Modern “prices” are whatever the market declares. I.e., today’s “price” for a particular “asset” is whatever someone is currently willing to pay. Yesterday’s price is not today’s, and today’s is not tomorrow’s. But what is the price for something that no one currently wants to buy?
On September 24th, the New York Times published an article on the $700 billion bailout entitled “Plan’s Mystery: What’s All This Stuff Worth?”. This article explored the gov-co’s problem of putting a dollar value on mortgage-related assets that no one wants.
According to the NYT, “While prices of most stocks are no mystery — they flicker across PCs and televisions all day — the troubled investments [mortgage-based debt instruments] are not traded on any exchange. The market for them is opaque: traders do business over the telephone, and days can go by without a single trade.”
Hmph—so what’s the “price” for an investment when there is no market, virtually no one has been buying and, now, no one is willing to buy? Under the “free market” philosophy, that price should be Zero. However, “Valuing mortgage bonds, even the safest variety, requires guesstimates.” OK—instead of allowing the market to declare the price, perhaps Treasury will hire a psychic to predict the future.
“The reality is that we are not going to know what the right price is for years,” said Andrew Feltus, a bond portfolio manager at Pioneer Investments, a mutual fund firm based in Boston. “It might be 20 cents on the dollar or 60 cents on the dollar, but we won’t know for years.”
That’s not “reality,” that’s crapola. We won’t need years to learn what these debt instruments are worth—the free market has already placed today’s price the stocks at or near Zero. Whether the price might be 20 cents or 60 cents or Zero cents at some future date should not be our concern.
Wall St., however, will need “years” of confusion and uncertainty to conceal the fact that they’ve operated a fraudulent investment scam based on “pieces of paper” priced by Wall St. insiders rather than a public market. In other words, a Wall St. insider essentially walked in, looked at a piece of paper (debt instrument) and unilaterally declared it to be worth, umm, say, $100 million—much like I might declare the value of the pot I used to cook my dinner to be $100 million. Then, the Wall St. insider would sell that “$100 million” piece of paper to another insider for $200 million, and the second insider could sell the paper to a third for $500 million, and then sell it again the original insider for $1 billion. With a very small “market” restricted to just a few insiders, debt instruments could be sold and sold again and again in “round robin” fashion to artificially and fraudulently increase the apparent “price” of the instruments. Then, using a billion-dollar piece of paper as collateral, Wall St. insiders might go to a bank and borrow a “real” billion dollars.
Of course, if the American people realized that Wall St. has been valuing pieces of paper at $1 billion whose true price was Zero, somebody might be jailed for defrauding banks with worthless collateral. Therefore, Wall St. insiders insist we’ll need years—lots of years—to “discover” what the “true value” of these “assets” might be. So long as we don’t “discover” that these debt instruments are worthless, there probably won’t be any criminal prosecutions for fraud.
However, thanks to our $700 billion bailout, the government will now look at lots of these debt instruments, certify that they were (or should be) worth $1 billion and buy them for $100 million. Once gov-co certifies that these “troubled investments” had some real value, the evidence of fraud will be pretty much eliminated and some very wealthy people will be able to sleep soundly on their yachts.
All of this illustrates two fundamental problems of the modern economic system: 1) How do we establish the price of anything? And 2) How do we prevent the prices from being manipulated by insiders?
The science of mouse traps consists of discovering and using irresistible incentives (cheese) to cause unwitting mice to act in a way that’s contrary to their best self-interests. With science and skill, people have learned how to build better (cheaper) mousetraps to cause the mice to surrender something valuable (their lives) for something almost worthless: a taste of cheese (a/k/a the “free lunch”).
The modern science of economics is fundamentally similar to the science of mousetraps. By understanding economics (human motivations) and obtaining exclusive control over the supply of “cheese” (legal tender or credit), the rich and/or powerful cause and motivate the “mice” (people) to act in ways that are contrary to people’s own self-interests. By means of economics, the powerful motivate the people (mice) to surrender something valuable (their life energy) in return for something intrinsically worthless (legal tender). At bottom, our vaunted modern “economy” is a highly sophisticated machine used to rob the masses and enrich the powerful. As currently applied, our economy is a mantrap baited with legal tender.
