Silver Is Money: Behold A White Horse - Part Five A

By: Douglas V. Gnazzo | Sun, Jul 31, 2005
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"According to the measure of a man, that is, of the angel"


Silver Coin - Apollo

This commentary was originally posted at www.financialsense.com on 29th May 2005.

Introduction

This will be the final conclusion to the series Silver Is Money. Several different topics will be discussed, and at times one may find themselves wondering what the topic under discussion has to do with silver being money. There is however, an interconnectedness to all things, including the various issues provided herein with the basic purpose and theme of this series - that silver is money.

By the end, such will be readily apparent. A bit of patience is required as I can get a bit long winded at times and tend to go off on little tangential digressions, but really they're not, as all things truly are connected. But I digress - already.

We are going to once again revisit the deflation versus inflation debate as well as the synthetic dollar short thesis. Certain opinions will be questioned, but in the pursuit and tenor of learning. All other opinions and comments are invited. It is only by such discussion and questioning that learning can take place.

Next will follow commentary on present goods versus future goods, as related to bank notes, both when backed by specie and not backed by silver and gold. This issue is obviously very germane to the main theme of silver is money.

Hyperinflation will be revisited one last time as well, with some interesting discussion, historical references, and thought provoking pictures. Some of the pictures speak volumes.

Lastly we will discuss paradigms, and paradigm shifts, trying to get a handle on what may or may not be occurring now, and in the future.

I can remember discussing this topic with a good friend Eric King, who has written articles for this website in the past. He is one of a few people, along with Jim Puplava, that understands the big picture in regards to what is occurring, not only in the markets, but in the world as well.

Part of this discussion will include some sacred geometry as well, which ties in perfectly with the topics under discussion. So fasten your seat belts and let's begin.

Inflation and Deflation

This will be the last attempt at trying to explain what has become quite the popular topic de jour. If I had a dollar for every opinion on this subject, I'd be poor if they were paper dollars, but rich if they were silver dollars. Which statement, on its own merits, almost explains the issues under question. I will attempt to elaborate.

When talking about economics, or finance, or monetary theory, it is always a good idea to make sure what everyone's idea of money is, as money is the basis of the monetary system, which in turn is the basis of the financial system, and the economy as well.

As society grows and expands, the direct exchange of barter evolves into indirect exchange, which uses the most widely accepted common medium of exchange for the trading of goods. The common medium of exchange is called money. This is the economic definition of money.

Besides the economic definition of money, there is the legal or juristic definition of money as well. This is what the legal system of the land, especially the government, accepts for payment of debt; and most significantly debt as in the form of taxes owed to the government. This is called legal tender.

It is also a good idea to have a definition of what debt is. Debt is an obligation, it is something that is owed, that has not yet been paid for, but is obligated to be paid for - in the future. Debt is a future obligation. Many very astute writers are of the opinion that debt is not a good thing. Maybe yes, maybe no. Maybe a little of both. Hear is why.

Savings and Credit

I have earned and saved 1000 silver dollars. They are mine to do with as I please. You come to me and say, I need to borrow some money, I need a loan - I need some credit.

Because the 1000 silver dollars are mine, if I lend them to you this does not create more money in the economy. Money that already existed is being lent out or borrowed. Nothing wrong with that. It is a good thing. As long as the rate of interest is honest and just.

So what's the big deal about all this debt being accumulated that everyone is always talking about that's going to be the downfall of our monetary system? Well it's one of those little secrets of the temple that the temple guys, who used to be called priests, but now go by other names, don't like you to know about.

The secret is that there is nothing wrong with honest debt, based on honest credit, using an honest rate of interest, based on honest money - money that is real, has been earned, and has been saved. It is a good thing. It facilitates commerce.

But when the money hasn't been earned, hasn't been saved, and then is loaned out as credit, the extension of such credit is not only creating a debt that didn't exist prior to the transaction, but it is also creating money that didn't previously exist.

How can that be, how can an individual or institution loan money that they do not have? That is absurd. Yes, in deed it is absurd, as well as few other superlatives we will politely not mention. As Murray Rothbard said:

"The problem, therefore, is not debt but credit, and not all credit but bank credit financed by inflationary expansion of bank money rather than by the genuine savings of either share holders or creditors. The problem in other words, is not debt but loans generated by fractional-reserve banking." [Rothbard]

What Side of The Line?

