Have you ever wondered what money really is [and why we need to own some gold as a result]? You’ll notice that everyone you read has a strong opinion , but who’s right? [Let look at the situation and see if we can come to an answer that we both can agree on.] Words: 3086

So says Danny B (www.fofoa.blogspot.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

 The article goes on to say, in part, that:

Is money really just one single thing and then everything else has varying levels of moneyness relative to real money? [For instance:]

• is gold real money?
• is money whatever the government says it is? 
• is money whatever the market says it is?
• is silver money in any way today?
• are US Treasury bonds money?
• is real money just the monetary base or is money all the credit that refers back to that base for value?
• is money supposed to be something tangible, or is it simply a common unit we use to express the relative value of things?
• is money really the actual medium of exchange we use in trade or is it the unit of account the various media of exchange (checks, credit cards, PayPal) reference for value?
• should the reference point unit of money itself ever be the medium of exchange? Some of the time? All of the time? Never?
• is money a store of value and, if so, for how long?
• is money supposed to be the fixed reference point (the benchmark) for changes in the value of everything else or is it simply a shared language for expressing those changes?
• is money something that changes over time or is money’s true essence the same concept that first emerged thousands of years ago?
• and probably the most important question: does the correct view of money produce answers that are vastly superior to the blind conjecture prescribed by all other views.

Answers

Everyone has a strong opinion about what money actually is so “everyone” will probably disagree with what I write but that doesn’t mean they are right and I am wrong. I want to challenge you to use your own mind and see for yourself. Take what I say and then take what they say, compare, contrast, analyze and then decide for yourself. The prescription produced by my view is quite simple – and only you can decide if it is vastly superior to their blind conjecture.

The Pure Concept of Money

According to Webster’s the word ‘money’ emerged in the English language sometime during the Medieval period in Europe, maybe around the late 1200s. Wikipedia suggests a possible etymology originating with the Greek word for ‘unique’ or ‘unit’. The Western term for physical coins that emerged sometime around the late 1500s was ‘specie’ from the Latin phrase for “in kind” or “payment in kind,” meaning “payment in the actual or real form.” The word ‘currency’ came a little later from the Latin word for current or flow, and was married to the money concept in 1699 by the philosopher John Locke who described the “circulation of money” as a flow or current of monetary payments made in specie.

Etymology is important, because with money or “the moneyness of things” we are talking about a vital concept that predates the word by thousands of years and it’s only by understanding the pure concept that we can see the ways the word has been bastardized by…[the debtors and the savers] over centuries. The meaning we commonly assign to words may change over time, but that never changes the original concept underlying the emergence of the word in the first place.

Case in point: Is ‘money’ equal to ‘wealth’? Is “gathering wealth” the same as “gathering money?” [Such an understanding of just what those words actually meant in the language of the time can be seen in the way Proverbs 13:11 was translated over the passage of time]… and which I think will help to illustrate my point about words and concepts:

(Wycliffe Bible 1395) Hasted chattel, that is, gotten hastily, shall be made less; but that which is gathered little and little with hand, shall be multiplied.

(King James Version 1611) Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.

(Young’s Literal Translation 1862) Wealth from vanity becometh little, and whoso is gathering by the hand becometh great…

[The Living Bible Version 1967) Wealth from gambling quickly disappears; wealth from hard work grows.]

The point is, your modern understanding of ‘money’, and the pure concept of money that emerged long before the word, may be substantially different things. I’ll go even further to say that the modern understanding of money is so confused and disputed by the two opposing money camps [the debtors and the savers] that the only way we can hope to have a clear view of what is actually happening today is by reverting our understanding to the original concept, before it was corrupted by the two camps so now let’s go back to the etymology at the top of this section… If we look at the specific etymology I highlighted, we are pretty close to the pure concept which I will confirm from a couple different angles [as follows:

'Money' is a "unique unit" that we use as a kind of language for expressing the relative value of things other than money. The modern example would be "dollar". Not "a dollar," not a physical dollar, but the word "dollar" as it is used to say a can of peas costs a dollar, or my house is worth 100,000 dollars, or you owe me a hundred dollars. If you give me two grams of gold you won't owe me a hundred dollars anymore. You don't have to give me actual dollars. That's just the unit I used to express the amount of value you owed me. That's the pure concept of money.

Who in the world is currently reading this article along with you? Click here

This is where it gets a little tricky and mind-bending. The actual physical dollar, that physical item we call "a dollar," is not money in and of itself. In other words, it is not intrinsically "money". It is only money because we reference it when expressing the relative value of goods, services and credit. If we stopped referring to it, it would cease to be money even though it would still be a dollar. Can you see the difference? Like I said, it's tricky.

