Lifetime lesson!? Gold und die Zentralbanken usw.

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Lifetime lesson!

Gary North's REALITY CHECK

Issue 149 June 14, 2002

MICAWBER'S AGREEMENT

Charles Dickens created a character for DAVID
COPPERFIELD, Mr. Micawber. And macabre he was! He was a
promoter, a blower of bubbles, a schemer, a spinner of
dreams. Nothing ever quite worked for him as planned, but
he was always hopeful. His philosophy of life has come
down to us in his famous phrase,"Something will turn up."

In the 1935 movie, W. C. Fields played Micawber. This
was an example of flawless casting.

Dickens identified the mind-set of the huckster, the
man who substitutes schemes on paper for productivity.
Dickens was convinced that capitalism is basically little
more than a gigantic system of schemes. He saw the system
as a bubble. He was wrong about capitalism, but he was
correct about the central institution of capitalism,
fractional reserve banking. This institution, from the
creation of the Bank of England in 1694 until the present,
has been the creation of government. It could not exist
without The Agreement:"You license our monopoly over
money, and we'll guarantee a market for government debt."
I call it Micawber's Agreement.

The Agreement is at the heart of the modern world's
economy. Only one thing has ever proven successful in
exposing this agreement as a Micawberesque scheme: a rising
price of gold. This is why, above all else, central
bankers strive to keep down the price of gold.

The price of no other commodity attracts as much
attention. The price of no other commodity is the subject
of extended editorials in financial publications. Gold is
not just another commodity, despite what the gold-haters in
the media assure us. If it were, then they would not have
to keep writing their articles that assure us that it is.

I realize that expert opinion can be awe-inspiring. I
fully understand that when Alan Greenspan appears on
Capitol Hill, Congressmen, Senators, and WALL STREET
JOURNAL columnists are impressed by rhetoric that is
matched only by Dwight Eisenhower's and Professor Irwin
Corey's. (http://www.professor.irwincorey.com) But, as I
listen to his presentations and read them on-line, I keep
in mind an image of W. C. Fields. This helps me to put
things in their proper perspective.

DISHONOR AMONG THIEVES

Prior to the outbreak of World War I in 1914, gold
coins served as money for the masses of the West. Gold
bullion is still money within the closed fraternity known
as central banking. It is money for central bankers
because they do not trust each other. They expect each
other to cheat, to debase their currencies, to defer
payment, to lie without embarrassment, and to stiff their
brethren if they think they can get away with it on the
cheap. They know from experience over centuries that
debtors cheat creditors. The modern economy is based on
massive debt, and every debt is denominated in a means of
payment: a currency.

Central bankers want to be able to cheat the public.
Cheating the public is the number-one goal of all central
banking. The system has always rested on monopoly and
deception. At the same time, the number-two goal of
central bankers is to avoid being cheated by each other.
These goals are always in conflict. That which best
protects the central bankers from each other -- a gold coin
standard -- also protects the public from central bankers.

In 1914, all central banks except the Federal Reserve
System stole the gold that three generations of citizens
who had dutifully and foolishly handed over to commercial
bankers. The only people who were not big losers were
those who had not been rich enough to open a bank account.
The"best and the brightest" were the biggest losers.
After 1914, shell-shocked European depositors trusted the
words -- no longer redeemable in gold -- of the commercial
bankers' official representatives, central bankers.

In 1933, Franklin Roosevelt acted as the agent of the
Federal Reserve, and confiscated Americans' gold, hiking
its price in 1934 by 75%, after the government was in
possession of the stolen goods. The government turns over
the stolen gold to the central bank. This is how the
system has always worked. This is The Agreement.

Central bankers are like most other debtors: they want
to be able to escape their creditors if bad times arrive.
They want to be able to get out of their obligations. They
did this in 1914. The FED did it in 1933. Central bankers
cheated millions of depositors, who had naively believed
the commercial bankers' original promise:"Invest your gold
with us, and we'll pay interest to you. You can get your
gold back on demand at any time (you dumb clucks)."

