"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
-Henry Ford
Recently the BIS (Bank of International Settlements) called for a radical overhaul of the global economic system.
the powerful Bank for International Settlements (BIS) has now voiced grave doubts about the policy and called on politicians to begin debating an overhaul of the current global economic system.
In another radical move it has also suggested ditching many national currencies in favour of a small number of formal currency blocks based on the dollar, euro and renminbi or yen.
The BIS's leading economist and head of monetary policy, William White, said growing levels of personal and corporate debt, both in the UK and internationally, were signs that while the fight against inflation may have been won, it has been at the cost of unbalancing the world economy.
That's some pretty radical stuff coming from an organization that is "a coalition of central banks and helps oversee the global financial system". In other words, these are the guys that run the world's economic system and they saying that the current system can no longer function in its current state. (i.e. It's broke)
In a world with a real news media, this kind of stuff would have gotten headlines around the world, while a missing teen in Aruba would hardly have been noticed. Instead, I can't find this mentioned in a single American news outlet.
This is hardly the first time that an important international body has warned that the current global economic regime is busted. In Sepetember of 2003 the IMF (International Monetary Fund) warned that America's yawning trade deficit could collapse the dollar. A month before the IMF warned that America's budget deficits could bring economic instability.
Of course that was nearly three years ago and both conditions have worsened a great deal. Does that mean that the warnings were false alarms? Hardly. It means that the catastrophic outcomes are closer. How do I know this? Because every once in a while there will be an announcement that indicates that the people who run the system understand how serious the situation is.
For instance, the first indication that Da' Boyz were preparing for trouble was five months ago when they announced a suspension of M3 reporting. While most people complained about the ending of the ability to accurately determine monetary inflation, I thought what was most interesting was what else they were no longer going to report "large-denomination time deposits, repurchase agreements (RPs), and Eurodollars".
RP's are the only accurate way to determine if the Fed was monetizing debt (i.e. printing dollars out of thin air to buy federal debt). Eurodollars are the only accurate way to determine the amount of dollars that are circulating the world outside of our borders (i.e. a reflection of our ballooning trade deficits).
The reason I find this most enlightening is because of what our current Federal Reserve chairman, Ben Bernanke, had to say back in 2002.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. 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.
[...]
A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.
[...]
Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
2 Chr 9:27 "And the king made silver in Jerusalem as stones"
And then last week there was
another news story that got very little press, but emphasized exactly how seriously Da' Boyz were taking the coming economic crisis.
A bank created to provide emergency backup for the Treasury market will be ready to operate in the next 18 months, a bond industry group is set to announce today.
The so-called NewBank exists largely on paper, but like a superhero on standby, it can spring into action to stabilize the government securities market if a legal or financial disaster strikes.
The bank is a result of a five-year effort by government and banking officials to draw up plans in the unlikely event that either J. P. Morgan Chase or the Bank of New York, the only existing clearing banks in the Treasury market, are suddenly unable to operate.
It's safe to say that if JPM suddenly failed then a cornerstone of the world's economic system has already failed. JPM is the
world's largest holder of derivatives, totalling tens of trillions of dollars in notional contracts.
Derivatives are an obscure financial instrument that the world's financial institutions increasingly use to insure against risk. Ominously it was only four months ago that one of the major derivative players in America, Refco,
filed for bankruptcy.
To further reinforce the idea that the world's economy is heading for a World Of Hurt (WOH), many of the most brilliant and successful investors in the world have given us notice. Bill Gross, chairman of America's largest bond fund, has said,
"the dollar as a currency is doomed". It is already well known that Warren Buffett and
George Soros have made financial bets in the tens of billions of dollars against the American dollar. Buffett has gone so far as to say America is headed for a
"sharecropper society".
If the smartest men in finance are betting against the dollar then it only makes sense for you to be worried.
At this point let's put two and two together.
- The Fed is no longer going to publish reports that reflect how much debt it is monetizing, nor how many dollars are in ciculation because of our trade deficits.
- The new Fed chief has spoken publically about the wisdom of theoretically dropping money from helicoptors over Manhatten in order to boost the monetary supply and suppress the value of the dollar.