A dollar is just a thing, a tradable item and it will continue being that same thing even if we stop referring to it when expressing relative values. It will still be a dollar, it just won't be money anymore. Therefore it is not money in and of itself. It is just a thing. Take the old German Reichsbank marks from 1923. Some of them still exist. They are still marks with lots of zeros but they are no longer money. We can still trade them. I might trade you a few Zimbabwe notes for an original mark, but that obviously doesn't make them money. The same goes for gold. Gold is just a tradable item.

We could be using seashells as money. If we were, then all the seashells available for trade would be the monetary base. That's the base to which I would be referring when I said you owed me one hundred seashells. A single seashell would be the reference point, the unique unit, but the whole of all available seashells would be the base around which money flowed. You could pay your debt to me with either an item that I desired with a value expressed as 100 seashells, or with 100 actual seashells. So if the total amount of seashells available (the monetary base) suddenly doubled making them easier for you to come by, I'd be kinda screwed. Of course I'd only be screwed if the doubling happened unexpectedly between the time I lent you the value of 100 seashells and the time you paid me back.

Getting back to our etymology, the concept behind the term 'specie' meant actual units of the monetary base. In the 1500s, that was the total of all metal coins-of-the-realm available for trade. That was the monetary base of the day and the term 'specie' arose as a way to express payment in the monetary unit itself rather than payment in bulls, or hats, or anything else but original concept aside, the meaning of the word became married to coins and stuck to this day as defined by the Online Etymology Dictionary which says: "Specie: 1610s, 'coin, money in the form of coins' (as opposed to paper money or bullion), from phrase in specie 'in the real or actual form' (1550s), from L. in specie 'in kind,' ablative of species 'kind, form, sort'."

Notice it says "coins… as opposed to… bullion." That's because while gold coins were referenced in the use of money at the time the word 'specie' emerged, gold bullion was not. "Gold" was not money in and of itself. It was just a thing; a tradable, barterable item. Notice also that it says "money in the form of coins." The coins themselves were also not money in and of themselves. They were only called money because, in that coin form, they were the monetary base that was referenced when expressing the relative value of everything else at that time. Some of those gold coins from the 1500s and 1600s still exist today. Today they are not money, but they are still gold coins. Can you see the difference yet?

Now remember, there's no right or wrong at this point. There's only the usefulness of a perspective in delivering the correct analysis of what's actually happening today and the best prescription for your personal action. You can't use a perspective until you get it and then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect...

The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself...Money is a value stored in your head! Money is not something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends...

The Monetary Base

The big secret [about money, however,] is that the people’s money is simply credit and by “the people’s money,” I mean our money, the real producing economy’s money. The monetary base is only the banks’ and governments’ money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.

Today’s monetary base is a clearly defined thing – it is all physical currency plus reserves held at the Fed. We the people cannot have electronic base money. We cannot open an account at the Fed – only banks and the government can. We use commercial bank credit and private credit to keep the economy churning. The reference point of our credit is the base. We reference that base when we transact in “dollars”.

Private and commercial bank credit appears and disappears spontaneously all the time, all throughout the real economy. This is what actually lubricates the economic engine; having a base of stable value to which we refer in monetary transactions. Private credit is generally cleared using bank credit and bank credit is cleared using the monetary base – but all credit denominated in dollars refers to that base and relies on a stable unit value or price stability.

It is the banks’ job (both commercial and central banks) to make sure that bank credit (the people’s money) and base money (the banks’ money) are fungible. That is, they are always freely and equally exchangeable…[although,] of course, they are two separate things, credit and base money, with two very different volumes. Under normal conditions, there’s a lot more credit money floating around than there is base money so keeping them fungible can be a juggling act on occasion. For the most part, however, we the people choose to hold bank credit as our money rather than cash and, in fact, it is the limited availability of cash in the system (its relative “hardness”) that keeps our money stable in unit value.

Think about it this way: We are free to choose cash at any time and when we go to the bank to exchange our credits for cash, we put that bank under pressure to come up with cash that is relatively “harder” to come up with (more limited in volume) than credit. Let’s say, for example, that “demand deposits” (those that can demand cash on the spot) are ten times larger than the total volume of cash in the system. Is this good for our money? Yes, because it means that the reference point unit we use is in limited supply, which keeps a vital tension on the overall system. The operations the bank must do to come up with our cash (sell off some value) maintain value in our credits.

Monetary Debasement

Say the base volume is one trillion dollars, which is about what it was in October of 2008. That means the base unit reference point for all dollar credit in the world is one one-trillionth of the base volume, all the available above-ground dollars ever mined throughout all of history. Then imagine you doubled that base to two trillion dollars. The unit reference point will have been cut in half, from one one-trillionth to one-half of one one-trillionth of the base volume.

