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Krugman: “Fiat Money…Backed By Men With Guns” – Ludwig von Mises Institute Canada

Krugman: “Fiat Money…Backed By Men With Guns” – Ludwig von Mises Institute Canada.

Say what you will about Keynesian superstar Paul Krugman, he doesn’t mince words. In a recent interview with Business Insider’s Joe Weisenthal, Krugman gave his opinion that Bitcoin was in a bubble because it wasn’t backed by a tangible asset.

krugman

Perhaps sensing that this may have undercut the case for Krugman’s preferred monetary system, Krugman was quick to add thatgovernment-issued fiat money was “backed by men with guns.” (See the video for yourself.) Thus, Krugman thought that government currencies were not in a bubble, even if they weren’t backed by tangible assets, because people needed to obtain the currency in order to pay taxes.

Krugman’s analysis provides a good opportunity to explore the subtlety of Ludwig von Mises’ monetary economics. On the one hand, Mises was a “hard money” man who was a fierce opponent of government fiat money. It is also true that Mises was a classical liberal who would have opposed government coercion in the form of legal tender laws, capital gains taxes on gold and silver, and other ways that governments currently use their “guns” to solidify the present system where most people on Earth use government-issued notes as their primary form of money.

However, even though a libertarian and proponent of Misesian economics might object to government-issued fiat money because of the coercion–”men with guns”–involved, strictly speaking Mises would not agree that a currency can be backed by guns, in the way Krugman describes. To speak in this manner is a complete surrender in the face of the economist’s task of explaining money.

Mises’ grand work in this area is his The Theory of Money and Credit, for which my free study guide is available. As Mises conceived it, the central theoretical task when it comes to money is to explain why money has a particular purchasing power. Why should it be that people give up valuable goods and services for a particular item–the money commodity–according to definite exchange ratios?

Mises’ answer is that people form expectations about the future purchasing power of money, and that is what gives it purchasing power today. These expectations in turn are based on their observations of the money’s purchasing power in the past. Thus lays the groundwork for Mises’ famous “regression theorem,” in which people’s subjective valuations of money necessarily involves a historical component (unlike their subjective valuation of, say, pizza). Gold, silver, and other forms of commodity money could ultimately be traced back to the days of barter, in which they had definite exchange ratios with other goods because of their usefulness as regular commodities.

In the case of government-issued fiat currencies, Mises explained their purchasing power using the same theoretical apparatus. The only difference is that at some point in the past, the currencies (such as the dollar, pound, franc, etc.) had been explicitly linked to the precious metals, and that’s what grounded everyone’s valuations of them.

Thus, Krugman’s glib assertion that today’s government fiat monies derive their value from guns completely dodges the problem for the economist: to explain the magnitude of that value. Even if we conceded that the government could force everyone to use something–let’s say a particular type of sea shell–as money, by insisting on payment of taxes in the form of sea shells, that policy wouldn’t explain why an hour of labor should trade for 10 shells, rather than 100 or 1,000. This is especially true when we reflect that most government taxes are expressed in terms of percentages, rather than an absolute amount.

Furthermore, it’s obvious that Krugman’s “explanation” would have no way of accounting for changes in either variable. For example, in the 1970s in the United States, price inflation took off dramatically, meaning the purchasing power of the dollar fell sharply. Was this because of a reduction in taxes? Of course not. And in the 1920s, there were sharp cuts in marginal income tax rates at the federal level. Did this lead to severe price inflation, as people now didn’t need as many dollars to pay Uncle Sam? On the contrary, consumer prices were fairly stable in this period.

As these observations should demonstrate, Krugman really hasn’t offered a viable explanation for the purchasing power of money. One might be tempted to say that at best, governments can use their taxing power to dictate what the monetary unit is, even though they would still have little control over its purchasing power.

