Uh Oh ...

Normally I agree with Dave Ramsey, at least at a personal economic level. It is good not to be in debt. And I even agree with him on another idea he spoke of today, but not for the same reason. I do not recommend to my friends to buy gold. My reason is that one does not make all that many $1000 (now $1300) purchases. Gold isn't an investment. It is a parking place. As is silver, which I do own and recommend. $20 increments. Dave Ramsey is worried about a gold "bubble", the price being unreasonably high and going down later. In what? Dollars? Unlike shrimp, lettuce, and even corn, silver and gold stay the same. An ounce of silver is worth an ounce of silver. No more. No less.The ounce of silver that I got for a dollar in 1964 is still worth ... an ounce of silver. The Federal Reserve Note I left in an old coat pocket and found recently now buys about 4% of what it would in 1964. That is the point. Dave Ramsey made a point about the Petroleum bubble last Summer when sweet crude went to $145 a barrel and gasoline was "$5 a gallon", and how that was a bubble too. But he missed the point: it wasn't petroleum nor gold that is the bubble. The dollar is the bubble, and a heavy one at that. When gasoline was $4.50 a gallon here, my ounce of silver bought four gallons of gasoline just like it did in 1964 when gasoline was 25¢ a gallon.

Right now, Mr. Ramsey, gold is at a record high, and silver is as high as it has been since the Hunt Brothers tried to corner the market many years ago. But, this is merely a symptom. The following is a commodity news clip from Friday October 9, 2010 from Brock Associates, a commodities broker to his clients:

Corn, soybean and wheat futures at the Chicago Board of Trade will all have expanded daily price limits on Monday as a result of Friday's sharp gains.
The daily price limit on corn futures will be expanded to 45 cents per bushel from the normal level of 30 cents.¹
...
Price limits will also expand on Monday for CBOT soymeal, soyoil and oats futures. For soymeal, the price limit widens to $30 a ton, from $20.

Straightforward working information that CNN, CBS, ABC, NBC and MSNBC, and even FOX didn't find important enough to mention even though it is a suspension of rules designed to control runaway panic selling and buying. Couple that with this information from today's Economic Policy Journal:

Corn prices have hit a two-year high in early morning trading, jumping more than 8 per cent.
CBOT December corn surged by an expanded daily limit of 45 cents, or 8.5 per cent, to $5.73¼ per bushel, the highest since September 2008. In the last two trading sessions, corn is up more than 15%.

Now, remember that little decal on your gas pump last time you bought gas - "may contain 10% ethanol". Ethanol, alcohol made from corn by Archer Daniels Midland in Clinton Iowa. They are competing with you for the food you eat and the feed that feeds the food that you eat.



No, Dave, you don't have to trade in commodities for the price of commodities to reach down and bite you².
Dave, usually I try to live my live in rules you would approve. I have little to no debt (depending on when you ask me. After a trip or after the next month). But I do have some holdings in silver of which you would not approve. They are not an investment. They are an insurance. Just like term insurance on my life, my silver is an insurance against financial calamity. And just like the life insurance, the health insurance, and more obviously, the fire insurance, I hope never to take advantage of it. I don't track its value from day-to-day looking for my opportunity to sell and make a profit. What would I put my safety net in? Dollars? A 401k?
You often advise your listeners to put their savings in a 401k. Do you suppose that the surge in the price of commodities on Friday and Monday might possibly be connected with a recess hearing at the U. S. Senate on Thursday that revived a long dormant plan to nationalize 401k and other tax sheltered savings plans.

Democrats in the Senate on Thursday held a recess hearing covering a taxpayer bailout of union pensions and a plan to seize private 401(k) plans to more "fairly" distribute taxpayer-funded pensions to everyone.
Sen. Tom Harkin (D-Iowa), Chairman of the Health, Education, Labor and Pensions (HELP) Committee heard from hand-picked witnesses advocating the infamous "Guaranteed Retirement Account" (GRA) authored by Theresa Guilarducci.
...
In a nutshell, under the GRA system government would seize private 401(k) accounts, setting up an additional 5% mandatory payroll tax to dole out a "fair" pension to everyone using that confiscated money coupled with the mandated contributions.³

Which 2000 page lame-duck omnibus bill will this be hidden in? Between theft like this and the regulations-and-debt coming out of Washington, is there any wonder that people are afraid of the future of the dollar?



