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Holy War between Paperbugs and Goldbugs

23 May

Paper Promises to Pay

Paper Promises to Pay

Over the years, I’ve read Business Insider with respect.  Their articles always seemed insightful, well-written and authoritative.  However, after the “April Plunge” (April 12th & 15th) in the price of gold, Business Insider published an article which openly celebrated the plunge in gold’s price and struck me as largely nonsensical.

In “EVERYONE Should Be Thrilled By The Gold Crash” Business Insider wrote:

“On Friday [April 12th], when the price of gold plunged, we said it was ‘great news.’ The idea behind saying the gold news ‘great news’ is basically this:  The last few years have seen a major ideological battle take place.”

Absolutely true.  The difference between investing in physical gold and investing in paper stocks, paper bonds, paper gold or even paper cash isn’t like the difference between investing in GM or IBM.  The difference between investing in physical gold and any other paper debt-instrument is as profound as the ideological difference between the Muslim and Christian faiths.  The clash between physical gold and paper debt instruments (between actual payments and mere promises to pay) is the financial equivalent of a holy war.  No compromise is possible.  In the end, there can be only one.

“On one hand, you have established economists, who believe the government has tools at its disposal to address a crisis. These tools include deficit spending and a violent expansion of the Fed’s balance sheet.”

“Established” economists?  “Established” by who and for how long?  For 42 years since the US adopted a pure fiat currency?  A century (since Lord Maynard Keynes)?  The fact that any economist is “established” proves nothing about the validity of his theories—especially at a time when, despite his “establishment” connections, the economy is impaired and perhaps on the verge of collapse.

“Conversely, you have critics who slam the arrogance of economists and central planners, and who have predicted that all of this economic acrobatics would result in an economic collapse, hyperinflation, and an explosion in the price of gold. Gold is important to their worldview, because it represents a quasi-money that’s not tied to any government or central bank.”

 

Bunk.  Gold is not “a quasi-money”.  Gold is the real deal.  Gold has been the primary “money” for 3,000 years.  Paper, fiat currencies like the US dollar are the “quasi-money”.

“Paperbugs” (those who value paper debt-instruments more highly than physical gold) see faith in gold as a kind of blasphemy.  Today’s holy war between the paperbugs and goldbugs is to determine whether gold or paper will be our economy’s “god”.

 

“Investing in gold is a rejection of government money and finance.”

Yes, yes, YES!  People invest in gold because they fear and distrust the government and the fiat monetary system.  Insofar as fiat currency depends on public confidence, any investment in physical gold evinces a loss of public confidence in paper dollars and therefore strikes at the heart of the fiat monetary system.

 

“Money flowing into gold-related assets represents a belief that rocks (however shiny they are) are a better place to invest than human endeavors (like stocks).”

“Arguably, 2000 represented a peak in belief in the capabilities of humans.  Of course, that bubble crashed. Then we had 9/11. Then we had two wars. Then we had the housing implosion. Then we had the financial crisis. Then the horrible recession. Then the European crisis and the debt ceiling and everything else.   In other words, we had a series of events that, for good reason, shook our faith in humanity.”

Business Insider would have us believe that fiat currencies represent a faith in humanity while faith in gold is merely a form of primitive rock worship.  If embracing gold constitutes a rejection of “humanity,” we mean ol’ goldbugs should be ashamed of ourselves, shouldn’t we?

But recent events have done nothing to shake my faith in humanity.  I’m still inclined to believe P.T. Barnum’s observation that “There’s a sucker born every minute”  (Proof?  How many people voted Democrat in the last election?  How many voted Republican?)  I have faith in persistent human ignorance and greed.  My faith in the human tendency to support any idiotic program—like fiat currency and paper debt instruments that promise something (tangible) for (virtually) nothing—remains unshaken.

I.e., if I want to buy a new Cadillac, I can pay for the car with physical gold.  But because gold is hard to find, refine and coin, paying for products with gold is difficult—even painful.  Such payments are based on hard work and the personal discipline required to save your money.

