To solve the world monetary crisis, I have heard it argued that the United States should meet its obligation to redeem Federal Reserve Notes with gold, once the true market price of gold is established. This supposedly is required to meet "the contractual commitment to redeem the currency in gold", according to the argument.
I like to examine that statement. There are three types of U.S. currencies, and one currency that is an obligation of the U.S.
The first type of currency is a U.S. Gold Certificate, which essentially is a "Warehouse Receipt" for the storage of gold at the U.S. Treasury. Gold Certificates ceased to be issued in 1928. U.S. citizens were prohibited from holding these certificates after 1933. Foreigners who held these certificates had them devalued by 1/3 in 1935 by F.D.R. and rendered irredeemable by Richard Nixon on August 15, 1971. Therefore, this kind of "contractual obligation" could not be connected to the post 8/15/71 FRNs.
The second kind of currency is a U.S. Silver Certificate. It lost its par to the Gold Certificate with the Fourth Coinage Act of 1873. This certificate was likewise a "Warehouse Receipt" for silver stored at the U.S. Treasury. Silver Certificates ceased to be issued in 1964. They are no longer redeemable, but they are still legal tender. Therefore, this kind of "contractual obligation" could not be connected to the post 8/15/71 FRNs.
The third type of currency is a U.S. Note. It was first issued in 1862. It was pure legal tender currency without a redeemable clause. However, it was a direct obligation of the U.S. government, and it legally was a "Bill of Credit". Acts of Congress in the 1870s provided an opportunity to redeem the currency for gold during a limited time. The U.S. Notes ceased to be issued after January of 1971. Therefore, this kind of currency could not be connected to the post 8/15/71 FRNs.
That leaves the Federal Reserve Notes which are also an obligation of the United States. In order to understand the "contractual obligations" connected to this note, it is necessary to examine the redeemable clauses printed on the FRNs. There are four separate redeemable clauses.
The first FRN clause is "This note is receivable by all national and member banks and Federal Reserve Banks and for all taxes, customs and other public dues. It is redeemable in gold on demand at the Treasury Department of the United States in the city of Washington, District of Columbia or in gold or lawful money at any Federal Reserve Bank." FRNs with this clause were last issued in 1918. Redemption for gold was made inoperative by Executive Order of F.D.R. in 1933.
The second FRN clause is "Redeemable in gold on demand at the United States Treasury, or in gold or lawful money at any Federal Reserve Bank". FRNs with this clause were last issued in 1928. Likewise, redemption for gold was made inoperative by Executive Order of F.D.R. in 1933.
The third FRN clause is "This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury, or at any Federal Reserve Bank". This clause held out a possible redemption for "actual money, which is gold", provided the Congress set "lawful money = actual money". FRNs with this clause were last issued in 1950.
The fourth FRN clause is "This note is legal tender for all debts, public and private". Any FRN issued after 1962 carried this clause precluding any interpretation that it was anything other than the "value" the holder and/or receiver placed upon it. An FRN for U.S. citizens could only be redeemed for the same FRN. Except, foreign holders of U.S. obligations, of which the FRN is one, were guaranteed by the 1944 Bretton Woods treaty to have their U.S. currency redeemed at the rate of $35/troy ounce of gold.
On August 15, 1971, Richard Nixon broke the treaty and defaulted on the U.S. obligation to redeem U.S. currency held by foreigners. For this act, the U.S. deserves full condemnation and derision. I completely join the outrage over the default of the obligation to redeem, however I cannot see a connection in terms of "Contract" or "Tort" law. The "law" violated was a treaty.
Once the act was committed, it was committed. The foreigners were furious. The U.S. was forced to enter a number of agreements to have foreigners keep the USD/FRN circulating as a reserve currency. To sell initial treasury debt after 8/15/71, the interest rate had to be set at 16%. The largest buyer of 16% treasury paper was Mao TseTung's Peoples' Republic of China.
The Chinese are not known for being poor businessmen, regardless of their political persuasion. I am sure they looked at the "Rule of 72" when they made the purchase. Yet, at 16% they must have known there were risks involved. Who would pay 16% interest on "supposedly prime paper" unless the markets considered it to be full of risk. What was the risk? The risk came with the default by Richard Nixon to redeem under the provisions of the 1944 Bretton Woods Treaty. Thereafter, no foreigner had a right to expect to be able to redeem U.S. currency for anything but U.S. currency. The world was outraged with us for committing this act. Yet, they turned around and did business with the FRN again knowing what the terms were. Would you do so for 16% interest? Well, the world did. When foreigners decided to stay with the fiat FRN after 8/15/71, they knew there was no gold backing and no agreement to redeem connected to the note. There was only the promise by the FED to maintain the "value" of the currency. The world should have known that "monetizing debt" in the long run is subject to severe punishment by the exponential function, meaning compound interest. Therefore, I cannot agree that under the circumstances, we are defrauding anyone by failing to redeem their FRN holdings for gold.