Central bankers are also like creditors: they don't
want to be cheated by their debtors. They wanted
protection. They trusted gold. So, having stolen the
public's gold with the politicians' blessing, they created
an inter-bank gold standard for themselves: the gold-
exchange standard. It began in 1922 (the Genoa agreement).
They extended it in 1944 (the Bretton Woods agreement). By
these agreements, the Bank of England and the FED promised
to pay other central banks -- but not the general public --
gold on demand. By 1944, the Federal Reserve System had
most of the world's gold. The FED then persuaded the
United States government to extend a promise to other
central bankers on its behalf:"Invest your gold with us,
the United States government, and we'll pay interest to
you. You can get your gold back on demand at any time (you
dumb clucks)." It worked like a charm. It always does.
The market for U.S. government debt became the largest debt
market on earth.

On August 15, 1971, President Nixon did to the world's
central bankers what all of the central banks and their
governments had done in 1914 to their equally naive
citizens. Without warning on a Sunday afternoon, he
revoked the promise and closed the gold window."Suckers!"

From that time on, the price of gold in relation to
any national currency was set by the law of supply and
demand. But, then again, it had always been set by supply
and demand. The question of the gold value of any currency
is always settled by supply and demand. How much currency
is coming out of some central bank? How much gold is being
made available by suppliers? Will existing monetary
policies be continued?



LIAR, LIAR

The larger the debt, the more tempting the lie.
"You're check is in the mail." This is because the present
threat of the future costs of defaulting on a loan pale in
comparison to the present cost of repaying. Bankruptcy
looms. Deferral now looks like a reasonable policy. If
the debtor can defer the day of reckoning, he will be
sorely tempted to do this. Bankruptcy tomorrow is a
greater threat than losing access to the credit markets in
a year. Maybe the lie will work."Something may turn up."
If the creditors keep pushing for payment, the
debtor's lie become obvious. At that point, the debtor
admits the truth:"I can't repay." When the debtor is a
sovereign government, nobody can do much about it. What's
gone is gone. It was nice while it lasted.

Creditors may threaten to cut off future loans, but
everyone knows that's also a lie. Latin American
governments have been playing the default game with gringo
bankers ever since the 1830's. Argentina is only the
latest example. Brazil will probably follow.

Do foreigners still loan money to the United States
government? Of course. Did our government stiff them in
1971? It stiffed their central bankers, but politically
speaking, central banking is not a big issue. The public
doesn't understand international economics and currency
markets, so voters don't toss out governments because their
governments have stiffed foreign creditors, including
foreign central bankers. If anything, the Senior Liar of
the existing government is likely to be re-elected. Nixon
was overwhelmingly re-elected in 1972.

The public ought to care. It pays for losses
sustained by the nation's bankers. Taxes bail out recently
stiffed bankers. The central bank says,"If we win, you
get to keep more of your money. So do we. If we lose, you
will pay for our losses." Nice work if you can get it.

The way the public pays is through higher taxes,
especially the inflation tax. Consider the year of the
great confiscation in the United States: 1933. To match
the purchasing power of the dollar of 1933, a person needed
over $3 in 1971. That is, the purchasing power of the
dollar fell by two-thirds. That's what President
Roosevelt's unilateral abolition of the gold standard did
to trusting Americans who had naively believed the
government's promise to redeem the public's gold at
$20.67/oz. This depreciation took 38 years. Suckers!

Ever since Nixon's unilateral abolition of the gold-
exchange standard in 1971 -- refusing to sell gold at
$35/oz to central bankers -- the dollar has fallen in value
by almost 80%. It takes $4.44 to buy today what it took $1
to buy in 1971. This depreciation took 31 years. Suckers!
See the inflation calculator:

http://www.bls.gov
The falling value of the dollar is the irrefutable
evidence of the effects of government lies. But hardly
anyone cares. Everyone thinks he is getting richer.
Through politics, the over-65 crowd has gotten a cost-of-
living escalator written into the Social Security law.
This is why the government uses the standard Consumer Price
Index to calculate inflation rather than the more accurate
Median CPI, which today indicates that price inflation is
three times higher than the CPI says.

http://www.clev.frb.org/research/mcpi.txt

Sometime in 1980, Dan Ackroyd did a skit on"Saturday
Night Live" called"Inflation is our friend." He came on-
screen with a Jimmy Carter-like accent, which was pretty
good for a Canadian."Didn't you always want to wear $400
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."
Too bad it's true.