On the other hand, thanks to fiat money and paper debt-instruments, I can purchase that Cadillac with nothing more than my promise to pay the debt at some later date.

So, if I want a Cadillac, it’s far easier to give the dealer my mere promise to someday pay rather than my actual payment (physical gold).  Thus, in the world of fiat dollars, you and I can acquire “something” tangible (a physical Cadillac) for “nothing” (or virtually nothing):  our intangible promises to pay (someday).

Promising to pay is called “credit”.  People love it.  Most people would much rather pay with an intangible “promise” (which they can personally spin out of thin air) than with a physical ounce of gold—which is hard to find and hard to save.  Therefore, when a fiat monetary system is first established, everyone feels pretty good since they can ultimately purchase tangible things (like cars and homes) in return for nothing more than their intangible promise to pay at some future date.

Consumers (people who want Cadillacs; the political majority) will look at a paper monetary system and exclaim, “Is this a great system—or what?!

Producers (people who manufacture Cadillacs; a political minority) aren’t so impressed.  Sooner or later they realize that they aren’t actually being paid for their productivity.  They’re selling tangible Cadillacs for intangible promises to pay. That’s a sure formula for going bankrupt.

The problem with an economy based on promises to pay rather than actual payments, is that, inevitably, people go too far and make more promises than they can ever possibly keep.  (Witness today’s national debt and the “liar loans” of the previous decade.)  Once it becomes clear that the promises can no longer be kept (as has happened with “liar loans” and will happen with the national debt), the value of the paper “promises to pay” (debt-instruments like US bonds, stocks and dollars) falls dramatically, illusions of paper wealth are destroyed, and the economy may collapse into chaos.

Thus, thanks to fiat currency, we might have one to two generations who get to live in apparent prosperity, followed by a third generation who will live in poverty and political turmoil.  Given the price that the third generation will ultimately be forced to pay, I see no reason to regard paper debt-instruments as more “humane” than gold.

•   Paperbugs (also called “Keynesians”) argue that it’s possible to run a prosperous economy forever based only on promises to pay.

Goldbugs, on the other hand, argue that, sooner or later, the world will demand actual, physical payments rather than more intangible promises.

Common sense can tell you which argument must inevitably prevail.

 •  “If we measure stocks in relation to gold, we see that stocks actually bottomed in Summer 2011.”

Could be—but was that “bottom” the result of natural forces in the free market?  Or was that bottom achieved artificially by means of market “stimulation” by government, the Fed and Wall Street in the manipulated market?  Have the prices of stocks risen since A.D. 2011 because the free market values them more highly, or because government manipulators are doing everything possible ($85 billion per month in Quantitative Easing) to sustain the illusion that stocks are gaining value?

 

•  Business Insider claims that A.D. 2011 was the moment of both maximum belief in gold (“rocks”) and the minimum belief in “humanity”.  Since then, a politically-correct belief in “humans” has been growing while the anti-social faith in “rocks” (gold) has fallen.

But goldbugs don’t believe in “rocks” over humans.  We believe in objective reality over the “appearance” of reality.  Therefore, we believe in tangible “rocks” (physical gold) rather than paper “certificates of rocks”.  We believe in payments rather than promises to pay.  We believe in people who are smart enough to value tangible, objective reality (gold) rather than the illusions and the appearance of reality provided by paper certificates and mere promises to pay.  We aren’t cruel.  We’re merely objective—and smart.

“So ultimately, the decline of gold and the rise of stocks [and growing confidence in ‘humanity’] is a big trend that everyone should cheer.”

 

Everyone should cheer”?  I might agree if the decline in gold and rise in stocks was caused by free, rather than manipulated, market pressures.  But if gold is falling and stocks are rising because they’ve been artificially “stimulated” (manipulated) by the Powers That Be, we goldbugs contend that the “truth will out,” the lies (manipulated prices) will fail, and soon gold will again rise dramatically while stocks fall.

