Page 2 of
2 SPEAKING
FREELY Uncle Sam can avoid dire
strait By Antal E
Fekete
science, replacing it with a
hodge-podge of dubious nostrums. America’s economy
and finance started to be run on a completely
false theory. Gold, and the power to create and to
extinguish money was taken away from the people.
It was given to the banks.
Operating on
the basis of this false theory, Americans scrapped
the foundations of the international monetary
system: they threw out positive values (such as
that of gold and silver) and replaced them with
negative values (such as debts and deficits). As a
consequence, outstanding debt can no longer be
reduced through the normal course of retirement.
Total debt can only grow. In no
time
at all America has turned itself from the largest
creditor into the largest debtor nation of all
times. Not only did the US government allow its
debt to grow exponentially; it also allowed it to
accumulate in the hands of America’s adversaries.
At the same time America’s industrial heartland
was dismantled. Well-paid industrial jobs were
exported and replaced by low-paying service jobs.
The United States is like a train running
downhill without brakes. The derivatives monster
is the proof of that. It has its own dynamics, but
it cannot be grasped without a solid understanding
of gold. Under the gold standard, interest rates,
and hence bond values, were stable. In fact, that
is the main excellence of a metallic monetary
standard: it makes interest and foreign exchange
rates stable. There are no derivatives markets on
interest and foreign exchange rates, because the
lack of volatility makes trading unprofitable.
Under a metallic standard "bond trading"
is an oxymoron, as is "bond insurance". Private
issuers of debt must set up a sinking fund that
will buy up all bonds offered in the market below
par. People buy bonds as a vehicle of saving.
Today, you would have to be insane if you wanted
to buy bonds as a vehicle of saving.
Why
then are bonds still in demand? They are in demand
because they are by far the best vehicle of
gambling. As I shall now show, under the regime of
irredeemable currency, speculation in bonds is
risk-free.
When the gold standard was
thrown to the winds, interest rates started
gyrating and bond values were totally
destabilized. After all, bonds promised to pay
principal and interest in terms of a currency of
uncertain value.
Mainstream economists
betrayed their sacred duty of searching for and
disseminating truth. They started preaching the
false gospel that it is possible to take out
insurance against losses in the bond portfolio.
However, the thesis that bond futures can be used
for purpose of hedging the bond price (in exactly
the same way as wheat futures can be used for the
purpose of hedging the wheat price) is an outright
lie.
Only those price risks can be hedged
where the price variation is nature given, as in
the case of agricultural commodities. If the price
variation is artificial, that is, subject to
government and central bank manipulation as are
foreign exchange and bonds under the regime of
irredeemable currency, then it is preposterous to
talk about hedging. One should talk about gambling
instead of hedging. As in the casino, the
so-called hedger is placing a bet against the
house, in this case the central bank, whose job it
is to manipulate the price.
The
derivatives monster The derivatives tower is
just a layered pyramid of "bond insurance",
so-called. Nobody asks the question whether
insuring bond values is possible in principle. As
I have stated, it is not. Insurance means
spreading the risks over a larger population than
that needing compensation. Insurance is the very
opposite of gambling where the player wants to
increase his risks in the hope of a large payoff,
not to decrease it.
Now think of an
inverted pyramid delicately balanced on its apex.
The apex represents the bond market (layer 1). The
next layer is bond insurance (layer 2). But since
the value of bond insurance is inherently even
more unstable than that of the bond, it is in need
to be insured as well (layer 3). And so on it
goes. The pyramid is growing at an exponential
rate as the need for reinsurance keeps increasing.
There are several problems. First of all
the whole idea is hare-brained, much the same as
the idea of "operation boot-strap". A soldier, no
matter how strong he is, cannot lift himself by
his own boot-straps. Similarly, you can’t insure
bond values without an anchor. The second problem
is that the slightest hitch at any layer will
bring down the house of cards. The principle of
insurance assumes that no tornado will destroy all
the insured homes simultaneously. The same
assumption cannot be made about bond insurance.
The volume of outstanding bond insurance
is much higher than the existing supply of bonds.
It is even larger than the existing money supply
(and goodness only knows that it is very large).
Therefore it is a physical impossibility to
compensate insurance-holders in case of global
trouble. If any doubt arises at any level about
the validity of the insurance policy, the whole
Ponzi-scheme collapses. The derivatives monster is
meant for simpletons.
The Presidential
election I find it frightening that none of
the mainstream candidates for the presidency even
vaguely refers to the on-going self-destruction of
the nation’s monetary and banking system. Like an
ostrich they ignore the problem.
A
presidential election year should be a great
opportunity for the nation to discuss its most
urgent problems and take remedial action wherever
necessary. In this election year the country is
blessed with the running of a competent and
upright candidate who sees and understands the
problems involved, and is willing to engage in a
public discussion of the gold standard as a way to
avert national and world economic disaster. This
candidate is Ron Paul, a physician who did not go
into politics with the idea of making money or
accumulating power. He went into politics in the
manner of Lucius Quinctius Cincinnatus, patriot
and hero of the old Roman republic.
When
Cincinnatus - Cincinnati was named in his honor -
was drafted to become consul, the messengers who
came to tell him about his new dignity found him
ploughing on his small farm. He answered the call,
but after solving the problems of the nation he
declined the offer to become dictator for life. He
returned home to pick up the plough again. .
Already in 1985, Paul called for the
opening of the US Mint to gold and silver as a way
to stop the threatening monetary and banking
crisis in his address "The Political and Economic
Agenda for a Real Gold Standard". If the country
had listened to him then, people would have been
spared of the economic pain of 2007, and the
possibly much greater pains that may be in store.
Not one among the Establishment candidates
is willing to take up Paul's challenge, thus
depriving the electorate of a singular opportunity
to learn about the dangers threatening the
Republic. We are left wondering whether their
ostrich-like behavior is due to ignorance or to
lust for power.
The electorate cannot make
an informed decision in November without
understanding the current monetary and banking
crisis and its connection to gold. It is not too
late to have a great debate on the gold standard
and on the consequences of maintaining the
irredeemable dollar standard in the face of an
escalating monetary and banking crisis. Labor
leaders and captains of industry should demand an
answer to all those questions that the
representatives of the financial press refuse to
ask of the candidates.
Reference Ron Paul, The
Political and Economic Agenda for a Real Gold
Standard,
www.lewRockwell.com
Antal E
Fekete has since 2001 been consulting
professor at Sapientia University, Cluj-Napoca,
Romania. In 1996 Professor Fekete won the first
prize in the International Currency Essay contest
sponsored by Bank Lips Ltd. of Switzerland. He
also runs the Gold Standard University.
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