Countries everywhere are facing debt crises today, precipitated by the credit collapse of 2008. Public services are being slashed and public assets are being sold off, in a futile attempt to balance budgets that can’t be balanced because the money supply itself has shrunk. Governments usually get the blame for excessive spending, but governments did not initiate the crisis. The collapse was in the banking system, and in the credit that it is responsible for creating and sustaining.
Contrary to popular belief, most of our money today is not created by governments. It is created by private banks as loans. The private system of money creation has grown so powerful over the centuries that it has come to dominate governments globally. But the system contains the seeds of its own destruction. The source of its power is also a fatal design flaw.
The flaw is that banks advance “bank credit” that must be paid back with interest, while having no obligation to spend the interest they collect so that borrowers can earn it again and again, as they must in order to retire the debt. Instead, this money is invested in various casinos beyond the borrowers’ reach. This leads to a continual systemic need for more new bank credit money, more debt with more interest attached, to prevent widespread defaults and deflationary collapse.
Today this problem is particularly evident in the EU. The Euro is a fixed currency system that does not allow for expansion to meet the demands of the private lending casino. The result is that EU member nations collectively are being crippled by debt.
There are more sustainable ways to run a banking and credit system, as will be shown.
How Banks Create Money
The process by which banks create money was explained by the Chicago Federal Reserve in a booklet called “Modern Money Mechanics.” It states:
“The actual process of money creation takes place primarily in banks.” [p3]
“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount].” [p6]
“With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts.” [p49]
A $100 deposit supports a $90 loan, which becomes a $90 deposit in another bank, which supports an $81 loan, etc.
That’s the conventional model, but banks actually create the loans FIRST. (Picture how a credit card works.) Banks need deposits to clear their outgoing checks, but they find the deposits later. Banks create money as loans, which become checks, which go into other banks. Then, if needed to clear the checks, they borrow the money back from the other banks. In effect, they borrow back the money they just created, pocketing the spread between the interest rates as their profit. The rate at which banks can borrow from each other in the U.S. today (the Fed funds rate) is an extremely low 0.2%.
How the System Evolved
The current system of privately-issued money is traced in “Modern Money Mechanics” to the 17th century goldsmiths. People who left gold with the goldsmiths for safekeeping would be issued paper receipts for it called “banknotes.” Other people who wanted to borrow money were also happy to accept paper banknotes in place of gold, since the notes were safer and more convenient to carry around. The sleight of hand came in when the goldsmiths discovered that people would come for their gold only about 10% of the time. That meant that up to ten times as many notes could be printed and lent as the goldsmiths had gold. Ninety percent of the notes were basically counterfeited.
This system was called “fractional reserve” banking and was institutionalized when the Bank of England was founded in 1694. The bank was allowed to lend its own banknotes to the government, forming the national money supply. Only the interest on the loans had to be paid. The debt was rolled over indefinitely.
That is still true today. The U.S. federal debt is never paid off but just continues to grow, forming the basis of the U.S. money supply.
The Public Banking Alternative
There are other ways to create a banking system, ways that would eliminate its ponzi-scheme elements and make the system sustainable. One solution is to make the loans interest-free; but for Western economies today, that transition could be difficult.
Another alternative is for banks to be publicly-owned. If the people collectively own the bank, the interest and profits go back to the government and the people, who benefit from decreased taxes, increased public services, and cheaper public infrastructure. Cutting out interest has been shown to reduce the cost of public projects by 30-50%.
In the United States, this system of publicly-owned banks goes back to the American colonists. The best of the colonial models was in Benjamin Franklin’s colony of Pennsylvania, where the government operated a “land bank.” Money was printed and lent into the community. It recycled back to the government and could be lent and relent. The system was mathematically sound because the interest and profits were returned to the government, which then spent the money back into the economy in place of taxes. Private banks, by contrast, generally lend their profits back into the economy, or invest in private money-making ventures in which more is always expected back than was originally invested.
During the period that the Pennsylvania system was in place, the colonists paid no taxes except excise taxes, prices did not inflate, and there was no government debt.
How Private Banknotes Became the National U.S. Currency
The Pennsylvania system was sustainable, but some early American colonial governments just printed and spent, inflating the money supply and devaluing the currency. The British merchants complained, prompting King George II to forbid the colonists to issue their own money. Taxes had to be paid to England in gold. That meant going into debt to the English bankers. The result was a massive depression. The colonists finally rebelled and went back to issuing their own money, precipitating the American Revolution.
In an international first, the colonists funded a war against a major power with mere paper receipts, and won. But the British counterattacked by waging a currency war. They massively counterfeited the colonists’ paper money, at a time when this was easy to do. By the end of the war, the paper scrip was virtually worthless. After it lost its value, the colonists were so disillusioned with paper money that they left the power to issue it out of the U.S. Constitution.
Meanwhile, Alexander Hamilton, the first U.S. Treasury Secretary, was faced with huge war debts, and he had no money to pay them. He therefore resorted to the ruse used in England known as fractional reserve banking. In 1791, Hamilton set up the First U.S. Bank, a largely private bank that would print banknotes “backed” by gold and lend them to the government.
The ruse worked: the paper banknotes expanded the money supply, the debts were paid, and the economy thrived. But it was the beginning of a system of government funded by debt to private bankers, who lent banknotes only nominally backed by gold.
During the American Civil War, President Lincoln avoided a crippling war debt by returning to the system of government-issued money of the American colonists. He issued U.S. Notes from the Treasury called “Greenbacks” rather than borrowing at usurious interest rates. But Lincoln was assassinated, and Greenback issuance was halted.
In 1913, the privately-owned Federal Reserve was authorized to issue its own Federal Reserve Notes as the national currency. These notes were then lent to the government, eliminating the government’s own power to issue money (except for coins). The Federal Reserve was set up to prevent bank runs, but twenty years later we had the Great Depression, the greatest bank run in history. Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, wrote in 1934:
“We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve.”
For the bankers, however, it was a good system. It put them in control.