- A new "bank" has been specifically created to monetize treasuries in case the world's largest derivative player goes bankrupt.
- A major derivative player has gone bankrupt.
- The BIS has called for an overhaul of the global economic system.
- The IMF has sounded the alarm about America's trade and budget deficits.
- The smartest investors in the world are betting against the American currency.
Are you scared yet? If not, why aren't you?
How did we get into this mess?
A very good question. For a good answer, let's look at what the BIS says is the primary reason for the need for a global overhaul.
The BIS, which is controlled by a coalition of central banks and helps oversee the global financial system, warned that by pushing interest rates so low, inflation targeting has encouraged the public to take on more debt and has accelerated a flow of money out of the world's major economies.
In a new BIS report he said: "In a number of English-speaking countries what has been observed is a decade-long reduction in the household saving rate and a significant increase in consumption.
[...]
Mr White said: "Those countries with the biggest external deficits [the US, the UK, Australia and New Zealand] also tend to have the biggest internal imbalances. Rising asset prices in such countries (recently, for housing in particular) have led to higher perceptions of wealth, and more spending." However, he added, far from managing these worrying build-ups, inflation targeting can encourage them.
Mr White's comments mark a significant departure for the BIS, which for many years has championed inflation targeting as an essential component of stable economies.
So let's translate this into something simple to understand:
The BIS has championed inflation targeting for decades, but now realizes that it causes asset bubbles in real estate and low saving rates because it discourages savings and encourages speculation. It's solution is to fold all the existing currencies into the four major ones of the world.
Or to put it an even simpler way: the guys who got us into this mess want to fix it by advocating a more intense version of the same mess.
So why, after acknowledging the problem, do they propose a solution that is fundamentally flawed to begin with? It's because they refuse to acknowledge the root cause of the problem. Instead they mearly look at the symptoms. They see accelerating debt levels, but they fail to acknowledge that debt levels have been rising for generations, and only recently have hit levels that are shaking the foundations of the global financial system.
Perhaps a more helpful solution would be to acknowledge the root causes of this rise in debt levels itself - and that is the nature of the global currencies.
"Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless."
Ludwig von Mises
What is Money? Money is any marketable good or token used by a society as a store of value, a medium of exchange, and a unit of account. Since the needs arise naturally, societies organically create a money object when none exists. In other cases, a central authority creates a money object; this is more frequently the case in modern societies with paper money.
In the past money was precious metals like gold and silver. It had intrinsic value. In other words, if you had a gold coin that was valued at $20 and you took a big knife and cut it into twenty pieces, you had twenty bits of gold that was each worth about a dollar.
Today you have a $20 Federal Reserve Note (note I didn't say "dollar"). If you take a knife and cut it into 20 random pieces you have twenty pieces of paper that are basically worthless, even for toilet paper. There is no instrinsic value to paper money.
That begs the question of: Why does paper money have any value at all then?
The most obvious answer is because "People will accept it as money." But that doesn't really get at the nature of paper money, nor does it answer the question of "How did we get into this mess?"
To understand this you must realize what a Federal Reserve Note (FRN) is - it's an IOU.
Fiat currency, which is what we have now, is debt-based. In other words, every time that a FRN (or a dollar of credit) is created, a dollar of debt is created. Every FRN in existence is someone else's liability.
Prov 22:7 "The rich ruleth over the poor, and the borrower is servant to the lender."
The Lie
Think about that for a moment. More money in the system means more debt in the system. It's a treadmill. The faster you go only means that you are expending more energy.
It's a concept that is hard to get your mind around because it goes against how we've been trained since we first picked up a coin as a child. Even now something inside of me rebels against the idea. The idea that more money means more "wealth" is ingrained into us. Yet once you've accepted the idea that money means debt then you realize that your concept of wealth is fundamentally flawed. You break your back all your life to accumulate money thinking that you are accumulating wealth, when in actuality you are mearly accumulating someone else's debt burden. Is that really what you consider to be wealth? Is that really what you want to work your entire life for?