•  “The huge corpus of economic research, which has informed the US’ efforts to stimulate [manipulate] the economy, is not a pile of garbage. You can do a lot without blowing things up, as the goldbugs claimed would happen.”

Now I’m inspired.  My confidence soars like an eagle.  By arguing that “You can do a lot without blowing things up,” the paperbugs implicitly admit that if they do “too much,” they might “blow things up”—just as the goldbugs have warned.

No doubt you can “do a lot without blowing things up”—for a while.  But who knows where the line is between doing “a lot” and doing “too much”?  And who believes the stimulation/manipulation of our economy can go on forever?  No one.

The stimulation/manipulation must inevitably end.  But, when it does, will the economy be able to sustain itself?  Just this week, Ben Bernanke mentioned the possibility of ending QE3 sometime this year and the Dow, which had been up nearly 150 points for the dropped down to a 100-point daily loss.  The stock markets know that only thing holding them up and even causing their rise is QE3.   The stock markets know that if QE3 ends, stocks will generally suffer a significant decline.

Paperbugs believe that once they jump-start the economy with enough stimulation/manipulation, the economy will be empowered to proceed on its own force.

Goldbugs believe that even if the stimulation/manipulation doesn’t result in an economy that’s so addicted to stimulation/manipulation that it’s unable to proceed on its own—the debts incurred by the stimulation/manipulation will still be sufficient to cripple or collapse the economy.

•  One of the big questions we face in the today’s markets is Who is in control?  Are the central planners in Washington DC in charge of the stimulated/manipulated markets?

For the moment, Yes.  But should they be?

Shouldn’t we have a free market where the people are in charge?   Ohh, the free markets would probably be a lot more volatile than the stimulated/manipulated markets.  But, in suffering a series of minor upturns and downturns, the free markets might also be less prone to a single, devastating collapse that could result in a depression that lasts for a decade or more.

Plus, with a “free” market dominated by the people, we’d see the “power” of the markets distributed among millions of individual investors.  The “distribution of power” is conducive to freedom and minimal corruption.

On the other hand, with a stimulated/manipulated market, the power is in the hands of central planners.  That centralization of power is contrary to the fundamental principles on which this nation was founded and is conducive to widespread exploitation and criminal behavior.

What we’re witnessing in our markets and economy right now is a “holy war” between those who believe in paper promises and the central planning required to make those paper promises good—and the goldbugs who believe in payments, savings, personal responsibility and the personal freedom of the “free” market.

Whoever is going to run our markets—either the people or the government—will be the same entity that runs this country.    Shall we have freedom and market volatility?  Or shall we have central planning and lost Liberty?

Any fool (including Business Insider) can see what the answer to those questions should be.  But what should be and what is can be two very different conditions.

Today’s “holy war” between the paperbugs (promises, promises) and the goldbugs (payments) will not merely determine whether Americans invest in paper or gold.  It will determine whether this nation shall be free or slave.

 
12 Comments

Posted by on May 23, 2013 in Banking, Fiat Currency, Gold & Silver Coin

 

Tags: , , , , , ,

12 responses to “Holy War between Paperbugs and Goldbugs

  1. Lee COCHRAN

    May 23, 2013 at 1:10 AM

    PLEASE READ WITH OPEN MIND..LOOK AT BOTH SIDES !!!!!! SAVE AS RESOURCE ..PLEASE GET ED-U- MACATED …ASAP

    Lee Cochran tnleeb@aol.com

     
  2. NDT

    May 23, 2013 at 1:29 AM

    “The difference between investing in physical gold and any other paper debt-instrument is as profound as the ideological difference between the Muslim and Christian faiths.”

    “We believe in people who are smart enough to value tangible, objective reality (gold) rather than the illusions and the appearance of reality provided by paper certificates and mere promises to pay.”

    The central ideological difference between the Muslim and Christian faiths is the interpretation of the crucifixion. Christianity maintains that the crucifixion was what it appeared to be, Islam maintains that the crucifixion was in some manner illusory.