Setting the Global Debt Trap
Prof. Carroll Quigley was an insider groomed by the international bankers. He wrote in Tragedy and Hope in 1966:
“The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.
“The apex of the system was to be the Bank for International Settlements [BIS] in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank… sought to dominate its government by its ability to control Treasury loans….”
The debt trap was set in stages. In 1971, the dollar went off the gold standard internationally. Currencies were unpegged from gold and allowed to “float” in currency markets, competing with other currencies, making them vulnerable to speculation and manipulation.
In 1973, a secret agreement was entered into in which the OPEC countries would sell oil only in dollars, and the price of oil would be dramatically increased. By 1974, oil prices had increased by 400% from 1971 levels. Countries lacking oil had to borrow dollars from U.S. banks.
In 1981, the Fed funds rate was raised to 20%. At 20% compound interest, debt doubles in under four years. As a result, most of the world became crippled by debt. By 2001, developing nations had repaid the principal originally owed on their debts six times over; but their total debt had quadrupled because of interest payments.
When debtor nations could not pay the banks, the International Monetary Fund stepped in with loans — with strings attached. The debtors had to agree to “austerity measures,” including:
- cutting social services
- privatizing banks and public utilities
- opening markets to foreign investors
- letting currencies “float.”
Today, austerity measures are being imposed not just in developing countries but in the European Union and on U.S. States.
The BIS: Apex of the Private Central Banking Pyramid
What Professor Quigley foretold about the Bank for International Settlements (BIS) has also come to pass. The BIS now has 55 member nations and heads the global financial pyramid.
The power of the BIS was seen in 1988, when it raised the capital requirement of its member banks from 6% to 8% in an accord called Basel I. The result was to cripple the Japanese banks, which until then were the world’s largest creditors. Japan entered a recession from which it has not yet recovered.
U.S. banks managed to escape by dodging the capital requirement. They did this by moving loans off their books, bundling them up as “securities,” and selling them to investors.
To persuade the investors to buy them, these mortgage-backed securities were protected against default with “derivatives,” which were basically just bets. The “protection seller” collected a premium for agreeing to pay in the event of default. The “protection buyer” bought the premium. Owning the asset was not required. Like gamblers at a horse race, derivative players could bet without owning a horse.
Derivatives became a very popular form of gambling. The result was the mother of all bubbles, exceeding $500 trillion by the end of 2007.
Because of securitization and derivatives, credit mushroomed. Virtually anyone who walked in the door could get a loan.
The tipping point came in August 2007, with the collapse of two hedge funds. When the derivatives scheme was exposed, the market for derivative-protected securities suddenly dried up. But the U.S. stock market did not collapse until November 2007, when new accounting rules were imposed. The rules grew out of the Basel II Accords initiated by the BIS in 2004. “Mark to market” accounting required banks to value their assets according to market demand that day. Many U.S. banks, like those in Japan in the 1990s, suddenly had insufficient capital to make new loans. The result was a credit crisis from which the U.S. has not yet recovered.
The BIS has now become global regulator, just as Quigley foresaw. In April 2009, the G20 nations agreed to be regulated by a Financial Stability Board based in the BIS, and to comply with “standards and codes” set by the Board. The codes are only guidelines, but countries that fail to comply risk downgrades in their credit ratings, something so costly that the guidelines have effectively become laws.
An article on the BIS website states that central banks in the Central Bank Governance Network should have as their single or primary objective “to preserve price stability.” That means governments should not devalue the national currency by inflating the money supply; and that means not “printing money” or borrowing credit created by their own central banks. Like the American colonies after King George took away their power to issue their own money, governments must fund their deficits by borrowing from private banks. The bankers’ global control over currency issuance has become virtually complete.
The effects of this policy are particularly evident in the European Union, where EU rules allow deficits of only 3% of government budgets and prevent member countries from either issuing their own money or borrowing credit advanced by their own central banks. Member nations must borrow instead from the European Central Bank, private international banks, or the IMF. The result has been forced austerity measures, as seen in Greece and Ireland. The system is so unsustainable that commentators are predicting that the EU may break up.
The Way Out: Return the Money Power to Public Control
To escape the debt trap of the global bankers, the power to create the national money supply needs to be restored to national governments. Alternatives include:
- Legal tender issued directly by national treasuries and spent on national budgets.
- Publicly-owned central banks empowered to advance the nation’s credit and lend it to the government interest-free.
- Nationalization of bankrupt banks considered “too big to fail” (after expunging or writing down bad debts on inflated bubble assets). These banks could then issue credit to the public and serve the public’s banking needs, with the profits recycling back to the government, defraying the tax burden on the people.
- Publicly-owned local banks (state, provincial, or municipal).
Publicly-owned banks have been successfully established and operated in many countries, including Australia, New Zealand, Canada, Germany, Switzerland, India, China, Japan, Korea, and Malaysia.
In the United States there is currently only one state-owned bank, the Bank of North Dakota. The model, however, has proven to be highly successful. North Dakota is the only U.S. state to have escaped the credit crisis unscathed. In 2009, while other states floundered, North Dakota had its largest budget surplus ever. In 2008, the Bank of North Dakota (BND) had a return on equity of 25%. North Dakota has the lowest unemployment rate in the country and the lowest default rate on loans. It also has the most local banks per capita.
North Dakota has had its own bank since 1919, when farmers were losing their farms to the Wall Street bankers. They organized, won an election, and passed legislation. The state is required by law to deposit all its revenues in the BND. Like with the sustainable model of the bank of colonial Pennsylvania, interest and profits are returned to the government and to the local economy.
A growing movement is afoot in the United States to copy this public banking model in other states. Fourteen U.S. state legislatures have now initiated bills for state-owned banks.
The model could also be replicated in other countries. In Ireland, for example, where the major banks are insolvent and are already nationalized or soon will be, the government could deposit its revenues in its own publicly-owned banks, add sufficient capital to meet capital requirements, and leverage these funds to create interest-free credit for its own local needs. That is exactly what Alexander Hamilton did when faced with government debts that were impossible to repay: he put the government’s existing funds in a bank, then borrowed the money back several times over, employing the accepted “fractional reserve” model.