THE DEBT RATCHET

A major problem with monetary inflation is the level
of debt it produces. The debt level ratchets ever upward,
never going back. Aggregate debt is never repaid. Or, as
King David wrote,"The wicked borroweth, and payeth not
again" (Psalm 37:21a).
Debt today is the foundation of the world's money
system. It is not the debt of a warehouse receipt: a fixed
quantity of gold in reserve for a specific number of
receipts issued (100% reserves). It is a system based on
expectations:"payday someday." We have capitalized debt.
We have allowed fractionally reserved central banks to use
politicians' promises of future payment (i.e., government
bonds) as the foundation of our money system. The only way
that the politicians can pay off today's level of
government debt is by creating even more government IOU's,
some of which will be used as the legal reserve to expand
the money supply. Debt will then rise even more, in every
niche of the economy except (possibly) the section run by
the Amish.

Debt is denominated in a currency. Debt locks in
everyone's hopes and plans. It also locks in our financial
markets. Debt lures us into making decisions based on an
assumption regarding money:"There's always more where that
came from." And there always is. The Federal Reserve is
pumping in new money today, just as it has done since 1933.
The St. Louis Federal Reserve's data indicate that the
Adjusted Monetary Base has risen by over 10% since May 30,
2001. It has been rising at an 11% rate since early April
of this year.

http://www.stls.frb.org/docs/publications/usfd/page2.pdf

The underlying assumption of every investor is that
the government -- meaning the central bank -- will make
available enough money for the vast majority of debtors to
keep making payments on their loans. Creditors look mainly
to next month's payment. If that is secure, they can
capitalize this hoped-for stream of income. They can sell
the credit instrument to someone else for cash. That's
what Fannie Mae and Freddie Mac are all about.

Creditors, like debtors, believe that the FED will
keep the debt system going, which means keeping the capital
markets solvent with credit-based money. They also believe
that price inflation will not rise at anything like the
rate of increase in the money supply. They believe that
they will be repaid in dollars of fairly constant
purchasing power. They believe this in the face of massive
historical evidence to the contrary, from the day that
Roosevelt confiscated the American public's gold. They
simply will not learn. Like the poor, the prophets of
deflation ever with us, never putting together cause and
effect, never learning that prices keep rising because the
money supply keeps rising. They even applaud the FED for
keeping the money spigots open.

Every school of economics except the Austrian School
(Mises and Rothbard) believes that a free market in money
can't work in theory: Keynesians, monetarists, and supply-
siders. They all call for government intervention into
money and banking. They all decry"tight money," which
they define operationally as monetary growth that allows a
recession.

The Keynesians and monetarists are consistent. They
reject the gold standard in any form. The supply-siders,
whose members have yet to produce a single textbook or
economic treatise that explains how their system works in
theory, sometimes call for a government-run, government-
controlled, government-guaranteed gold standard, which
somehow will not keep money so tight that an economic
depression results. They proclaim a gold standard that
somehow will not destroy the number-one assumption of
America's capital markets, namely,"There's always more
where that came from."
Whenever you are told about a gold standard that will
enable the present debt system to survive the effects of
stable money and the massive level of default that will
result when the money spigot is closed, ask for a reference
to the chapter in the textbook that describes how this is
possible. You will be told, Ackroyd-like,"trust me."

If you want Mises' view of why monetary inflation
leads to an economic depression after the money spigot is
closed, read Chapter 20 of HUMAN ACTION. Or read my on-
line e-book, MISES ON MONEY, Part V.

http://www.lewrockwell.com/north/mom.html


WHOM SHOULD WE TRUST?

