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Thursday, July 9, 2009


In its June 29, 2009 issue, Business Week ran an article, by Peter Coy, entitled "Why the Fed Isn't Igniting Inflation." This perfectly illustrates how the paper aristocracy lies to the American people, the purpose being to steal their (meaning your) wealth. Today I want to point out the lies and the doubletalk involved in this article and why it is absolute crucial (for your own well being) that you understand what is going on.

Before we get into the nitty-gritty, there are two things which are absolutely crucial for you to understand. First, almost everyone in the world wants wealth. There is an expression to this effect: "I've been rich, and I've been poor. And rich is better." There were a few hermits in the Middle Ages and a few hobos from time to time. But the vast majority of human beings on planet Earth want wealth.

So far, so good. Second, some of these people want wealth but do not want to do work to produce it. They want to take from the other people around them (meaning you). Most of these people are common thieves, and we deal with them by creating a police force and putting them in jail. However, a small group of these thieves have figured out a better angle. You can understand this technique by studying the medieval aristocracy.

They had seized all of the arable land in Europe by the sword, and they enserfed the average guy to work the land, produce food for him and other goods. In those days, if you didn't like your boss (the land lord), it was against the law to quit your job. If your boss' son wanted to rape your daughter, there were no police or courts to stop him. And he had an armed gang of thugs to beat you up (with a session of torture thrown in for good measure).

Yes, things were bad. But here is the problem. The common people outnumbered the aristocrats by 100 to 1. I don't care if the aristocrats had weapons and armed thugs. Why couldn't the common person simply rise up and overthrow these aristocrats by sheer force of numbers? Ultimately they did, and there were a series of revolutions (of which the American Revolution is an example). But my point is that they didn't for a long, long time. The people of Europe went over a thousand years working as serfs (in incredible poverty and misery) for their feudal lords. Even the use of the word "lord" to describe these people shows the imbalance because this is the same word we use for God. These people were looked upon as little gods, and all they were were thieves. This leaves us with two questions.

Since the people were ultimately able to overthrow the medieval aristocrat, how come they went on for a thousand years working as serfs? And when they did successfully rebel, how did they do it?

This brings us to the third crucial point. The way that the successful thieves got away with their robbery was via a class of intellectuals. This is an incredible story, and it proves that the pen is mightier than the sword.

Take as an example the peasant's revolt of 1381, the first well-known case of the people's attempt to win their freedom. On one fine day, the King of England looked out and saw 60,000 angry peasants, armed and knocking at the gates of London. The gates of the city were thrown open to them by 40,000 Londoners, and an army of 100,000 angry people faced the king (who had been caught by surprise and had no army). They were demanding the abolition of serfdom (meaning the right to quit their jobs).

Caught off guard, the king lied to the people and pretended to grant their demand. Then when they had dispersed, the king raised an army, reneged on his promises and crushed the peasant opposition. The peasants were defeated, but their movement (called Lollardry) went underground. There it simmered for a century-and-a-half and finally emerged victorious in the early 1500s, where it is known as the Protestant Reformation.

The reason the aristocrats were successful from about 400 AD to about 1400 AD was that a class of intellectuals, in the form of the priests of the Catholic Church, preached on the side of the aristocrats. They told the peasant that God wanted him to meekly turn the other cheek and submit to outrageous injustices. For saying this, the priests were given a privileged position by the aristocrats (vow of poverty be damned). The feudal lord simply passed on to them a small portion of the wealth that he stole from the peasants.

This system started to collapse, as noted, with the Protestant Reformation. The new Protestant ministers were a different class of intellectuals. They were on the side of the people. They preached freedom and defiance of the aristocracy. By the mid-1600s, half the people of Britain (the more dedicated Protestants) were for freedom, and half the people (the Catholics and their sympathizers) were for the king. There was then a war (the English Civil War, 1642-46) in which the people (led by the Protestants) rose up and fought for democracy. Our own American Revolution of 1776 was based on this war, and the slogan "no taxation without representation" comes from this period in English history. The democrats won the war, chopped off the king's head and tried to set up a democracy in England. Unfortunately, they had no understanding of politics. Although their intentions were good, they fell to quarreling among themselves, and this democracy collapsed in 1660. However, they did not give up heart. There was a second revolution in 1688 (the Glorious Revolution). The king was thrown out, and England became a democracy for good.

Now let us apply these principles to our own day. Again we are faced with a group of thieves who want to steal our wealth. Again these thieves are especially dangerous because they have a group of intellectuals on their side. However, today the intellectuals are not priests; they are Keynesian economists. And the way they steal our wealth is not by enserfing us to the land; it is by the counterfeiting of money. The most important event, the event determining the character of the world in which we live, was the enactment of the Emergency Banking Bill of 1933, on March 9, 1933 by the Democratic Congress on the first day of the Administration of F.D.R. This took the country off the gold standard and created a new money (the legal tender Federal Reserve note) which was issued by a group of (private and government) bankers. Since that time there has been a steady creation of money and a steady decline in the value of money. Today's dollar is worth about 6¢ (using official figures, which are suspect).

Ludwig von Mises pointed out that, when money is created, the people who get it first benefit. The people who get it last lose. The privilege to create money is a form of stealing. Because the United States Constitution (via the 10th amendment) prohibits paper money, the Emergency Banking Bill of 1933 is null and void, and the entire paper money system is illegal. Our government is now only a democracy in name.