Obviously to do such lending borders very close to being fraud, and at the least it is dishonest, as it hides what is actually taking place, as opposed to providing full disclosure and honesty as to what is occurring.

Money is being created by the mere act of lending, expressly so that the new money can be lent out as credit by using fractional reserve lending policies.

This allows the lender to lend that which they did not earn or save. That which they did not already have as savings, but simply created when the desire beckoned. And to then make a profit on lending that which had not previously existed. The supply of money is being increased without labor or savings. This is not a good thing.

This is the creature brought forth by the unholy wedlock of the beast of dishonest credit with the beast of fractional reserve lending. Born is the creature known as paper fiat. It is a vile and despicable thing - an abomination that walks upon the face of the earth, doomed to a perpetual life of a continual feeding frenzy. It facilitates two things, both of which are less than desirable: more debt and wealth transference.

When money is allowed to be created without effort, without work, without savings, all for the sake of the profit of the few that are allowed to create the dishonest money, by the extension of credit of that which they do not have, and to then make a profit or interest on the dishonest act - such is not a good thing.

The extension of credit should only come from the savings pool. If the money or credit does not already exist in the savings pool, the money that is created by the extension of credit is not real. It is merely being spoken into existence by fiat. Illusion and delusion become the twisted sisters of fate.

This is why in paper fiat land, the motto of the day is inflate or die. More and more money has to be created just to pay the interest on the money previously created and then lent out. It is a vicious and terrible circle that never ends. It is a mad dog, chasing his tail. But it does keep the bankers healthy, wealthy, and wise. On second thought, it keeps them wealthy.

Why Debt?

Why is such a dishonest system allowed to exist?

Because it creates a perpetual interest rate stream of wealth transference for the few elite puppet masters of the universe who can create their own money and lend it out on interest to the rest of We The People.

And since they rule, the rest of us have been played for fools. Most of us do not even know how the system actually works. But we do not have to accept the unacceptable - a dishonest monetary system of paper fiat. Knowledge is power. Learn how it works. Empower yourself.

We do not have to accept the Bureau of the Public Debt : The Debt To the Penny.

There is the choice of Honest Money of silver and gold, as stated in the Constitution. Remember, and vote accordingly. This is why the money-masters fear honest money of silver and gold, it keeps them under control. It almost makes them honest.

Help silver and gold to keep them honest. Demand that it be so done. Exert your constitutional freedom and rights. Exert your sovereignty. See that the Constitution is followed as the Supreme Law of the Land. See justice prevail. See truth triumph. See that the untruth is no more.

One More Time

The following will discuss a recent article by one of the stock markets living legends on the deflation versus inflation debate, and on the synthetic short dollar thesis. I have chosen this particular piece as it covers several very critical points of a complex issue. The article was posed in the format of questions and answers.

"May 13, 2005 -- Question -- If deflation is almost impossible, since the Fed can neutralize any deflation simply by increasing the money base, why is the Fed so worried about deflation -- or, as the Fed puts it, "insufficient inflation"?

Answer -- If there's a credit collapse, it seems to me that the situation could change very quickly and soon get out of hand -- in which case we'd have deflation.

The fact is that the stock market has been deflating all year. Now the stock market has been joined by oil, commodity prices, copper, steel, aluminum, gold, Goldman Sachs Natural Resources Index, materials in general. I don't know what you want to call it, but I call it some kind or variety of deflation.

You want proof? OK, check the daily chart of the CRB Commodity Index below. I'd call this a breakdown, wouldn't you? It sure isn't an inflation in commodities." [Richard Russell]


[chart included in quoted article]

Here is another chart of the CRB, with a different view and timeframe not provided in the above article.


[chart provided by Gnazzo courtesy of bigcharts.com]

Two different charts showing two different views, one the trees, the other of the forest. Continuing on with the quoted article:

"In the meantime, the hottest item around is the US dollar. Why is the dollar at a high for the year? Good question, and I haven't read about or seen the definitive answer yet. Of course, the market answer is "more buyers than sellers," but how does that help us?

