We are all dependent on each other to some degree. The free market is a gigantic system of interdependence. There are degrees of dependence, of course. But every buyer and every seller has some influence on a particular price. So do our perceptions of what each other might do under slightly different circumstances — say, a price hike or reduction of 10%.
What we personally know about any one tool in our lives is minuscule. Compared to what some primitive hunter knows about his spear or his traps, we know almost nothing about the things that keep us alive. We flip a switch, and a light goes on. We press a button on the channel-flipper, and the McLoughlin Group goes off. What do we really know about how all this works? Practically nothing.
Last November, I got sick. I rarely get sick. But, starting around noon, my stomach started to hurt. By 11 p.m., I was in constant pain. I was vomiting green bile. By 2 a.m., I did what I do not recall ever having done: I had my wife drive me to the emergency hospital. They put me on some sort of sedative. By 10 a.m. the next morning, a physician I had only just met removed my gall bladder.
Think about this. I allowed a stranger to administer a mind-altering drug. The other stranger inserted a small TV camera inside me. Then he made incisions in my stomach and took out my gall bladder.
What is a gall bladder? What does it do? Now that mine is gone, what am I missing? I haven’t a clue. When I had a gall bladder, I didn’t even know it was there. Now that it’s gone, I don’t care.
He later told me that on the same day that he removed my gall bladder, he did five of these operations. His partner did several more. Given what I paid for mine, nobody will have to hold a fund-raiser for his widow. I don’t live in a large city. Here is one man and his partner who run an assembly line for removing gall bladders. These men are specialists in the surgical removal of something the rest of us barely know exists until the pain hits. It’s amazing. These people make a good living by doing things that the rest of us are unaware of most for of our lives — all of our lives, if things go well.
The free market brings together buyers and sellers of specialized procedures so obscure that the buyers are completely in the dark. Nevertheless, despite my ignorance, I got well. I spent some money, and I got well. In 90 minutes, the pain ended. Prior to anesthetics (1844), I probably would have died an excruciating death. The alternative would have been an excruciating operation. There were no assembly lines for surgery in 1843. Think of the scene in “Gone With the Wind” at the hospital-in-a-church. They didn’t call doctors “sawbones” for nothing.
THE MYSTERY OF CENTRAL BANKING
Now think about central banking. How many people understand fractional-reserve banking? Not many, including most of those who took a money & banking course in college. I have read only one textbook on money and banking that does a good job in explaining the system, Murray Rothbard’s The Mystery of Banking. Today, I’m happy to say, you can download a copy for free.
Nation by nation, the public is dependent on the wisdom of a group of highly paid experts called central bankers. These people work for private organizations that have been granted sovereign power by their national governments. No other group of profit-seeking private entrepreneurs in the world enjoys an equal measure of autonomy — autonomy (self-law) from both the government that granted them their monopoly over the money supply and also from consumers in the free market. They impose sanctions, both positive and negative. No sanctions are imposed on them by the likes of us.
The public has been taught by the media, including all accredited colleges, that this profit-seeking monopoly is run for the benefit of the people. Public-spirited monopolists over the money supply really have the nation’s interests at heart. Because these men, unlike all other monopolists, are simultaneously self-sacrificing yet self-serving, politicians have granted them independence from the government. They also possess independence from the free market’s negative sanction: bankruptcy. In fact, the central bank is charged with the task of forestalling widespread bankruptcies, beginning with the institutions that legally own the central banks, private commercial banks.
A central bank, unlike any other organization, is praised because no one in civil government controls it. Textbook writers in economics, as well as financial columnists for the major newspapers, praise the central bank for its anti-democratic legal status. The nation’s professional opinion-makers assure the literate public that the great benefit of a central bank is that it is independent from politics. Congress cannot tell it what to do. Neither can the President. This is presented as an enormous advantage to the public. The academic economists’ theory of monopoly pricing is suspended in this one instance. So is the academic political scientists’ discussion of anti-democratic associations. In only one other area of officially democratic policy-making is anything equally schizophrenic: tax-funded education. Here, too, the voters are assured by expert opinion-makers that democracy is a liability, that those who pay the piper are not qualified to call the tune.
In these two areas, therefore, we find a theory of what used to be called priestly status. Central banking and public education are both run by employees of a government-granted monopoly. Both institutions are said to be immune — rightfully immune — from the wrath of voters and the pressures of free market competition.
There are now faint signs of waning faith in both of these priesthoods. Home schools are springing up. So is the price of gold.
There is no monopoly more profitable or with more power to ignore the government than a central bank. It has power over the only common link among all participants in the economy: the money supply. The world’s national governments have self-consciously transferred power over the central economic institution — money — to a group of unelected, profit-seeking, self-screened representatives of the commercial banking system, a system based on fraud.
Commercial banks promise to pay depositors interest on money that can be withdrawn by the depositors at any time, yet the banks lend this money long-term to borrowers, who do not have to repay it until a specific date. The system is “borrowed short” and “lent long.” Bankers earn a good living, and a few get rich, from contracts that are based on a lie. This promise is believable most of the time because only a handful of depositors can actually withdraw their money at the same time. Whenever a lot of them — maybe 10% of them — try to withdraw currency at the same time, we call these events panics or bank runs.
