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From Gold To Nothing: How 1971 Changed Everything In The Economy
From Gold To Nothing: How 1971 Changed Everything In The Economy
The monetary system is a major component of the whole economic system. Despite that, today we take it for granted and don’t even ask ourselves how it works and if it is the best solution available or the correct way to manage things.
Even though it appears to be stable, history shows that monetary systems changed periodically in the last century (20–30 years on average).
The main difference between our current monetary system and previous monetary system is that today it is entirely based on FIAT Currency, in contrast to older monetary systems that were backed by gold.
That means that what we call money is a government-issued currency that has zero intrinsic value and is not backed by anything.
From 1971, this kind of system allows central banks to literally control the economy and opened a new chapter in the world monetary system.
In this article, I am going to briefly explain why 1971 changed everythingand what are potential consequences of such a decision.
Since 1971 the world runs on FIAT currencies that are not gold-backed in any way. This changes everything.
Before digging into it, we have to review some history.
The Bretton Woods System and It’s Collapse
Towards the end of the World War II, peace was a real concern and it was clear that the world needed a new monetary system able to support the economy.
In fact, one of the major reason that led to World War II was the failure in dealing with economic problems after World War I.
Why It Was Needed And How It Worked
The Bretton Woods agreement was signed at a conference between allied nations in 1944.
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Should the Fed Tamper With the Quantity of Money?
SHOULD THE FED TAMPER WITH THE QUANTITY OF MONEY?
Most economists are of the view that a growing economy requires a growing money stock, because economic growth gives rise to a greater demand for money, which must be accommodated.
Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession or, even worse, depression.
For most economists and commentators the main role of the Fed is to keep the supply and the demand for money in equilibrium. Whenever an increase in the demand for money occurs, to maintain the state of equilibrium the accommodation of the demand for money by the Fed is considered a necessary action to keep the economy on a path of economic and price stability.
As long as the growth rate of money supply does not exceed the growth rate of the demand for money, then the accommodation of the increase in the demand for money is not considered as money printing and therefore harmful to the economy.
Note that on this way of thinking the growth rate in the demand for money absorbs the growth rate of the supply of money hence no effective increase in the supply of money occurs. So from this perspective, no harm is inflicted on the economy.
Historically, many different goods have been used as money. On this, Mises observed that, over time,
. . . there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money[1].
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Getting rid of Debt: How About Replacing Money with Social Credit?
Getting rid of Debt: How About Replacing Money with Social Credit?
Mark Twain had a genial idea with his story “The One Million Pound Bank Note” published in 1853. It was such a huge amount of money that it couldn’t be exchanged, yet it gave its owner all sorts of perks and goods. It was, in a certain way, an anticipation of what we call today the “social credit score” obtained on the various social media services on the Web. It is a form of money that can be owned, but cannot be exchanged — in most cases, you can’t even go negative with your social credit. So, no debt, no bankruptcy. Would it be possible to build a financial system based on this concept? Not easy, but also an idea being examined nowadays, especially in China with their state-owned social credit system (shèhuì xìnyòng tǐxì). The text below is derived from the chapter on financial collapses of my new book “The Seneca Strategy,” to be published in later 2019.
The whole problem of financial collapses is the result of the existence of money. But what is money exactly? Without going into the various theories of money that economists are still discussing, we can say that once, money was something that everybody agreed on: a weight of precious metals. After all, the British currency is still defined in units of weight, even though one pound (in monetary terms) does not weigh a pound (in physical terms). Still, up to not too long ago, money was simply a token representing a physical entity, typically a certain weight of gold and silver. But things changed a lot with time and, with the 20th century, the convertibility of the dollar into precious metals was more theoretical than real. In 1971 president Nixon formally canceled it.
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In The Fed We Trust – Part 1
In The Fed We Trust – Part 1
This article is the first part of a two-part article. Due to its length and importance, we split it to help readers’ better digest the information. The purpose of the article is to define money and currency and discuss their differences and risks. It is with this knowledge that we can better appreciate the path that massive deficits and monetary tomfoolery are putting us on and what we can do to protect ourselves.
