Speaking of Silver
by Alfred Adask
There's a fascinating article at United States History entitled, " The Silver Question". It's fairly short and I recommend you read it. That article points out that monetary inflation isn't new or unintended. I was surprised to read that special interests have advocated that government adopt inflationary policies since the early 1800s.
But, what's really surprising, is the article's claim that physical silver coin was originally advocated as a means to inflate the gold-based monetary system. The silver coin was added to the money supply for the purpose of inflating and devaluing the gold-based dollar, and making it easier for debtors to repay their debts by providing a mass of new, cheaper currency-silver coins.
This implies that silver has never been a true equivalent to, or substitute for, gold since silver was more inflationary than gold.
* I'm going to pull one paragraph from that article and draw some inferences.
"Efforts to induce inflation into the American economy, the panacea of debtors, had been present from earliest times [in American history]. Some of this enthusiasm was devoted to paper money schemes, such as the land bank ideas of colonial times and the greenback agitation of the post- Civil War era. Others hoped to lessen debtors' burdens by enacting programs dealing with the nation's coinage."
The "programs dealing with the nation's coinage" were proposed laws to allow and/or increase the use of silver coins.
Special interests have advocated inflation since the early 1800s. The purpose for that inflation was to enrich borrowers (and rob creditors) by allowing borrowers to repay their debts with cheaper, inflated dollars. By favoring borrowers with inflationary silver, it was apparently sensed or understood that ordinary people would borrow more, spend more and thereby "stimulate" the economy.
Apparently, they had QE even in the 1800s. Nothing new under the sun, hmm?
Of course, there were always "paper money schemes" to promote inflation. However, the gist of "The Silver Question" article is that an increase in physical silver coinage was often advocated as a means to cause the inflation that gold would not allow. Debtors whined that there just wasn't enough gold to be inflationary.
Physical silver however was plentiful and cheap and was therefore deemed to be inflationary-not as inflationary as paper currency, but more inflationary than gold.
Based on the article's claim, we could draw an hypothetical spectrum where:
1) Physical gold was "real money," in part, because it was the least inflationary and most stable store of value. If you borrowed 5 ounces of gold, you were obligated to repay 5 ounces of gold, plus interest. Under such agreement there was little opportunity for inflation (or deflation) to occur.
2) Physical silver was not quite "real money" because its use tended to be inflationary. If you borrowed 5 ounces of gold (which was relatively hard to come by) but could repay the debt with, say, 80 ounces of silver (which was comparatively easy to come by) you could repay your gold debt with cheaper silver and thereby rob your creditor. That's inflationary. ("Inflation" is a fancy word for government-sanctioned robbery of producers, savers and creditors.)
3) Paper dollars were "currency" rather than real "money" and, because they could be easily printed with only paper and ink, were potentially more inflationary than cheap silver.
4) Digital dollars of the sort used today are also only a "currency," can't redeemed by the issuer, can't be deemed to be real "money," and--because the creation of digital dollars doesn't even require paper or ink, they have the highest potential for causing inflation.
That hypothetical "spectrum" suggests a few more possibilities:
1) Within the context of American history, silver has probably always been more inflationary than gold.
2) Since the nation was founded, our national government has regularly caused inflation to favor borrowers.
3) We've had episodes of deflation, but inflation has been generally predominant.
4) If, from early on, silver was injected into the American economy in order to inflate the money supply, the real "money supply" was composed only of gold. I.e., the only "real money" is gold.
Adding silver to the money supply was an interim substitute for gold in that 20 ounces of silver might be "redeemed" by trading it in at a bank for 1 ounce of gold.
Similarly, the first paper dollars weren't real money (gold) but they could be used as a substitute for gold so long those paper dollars were redeemable in gold.
Later, government weaned us from real money by adding pure fiat currency (paper dollars unbacked by gold or even silver and irredeemable by its issuer). Simultaneously, government started using a pure, debt-based currency as if it were "real money" (an asset).
Most recently, government added digital currency to the money supply which was not only irredeemable but cost virtually nothing to produce.
In all of this, the lessons may be that:
1) Gold is the only real/honest "money" (stable store of value).
