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Mix-Ansicht- Debt, Money, Gold and History / The Daily Reckoning - - ELLI -, 06.01.2003, 11:20
Debt, Money, Gold and History / The Daily Reckoning
-->The Daily Reckoning
Weekend Edition
January 4-5, 2003
Paris, France
By Addison Wiggin
MARKET REVIEW: Debt, Money, Gold and History
"The 19th century gold standard was the highest monetary
achievement of the civilized world. The gold standard was
neither conceived at a monetary conference, nor was
it the brainchild of some genius. It was the result of
centuries of experience."
Ferdinand Lips,
at the Humanitarianism at the Crossroads Congress
The first two trading days of the year found the Dow 260
points higher... and a host of analysts predicting the bear
market can't possibly last another year."Four in a row?
The odds are against it," says a headline on CNBC's
website. Of course, if you want to get technical from a
statistical point of view, the odds of the Dow ending 2003
up or down have absolutely nothing to do with last year's
downer ending... or the year before... or the year before
that.
What concerns us so far this year with respect to the stock
market is the same thing that concerned us last year: Mr.
Bear hasn't completed his work.
In fact, as far as we can see, he's only made a
half-hearted attempt at bringing stocks down to a
valuations where it makes sense to buy them again. Based on
'core earnings,' S&P stocks are still trading at 40 times
earnings. Or, as Barron's calculates it, based on last
year's reported earnings, they sell at a P/E of 28. Either
way they are expensive. And Mr. Bear usually lumbers off to
hibernate when they reach a P/E range of somewhere around 8
to 10 times earnings.
Gold lept up to $352 Friday before settling back a buck.
The dollar index fell back to 102. According to a chart on
the Fed bank of Atlanta website, it has dropped 25 points
since Bernanke made the now infamous"printing press"
speech on November 21, 2002.
Here at the Daily Reckoning, you may have heard us say on
occasion, we're not interested gold and the dollar because
we claim to know what is going on in the world markets...
but precisely because we don't. The 'gold standard' simply
provides us with a convenient intellectual escape hatch.
In fact, if you pressed us on the issue, you might get us
to agree with F.A. Hayek, who suggested that nobody - not
the celebrated central banker who claims to know where the
keys to the printing press are, not a president with a
rising approval rating and a penchant for fighting foreign
wars, not even a handful of cranky economic critics
hammering out daily market commentary from their desks
overlooking Le Paradis café in Paris - could possibly have
at their finger tips all the necessary data to set 'rates'
for millions of buyers, sellers, lenders and borrowers
acting independently. Forthwith, a few incomplete thoughts
about history, money, and debt... staggering levels of
debt.
"Modern banking," a treasury official explained to a Daily
Reckoning reader, who subsequently posted the explanation
on the DR discussion board,"is often explained by analogy
with the practices of goldsmiths in early seventeenth
century England."
"In both the goldsmith's practice and modern banking, new
money is created by offering loans to customers. A private
commercial bank which has just received extra reserves from
the Fed can make roughly six dollars in loans for every
dollar in reserves it obtains from the Fed. How does it get
six dollars from one dollar? It simply makes book entries
for its loan customers saying you have a deposit with us."
In other words, to create a new dollar, the Fed simple
makes a promise to pay. They can make as many promises to
pay as they like... without anything to back up the
promise, but further promises.
"The Fed has several ways of controlling the total amount
of reserves in the system," the fearless treasury official
goes on."The Federal Reserve Banks can lend reserves to
the private, commercial banks. To do this, the Federal
Reserve Bank simply makes a new entry on its books showing
that the borrowing bank has more dollars in its account
with the Federal Reserve bank."
That is the nature of the system. 'Money' is debt. Every
physical"dollar" in existence represents six dollars owed
by somebody... plus interest. The Fed"manages" the debt
load, the way a washing machine manages the spin cycle;
sometimes the loads get out of whack and the whole machine
becomes unstable, but for the most part it runs smoothly
and your clothes come out without stains.
"Unfortunately," the economist Ferdinand Lips observed
during a speech at the Humanitarianism at the Crossroads
Congress in Feldkirch, Austria in early September (also
sent to me by a Daily Reckoning reader),"it is not widely
known that the 19th century was a period of prosperity and
economic growth without inflation."
"It strikes us like a fairytale [in the age of Keynesian
and Monetary school economics]," says Lips,"when we
discover that in those days the most important currencies
were stable over a long period. The French franc, for
example, remained solid for one hundred years."
That hundred year stretch was the era of the gold standard.
Lips provided the following,"Life Span of Currencies":
French Franc 1814 - 1914........100 years
Dutch Guilder 1816 - 1914........98 years
Pound Sterling 1821 - 1914.......93 years
Swiss Franc 1850 - 1936..........86 years
Belgian Franc 1832 - 1914........82 years
Swedish Krona 1873 - 1931........58 years
German Mark 1875 - 1914..........39 years
Italian Lira 1883 - 1914.........31 years
"The basic rule of the gold standard," suggests Lipps,"was
a fixed amount of gold for each money."
In other words, rather than each unit of money representing
a debt owed, it represented a specific weight of gold.
Paper currencies were redeemable in gold at any time. And a
nation's"monetary reserves" consisted of only gold.
Curiously, many of these currencies were destroyed in favor
of debt-money currencies, so their representative
governments could finance World War I. Acting within the
confines of the gold standard, it would have been
impossible to raise the"money" needed to conduct such
massive destruction over a sustainable period. Better
centralize, create debt at will, and then, carefully,
manage the supply of debt.
Best regards for the weekend,
Addison Wiggin,
The Daily Reckoning
P.S. Indeed,"world history proves," Lips says,"that there
is a close relationship between monetary systems and war
and peace." Would, for example, this administration be able
to afford to send its armies to every corner of the globe
with or without support from the nations its promising to
protect?
P.P.S. One might also suggest that there is a close
relationship between an nation's choice of monetary system
and its habits of consumption."On an international level,
[during the age of the gold standard]," says Lips,
"importing and exporting gold was unrestricted. All balance
of payments deficits were settled in gold." If the US
dollar did not now constitute 76% of the world's central
bank reserves, would it be possible for the US economy to
consume 5% more than it produces year after year?
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