Yet even this concedes too much. Strictly speaking, if the only policy we are considering is that the government says every year, “Citizens must turn in such-and-such number of sea shells as tax payment,” that alone won’t even be sufficient to conclude that the sea shells will be the money in this society. People could still use some other commodity as the money, and then use the actual money to buy the sufficient number of sea shells each year right before paying their taxes.

UPDATE: After originally posting this, I realized there was a problem with one of my examples: In the 1920s amidst the marginal income tax rate cuts designed by Treasury Secretary Mellon, the U.S. was still on the gold standard. Thus this period is not a good refutation of Krugman’s explanation for fiat money’s exchange value. (Of course, we can simply look at other examples of governments that engaged in large-scale tax cuts even while using a fiat currency, and we don’t typically see a sharp rise in price inflation accompanying them.)

Robert P. Murphy is the author of The Politically Incorrect Guide to Capitalism, and has written for Mises.org, LewRockwell.com, and EconLib. He has taught at Hillsdale College and is currently a Senior Economist for the Institute for Energy Research. He lives in Nashville.

 

What Is A Gold Standard? | Zero Hedge

What Is A Gold Standard? | Zero Hedge.

Given our earlier discussion of Nobel winner Sargent’s comments on Greece and the gold standard, and the ongoingmelt-up in asset markets due to the ‘limitless money-printing’ of central banks around the world, we thought it worth a look at what a gold standard is (and is not). Before 1974, U.S. dollars were backed by gold. This meant that the federal government could not print more money than it could redeem for gold. While this constrained the federal government, it also provided citizens with a relatively stable purchasing power for goods and services. Today’s paper currency has no intrinsic value.

It is not based on the value of gold or anything else. Under a gold standard, inflation was really limited. With floating value, or fiat, currency, however, some countries have seen inflation reach extremely high levels—sometimes enough to lead to economic collapse. Gold standards have historically provided more stable currencies with lower inflation than fiat currency. Professor Larry White asks, should the United States return to a gold standard?

 

 

Signs that global industrial civilization is beginning to collapse — Transition Voice

Signs that global industrial civilization is beginning to collapse — Transition Voice.

collapsed bridge

I began reading Dimitry Orlov’s recent publication, The Five Stages of Collapse: Survivors’ Toolkit, last week and it has got me thinking about his thesis with respect to the revelations around the U.S. surveillance system being used globally by the-powers-that-be (both corporate and political), in combination with the ongoing exposure of manipulation of various markets and interest rates.

Orlov argues that the five stages of collapse

Serve as mental milestones…[and each breaches] a specific level of trust or faith in the status quo. Although each stage causes physical, observable changes in the environment, these can be gradual, while the mental flip is generally quite swift.

Here are his five stages:

  1. Financial collapse where faith in risk assessment and financial guarantees is lost (think Cyprus).
  2. Commercial collapse that witnesses a breakdown in trade and widespread shortages of necessities (think Greece).
  3. Political collapse through a loss of political class relevance and legitimacy (think current events almost everywhere).
  4. Social collapse in which social institutions that could provide resources fail (coming to a locality near you?).
  5. Cultural collapse that is exhibited by the disbanding of families into individuals competing for scarce resources (hopefully we never witness this).

Five Stages of Collapse cover

Stage one: Financial collapse

Orlov states “all that is required for financial collapse is for certain assumptions about the future to be invalidated, for finance is not a physical system but a mental construct.” It would appear that we are well into this first stage as more and more people are questioning not only the stability of the financial system, but its very structure and long-term viability.

The subprime mortgage crisis of 2008 has left lingering concerns about the fragility of the global economic system. Add to this the ongoing manipulation of global interest rates and markets that has been exposed (see this). This manipulation has little to do with improving a system for the majority but has a lot to do with enriching the elite minority and transferring wealth to them from the majority (see this and this). Add to this the ever-increasing liquidity injections (i.e. money printing) by the world’s central banks (see this) and the theft of allocated funds by unprosecuted criminals (see this) and we have a recipe for increased loss of trust throughout the global financial system. In fact, there are many who have already lost complete faith in the system and recommend disinvesting one’s savings from these corrupt institutions and investing in hard assets (i.e. gold, silver, agricultural land, art, memorabilia, farming supplies, wine, etc.) that maintain or increase their value over time relative to the government-mandated fiat currency which loses its worth due to central bank malfeasance-inflation (see this and this).