2) Every form of currency other than gold (including silver) is, to some degree, inflationary;
3) The inflationary potential of a particular form of currency is proportional to the "distance" between that currency and gold. For example, silver is closest to gold and least inflationary; digital, debt-based currency would be the farthest from gold and therefore most inflationary; and perhaps,
4) Precisely because gold has been the most stable store of value, gold is not inflationary. That might explain why modern, Keynesian-based economies and overly-indebted governments hate and fear gold. Debtors (like government) can't rob creditors by means of loans denominated in ounces of gold. You borrow 5 ounces; you repay 5 ounces. However, if government declares silver, paper, or digital dollars to be equivalent to gold at some irrational ratio, inflation can be induced, and debtors can rob creditors by borrowing 5 ounces of gold and repaying with 80 ounce of cheap silver, or 5 sheets of paper currency, or a series of digital 1's and 0's on some bank's hard drive.
5) The principle rationale for currencies other than gold is to cause inflation which robs creditors and enriches borrowers.
Based on the previous five "lessons," it follows that debtors who can't or don't want to repay their debts in full, will logically fear gold and seek to remove it from the "money supply". In a debt-based monetary system, like the one we have today, gold is anathema.
Therefore, it should come as no surprise that The Powers That Be ("The Debtors That Be"?) work to suppress the price and desirability of gold.
It should also be no surprise that those who are producers and/or savers have a natural affinity for gold. They want gold's real, stable value to be recognized and respected.
* The question is, who will prevail-the consumers/debtors (who don't want to repay their debts in full and therefore despise gold) or the producers/savers/creditors (who advocate gold as a stable store of value for the wealth that they've earned and saved)?
The answer to that question can be found in the answer to another question: Who is more important to our survival-the producers/creditors or the consumers/debtors?
In the end, the consumers/debtors are a dime a dozen. We don't really need most of them. What we must have are the producers who generate the food, clothing and shelter we need to survive.
Insofar as our survival as individuals and as a nation depends on having an adequate supply of producers, it seems likely that the producers' values must ultimately prevail over those of the consumers/borrowers. If we don't protect our producers, we'll all starve to death. Therefore, debtors be damned-gold must rise again-not simply to make a profit, but to survive.
Liars' Loans
by Alfred Adask
Inflation has been government's primary monetary objective since the Civil War. It's merely a matter of self-interest. Government went deeply into debt to fight the Civil War. (Some say that debt actually, ultimately, but secretly, bankrupted the government.) Clearly, the Civil War changed our government into a persistent debtor. To this day, insofar as government must borrow to raise revenue, government will naturally favor inflation since it allows government to repay its debts with cheaper/inflated dollars.
The deeper government goes into debt, the more determined government should be to cause inflation.
If you want to stop or slow inflation, stop government borrowing. Enforce a pay-as-you-go fiscal system wherein government can only spend the revenue it has actually collected in taxes and can't borrow more against future generations. A pay-as-you-go fiscal system won't, by itself, stop inflation. But it will remove government's incentive to inflate and that should help slow or stop inflation.
* If government stops or slows borrowing, we should expect to see a tendency towards less inflation and perhaps towards deflation and depression. Insofar as today's private producers/creditors have become wary of lending to our overly-indebted government, government's capacity to borrow has been restricted. Result? We've been sliding towards deflation and/or economic depression.
Even if government were allowed to borrow mo', mo', mo' "money," could the National Debt be increased without limit, forever?
Certainly not. There'll inevitably come a time when it's finally admitted in public that the national and private debts can't be repaid in full or by even 25%. Many believe that time is close at hand.
If that belief is correct, then, when the world faces the fact that most debts can't be paid, we could see a couple of consequences:
1) Most consumers/debtors who depend on borrowing to fund their lifestyle, will be plunged into poverty when they can't borrow another nickel; and
2) Most creditors will be also be impoverished when they lose whatever wealth they'd loaned out in return for paper-promises-to-pay that can't be kept.
How will the economy sustain itself if consumers can't borrow any more currency, and the creditors have lost most of their purported "paper" wealth when the debts are repudiated? Where will our "paper capital" come from if borrowers can't borrow and creditors can't collect existing debts?
The only "capital" that will remain will be tangible wealth like land, resources, tools and equipment. The only remaining "liquid capital" will be gold and, perhaps to a lesser extent, silver.
Those who have real capital may be able to survive and even prosper. Those who don't have real capital may starve.
* Once it's publicly admitted that the debt can't be paid, the people most likely to survive will be:
1) Those who are neither debtors nor creditors, but are, instead, savers who saved their wealth in tangible forms like land, tools, gold and/or silver that can't be destroyed by the admission that debts were unpayable; and,
2) Producers who have sufficient intelligence, knowledge, tools and work ethic to produce goods and services the world needs (like food, water, clothing and shelter) and spend less than they earn doing so. By spending less than they earn, producers become the only real source of savings. Those savings become the foundation for new credit that can be used to restart the economic engine.