I've been saying all along that when everybody is invested on one side of the equation -- watch out. And it's true, the biggest "given" around a month or so ago was that "shorting the dollar was the guaranteed path to profits." And it's true, even Buffett and Gates announced to the world that the dollar had nowhere to go but down.

In this business, when everybody agrees on one thesis, it's almost a certain that this "thesis" has been fully discounted by the market. Thus everybody followed what was "agreed upon" and took a position against the dollar. So yes, the dollar's strength could simply be a matter of driving the dollar shorts to the wall.

The other thesis that comes to mind is something I've talked about before. All debt must be paid off, some debt paid off in a hurry and some paid off over time. But you pay off debt with dollars, and if there's too much debt outstanding and there's pressure to pay off that debt -- that's going to create a demand for dollars.

The greater the debt, the greater the potential demand for dollars to pay off that debt. Which is why I said that massive debt amounts to a massive synthetic short position against the dollar.

Now I'm wondering if what we're seeing is a sudden demand for dollars. I'm wondering if what we're seeing is a short squeeze against the dollar brought on by hints of deflation. Remember, in deflation dollars become scarcer -- and in deflation debt becomes a dirty word.

If, in fact, deflation is in the wind, there's going to be a mad rush to pay off debt, and that's going to generate an urgent demand for dollars. Could that be what we're seeing now, as the dollar rises to a high for the year? It's sure got me wondering.

So do we have the two worst combinations -- a deflationary squeeze on debt and a huge short position against the dollar? Whew" [Richard Russell]


[chart in quoted article]

Now here's another chart of the dollar, with a somewhat different view and timespan. Note that charts are kind of like statistics, they can be presented to say just about whatever one wants to say, especially if taken out of context and or applied out of context. Note: I am not saying that such is the present situation within the article under discussion. Only that it that it can easily be done and does occur quite frequently.


[chart provided by Gnazzo courtesy of stockcharts]

Different views. Neither is wrong or right. One is a view of the trees, the other of the forest. It is always a good idea to keep both in perspective. One never knows if the forest is going to turn into the trees, or the trees into the forest - or neither.

But usually it is the long term primary trend that is most important, not the shorter term noise and confusion that can lead one astray. At least that is what I was taught, but perhaps things have changed.

Now that the overall article and charts have been presented, let's take a closer look. All differing opinions are welcome and invited.

Questions

Anyone who thinks that deflation is nigh impossible is badly mistaken, it is quite possible. With this we are in agreement with the above quoted article. As to why the Fed might be worried about deflation occurring, regardless as to their ability or disability to inflate the monetary base, I can think of a few good reasons, as noted below.

Also, the monetary base is not the important nor the intended target. The credit market is where the action is. But that will be covered a bit later, as it is an important distinction not generally understood or recognized. At least so it seems.

With all due respect, the author of the quoted article provides the caveat that the importance of the exact definition and meaning of deflation is not of as great of import as are the charts, yet the statement is made that "if there's a credit collapse, it seems to me that the situation could change very quickly and soon get out of hand -- in which case we'd have deflation".

This is a distinct possibility, however, isn't the statement also providing what the author says appears to be the definition of deflation, i.e. credit collapse, which is the classical definition of deflation..?

But that's the rub, which very few seem to get, even those that use the correct words: credit contraction.

Credit contraction does not mean falling prices of goods, that is price deflation.

Credit contraction does not mean the deflating prices of copper or other commodities, once again that is price deflation.

Credit contraction does not mean the deflating price of the stock market, that is asset deflation.

Credit contraction means just what is says - credit contraction.

These distinctions are not just about semantics or the splitting of hairs. They are about critical distinctions of very important issues intricately involved in understanding monetary theory.

When one is trying to provide explanations, or make pronouncements of certain economic variables, let alone the economy in aggregate, as to the preponderance for deflation or inflation, such distinctions are of an even greater magnitude. One most not forget that hyperinflation is also a possibility as well.

As was shown earlier, honest credit is the extension of money that exists in the savings pool as a loan. In paper fiat land, the extension of credit creates money and debt - simultaneously. That's the dishonest, nasty and ugly part - the abomination.