These events used to produce bankruptcy (bank + rupture). But then central banks came along, beginning in 1694 in England. They are invested by the State with what has traditionally been explained as the state’s sovereign authority: the authority to create money. This ability to create money reduces the threat of bank runs, but it also guarantees the creation of depreciating money.
Today, German banks are starting to go bankrupt. It’s not a nation-wide panic yet, but it could become one.
The German central bank, the Bundesbank, will of course intervene at some point to prevent a widespread panic. It will tell depositors not to worry. But deposit insurance is low in Germany, less than 20% of what it is in the United States. Depositors are at much greater risk there. So, this panic could get out of hand. It may take emergency action by the government. There is no doubt what that action will be: to grant more power to the central bank, and to use government money to bail out the system.
Japanese depositors are in a similar condition. Their banks are in much worse shape than German banks.
Every national currency is depreciating. Compared to the price of goods that the currency would buy 30 years ago — especially real estate — consumers around the world are suffering from currencies of declining value. This makes them seekers of long-term debt, especially for real estate. This quest for money to borrow increases demand for the asset leased by banks: money. In other words, the central banks’ slow destruction of money creates public demand for the services of commercial banks. This is a classic vicious circle. It is the product of a government-granted monopoly. Banking is not a free market phenomenon.
Today, an American commercial bank can borrow money in the federal funds overnight money market at 1.75%. The Federal Reserve System has driven short-term rates this low — an unprecedented reduction. The commercial bank can then lend this borrowed money to credit card users for up to 24%. Let’s see: for every $175 paid out, a bank pulls in $2,400. Not too shabby a deal! Last week, I had three offers in one day for new credit cards in the mail. I suspect that there is a relationship between these two rates of interest and the number of credit card solicitations in the mail. Of course, these cards were “low rate” cards. I was asked to pay about 9.9%. I failed to take advantage of this.
“PUT A GALLON IN ME, ALAN!”
I trusted the physician who cut me open. I was highly motivated. It hurt when I laughed. It hurt when I didn’t laugh. “Cut me open, Doc! I’ll pay!”
Today, 270 million Americans and a whole lot of foreign holders of dollar-denominated assets have basically told Alan Greenspan to put them on the operating table, do whatever is necessary to make the pain go away, and take whatever he wants out of our bank accounts. He tells them: “This may require blood.” Everyone tells him to go ahead and cut. What they don’t understand is that when he says, “This may require blood,” he doesn’t mean blood poured in; he means blood taken out. He means more debt: more obligations to repay bankers and other lenders. He means another contract that surrenders an additional percentage of our future productivity. We sign on the dotted line.
Even when we don’t sign, our elected representatives do. Taxpayers are facing another increase in the on-budget U.S. national debt limit. Congress will sign on the dotted line on our behalf. The last time that Congress resisted was in fiscal 1995. Clinton and the voters put an end to the “Contract with America” at that time. The real contract with America means more debt, more fiat money, and dependence on the U.S. government and the central bank.
In every nation, users of money and banking services have told the same thing to their respective central bankers. But Greenspan is the world’s most important money doctor. If he and his associates make a mistake, the pain will increase for a billion or more people.
We have preferred the drip, drip, drip of debt. This has been accompanied by the drip, drip, drip of price inflation. I keep thinking of Dan Ackroyd’s 1980 “Saturday Night Live” skit, “Inflation is our friend.” “Didn’t you always want to wear $1,000 suits and live in a $200,000 home. I know I did. Well, now we can. All it takes is a little ink and some paper.”
The public has trusted politicians and central bankers. Voters assume that the promises and assurances of these experts are reliable. They have accepted high-flying theories of why these power-seeking, money-seeking, money-creating people are in fact self-sacrificing servants of the public’s good. Voters have trusted their judgment. We have allowed them to indebt our children and our grandchildren. Then, when our children and grandchildren start to vote, they are assured by the same experts that everything is just fine, and besides, the debts will be paid by their children and grandchildren.
Every generation wants to defer the day of reckoning. Every generation votes to pass on the old maid card: “account overdrawn.”
The sad thing is that the average person, in every industrial nation, really believes that official promises are reliable, that a politician’s promise regarding the economic future is as good as gold.
AS GOOD AS GOLD? NO, BETTER!
“As good as gold.” This phrase is not in common use any longer. Gold is seen as a losing proposition. For 21 years, it was. But now the tide seems to have turned. The dollar is falling, as well it should. Gold’s price is rising. Why? Because a tiny handful of people are catching on to the nature of the lies.
Promises that rest on lies eventually are broken. Everyone can’t get his money out of the bank at the same time. Everyone who has been promised a comfortable retirement by the government won’t enjoy one. Every old person who gets sick won’t get well at government expense. Some will. Some have. Most won’t.
A Ponzi scheme’s early investors can make money, although few of them ever do. They stay in the program. They reinvest. Ponzi scheme designers know this will happen. Greed is powerful. It overcomes common sense. Early participants in a Ponzi scheme can make money because most of the money invested by late-comers is handed over to early investors as part of the scam’s strategy. The Social Security System is a Ponzi scheme. This one is working, for there have been hundreds of millions of new participants pouring in their money. Also, it is illegal to pull out of the program. But the end is now in sight. The retirees will begin to overwhelm the system’s revenues no later than 2011. In Japan and Italy, this will take place within two to three years if the recession continues.
Whom should you trust? Politicians who make promises that, statistically, cannot be fulfilled? Commercial bankers who make promises — “withdraw your money at any time” — that cannot be fulfilled without a digital printing press to make the promises technically valid? Or should you trust gold, which rises in price when political promises are fulfilled with fiat money instead of tax revenues?
The public regards Alan Greenspan as part magician, part guru. This faithful assembly of millions includes some very sophisticated investors. But there is a major problem with investing anyone with guru status and a monopoly over money: he is an old man. Greenspan, like Warren Buffett, will not live forever.
The public always seeks out representatives to trust in. They do not really put much trust in bureaucracies. They put their trust in specific individuals. Voters invest these representatives with the aura of infallibility whenever they do not understand what these representatives actually do. This is rational. Voters need to hold someone responsible. It is far easier to hold an individual responsible than a committee. In good times, the recipients of the public’s trust rejoice. In bad times, they point the finger of blame elsewhere. Or they retire.
The day Greenspan dies or retires, you won’t want to be in the stock market.
A DELIBERATE MYSTERY
Voters do not understand central banking. Most of them could not identify the Federal Reserve System, even if you showed them “Diehard 3.” If you were to read the questions that Congressmen — Ron Paul excepted — and Senators ask Greenspan, and his answers that they accept as meaningful, you would begin to understand that they have little idea what the Federal Reserve System can do or has done.
The public cannot be expected to understand the intricacies of economics. That voters do not understand the Federal Reserve System is understandable. Almost two decades ago, the mainstream book publisher, Praeger, published a book with the provocative title, The Federal Reserve System: An Intentional Mystery. The system was designed in 1910 at a secret meeting of bankers and Senator Nelson Aldrich — Nelson Aldrich Rockefeller’s grandfather — on a first-names-only basis, just in case of courtroom or Congressional testimony under oath later on. It was held on an island off the coast of Georgia, an island owned by J. P. Morgan, William Rockefeller (John D.’s banker brother), and their business associates. The FED was designed to deceive politicians, which it did. Even the anti-gold, anti-bank, anti-Establishment radical Democrat, William Jennings Bryan, was conned into supporting the Federal Reserve Act of 1913, when he was Secretary of State under Wilson. Wilson’s son-in-law, Secretary of the Treasury McAdoo, fooled the Great Commoner into thinking the FED was anti-New York banking!
All over the industrial world, people have trusted their futures to central bankers and politicians who officially regulate central banking, but who rarely do. People hope for the best. They trust that the experts know what they are doing.
Hundreds of millions of people have placed their trust in self-interested men who have received from national governments a grant of sovereignty, not just an economic monopoly. These men are seen as being wiser than the free market and more honorable in profiting from this unique grant of sovereignty. An elite group of salaried academic economists and monopoly-possessing businessmen, who cannot easily be fired for poor performance, are regarded by the public and the politicians as possessing greater insight into supply and demand than the combined knowledge of the world’s capital markets, whose investors have their own money at risk.
This is one more example of the truth that most people really don’t understand the logic of the free market or how the free market works in practice. This includes people who call themselves free market economists.
When gold’s price rises, and when a currency unit falls in relation to gold and other currency units, those who rely on that currency unit for their very lives are tempted to shift their trust elsewhere. This is bad news for politicians and central bankers.
In an economic crisis, politicians will not accept any responsibility for failure. They never do. They will eventually blame the Federal Reserve System. They will be correct to do so.
People have to decide whom to trust. I trusted that physician. I had little choice. I trust the FED, too. I have no choice. It runs the only game in town. I trust the FED’s tenured agents to seek profits by not collapsing the economy. But I always place limits on this trust. I do not believe that monopolists are as wise as participants in the capital markets. So, I do not trust the FED with everything I own. I also do not trust Social Security’s promises. I do not intend to retire.
I believe that a crisis of public trust is brewing. Voters will not know exactly what went wrong with the economy after a payments crisis hits, but they will know that something surely went wrong. They will demand wild, impossible political solutions. They will insist that they get paid. No matter how little the dollar is worth, they will insist on payment. They have bet everything on the flow of funds. I mean everything.
If you entrust your economic future to self-interested monopolists who promise prosperity based on statistical falsehoods, you will find it difficult to think straight. Investors in gold today are few and far between. But, as more people’s faith in the spinners of statistically impossible dreams begins to wane, there will be a search for other things to trust in, other promises to trust in. Most investors will cling to false promises for too long. But a few will put their money where their dreams are.
Put some of your dreams in places that do not rely on the continuing wisdom of tenured bureaucrats with a monopoly over money.
June 24, 2002