Members of the fraternity of central bankers know
enough not to trust each other. If they see that one of
their member banks is cranking up its domestic money
supply, they buy gold from that member. They deplete his
bank's god reserves.

The central banks' gold is stored mostly at the
Federal Reserve Bank of New York, at 33 Liberty Street. If
you saw"Diehard 3," you know this. (I wonder if a
majority of the viewers of that film every understood what
they were seeing. Probably not.) In each nation's
designated cubbyhole in the underground vault at 33 Liberty
Street is stacked a pile of gold ingots. Transactions
among central banks are settled daily. Men on electric
fork lifts carry gold bars from cubbyhole to cubbyhole.

It is clear what the central bankers trust as the
final court of appeal: gold. Anyway, that is what they
used to trust. I believe this is now changing. In the
past, they have trusted the FED not to end the game by
confiscating everyone's gold, and telling the world to go
fly a kite. So far, this trust has not been violated.
America is the world's superpower. It has the largest
capital markets. If it were ever to act in the way that a
Latin American banana republic acts, the world's central
banks would... would...? What?

I know. I know. They would sell U.S. government
debt. (To whom?) They would buy some other nation's debt.
(With what?) They would select some other form of debt to
back up their own currencies, thereby replacing the dollar.
(Like what?)

What could they do? They could roll on the ground and
hold their breath until they turned blue. They could
scream. And then, as central bankers always do, they would
lend to the highest bidder. That would probably be the
United States.

The fact is, the fractional reserve system has sucked
in the central bankers. Like depositors who turned in
their gold coins in exchange for interest-bearing debt
("deposits'), so have central bankers turned in their gold
in exchange for interest-bearing debt ("T-bills"). Like
depositors, they can't get their gold back. Nixon ended
that right. So, if they want gold, they must buy it in the
open market. This would drive up gold's price as
denominated in the central bank's currency. This would
alert the world that something is wrong with the currency
of the nation whose central bank is buying told. No
central banker wants to cause that to happen. So, as
individual banks, they dare not buy much gold. So, they
don't have much use for gold any more. Because Nixon
changed the rules, they have been trapped by the logic of
the market for gold: supply and demand.


Central banks today are selling their gold. They are
concealing this through lease contracts, which are in fact
permanent sales contracts. The bullion banks that have
borrowed the gold, sold it, and invested in government
bonds cannot possibly repay with actual gold. ("The wicked
borroweth and payeth not again.") The central bankers know
this. They do not care. The bullion banks are selling
gold to the general public, who in turn use the gold for
non-monetary purposes. This keeps down the price of gold.

European central bankers have come to the conclusion
that they can't sell their holdings of dollars and use
these dollars to buy gold from other central bank. They
don't dare fly gold home for safe storage in their own
vaults. That would panic the world's capital markets. The
dollar might collapse, and all of them hold dollars. Like
depositors in a bank that is unsound, they dare not
withdraw their money for fear of creating a bank run.

Gold therefore isn't useful for central bankers any
more. They are trapped by the fractional reserve system
that their predecessors created. They dare not display
distrust in the dollar because the international trade
system rests on the maintenance of public trust in the
dollar. So, they do not buy gold as a hedge against a fall
in the value of the dollar. Instead, they sell gold. This
keeps the price of gold low, which creates the illusion
that there is not a looming crisis facing all nations:
their governments' inability to pay off their retirement-
medical programs to an aging population.

A massive, worldwide default is looming. There is no
way to avoid it. The central bankers all know this. No
one knows it better than Peter G. Peterson, an investment
banker who heads the Council on Foreign Relations. He has
written several books about this. The latest is GRAY DAWN
(1999). They know. Their governments will eventually call
on them to create enough fiat money to pay off the
governments' debts to an aging public.

There is only one way that the world's Social
Security-Medicare programs can be paid off: with fiat
money. Then money will depreciate in value. The central
banks are selling gold to the public in order to keep the
price of gold from indicating the magnitude of the default-
by-inflation that lies ahead.