Today, our modern economy (mantrap) is in crisis. The mice have started to see that: 1) the bait (legal tender or credit) isn’t even real “cheese” (gold or silver money); and 2) we can be badly hurt if we stick our heads in the economic trap.
This understanding is manifested by price instability and market volatility. We look at the stock markets and the Dow Jones is down 777 one day and up 490 the next. The price of crude oil soars to $140, falls to $95, and bounces back to $105. In just a few months, the price of gold hit $1,040, tumbled to $750, jumped up again to $910 and fall back to $840.
The price instability and market volatility that we see in the equity, bond and commodity markets are evidence that the people no longer have a reliable system of values. Without a reliable system of values, the people don’t know what to do. Should we buy or sell? Hesitate or go for broke? Shall we take another bite of “cheese” attached to a $700 billion dollar mousetrap or shall we go hungry?
Some mice are beginning to balk at the scent of cheese (legal tender) and refuse to enter the mousetrap. Government and whatever powers government serves have responded by providing bigger (inflated) chunks of artificial cheese to lure us back into the trap. But as more and more mice recognize that the new-and-improved “cheese” is really the same old cheese, only inflated and puffed up to look more tasty, more and more “mice” are refusing to enter the trap.
For example, the mice are refusing to pay $1 million for a house that’s only worth only $250,000. We are refusing to use our Master Cards to “shop ‘til we drop”—or “shop ‘til we’re trapped”. Local banks are refusing to use their power of fractional reserve banking to inflate $100 worth of cheese into $1,000 worth of artificial, inflated cheese (consumer credit loans).
Price instability and market volatility are ultimately based on a single reality: our means of measuring value—our medium of exchange (the dollar)—has no value. Having no intrinsic value, our dollar has become value-less. We are left to measure our prices with an elastic yardstick.
Imagine measuring the height of your child with an elastic yardstick that is supposed to be 3 feet long, but can sometimes be 2 feet long and at other times be 6 feet long. How tall is your son? Is he taller or shorter than other kids his age? Without a fixed standard of measurement, you can’t know if you should be proud or concerned by your son’s growth. Is your boy the tallest kid in his class? Then you might be proud. If he’s so tall as to suggest that he might have a pituitary problem, you might be concerned. If he’s abnormally short, you might want to take your boy to an endocrinologist for hormone shots to make him grow to a normal height.
But without some accurate measurement of what your boy’s height is, and without accurate measurements of the average height of all boys his age, you can’t know what to do. Without accurate measurements, you can’t know whether to buy him a basketball or take him to the doctor. So long as your unit of measurement (an elastic yardstick) is not fixed, you can’t truly know what to do.
In economics, prices are the measurements by means of which we decide “what to do”. For example, you may not want, need or be able to afford a new Cadillac priced at $50,000. But if you found someone willing to sell his new Caddy for just $5,000, could you afford to turn down the deal?
Prices tell us what to do. By means of prices, we know where we can afford to live, what food we can afford to eat, how much we can afford to spend on clothing, cars and vacations. Prices ultimately tell us how many children we can have, and even whether we should marry or divorce. (The primary cause of divorce in this country is “financial stress”.)
So long as prices are steady or at least changing at a predictable and moderate rate, almost all of us—from the homeless bum to the richest billionaire—can confidently handle our own financial affairs. We absolutely know if we can or cannot afford to eat a lobster dinner, buy a new Cadillac, or divorce our spouse so we can fool around with our secretary (or gardener).
But when prices become unstable, we don’t know what to do. Worse, once we realize that prices aren’t merely unstable, but are manipulated by the powerful in ways we cannot guess or predict, we become afraid to act. Price volatility pushes us toward a condition of self-doubt and fear, and we tend to panic or to do nothing. The inflatable/deflatable “cheese” is no longer sufficient to motivate us to build traps, sell traps, buy traps or stick our heads in the traps. Our “mantrap” economy grinds to a halt.
