Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

The Return of the Gold Standard After 36 Years

Commodities / Gold & Silver Sep 25, 2008 - 02:46 PM GMT

By: Professor_Emeritus

Commodities Best Financial Markets Analysis Article“Two legs bad, four legs good!”
There were two main direct assaults on the gold standard by the American government: the first on the watch of a Democratic president, Franklin D. Roosevelt, when the U.S. defaulted on its domestic gold obligations in 1933; the second on the watch of a Republican president, Richard Nixon, when the U.S. defaulted on its international gold obligations in 1971. In each case, the gold standard struck back.


Uncannily, in each case there was a lag of 36 years, signifying the fact that it takes that long for a new generation to acquiesce in the slogan “two legs bad, four legs good!” as in George Orwell's Animal Farm , a parody of the Soviet Union and the Bolshevik revolution. It will be recalled that the pigs have overthrown the farmer and took over the farm, trying to run it under this revolutionary slogan.

The run on the dollar in the wake of the 1933 default started in 1969, wiping out more than one half of the value of the currency in a few years, the worst episode of monetary destruction in history of the dollar up to that point. The second run on the dollar in the wake of the 1971 default started in 2007, when American banks faltered as bond insurance premiums they were paying on their assets skyrocketed. The second run still continues as foreign dollar account holders have not been heard from. Make no mistake about it: the present financial crisis is a gold crisis, even though this fact is vehemently denied by the Establishment.

Cause and effect

Causality may be camouflaged by lags, and the longer the lag, the more perfect the camouflage is. This is confirmed in the case of the government sabotaging the gold standard. From the point of view of the Establishment, the causality nexus must be covered up by hook or crook. The propaganda line is that gold has long since outlived its usefulness and it was necessary for the government to make some housekeeping changes in order to get rid of this useless and annoying appendage. Note that this is exactly what you would expect to hear from a banker defaulting on his gold obligations: he would badmouth gold and promote his own dishonored paper. But if gold is really so useless, and so entangled with superstition, then why not pay it out as honor demands, and avoid the stigma of national dishonor?

The 36-year long lag is explained, in part, by the servility of academia and media in parroting government propaganda ― betraying their sacred mission to inform without fear and favor. The general public, even if indignant at the time of the default, gets desensitized to the enormity of gold confiscation and the government's declaring default fraudulently. As Hitler said, propaganda does work, provided that it is diligently repeated year after year. Nazi Germany just was not given 36 years for its propaganda to sink in. The Soviet Union was; that's why the tenets of international socialism are still treated as holy writ, and those of national socialism as garbage, regardless of the close similarity.

“Four legs good, two legs better!”

Animal Farm could just as well be a parody of the regime of irredeemable currency. The pigs have overthrown the gold standard. They started to mimic its operation, prodded by the chief of pigs, Alan Greenspan. Their revolutionary slogan later gave way to a new one: “four legs good, two legs better!”, when the pigs tried to walk on their hind legs instead of all four, to the endless amusement of the other four-legged creatures on the farm. Unfortunately for them, their new manner of walking could not help the fact that they remained just as pig-headed and ham-handed as ever.

Kill the Constitution to make it a “living document”

The role of gold in the monetary system is anchored in the U.S. Constitution. The Founding Fathers were no fools. They knew exactly what they were talking about when they insisted on a blanket denial of power for the government to monetize its own debt, or any debt for that matter. They knew perfectly well that a metallic monetary standard is the only effective prophylactic that can deny that power. The fact that the U.S. government never considered proposing an amendment to the Constitution to legalize fiat money is a telltale. Policy-makers could not muster the necessary moral courage to face counter-arguments in an open debate. Irredeemable currency has no integrity: the issuer is given privileges with no countervailing responsibilities. He is granted unlimited power in a republic based on the principle of limited and enumerated powers. The principle of checks and balances is thrown to the winds. These features are all alien to the spirit of the Constitution, not just to its letter. Rather than facing a public debate, the government prefers to live with the odium that it is the destroyer of the Constitution.

The legislative branch usurped powers denied to it by the Constitution. The executive branch conspired with the legislative branch to pull it off. All presidents, starting with Franklin D. Roosevelt, have perjured themselves when they swore to uphold the U.S. Constitution, and then turned around and signed bills into law to keep raising the limit on government debt payable in irredeemable currency, i.e., monetized government debt. The judiciary branch of the government, rather than exposing the conspiracy, has joined it, on the basis of the spurious doctrine that the Constitution “is a living document” which does not say what it says, but what the judiciary say it says. In other words, you have to kill the Constitution to make it a “living” document.