How can one pay off debt, if the money itself is the same as the debt, and only comes into "being" by the extension of credit, which is the owing of debt? A more sinister state of affairs is hard to conjure up, and leaves the taste of wormwood on the palate, and the smell of brimstone in the air. Whew indeed.

The Dollar

The question was posed, why is the dollar at its high for the year? Perhaps because it is undergoing an intermediate term counter-trend rally. Perhaps not. But there are those that have railed against the viability of the dollar for years, and rightfully so. And yet...

The long term chart provided above doesn't look too healthy as well. Why focus on the short term chart and noise when the long term primary trend is what matters the most? Not to forget the fundamentals for the dollar are absolutely horrendous. Those deficits are looming large and getting larger by the day.

Many have said that the dollar is the biggest con game around. With that I agree. Many have also said that the dollar is ultimately destined to become worth less and less, until worthless. I agree with that as well. That's the long term trend. The shorter term trend is up, as the short term chart clearly shows.

It also appears that an intermediate term counter-trend rally is occurring as well. However, the dollar is not up as in a new bull market, not that the author of the article is calling for that, which then begs the question - what's all the fuss over a counter-trend rally about? The primary trend is what counts.

The article goes on to offer various possible explanations as to why the dollar may be at new yearly highs. The first offered is that "So yes, the dollar's strength could simply be a matter of driving the dollar shorts to the wall." I agree that this is a very distinct possibility.

Next the article offers "the other thesis that comes to mind is something I've talked about before. All debt must be paid off, some debt paid off in a hurry and some paid off over time. But you pay off debt with dollars, and if there's too much debt outstanding and there's pressure to pay off that debt -- that's going to create a demand for dollars." That sounds about right, but just exactly does that mean, in paper fiat land?

Earlier we saw that debt is not a bad thing if the debt is based on honest credit that in turn is based on honest money. However, we also saw that if the debt is based on dishonest credit, as is the case with fractional reserve lending of paper fiat, then money is actually created by the mere extension of credit - dishonest money. The whole paper fiat system is dishonest.

Now understand the implications of fractional reserve lending in a paper fiat system:

As Jim Puplava clearly elucidates in his Storm Watch Update article Tipping Points:

"Last year the US economy added $2,718 billion in debt. However, the broadest measure of the money supply (M3) expanded by only $587.5 billion. For those who are relieved that money supply growth has slowed down, as shown in the table below, take no comfort. Credit expansion in the US is rampant as reflected in last year's total credit expansion of $2,718 billion."

"While the monetary base grew by only $33 billion, Federal Reserve Credit and Foreign central bank purchases of Treasuries grew by $42 billion and $207 billion respectively."

"Credit expansion in the US is hyperinflating."

"Outstanding debt in the US has grown by 38% over the last four years to $36.2 trillion, an increase of over $10 trillion in the last four years. Last year alone consumer borrowing expanded by $1,017.9 billion, up from $839.4 billion the prior year."

"New mortgage borrowing surged 87% to $884.9 billion as more Americans bought McMansions in the suburbs. The whole US economy is turning into a hedge fund with national savings of only $133 billion against national borrowing of $2,718, a 20-1 leverage factor." [Storm Watch Update Tipping Points by Jim Puplava]

What this means is that a demand for dollars or Federal Reserve Notes is meaningless in today's bubble world in paper fiat land. The monetary base only increased by $33 billion last year, total credit expansion was $2,718 billion.

So when one speaks of demand for dollars, what do they mean? Is there going to be a need to actually print $2,718 billion dollar bills or Federal Reserve Notes? I think not. It is all a game of double-entry bookkeeping in cyberspace. The figures already exist. They need not be created anew.

However, more can be created at will. As helicopter pilot extraordinaire and Fed Chairman apparent Ben Bernanke states:

"But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." [Remarks by Governor Ben S. Bernanke before the National Economists Club, Washington, D.C., November 21, 2002: Deflation: Making Sure "It" Doesn't Happen Here.

Also, myself and others have shown, in paper fiat land debt does not, and it cannot be - paid off. Debt can only be offset, or defaulted on. Some also include inflated away, but that in my opinion comes under the heading of offset. The point being, it isn't going to get paid off. There is no such thing as payment within the dishonest system of paper fiat. Such is wishful thinking, the stuff of fairy tales.

