t know the ramifications of the passage of the Dodd-Frank bill back in 2010. They take it at its word that it is a consumer protection act, but is nothing of the sort. They’ll reap what they sow. The evidence has been plentiful, the analysis outstanding. There have been countless opportunities for people to learn of the truth. Ours is not to concern ourselves with those who refuse to have their eyes opened, but for those who are seeking knowledge. After all, nobody can fault someone who doesn’t know, but wants to. There are plenty who do, especially in light of the EU’s passage of a new set of bail-in ‘rules’ this week. Much of this was already known and previously agreed to, but there are some more interesting spin-offs and it is definitely worth revisiting. The mere fact that they’re spending so much time prepping for another bank blowup essentially guarantees that one is coming at some point. These things tend to become self-fulfilling prophecies in and of themselves, and when there is so much potential looting and pillaging to be done, all the more so!

We want to state up front that this is an extensive subject and that it is impossible to provide a comprehensive look at all the facets of the emerging truth regarding the bail-in mechanism and the entire associated minutia in a single essay. Our commitment is to dedicate our remaining articles to this topic alone in the hopes of providing a singular source of information on the topic. Continue reading

Is Bitcoin Money?

I like Max Keiser, I think he’s a great personality and shines a light on corruption like no other journalist but after re-reading this article which I posted 6 months ago, I have to unequivocally state that he’s wrong. The Aristotelian characteristics of money have 3 additionals which Max omitted. That is, medium of exchange, store of value and a standard of account.

It has not been around long enough to be a store of value and it’s volatile. It is now accepted by over 4000 vendors worldwide but its not universally accepted so it’s not a medium of exchange in the truest sense. Finally, it’s not a standard unit of account so you cannot derive a meaningful interpretation of prices, costs or profits. Is Bitcoin money, no it is not, is it a currency like fiat but in its infancy, yes it is. 

I must make a point in regard to intrinsic value, value does not exist outside of the conscience. What do I mean by this? If the human race disappeared off the face of the earth, how much would your home be worth? A pint of beer or a latte? It wouldn’t have any value, it would be just an object as our conscience is not their to assign value. Intrinsic value needs to expanded using marginal utility theory and therefore ‘marketability’.

What is money? Gold, silver, their respective bills and to a lesser degree, copper. Max Keiser in The Huffington Post:

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Since Bitcoin is now a $400 million market, with its price hitting new all-time highs, now might be good time to ask, is bitcoin money?

According to Aristotle, for something to be considered money, is has to fulfill four characteristics:

1) It must be durable. It can’t fade, corrode.

2) It must be portable. It has to be ‘dense’ so that you can take it with you when you travel to the market.

3) It must be divisible or, ‘fungible.’ This means that if you break it up into smaller pieces each smaller piece when you add them up will equal the value of the original piece.

4) It must have intrinsic value. One must consider that value does not exist outside of the conscious, if human beings disappeared off the face of the earth, how much would your home be worth? Or a pint of beer? It wouldn’t have any value. Therefore we must look to marginal utility theory and the theory of marketability. Those goods which are classed as money have no or a very limited declining marginal utility, by this I mean your satisfaction of receiving another unit of that good is not diminished. 

Let’s look at these four characteristics and see if they apply to Bitcoin. Continue reading

America’s Energy Boom And The Rising U.S. Dollar

I’ve always thought the demise of the dollar would be a given, falling away to history but they’re not going down without a fight. I now see why fracking is so important, regardless of negative EROI and the detrimental effects on the environment and to human and animal health.

Courtesy of Oftwominds Blog:

The energy boom directly reduces the number of U.S. dollars being supplied to the global economy, and that pushes the value of the dollar higher.
The petrodollar regime–that oil is bought and sold globally in U.S. dollars–is easy to understand. It boils down to these two principles:

1. Petroleum is the lifeblood of the global economy.

2. Any nation that can print its own currency and trade the conjured money for oil has an extraordinary advantage over nations that cannot trade freshly created money for oil.

This is why many analysts trace much of America’s foreign policy back to defending the petrodollar regime. In the normal course of things, anyone printing money in quantity would soon find the conjured currency bought fewer and fewer barrels of oil as the surplus of conjured currency floating around the world greatly exceeded the supply of oil.

Currency can be conjured out of thin air, but oil is increasingly costly to find, extract and process.

America’s energy boom is creating consequences for the value of the dollar. As I have explained here a number of times, this goes back to Triffin’s Paradox, which states that when one nation’s fiat currency is used as the world’s reserve currency, the needs of the global trading community are different from the needs of domestic policy makers.

What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012)

Understanding the “Exorbitant Privilege” of the U.S. Dollar (November 19, 2012)

Prior to 1971, the dollar was backed by gold, which acted as a supra-national anchor to the dollar’s reserve status. The gold standard inhibited both massive trade deficits and money creation, so it was jettisoned.

The Triffin paradox is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this ‘reserve’ currency (foreign exchange reserves) and thus cause a trade deficit. (emphasis added)
The use of a national currency (i.e. the U.S. dollar) as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Net currency inflows and outflows cannot both happen at once.

In other words, the U.S. must “export” U.S. dollars by running a trade deficit to supply the world with dollars to hold as reserves and to use to pay debt denominated in dollars. If the trade deficit shrinks, fewer dollars are available for reserves and to service debt denominated in dollars.

Basic supply and demand will push the dollar higher relative to other currencies and eventually, other assets.

One reason why the trade deficit is shrinking is the U.S. is supplying more of its own energy. Every unit of petroleum extracted in the U.S. means a unit does not have to be imported from oil exporting nations.

The energy boom directly reduces the number of dollars being supplied to the global economy. This creates a relative scarcity of dollars, which pushes the value of the dollar higher:

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Is it coincidence that the dollar’s uptrend aligns with the rise of U.S. energy production? It’s not coincidence, it’s causation.

Oil prices have broken out of a technical wedge:

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As global oil prices push higher, more previously marginal petroleum reserves in the U.S. and Canada become profitable, further boosting production. The more energy produced in the U.S., the smaller the trade deficit and the fewer dollars provided to the global economy.

As the dollar strengthens, the U.S. will pay less for imported energy and earn more for exported energy. This decline in energy costs will ripple through the real economy, offsetting any decline in exports. A strengthening dollar lowers the cost basis of all goods and services originating in the U.S.

A strengthening dollar also benefits trading nations, as the increasing value of their dollar reserves enlarges the base for their own credit. This is the irony of China’s dumping of its dollar reserves: China only amassed such massive dollar reserves because it was running equally massive trade surpluses with the U.S. As the trade surplus shrinks, so too must China’s dollar reserves contract.

Many observers confuse the dollars created by the Federal Reserve with the dollars available to trading nations for reserves and dollar-denominated debt. If the Fed creates $1 trillion which then lays fallow in the U.S. financial system, those dollars are not exported into the global economy via trade deficits.

Add all this up and it’s clear America’s energy boom will push the dollar higher as the trade deficit shrinks and those needing dollars on the global market will have to pay more for to get the dollars they need for reserves and payment of dollar-denominated debts.

Things are falling apart–that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.