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One World, One Currency

April 7, 2010


                                                    By Jacob Steelman

The World economies are at a crossroads.  We are experiencing one of the severest market corrections since the 1929 Great Depression.  Should we travel down the Austrian (laissez faire economy and society) road to wealth accumulation and prosperity by allowing the correction to take place naturally while at the same time drastically reducing government intervention, expenditures, taxation and eliminating fiat currency?  Should we travel down the Keynesian (command-and-control economy and society) road to serfdom and lower standard of living by the government’s attempts to prevent the correction from taking place (keep the malinvestments from being liquidated) by expanding government intervention, creating more fiat currency, stimulus and taxes to prevent correction of the malinvestments which were caused by the preceding government intervention, fiat inflation, stimulus and taxes? While the politicians’ and ruling élites’ public pronouncements indicate confidence that they know what to do, behind closed doors that unity may not (and most probably does not) exist.  Reports by the Bank for International Settlements, the International Monetary Fund, the World Bank, the Federal Reserve (“Fed”),  the U.S. Treasury and the Congressional Budget Office (“CBO”) paint a different picture of a slow and complicated recovery (restoration of the malinvestment).  

At the recent 2009 Bilderberg meeting of the European and American ruling elites there appeared to be disagreement over the path to take. “Either a prolonged, agonizing depression that dooms the world to decades of stagnation, decline and poverty … or an intense-but-shorter depression that paves the way for a new sustainable economic world order, with less sovereignty but more efficiency.”  Are some amongst the ruling elites reading or the Mises Daily?

But the ruling elites of the developed countries must have sensed the train wreck and thus began to question whether or not a private currency system makes more sense then the current government system. In an article published in the Financial Post November 8, 2007 Benn Steil, Director of International Economics for the Council on Foreign Relations, said that private money is a real possibility if the United States does not “return to long-term fiscal discipline”.

“As for the United States, it needs to perpetuate the sound money policies of former Federal Reserve chairmen Paul Volcker and Alan Greenspan and return to long-term fiscal discipline. This is the only sure way to keep the United States’ foreign creditors, with their massive and growing holdings of dollar debt, feeling wealthy and secure. It is the market that made the dollar into global money – and what the market giveth, the market can taketh away. If…the dollar fails, the market may privatize money on its own.”

 Mr. Steil goes to on to say

“…private gold banks already exist, allowing account holders to make international payments in the form of shares in actual gold bars. Although clearly a niche business at present, gold banking has grown dramatically in recent years, in tandem with the U.S. dollar’s decline. A new gold-based international monetary system surely sounds far-fetched. But so, in 1900, did a monetary system without gold. Modern technology makes a revival of gold money, through private gold banks, possible even without government support.”

Now gold is once again being considered for a role in the new international currency being proposed by the BRIC countries.  The BRIC countries (Brazil, Russia, India and China) hold 42% of the international reserve assets and $7.9 trillion of US debt.  One would not expect them sit idly by while the US government and US central bank seem intent upon destroying the US dollar by printing trillions of new dollars in an effort to prevent the occurrence of a market correction of the malinvestments from the previous fiat inflation.   In early September 2008 China raised the issue of a new reserve currency to replace or supplement the US dollar and soon thereafter the BRIC countries began pushing for a basket of currencies consisting of the euro, the yen, the new regional Middle Eastern currency (which is under development), the US dollar and gold to be used by the IMF for its Special Drawing Rights (“SDR”).  Under this system the SDR would be the currency for use in international transactions.  Thus,once again gold would be utilized in international trade after having been banished from international transactions by President Nixon when he devalued the US dollar in August 1971.  Many experts and commentators argue that the BRIC countries would be shooting themselves in the foot by drastically depreciating the value of their US dollar denominated investments were they to successfully replace the US dollar with the SDR basket.   This fails to ignore the decision by every investor to cut their losses and liquidate their investments when faced with the prospect of continuing declines in the value of their investments.

While it is arguable (among non-Austrian economists) whether or not the monetary policies of Messrs. Volcker and Greenspan were sound (many, if not most, point the finger of blame at Greenspan for today’s financial problems), it is wishful thinking to believe for one second that governments and the government’s financier, their central banks, will maintain long-term (or even short-term) discipline in spending and creating money. Their track record to date is not good and is becoming worse by the day. The events since August 2007 and particularly the response by central banks and governments to the meltdown which began during the week of 15 September 2008 and thereafter clearly indicates that the prospects for a “return to long-term fiscal discipline” is poor. The appetite of politicians, bureaucrats and governments for expansion of power and spending is too great to resist and the bureaucrats at central banks are all too eager to accommodate the demands of the government and the power broker politicians. It is the reason the world’s economy has been on a course toward economic disaster since the flood gates of fiat currency (initially paper money and now electronically created money) were opened in 1913 with the passage of the Federal Reserve Act in the United States.