If debt were to be paid off in our system of paper fiat, as every unit of debt were paid off, a unit of money would disappear. To pay off debt would be the end of the system. They who receive the perpetual interest rate stream do not want that to occur. That would be the end of their golden cow that they have so painstakingly bred, raised, and nurtured - their creature of wealth transference.

Any short dollar thesis based on the demand for dollars to pay off debt with is a bit of a stretch to say the least. The demand and supply of dollars to service the debt with is what is most crucial. The debt is never going to be paid off. Period. End of story.

As mentioned in part four of Silver IS Money the Monetary Act of 1980 Depository Institutions Deregulation and Monetary Control Act of 1980 allows the Fed to buy any asset it so desires at full face value. Which is a fair size caliber weapon against deflation. But deflation is a very serious opponent.

Any thesis of deflation taking place, without the contraction of credit is also a bit of a stretch. The monetary base doesn't quite cut it. Prices of stuff falling doesn't cut it. Prices of assets doesn't cut it. They all may contribute to what does count, which is the contraction of credit, which last year expanded by $2,718 billion. So, as of now, there is no contraction of credit. Just the opposite is occurring.

Credit is presently hyperinflating. When credit starts contracting, then one can talk deflation.

This was clearly explained and illustrated by Jim Puplava in his Storm Watch Update article Tipping Points.

However, this in no way means that deflation cannot occur, it can. But let's at least be clear as to what it means, and what it is and what it isn't. It is a credit contraction that leads to credit and debt default. And yes it can occur. And yes it may occur. But it is not presently occurring, just the opposite is occurring.

"And the moral of that is
The more there is of mine, the less there is of yours."

The Twisted Irony of It All

Now here is where it really gets twisted, and thus a bit confusing. It does appear plausible to assume that an increased demand for dollars would take place during a deflationary contraction. It also seems plausible that a shortage or scarcity of dollars could therefore take place during an episode of deflation.

But the real exponential increase in the demand for dollars,
and the resulting scarcity of dollars does not occur in a deflationary contraction,
it occurs during an episode of runaway inflation - of hyperinflation.

How Can That Be?

It sounds twisted because it is. Our entire monetary system has been turned on its head and is upside down, inside out. Black is white and white is black. Originally silver and gold defined the dollar. Now silver and gold are priced in paper dollars - Federal Reserve Notes, notes of confiscation and wealth transference.

Try to find a definition as to what a dollar is anywhere in the United States Code, you can't, it ain't there.

When the silver and gold monetary system of the Constitution is debased the way that ours has been plundered, the result is the mess we now have before us, and all its twisted brothers and sisters that have been bred and fostered along the way. It is a sad state of affairs that need not be.

The United States is the greatest country on the face of the earth, which is why we have probably prevailed against such a self-destructive monetary system for as long as we have. But the stress and imbalances are beginning to show. Cracks are evident. Even the systems generals are becoming worried:

"The world is increasingly alarmed by America's profligacy. It's not just the staff of the International Monetary Fund who lecture us as if we were a banana republic. Global leaders at the Davos World Economic Forum and other venues speculate openly about how long the dollar will remain the world's reserve currency, and about whether the U.S. financial system will take down the global economy when it implodes." [Peter G. Peterson, former Chairman of the Council on Foreign Relations and former Chairman of the Federal Reserve Bank of New York]

Imagine the opportunities available for all if we had a sound monetary system based on savings, or the accumulation of excess production as profits - the accumulation of wealth instead of debt. It can be easily obtained, all we need to do is to follow the Constitution and the Original Coinage Act of 1792.

Return Silver and Gold to their rightful place as the Sovereign of Sovereigns

Think about what those last three words mean - the Sovereign of Sovereigns. They explain the inherent strength and soundness of silver and gold, as they are powerful enough to keep sovereigns in line, hence they are the Sovereign of Sovereigns. They are the keepers of the temple.

They have an innate ability of self-discipline and self-control. Silver and gold cannot be printed up, or created by a computer - they must be mined using hard labor from the bowels of the earth. The supply of silver and gold cannot be instantaneously increased as if one is going through the McDonald's fast money supply window for a quick fix.