How often do you think about what the dollar bills in your wallet or the pixel dollar signs in your bank account are? The correct definitions of currency and money are crucial to our understanding of an economy, investing and just as importantly, the social fabric of a nation. It’s time we tackle the differences between currency and money and within that conversation break the news to you that deficits do matter, TRUST me.
At a basic level, currency can be anything that is broadly accepted as a medium of exchange that comes in standardized units. In current times, fiat currency is the currency of choice worldwide. Fiat currency is paper notes, coins, and digital 0s and 1s that are governed and regulated by central banks and/or governments. Note, we did not use the word guaranteed to describe the role of the central bank or government. The value and worth of a fiat currency rest solely on the TRUST of the receiver of the currency that it will retain its value and the TRUST that others will accept it in the future in exchange for goods and services.
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Stocks Crater – 3.5 Trillion Dollars In Global Market Cap Wiped Out – China Considers “Dumping U.S. Treasuries”
Stocks Crater – 3.5 Trillion Dollars In Global Market Cap Wiped Out – China Considers “Dumping U.S. Treasuries”
Wall Street responded to our escalating trade war with China by throwing a bit of a temper tantrum. On Monday the Dow Jones Industrial Average was down 617 points, and that was the worst day for the Dow since January 3rd. But things were even worse for the Nasdaq. It had its worst day since December 4th, and overall the Nasdaq is now down 6.3 percent in just the last six trading sessions. Of course it isn’t just in the United States that stocks are declining. Since last Monday, a total of approximately $3.5 trillion in market cap has been wiped out on global stock markets. And since it doesn’t look like we are going to get any sort of a trade deal any time soon, this could potentially be just the beginning of our problems.
China fired a shot that was heard around the world on Monday when they announced that they would be dramatically raising tariffs on U.S. goods…
China will raise tariffs on $60 billion in U.S. goods in retaliation for the U.S. decision to hike duties on Chinese goods, the Chinese Finance Ministry said Monday.
Beijing will increase tariffs on more than 5,000 products to as high as 25%. Duties on some other goods will increase to 20%. Those rates will rise from either 10% or 5% previously.
According to CNBC, these new tariffs are going to be particularly damaging for U.S. farmers…
The duties in large part target U.S. farmers, who largely supported Trump in 2016 but suffered from previous shots in the Trump administration’s trade war with China. The thousands of products include peanuts, sugar, wheat, chicken and turkey.
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The Drastic Alteration of QE that is About to be Unleashed
The Drastic Alteration of QE that is About to be Unleashed
QUESTION #1: Sir,
You stated in your blog that Fed may fix 2 and 10 year bond rates. Doesn’t this negate the yield curve concept/ credit theory? Won’t this accelerate the distrust for government? Wont this further accelerate/aggravate the pension crisis?
Appreciate you teaching the little guys
See you in Oct
DK
QUESTION #2: Marty; What you are describing with the change in QE is clearly coming from your contacts behind the curtain. How do you think this will play out?
CB
ANSWER: It is clear QE is dead. However, at the same time it has trapped all central banks. I am preparing an important paper on this subject. It is complicated, but it is the very reason why the West will collapse and the financial capital of the world will move to China, who has come out and stated publicly that they will not engage in QE. As far as accelerating the distrust in government, this will be felt within the professional class. It will take time to filter into the general public and it will most likely take the form of another cause altogether. It is unlikely that the general media will even understand this subject matter.
As to how will this play out, I can only say get ready. This is most likely the last straw that will eventually break the back of the monetary system. The general press will not understand that this shift in policy was the last straw. They will not even understand the ramifications for probably two years.