¹ What this means is that there are no sellers willing to sell at the mandated price high limit. So far, people can not be forced to sell at a loss. Stay tuned.
² Gold here may diverge from the other commodities as it is a hedge against currency variation only, i.e. it does not get traded like all the other commodities primarily as a regulator of supply against future commercial demand - even silver is an industrial metal and traded that way as its primary purpose. Speculation and arbitrage are parasitic riders on the primary purpose of commodity trading; even if, sometimes the tail wags the dog.
³ http://www.humanevents.com/article.php?id=39336

A Monopoly on Monopoly™ Money

Once upon a time in a land that was not far away...

Almost anyone could make a dollar bill. That's right. All the bill was was a certificate of ownership, a receipt. You still get them now - the difference is that with the common green Federal Reserve Note so common, no one remembers that we used to pass the receipts back and forth. The dollar was not the green piece of paper. The dollar was a round piece of 90% silver weighing 0.77344 troy ounces. Under the US Constitution, the US Congress had the sole power to coin money, regulate the value thereof, and of foreign coin... But the certificates, that was a different story. States, banks, companies, cities could and did circulate specie that could be exchanged for lawful money. It wasn't until the Progressive Government became greedy, coveted it all and formed the Federal Reserve, created Income Taxes, and taxed competing currencies, that the government felt the need to channel all our wealth through their hands in Washington.

Just prior to the Great Depression of 1929, there was somewhat of a standardization of currencies with new smaller bills - the ones that we use today. There were six major types, three of which survived the Depression. The ones that didn't make it were:


The Gold Certificate. Circulated in ten and twenty dollar certificates, each one represented a coin of gold of its nominal value. Private ownership of Gold and Gold Certificates became illegal under President Franklin Delano Roosevelt in 1932.¹


There were two types of National Currency:


The National Bank National Currency, backed by Treasury Securities that your local National Bank of Hometown had purchased with "lawful money" from and then deposited with the Federal Government's Treasury Department in an amount equal to the currency in circulation. This effectively doubled the amount of money in existence. The following quote from a publication of the Friesian School.

If the problem during the Great Depression had really been that there was "not enough money," then it would be surprising that National Bank Notes were suppressed in 1935 -- the bonds that had been issued to secure banknotes were all discontinued. If, however, it is understood that the political answer to the Great Depression was that only the federal government can be trusted with power over the economy, banking, and money, then the move is self-evident. (emphasis theirs)

And The Federal Reserve Bank National Currency, issued by the Federal Reserve bank, this bill was backed by Treasury Securities similarly purchased from and deposited with the Treasury Department. Aside from no longer differentiating the currency and note, this is not materially different than recent Federal Reserve Bank actions. These continued to be in marginal circulation until 1945.



The ones that survived until more recent times were:


As with the Gold Certificate,The Silver Certificate. the Silver Certificate is a receipt for metal on deposit with the Treasury Department. No more certificates could be in circulation than silver coin in circulation and in reserve. It was a natural limit on inflation. C. Douglas Dillon, Lyndon Johnson's Secretary of the Treasury ordered silver coin to cease being minted in March of 1964,several months after President Kennedy's assassination. The bills ceased being redeemed for silver in 1968.²

The United States Note,
the Federal Government's own fiat currency. Originally issued under President Lincoln, they became bound to an existing quantity in 1878 that continued until 1990s, although in the later years they existed in captivity and were not issued out to the banks and public.

And finally, the monopoly on Monopoly™ money. The only currency now in circulation. The one that (with the United States Note aforementioned) purports itself to be a dollar and not redeemable for one, the Federal Reserve Note. Between the Federal Government borrowing money to back them and the Bureau of Engraving and Printing printing them to belong to and be issued by the Federal Reserve Bank, a quasi-independent corporation, the current currency is a Gordian Knot of evasion of responsibility while retaining the benefit of wealth. Unfortunately, it is ultimately redeemable only in itself.

So was this one:


The advantage of having multiple currencies, was the same as the advantage of the backed currencies, stability to prevent runaway inflation, while still allowing the advantage of the fiat currencies, liquidity (ready availability without hoarding) to match the real wealth of the Gross National Product.

Having a monopoly of merely one currency, and a non-government fiat one at that, is that there is no balance on their checks. There is nothing to moderate the ease of debasing the currency. We will all be the poorer for it.

¹’² Gold nominally backed the US currency internationally under the Bretton Woods system until 1971, when President Nixon ceased honoring a run on the US gold reserves by Charles de Gaulle when the pegged price was less than the international price.