Hyperinflation

So is this thing called hyperinflation truly a pale horse that hell follows after, an abomination and pestilence, the scourge of mankind? A description follows, the reader can judge for themselves.

Hyperinflation is inflation that has run amuck, the creature that is no longer under the master's restraint. Others have called it runaway inflation, which is very apropos. We will now take a closer look at this creature, for a detailed study of the issues see: Scylla & Charbydis: The Scourge of Mankind.

The accumulation of an excess production of goods, over the consumption of goods, is called savings, the accumulation of wealth. Money, as the common medium of exchange for all goods, is stored or hoarded for future use, to transfer from savings into income, to exchange for what is needed.

As there is a limit to what man can produce, there is a corresponding limit of excess production over consumption or savings that can occur. The savings pool and hence credit are limited - in natural.

The word credit is derived from the Latin creditum [a loan] and from credere [to trust or believe in]. As covered in an earlier paper, Gold: Sovereign of Sovereigns money fulfills several roles, one of them being the standard by which value is transferred through time.

Certain individuals desire to borrow money on credit, which is the trust and belief that they will repay the borrowed money. Other individuals desire to loan their accumulated and excess savings to those in need of money, and to charge a fee for doing so, in order to derive interest from the employment of their savings.

As long as the money is honest money, and the credit comes from out of the savings pool already in existence, and the rate of interest is honest, the transaction to lend and to borrow is honest and justified.

In an honest or sound monetary system, credit is taken from the pool of savings and lent out as a loan. The cost of borrowing money or the price of credit is the interest rate. Because the pool of savings is limited, the amount of credit that can be lent out from it is limited as well.

The greater the demand for credit the greater is the interest rate that is charged to borrow the savings. As the savings pool is drawn down through lending, savings become scarcer, hence a higher rate of interest is needed to convince savers to part with their savings.

But that is in an honest or sound monetary system, not in a fraudulent paper fiat system. In paper fiat land just the opposite takes place. If the credit came from the savings pool, interest rates would rise as the savings pool was drawn down.

Instead, the Fed manipulates interest rates to keep them below the natural rate of interest that would exist if credit came from savings, which would limit the available amount of credit. This is one of those dirty little secrets the keepers of the temple don't want us to know about, as it is how they manipulate the system. Or what they call - fine tune. Euphemistically put, of course.

"The issuers of the fiduciary media are able to induce an extension of the demand for them by reducing the interest demanded to a rate below the natural rate of interest, that is below that rate of interest that would be established by the supply and demand if the real capital were lent in natura without the mediation of money (central banks), whereas on the other hand the demand for fiduciary media would be bound to cease entirely as soon as the rate asked by the bank was raised above the natural rate." [Ludwig von Mises - The Theory of Money and Credit]

Inflation is the modis operandi of a paper fiat currency; it must inflate or die. Inflation is the increase of the supply of money [quantity] greater than the corresponding demand for money. Such behavior results in a loss of the objective exchange value or purchasing power [quality] of the currency.

As monetary inflation continues, debasement of the currency continues to takes place, and the loss of purchasing power increases. Our money is continually becoming worth less and less. It requires more units of money to buy the same amount of goods. This is the quality aspect of money - its purchasing power.

However, a funny thing happens on the way to the market. Because the purchasing power of our money has been going down, the demand for more quantities of money, to make up for the loss of purchasing power, keeps increasing. No problem says the Fed, you want more money, we will give it to you; and they do.

But in the process of giving us more money, to meet the greater demand, more purchasing power [quality] is lost, which then requires more units of money [supply] to make up for the loss. Again the demand rises for more supply. And so the process keeps repeating, it is a vicious circle.

As the purchasing power of money keeps lessening it creates a greater demand, soon it is discovered that the purchasing power of the money is falling faster and faster, faster than the demand is rising.

What was an unlimited supply of money meeting a limited demand for money suddenly becomes an unlimited demand for money meeting a limited supply of money, as the money can't be created fast enough to keep up or make up for the loss of purchasing power.

Suddenly interest rates start to rise, as do prices. But the rise in interest rates does not support the currency. The purchasing power of the currency falls in spite of higher interest rates.

