Debtor's Prison

Greetings Fellow Inmates,

It has been a long 20 days since we last convened, so we wish all our readers and friends all around the global penitentiary system a prosperous start to 2010.  We have spent these 20 days on leave in a fruitful little corner in The Yard; we played, we toiled, and return refreshed to our regular routine.   For this first post on the new year, we thought to begin with what will be one of the central themes of our discussions in 2010; money, itself.    In many ways, we have already spent a great deal of time thinking about what constitutes money, its sufficient and necessary conditions, and attempted to come up with some draft definitions.   2010 is likely to be a year that will lead to many people to question very basic notions about risk, wealth (what it means and how to preserve it) and well-being.   Now, let us be clear and specific.   We have thus far made very few predictions about 2010. As many of our readers know, we are weary of prognostication; we mostly like to spot problems and inconsitencies, whose eventual consequences become impossible to time given the chaotic nature of herd behaviour and information absorption coefficients.  We did predict however that by 11.07.10, Uncle Benny will have increased quantitative easing, and put our money where out mouth is.  The most recent Fed Board Minutes confirm our suspicions.   This alone could be enough to trigger a collective “realization” that QE is getting out of control, and in combination with the rising inflation pressures continuing and worsening in 2010 could really lead investors worldwide to seriously question the viability of the current UST/USD-denominated system.   Therefore, we are strongly predicting a very significant lack of confidence in the UST/USD-system, as qualitative as this is.  Will 2010 be enough to break the greenback’s back?  Who knows, but the first flowerings will certainly appear this year.  Make no mistake about it, the coming crisis will be one of confidence, a break of the faith in the system.    A central tenet of the broken faith will be to shift from paper/digital assets into real ones.   When the full crisis is set and done, most of us will have been forced to re-evaluate what constitutes “real” wealth, and how to best store it; a discipline we have long forgotten generationally (since 1933), and will thus lead us to question basic notions about money.

Tonight, our discussion will be framed by an exceptional essay written by one of the most notorious characters in the twentieth century, Judy Greenscam.  As a brief aside, we’d like to direct our readers to “The Enforcers” section, where we have just added a bio sheet for Judy Greenscam.  Once again, this section is highly recommended reading and well worth your while.   Moreover, we would like to announce a contest where the first reader to correctly identify the origin of the nickname “Judy” will win an autographed copy of Judy’s book, The Age of Turbulence shipped anywhere in the world, as well as permanent enshrinement in Judy's biosheet; we have left ample clues throughout the website.    Anyway, back to the essay.

The piece, grandiosely titled “Gold and Economic Freedom”, first appeared on 01.06.66 in Ayn Rand’s “The Objectivist” Newsletter.  It really is a marvellous brief treatment of the gold standard and how it protects/defines wealth so much better than a paper fiat system.  Imagine that: Judy at one point was succinct, precise, thorough and piercing.   Of course she was!  The whole greenscamspeak charade was nothing but a smoke-and-mirrors show, at which Judy maniacally and hysterically laughed in private.   But that is neither here nor there.   The true value of Judy’s piece, which we recommend you read in its entirety, is its attempt at clear and unquestionable definitions of money, wealth and savings.   Judy’s words ring just as true today as they did in 1966, and will remain true for the foreseeable future: such is the nature of exact and rigid definitions.   We will quote Judy in italics, and we begin with the most basic definition of all. 

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

General and robust, we shall adopt it; whenever we use the word “money”, we mean the above.  Beyond this literal definition however we will, of course, still explore all the ontological, philosophical and ultimately practical nuances of properly defining/designing a form of money, or store of wealth.    Judy then proceeds to describe some of the features of such a medium of exchange, in much the same way we have attempted to do many times here at DP.   Quite fundamentally, she asserts that a universally accepted medium of exchange allows market participants to “store wealth”, or rather, “save”.   This is of course, the crux of the issue, and one that we will continue to flesh out in 2010, just as we started way back when back when in “A Brief Commentary on Intrinsic Value and Stores of Value”.

Judy proceeds to make several bold statements concerning gold’s role as protector and insurer of economic freedom.   It is extremely ironic, yes, but also mind-bogglingly ridiculous that such an intelligent person, capable of emitting such harsh maxims and syllogisms about gold as economic liberator can then become the Chief Architect of the system created specifically to remove said gold standard¸ and thus, according to Judy, created to economically imprison the populace.    If you are unable to see how this is an enormous case of doublethink then we suggest turning off your BlackBerry, your BloomBerg, and stop listening to Barack oBama.  Judy’s following statements about gold are, again, mostly interesting when juxtaposed to the actual system, for which Judy is perhaps most single-handedly responsible.

Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. 

It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

The statements speak for themselves, but we mostly emphasize the nature that gold leads to quick and efficient market corrections, as it inhibits the accumulation of excesses (unlike paper).   There is ample historical evidence for this, and we strongly urge you to verify this yourself.   Perhaps at some point, we will model this in history (some sort of depth studies of recessions on/off gold standard), but for now our intent is not to expound on the nature of the gold standard, nor even evaluate the merits of Judy’s claims.  We merely point out again the deep and troubling irony of Judy’s avowed knowledge about the nature of the gold standard, 21 years before she became Chairman of the Fed, acting directly against the interests of “Economic Freedom” as she defined it here in 1966.   It’s almost like Judy likes playing the “contrapositive”, or the “receptive” end of the negative.  Hmm.

If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913.

This is a marvellous quote that aims a painful arrow of truth at the Fed’s little heart-place-holder.   This is the principal alleged reason why the Fed was created; to eliminate the business cycle.   If a central bank could create liquidity at will, it was claimed, businesses would never run out of money.   Well, this hypothesis has now been unequivocally, often and robustly proven to be false.    Hence, on its outwardly public purpose, the Fed has failed miserably.   It should be abolished, and a new system devised.   The one thing the Fed has done however though, invariably, is to increase inflation.   Just look at the CPI chart in our previous post.   At creating inflation, the Fed has been an enormous and unwavering success.   This, we believe, was the actual real purpose of creation of the Fed: to create a persistent and stable inflation and thus deprive the populace of their wealth.   The people in charge of the world are very successful at achieving their aims, so as the obvious architects and players in the Fed (again, see The Enforcers), we are confident in assuming that the actual purpose of the Fed is precisely that at which it is the most successful, creating inflation.   This amounts to the grandest-scale theft, a gargantuan erosion of the wealth, a mass impoverishment of the world’s peoples.   Some might call us histrionic, but we beg to differ, and so does Judy.   We are simply sticking to definitions, as was Judy back in her 1966 pre-greenscamspeak days:  a system that creates/promotes a persistent inflation is equivalent to a system that discourages long-term saving, erodes wealth and deprives its participants of economic freedom.   Or as Judy says, remember, way back in 1966,

The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods.

Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

We could have hardly said it any better, right on Judy.   Let us repeat, “Deficit spending is simply a scheme for the confiscation of wealth.”  Scheme. Confiscation.   Strong words.    We would absolutely love to simply sit Judy, Uncle Benny Obummer, Granpa Volcker, and Mayo Larry in a room as ask them to respond, in the most clearly-worded way possible to the above quotes.   They are largely irrefutable, barring any semantic Idea Shape-Shifting such as that Judy would later-on perfect.  Deficit spending causes greater in debentures, which only increases the ratio of claims to assets, leading not only to further economic imprisonment (in time-terms), but also much greater risk of systemic fiat collapse.

It’s amazing to think the kind of world we would currently live in if the person that wrote this article in 1966 would have actually served as the Chief Monetary Authority in the World for 19 years.   Instead, what we got was Judy, one of the puppeteer’s many masks (also one of the most funny-looking ones).    

We thus conclude this little post.  We will now resume regular postings on DP after our little vacation.  We will resume many of threads we began late last year and cover some of the most pressing developments in our financial and economic universe.    Ultimately, it is important for DP staff to constantly evaluate and reiterate the purpose of our little endeavour.   We are truly immersed in a life-quest to unravel the different risks and economic shackles that imprison us.   We have found that some of the simplest questions pose the most difficult conundrums and are the most problematically dealt with in our current world.  We do not, however, believe we are bound for eternal failure.   It is entirely within the grasp of human intellect to arrive at sound and robust definitions of value and money, to at least a modicum of self-consistency, and build an economic system around them that does not violate or “fuzzy-up” these definitions.    We will attempt this exercise for ourselves, as it will offer invaluable insights for the rearranging of our own lives and risk, and we will fervently hope that our discussions here help further the mental discourse of at least a few survivors that will shape the system of tomorrow.

May your capital be safe and your investments prosperous,

MAAA