Japan’s solution is also a variant of what Alexander Hamilton proposed two centuries earlier. Japan retains its status as the third largest economy in the world although it has a debt to GDP ratio of 226%. Japan has “monetized” the national debt, turning it into the national money supply. The government-owned Bank of Japan holds Japanese government debt equal to 100% of the nation’s GDP; and because the government owns the bank, this loan is interest-free and can be rolled over indefinitely. An interest-free loan rolled over indefinitely is the equivalent of issuing money.
___________________
Ellen Brown is an attorney and president of the Public Banking Institute,
http://PublicBankingInstitute.org
. In Web of Debt, her latest of eleven books, she shows how the power to create money has been usurped from the people, and how we can get it back. Her websites are
http://webofdebt.com
and
http://ellenbrown.com
.
Ludicrous….I’m a working class private interest and I own gold. Where do you get this crap ? Anyone reading this can buy gold. I think you’re parroting something off someone’s conspiracy site. If your paranoia was well founded, the gold would be priced out of reach and be controlled by the very people you’re concerned with. You should get together with the other camp of creative lost sheep and ask them why the elite are depressing the price of gold. At least if that one’s true, it may be because they’re holding the boat at the dock before is really sets sail without those who couldn’t wake up.
I have another scenario for you. Gold was never a good form of currency before it was removed from a fixed peg such as what we saw during Bretton Woods.($35/oz) It needed to break free and float which is what happened in 1971. You and/or people like you got memorized by the fiat dollar and missed the bigger picture. A gold backed monetary system with a fixed trade value on gold cannot support liquidity demands because there isn’t enough gold to meet monetary demand on the basis of the FIXED PEG rules. Monetary demand for gold does not have to be met with more and more commodity if the demand is allowed to be reflected in a rising trade value. That’s what we have in place now. Gold is now monetized, everyday, by poor little guys like me who prefer to trade with a debt-free store of value , especially now that it has instant liquidity. Gold has NEVER ever been deflationary. The problem was not the gold. The problem was a lack of liquidity on the basis of the FIXED price peg which demanded more and more gold. Guess who created the pinnacle event that set gold free which has allowed each and every one of us to trade in real-time gold currency ???
Fully backed gold currency in real-time , where real-time (floating) is what’s new, is here and now and free from centralized corruption of government. If you choose to ignore the events of history and then whine about not having access, you’re shirking your personal responsibility to be properly informed. I can tell you’ve been hanging around in here a little too long when you even insinuate that gold is deflationary. That’s Ellen’s old 20th century argument and a great embarrassment for her since fixed gold went out with Bretton Woods 40 years ago. Don’t expect any support on your argument from her either , I think she’s finally woken up ….. God willing.
[...] Madoff. Then there’s Social Security according to Rick Perry. Now here’s an essay (from a website about a book) that ups the ante. Ellen Hodgson Brown argues that the entire global [...]
Hello there! I could have sworn I’ve been to this website before but after browsing through some of the post I realized it’s new to me. Anyhow, I’m definitely happy I found it and I’ll be book-marking and checking back often!
Thank you for the excellence with which you write and present your ideas, Ellen.
I’m looking for an argument that suggests that assets put into circulation as money cannot purge debt for a project that my daughter is writing in university. Can anyone support this with an idea ?
[...] summum bonum of modern economies. Why this should be is explained by Ellen Brown in her article on The Global Debt Crisis: “Contrary to popular belief, most of our money today is not created by governments. It is [...]
[...] från en bra artikel av Ellen Brown – The Global Debt Crisis: How We Got in It and How to Get Out Countries everywhere are facing debt crises today, precipitated by the credit collapse of 2008. [...]
There is a lot of money in the hand of individuals (milionaires,billionaires,bank accounts of retirees,bank accounts of companies) probably more than all debts cause you see if there is a debt there is something underlying it of course this something can be lowered in price but rarely would it be under the real price which is the selling price minus the down payment that came with it except for houses in the US lately but not all of them…of course a small percentage of assets go down the drain but alot are going to the roof to compensate, if prices of assets go down it logicaly make the existing money more valuable as long as these assets are valuable to existing life so productivity can improve quick to stabilise any emotional crash of financial assets so when you wake up in the morning the dow jones industrial index is always closer to the top than the bottom on the 100 year chart chart and true it is that the Dow will be close to its top in 5 years from now as it will be in 20.
Forget the complicated mumbo jumbo. It sounds like a by-product of the debt money paradigm. We can solve all our debt problems by simply monetizing precious metals at the individual level, circulate PM’s and debt will be purged back to the nothingness it was created from. When a society adds debt free liquidity into the economy, it frees up debt-based-fiat to find the hands that need it most for debt servicing and the total removal of that currency. Gresham’s Law is in the process of reversing based on real-time bullion valuations. Gresham’s law was/is predicated on FIXED bullion values. Real time bullion is what will extinguish debt. The irony is that both came out of 1971 closing of Bretton Woods. In 1971, the most desirable real-time genie was loosened from a bottle but in that process, the evil debt genie also escaped the same bottle. The irony is that the real-time genie holds the key on how to get the debt genie back into the bottle.
No, guys, there is just one root problem: corrupt politicians who take campaign bribes from the Fat Cats that want the rules adjusted to their favor. Only a 100% turnover and public funding of campaigns will fix it.
That’s a political problem, not a monetary issue. The monetary issue can be solved without political involvement. Just circulate personally owned/held PM’s That’s all. Debt will organically be purged.
I disagree. That is a political corruption problem that dictates the monetary results.
Both factors, no doubt. But if the banks hold the purse strings, pay the piper, they call the tunes. Who will have the upper hand in society, financial oligarchs or the people?
People who think banks hold the purse strings are caught in a paradigm that falls into the legal market and not the market driven by market principles. Gold and silver need no legal tender status and are perfectly legal to use in trade. Legal tender status is nothing but a crutch to create the appearance of market credibility. Precious metals are intrinsic to a transfer of economic activity and are therefore labored by “the sweat of the brow”, so that the weight of pure gold is proof of that energy transfer and all the market fundamentals and laws that go with it. Don’t apply a legal principle to a market application…. apply a market principle to a market application. Do you guys get that or do you suffer from Stockholm syndrome ?