Stage two: Commercial collapse

A breakdown in trade is beginning as more and more sovereign nations impose tariffs and/or devalue their currency in a vicious circle: currency devaluation leads to increase in exports for the “devaluer” but a decrease for competitors-it’s a zero sum game after all); the competitor either devalues their currency in kind (see this and this) or imposes tariffs on the nation engaging in purposeful devaluation (see this).

In Greece, a peripheral nation within the Eurozone and a test case for extreme austerity, this type of collapse has occurred in regions, resulting in shortages of necessities such as pharmaceuticals, energy, and food (see this and this).

Stage three: Political collapse

I believe we have begun down this path with evermore revelations of government malfeasance. The latest salvo in this ongoing struggle between what we are told by our governments and what is the on-the-ground reality has been launched: the National Security Agency’s decade-plus invasion of privacy through a global surveillance regime. It’s bad enough that the elite have lied about this for more than a decade; what’s worse is their targeting of whistle blowers as traitors as this discourages exposing immoral or illegal acts perpetrated by our elite.

We are moving ever closer to Orwell’s vision of a totalitarian world as expressed in his book 1984. One commentator has argued that 1984 was not designed to be an instruction manual but a warning, and others have been warning about this type of intrusion for some years.

There are numerous examples of political malfeasance and corruption being uncovered recently. For example:

  • The mayor of Toronto videotaped participating with others smoking crack cocaine;
  • The U.S. National Security Agency’s creation of a global, electronic surveillance state-apparently even used to eavesdrop on other nations’ leaders at meetings;
  • The mayor of Montreal arrested for corruption;
  • Numerous former presidents/prime ministers/etc. being arrested/charged for various crimes from torture to murder (see thisthisthis, and this)
  • The current and former premier of Ontario being linked to decisions cancelling gas plants to save political seats during an election.

Using Orlov’s framework to interpret these concerns, arguments, perspectives, and facts, it would appear that trust and faith in the various systems are collapsing at an incredible rate. Faith in the financial system is crumbling; commercial enterprises, especially multinational corporations, are losing support and trade barriers are beginning to be erected; and, finally, all that is needed for political collapse is for more citizens to come to the realization that the status quo is no longer working for the benefit of all but for the benefit of the elite. When the masses finally come to better understand the corruption and malfeasance that percolates throughout the political world, collapse of the political class will occur.

However, even given the various signs that the system is on the verge of collapse, it is important to realize that no one can predict when this might occur. It could be tomorrow, next week, next year, or next decade…one never knows what event, minor or major, could spin us in an unexpected direction. Learn how to protect yourself and your family financially, socially, and practically (i.e., survival skills) to be in a better position to adapt to the coming changes.

This article was originally published on the Olduvai Blog: Musings on the Coming Collapse.

 

– See more at: http://transitionvoice.com/2013/11/faith-and-trust-in-the-system-is-collapsing/#sthash.gOYD7456.dpuf

 

The boom and bust cycle | Zero Hedge

The boom and bust cycle | Zero Hedge. (source)

This post was first published at Bawerk.net. You may also follow us on @EBawerk

As is clear to all with half a brain the production of un-backed fiat money distorts the economic system. Simply told, when an entity in society is given monopoly to manufacture medium of exchange at its own discretion they will harness this power. Slowly at first, unsure about its effects, but always testing the limits of the privilege bestowed upon them.