Say you’ve got a contract or a credit for a kilo of gold. Now obviously the total volume of gold can’t be doubled overnight like the dollar base was, so what would be the equivalent effect? Well, it would be like someone cutting that reference kilo in half. Your one kilo contract, since it is denominated in kilos, refers to this unit reference point that has just been cut in half. It has suddenly become twice as easy for your creditor to deliver on his obligation. By the way, the volume of the dollar base has more than doubled since Oct. 2008. It’s now at 2.7 trillion, which means the unit reference point was actually given a 63% “haircut” in three years, from one one-trillionth to little more than one-third of one-trillionth of the total volume.

Now, before you start arguing your own favorite economic pet theory, let me remind you that there is no right or wrong at this point. There’s only the usefulness of a perspective in delivering the correct analysis of what’s actually happening today and the best prescription for your personal action but [remember,] you can’t use a perspective until you get it. Then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect.

Clearly the 63% destruction of the dollar unit reference point over the last three years did not immediately translate into a 170% rise in prices at the grocery store and I wouldn’t expect it to. It never works like that. Henry Hazlitt explained it like this: “The value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money.”

If you have a large 401K, IRA or pension fund full of credits for dollars, you may be taking comfort in the fact that the 63% haircut in the very unit your retirement nest egg references has not yet shown up at the stores where you shop but the fact remains that the dollar has been debased. That’s why they call it debasement. The base is diluted by expanding its volume which reduces the value of the unit used for reference relative to the volume of available units.

There are, of course, plenty of economic theories out there that are wholly designed to distract your attention away from this plain and obvious debasement and to tell you why it doesn’t matter, and how the presently slow price inflation is proof that it doesn’t matter if they debase your money and your life’s savings. Some will tell you that the apparent fungibility of credit and cash means they are the same thing. Some will even try to tell you that the base unit reference point derives its value from the volume of credit rather than its own volume, and that the base volume is essentially meaningless but I think that if you are keeping your wealth in the form of money, sheep being periodically sheared is an image worth keeping in mind.

The Pure Concept of Wealth

Another concept of concern today is that of ‘wealth’…The fundamental property of wealth is that of “possession.” It is by this property that wealth is identified, and thereby it becomes ‘wealth’. In the world of wealth, worth is enhanced because the supply is lessened by this ‘possession attribute’ and possession is how most people in antiquity understood wealth.

Have you ever noticed how the super-rich seem to stay super-rich no matter how much money they spend? Not only that, but they seem to get wealthier the more they spend! They buy amazing super-homes, expensive antique furniture to fill the homes, and priceless artwork to hang on every inch of their fancy walls, yet somehow they retain their wealth. That’s not to say that they don’t also participate in the Western tradition of “the something for nothing game” we call the paper markets. They do, but that participation does not constitute their ‘wealth’ yet we, the commoners, are told constantly, by state-approved financial advisors, to put our entire nest egg at risk in this “something for nothing game.”

We can’t afford that nice furniture and art that the super-wealthy buy, so we buy low-priced crap from China that is worth half what we paid for it the minute we walk out of the store. What is going on? Is it possible to imagine a new monetary system that would put common people on equal footing with the super-rich when it comes to possessing our wealth?

In this world we…must have currency and an enduring, tradable wealth asset that places our footing in life on equal ground with the giants around us – and that is GOLD! 

Sign-up for Automatic Receipt of Articles in your Inbox or via FACEBOOK | and/or TWITTER so as not to miss any of the best financial articles on the internet edited for clarity and brevity to ensure you a fast an easy read.

4. 2012: More Money-printing Leading to Accelerating Inflation, Rising Interest Rates & Then U.S. Debt Crisis! Got Gold?

Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660

5. Fiat Money: Exactly What Is It? Why Is It Such A Scourge?

Considering the fact that you can fool some of the people some of the time but you cannot fool all of the people all of the time, is it any wonder millions, both through the Tea Party demonstrations and now the Occupy Wall Street Movement across the country and elsewhere around the world, are protesting the abysmal scourge that fiat currency has brought upon us as a result of that fateful day back on July 25th, 1965. To appreciate the significance of that historic day we must fully understand what fiat currency is and why such a concept is about to implode and this article does just that. Words: 1372

6. Egon von Greyerz Interview on Future QE, Hyperinflation and the Price of Gold

Over the past few years [most] investors have become familiar with gold. The shiny precious metal has surged in price and has managed to hold strong while broad indexes have slipped, highlighting its appeal as a diversification agent and safe haven investment. This has prompted many investors to ramp up their allocations to the space in order to take advantage of these favorable trends and lead their portfolios to broad gains…[but]  there are a number of other issues that investors need to be aware of when considering allocating capital to the space, as there are several reasons to avoid the precious metal from an investment perspective. Below, we highlight seven reasons for why investors may want to temper their expectations for the metal and consider a more diversified approach that doesn’t include such a large allocation to the ‘barbaric relic’. Words: 2030

Should Gold be the Market’s Global Currency?
 