When PM’s are used as currency, that market participation adds grease to economic activity (liquidity) but without the debt associated with debt currency (dollars). This frees debt currency up to find the hands that need that fiat to service existing debt and return the debt currency back to the nothingness that it came from. This is how the transition from debt based currency to asset based currency is taking place ….. right under your nose.
Why do you suppose that government “appears” to be so useless and impotent ? It’s not their role in “the script” to monetize PM’s. They can’t regardless of intention for the simple reason that in any migration in any kind of macro system there is a very important principle that MUST be held up. Neither system can be allowed to crash in the process. Ant top down proclamation or appearance of support for PM’s as money would crash the dollar very quickly. Not good ! Rate of change is critical so the elite are relegated to simply “carrying the stick” (inflation) to wake the market up to its bottom-up responsibility. Yes, this beast must rise,
You cannot pour new wine into old wineskins.
Sure you can. Find me an old wineskin and I’ll pour some new wine into it! I certainly don’t buy this deification of “the market” and its “principles” as if they were the word of “God”. They’re hogwash. “The market” means the rule of money, wealth has its way. As Ha Joon Chang says in Bad Samaritans, when you deregulate an area of the economy (leave it to “the market”) you just say that money rules in that area over any consideration of environment, human well being, or rights protected. Without regulation to protect against monopoly, for instance, competition is dead in the water and pure unopposed exploitation reigns. The market left unregulated is intrinsically criminogenic (see James Galbraith’s The Predator State), unethical behavior drives out ethical, bad money drives out good. Look what happened with the deregulation of 1999 and the ensuing collapse. Fraud and theft prevailed. That’s “the market” for you. It is at best a subordinate tool in political economy, and it’s insane to think it could be a functional prime principle. It doesn’t work.
Financial firms now even admit that fraud is a legitimate business model. No matter how the money thing works itself out, I own gold bullion as a hedge!
“Legal Tender” is not necessary for government issued fiat to work – the government just has to demand that taxes be paid in its own currency and so long as the government can enforce the tax laws, it will work as currency for the whole nation.
There is no need for gold, silver, or any other commodity.
Only if you believe in top-down governing of the monetary model. There is much more freedom in decentralization and decentralized money must be asset based. We can not all run around writing IOU’s as a form of currency. Centralization is a necessary evil for debt-based currency. I’ll pursue freedom, thanks.
Legal tender laws are required for fiat to work if the numbers are created from nothing but a promise. If there is no decree, why would the market choose it ? There’s no reason as there is no intrinsic value to the economy in paper.The market would gravitate to something that has real value other than paper unless forced to accept paper. The legal tender laws act as a crutch for an impotent monetary concept.
While 100% turnover and public funding of campaigns are excellent ideas, they don’t get at the main root of the problem, which is bank power to create money. Here’s a quote from a fine article (http://www.voxeu.org/index.php?q=node/4647) that focuses on this issue:
” We suggest that politicians may actually prefer banks not to be in the public sector. When banks are – in theory – controlled by their shareholders, in practice they are more likely to be controlled by their top managers because of agency problems. Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians – at the expense ultimately of the taxpayer. In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions, positions on the boards of banks or lucrative consultancies. Activities that are more likely to provide both sides with quick returns are the more speculative ones, especially if they are sufficiently opaque as not to be well understood by the shareholders such as complex derivatives trading.
Government owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians. Moreover, politicians tend to be held accountable for wrongdoings or bad management in the public sector but are typically only indirectly blamed – if at all – for the misdemeanours of private banks. It is the shareholders who are expected to prevent these but lack of transparency and weak governance stops them from doing so in practice. On the other hand, when it comes to banks that are in the public sector, democratic accountability of politicians is more likely to discourage them from engaging in speculation. In such banks, top managers are more likely to be compelled to focus on the more mundane job of financing real businesses and economic growth.”
Far too complicated for the average person, but the average person can spend gold-as-money or pay for something with gold backed digital currency, online. Keep it simple by making it simple and by-passing an unnecessary political nightmare. When pursuing a political issue, address the political system. When addressing a monetary issue, address the monetary system but most importantly , think bottom-up and stop defaulting to a top-down paradigm that is your greatest captor.
G-backed digital currency runs us into the same problem that certificates issued by goldsmiths of old and present-day ETFs have: After awhile, there will be more paper or electronic blips circulating than there is physical gold to back it. It’s fractional reserve banking all over again, to paraphrase Yogi Berra. Of course, we could always regulate it…
Not true currently,Lukman, but true back in the days of the goldsmiths, yes. The goldsmiths did not have the luxury of having a real-time market supporting the trade value of gold weight. On a different note, if you examine any gold backed payment system on the internet, you’ll discover that all gold weighted digital currency in an customer’s account is denominated in weight and accounted for by weight. Weight is the standard. These weighted digits are backed by real weight 100% and the weight is not held by the payment processing company. The payment processors such as pecunix, goldmoney and freelakotabank do not hold, buy or sell bullion, themselves. Those services are decentralized. The payment processor is simply a user interface and a 3rd party accountant for gold weight that is allocated to the account holder and held by a completely different entity. The “accountant” and the gold holding company do not buy or sell gold to the account holder either. The three services are all decentralized and independent. Thanks for pointing that out though because the consolidated power of banks during the old gold standard did have banks accounting, exchanging and holding bullion. Is it no wonder they could get away with cooking the books when they controlled all the affiliated services ? You’re borrowing from an old and antiquated example that is not relative to today’s real-time gold backed digital currency payment systems.
the easiest way to deal with all these simple things is the dow jones industrial and his little brother the s&p 500 the first one is the perfect inflationary index of them all and the second one is the money maker (the milky cow) but down tell the little sister she ‘s better off playing with her barbies…think about it look at the trends and macro-economics and you will see that no lies can hide in these two reflections of purety and freedom blowing on the wall of the street.
and people since I feel generous tonight I will tell you a little secret of mine… by the end of the year around oct-nov you shall see a sudden drop in both the dow and the s&p 500 followed by some side way action for a month and then should start the big inflationary bull market of the 21st century it will be slow to start so nobody will notice but it will be the best entry point in the futures market for the s&p 500 all you will have to do is start as buyer on a daily basis and you will end up with tens of millions if not hundreds depending on your strategy just don’t forget the children of god on that day and I will accept that as my cut on your luck…
a hint…the inflationary bull market should last ten to 15 years
Dear Rooster
If you re-write the comment you just post and change the word gold by oil then and only then will you start to be taken seriously.