Central bankers are today resorting to the tried and
true method used by overextended debtors down throughout
the ages. They are gagging the inside stoolie. The inside
stoolie is gold. When the price of gold rises, the public
is alerted:"Liar, liar." Central bankers are manipulating
the gold market by selling off their gold. Like a
riverboat gambler with a fat roll of $1 bills, and a few
$100 bills around the outside of the roll, spending a few
of them for show, central bankers are selling off their
gold reserves in order to keep the reality of the looming
currency crisis from becoming obvious. They are deferring
the day of reckoning. Why? Because they have a dream:
"Something may turn up."

Central bankers after 1815 trusted gold rather than
each other, but they have all quietly agreed to sell off
gold officially, a little at a time, and sell lots of it
unofficially through the gold leasing program, which hardly
anyone notices. They keep the sold gold on their books
because they define these sales as loans, payable in kind.
It's a short-term tactic, and it appears to be irreversible
as central bank policy.

They no longer trust gold. Then what will they trust
in the future? They will have to trust each other's
politicians. That is, they are now trapped, just as the
rest of us have been trapped since either 1914 (Europe) or
1933 (the United States).

The public prior to 1914 trusted the banks because the
banks promised to redeem gold at a fixed price. This
promise was backed up by the courts -- contract law. When
World War I broke out, the politicians broke the law on
behalf of the banks, authorizing the banks' confiscation of
the depositors' gold. Then the politicians confiscated
this gold on behalf of their respective central banks,
turning the gold over to their central banks. In short,
the politicians lied.

Politicians always lie. Their job is to lie. We pay
them to lie. We re-elect them for lying well. The
question for each voting bloc is this one:"Which political
party's lies seem to favor us?" Politics is about wealth-
redistribution by force, and the greatest tool of political
wealth-redistribution is the lie."Everyone will retire in
comfort.""We will not break our promise to our senior
citizens.""The Social Security trust fund is secure, and
the fact that it is filled with IOU's has nothing to do
with anything.""Taxes will not go up.""We will not go
to war." And so on. All lies. We know they are lies, and
we select which lies we will vote for, believe in, and
invest in terms of.

Nineteenth-century Latin American dictators spotted
the willingness of gringo commercial bankers to invest in
terms of obvious lies, and they have milked the banking
system ever since. It took longer for us gringos to figure
out how the system works. But we did eventually learn.

The fractional reserve banking system is a gigantic
lie. Commercial bankers represent their depositors, who in
turn believe in the biggest lie of all:"Deposit your money
with this bank, and we will pay you interest on it, and you
can get back your money -- your lent-out money -- on demand
at any time." This is the lie of fractional reserve
banking. This lie is to capital markets what a perpetual
motion machine is to physics. When you hear about a
perpetual motion machine, you can be sure of two things:
(1) the promoter is lying; (2) there is a hidden power cord
or battery somewhere in the system. When you hear about an
investment that pays interest, but which you can get back
at any time, start looking for the hidden power cord.

Don't trust sellers of perpetual motion machines.
Don't trust the machines, either. Look for the cord. If
you get the opportunity, cut it.

We live in an era of widespread faith in perpetual
motion machines: government benefits for the masses paid
for by The Guy Behind the Tree; bank deposits that pay
interest on lent-out money that is available on demand; a
central bank-run version of the gold standard that has not
had redeemable receipts since 1971; the promise of stable
prices from a monetary system that rests on government
promises to pay. Lies, all lies. And our world is built
on them. For now.


CONCLUSION

Your economic future rests on the fulfillment of
promises so brazenly false that no one with an IQ above 90
should believe even one of them. It rests on what most
people ought to recognize as lies. Yet in the best
universities, in the fattest textbooks, in the highest
seats of power in the land, all over the world, these lies
are not only believed, they are presented to the public as
profound truths -- proof that the world is a new and better
place.

As for me, I prefer Kipling's version of these new and
profound truths. Read"The Gods of the Copybook Headings"
(1919). Then plan accordingly.

http://www.kipling.org.uk/poems_copybook.htm

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• Lifetime lesson!? Gold und die Zentralbanken usw. - spieler, 19.09.2003, 20:03