As always, they will overexploit the power. They will manufacture money and give it to the masters that coercively secure the continuation of the power. The masters will obviously spend the money, creating a transaction in whichnothing is payment for something. These transactions are by definition unsustainable because they violates Say`s law. We call them “bubbles”

In a free market supply is used to create its own demand. When people spend fiat money they exercise demand without providing supply. Said in other words, spending fiat money is tantamount to capital consumption and makes society poorer.

While the boom that follows money spending feels good, it must inevitably come to an end because the economic system cannot maintain the constellation that was induced by the money printing in the first place. Within the boom lays the seed for the necessary bust.

We have made a metric that sums up fiat money in its purest sense and compared that to the underlying trend growth of nominal GDC.

Our hypothesis is simple: if money growth exceeds the GDC metric a deflationary busts will inevitably come. If authorities refuse to accept reality and print more fiat money at the first sign of bust, they may “save the day” but they will “ruin tomorrow”!

For every action taken there will be an equal and opposite reaction! When the fiat masters go too far they create the set-up for an imminent deflation.

We looked at this relationship and as the chart below show, a boom-bust cycle based on monetary expansion is clearly visible..

Source: Federal Reserve of St. Louis (FRED), own calculations

Our main concern is obviously what happens when the equal, but opposite reaction comes as a consequence to the monetary experiment dubbed the “Bernanke-put”.

A secondary concern is indirectly derived from this. Money printing tears the social fabric apart and people react by taking up massive amounts of debt; debt that will never be repaid in currency units of equal purchasing power.

Now, if the equal reaction comes, that will raise the real burden of outstanding debt, which consequently will bankrupt all debtors.

The next chart looks at various sovereigns’ roll-over risk for 2014. The exceptionally large amount of debt taken on since the financial bust in 2008 will forever constitute a massive risk for the issuing country as debt is never repaid, only rolled-over, that is old debt is paid with new debt.

Source: Bloomberg, International Monetary Fund (IMF – WEO), own calculations

By this it is obvious to us that deflation simply cannot be allowed to happen! Our monetary masters will lose everything if they even flirt with the mere idea! Witness the taper scare this summer!

And since we are getting close to the next cycle low, why even bother try

Source: National Bureau of Economic Research (NBER), Bureau of Labor Statistics (BLS), own calculations

Concluding Remarks

We leave the last word to the real Maestro

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”

– Ludwig von Mises

Silver vs. Fiat Currencies & The Debt Ceiling Delusion : SRSrocco Report

Silver vs. Fiat Currencies & The Debt Ceiling Delusion : SRSrocco Report. (source)

Silver vs. Fiat Currencies & The Debt Ceiling Delusion

As the U.S. Government continues to waste time debating over the “Debt Ceiling Delusion”, the death of the fiat monetary system grows closer.  Since 2000, the value of gold and silver have increased substantially compared to the world’s fiat currencies.

Silver vs Fiat Currencies

According to GoldSilver.com article, Race to Debase 2000 – 2013 Q3 Fiat Currencies vs. Gold & Silverfiat currency has lost on average of 78.16% of its value compared to silver.

You can check and see which currencies have lost the most of their value compared to silver and gold at the link above.  Below is only part of the table which includes 120 fiat currencies from around the globe:

Table Silver vs Fiat Currencies

If you had purchased silver in South Africa in 2000, it would be worth 563% more today.  We can see also why the Vietnamese have been buying the precious metals as silver is worth 519% more today than it was in 2000.

The world is now in the last stages of the Fiat Monetary System.  The debate on the U.S. Debt Ceiling is masquerading the fact that there is no solution or remedy except a grand collapse of the financial system.

Mike Maloney explains in this brief video how there is always much more debt than available currency in existence to pay back the debt:

 

Video Link Here:  Why The Debt Ceiling is Impossible – It’s a Delusion

This is also a preview of Episode 4 of the series, Hidden Secrets of Money which I highly recommend watching the full version when it is released shortly.