Contango and Backwardation - or Veruca Salt Wants It Now

Now there's some terms you don't see everyday.

These two terms describe conditions in the futures markets. Contango is the normal condition in which things will cost more in the future than now. It is normal because it includes the costs of storage of the real commodity, and the money value of lost interest realized by paying now instead of later. And increasingly in our society the probable effect of inflation of the currency.

Backwardation on the other hand is a bellwether of things to come. If a precious metal like say silver was trading at $16/oz for immediate delivery and trading at $14/oz six months out, the prudent thing to do would appear to be sell your silver now and re-buy it now for delivery in a half year, pocket the $2000 or $20,000 stick it in a CD drawing interest,and retrieve your silver in six months avoiding the storage fees. But it doesn't happen. Or rather it doesn't happen until the difference is sufficient. Why? Because of the risk that you will not be able to retrieve your purchase, and the risk that the money you have drawn off your transaction will have inflated (read devalued) to a greater extent than your gain.

Gold Breaks 1000

1015 actually. The press is so excited! The silver I bought for $14.50 premium (commission) included closed today at $17.41 spot. I am not excited, I am worried. Why? Why am I not happy?

Gold and silver are not investments. They could be, but they aren't at this time. What they are is stores of value. An ounce of Gold will always be worth ... an ounce of Gold. An ounce of Silver will always be an ounce of Silver, no more, no less. Not so for that Federal Reserve Note¹ you are carrying in your pocket.

So why aren't I happy? Because not all of my money is secure in tangible assets. And a gain in Silver or Gold is more than offset by the loss in my savings, my salary, and ultimately, my pension.




¹Note - a memorandum of debt

Debasing Our Currency

From the The Coinage Act of April 2, 1792
(1 Stat. 246)

Section 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of the fine gold or fine silver therein contained, or shall be of less weight or value than the same out to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offenses, shall be deemed guilty of felony, and shall suffer death.

It sounds like our founding fathers were a little serious about their money. I wonder what they would think of the current lot of rounders who occupy Washington, DC, today, who are not content to debase the currency 100%, but are now debasing even that? Out predecessors were so serious about unbacked money that even Lincoln's piddling little foray into United States Notes reverberated anger for fifty years. And that was a parallel currency to provide liquidity in times of hoarding.

The United States Constitution itself is also rather serious about its money. From Article One, section 10 reads:

Section 10. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

It sounds like a restriction only on the states, but it is a restriction on itself as well, for in those days we truly were the United States of America, and not the People's Republic of America as we morphed into from the early 20th Century under the Progressives culminating in President Obama. And the Federal Government restricted by the Constitution and the Ninth and Tenth Amendments could do nothing that the states could not legally do unless written into the Constitution.

What Is Money?

As I was doing my presentation on historical currency and inflation the other day, I was asked by an enthusiastic listener: "You mean we should invest in Gold".
I responded "Actually, No. Gold is one thing you could use to keep your wealth. So is silver. So is real estate. But so are nails, or 1/4-20 by inch and a half hex-head bolts. And virtually anything but shrimp and lettuce or the FRN."
I realized I was on to something. The first consideration of preserving your wealth was that it should be physical and non-deteriorating.

Officially, money is anything that is generally accepted as payment for goods and services and repayment of debts.[1] And the main uses of money are as a medium of exchange, a unit of account, and a store of value.[2] The principal use of money is as a medium of exchange. Even the shrimp would suffice for this. And a pound of shrimp could well be a unit of value, but it is declining in value almost as fast as the Federal Reserve Note.

But we know that money is really the physical manifestation on your life and labors. You trade that part of your life for it. To take it from you is to take that part of your life. Whether by inflation or taxation, [especially that taxation that provides no thing to you in return] your loss of wealth is theft of your life and freedom - That is slavery.
________________________________________
[1] Mishkin, Frederic S. (2007). The Economics of Money, Banking, and Financial Markets (Alternate Edition). Boston: Addison Wesley. p. 8. ISBN 0-321-42177-9.
[2] Mankiw, N. Gregory (2007). Macroeconomics (6th ed.). New York: Worth Publishers. ISBN 0-7167-6213-7.

IF

If Gold is not important to our wealth, why is the Government hoarding so much of it? And why won't they let anyone, even Presidents, look at it?

The Creature From Jekyll Island.