     
  3. Carlton

    May 23, 2013 at 1:59 AM

    @Adask “Shouldn’t we have a free market where the people are in charge?”

    Maybe, but there is little prospect of this ever happening. Free markets are like unicorns: they are often mentioned, but no one has ever seen one. At least not on the scale of a first world economy (Gilligan’s Island notwithstanding).

    These types of economies – e.g. America for most of the 20th century – run on lots of government regulation and tons of paper promises. There is no sign they will ever do otherwise.

    And when these first world economies collapse, you still don’t get a “free market”? Experience hath shewn that what you in fact get is rule by agents of the paperbug bankers.

     
  4. D. Majewski

    May 23, 2013 at 8:35 AM

    The people in Asia definitely know the difference. Listen to Don McAlvany on yesterdays weekly commentary (http://mcalvanyweeklycommentary.com/05-22-13/).

     
  5. Beth

    May 23, 2013 at 9:59 AM

    What happens when 1) the fiat dollar crashes; 2) physical gold holders use their gold to pay off debts; 3) physical gold re-enters market; 4) paper gold holders want to redeem their paper gold for physical gold; and 5) there is not enough physical gold to fill the orders? What kind of contractual guarantees do paper gold holders have in such a situation that they will be able to obtain their physical gold at their “buy” price? Or are the two – paper and physical -not interchangeable?

    What kind of contractual guarantees do owners of physical gold who do not have their physical gold in their possession have in the above scenario (ie, call for personal possession of their physical gold when the fiat dollar crashes)?

     
    • Adask

      May 23, 2013 at 5:40 PM

      What happens is all Hell breaks loose. Everyone will be in trouble–including those who hold physical gold. But those holding almost any paper-debt instrument will see their wealth vaporized and wind up in much more trouble than those who hold gold. Hard times are almost certainly headed our way. Those hard times won’t be easy for anyone, but they’ll be easiest for those who’ve anticipated the trouble and prepared for it as best they can. Part of that preparation will be ownership of gold and silver.

       
  6. Yartap

    May 23, 2013 at 1:51 PM

    “China, Germany, Switzerland and UAE your gold is in the mail and will be returned to you when we get it.” said the Fed. “Americans we have paper gold certificates for you. Come and get ‘um. These certificates are backed up by “rented” physical gold that is somewhere. Here use our freshly made Reserve Notes (QE”s) at interest to buy them.” said the Fed. Shhhh, you guys in the back – paint up some more bricks to look like gold to place in the vault and take a picture of it to send to the foreigners to keep them quiet!.

     
  7. palani

    May 23, 2013 at 8:53 PM

    People who hold paper in high esteem and deal only in promises to pay are BANKRUPT. Bankruptcy is analogous to the death certificate that cancels a birth certificate. Once you are BANKRUPT you are finished; dead; capute; gone!!!! You aren’t coming back. Names change and the system continues on its irresponsible way as before. Since the dynamics haven’t changed the outcome will be the same.

    You are stuck in a system where you are attempting to salvage a few miserly pieces of paper and when you do you call this WINNING. A slave can’t own property and a debtor cannot be free. In the financial world the dead are not resurrected. Instead they just hang around and stink up the place.

     
    • JC

      May 24, 2013 at 2:27 AM

      > you are finished; dead; capute; gone!!!! You aren’t coming back.
      Tell it like it is !!!

       
  8. JC

    May 24, 2013 at 1:20 AM

    Greetings from Seoul Korea

     
  9. Tony

    May 27, 2013 at 10:18 AM

    I know this is long, but I can’t help wonder if a third option is at least worth recognizing. What does a people do if it had no gold and silver? But, what it does have is the ability to labor and of course it has other goods.

    I wonder if a last day transition will be from fiat to gold (and possibly silver) WHEN “the bad guys” have essentially all of both.

    Note: i realize this other option is totally incompatible with paper not tied to anything of actual worth, BUT, it is also an option NOT dependent on gold and/or silver.

