Archive for November, 2013

Gold is Money

keep-calm-buy-gold

“Gold is money. Everything else is credit” — J.P. Morgan testifying to Congress in 1912.

Let’s acknowledge that although the terms money and currency are often used interchangeably, they actually have distinct meanings.

Currency has value because it has been deemed so by the government in power in that jurisdiction. Why has a piece of paper with Queen Elizabeth’s face on it considered to have value within the UK? Because that government has decreed it so. There is no intrinsic value in that piece of paper. It is only valuable because the UK government defends its value through control of its printing and severe suppression of its counterfeiting. That rectangle of paper has no practical use and only holds value because of the projection of force by the British government. That force is a two sided sword. If wielded with integrity, it staunchly defends that paper’s value.

If it is abused (and boy is it currently being abused), it is fighting a losing battle with reality. This is the major failure of fiat currency. Through the cancer of Quantitative Easing (QE), the value of the currency is being constantly diminished. The amount of currency in circulation in the UK, if properly protected, should be increased by the Bank of England roughly in line with the rise in UK GDP.

These last five years this has not been the case. QE has run way ahead of GDP, and the only reason we have not yet seen hyperinflation is because this excess currency has been diverted through the crony banking system in order to build up their depleted capital reserves (depleted because of their utter incompetence in the last property boom/bust). Everything in excess of this reserve has been diverted via the bank’s investment arm into the grossly over inflated stock market.

I’m not picking on Sterling in particular; USD, EUR and YEN are all being similarly manipulated.

Which brings us to money. The quote above from 1912 succinctly differentiates money from credit.

Note, credit not currency.

Back in J.P.Morgan’s time currency was freely exchangeable for gold at a set rate that had barely changed for 150 years since the formation of the United States. The “dollar a day” set wage for a day labourer had held steady since before the revolution. There was practically no inflation for all that time.

JPM was of course testifying against the formation of the Federal Reserve.

It went ahead anyway.

Since then, the dollar has lost over 95% of its value through systemic devaluation of the dollar. What JPM warned against has happened. Currency has been converted from money to credit.

There have been three steps to this.

The first was the creation of the Federal Reserve in 1913. Although this sounds like it is a government entity, it is not, it is in fact a private corporation owned by a conglomerate of private banks with a government monopoly to create dollar bills, to manipulate the national interest rate, and recently it has taken upon itself the right to create money out of thin air using the QE mechanism.

The next step was the confiscation of physical gold held by private American citizens by President Roosevelt in 1933 with Executive order 6102

The final step was the dropping of the gold standard by President Nixon in 1971. Prior to this anyone could go to the Fed and demand physical gold for $35 per ounce. This became unsustainable because investors lost faith in the US governments’ ability to deliver on this promise because of the over-extension of spending.

And so, what J.P.Morgan warned against has indeed come about. Currency has lost its connection to gold money and has in fact been turned into credit. That is, the currency has been turned into debt through the action of the FED.

What caused this over-spending? The ongoing Vietnam War and the financial commitments of the ‘Great Society’ introduced by President Lyndon B Johnson.

All of these steps replaced a regime of dollar value fixed to an immovable quantity of gold, with one of an ephemeral number of printed dollars printed at the discretion of a privately owned banking cartel under the influence of a political structure using it to support short term political expediency.

What could possibly go wrong?