Trillions of dollars, pounds, Euros, yen and Yuan have been spent since August 2007 in an effort to reverse the market correction in the United States, Europe and Asia.  Despite all these efforts almost 10% of the workforce in the United States is unemployed and this percentage is projected to rise to well over 10% in 2010 (many experts believe the real number of unemployed is closer to 16% or higher). The deficit of the United States government for fiscal year 2009 will be $1.6 trillion and the federal debt is expected to be $1l.8 trillion.  The federal debt is projected to soar to $21 trillion by 2015 but is more likely to be closer to $25 to $30 trillion or more.  Unfunded liabilities for Social Security, Medicare and Federal pensions are estimated at $104 trillion. The FDIC is running a deficit and is projecting having to spend another $100 billion on bank failures over the next 4 years.  Many market analysts are forecasting another recession for 2010 similar to what happened in 1930. Not surprisingly individuals are concerned if not scared about the future. When individual’s incomes are drastically slashed, their investments and retirement funds are deteriorating and they are insecure about continuation of their future income stream (from their employment or investments) or appreciation of their investments they (unlike the government) naturally curtail expenditures in order to conserve cash. It does not take a rocket scientist or Harvard economist to figure out what people need – money (not more debt) in the pockets of individuals and business; to be spent or saved as they deem necessary for their particular circumstances.

 In such circumstances of uncertainty people will generally conserve (save) more of their money. These savings (deferred consumption) are placed with financial institutions who in turn loan this money to creditworthy businesses and individuals requiring capital to expand their businesses or make purchases of capital goods and services.  During the correction (correcting the malinvestments of fiat inflation but called recession or depression by the media pundits indicating deflation or a drop in share and commodity prices) banks are careful to whom they lend money. Only those projects having a high likelihood of success are considered and then only on strict lending terms (e.g. borrower’s experience, borrower’s financial strength, borrower’s investment in the project, marketability of the product to be produced, etc.). For successful entrepreneurs and business men and women periods of correction are a good time to initiate capital projects since the cost of the factors of production (raw materials, land, labor and capital) are much less expensive. Unlike the malinvestments during the expansionary period (fiat inflation period) these are investments that have a high likelihood of successfully satisfying the real demands of consumers.  Thus, out of the market correction begins the process of rebuilding wealth and prosperity through continuation of the correction of the malinvestments created by the fiat inflation.   

Rather than helping the people put more money in their pockets the government of the United States and the Federal Reserve are intent upon continuing to pick the pockets of the people and protect themselves and their clients, the ruling elites. The government wants to keep prices high and continue the malinvestments of fiat inflation. The politicians and bureaucrats endorse more government expenditures to help prop up their cronies who engaged in or profited from the malinvestments of the fiat inflation.  They bailout banks, financial institutions, automobile manufacturers (and their labor unions), defense contractors (by continuing the overseas wars in Iraq and Afghanistan) and other ruling elites.  It is clear that the Fed views the correction of malinvestments and the deflation that follows from such correction as the evil to be prevented. In other words the Fed will work to maintain the malinvestments and thus the resultant inefficient allocation of capital and other factors of production. In a speech before the National Economists Club in Washington, D.C. November 21, 2002 Ben Bernanke said

 “The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.”

 Such a statement is not surprising by a member of the banking cartel.  After all banks loan capital on the basis of the sustainable values of such assets as commodities, real estate, shares and increasing (or stable) cash flows and revenue streams.  When asset values are used as collateral or security for loans the bank’s security for repayment of their loans is jeopardized as asset values decrease and hence the bank’s loans are in jeopardy of not being repaid or requiring refinancing at different rates and terms.  Continuation of such a state of affairs would force banks to write down the value of their loan portfolios and thus threaten the solvency of the banks experiencing such an event.  This is precisely what happened in the most recent market correction. When the market correction began in August 2007 commodities, shares and overvalued currencies began to fall dramatically.  Within days the Fed and other central banks initiated (and have continued to the present time) efforts to thwart the market correction of the malinvestments caused by the fiat inflation.  Trillions of dollars have been spent to improve the balance sheets of banks and large businesses (e.g. General Motors and Chrysler) in the United States and around the world to prevent the failure of the banking system and a run on the banks by depositors.   As my wife, Orasa, is fond of saying “open your two eyes and see for yourself” where the bailout money is flowing – to the ruling elites, not to the people.  

The ruling elites contribute huge sums of money to the coffers of politicians and have large staffs of lobbyists whose daily job it is to seek benefits for their clients at the expense of other taxpayers or competitors. The individual has little to contribute and cannot afford to spend everyday lobbying Members of Congress.  Citizens must ban together in campaigns such as the Campaign for Liberty in an effort to persuade the government to listen to their voice.

 Like the FDR-Hoover administrations presiding over the Great Depression of 1929, the Fed and the Bush-Obama administrations are intent upon thwarting the market correction and preventing the correction from continuing for the consumers and citizens.  The government and the Fed continue to spend trillions of dollars on bailing out firms (and their unions) that should otherwise be liquidated as well as spending on foreign wars to prop up the defense industry. They continue to tax the citizens directly through income, sales and other taxes and indirectly through depreciation of the dollar as a result of the Fed’s massive printing of money.  As if this were not enough the government is about to launch a grand new tax on hydrocarbons (to benefit natural gas producers at the expense of coal producers and users) which will ultimately have to be paid by the consumers in the form of higher prices for energy.   To placate the United Steel Workers (and their employers) the government adds insult to injury by instituting trade protectionist measures to prevent less expensive tires from being imported into the United States from China through imposition of a 35% tariff (driving up the cost of less expensive Chinese tires by 35%).  So much for the politicians’ rhetoric favoring free trade.  When the consumer needs less expensive goods and services the government protects its clients, the domestic tire manufacturers and their unions, at the expense of the American consumer.  Why do Americans and citizens of other countries continue to fall for the government’s lies?  “Open your two eyes and see for yourself” what the politicians, the bureaucrats and ruling elites are doing to consumers, citizens and taxpayers.