With regard to the Chinese, I could even make an argument that they benefitted by the fiat FRN until now. However, being part of the human race, even the Chinese are covered by Albert Bartlett's quotation "The greatest shortcoming of the human race is our inability to understand the exponential function". It seems that their central bank did not understand the exponential function dilemma any better than did the FED.
Albert Bartlett's lament is now becoming a serious issue. It is time to stop monetizing debt.
The return to a sound and workable monetary system via the institution of a parallel currency will be the topic of a future post.
Saturday, January 30, 2010
Monday, December 7, 2009
What the Chinese know.....
After President Obama's return from a visit to China in late November 2009, "Saturday Night Live" a satirical program of the NBC Network, featured a spoof that can be seen via the following link:
http://www.hulu. com/watch/ 110317/saturday- night-live- china-cold- open
Why would a network which is normally blindly supportive of President Obama, broadcast such scasing criticism of his trip to the Far East? The only answer that I have is that the money interests who control the NBC network were highly dissatisfied with President Obama's performance in China. The spoof on "Saturday Night Live" in my opinion, was a public way of letting him know about the dissatisfaction.
Take a look at this clip......then I'll explain why President Hu Jintao wants to be kissed.....
When in August 1971 Richard Nixon defaulted on the U.S. Dollar held by foreign central banks, it required Paul Volker to raise the interest rate to 16% before the FED could sell any U.S. Government bonds to foreigners again. The primary purchaser of those Treasuries paying 16% was the PRC under Mao. (They know the Rule of 72)
Since then, the Chinese population has bought plenty of Freddie Mac and Fannie Mae bonds, as well as treasuries for their retirement savings. They all expect to be paid their interest on those bonds.
What they receive as interest on the U.S. and G.S.E. bonds is tax payers' money. It is the tax payer that has to pay interest on the debt the Congress voted and sold to the FED to peddle wherever.
As long as the Chinese government knew that the U.S. taxpayer had to hand over hard earned money to pay for the interest, evenso the Congress was piling on more and more debt, they were ready to buy more of the debt. However, when the ponzi scheme, which is the monetizing of debt, finally started to break down in September of 2007 with the first default of mortgage bonds, the U.S. Treasury and G.S.E. bond market suffered tremendously.
The FED from then on could no longer monetize enough debt, but actually had to print money that became a direct claim on U.S. assets and essentially on the assets of the American people. This sort of printing of pure fiat currency has in all history inevitably resulted in default. That is what the Chinese know.
They are demanding from President Obama, that he increase federal taxes not just print paper money (actually just computer blips). That is were President Obama is caught. He promised he would not raise taxes on anyone under $250,000 of income. Yet raising taxes on anyone over $250,000 will actually dry up any investment in the productive economy and lead to a total financial and economic collapse.
Therefore, if he is going to satisfy the Chinese at all, he has to collect money from the large masses without calling it a tax.
Are you catching on.....???? Health Care Reform isn't about health care (paying premium for four years up front, before benefits set in.......), Cap & Trade isn't about energy or global warming (government selling carbon credit for which it sets the price and which it creates out of thin air).....and anything else that comes down the road in the form of direct taxes....be it a war tax, or a mileage tax or a CO2 tax....etc, etc.....all is just an attempt to mollify the foreign bond holders by making the tax payer pony up for the debt and the interest on the debt the U.S. Congress voted.
When Treasury Secretary Geithner and President Obama insure the Chinese that they will get their "money", yet there is no chance in hell that they will, you can see why President Hu Jintao feels violated. Maybe a kiss on his behind will gain us a smidgen more of reprieve. Being subservient to overseas oligarchs seems to come natural to our chief executive. So please, Mr. President plant that kiss.....it might just buy us another month time.
http://www.hulu. com/watch/ 110317/saturday- night-live- china-cold- open
Why would a network which is normally blindly supportive of President Obama, broadcast such scasing criticism of his trip to the Far East? The only answer that I have is that the money interests who control the NBC network were highly dissatisfied with President Obama's performance in China. The spoof on "Saturday Night Live" in my opinion, was a public way of letting him know about the dissatisfaction.
Take a look at this clip......then I'll explain why President Hu Jintao wants to be kissed.....
When in August 1971 Richard Nixon defaulted on the U.S. Dollar held by foreign central banks, it required Paul Volker to raise the interest rate to 16% before the FED could sell any U.S. Government bonds to foreigners again. The primary purchaser of those Treasuries paying 16% was the PRC under Mao. (They know the Rule of 72)
Since then, the Chinese population has bought plenty of Freddie Mac and Fannie Mae bonds, as well as treasuries for their retirement savings. They all expect to be paid their interest on those bonds.
What they receive as interest on the U.S. and G.S.E. bonds is tax payers' money. It is the tax payer that has to pay interest on the debt the Congress voted and sold to the FED to peddle wherever.
