Exploiting the Delusions of Money
21 April 2003
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by Ed Bugos

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Today's Highlights:
Liberty's enemies are empowered from within
How inflation funds big government
Sure central banks sell gold, but they need reserves to always sell
Earnings delusions - past and present - subscription req'd
Weak dollar outlook becomes part of bullish delusion - subscription req'd
Deflation & yield guarantee delusions cap bond yields - subscription req'd
Conclusion - subscription req'd

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.

  1. Inflation leads to economic problems beginning with monetary debasement and ending / resulting in malinvestment, unemployment, capital thinning, excessive indebtedness, financial volatility, and political corruption.
  2. 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 handů 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 deludedů

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.

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Ed Bugos

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