In the past I have recommended a few books. My all-time favorite Atlas Shrugged, Jonah Goldberg's Liberal Fascism, Lester Thurow's The Zero-Sum Society, and Dr. Thomas Sowell's Applied Economics (2nd edition). I am adding another one. Part mystery, part story, part encyclopedic, G. Edward Griffin's The Creature From Jekyll Island (2nd edition)is now at the top of my recommended reading list. The following excerpt from TCFJI includes a quote and its footnote by Alan Greenspan from before the Creature co-opted him.

GOLD IS THE ENEMY OF THE WELFARE STATE
In more modem times, rulers of nations have become more sophisticated in the methods by which they debase the currency. Instead of clipping coins, it is done through the banking system.
The consequences of that process were summarized in 1966 by Alan Greenspan who, a few years later, would become Chairman of the Board of Governors of the Federal Reserve. Greenspan wrote:

The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit....
The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents th# goods purchased by the government for welfare or other purposes....
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

Unfortunately, when Greenspan was appointed as Chairman of the Federal Reserve System, he became silent on the issue of gold. Once he was seated at the control panel which holds the levers of power, he served the statists well as they continued to confiscate the people's wealth through the hidden tax of inflation. Even the wisest of men can be corrupted by power and wealth.

l. Alan Greenspan, "Gold and Economic Freedom," in Capitalism: The Unknown Ideal, ed. Ayn Rand (New York: Signet Books, 1967), p. 101.

So, Neal Boortz, I don't know if your faint praise is the same for this is the same as the mock faint praise you give Atlas Shrugged to get us to read it, or if you find this a little too "conspiracy theory" for your tastes (I don't), but I find it well documented and believable.

(Mr. Brabson, can this be the 7th grade book report I owe you?)

Gold!

On the side of this Blog page is a cute little applet that shows and tracks the price of gold. I don't own any gold, mostly because while it is a great hedge against hyper-inflation, I do not do much in the way of $1000 transactions. Oh, a house, and a camera, and an occasional car, but other than that? For hyper-inflation, I stick to Silver, heavier per value, but its nice twenty dollar per troy ounce¹ increments far more liquid.
BUT, Gold is an excellent barometer of the health of wealth. And in the last 40 hours, I have noticed something. Gold has increased against the dollar by 20% - It went from $775 per troy ounce spot price to $925.10 per ounce. This is an increase of almost exactly 20%. Somebody somewhere with lots of Money² thinks the world just went to hell in a handcart

¹ Not spot - what you or I would actually pay to hold it in our hot little hands.
²First mis-type was Monet. Probably have lots of those too.

As Constant As the Dollar

As Constant As the Dollar
Original photograph by luxomni

These are five of the six kinds of currency in circulation prior to FDR*. Although readily interchangeable for each other, each one really was different. Two of them were anchored in value, because they backed by a coin or block of metal of similar value. In truth, they were a receipt for ownership of that coin or hunk of metal. Therefore it was a "Certificate" of ownership. It was easier to carry and readily transfer the receipt than it was the metal itself. The other bills were promises. "We don't have it right now, it is tied up in other things - i.e. loans or property, but we can get you some metal. Hence it was a promissory note - a United States Note, or a Federal Reserve Note. The last is National Currency. This is a place-holder -- i.e. "We not only don't have it in metal right now, but we don't even have it on loan right now. We will get you some eventually". The purpose is to keep commerce moving. Since "A" will work for "B" and "B" will sell to "C" who will sell to "A" all we need is a barter ticket to keep track of the motion.It self-proclaims that it is exchangeable for "Lawful Money". Ipso Ergo, it is "Unlawful Money".

They were all interchangeable, as was the silver dollar that was really a measured amount of silver (until C. Douglas Dillon, President Lyndon B. Johnson's Secretary of the Treasury ceased redemption in March 1964). Gradually, these bills all have been removed from use, leaving only the Federal Reserve Note in circulation.

To quote the U.S. Department of the Treasury web site, "the [Federal Reserve] notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are "backed" by all the goods and services in the economy." Because that is neither a fixed amount nor relationship, the value is free-wheeling.

But do note that that full faith and credit never seem to work in the public's favor. That 10 cent Pepsi, now a dollar-thirty-nine
-- it wasn't the Pepsi that changed.


*The sixth was the National Bank note or "hometown note" issued by national banks (First National Bank of [Your-town here]) under authority of the Federal Reserve system.