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Liberty's
enemies, when it comes down to being specific, are the social architects
of the New World Order; the one world government; and the one world
currency.
Liberty's enemies oppose money as
the basis for peaceful relations in society. Instead, they prefer
a morality governed by some democratically arrived at principles
to the moral discipline thrust
upon them by "sound" money.
Naturally, they can't differentiate between honest and dishonest
money. It's all evil.
Liberty's enemy is socialism, fascism,
or big government - particularly when totalitarian (as if it ever
wasn't). For then, individual liberty is less important.
But these are not primarily
external dangers. Socialist economies typically haven't been able
to sustain their armies for long absent the constant conquest of
new resources to exploit, which would make them more like fascists
by the way. No. The enemy of liberty is not external. It is from
within - all of us.
Large numbers of the conservative
right on this continent have no idea. Anybody not with the US government
today is perceived to be left wing.
Let me tell you something. Anybody
that doesn't understand our criticism of the US government today
is not anywhere as right of center as we are. If you think being
fascist represents a right wing choice of any kind, you're wrong.
There are very few differences between socialism and fascism. Both
are totalitarian, and involve big government.
At dinner last night, with another
libertarian, we wondered why it is that amid all the right wingers
in America today, the government continues to grow. And despite
one privatization scheme after another, or one promise after another
to reduce taxes here or government there, the government continues
to grow.
The American Constitution, as I understand
it, was set up initially to protect the individual's liberty by
making it incumbent on Congress to limit government. How else do
you protect the market's (consumer's) sovereignty? But despite all
the hoopla about how capitalist the Republican right appears to
represent themselves today, most of them are simply part of the
winning argument - big government. The rest of us, libertarians
included, are irrelevant. Individuality is irrelevant. Because government
continues to grow, somehow, and despite all the conservatives in
power.
Today you're going to find out how,
if you don't already know.
Inflation Funds Big Government
It's really a two-step process in the big scheme of things, and
it has everything to do with money.
- Inflation leads to economic problems
beginning with monetary debasement and ending / resulting in malinvestment,
unemployment, capital thinning, excessive indebtedness, financial
volatility, and political corruption.
- Then everyone blames the markets
and capitalism for all the bad outcomes and asks the government
to help them out of the mess it helped create. Government expenditures,
taxes, inflation, and regulatory power increase.
This is how the government grows
over time. It's how inflation is a confiscation of wealth, or a
means of wealth transfer to political circles. It's the reason inflation
is a hidden form of taxation - because people don't generally
come to realize it to be the main problem, and so they beg for more
of it in order to cure the economy of the symptoms or imbalances
caused by it in the first place.
But if not corrupt, our governments
are smart today. They know some of its citizens are hip to their
desire to grow. So they (Republican or Democrat) engage in PR campaigns
to persuade the markets that they are subjugated to them. Whether
it's the promise to lower taxes, or the deficit, or to privatize
an industry here or there, in the end they too must know that somehow,
it's all an illusion, because government continues to grow.
 To
the extent the markets believe it, the immediate result is for market
confidence to rise in the government's economic policies. To
the extent they are stimulative and the market's confidence reflects
in new currency / loan demand, the inflation can start. GDP can
grow with or without profits this way. The phony growth in
economic activity allows the government to grow unnoticed. And it
can claim that its growth is modest - relative to the growth in
GDP.
However, here's the catch. Much of
the growth in GDP is not real. We never know it at the time, since
there's so much money sloshing around in a boom. On the other hand,
the growth in government is real. Moreover, so are the obligations
of government, and its citizens who become increasingly dependent
if not addicted to their government's easy (money or economic) schemes.
 There
you have it. Inflation finances the growth in government, both present
and future. It's a vicious cycle of promise, deceit, and corruption.
Central banking is the mechanism that sustains it. The cost is your
liberty. At first it's only economic. Through inflationary error,
the government creates a crisis that it promotes itself as the best
cure for.
In place of the market, the government
increasingly dictates the economy's resources - through higher taxes,
price controls, greater spending, economic planning, consolidation
of banking/media power, etc. The process is gradual, and real.
I sincerely believe we only have to figure out where we are on the
timeline to hyperinflation. It's no longer a matter of "if."
Understanding what is inflation and
what isn't is basically like determining what is real and what isn't.
The Federal Reserve still has much more power than most individuals
do in the information war. They've convinced people inflation doesn't
exist and that the nineties was just a little euphoria owing to
the productivity shock, and even the "soundness" of the preceding
monetary policy.
Central banking is a failed doctrine,
but people today look to our central banks as if they were Gods.
If ever there was a delusion, it
is the general validity of central banking in a capitalist society.
Essentially, weak banking policies are simply sustained longer than
they should. If the Internet is the potential instrument of overcoming
this delusion, gold is the barometer.
The problem is that few of us would
like to see central banking go, for all the negative consequences
its departure would produce (in the immediate aftermath). But that
is a sure sign of the corruption from within; as any half-ass
analysis would show those consequences would derive from imbalances
created by central banking in the first place. It's a classic cop-out...
an unwillingness to take the real medicine.