Why Fed Chair Powell is a Laughingstock
Why Fed Chair Powell is a Laughingstock
Fake Work
Clarity. Simplicity. Elegance. These fundamentals are all in short supply. But are they in high demand? As far as we can tell, hardly a soul among us gives much of a rip about any of them. Instead, nearly everyone wants things to be more muddled, more complicated, and more crude with each passing day. That’s where the high demand is.
One can always meet the perils of overweening bureaucracy with pretend happiness… [PT]
For example, executing and delivering work in accordance with the terms and conditions of a professional services contract these days is utterly dreadful. The real work is secondary to fake work, trivialities, and minutia. Superfluous paperwork and an encumbrance of mandatory web-based tools are immense time and capital sucks.
While each T & C may have been developed for one good reason or another, over time, they’ve piled up into something that’s an unworkable mess. But like tax law, or local zoning codes, they must be followed with arduous rigor.
Crushing futility… [PT]
What’s more, many livelihoods depend on all the fake work that’s now built into what should be a simple contract. Auditors, contract administrators, accountants, MBAs, spreadsheet jockeys, risk managers, and many other fake professionals, run about with rank importance. What would happen to these plate spinners if the fake work disappeared?
Without all the unnecessary rigmarole, the unemployment rate would quadruple overnight. Hence, like fake money, fake work is piled on by the boatload to stimulate the need for more fake work. And like a handshake agreement – or sound money – the return to an era of greater clarity, simplicity, and elegance is mere wishful thinking.
Plotted Dots
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The Company Store
The Company Store
Leaves almost nothing to live on
In the song Sixteen Tons by Merle Travis (and made famous by Tennessee Ernie Ford), the idea of the ‘company store’ referred to a system of debt bondage that effectively trapped workers within an unfair system designed to harvest all of their labor at very low cost.
You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store
Sixteen Tons – Merle Travis
How exactly did the company store system operate?
Under a scrip system, workers were not paid cash; rather they were paid with non-transferable credit vouchers that could be exchanged only for goods sold at the company store. This made it impossible for workers to store up cash savings.
Workers also usually lived in company-owned dormitories or houses, the rent for which was automatically deducted from their pay.
This model was simple enough to understand. “Pay” your workers with scrip vouchers, then sell them your marked up goods at the company store, pocketing a nice profit. On top of that, force your employees to live in company housing, too, also at terms very favorable to the company.
Add it all up and the workers found themselves in perpetual service to their employer. No matter how hard and long they toiled, there was nothing left for their own private benefit after all was said and done. The company succeeded in skimming off any and all ‘excess’ for itself.
This vast unfairness eventually led to the formation of unions as well as to regulations providing protection to the workers.
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Central Banking is Central Planning
CENTRAL BANKING IS CENTRAL PLANNING
At a time when the appeal of and demands for a new “democratic” socialism seem to have caught the imagination of many among the young and are reflected in the promises of a good number of political candidates running for high office, there is one already-existing socialist institution in America with few opponents: the Federal Reserve System.
The fact is, central banking is a form of central planning. The Federal Reserve has a legal monopoly over the monetary system of the United States. It plans the quantity of money in circulation and its availability for lending purposes; and it sets a target for the annual rate of price inflation (currently around 2 percent), while also intentionally influencing interest rates, affecting investment spending, and supporting full employment. Almost all discussions and debates concerning the Federal Reserve revolve around how it should undertake its monetary central planning: which policy tools should be used, what target goals should be aimed for, and who should be in charge of directing America’s central bank.
Federal Reserve Independence in the Trump Era
A complementary issue that has received renewed attention concerns the question of how much “independence” the Federal Reserve and other central banks should have to determine and implement monetary and interest rate policy. This has recently come to the fore due to comments made by President Donald Trump concerning Federal Reserve interest rate policy and the individuals he has recently proposed for positions on the Federal Reserve Board of Governors.
Several times over the last year, President Trump has expressed irritation and frustration with increases in market rates of interest under the Federal Reserve Board leadership of Jerome Powell, who Trump nominated for Fed chairman and who has held that position since February 2018.