In fact, we have returned to the Middle Ages whereby an aristocratic class steals our wealth. Instead of the medieval aristocracy we have the paper aristocracy.

Right now the combination of presidents Bush and Obama have just created a trillion new paper dollars, a 70% increase over the money supply of last May ($1.3 trillion). Trillion dollar deficits are planned as far as the eye can see. These deficits will be monetized. There is no deficit of any size in the history of the United States, or any other democracy (in name) which has not been monetized. The idea that government finances its deficits by borrowing from the people is a lie, pure and simple. All deficits (except very small ones) are financed by the printing of money. If the U.S. prints a trillion dollars for each of the next 3 years, then the money supply will increase from $1.3 trillion to $5.3 trillion, and this will lead to a 4-fold multiple of prices. Pretty it will not be.

This is the point of the Peter Coy article in Business Week. He is one of the class of new intellectuals who act as apologists for the paper aristocracy and help them to steal our wealth. His job is to lie to the average American (that's you).

With the money supply about to multiply by a factor of 4 times, there is one way to protect yourself. You must place your wealth in real assets. The best asset for this purpose is gold, as has been proven for the past 2 millennia. It is not exactly rocket science to see that, with the nation's money supply about to quadruple, one has to move one's assets into gold.

We have not been reduced to the level of the medieval serf. We still have a considerable amount of freedom. There is a world-wide functioning gold market. There are gold coin shops in every city of any size. Anybody can see that, as the currency depreciates, prices expressed in that currency have to go up. But prices expressed in a gold currency have remained the same for two-and-a-half thousand years. (U.S. statistics, by the way, prove that, while the United States was on a gold standard, from 1788 to 1933, the Wholesale Price Index was unchanged over the period, that is, from 1793-1933 the WPI came out exactly the same.)

So it is Peter Coy's job to serve the paper aristocracy by convincing us not to buy gold. He even admits the enormous expansion of the money supply:
"The nation's monetary base - consisting of bills and coins in circulation plus banks' deposits at the Fed - has climbed 114% over the past year through May." (Peter Coy, "Why the Fed Isn't Igniting Inflation," Business Week, 6-29-09, p. 20.)
First a little background here. Every time in economic history that there has been a significant increase in the supply of money there has been a corresponding decline in the value of the money. (By the way, the use of "inflation," meaning a rise in goods, rather than "depreciation," meaning a fall in money was an early example of intellectuals twisting language to confuse us. There is nothing wrong with goods that causes prices to rise. 

It is always an increase in money.) There is a perfect correlation here. Every time they have printed money prices have gone up.There is not a single exception. Every real economist has studied the money fluctuations of American history. Here is the record.

During the gold standard period (1788-1933), it was not a perfect gold standard. There were 3 interruptions. The Government used paper money (from the banks) to finance the War of 1812. The banks of the Middle Atlantic states and the South created money and lent it to the Federal Government. New England was anti-war, and its banks did not create money. Daniel Webster notes that Washington D.C. bank notes had dropped to 75% of their nominal value (meaning that prices in D.C. had risen by 33%). Prices in New England did not rise. After the war ended, a hard money faction (led by Andrew Jackson and Martin van Buren) came to power, abolished the central bank and put the gold standard on a firmer footing.

During the Civil War, Lincoln financed the war by issuing greenbacks. The money supply doubled, and so did the price level. After the war, the greenbacks were retired, and the price level subsided. By 1879, prices were back to their 1860 level and the gold standard had been restored. 

And finally in WWI, the money supply also doubled, and prices doubled also. Cigars went from 5¢ to 10¢, leading to the famous Republican policy of "a good 5¢ cigar." To implement this policy, the Republicans reduced the money supply and brought prices back down. By 1933, the WPI was back to its 1914 level (which by the way was the same as its 1793 level).

Mr. Coy's argument is as follows: "the inflationary effects of the new money are being fully offset, or more than offset, by the far-reaching and long-lasting impact of household debt repayments. "Americans have abruptly switched to working down the debts." [Peter Coy, Ibid.]

So I went to the current Fed website and checked the statistics on the rate at which Americans are paying down their debts. Household debt repayments are not going up. They are going down. Americans are not paying off their debts more rapidly. They are paying their debts more slowly.

In general, there has been a small contraction in outstanding loans since mid-2008, but this is normal in every "recession" and does not approach the degree of monetization by the Fed. Normal Fed expansion overwhelms this minor contraction at every turning point, and the result is an increase in prices. However, the current Fed monetization is gigantic. The monetary base is up by over 100% from a year ago, and I estimate the money supply proper as up 70%. This will result in a massive rise in prices - far, far beyond what this country has ever seen.

You have to protect yourself. Peter Coy is trying to lull you to sleep so that his bosses can steal your wealth. They benefit from the Fed easing. For them to benefit, the average guy must lose. There are times when one can protect one's self by going long stocks. (I was a stock bug in 1982.) But this is not one of those times. We are in the (upswing of the) commodity pendulum. Commodities are going to be the beneficiary of the Fed's monetization. And gold is the most user friendly commodity there is.

© 2009 Howard S. Katz

Howard S. Katz is author of the One Handed Economist, a financial newsletter with timely market advice that integrates technical analysis with insights about Austrian economics and analysis of Federal Reserve Bank policy.

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