If we want to travel on the road to prosperity there are several steps that must be taken in order to continue the market correction that started in August 2007.

First, the government must immediately provide complete transparency for the Federal Reserve System as well as all other government institutions.  Taxpayers should have the same right as shareholders to know how their money is being spent. The Federal Reserve and the Treasury Department should have the same accountability to their shareholders (the taxpayers) as corporations are required to provide to their shareholders.  Late in 2008 Congress authorized spending of up to $700 billion to purchase deteriorating (troubled) assets from financial institutions through passage of the Troubled Asset Relief Program (TARP).   To date almost $450 billion has been spent on bailing out large US banks, AIG, GM and Chrysler to mention a few of the more infamous recipients of government money.  Only about $80 million has been paid back (as principal, interest or dividends) and government auditors have indicated getting back the remainder will be difficult if not impossible. This was to be a temporary measure but it seems the Obama administration wants to keep the program going until at least the end of 2010.  There is nothing more permanent in Washington then temporary taxes and expenditures.   Despite numerous inquiries no one seems to know how the money has been spent and the government continues to resist providing such information.      

Second, the government must end the Federal Reserve System’s banking cartel and monopolization of currency creation.  Fiat currency (paper currency not backed by assets such as gold or silver) and fractional reserve banking (allowing banks to maintain less than 100% reserves for demand deposits) have been a disaster resulting in the printing of money to fund all sorts of government interventions (e.g. welfare, warfare and empire building) in the economy and the society of free people not to mention the destruction of the value of the currency in circulation.  The creation of capital from accumulated wealth and the investment or lending of such capital is the life blood of a market economy must not be entrusted to government.  A globalized market economy attempting to satisfy the growing demands of a rapidly increasing middle class cannot afford the instability, disruptions and significant malinvestments caused by central banks’ politization of such a critical business as capital lending and investment and currency creation. The government should privatize (transfer ownership from government ownership to private ownership) and de-regulate (not re-regulate) banks and financial institutions which will allow the most efficient firms to survive and prosper and eliminate firms that engage in malinvestments.  Private firms should have the right to compete with the Fed to provide mediums of exchange required by consumers for international as well as domestic transactions.

Third, the government must put more money in the pockets of the people through provision of more liquidity being made available to individuals and businesses by promptly rebating most and reducing all taxes (especially taxes on incomes, investments, businesses, sales, etc.) and reducing government expenditures (especially expenditures for war, empire building, nationalizations of businesses and healthcare and bailouts). The government of Australia rebated a portion of the taxes collected to the people which despite the dour projections of the pundits (people would spend the money unwisely on gambling or worst save it) ended up being spent or saved in accordance with each individual’s preferences and as result boosted the economy.  

Fourth, the government must stop any further bailouts and forced reorganizations of businesses and financial firms. Bailouts of inefficient firms (and their unions) maintain malinvestments in the marketplace thus diverting resources and factors of production from utilization by more efficient firms capable of profitably satisfying consumer demands.

Fifth, the government must sell its bailout loans (and toxic assets it acquired as part of such bailout) to private investors at a deep discount if necessary and get out of the lending and investing business.  In addition the government should sell its state owned enterprises such as the US Postal Service, TVA, Amtrak and national parks. Continual government ownership of factors of production and participation in business enterprises politicizes the use of such factors of production and business rather than allowing such factors of production and businesses to satisfy real consumer demands and turn a profit.    

Sixth, the government must eliminate all protectionist measures and restrictions on immigration.  Goods, services, capital and labor must be allowed to freely move from one country to another without government interference.  Trade and migration barriers hurt consumers by keeping prices high and protecting inefficient firms from the rigors of a competitive marketplace.  Ultimately trade barriers lead to trade wars and then frequently to real wars such as occurred between the Japanese and the United States in the lead up to Pearl Harbor. 

Seventh, the government must deregulate all businesses and labor organizations.  Regulations are barriers to entry which prevent or delay new efficient firms from entering the marketplace or growing to satisfy consumer demands.  Proposed legislation such as the Employee Free Choice Act supported by Senator Arlen Specter (D-PA) which eliminates secret ballots gives unions monopoly power (sanctioned by the government) over employees and lowers the efficiency of firms forced to unionize.

Only the private market free of government intervention allows individuals the freedom to travel on the road to prosperity resulting from the creation of private individual wealth. Turning off onto the road to serfdom forced upon us by government intervention prevents prosperity by destroying individual wealth while making slaves of us all.

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April 7, 2010

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