World Bank president Robert Zoellick has stirred up a hornet’s nest with his recent call for a return to a gold anchor in the global financial system. The usual suspects immediately denounced him – Keynesian Brad DeLong has [gone so far as to] anoint Zoellick the “Stupidest Man Alive” –  [and I would like to add my voice to the chorus by explaining] the dangers of Zoellick’s gold proposal, and why fans of the classical gold standard should be wary. Words: 1708

So says Robert P. Murphy (mises.org) in his article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted into edited [...] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.) Murphy goes on to say:

The Limitations of the Printing Press

In order to make sense of our current situation — and why Zoellick would timidly call for a return to a pseudo-gold standard — we need to first think through the logic of fiat money. Fiat money is not “backed up” by anything; it is intrinsically useless paper (or nowadays, mere electronic bookkeeping entries) that is valuable only because of its anticipated purchasing power. In contrast, a market-based commodity money, such as gold or silver, is a useful good in its own right, serving industrial and consumer purposes.

The critical difference between fiat and commodity money is that fiat money can be produced in virtually unlimited quantities at very low cost. In this respect, the person who controls the printing press of a fiat currency is in a much stronger position than the person who owns a gold mine. With just some ink and paper, the printing press can create a million new dollars quite easily, whereas the owner of the gold mine would need to hire workers to operate expensive equipment in order to bring forth new amounts of gold having the same market value.

Editor’s Note: Don’t forget to sign up for our FREE weekly “Top 100 Stock Market, Asset Ratio & Economic Indicators in Review”

We shouldn’t conclude, [however,] that the owner of a printing press has unlimited power. For one thing, prices would eventually rise in response to large amounts of new money creation. So printing off, say, $1 million in fresh new currency would buy fewer and fewer goods and services with each successive round of inflation. Even more problematic [is that] the people in the community would abandon the currency if inflation became too excessive. For example, if a brilliant counterfeiter developed a machine to produce perfect $100 bills in his basement, he wouldn’t be able to literally buy the whole world. Long before that point — even if the authorities didn’t track him down — people would have ditched the dollar and switched to the use of other currencies.

Although the above scenario sounds far-fetched, it is actually very close to the real world right now. The only difference is that instead of our hypothetical, brilliant counterfeiter in the basement, we have our actual, less-than-brilliant economist in the Federal Reserve. His name, of course, is Ben Bernanke.

The Bretton Woods System

The original Bretton Woods system — so named because of the location of the meetings that established it in 1944 — governed international monetary arrangements in the post-war era until Richard Nixon’s fateful decision to close the gold window in 1971.

Under the Bretton Woods agreement, other nations would use U.S. dollars as their “reserves.” The Bank of England, Bank of France, etc., would issue their own domestic currencies, but would maintain stockpiles of U.S. dollars with which they could regulate the value of their own currencies. If the British pound sterling began to depreciate against the U.S. dollar, for example, then the Bank of England could enter the foreign-exchange market and use some of its dollar holdings to “buy pounds,” thus bringing the value of the pound back within target. In this way investors across the globe could feel comfortable with their British financial holdings because the pound was tied to the dollar.

Note the tremendously advantageous position that the Bretton Woods system assigned to the United States. As issuer of the world’s reserve currency, the United States had a very captive market. If the Bank of England wanted to increase its dollar reserves by another $1 million, then ultimately Great Britain had to sell $1 million worth of goods and services to Americans in order to earn the dollars. The Bretton Woods system effectively expanded the scope for U.S. inflation to the entire world, thus magnifying the benefits to those who controlled the American printing press.

Of course, the other members of Bretton Woods understood these details. The U.S. achieved its privileged outcome in the negotiations because of its economic and military might at that point in world history but in order to restrain the natural temptation for runaway inflation by U.S. officials, the Bretton Woods system linked the dollar itself to gold. Specifically, any central bank could redeem its dollars for gold at the fixed rate of $35 per ounce.

The Bretton Woods system has been described as a “gold-exchange standard,” in contrast to the classical gold standard. In the original framework — which was smashed, like so many other aspects of Western civilization, in World War I — each nation tied its own currency to gold. Then, the currencies in turn traded at fixed exchange rates against each other, because of their mutual ties to gold. Individual citizens could present the currencies for redemption in gold, keeping a very tight check on inflation. If any central bank began to issue too much currency in relation to its gold reserves, speculators would begin depleting the reserves, causing the central bank to quickly reverse course.

Under the diluted Bretton Woods system, individual citizens had no right of redemption. Most currencies were only indirectly linked to gold (via their link to the dollar) and, of course, even this tenuous link was destroyed when Richard Nixon abandoned the dollar’s convertibility to gold in 1971. At this point, the entire global financial system was based utterly on fiat money.