The ultimate reason for our current “economic crisis” is not financial. The financial problems are an effect, not a cause. The real cause is an unstable system of values precipitated by an “elastic” dollar which (like an elastic yardstick) can no longer provide accurate measurements (prices) on which we can rely to decide what to do.
For example, you might live in a house that’s priced at $250,000. You might want to sell your house. I might have 2,500 hundred-dollar bills (cash). Although my 2,500 green pieces of paper are currently “priced” at $250,000, it cost less than a nickel to print each of those 2,500 pieces of paper. Thus, the true “value” of my 2,500 green pieces of paper may be less than $125. So, if I come to your door and offer to pay you 2,500 pieces of paper (which cost only $125 to produce) for your $250,000 house, are you really willing to sell to me? Will you trade your three-bedroom, two-bath house for a pile of paper and ink that cost $125 to produce?
If so, you are exactly the kind of “mouse” that the modern economy needs and depends upon. You’re the guy who thinks he can safely stick his head in the trap and get a free cheese lunch.
Ohh, and don’t forget that if current inflation is running at 15%, if you take my 2,500 pieces of paper (cheese), by this time next year, that payment will only have a purchasing power of about 2,125 piece of paper. So, what should you do? Sell or just hunker down? Without stable prices and a fixed medium of exchange, how can you know what to do?
Price instability affects the buyer just as much as the seller. For example, knowing that price of American homes fell by an average of 17% over the past twelve months and will likely fall that much again over the next twelve months, do I really want to trade my 2,500 green pieces of paper today for a house that I can probably purchase for just 2,000 pieces of paper twelve months from now? What should I do? Buy, or hunker down?
Odds are that based on this legal-tender confusion of values, at least one of us will “hunker down” and refuse to transact. Either you will refuse to sell because your recognize my 2,500 pieces of paper are subject to 15% inflation, or I will refuse to buy because your house is subject to 17% deflation. Result? No transaction. No one voluntarily sticks his head in the trap to taste the cheese. Without willing victims, the mantrap economy begins falter. Gov-co screams “the sky is falling and you damn mice better fork over $700 billion to shore it up!”
Why does it all happen? Because the U.S. dollar is a pure fiat currency that has no intrinsic value. Despite our the prohibition at Article 1 Section 10 Clause of our U.S. Constitution (“No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts.”), there’s been no gold coin in general circulation in this country since A.D. 1933 and no silver since A.D. 1968. We are living in a “brave, new world order” of fiat money where “everything is negotiable” precisely because we have no fixed medium of exchange and no fixed values. Thanks to our fiat monetary system, our constitutional fixed medium of exchange (our fixed means of measurement), has been replaced by an elastic and unreliable medium where no price can be known for sure.
What is the real value of a house priced at $250,000 or a derivative priced at $10 million? Answer: Nobody knows. More, no one will know, no one can know, until we restore a specie-backed monetary system. Gov-co is complaining that we have a problem with “illiquid assets”. “Illiquid” means that no one will buy the alleged “asset”—at least not at a price even close to what the last “fool” paid. Why won’t folks buy? Because they don’t know what the value of the “illiquid asset” really is. Why don’t they know? Because there’s no fixed medium of exchange and no fixed system of values. Because we don’t know the value, we won’t buy (or sell).
Without reliable prices, we don’t know what to do, and therefore we tend to do nothing. As we “hunker down” in confusion and fear, the economic mantrap grinds to a halt.
Now, the question becomes, can we “mice” find “cheese” (or anything else that’s real) to support ourselves without the associated trap? Amazingly, we’ve become conditioned to accept the “fact” that “cheese” can only be found inside the mantraps. I.e., without the trap (the fiat money economy), we must starve.