Marc … Are you young ? There is a great difference between wealth and money. Oil is a good source of wealth, but is a poor form of currency. My references to gold have been as a source of monetary liquidity where monetary characteristics are vital, not necessarily as an investment. In the current environment, I would also say that gold is still very much in an “investment leg” on the way to finding its market oriented trade value. I’m curious to know if you think a society should consumer that which it chooses to use as money ? Oil is a consumable.
Tell that to the Arab nations that sell their oil in dollars. To them oil is a great source of currency. Once nixon removed us from the gold standard and brentton woods was ended the petro dollar system was set up. Everyone who holds up silver and gold as the answer ignores the fact that the dollar is king for selling and buying oil.
While technically our dollar is a fiat system, but the thing that backs the dollar is oil. This is the thing that gives the currency value. If it were not for that the dollar would have crashed long ago. I read a lot of dooms day predictions that say our dollar will collapse. The truth is 2 thirds of the currency supply is overseas and there is actually a dollar shortage abroad.
Lot’s of gold and silver salesmen will tell you that we have a fiat system. They will not tell you we got the Arabs to back our dollar in the 70′s This lead to a different set of problems. Even when we had the oil embargo durring the 70′s by opec which led to the so called Energy Crisis. They still sold oil in US dollars. Oil makes the world go around and you can not ignor the history of how oil sustained and protected the dollar for the last 40 years.
A good quality currency should not be consumed. There is a marked difference between utility value and value that is intrinsic to economic activity. Gold is not perfect as a form of money because it does, indeed, have some utility value for electronics, health applications and jewelry. If gold actually had no utility value at all, it would be perfect for monetary applications because 100% of its value would be allocated to the intrinsic value of economic activity and the “sweat of the brow”. Note that most gold ever mined in history is still around ? That cannot be said for commodities like oil or gas that are consumed. This does not diminish oil or gas in terms of value but establishes a definition in terms of the type of value and in the case of most commodities, including fossil fuels, their value is highly prized for their utility, not their ability to remain. Consumables can make for great sources of wealth while being poor forms of currency.
The market principles that I refer to are organically based which does not accommodate debt-based fiat currency. My gold references references have been to gold-as-money within a gold-money paradigm. Your historical references that include corruption are quite natural given that the debt-genie was loosened from the bottle in 1971.
If there’s a common concern to rid the global system of debt, the simplest solution is to purge debt by adding asset based liquidity and allow debt to be repaid and removed. That can only be accomlished by the grass roots of the market however. Any top-down impetus would lead to a quick existing of the dollar.
As for Gresham’s law, it’s becoming progressively obsolete. Gresham’s law on bad money chasing out good money is predicated on fixed values for bullion, not floating values where the trade value can rise. It’s natural for people to hang on and hoard bullion when the market perceives it to be undervalued. This is one of the reasons that the peg had to be severed for the sake of real-time valuations. Good money will start to chase bad money out as gold continues to “find its price”.
Rejoice. Real-time is the new wineskin. Be happy and have a great week-end.
Dear Rooster, I am young at heart, today pretty much everything is liquid
you can cash your oil on a daily basis if needed and it is my my understanding that oil will be buy by gold in the future if I follow your logic and not the other way around so if I have oil and you have gold who do you you think will end up with the gold?
We are in different conversations, Marc. I am not referring to trade values (price) as a means of having more wealth. I am making a pitch for why gold is a better currency that fiat or than oil. I think we can agree that an asset based currency is a better bet than one predicated on debt (a promise).
Oil has tremendous utility value. By comparison, gold has little, but that’s the whole point of gold-as-money. A society should not consume that which they choose to use as money. The utility of oil and other commodities makes them great sources of wealth but poor forms of money. Money should remain, not be consumed. It’s not gold’s utility that creates tremendous value (not price) for currency, but its intrinsic value to the economy. It has a natural supply-demand characteristic that maintains a natural supply discipline that debt currency doesn’t have given man’s temptation. In the case of oil or other commodities, their utility value interferes with trade value stability. Said another way, if gold had absolutely no utility value whatsoever (which it does have) and relied only on its intrinsic value to the economy (transfer of economic energy), then it would be an even better source of money than it is at the moment because of the application of supply dedication being limited to a currency use.
Again, a society should not use a consumable for a source of money. As long as the money has an economically driven supply discipline (intrinsic), then the more useless it is in terms of utility, the better. By that definition, oil is a terrible currency …. great source of wealth but a terrible currency.
Gold is money. One of its great monetary characteristics is its low utility value. Gold relies on value that’s intrinsic to real economic activity for its creation and therefore subscribes to market law. That’s the important value for money. There’s actually no point in having utility value in a currency. There would be temptation to consume it and use it up, like we do with oil and copper. Think about it. Should a society consume that which it uses as money ? Should it not remain in circulation ? When you see this point, you will be on your way in distinguishing money from wealth. Oil is wealth but a poor currency.
Money is what people agree it to be. It is a social construct. To say that in all cases in which people successfully use things other than gold as money — paper or computer entries for instance — that they had no money false-to-fact.
Social construct … fine. It should have social ethics then, yes ? Would store of value properties and market driven supply discipline be considered good social ethics ?