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Not Modern, Not About Money, and Not Really Much of a Theory
NOT MODERN, NOT ABOUT MONEY, AND NOT REALLY MUCH OF A THEORY
“Ignoring MMT’s rising popularity would be about as smart (and effective) as a dog barking at the waves in the ocean.”
–KEVIN MUIR, author of the avant garde financial newsletter, The Macro Tourist
“I believe that all good things taken to an extreme become self-destructive and that everything must evolve or die. This is now true for capitalism.”
–RAY DALIO, founder of hedge fund behemoth, Bridgewater Associates
______________________________________________________________________________________________________
INTRODUCTION
The final lap. It’s hard to believe that as recently as February, when I first brought up the concept of a new economic model that was poised to radically alter the world we’re living in, MMT was as obscure as an extra in an old Cecil B. DeMille bible film. Yet, a mere two months later, you have to try extremely hard to ignore Modern Monetary Theory and its swelling number of disciples.
Perhaps at this point, some of you who have read the three previous installments of our month-long series on MMT wish I’d never brought it your attention. You might even think it’s such a zany idea that it will never see the light of day. If so, you could be right—but I doubt it.
Prior issues of this series have made the point that ultra-low and, even, negative interest rates have led to a boom in asset prices at the expense of the real economy. This has created the most lop-sided income distortion since 1929.
Source: Grant Williams, TTMYGH (2/10/2019)
Even after 10 years of a long and sluggish expansion—which happily has driven unemployment down to 50-year lows–there is an unmistakable whiff of outrage in the air. The non-1% or, perhaps more accurately, the non-5%, are coming to believe they’ve been stiffed by the reality revealed in the above chart.
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Living With Integrity
Living With Integrity
It’s time to choose a new direction.
Every so often, our work in the premium side of PeakProsperity.com is deemed so important that our paying subscribers request we share it with the general public. Last week’s ‘Off The Cuff’ podcast received so many of these requests that we are releasing it to all here.
In last week’s Off The Cuff podcast, Chris delivered a very personal message about how we each decide to live our lives.
A growing number of people are watching the “prosperity” around them — record high asset prices, record-low unemployment, new technologies, etc — and yet feeling that we’re making the wrong trade-offs as a society. All that wealth is flowing into fewer and fewer pockets, ecosystems are faltering and an alarming number of species are dying off, depression rates (especially among the youth) are skyrocketing.
In short: there’s more money flowing around than ever, and yet we and the planet are becoming sicker and unhappier.
Why?
From Chris’ point of view, it comes down integrity. The modern human way of life lacks integrity as a guiding principle. For those of us who desire a better future, brining our actions into better alignment with our integrity is the path to true prosperity.
My ultimate diagnosis of what’s going on in the United States culture and a lot of Europe culture — probably in other cultures, but I can’t speak to them as well – it’s that they lack integrity. Now, integrity isn’t simply “Oh, I don’t lie”. Integrity means that your actions are for the greater good. Sometimes there are acts of integrity which actually are not optimal for you; they’re optimal for the larger society around you.
Integrity is thinking out seven generations. Integrity is saying that beauty matters in our life, and that when we take out a species, we’re taking away something extraordinarily beautiful.
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We Have Seen This Happen Before The Last 3 Recessions – And Now It Is The Worst It Has Ever Been
We Have Seen This Happen Before The Last 3 Recessions – And Now It Is The Worst It Has Ever Been
Since the last financial crisis, we have witnessed the greatest corporate debt binge in U.S. history. Corporate debt has more than doubled since then, and it is now sitting at a grand total of more than 9 trillion dollars. Of course there have been other colossal corporate debt binges throughout our history, and they all ended badly. In fact, the ratio of corporate debt to U.S. GDP rose above 40 percent prior to each of the last three recessions, but this time around we have found a way to top that. According to Forbes, the ratio of nonfinancial corporate debt to U.S. GDP is now nearly 50 percent…
Since the last recession, nonfinancial corporate debt has ballooned to more than $9 trillion as of November 2018, which is nearly half of U.S. GDP. As you can see below, each recession going back to the mid-1980s coincided with elevated debt-to-GDP levels—most notably the 2007-2008 financial crisis, the 2000 dot-com bubble and the early ’90s slowdown.