No longer shackled by the peg to gold, the Federal Reserve began printing money with reckless abandon. The obvious results were an acceleration in U.S. consumer prices, and an explosion in the U.S. trade deficit, trends that noticeably worsen after 1971.

The Reluctant Return to Gold

Say what you will about the powerful people running the global monetary system, but they aren’t stupid. They can see as well as the rest of us that there is no “exit strategy” for Bernanke’s bouts of massive inflation, or “quantitative easing” as they now call it. At some point, the trillion(s) in excess reserves will begin leaking back into the broader monetary aggregates. At that point  Bernanke or a successor will need to choose between saving the dollar or saving major Wall Street institutions. I predict that he will sacrifice the dollar, and it seems many elites around the world have come to the same conclusion.

It is in this context that World Bank president Zoellick writes:

The G20 should complement [a] growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

(See http://www.munknee.com/2010/11/imf-proposing-new-world-currency-to-replace-u-s-dollar-and-other-national-currencies/ for more detailed commentary on the IMF’s proposals for a new world currency)

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today. (emphasis added)

“Gold is the bane of central bankers.”

To repeat, gold is the bane of central bankers; it ties their hands and limits their discretion when conducting monetary policy. However, the game collapses if people lose faith in the fiat currency underpinning the whole system. As the recklessness of Bernanke’s moves becomes apparent to more and more people, the central planners around the world will need to throw a bone to the fearful public. A “basket of currencies,” each of which is still fiat-paper money, will not suffice.

As Zoellick is a member of the Council on Foreign Relations, and a participant in the notorious Bilderberg meetings, some analysts are understandably suspicious of his motives. After all, if powerful people were trying to introduce a regional currency to replace the dollar — in the same way that the euro has supplanted the traditional European currencies — then it would be necessary to first wreck the dollar. In its place, it would be very tempting to offer a new currency with a tie to gold. In this light, what appear to be “inexplicable” and contradictory actions by the Federal Reserve and other powerful figures would make perfect sense.

Conclusion

Regardless of the machinations of the political insiders, the laws of economics cannot be denied. Central bankers cannot be trusted with the printing press, especially when there is no formal check on their inflationary policies.

It is no coincidence that gold is hitting such heights as investors the world over hunker down for what may very well be a collapse of the dollar system.

*http://mises.org/daily/4841 (Robert Murphy is an adjunct scholar of the Mises Institute, where he will be teaching “Anatomy of the Fed” at the Mises Academy this winter. He runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal.)

Have you ever traveled abroad and taken a look at the local currency and wondered how the citizens of that country could take seriously what looks like “Monopoly money?” I’ve got news for you: you’re using the same stuff. Monopoly money is the money over which some government has a monopoly. It is the currency of the realm only because the state makes it illegal to use any other type. Words: 633

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Robert Prechter’s (www.elloittwave.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Prechter goes on to say:

Paper Money Is Doomed to Depreciate – Look at the USD
Promissory notes issued by a state and declared the only legal tender are always doomed to depreciate to worthlessness because of the natural incentives and forces associated with governments. A state cannot resist a method of confiscating assets, particularly one that is hidden from the view of most voters and subjects.

A State Sponsored Gold Standard is Only a Political Promise – Remember Nixon?
By extension, it is unreasonable to advocate a standard for such notes, which is simply a state’s promise that its currency will always be redeemable in a specific amount of something valuable, such as gold. A gold standard of this type is only as good as the political promises behind it, reducing its value to no more than that of paper.

It could be argued, in fact, that a state-sponsored gold standard is far more dangerous than none at all, as it imbues citizens with a false sense of security. Their long range plans are thus built upon an unreliable promise that the monetary measuring unit will remain stable. Later, when the government’s “IOU-something specific” becomes, as Colonel E.C. Harwood put it, “IOU nothing in particular,” reliability disappears and the arbitrary reigns. Although the populace tends to retain its confidence in the currency for awhile thereafter, the ultimate result is chaos.

Grams of Gold Are the Best Currency
The only sound monetary system is a voluntary one. The free market always chooses the best possible form, or forms, of money. To date, the market’s choice throughout the centuries, wherever a free market for money has existed, has been and remains precious metal. This preference will undoubtedly remain until a better form of money is discovered and chosen. Until then, prices for goods and services should be denominated not in state fictions such as dollars or yen or francs, but in specific weights of today’s preferred monetary metal, i.e., in grams of gold.

Gold is Not Something ‘To Buy and Hold Forever’
That being said, it is also true, and crucial to wise investing, that markets come in both “bull” and “bear” types. Being a “gold bug” at the wrong time can be very costly in currency terms. It is all well and good to despise fiat money, but it is hardly useful to sit in gold and silver as if no other opportunities exist.

In contrast to the one-note approach, which has had an immense opportunity cost since 1980, competent market analysis can help you make many timely and profitable financial decisions in all markets, including gold and silver.