    Tony

    http://www.webofdebt.com/articles/bankrupt-germany.php
    “We were not foolish enough to try to make a currency [backed by] gold of which we had none, but for every mark that was issued we required the equivalent of a mark’s worth of work done or goods produced. . . .we laugh at the time our national financiers held the view that the value of a currency is regulated by the gold and securities lying in the vaults of a state bank.”

    – Adolf Hitler, quoted in “Hitler’s Monetary System,” http://www.rense.com, citing C. C. Veith, Citadels of
    Chaos (Meador, 1949)

    Guernsey wasn’t the only government to solve its infrastructure problems by issuing its own money. (See E. Brown, “Waking Up on a Minnesota Bridge,” http://www.webofdebt.com/articles/infrastructure-crisis.php, August 4, 2007.) A more notorious model is found in post-World War I Germany. When Hitler came to power, the country was completely, hopelessly broke. The Treaty of Versailles had imposed crushing reparations payments on the German people, who were expected to reimburse the costs of the war for all participants — costs totaling three times the value of all the property in the country. Speculation in the German mark had caused it to plummet, precipitating one of the worst runaway inflations in modern times. At its peak, a wheelbarrow full of 100 billion-mark banknotes could not buy a loaf of bread. The national treasury was empty, and huge numbers of homes and farms had been lost to the banks and speculators. People were living in hovels and starving. Nothing quite like it had ever happened before – the total destruction of the national currency, wiping out people’s savings, their businesses, and the economy generally. Making matters worse, at the end of the decade global depression hit. Germany had no choice but to succumb to debt slavery to international lenders.

    Or so it seemed. Hitler and the National Socialists, who came to power in 1933, thwarted the international banking cartel by issuing their own money. In this they took their cue from Abraham Lincoln, who funded the American Civil War with government-issued paper money called “Greenbacks.” Hitler began his national credit program by devising a plan of public works. Projects earmarked for funding included flood control, repair of public buildings and private residences, and construction of new buildings, roads, bridges, canals, and port facilities. The projected cost of the various programs was fixed at one billion units of the national currency. One billion non-inflationary bills of exchange, called Labor Treasury Certificates, were then issued against this cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. This government-issued money wasn’t backed by gold, but it was backed by something of real value. It was essentially a receipt for labor and materials delivered to the government. Hitler said, “for every mark that was issued we required the equivalent of a mark’s worth of work done or goods produced.” The workers then spent the Certificates on other goods and services, creating more jobs for more people.

    Within two years, the unemployment problem had been solved and the country was back on its feet. It had a solid, stable currency, no debt, and no inflation, at a time when millions of people in the United States and other Western countries were still out of work and living on welfare. Germany even managed to restore foreign trade, although it was denied foreign credit and was faced with an economic boycott abroad. It did this by using a barter system: equipment and commodities were exchanged directly with other countries, circumventing the international banks. This system of direct exchange occurred without debt and without trade deficits. Germany’s economic experiment, like Lincoln’s, was short-lived; but it left some lasting monuments to its success, including the famous Autobahn, the world’s first extensive superhighway.1

    Hjalmar Schacht, who was then head of the German central bank, is quoted in a bit of wit that sums up the German version of the “Greenback” miracle. An American banker had commented, “Dr. Schacht, you should come to America. We’ve lots of money and that’s real banking.” Schacht replied, “You should come to Berlin. We don’t have money. That’s real banking.”2

     
  10. palani

    May 31, 2013 at 6:14 PM

    “What does a people do if it had no gold and silver”

    Having limited means my approach is to apply a $1 Fox stamp to anything I want to call a contract. After all, the common law form is ‘One dollar and other valuable considerations’. You don’t need to fulfill the entire contract with gold or silver when there is not enough of either to perform the entire contract.

    I once purchased some land with a one dollar silver coin and an order to the bank to pay a certain sum (other valuable considerations). I told the seller that the one dollar was likely all the substance that he would see. I believe he still holds the coin.

     

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