You can see the chart they are talking about right here, and it clearly shows that each of the last three recessions coincided with the bursting of an enormous corporate debt bubble.
This time around the corporate debt bubble is larger than it has ever been before, and risky corporate debt has been growing faster than any other category…
Through 2023, as much as $4.88 trillion of this debt is scheduled to mature. And because of higher rates, many companies are increasingly having difficulty making interest payments on their debt, which is growing faster than the U.S. economy, according to the Institute of International Finance (IIF).
On top of that, the very fastest-growing type of debt is riskier BBB-rated bonds—just one step up from “junk.” This is literally the junkiest corporate bond environment we’ve ever seen.
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Chapter 7: Secrets, Ignorance and Lies: Money, Credit and Debt
CHAPTER 7: SECRETS, IGNORANCE AND LIES: MONEY, CREDIT AND DEBT.
“The tyranny of fraud is not less oppressive than that of force.” John Taylor of Caroline, Virginia (1814).
Our money system relies on people not understanding it. If people understood it, they would demand reform.[1]
The most outrageous falsehoods are propagated daily about money and banking. Here are one or two examples:
‘A commercial bank is fundamentally nothing more than a middleman to put these two groups of people (investors and entrepreneurs) together in an efficient way’.[2]
This untruth is repeated regularly in education and the media, and most people believe it. The ‘middleman’ story is denied repeatedly and explicitly by authorities who know about the system, and are honest.
Here are some authoritative denials of the ‘middleman’ narrative:
The Bank of England: “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them…[this] ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. …Rather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.”[3]
Abbott Payson Usher (20th century banking historian): ‘The essential function of a banking system is the creation of credit, whether in the form of the current accounts of depositors, or in the form of notes. The form of credit is less important than the fact of credit creation.’[4]
Joseph Schumpeter (economist): ‘It is much more realistic to say that the banks ‘create credit’, that is, that they create deposits in their act of lending, than to say they lend the deposits that have been entrusted to them.’[5]
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Lacy Hunt Blasts MMT and Speaks of Hyperinflation If Implemented
Lacy Hunt Blasts MMT and Speaks of Hyperinflation If Implemented
In the Hoisington First Quarter Review, Lacy Hunt blasts MMT as “self-perpetuating” inflation.
Please consider the Hoisington Investment Quarterly Outlook for the first quarter of 2019.
MMT Leads to Hyperinflation
Under existing statutes, Fed liabilities, which they can create without limits, are not permitted to be used to pay U.S. government expenditures. As such, the Fed’s liabilities are not legal tender. They can only purchase a limited class of assets, such as U.S. Treasury and federal agency securities, from the banks, who in turn hold the proceeds from this sale in a reserve account at one of the Federal Reserve banks. There is currently, however, a real live proposal to make the Fed’s liabilities legal tender so that the Fed can directly fund the expenditures of the federal government – this is MMT – and it would require a change in law, i.e. a rewrite of the Federal Reserve Act.
This is not a theoretical exercise. Harvard Professor Kenneth Rogoff, writing in ProjectSyndicate.org (March 4, 2019), states “A number of leading U.S. progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.” How would MMT be implemented and what would be the economic implications? The process would be something like this: The Treasury would issue zero maturity and zero interest rate liabilities to the Fed, who in turn, would increase the Treasury’s balances at the Federal Reserve Banks. The Treasury, in turn, could spend these deposits directly to pay for programs, personnel, etc. Thus, the Fed, which is part of the government, would be funding its parent with a worthless IOU.
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