*http://www.financialsense.com/Experts/ewave/2009/0612.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

Hyperinflation is perhaps the darkest side of a government fiat money regime. Among mainstream economists, hyperinflation typically denotes a period of exceptionally strong increases in overall prices of goods and services, thus denoting a period of exceptionally strong erosions in the exchange value of money. Words: 1353

So says Thorsten Polleit (www.mises.org) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Polleit goes on to say:

Hyperinflation: A Definition
Some people consider a rise in overall prices of 10 percent per month (which implies an annual rate of price increases of around 214 percent) as hyperinflation; others indentify hyperinflation as a monthly price rise of at least 20 percent (which implies an annual increase in prices of nearly 792 percent).

The monetary theory of the Austrian School of economics teaches that inflation is the logical consequence of a rise in the money supply, and that hyperinflation is the logical outcome of ever-higher growth rates in the money supply.

According to the Austrian school, money is, like any other good, subject to the irrefutably true law of diminishing marginal utility… in which an increase in the quantity of money by an additional unit will inevitably be ranked lower (that is, valued less) than any same-sized unit of money already in an individual’s possession. This is because the new money can only be employed as a means for removing a state of uneasiness that is deemed less urgent than the least-urgent uneasiness which one has up to now been removing with the money in one’s possession.

Effect of Increasing Money Demand
People hold money because money has purchasing power and the purchasing power of money is determined by the supply of, and demand for, money. If a rise in the money supply is accompanied by an equal rise in money demand, overall prices and the purchasing power of money remain unchanged. Once people start to exchange their increased money holdings against other goods, however, prices will start to rise, and the purchasing power of money will fall. That said, it is the rise of the money supply relative to the demand for money that brings to the fore the obvious effect of an increasing money supply: rising prices.

Mises saw that money demand plays a crucial role for the possibility of an unfolding hyperinflation. If the central bank is expected to increase the money supply in the future, people can be expected to rein in their money demand in the present – that is, increasingly surrendering money against vendible items. This would, other things being equal, drive up money prices. Mises noted that “this goes on until the point is reached beyond which no further changes in the purchasing power of money are expected.” The process of rising prices would come to a halt once people have fully adjusted for the expected increase in the money supply.

What happens, however, if people expect that, in the future, the money-supply growth rate will increase to ever-higher rates? In this case, the demand for money would, sooner or later, collapse. Such an expectation would lead (relatively quickly) to a point at which no one would be willing to hold any money – as people would expect money to lose its purchasing power altogether. People would start fleeing out of money entirely, i.e. a “crack-up boom” would occur.

What Does “Crack-up Boom” Mean?
This is what Mises termed a crack-up boom: “If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).”

The Unrelenting Power to Inflate
If people expect a forthcoming, drastic increase in the money supply – but if they, at the same time, expect that such an increase will be limited (i.e., a one-off increase) – the central bank can actually orchestrate a debasing of money without causing its complete destruction. As long as government and its central bank succeed in making people believe that any future rise in the money supply will remain within an acceptable limit, from the viewpoint of the money holder, monetary policy is an effective and most perfidious instrument for expropriation and non-market-conforming income redistribution.

Murray N. Rothbard, in his famous essay ‘The Case for a 100 Percent Gold Dollar,’ saw the danger that the government-controlled fiat money could be held up and run indefinitely and that it would not necessarily drive itself into a fatal and final collapse. In fact, as long as people do not expect that a money supply increase will spin out of control, the central bank is in a position to debase the currency without completely destroying it. In other words: hyperinflation would be possible without destroying the money completely. The crack-up boom, as Mises pointed out, would unfold only when people come to the conclusion that the central bank will expand the money supply at ever-greater rates:

“When finally the masses wake up they become suddenly aware of the fact that inflation is a deliberate policy that will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

Debt Levels
Today’s fiat-money regimes are characterized by ever-greater amounts of debt relative to real income – caused by policies that try to solve the economic problems caused by credit and money creation out of thin air by using even greater amounts of credit and money created out of thin air and the higher an economy’s overall debt level is, the more likely hyperinflation becomes.

To show this, let us assume that after a long period of money creation through bank circulation and credit expansion a credit crisis emerges. Creditors are no longer willing to roll over maturing debt at prevailing interest rates. Borrowers cannot repay their obligations when payment is due, and neither can they afford paying higher borrowing costs. Investors start fleeing out of bonds, making interest rates increase sharply and thereby covering up unprofitable investment. More borrowers, including banks, fail to meet their obligations, and bankruptcies spread. Ensuing recession and rising unemployment aggravate the collapse of the credit structure.

Should investors in the above situation expect that the government and its central bank would opt for bailouts financed through additional money creation, the demand for money and fixed claims would most likely dry up. This would make it necessary for the central bank to extend ever-greater amounts of money to struggling borrowers in order to prevent the spread of bankruptcies.