I would see no problem with store of value, but I think market driven supply discipline is a mistake. According to economist Ha-Joon Chang in his book Bad Samaritans, the market means the rights and interests of the many, society as a whole, and the environment are subordinated to the money power of the wealthy. “Market failures” are rife, the prime example being the 2008 debacle, which showed that the market is neither self adjusting nor self-regulating.
It is self regulating but does lack a broad aggregate market participation. This is a structural issue based on the classical structure of hierarchy (imbalance). That will only change by way of mass market participation, which becomes easier by the year with home based e-comm applications. The 2008 debacle was predicated on debt. The core of my position is to purge debt from the system. That can only happen by way of market participation and by monetizing debt-free assets that can circulate in order to support the economy (liquidity) and also allow debt based currency (fiat) to be withdrawn.
No, it’s not self-regulating. So Greenspan conceded.
It is self regulating given some structural equilibrium. Structure is the principle by which power flows and in our experience, we have been supply driven since the apple was shoved in our faces. There was no way to evolve out of hierarchy (a necessary evil) without the advent of the information age.
I feel that a currencies “store of value” function is in direct opposition to its “facilitate economic transactions” function. Since many commodities and products provide a store of value, the most important part of any currency is its ability to facilitate trade. When currency holds value, people tend to hoard it, reducing its ability to facilitate trade. When currency has little or no storage value, people will freely spend it, enhancing trade.
So I actually believe that a currency that is good for storing value operates against the best interests of society as a whole. And as ErnieM mentions, “The Market” tends to serve the best interests of the wealth at the expense of everyone else. The “Invisible Hand” seems to of human origin rather than divine; and those who control oligarchic companies are able to influence the market to their advantage and everyone else’s disadvantage.
As I suspected, your paradigm is over 40 years old. You’re right about historical hoarding because people just didn’t feel they were getting good trade value for their precious metals. This was not because of the precious metals, however. The hoarding was based on the FIXED value of the bullion, thus people hung on. Gold now trades in real-time (it floats) and the higher it goes in the pursuit of “its price” the more liquid it becomes. Bullion’s liquidity problems, the real issue of your contention, are in the process of being solved as bullion climbs higher in trade value.
Two major things had to take place before bullion could be re-monetized as useful and user friendly currency.
1) It had to be valuated by the market and thus set free to float. That took place in 1971. (think actual weight, not gold backed dollars)
2) There had to be a simple and user friendly way to enhance distribution for the sake of economic liquidity. Gold backed digital currency (ownership title of fully backed weight) was developed in the mid-1990′s. This allowed for very easy “weight splitting”, such as a small amount that you might use to buy a jelly bean.
Based on the development of real-time gold backed digital currency (denominated in weight), one can now buy a stick of gum or a Mercedes using debt-free bullion without transferring any debt or creating any new debt. There is also no counter-party risk. This can all be done with the click of a mouse like many other e-comm transactions that we might associated with fiat currency transfers. Transaction cards will follow as the market supports debt-free currency.
Gresham’s Law (hoarding), as it once pertained to bullion, is now in the process of reversing. GL as it pertained to gold and other PM’s, was predicted on FIXED values for bullion , not floating values that we have now. This new real-time gold-as-money standard has to be implemented from the grass roots, by the market, however. That’s the part people miss for the most part because we all have a real bad habit of assuming that a monetary system must be implemented from the top. Only a debt based system must be hierarchical (centralized) because of the issuing of IOU’s. Gold is sovereign and can be decentralized right down to the individual.
Dear Rooster, I finaly understand you but since I dont need money to live except a pocket of change for my daily trade and of course my pay check to pay the rent and love… I would be more incline to bet on oil at this time for cash preservation if needed…I must admit I bought lots of gold warrants in the 2002-2004 years and it helped me fullfill some extravaganza’s…But I understand you must have too much in hand and feel worry about its value but remember…when the police officer arrested the man he asked, “why steeling all that gold before the eyes of so many people…” he answered back…” when i took the gold I saw nobody…I only saw the gold…”
As long as you make dollars your currency for circulation and it is debt based, debt will remain with us. Are you aware that if gold and silver are monetized and CIRCULATED that they support liquidity to the extent that debt can be purged back to the nothingness it was created from ? Think about that. When economic liquidity is supported by real assets, debt-free, it supports the servicing of existing debt (fiat based) by freeing up debt-currency to find the hands that need it so it can be returned to its creator. It’s not just about the asset but the circulating currency. This is where commodities of utility value, such as oil and gas, do not make for good currency because they are consumed. There’s plenty of history to attest to this. Gold’s struggle as a currency was to attain real-time valuations which simply had to wait for the information age and real-time applications.
Global Debt Crisis
The greatest private fraud of human history.
Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy “illness” threaten Democracy and the freedom of people?
http://eamb-ydrohoos.blogspot.com/2012/01/global-debt-crisis.html
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By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total …understand where this plan started just to bring all states at the same end …understand how this type of plans are established…
Authored by PANAGIOTIS TRAIANOU
[...] The Global Debt Crisis: How We Got in It and How to Get Out [...]
Great points. I have found a lot of help at http://www.debthelp-usa.com/ and http://www.fixyourowncredit.net
The web of debt…I visited it and found interesting things to read….and know
rrrrprrrr … We have only been on a pure debt based fiat system since 1971. Gold was a factor in the monetary system before that but is was at a fixed value. The fixed peg during BW was $35.00 USD/oz. That’s all well and fine if the world can support more and more liquidity by supplying more and more gold but as you know, it’s a finite resource. It makes more sense to let the trade value float as a function of any monetary demand that may be placed upon it and allow the trade value to rise. That’s what’s happened. Re-monetization of gold in real-time is where we are now , but this time around it cannot be a top-down process, It must be a bottom-up process by the marketplace. That’s what’s happening and on this basis , Gresham’s Law gets reversed as good money drives out bad money. Gresham’s Law was only an influence on driving precious metal money out of circulation because of fixed values placed on those metals in the past. The undervaluation led to hoarding. The problem was the fixed peg, not the PM. Real-time trading abilities only came about as a result of the severing of the fixed peg in 1971. Gold was ten set free. The dollar’s temporary role (as a currency) has recently been a stop-gap measure to its truer role (and current role) as a real-time measure for gold weighted payment in real-time. Real-time is key to all of this.