Slowly panic starts to set in. People can't spend their money fast enough - before it looses more purchasing power.

Now the monetary beast of inflation turns upon itself to feed. Suddenly, what was an unlimited demand for money meeting a limited, although ever-increasing supply of money, now becomes no demand for money, as the market correctly perceives that no amount [quantity] of money can make up for the loss of the purchasing power [quality] of the money caused by the debasement of the currency.

The gig is up. The fraud is seen for what it is. The currency is no longer accepted as the common medium of exchange. The use of the currency ends. The creature they created destroys itself by suicide - by runaway inflation called hyperinflation. Hyperinflation is the death-knell of all paper fiat currencies.

Staring Into The Abyss

Deflation and hyperinflation are different in form, but they are identical in substance - two opposite sides of the razor sharp edge of debt. On either side lies the abyss. Deflation destroys the value of debt through defaults and bankruptcies, hyperinflation by debasement and loss of purchasing power.

The decision as to the use of money and credit is no longer in the hands of the producers in the economy, as it should be, it now rests with the financial sector, with the bond market, as the bond market is the debt market; and in paper fiat land we live and breathe and have our being by debt.

Which path we take at the fork is anyone's guess, but is does appear that the bond market will have a big vote in the choice. Will greed of profit prevail, or will fear cause them to cut bait and run? Or might honest money be reinstated? This also goes towards explaining the action in the bond market of late.

Present Goods Versus Future Goods

By monetizing government debt, Federal Reserve Notes, which are irredeemable promises to pay, circulate as the currency. This is a diseased system, its cancer daily growing, draining its life away.

Consequently, Federal Reserve Notes must be realized for what they are: future goods being exchanged for present goods. A mechanism of wealth transference that takes from the future to obtain in the present.

Most are of the opinion that bank notes are present goods. But how can that be? Even when backed by gold they were future goods, as they represented an obligation that had not been meant.

If a bank note is an obligation to be redeemed, it is an obligation that has not yet been fulfilled or paid. It is waiting to be fulfilled - in the future, hence it is a future good.

When one uses bank notes they are exchanging a future good [the bank note] for a present good [the item they exchange it for]. Federal Reserve notes are bank notes of the Federal Reserve. They are future obligations to pay.

Because of the time preference of a future good to a present good, such a transaction involves the extension of credit, as a promise to fulfill a contract or obligation is being offered and accepted.

The transaction, however, has not been completed - payment has not yet been made. Goods have been exchanged on credit - they have not yet been paid for, but simply discharged or offset.

This is why Robert Hemphill stated the following in the forward of Irving Fisher's book, "100% Money," when he was the Credit Manager Of the Federal Reserve Bank of Atlanta, Georgia:

"This is a staggering thought. 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. We are absolutely without a permanent money system.

When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is.

It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." [quote by Robert Hemphill, Credit Manager FRB of Atlanta]

A fractional reserve system of money cannot be liquid.
It is without question, undeniably impossible.

If more depositors demand to redeem more money then the banks have on reserve, huge problems will occur. Such is what precipitates bank runs, deflation, depressions, or worse yet - hyperinflation and the complete destruction of the currency. History is replete with such events.

The truth be known - our monetary system is not real, it is one big illusion, the only thing that holds it together is the confidence of the people that believe in it, that most people will never want to take their money out of the banks, because it they do, they will get a rude awakening - it ain't there - it isn't anywhere - it isn't. Make no mistake about it, and vote as your conscience and heart dictate.

Fractional reserve lending of paper fiat money is
the biggest fraud ever committed by man.

The Weimar Hyperinflation

The time - the dawn of World War I. The place - Berlin, Germany. The player - the Reichsbank, the Central Bank of Germany. The victims - the general populace of the German people. The plot - the suspension of the rights of the people to convert banknotes to gold.

The inevitable result - when the mark fails, the Government has nothing backing it, paper is paper, as exemplified by toilet paper which is good for....

When war broke out in 1914, the German mark was valued at U.S. $1 to 4 marks. By the end of the war, the ratio was U.S. $1 to 18 marks and falling.

The Weimar Government was born in 1918. The Allies had forced Germany to sign the Treaty of Versailles. Among the clauses of the treaty was a demand for war reparations to the victors: Britain and France, both of whom needed to repay their loans to the USA.