Regulator of debt

To expect that the gold standard can be destroyed with impunity is a pipedream. The Establishment will never admit that the present monetary and financial crisis is a gold crisis, or that the day of reckoning has dawned. It will find any number of ad hoc explanations, such as too little regulation, too relaxed lending standards, naked short selling of financial stocks, etc., etc. The big picture is blackened out. For this reason, it is necessary to state the cause-effect nexus between ousting gold from the monetary system and the credit collapse that is now unfolding before our eyes, after a 36-year lag, in the clearest possible terms.

Gold has the same role to play in the monetary system as the fly-wheel regulator does in an engine, the brake does in a train, and circuit-breakers do in an electrical network. Gold is the regulator of the quantity of debt in the economy that can be safely created and carried. It is also safeguarding quality by rejecting toxic debt before it can start metastasis. Debt-based currency utterly lacks safeguards limiting quantity and vouching for quality of debt. Debt-based currency is an invitation to disaster, that of the toppling of the Tower of Babel. Its effects are far from being instantaneous. There is a threshold and there is a critical mass involved. We have long since crossed that threshold and passed that critical mass. By no rational calculus can the outstanding debt be expected to be repaid without inflationary or deflationary adventures, even if further increase were stopped dead in its track. The discussion of the present financial crisis by academia and media avoids all reference to this fact. Under the gold standard a fast-breeder of debt was unthinkable, and debt was retired in an orderly manner.

Destabilizing interest rates

The significance of gold in the monetary system is not that it can stabilize prices, which is neither possible nor desirable. It is the fact that gold can stabilize interest rates . No debt-based currency can do it, because the value of the unit of account is left undefined and is subject to political manipulation by the pressure groups. The discussion of the present financial crisis by academia and media avoids reference to this fact as well. Under the gold standard interest and foreign exchange rates were so stable that there was no bond speculation ― for lack of volatility would make it unprofitable. There was no Debt Tower of Babel to threaten with burying the economy underneath. Under the gold standard there were no credit-default swaps. There was no need for them.

Barbarous relic or accounting tool?

The gold standard has been called a “barbarous relic”. However, the unpleasant truth, one that government propagandists have ‘forgotten' to consider, is that the gold standard is merely a tool for sound accounting and, yes, for sound moral principles. Book-keeping under the regime of irredeemable currency is an exercise in prestidigitation. The gold standard is the only conceivable early warning system to indicate erosion of capital. It was not the gold standard per se that politicians and adventurers wanted to overthrow. Above all, they wanted to get rid of certain accounting and moral principles, especially those applicable to banking, that had become a fetter upon their ambition for aggrandizement and perpetuation of power. Historically, sound accounting and moral principles had been singled out for discard before the gold standard was given the coup de grâce . Just how monetization of debt has led to unprecedented and previously unthinkable corruption of accounting and moral standards, this is a question that has never been addressed by impartial scholarship before.

In order to see the connection we must recall that any durable change of the rate of interest has a direct and immediate effect on the value of financial assets. Rising interest rates make the value of bonds fall, and falling interest rates make it rise. As a result of this inverse relationship the Wealth of Nations flows and ebbs together with the variation of the rate of interest.
Capital destruction

Indeed, rising interest rates destroy wealth as they render the productivity of capital submarginal. Establishment economists and financial journalists preach the false doctrine that, conversely, when the government and its central bank suppress interest rates, new wealth is being created. This is the gravest error of all! Falling interest rates destroy capital in a most devious way, as they increase the liquidation-value of debt contracted earlier at higher rates. All observers miss the point that as interest rates fall, the burden of servicing outstanding debt is increased . They blithely assume that all debt is automatically refinanced at the lower rate. This is definitely not the case. The issuer must continue to redeem the maturing coupons of fixed nominal value, regardless how far the rate of interest may have fallen after selling the bond. To that extent all issuers of bonds (along with other borrowers) are subject to impairment on capital account in a falling interest rate environment. If the impairment is ignored, the outcome is wholesale bankruptcies in due course.

Enterprises should make up for losses of capital due to falling interest rates whenever they occur. The trouble is that they don't. As a result they report losses as profits. There is a negative feedback. Capital is eroded further. When the truth dawns upon them, it is already too late. I shall argue that this is the essence of the present banking crisis in America, and it was caused by the destabilization of the interest rate structure, the ultimate cause of which was the overthrow of the gold standard in 1971.