The State Debt Lie & Why Constitutional Law Is Covered By Commercial Law http://statedebtlie.wordpress.com/
According to Modern Money Mechanics debt is monetized. What does this mean? Every dollar in your wallet represents someone else in debt, or to put it another way. If everyone in america were to pay off their debt including the united states there would not be one dollar in circulation.
If you change out the banking system you change out the monetary system too. I know our current system is crazy but that is the truth.
Our debt based money system came as a result of Modern Money Mechanics. Which came as a result of the Federal Reserve. Which was created in 1913. There is a reason why the first two central banks in Americas history only had a 20 year charter
Debt expands the money supply. This is why 3 of the contraction measures for money deal with the loan process.
Oil is an artificial crutch for the petro-dollar, one that will surely break down. That said, oil is still not a good form of liquidity regardless of the price. A good form of currency doesn’t get consumed. Should a society consume that which it uses as currency or should it remain ? Again, don’t confuse wealth with being a good source of currency.Gold remains. It’s not gold’s utility value that makes it a great currency. It’s gold’s value based on it being intrinsic to economic activity without cheating organic law. IOW, its gold’s natural supply (and value) discipline that makes it a great currency. Said another way, if gold had zero utility value, it would be even better suited to a currency role than in its current status because 100% of its value would be intrinsic to economic creation. “Uselessness” can be considered a great thing in this monetary application.
I’ll give you an advantage over the rest of the market, a very rare one. The USD was not solely developed to be a currency. Its currency role is nothing but a stop gap measure in history, one that acts as a “bridge of transition” into a real-time bullion based currency system …..market driven. The big picture is not about moving from fiat to bullion. It’s actually bigger. It’s about moving from gold-as-money (with FIXED value) to gold-as-money (with real-time valuation) where the transition goes through the development of a free floating fiat system (USD) so that the dollar could eventually take on its ultimate role as a real-time measure for real-time-gold-as money. Gold was always a great store of value. The problem with gold currency systems of the past was fixed values that killed liquidity. The problem was not the bullion, but the fixed value. This is why the FIXED peg of Bretton Woods had to be severed in order to set gold free to float. It was about gold all along, not about the dollar. The dollar has an important role in a real-time gold-as-money paradigm, but only as a measure, not a currency. The two will still co-exist so what we end up with is two monetary paradigms, one based on debt (USD) and the other based on assets (real-time gold) where the dynamic measure of “USD/oz” is a bridge of transition. You cannot pour new wine into old wineskins. This has been made possible, only be way of the information age. God may be slow but gold is never late.
Right, Rooster, God is slow but gold is never late. You seem to be confounding the two. If you look at any actual history, plenty of which you will find in Web of Debt, you will find gold to have been woefully late and inadequate quite often. Let’s leave God out of it.
God was a typo. Your reference to “quite often” is back in a time when gold had a fixed value. Gold has always been a good store of value, but as a currency, it has always lacked liquidity because of fixed values placed upon it. When gold has a FIXED value, as it it did during Bretton Woods, liquidity comes down to the amount of physical gold that’s in a system. Demands on monetary gold require greater reserves when it’s FIXED, but when it is not fixed (Post Bretton Woods), it can extinguish debt on the basis of higher trade values. Gold’s liquidity challenges, historically, were not about the bullion. They were all about the fixed value. This is why it was necessary to severe the FIXED PEG and set gold free in 1971. Gold can now be remonetized in real-time (floating) just as the market currently does , quite often, using real-time bullion based payment systems. If you think more gold is required for a modern gold standard, then I’m afraid your mindset is over 40 years behind the current reality of real-time gold-as-money. The 21st century gold standard is already here. There is no systemic problem as per the design. There is only a marketing challenge, one that must be addressed bottom-up by the marketplace. Debt-free store of value has married with instant global liquidity in real-time.
Bretton Woods did not end because the government wanted gold to float. It is true that gold started to float after Brentton Woods, but that was just a byproduct. The real reason Nixon took us off that standard was due to our debt and our inability to maintain the dollar.
“Nixon’s decision was made in the context of emerging difficulties in the US economy. Increased government spending due to the Vietnam War and President Johnson’s Great Society program of public education and urban redevelopment had led to rampant inflation, which, in turn, worsened the USA’s balance-of-trade position. In addition, the USA was facing stiffer competition from export-orientated economies such as Japan and Germany as well as newly industrializing states such as Korea and Taiwan. The relative decline of the US economy was reflected in the fact that, having been responsible for almost 50 per cent of world industrial output in 1945, this had fallen to about 20 per cent by the early 1970s. Ultimately, the decision to end the Bretton Woods system was determined by the USA’s declining gold stocks and therefore its inability to maintain the value of the dollar”
http://www.palgrave.com/politics/global/students/casestudies/14039_89826_Ch19_GPI_BrettonWoods.pdf
I agree that the petro-dollar is an artificial crutch. and one that could collapse in the future
http://www.youtube.com/watch?feature=player_embedded&v=GuqZfaj34nc
The dollar has been moving to a debt based system since 1913. We give t-bills (debt) to the federal reserve,.and they give us notes. The only real hope for us is to end this debt based fiat currency and take the power away from the bankers and give it back to the people as this article goes on to point out.
The question is How likely is that to happen given the power of the federal Reserve, the IMF, and BIS? While the dollar is currently a reserve what would they replace it with? The Euro? fear of the debt associated with fiat currencies and the impending writing on the wall is the primary cause and driving force for all precious metals that are skyrocketing in price. Not supply and demand. Nations are once again seeking to add gold to their reserves. Fear is the main driving force behind the price of gold these days not trade.