Big government will no doubt continue
to grow until the market itself is burdened with the task of proving
that central banking is economically unviable. This means a future
crisis that will be blamed on capitalism no doubt. But while an
economic crisis is perhaps already unavoidable, there is the opportunity
for politicians to end the Fed's almost 90-year reign, and bring
America back to its market roots. I'm sure it will be fleeting.
The Federal Reserve's Congressional
mandate expired in 1999 amid what most people would call success
in its stated goal of full employment - under the Humphrey
Hawkins Full Employment Act of 1978. Since then (1999) both Congress
and the Fed Chairman have conducted the Humphrey Hawkins testimonies
semiannually as normal.
We haven't seen any sign of a new
mandate yet (which doesn't mean there isn't one). However,
nor are the results of the 20-year experiment all in yet.
I predict that before gold's bull
market is over, the prospect of the Fed's dissolution will be considered
by Congress. Or can you think
of a more relevant topic for Congress when gold is trading at $2000?
Don't get too excited though. It's not like the topic will even
get a hearing before $2000 gold. It would take too strong a moral
conviction to consider dissolving any central bank before a crisis
materializes.
Central
Banks Sell Gold, But Need Gold Reserves to Sell
Perhaps the most effective delusion with respect to gold is the
idea that central bank gold represents an overhang of gold that
has yet to come to market. It's not an overhang, it's ammunition.
Big difference.
Here's how we see it.
Central banks essentially liquidate
the public's real wealth in order to redistribute it, or achieve
political objectives. The thing is, the ability to do that is what
makes them an ongoing concern,
and the moment they run out of gold they cease to have any real
power. They need real gold
reserves in order to fuel their imaginary world of easy money.
Sound money is like oxygen to capitalism.
But central banks don't give us sound money. They give us fiat money,
sustain its value for long periods of time artificially, and choke
off capitalism in the process... it runs out of air if you will.
In the nineties, central bankers
explained that the intention to sell their gold reserves was influenced
by the opportunity costs of owning and storing it, which were rising
with every uptick in stock prices during the period.
That was the official reason. The
inference was that gold had lost its monetary value. But despite
the fact that it hadn't, the threat of liquidation helped them perpetrate
yet another delusion. And yet again, the perpetuation of it drew
us to what ails the monetary system. Unsound money.
It is in the interest of a central
bank to sell gold, but only while it has enough to sell. In other
words, when a central bank threatens to sell its gold, it doesn't
really want to get rid of all of it. It only wishes to sell it continuously
in order to support the value of a currency it makes worth less
each day the bank's inflationist dogma exists.
The advent of derivatives markets
and other structured finance opportunities during the nineties enabled
a myriad of new ways for central bankers to do this without having
to actually reduce their stock of gold. Or so they thought.
This is the problem they've found
themselves in right now, as it costs increasingly more to close
the outstanding arrangements (5000 to 10000 tons) made at lower
gold prices.
To avoid acknowledging this problem
as originating from the delusion that gold is a worthless asset
requires the conviction that
the dollar is sound money, and that it didn't benefit from the leasing
of too much gold in the nineties - even at the margin.
The subtle difference between the
central bankers' desire to sell some gold at the right time and
getting rid of it outright is in reality quite enormous.
But if there's no gold left to sell,
the central banks are out of business (bad news for the BOE - hey,
maybe that's another reason why they're going to adopt the Euro
now).
In our view, it's precisely the reason
the Washington Agreement was signed. It wasn't to support impoverished
gold producing nations. It was to prevent the delusion from getting
out of hand… from the banks believing it themselves.
The average investor is confused
by the bank's desire to sell.
If the gold is the public money,
what are they doing selling it? So the investor has a choice. He
or she could believe the metal is worthless, or that the central
banks are dishonest. If they choose the latter, they've arrived
at the same conclusion we have. Central bankers sell gold to persuade
the market that the dollar is really money.
To understand this, however, investors
have to understand the "economic" difference between money
and an asset (financial or otherwise), capital good, or currency.
The main difference of course being that money is "the"
most liquid (preferred) medium of exchange chosen by the
market. Currencies are glorified money substitutes; assets produce
income streams; and capital goods produce consumer goods.
Be careful though. Once you understand
what money is, everything your central bankers say begins to sound
like a con, and everyone else will seem increasingly deluded…
Delusions will appear everywhere.
It could drive you mad, or you might just want to exploit them.
Exploit doesn't have to be bad. You could look at it this way -
you'd be making the market more efficient. Heavens knows it needs
some sense knocked into it.
The above commentary
is an excerpt of the most recent Goldenbar editorial. The rest of
the article reveals delusions related to the corporate profit boom
turned bust; the weak dollar and its bullish stock market impetus;
as well as the delusions about deflation and yield guarantees.
To view the entire
article, and receive a one week free trial subscription
to Ed Bugos' Daily Global Market Outlook, email us at:
mailto:gold@goldenbar.com
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Ed Bugos
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