Interest rates have been falling for the past 28 years with the result that the liquidation-value of outstanding debt has reached the tipping point, where capital is plunged into negative territory. Capital dissipation stops as there is nothing more to dissipate. This is sudden death for the enterprise. Producing firms fold tent and look for greener pastures in Asia where wage rates are lower, while financial firms and banks start falling like dominoes.

No commentator is able to explain how American banks could run out of capital in spite of obscene profits they have been making. My explanation is simple. Capital destruction has been going on stealthily for 28 years but the banks were not paying attention. The magnitude of the decline in interest rates, if not its length, is historically unprecedented. The banks have been paying out phantom profits in dividends and in compensation, in the belief that their capital accounts were in good shape. They were not. They were insidiously eroded by the falling interest rate structure, as it inevitably increased the cost of servicing capital already deployed. The banks were unwilling or unable to raise new capital to cover the shortfall. Under these circumstances they should have reduced their own exposure to borrowing. Instead, they were vastly expanding it. By the time they woke up, capital was gone and they were in the grips of bankruptcy.

This puts the importance of the gold standard into high relief. Both rising and falling interest rates are extremely harmful to enterprises, banks not excepted. The plight of General Motors is no different from that of Morgan Stanley. The environment in which they can safely prosper is that of stable interest rates, that only a gold standard can provide.

Not all risks can be effectively insured against

Academia has failed to study and expose the untoward consequences of ousting gold from the monetary system. It dismissed the problem of fluctuating ― nay, gyrating ― interest rates by saying that insurance against those risks is available, just like insurance against the risk of fluctuating foreign exchange rates is, through the derivatives markets. If academia had done its job to research the problem properly, it would have discovered that there are risks against which no effective insurance is available. For example, there is no effective insurance against risks artificially created at the gaming tables in a gambling casino. Likewise, risks represented by fluctuating interest and foreign exchange rates have been artificially created by the government in ousting gold from the monetary system. Under the gold standard, there was no risk of fluctuating interest and foreign exchange rates. Bond values were stable.

Bond values are no longer stable, but there is no effective insurance against diminishing bond values. If you were to offer insurance against losses due to declining bond values or bond default, then you would have to look for second-round insurance to cover your assumed risk. Second-round insurers would need third-round insurance, and so on and so forth. This means an infinite chain of insurers, in effect, a Tower of Babel growing ever taller ever faster. Such a tower is not a figment of the imagination. It is real; it exists even though the earth is quaking under its foundations. This Tower of Babel is the derivatives market. At each level the instrument of insurance is a credit-default swap. The amazing thing is that there are far more credit-default swaps outstanding than there are bonds in existence that they are supposed to be insuring.

Observers make wild guesses in trying to explain this strange phenomenon. They suggest that most are “dry swaps”, that is, they have been created solely for speculative purposes. In this way speculators can gamble with almost no money down. This is the position, for example, of Floyd Norris of The New York Times (Reckless? You are in luck! September 19, 2008.)

I reject this explanation. In reality all credit-default swaps were created to insure actual risks directly or indirectly connected with bond-holdings in the balance sheets of financial institutions. First-round insurance is usually the purchase of a bond futures contract; second-round insurance is the purchase or sale of a put or a call options on bond futures. Third- and fourth-round insurance can also be negotiated in the form of a credit-default swap in the derivatives market. I submit that all the credit-default swaps were negotiated by actual insurers to cover risks they have actually assumed in writing insurance at a lower round. They were not negotiated for speculative purposes. However, at bottom, these risks are artificial, as they have been created by the government in overthrowing the gold standard. This is the true explanation of the exploding derivatives market that doubles in size every second year, and has already surpassed the one-half quadrillion dollar ($500,000,000,000,000) mark.

The derivatives market is the nemesis of government dishonesty and incompetence. The gold standard is striking back ― with a lag of 36 years.

Conclusion

The present credit crisis is the greatest ever in history. It burst upon the world in February, 2007, when insurance premiums on bonds in the banks' portfolio shot up. However, the roots of the crisis go much farther back. They go back all the way to the ousting of gold from the monetary system 36 years earlier. Gold is an indispensable tool for the banks to manage risk. The Federal Reserve can print its notes ad nauseam , and Helicopter Ben can air-drop them to the banks and bond insurers.

It will not address the risks of declining or evaporating bond values. To do that you need something more substantial than irredeemable promises to pay. In Part 2 of this article I shall look at the present crisis in greater detail from the distinctive perspective of the gold standard as an early warning system indicating capital erosion.