For now the petro-dollar is the only thing that is stabilizing the dollar. The fact that oil is a consumable commodity makes no difference except for the laws of supply and demand. silver is a consumable commodity too. The rise in price is not due to only due to consumption.
http://en.wikipedia.org/wiki/Bank_for_International_Settlements
http://rense.com/general85/tower.htm
Marcus …. You’re saying the same thing in a long and drawn out manner. Lack of liquidity was the problem. Gold was undervalued based on the printing (debt) that was in conjunction with the war. France saw the gold as a bargain considering all the USD’s drifting around the planet.
The point is this and these are the facts. Gold and dollars were fixed at $35/0z . That fix got severed. They then floated and the ability to float set gold free in the technical sense that it could find its own trade value as per market fundamentals. This set the stage for today’s real-time gold-as-money because had that fixed peg not been severed, there would not be any real-time gold market. Those are the facts. Forget the official version because it’s mired in politics to obscure the truth. Go with the facts. It is what it is.
Now that we have real-time gold-as-market-money , we can expand the liquidity of gold by allowing the trade value to rise in its monetary role, like any other currency. That could not be done when gold had a fix.
Another fact : For the first time in history, we have gold backed currency (actual weight) that trades in real-time. Gold has never had real-time valuations as a currency in the past because the real-time technology to support bullion as a fully liquid currency was not available until fairly recently. Note : liquidity = weight x trade value
You cannot pour new wine into old wineskins.
@therooster,
I don’t think our viewpoints are really that far apart. I think we differ a little as to how we got here. Healthy discussion is good. Exchange of ideas is a great thing. There are a lot of points you made that I agree with,
I do think that government policies and the political side of things have directed our path and will forge the future. I don’t believe that the way I described Bretton Woods ending is a sanitized version. I think it is the truth. Policies pursued by Johnson had a major impact on its demise just as over spending by our current leaders will change the way things are done now.
I agree with all your points on gold. “Gold and dollars were fixed at $35/0z . That fix got severed. They then floated and the ability to float set gold free in the technical sense that it could find its own trade value as per market fundamentals.” True
The real questions here are not about gold, but the future of reserve currencies. Will the BIS and the IMF succeed in introducing a global reserve currency? Will China’s currency replace the dollar in reserve status? Will there be a more diversified basket of currencies that have reserve status? Once a new system is in place and the dollar is not required for reserve. and once the military is scaled way back.You can bet that the petro-dollar will come to a gradual end.
If a new monetary system comes into place and stabilizes the world economies the fear factor will be gone. If people feel secure once more you will see the price of gold come down. Fear in itself can create bubbles, or gold itself will be used as a reserve and the price will remain stable.
This is not to say that the price in precious metals are going to come down anytime soon. In fact I believe the opposite will happen. I am only talking extreme long term possibilities here. I think before and if gold comes down we would see hyper inflation and maybe a few redenominations. Once again I am looking at long term.
Right now I think buying gold and silver is one of the smartest things you can do to protect your wealth from a dollar that is losing value everyday. Your right though. We are really not that far apart in our views.
The threat of a global reserve currency or any centralized reserve currency is “the stick” , the impetus for the market to move toward decentralization and that means personally owned sovereign precious metals. Gold is a reserve currency right now. It is also a real-time sovereign currency used by individuals all over the world, each and every day. That’s not conjecture or hypothesis. That’s fact. Ride it because it’s only through increased demand that we will see more and more monetization, monetization that leads to greater freedoms.
The events and motivations behind BW are immaterial, either way. It’s the outcome that is what it is. Let’s run with the facts.
Your “real question” has you thinking top-down. This is my observation of your thinking. Sovereign gold monetization by the individual is a grass roots market function, bottom-up and organic. It has to be. Because of the real-time component, any migration from the current legacy (USD) system to real-time gold-as-money would cause a sudden (and devastating) crash in the USD. Rate of change has to be considered which is why the elite are limited and relegated to “carrying the stick”. Regardless of what you may think the intentions of the elite may be, they cannot overtly support gold-as-money in REAL-TIME. The process has to be bottom-up. We must be as wise as serpents.
Never forget the gifts of the Magi.
First I am not saying the IMF and the BIS will succeed. but that won’t stop their attempt. To say that there is no threat of a global currency and that everyone will continue to use gold is a bit naive. Bassel 3 and everything going on in the world bank, WTO, IMF,and BIS is an attempt to get a one world currency. If the central banks cooperate with this how exactly is it going to be stopped with gold? I think there is a high provability that they will be successful.
I have a quarter from 1963. the silver content in that quarter makes it worth $3.25 cents. let us say I walk into walmart and find a loaf of bread for 3.25 and I proceed to check out. They ring me up and I hand them the quarter. They are going to say I owe them 3 more dollars. but wait I explain, that quarter is worth 3.25 cents because of the silver content. They are going to look at me like I am crazy.
If I have 1500.00 worth of goods and I am checking out at my local Sams Club. I toss them a gold coin and tell them to keep the change. they are going to look at me like I am some kind of idiot.
gold is used around the world as a reserve. in some countries it acts like currency but not in every country and in every situation. I can not make exchanges here in my town using precious metals. I can sell precious metals and use the currency to buy things.
It was the great depression that change the way gold backed the dollar. During the great depression Those countries that got off the gold standard sooner, recovered quicker. Gold will serve to protect your wealth from a falling currency. While gold has gone up the dollar has gone down, but gold will not be the sole source of money through out the world. It will not be the only reserve.
You won’t get all the central banks to comply. This is not a top down way of thinking. This is a who is in charge makes the rules thinking. Did you click on the BIS link I provided? look into the IMF. This is the global central banking system of the world. All central banks plug into them. The fact is they are not going to be dismantled because the world is now some how convinced it is only going to use gold and nothing else. did you view the You Tube link I provided? You can call it bottom up thinking. or you can call it anything you want. I refer to this as a pipe dream. We are so far gone right now. And you are dealing with an uneducated low information populous.
Fiat currencies come and go. There value is intrinsic. The new global currency that these guys want to put in place is only a step. The next step after that will be a mark implanted on your body and that mark will be run through a scanner like a credit card machine anytime you want to make a purchase.
This is the plan and to say it does not exist is like an ostrich putting their head in the sand