But The Lie is even worse than that when you consider that those debt-based pieces of paper are backed by the American taxpayer. Each taxpayer has been saddled with hundreds of thousands of dollars in liabilities and that is the only thing keeping the dollar from collapsing. You are an American taxpayer and therefore
you are working your whole life to accumulate more of your own debt burden. It's practically
Matrix-like when you consider how deep The Lie goes.
And that brings us back to the the problem that the BIS was warning us about - unsustainable rising levels of debt. The same people who are printing the money are also telling us not to take on the debt that they issue. Can you see the irony here?
"The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy. I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned, an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its REIGN by working upon the prejudices of the people until the wealth is aggregated in a few hands and the Republic is destroyed."
President Abraham Lincoln, 1863
At this point I should answer the question that might be on your mind: Who got us into this mess? The answer is really quite simple: The federal government sold us out to the banks. Why would they do that? The answer is
control. Debt-based currency is easy to track, unlike currency with instrinsic value like gold and silver. It is no coincidence that the Federal Reserve was created the exact same year that Income Tax was created.
This wasn't the way our country was created. Article 1 Section 8 of the U.S. Constitution gave only Congress the power "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;"
Article 1 Section 10 of the U.S. Constitution prohibited: "...make any Thing but gold and silver Coin a Tender in Payment of Debts;"
And yet in 1913, Congress created
the Federal Reserve, a group of private banks, and gave them the power to create the nation's money. They didn't even bother to amend the Constitution to allow this. They simply ignored it.
I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.
If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.
-Thomas Jefferson
Those are wise words from the creator of America's Democratic Party. It's sad that those words of warning were ignored.
End Game
If you've read all the way to this point you are probably both depressed and angry. I can offer two things: a) a vision of how it will end, and b) a way to protect yourself from that end.
"Give me control of a country's money and I care not who makes the laws".
- Meyer Rothchild
Fiat money has been tried before in history. It has
always ended the same way - with hyperinflation and currency collapse.
China started a 500 year experiment with paper money in the 10th Century. The currency collapsed at least seven times (probably more, but that's all I could verify) before they finally gave up and went back to precious metals.
France experimented with fiat money in the
1720's and then again in the
1790's. Germany had their own experiment in the
1920's.
Fiat currencies have even failed in our own country during
the Revolution and again during the Civil War (Confederate side).
It has been done over and over again - more times then I could list here and you would want to read. Every time it ended the exact same way.
I've read that the average life-span of a fiat currency is around 60 years (give or take several decades). The world is currently midway through the fourth decade of total fiat currency, although most countries were in it long before 1971. Given that history it should surprise no one that serious imbalences and stresses are appearing around the globe, for it is the nature of the currency regime itself. Fiat currencies normally don't fail overnight (although in Weimar Germany it practically did). Sometimes they fade away gradually with a modest amount of price inflation similar to what we are experiencing today.
The Fed will even tell you
exactly how much they have destroyed the currency in your pocket. For instance, a dollar's basket of goods bought in 1913 (the year the Federal Reserve was created) now costs $19.66 to buy. A dollar's basket of goods bought in 1971 (the year we defaulted on the international gold standard) now costs $4.80. Now that's arrogance. Sort of like a pickpocket telling you exactly when he's going to steal from you and how much.
About three months ago there was an interesting sentence buried deep in an
obscure financial article about the rising price of gold that caught my attention.
Obviously the next key level would be $515/oz and this looks quite possible. Although some commercial banks are trying to push the price lower I think it's not an issue for as long as it holds above $490/oz.
Why would commercial banks be working to push the price of gold lower? The answer is amazingly simple: The banks have a product to sell - paper money. Gold was money for 5,000 years, and is therefore, a competitor of the bank's only product.
To put it another way, the banks who control the current economic system are making ungoldly amounts of wealth from the status quo and want it to continue for as long as possible eventhough they know that the current system is doomed. To do this they are selling their gold hoards that were given to them when our government sold us out.
"A capitalist will sell you the rope you will hang him with if he can make profit on it."
- Lenin
And that is their weakness and your opportunity. They are handing you the tools to survive the collapse of the system they have created. Silver and gold has more than
doubled in dollar terms since Bush became president. You can bet that it will do far more than that before it is over. One thing you can be certain of - paper money will eventually return to its instrinsic value.