Gold Standard University is closing down

Gold Standard University Live had its mission cut out for it: to do the research that academia refused or was forbidden to do: find out the consequences of ousting gold from the monetary system by the U.S. government. Unfortunately our sponsor, Mr. Eric Sprott of Sprott Asset Management, Inc., has withdrawn his financial support saying that our “results do not justify the expenditure”. I am forced to terminate the sessions. The last one will be Session Five to be held in Canberra, Australia, November 11-14, 2008.

In view of the extraordinary events unfolding in world finance and the American banking scene, I shall put on extra meetings in Canberra where I can answer the questions of participants. I shall show that this is not a sub-prime crisis, not a real estate crisis, not even a dollar crisis. This is a gold crisis: the chickens of 1933 and 1971 are coming home to roost. I invite you to come and contribute to the success of Gold Standard University Live with your questions and comments. At any rate, the sessions will be taped and the DVD's made available to the public, along with the conference proceedings.

September 25, 2008.

References

It is not a dollar crisis: it is a gold crisis             June 4, 2008
Is our accounting system flawed? ― It may be insensitive to capital destruction      May 23, 2008
Forgotten anniversary haunts the nation             March 25, 2008,

By Professor Antal E. Fekete,
Intermountain Institute for Science and Applied Mathematics

"GOLD STANDARD UNIVERSITY" - Antal E. Fekete aefekete@iisam.com

For further information please check www.professorfekete.com or inquire at GSUL@t-online.hu .

We are pleased to announce that a new website www.professorfekete.com is now available. It contains e-books, archives, news about GSUL, and material of current interest

Copyright © 2008 Professor Antal E. Fekete
Professor Antal E. Fekete was born and educated in Hungary. He immigrated to Canada in 1956. In addition to teaching in Canada, he worked in the Washington DC office of Congressman W. E. Dannemeyer for five years on monetary and fiscal reform till 1990. He taught as visiting professor of economics at the Francisco Marroquin University in Guatemala City in 1996. Since 2001 he has been consulting professor at Sapientia University, Cluj-Napoca, Romania. In 1996 Professor Fekete won the first prize in the International Currency Essay contest sponsored by Bank Lips Ltd. of Switzerland. He also runs the Gold Standard University on this website.

Antal E. Fekete / Professor_Emeritus Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

roshea
26 Sep 08, 21:07
No Bailout!!

No Bailout!! NO BAILOUT!!!



26 Sep 08, 22:57
URGENT ACTION NEEDED!

URGENT ACTION NEEDED! -- Contact the courageous Indiana Congressman who is standing up to the Fed !

Right now senior Indiana Congressman Mike Pence (R) and others are at Capitol Hill holding their ground against The Fed, Bush, Paulson, and Bernacke. Time is of the essence because Bush continues to feed the message to the media that our world will melt on Monday if they don't get their $700+ billion bailout regardless of what America's taxpayers want. This is not true. America will still be here on Tuesday.

Currently, Congressman Pence is wisely calling for a suspension of the capital gains tax on investments in order to encourage the millions of Americans without debt to invest in the markets. Here is the Congressman's plan.

www.MikePence.com

Call Congressman Pence from Indiana, tell him America has his back, and ask him to co-sponsor HR 2755, The Act to Abolish the Federal Reserve Bank, the culprits who want to steal our wealth and leave generations in debt to their private consortium of bankers. The Congressman's office is receptive to your message!

PLEASE FORWARD THE MESSAGE BELOW TO YOUR LISTS:

"We are helping the Indiana tax activists with HOOSIERS FOR FAIR TAXATION in Congressman Mike Pence's home state of Indiana. They have a solid verifiable track record of successes and political network that includes elected officials on the right side.

Mike Pence, a courageous Senior Congressman from Indiana, was first to stand down the Fed against the bailout. Please call and fax his Indiana Office. Tell him we are grateful for his courage, tell him America has his back, and ask him to co-sponsor HR 2755, the Act to Abolish The Federal Reserve Bank and return America's wealth to her own Treasury! There is unbelievable ground support and the Congressman is getting calls from high places to co-sponsor the Act to Abolish the Federal Reserve, HR2755.

Be polite, enthusiastic, and be sure to thank him for his courage!

The numbers below are for his campaign office. There will likely be staff in his office this weekend. If no answer, send a fax and leave voicemails with your name, city, state. It doesn't matter if you are not from Indiana.

REP MIKE PENCE INDIANA OFFICE

PHONE: 765-643-9503

FAX: 765-643-9514

P.s. Then don't forget to call your own local Congressperson and tell them her or him to stand with Representative Mike Pence and with the American People."

www.HoosiersForFairTaxation.com


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules