-- Posted 12 March, 2006 | | Source: SilverSeek.com
I was pretty surprised this morning when the preacherman on my radio started talking about inflation.
“Inflation,” he said in his impressive Australian accent, “is an increase in supply. And America has lately seen an inflation in the supply of many things, including knowledge, entertainment, and money.”
“So far, so good,” I thought. But I was soon thankful that the country roads on which I drive are sparsely traveled in the early mornings, for his next sentence nearly sent my car careening into the ditch.
“I’m not talking about monetary inflation,” he said, and I could almost see him shaking his head, silently scolding me for even considering the thought. “Monetary inflation is not a real problem so long as we have a Paul Volcker or an Alan Greenspan at the head of the Fed.”
“No,” he continued, but whatever he said about the challenges of recovering the America that has been lost was lost on me. He may have been an expert on culture (at least he was famous enough to be giving a keynote address) but he was certainly not an expert on money. And in missing the point about monetary inflation, he undercut his entire argument. He missed what was perhaps the most important point he could have made.
Someone who was an expert on money, James Madison, said a long time ago that inflation and paper money were a moral problem, a problem that undercut morality and culture and government and industry. In the Federalist Papers, a series of essays designed to raise knowledge of and support for our newly-penned Constitution, Madison said:
"The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the States…”
-- Federalist 44
Paper money, unbacked currency and the inflation that arises from it, directly undercut the very morality the preacherman sought, yet he was not able to find it, for as another man who knew something about money, John Maynard Keynes, wrote:
“There is no subtler or surer means of overturning the existing basis of society than to debase the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which only one man in a million is able to diagnose.”
Preacherman was not one in a million: he was just like the other millions for whom our modern, debt-based, fiat monetary system is considered normal, rather than a dangerous fraud that threatens to engulf us all. He abhorred the overturning of the existing basis of society and yet missed perhaps the most pernicious cause: paper money.
But what is it about paper money, unbacked currency, and inflation that undercuts the morals of the people, that destroys confidence in industry and government?
Paper money is in its very essence dishonest. It is a theft of goods and services, for when paper money is created it promises something for nothing, stealing its value from every other dollar in existence, and from the people that hold them. It creates confusion, necessitates dishonesty, and destroys the character of Republican government by destroying its basis: the necessary confidence between man and man.
And paper money lies because it does not hold its value: day after day it buys less and less of the goods it promises, creating perverse incentives, discouraging savings and thrift, and promoting – in a way that but one man in a million can diagnose – the very “live for today” philosophy that the preacherman decried so mightily in his sermon.
I tried to tell him. Oh, I laid out in detail how every nation that relied on paper money eventually suffered a breakdown in social order. I told him how the Bible says that false balances are one of those things that God judges, pointing out how Proverbs 16:11 and Leviticus 19:36 state that unjust measures are an abomination. I explained, unwisely ignoring the road ahead of me, how society would cease to function if every day the foot was just a bit shorter or the ton a little lighter, and how a shrinking dollar has the same effect.
But he wasn’t listening. If he did listen, he might have asked me where those horrible things are that I say will come from dishonest weights and measures. “If things are as bad as all that,” he might have asked, “why is America still the strongest nation in the world?”
And I had two answers from the news this week.
The first is a note concerning the work of an archaeologist in Liverpool who is currently undertaking an exhaustive study of the coinage of Rome:
Silver coins formed the backbone of currency in the Roman Empire. Roman emperors manipulated the silver content of the coins to solve short-term financial problems frequently caused by government overspending. For the most part, this manipulation involved the reduction of the silver content of the coinage in conjunction with a drop in weight.
As the Romans debased their currency in order to pay for government overspending, so have we. As the Roman Empire ended with armies of conscripts marching back and forth over the countryside looting everything of value in order to survive, so will ours.
The second is an opinion from Bill Fleckenstein, who this week spent some electrons on the lies the government tells (remember “the necessary confidence in the public councils”?) to cover up the pernicious effects that paper money has on our lives and fortunes, distilling essence of the coming problems into a single paragraph:
“Lots of these imbalances have existed for some time, and they haven't mattered. Such macro problems only matter when they matter. Once that point in time is reached, events have a way of swiftly getting completely out of control -- which is why one has to understand the nuances and be alert for potential signs of chain reaction...”
A chain reaction: that’s what the preacherman was talking about. He was noting, as I continued my monologue, how causes in one place create effects that undercut public morality in places entirely unexpected. Unexpected, perhaps, for most of the millions; but entirely expected, even considered inevitable, by the few who understand that honest money and public morality are inseparable.
Bookman’s Picks:
Being the owner of a bookstore, I’m blessed to have a continuous stream of old economics and investment books crossing my desk. The fact that they are old and out of date gives them two advantages over new ones: they are inexpensive (some sell online for literally a penny plus shipping) and the reader can understand which analyses have withstood the test of time. Each month I’ll bring a pair of reviews of old books that seek to answer the same questions investors are (or should be) asking today.
“How You Can Profit from the Coming Devaluation,” by Harry Browne, 1970.
The world is immeasurably poorer with the passing of Harry Browne this week. The grand old man of hard money and two-time Libertarian candidate for President authored a Solomon’s Treasury of books and newsletters and understood probably as well as anyone the effects of inflation on society.
I picked this book of his many because of a single quote (Page 87):
“Can you imagine being asked to pay $3500 for a Volkswagen? That’s stretching your imagination quite a bit, I realize. And yet that day may not be very far away”.
That day has come and gone. And realizing that a new Volkswagen today runs at least 5 times what Browne predicted clearly illustrates the amount of value that has been stolen from every dollar in our pockets through inflation.
As America prepares for another devaluation - this one perhaps leaving the dollar valueless - the advice of Harry Browne has once again become priceless. He will be dearly missed.
“Confession of a Wall Street Insider,” by C.C. Hazard, 1972
C.C. Hazard wrote under a pseudonym so he could lay out a truth that might have cost him his Wall Street career: the market exists in large measure to transfer money from small investors to large ones.
The mantras of the current market are no different than the mantras of the late 60s bull; they are simply peddled via the internet rather than the phone. The IPO game, the manipulation of charts, and the churning of accounts still exist, and are still used to keep the small investor buying shares that, like the paper dollars Browne decried, are worth less and less as the years pass.
No one, especially resource investors, should confuse a bull market with genius, and all should realize that the market consistently rewards those investors who, if they are not true insiders, act like they are.
Spending an evening with Hazard is a jading experience; he finds no public morality where the vultures gather to pick clean the bones and retirement funds of the small investor.
But it is an education that no investor should deprive himself of, especially with the sharks of the dotcom boom swimming unseen into the growing pool of resource stocks.
Bill Hoyt
March 10th, 2006
Opinions contained herein are purely those of the author, but he invites you to share them if you wish. Visit his web log, El Borak’s Myopia, for daily commentary and responses to reader email.
-- Posted 12 March, 2006 | |