The larger the amount of outstanding debt is, the larger will be the potential increase in the money supply. The more the money supply grows, the more likely it is that there will be hyperinflation and a potential breakdown of money demand: the unfolding of a crack-up boom.

*http://www.gold-eagle.com/editorials_08/polleit012310.html

Austrian Economics teaches that a circulation-credit-fueled boom can only be sustained by ever-greater doses of credit and money expansion, provided at ever-lower interest rates. As soon as the growth rate of credit and the money supply slows down, the illusionary upswing collapses. Mal-investment is revealed, firms cut employment, and the economy goes into recession. [Sound familiar?] Words: 982

In further edited excerpts from the original article* Thorsten Polleit (www.mises.org) goes on to say:

The current upward dynamic of the debt-to-GDP ratio in the U.S. is economically unsustainable but something can be done to correct the situation. While we do not know how much debt relative to GDP an economy can shoulder the level of debt relative to income cannot rise without limit. This insight is important, given that there is strong reason to believe that the extraordinary rise in the debt-to-GDP ratio is a result of the government-controlled, fiat-money system in which the money supply is increased through bank lending.

The Correction Scenario
Let us assume, for the sake of argument, that the current debt-to-GDP ratio has exceeded its sustainable level. What are the chances that output could start expanding more strongly than debt, thereby lowering the ratio? This would be a rather favorable scenario, as the debt-to-GDP ratio would decline, while income and employment would increase. Unfortunately, however, it is a rather unlikely correction scenario.

Lenders can then be expected to demand higher interest rates and/or to stop extending loans as the outlook for the possibility of borrowers repaying their debt (in real terms) deteriorates. In other words, market forces start pressing for a change in the hitherto-observed path of the total-debt-to-GDP ratio.

If commercial banks make their debtors repay their loans, the money supply declines. A drop in the money supply, in turn, would represent deflation and the symptoms would be declining prices for goods and services of current production, and for existing assets such as, for instance, stocks and real estate.

Deflation would lead to credit losses as a growing number of borrowers would find their incomes greatly diminished and — most importantly — falling short of expectations. Many borrowers would default on their debt.

If credit-related losses exceed their equity base, banks go bankrupt. Savers and investors in bank debentures would have to accept losses, as banks could not meet their debt service. It doesn’t take much to see that such an outlook could trigger a “flight out of debt.”

Investors would try to dump their bonds, causing interest rates to go up. Borrowers in need of rolling over their debt would have to accept higher refinancing rates, which would leave a growing number of investment projects unprofitable. The mere expectation of rising credit costs would therefore make possible an anticorrection scenario.

The Anti-correction Scenario
In the anti-correction scenario, central banks — seeing an unraveling debt pyramid — would decide to prevent banks from defaulting on their debt by pushing short-term interest rates to record lows and providing additional base money for bank refinancing — by monetizing banks’ debentures and/or (troubled) assets.

Keeping a circulation-credit boom going requires ever-greater amounts of credit and money, provided at ever-lower interest rates. However, credit and money cannot be increased indefinitely by the central bank and commercial banks. In fact, it is money demand that would set a limit.

If inflation — that is, a rise in the money supply — does not exceed an unacceptable level, people may well continue to use money even if it loses its purchasing power. If, however, inflation exceeds an acceptable level, or if people start expecting inflation to continue to rise further, the money is doomed to fail.

As Ludwig von Mises noted in 1923, “once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.”

The private sector may be able to cope with deflation (and the ensuing redistribution of property rights). The institution of government, in its current size and scope, however, cannot. Inflation — the rise in the money supply — is an indispensable tool for financing government outlays for which the taxpayer would presumably not want to pay out of his current income.

Mises noted, “inflation becomes one of the most important psychological aids to an economic policy which tries to camouflage its effects. In this sense, it may be described as a tool of anti-democratic policy. By deceiving public opinion, it permits a system of government to continue which would have no hope of receiving the approval of the people if conditions were frankly explained to them”.

The effort to prevent government from defaulting on its debt is, therefore, the greatest danger for the value of money and this is why an unsustainable debt-expansion path poses such a great danger to the exchange value of money.

Central banking makes it possible for the government to expand the money supply by any amount, at any time deemed necessary and once (hyper)inflation is publicly seen as being the lesser evil of all options available for the government meeting its debt service, it cannot be dismissed out of hand that (hyper)inflation would be the consequence of an unsustainable debt-to-GDP ratio.

*http://mises.org/daily/3754

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

As inflation rears its ugly head and future demand for gold promises to overwhelm mine supply, gold’s price will launch a parabolic rise from current levels in the near future. Gold has much, much further to go. Words: 536

In further edited excerpts from the original article* John Embry (www.sprott.com), chief investment strategist at Toronto-based Sprott Asset Management, goes on to say:

Inflation
The monetization of various forms of government debt by the printing of large sums of money, disarmingly referred to as ‘quantitative easily,’ is proving to be the catalyst for accelerated inflation and, as such, if inflation gathers momentum, long-term interest rates will rise, which in turn should speed up the weakening of the anemic US dollar.