Until the remaining producers produce enough new products and generate enough new profits to be saved and then used as capital for new credit, the economy will lie mired in an economic collapse of the sort that plagued Russia for a decade after the fall of the Soviet Union.
This suggests that a "chain" of sorts exists between productivity, savings and credit.
First, you must have productivity to generate savings.
Second, you must have savings to generate credit.
Third, credit may be used to advance the economy.
Credit is important; savings are more important; productivity is most important. Without productivity, there can be no savings and therefore no real credit.
* Modern economics has sought to break that "chain" by allowing increased credit to be created without increased savings or even increased productivity. Today, in order to create credit, all we need is someone to promise to repay a debt. No proof of savings or productivity is required-only a promise to repay.
Government is presumed to be credit-worthy because it can seemingly extort unlimited taxes from its subject to repay its debts. Therefore, whenever government needs to spend more currency, it can borrow more based on nothing but its promise to repay. Government is not productive. Government doesn't save anything. Government can't issue classical credit-based on: 1) productivity; and 2) savings. Therefore government argues that the need for productivity and savings is pass�. All we need for credit in our brave, new debt-based monetary system is government's (or someone's) promise to repay a debt.
A better example of credit being issued without regard for the borrower's savings or productivity is seen in the "liar loans" that funded many mortgages in the early 2000's and, more recently, are funding many auto loans.
In the early 2000s, government policies allowed and encouraged banks to lend mortgage money to people who claimed falsely (lied) to have sufficient resources to repay their mortgages. In fact, these "liars' loans" were knowingly issued to people who lacked sufficient savings (No money down!) or productive capacity (high-paying jobs) to repay their mortgage debts.
Everyone involved knew that "liars' loans" were based on fraud. Still, nobody cared since government backed the liars and the liars produced "promises to pay" (mortgage notes) that were bungled together into "bonds" that were sold to greedy domestic and foreign "investors" (a/k/a, "saps").
The whole scheme worked brilliantly. By golly!--we didn't need productivity and savings as prerequisites to issue credit! Thanks to our debt-based monetary system and "liars' loans," we'd found the proverbial money tree. All we had to do was water that "tree" with mere promises to pay. The economists and politicians who devised this scheme were viewed as geniuses.
But then, much to everyone's shock and dismay, too many of the liars who'd taken out the "liars' loans" couldn't repay their debts. Gasp!
Result? A line of dominos began to fall that nearly collapsed the U.S. and global economies.
Gee, who'd've thunk it?
Who, among all of the brilliant PhDs and politicians running our government and economy could've dreamed that they couldn't issue credit based on mere promises to pay (rather than on productivity and savings)without precipitating an economic debacle?
Who'd've dreamed that reality couldn't be bent to conform to our economists' imagination and will?
My semi-satirical point is that the liars' loans that helped precipitate the Great Recession of A.D. 2008 are evidence that you can't have real credit without first having real productivity and then real savings. Credit is not an "entitlement". Credit must be honestly earned.
Government's attempts to free credit from the "tyranny" of productivity and savings have not only failed, but may yet topple the U.S. and/or global economies into a horrific depression.
* Even if the government hyper-inflates the money supply, can the National Debt (which is at least $19 trillion) ever be repaid?
Maybe.
But what if the real National Debt is closer to $100 trillion (as per Shadowstats.com) or $200 trillion (as per the Congressional Budget Office and economist Laurence Kotlikoff)? Can a National Debt of those dimensions ever be repaid in full?
Absolutely not. I doubt that more than 10% to 20% of that debt could ever be repaid.
So, can government still extort enough income taxes from American workers to repay the National Debt-especially, after government sent many of our industries and jobs to third-world nations and our real unemployment rate is closer to 23% than 5%?
Can government raise taxes on businesses that are already subject to ruinous regulation and unfettered competition from cheap foreign labor without causing recession or depression?
Can government seize enough of our savings to repay the National Debt?
If not, government is nothing but another "liar" and the National Debt is nothing but evidence of more "liars' loans". If so, sooner or later, the government liars will have to admit that the National Debt can't be paid. When that admission becomes public, it will trigger the same sort of havoc that followed from the failure "liars' loans" of the early 2000's-except, this time the havoc will be on a much grander scale. Plus, the world will know that the government is a congenital liar.
People, institutions and governments that choose to lend to liars are fools destined for poverty. Liars may be sufficiently smooth-talkers to get loans, but they're not sufficiently good producers or savers to repay them.
Who's the biggest debtor in the world? Who's the biggest liar?
Answer those two questions and you'll know to whom you should never lend your wealth.
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