Gold & Silver Will Be Much More than Stores of Value

As I have mentioned in prior articles, many precious metal analysts believe gold and silver are either “Insurance” or “Stores of Value” rather than investments.  They believe that the precious metals should be held as insurance against the collapse of currency or governments, while others believe that it will retain a store of value against inflation and etc.

While I believe these are valid reasons to own gold and silver, they fail to address the energy issues going forward and their impact on the monetary metals.  The Dollar was able to survive for another 3+ decades after gold and silver peaked in 1980, due to a rising global energy supply.

A Fiat Monetary System based on fractional reserve and compound interest needs a growing energy supply to survive.  Peak Oil should have already come and gone several years ago, however massive amounts of new debt allowed non-commercial oil deposits to be extracted.

Even though shale oil production from the Bakken in North Dakota has provided a great deal of oil to the United States, it has come at cost.  According to Rune Likvern of Fractional Flow, his estimated cumulative net cash flow of the Shale Oil producers in the Bakken is now at a Negative $16 billion.

July 2013 Estimated Net Cash Flow Bakken

The Red area of the chart shows the estimated cumulative net cash flow and the black bars represent the monthly net cash flow.  Thus, the shale oil companies in the Bakken had to acquire an estimated $16 billion of additional funding not providing by their operations alone.

Unfortunately, unconventional oil resources such as Shale oil and gas will not be able to allow “Business as Usual” in the world to continue as the costs are greater than what consumers can afford to pay.

This is indeed the reason why we have been witnessing the “Great Shale Energy Hype” by the oil industry and official institutions.  Without shale oil or gas, the Fiat Monetary System would have more than likely died a few years ago.

Gold and silver will become excellent investments as they will be the GO TO ASSETS as most others will become increasingly worthless as the global energy supply peaks and declines.  Furthermore, it may not be prudent to switch out of the majority of ones gold and silver investments and into other asset classes when the GREAT REVALUATION OCCURS.

I will explain why in more detail in the future.  However, most Real Estate values on average will decline substantially in a peak energy environment.  Real Estate in selected areas and regions will do better than others.  Moreover, warehouse and commercial real estate will suffer significantly as the market will deal with decades of overbuilding on top of dwindling demand.

Very few realize just how much a peak energy environment will affect the economy and their investments going forward.  The SRSrocco Report will provide information and updates on how energy will impact the precious metals, mining and overall economy.

 

9 Mind-Blowing Facts About Money | Washington’s Blog

9 Mind-Blowing Facts About Money | Washington’s Blog. (FULL ARTICLE)

China Invented Every Form of Money

China:

  • Seized gold six centuries before Franklin Roosevelt, in order to prop up its fiat currency and prevent runaway inflation

Debt Forgiveness Is The Basis of Modern Civilization

Religions were founded on the concept of debt forgiveness.

For example, Matthew 6:12 says:

And forgive us our debts, as we forgive our debtors.

Periodic times of debt forgiveness – or debt “jubilees” – were a basic part of the early Jewish and Christian religions, as well as Babylonian culture.

David Graeber, author of “Debt: The First 5,000 Years” told Democracy Now:

If you look at the history of world religions, of social movements what you find is for much of world history what is sacred is not debt, but the ability to make debt disappear to forgive it and that’s where concepts of redemption originally come from.

Ambrose Evans-Pritchard wrote in 2009:

 

Hidden Secrets of Money – Free Video Series on Money Secrets

Hidden Secrets of Money – Free Video Series on Money Secrets.

 

Quantitative Easing Worked For The Weimar Republic For A Little While Too

Quantitative Easing Worked For The Weimar Republic For A Little While Too.

 

Comedian Takes On The Insanity Of Fiat Money

Comedian Takes On The Insanity Of Fiat Money.

 

Marc Faber On Protecting Wealth In The Coming Collapse | Zero Hedge

Marc Faber On Protecting Wealth In The Coming Collapse | Zero Hedge.

 

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