U.S. Dollar
Furthermore, gold is increasingly asserting itself as a powerful inverse proxy to the dollar. This makes the yellow metal the ultimate safe haven alternative to holding US ‘fiat’ money which is a currency that is not backed by anything of tangible value.

Supply
Then there’s the fact that most of the world’s major deposits are virtually mined-out and new ones are becoming harder to find and more expensive and politically problematic to bring on-stream.

Indeed, Aaron Regent, president of Barrick Gold (ABX), recently told a gold investment conference in London that major gold mining companies are continually struggling to replace mined-out reserves saying, “There is a strong case to be made that we are already at peak gold. Production peaked around 2000 and it has been in decline ever since. We forecast that decline to continue as it is increasingly difficult to find ore.”

It is interesting to note that the world’s top trio of producers — Barrick Gold, Anglogold Ashanti (NYSE: AU) and Newmont Mining (NYSE: NEM) (TSX: NMC) — each generate between 5 to 8 million ounces of gold per annum which means that at least one new multi-million ounce deposit needs to come on-stream every year just to replace this output. That simply is not happening.

Demand
It will not be long before inflation, a debased US dollar, and shrinking global output converge to act a springboard for gold’s ascendency well above the $1,200 level and, at that point, investment demand will explode on a worldwide scale.

Conclusion
The rally in bullion prices is far from over, contrary to what some market pundits are suggesting. It has is merely in a consolidation phase before its next up-leg.

Gold’s price still has a long way to go before it even comes close to matching its peak price during its last major bull run, when it hit an intraday high of $875 on January 21, 1980. To do so it would have to rise to around $2,300 on an inflation-adjusted basis.

*http://www.goldalert.com/stories/Parabolic-Gold-Price-Rise-Imminent-Asserts-Gold-Bull-John-Embry

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

Many countries have suffered through the destruction brought on by huge surges of inflation and many people have lost their wealth, their savings, and even their perspectives in the wake of inflationary episodes. Indeed, inflationary periods are highly unjust. They undermine the ethics of hard work and thrift. They destroy solidarity, lead to widespread hardship and often to social unrest. [Is such a time upon us once again?] Words: 711

In further edited excerpts from the original article* Claus Vogt (www.moneyandmarkets.com/) goes on to explain where we are in the scheme of things:

The Progression of Inflation
Inflationary periods progress through three major points:
1. They have taken place under fiat money. This point was fulfilled on a global basis with the end of Bretton Woods.
2. They are caused by huge public deficits, which are largely financed by money creation. This point is increasingly becoming the political answer to the burst housing bubble.
3. They are man-made, always the result of deliberate political decisions. This point has arrived with the International Monetary Fund (IMF) recently recommending that the world central banks double their official inflation target from 2 percent to 4 percent.

[To top it all off] we have Ben Bernanke who is a dedicated inflationist at the helm of the world’s most important central bank and accountable for the world’s most important reserve currency. You’ll remember that famous speech on November 21, 2002 in which he said: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” By speaking these words, the Federal Reserve chairman commended himself for his job as the most important monetary bureaucrat – promising politicians to always print his way out of any predicament or crisis – and that’s exactly what he has done during the past years and that’s exactly what the IMF is now recommending.

Does this mean inflation is no longer a bad thing? No, definitely not. Inflationary policies are as bad and devastating as they’ve always been but now they seem presentable! The big problem is, however, that neither Bernanke nor the IMF bureaucrats seem to remember how difficult and painful it is to get the inflation genie back into the bottle once it has been let out.

When Inflation Threatens, Investors Flock to Gold to Protect Their Wealth
Economic growth is one of the main, long-term drivers of stock and real estate prices and when inflation hits there is generally little or even negative growth. Consequently, stocks and real estate do not hold up well while gold, in contrast, has been the best hedge as investors seek to protect themselves against the large purchasing power losses of inflated currencies.

While stocks have been in a secular bear market since 2000, gold has been in a secular bull market. The inflationary times that loom ahead argue that this bull market has a long way to go so, strategically, gold still is a strong buy.

What Does the Shorter-term Hold for the Price of Gold?
Gold, in euros, has already broken out to an all-time high… while priced in dollars, gold is also looking attractive. All in all, the situation for gold looks very attractive. Fundamentals are bullish and policy makers are recommending and implementing inflationary policies.

The short-term correction that started in December 2009 seems to be over and I believe gold is ready for a resumption of its long-term bull market.

*http://www.moneyandmarkets.com/imf-doubles-inflation-target-38126 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.