Lookit the $700 billion bail-out. What’s gov-co’s fundamental argument? They argue that if you freakin’ mice won’t stick your heads in a $700 billion trap, you’ll only wind up in a bigger, badder trap later on. The fundamental argument of the modern economy is that you freakin’ mice can’t survive without the mousetrap. Amazingly, we mice have been conditioned to believe that mousetraps are the source of cheese; that without mousetraps (and the free lunch they promise), there can be no cheese and we must therefore perish. Modern economic theory is the means by which those who have power to make the cheese (legal tender) have taught the mice to worship the mousetrap.
Today’s critical question is: Can the mice can make it without the trap? Can we survive outside the trap? The answer is Yes (some can) and No (some can’t).
The essential feature of any mousetrap is the promise of a free lunch. Those mice that are sufficiently moral, independent, and self-reliant to live without a free lunch can survive without the inflated cheese (legal tender) and without mousetraps. Those mice that are addicted to the free cheese (financial junk food and junk bonds) and who are unable or unwilling to independently provide for themselves will be trapped and destroyed. (Gov-co describes the mice addicted to the free lunch as “useless eaters”.)
What kind of “free lunch” is available to trap the mice? How ‘bout So-So Security? If you give them 15% of everything you earn for 45 years (a sum that for most people would be enough to generate over $1 million in saving if privately invested), gov-co will give you a $1,200 monthly pittance when you retire (maybe).
And then there’s the free lunch in your retirement funds. Just invest you legal tender today, and get rich quick tomorrow. It’s easy, it’s fun, and you don’t actually have to work. You just invest (gamble). It’s like going to an economic casino where all the players are guaranteed to win on every roll of the dice.
Easy credit is another free lunch that allows us to buy homes we can’t afford, didn’t earn and don’t deserve. And then there’s deficit financing so gov-co can seemingly provide “free” Medicare and Medicaid. How ‘bout mortgage-backed bonds, derivatives and Structured Investment Vehicles whereby the “really smart” mice can leverage thousands into millions and millions into trillions?
There is no end to the variety of “free lunches” whereby we are all promised “something-for-nothing” at someone else’s expense.
The problem is that, ultimately, there is no free lunch. The promise of unearned wealth is a lie. Sooner or later, those who nibble at the free cheese trigger the trap’s sudden smack. Each bite of “free” cheese only imparts more and more potential energy into the trap’s spring (debt) until the spring becomes so tightly over-wound, that it snaps with a vengeance. Today, our spring (debt) has almost sprung.
As I’ve previously written, the total American debt (government and private) is at least $75 trillion (some say $100 trillion). $75 trillion works out to $250,000 in debt for every man, woman and child. That debt can’t possibly be paid. That debt is the evidence of all the free “cheese” we’ve consumed over the past couple of generations. That debt is the kinetic energy stored in the “spring” in the “mantrap” we call our “economy”. When the spring pops loose, it’s gonna kill or maim every mouse in the trap.
I’m warning every “mouse” with ears to hear and eyes to see to flee the trap NOW. The “cheese” (free lunch and legal tender) will Ground Zero when the spring snaps. Get as far from that “cheese” as you possibly can.
Unfortunately, this is a “global” trap. When it snaps, few countries will escape the deadly “smack”. So where to you run? I doubt that there is any country that’s truly safe.
Nevertheless, if you already have wealth stored in some variety of “cheese” (stocks, bonds, retirement funds, So-So Security denominated in legal tender), recognize that your chances of ever eating that “cheese” are slim indeed. Do not rely on that artificial, legal-tender “cheese” to feed you when times get tough. If possible, take your legal tender (junk food/junk bond/junk cash) “cheese” and convert it into something truly “edible” like specie (gold and silver). More, begin to adjust your mindset to 1) recognize that you can’t prosper in the legal tender trap; 2) you must learn to survive without a free lunch.
Again, the “cheese” in our economic mantrap is legal tender. That “cheese” will be Ground Zero when the trap snaps. Get as far from legal tender as you can. Flee the green pieces of paper, Master Card and Visa. This whole damned economic trap is based on the belief that the people can’t survive without legal tender trap. I think we can. It’s the “system” that can’t survive without legal tender. Hold the gold you own; buy more if you can.
Buckle up.