Naturally, da boyz from J.P. Morgan were glad to be of service, and were instrumental in "structuring" all of the financing and even a good deal (no pun intended) of the terms of the treaty.

May 1921. The war reparations figure arrives: £6,600,000,000 or 132,000,000,000 German marks. Germany comes close to making her entire first payment of £2 billion. So far, so good.

However, a few months later people in Germany were beginning to talk, about the supply of money, the mark, which was becoming scarcer and harder to get. People became nervous and tried to redeem their bank notes for gold. They were not allowed to do so.

Germany could no longer meet its war reparations payments. It's default of reparations payments was used by France, Belgium, and Italy as the justification to occupy the German territory of the Ruhr. The mark responded by falling to U.S. $1 to 8,000 marks.

The German people got a bit ticked off, so they decided not to work and went on strike. The rest of the world responded in a show of humanity and brotherhood, calling in all foreign loans and canceling all foreign investments. The golden rule - inverted. Seems like da boyz are into inversions and such.

Makes one wonder if the wiz kids who wrote the Treaty of Versailles knew what they were doing - or perhaps they knew all too well. J.P. Morgan never was one to employ dummies, especially in the upper echelon. The House of Morgan was more into the intelligent, quite, sly, shrewd type. Unremitting and relentless - all in the pursuit of profit, kneeling and paying homage before the alter of Lucre.

What was the German Treasury to do? They did what all treasuries are created to do, they printed more money, 24 hours a day, 7 days a week, non-stop. Helicopter pilot extraordinaire Ben Bernanke would have been envious.

By 1923, "wholesale prices have risen on average 5967 times the peacetime level, those of foodstuffs to 4902 times, and those for industrial products 7958 times." [Franz Bumm of the Reich Department of Health, quoted in F. K. Ringer, 'The German Inflation of 1923']

The value of the mark collapsed. First the Treasury minted 200 mark coins, then 1,000 cloth notes, then 20,000 mark bonds. All became worthless. At the pinnacle of the crisis, one American dollar was worth roughly 4,200,000,000,000 marks.

"By the end of the 1923 hyperinflation, the total nominal national debt of Weimar Germany was worth the equivalent of a few pennies or less." [Jonathan Tennenbaum]

A loaf of bread cost 200,000,000,000 marks. This is when the stories of wheelbarrows of paper money being needed to purchase basic staples abounded, when people would steal the wheelbarrows and leave the money behind. Incredible but true.

Remember This Well

In 1924, the German currency as represented by the mark was abolished, it was no more. A new currency was issued called the Rentenmark. One Rentenmark was worth 1,000,000,000,000 marks.

The House of Morgan, always willing to give a helping hand, drew up and initiated the Dawes Plan and the Young Plan, duly named after the plan's creators - da boyz, who have recently been reported to be back in town, but rumors abound that so is Doc. Could get interesting. Stay tuned.

But this is a rare occurrence - isn't it? Maybe, maybe not. The reader can decide based on the evidence provided. Want more evidence? No problem.

Then of course there is our own example of the Continental during the Civil War. The Continental Congress decided in May 1775 to issue paper money to finance the war.

More and more "Continentals" flowed into circulation as the war progressed, and people realized that Congress could not possibly redeem them in Spanish dollars, gold, or silver.

This loss of confidence brought rapid declines in the purchasing power of the Continental currency. "Not worth a Continental" became a common place saying.

Continental currency issued between 1775 and 1779 amounted to some $240 million, a staggering sum for a new nation.

The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion Pengő. image. There was even a banknote worth 10 times more, that was printed, but not issued image.

The Post-WWII hyperinflation of Hungary in 1946 holds the record for the most extreme monthly inflation rate ever - 41,900,000,000,000,000%. [info and links courtesy of the Hungarian National Bank].

There is the example of Bolivia in 1985 when hyperinflation caused prices to increase 12,000% in less than a year. There are more examples, but I think the point has been sufficiently made.

===> Continue to Silver Is Money: Behold A White Horse - Part Five - B

 


 

Douglas V. Gnazzo

Author: Douglas V. Gnazzo

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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