As long as the Chinese government knew that the U.S. taxpayer had to hand over hard earned money to pay for the interest, evenso the Congress was piling on more and more debt, they were ready to buy more of the debt. However, when the ponzi scheme, which is the monetizing of debt, finally started to break down in September of 2007 with the first default of mortgage bonds, the U.S. Treasury and G.S.E. bond market suffered tremendously.
The FED from then on could no longer monetize enough debt, but actually had to print money that became a direct claim on U.S. assets and essentially on the assets of the American people. This sort of printing of pure fiat currency has in all history inevitably resulted in default. That is what the Chinese know.
They are demanding from President Obama, that he increase federal taxes not just print paper money (actually just computer blips). That is were President Obama is caught. He promised he would not raise taxes on anyone under $250,000 of income. Yet raising taxes on anyone over $250,000 will actually dry up any investment in the productive economy and lead to a total financial and economic collapse.
Therefore, if he is going to satisfy the Chinese at all, he has to collect money from the large masses without calling it a tax.
Are you catching on.....???? Health Care Reform isn't about health care (paying premium for four years up front, before benefits set in.......), Cap & Trade isn't about energy or global warming (government selling carbon credit for which it sets the price and which it creates out of thin air).....and anything else that comes down the road in the form of direct taxes....be it a war tax, or a mileage tax or a CO2 tax....etc, etc.....all is just an attempt to mollify the foreign bond holders by making the tax payer pony up for the debt and the interest on the debt the U.S. Congress voted.
When Treasury Secretary Geithner and President Obama insure the Chinese that they will get their "money", yet there is no chance in hell that they will, you can see why President Hu Jintao feels violated. Maybe a kiss on his behind will gain us a smidgen more of reprieve. Being subservient to overseas oligarchs seems to come natural to our chief executive. So please, Mr. President plant that kiss.....it might just buy us another month time.
Monday, November 2, 2009
Are We Coming out of a Recession?
On November 2, 2009 surrounded by his team of economic advisors, President Obama told the public that his administration saved the economy from the brink of a depression. He further declared that we are coming out of the recession, though an improvement in the job market may be lagging. Should you believe him or his economic advisors? I suggest that you do not.
The Obama administration, and the previous Bush administration promoted the expenditure of trillions of dollars for TARP and stimulus spending. To have saved thereby the banking system from a sudden and catastrophic meltdown after the failure of Lehman Bros., AIG and others, may be a proper claim to make. However, the banking system is not the same as the productive economy. To stimulate production and commerce, President Obama advocates the Keynesian approach by spending government money (debt). His approach to curing the economic ills is evidence that he understands little about how a political economy works. His economic advisors are seemingly unable to inform him, either on purpose or because they lack knowledge. The Keynesian solution simply will not work this time around. Quite to the contrary, it will lead to the feared depression. Here is why....
During past recessions, the spending of government (debt) to stimulate the economy could be justified because a $1 of spending produced $2, $3 or at least more than a $1 worth of productivity increase. With this process, the economy was sooner or later brought back into balance.
Spending by government today of a $1 to stimulate the economy only returns $0.80 of productivity. Much of the stimulus money ends up reducing debt, rather than as an investment in production and the creation of jobs. In other words, the more the government stimulates today, the deeper in the hole the economy goes.
That is why the TARP and stimulus money sits in the bank vaults at J.P. Morgan and Goldman, Sachs & Co., instead of being put into circulation. This is certainly good news for the monetary elite, because the money on their books guarantees against attacks on the financial system.
For the rest of us, this locked up money does nothing. The "happy talk" about coming out of the recession eminating from President Obama is just that, "happy talk".
The Obama administration, and the previous Bush administration promoted the expenditure of trillions of dollars for TARP and stimulus spending. To have saved thereby the banking system from a sudden and catastrophic meltdown after the failure of Lehman Bros., AIG and others, may be a proper claim to make. However, the banking system is not the same as the productive economy. To stimulate production and commerce, President Obama advocates the Keynesian approach by spending government money (debt). His approach to curing the economic ills is evidence that he understands little about how a political economy works. His economic advisors are seemingly unable to inform him, either on purpose or because they lack knowledge. The Keynesian solution simply will not work this time around. Quite to the contrary, it will lead to the feared depression. Here is why....
During past recessions, the spending of government (debt) to stimulate the economy could be justified because a $1 of spending produced $2, $3 or at least more than a $1 worth of productivity increase. With this process, the economy was sooner or later brought back into balance.
Spending by government today of a $1 to stimulate the economy only returns $0.80 of productivity. Much of the stimulus money ends up reducing debt, rather than as an investment in production and the creation of jobs. In other words, the more the government stimulates today, the deeper in the hole the economy goes.
That is why the TARP and stimulus money sits in the bank vaults at J.P. Morgan and Goldman, Sachs & Co., instead of being put into circulation. This is certainly good news for the monetary elite, because the money on their books guarantees against attacks on the financial system.
For the rest of us, this locked up money does nothing. The "happy talk" about coming out of the recession eminating from President Obama is just that, "happy talk".
Subscribe to:
Posts (Atom)