Libertad

Hard Money week – the fight for real money. Our first essayist in this week’s Hard Money series is vying to back the Mexican peso with a circulating silver coin.

*** ¿Le gustaría recibir The Daily Reckoning en español? ¿Esta interesado en ayudarnos a traducir, escribir o investigar sobre los mercados hispanoamericanos? ¡Contáctenos! tom@dailyreckoning.com

The last Mexican economic debacle of 1994-1995 prompted my search for monetary stability.

Intuitively, I first thought of gold, but I reached the conclusion that the enmity of the United States and of the IMF toward the monetization of gold would make that avenue a dead end. Therefore, I took the alternate route, a plan to monetize silver, a metal of which Mexico is the world’s No. 1 producer.

Mexico’s history is inextricably linked to silver money, since silver minted in Mexico was the world’s most important money for centuries. I should point out that the U.S. silver dollar, as defined in the Constitution, is based precisely on the characteristics of the "Ocho Reales" coin minted in Mexico.

The memory of our silver coinage is still with us. It was a popular coinage for everyday use, unlike the gold coin that was reserved for more important transactions. The gold coin disappeared anyway, after U.S. pressure following the Spanish-American War forced Mexico into the monometallic use of gold.

Mexican Silver: Retracing the Steps

The Mexican audiences that I have addressed in the last nine years have enthusiastically received my idea regarding the introduction of silver into circulation. It is too early to say whether or not my plan will come to fruition, but there are hopeful signs.

I believe that the only road to a monetary system that permits the survival of industrial civilization is one that retraces the steps that carried us to our present state.

Paper money was introduced after real money already existed. For a time, paper, gold and silver money circulated together, side by side. Overextending and mismatching credit finally resulted in the creation of such large amounts of paper money that real money became an obstacle to further creation of paper money.

I believe that we must go back the way we came, by reintroducing real money to circulate in parallel with paper money.

I cannot imagine any country in the world – or any group of countries – reforming paper money and the banking systems as we know them and reinstituting gold or silver coinage and bills redeemable for metal at sight.

I do not believe that the world’s monetary and financial system can be reformed; any attempt at reform would decimate the world’s economic activity instantly. There is no alternative: We have to let the world’s monetary and financial system proceed to its own destruction; we cannot "go back to gold."

Mexican Silver: Fiat Money Will Destroy Itself

What we must therefore strive for, as much as possible, is the reintroduction of silver or gold – or even both – into parallel circulation with the fiat paper money we presently use everywhere. Eventually, the world fiat money system will destroy itself through its inherent defects.

Humanity has selected gold and silver as money. No other metals or objects have served humanity so well. Precious metals will never be supplanted by fiat money. The era of fiat money in which we find ourselves living is an aberration in human history and will soon pass.

Once silver and gold are in circulation with paper money, a number of positive changes will begin to emerge. These results will further enhance the attraction of precious metals as money, reinforcing the movement.

Slowly, the world should begin to regain its monetary and financial composure, after the paper orgy of the past hundred years, with paper issue tamed and civilized by the presence of gold or silver circulating in parallel with it.

Is there a political will to implement my plan anywhere in the world? That I do not know.

However, I do have the conviction that the plan I propose will work, and that silver in Mexico, or gold in the United States or Europe or anywhere else, can be brought into circulation in parallel with paper money.

I believe my plan offers a viable way to "get there from here". It does not address the reform of the present worldwide system of fiduciary money. It outflanks the problem by resorting to the introduction into circulation of real money, in parallel with fiduciary media.

It is my fond hope that other minds interested in the vital subject of sound money may find some inspiration in what I present, and that better minds than mine may wish to focus their political efforts and monetary research along the lines I am sketching.

Precious metals are painted as "antiquated", and have been superseded by technology and modern finance. Those of us who insist on gold currency are derisively labeled "goldbugs"; however, as soon as we are able to put silver or gold into circulation with paper, all those arguments crash. As with all things that are to work naturally and automatically among millions of human beings, simplicity is essential.

Mexican Silver: My Plan

The plan I propose is quite simple.

1. The 1-ounce troy pure silver Libertad coin minted by the Mexican Mint will be selected as the coin to circulate in parallel with paper (fiduciary) pesos. This coin will have no nominal value engraved upon it. This is an essential characteristic of any coin that is to circulate in parallel with paper money.

2. The Mexican central bank will issue a daily quote on the full legal tender value of the 1-ounce Libertad coin, expressed in fiduciary pesos. At its quoted legal tender value, the coin is good for all types of payments, without discount of any sort.

3. The Mexican central bank will not reduce any quoted value of the Libertad ounce in fiduciary pesos, in any future quote. Successive quotes may stipulate a higher value in fiduciary pesos or may remain unchanged for a period of time, but quotes will never be lower.

Such is my plan for the introduction of silver into circulation in Mexico.

Regards,

Hugo Salinas Price
for The Daily Reckoning
September 14, 2004

Editor’s note: Hugo Salinas Price is president of the Mexican Civic Association Pro Silver. Since the peso crisis of 1995, Salinas Price and other outspoken peers have dedicated themselves to spreading the word about real money.

For 35 years, Salinas Price was CEO of Elektra. Under his leadership, Elektra grew from being a small electronics store into a publicly traded behemoth with over 600 stores nationwide.

Do you speak Spanish? Nuestros compañeros de Club Oxford están produciendo informes financieros en español. El servicio se llama "SuInversión.com"

We got an e-mail message from a man of faith yesterday. A Daily Reckoning reader, also the minister of a Midwestern church, tells us that if we were true Christians, we would stop being so "negative." Things will work out, says he. How they will work out, he did not specify. Nor, as to how he knows they will "work out," no information was provided. But if we had more "faith," he concluded, we would stop worrying and criticizing.

So there you are, dear reader. Now all the four estates are in agreement. America is united in its faith. All Will Be Well. We can shut up.

We expected no more from the others – the administration, the political elite and the press. All tell us that things will work out. Somehow, the laws of gravity and economics won’t apply to America, they say; we live in heaven-on-earth. We have a faith-based currency – there is nothing else behind it. We have a faith-based economy – if you don’t believe, you are an economic "girlie man" says California’s leading man of faith. We have a faith-based government – we are "the greatest force for good on earth," says the president, and we’ll remain No. 1 in goodness as long as we have "faith in ourselves."

But what would they say? You don’t make friends, sell newspapers or get votes by preaching fire and brimstone…or warning citizens that they must DO good, not just think they ARE good.

But the clergy?

Pastor Nordberg, representing clergy, disappoints us. You’d expect a "man of faith" to be able to tell the difference between real faith…and "faith" as a cover for recklessness, greed and stupidity.

Not that we’re worrying about it. People will get what they deserve; that is as it should be. We suspect that all the Western democracies are headed toward a long, slow slump…with the United States leading the pack.

But "steel is hard because it’s known the hammer and white heat," says a Johnny Cash tune. The United States will be hammered and slammed in the years ahead. Perhaps it will be beaten into a better shape.

Maybe it will be straightened out. For what we see are not the true, blue-steel beams of abiding faith undergirding the republic, but the twisted tendrils of grasping faithlessness choking it off and pulling it down.

Our old friend Scott Burns got together with Laurence Kotlikoff and wrote an excellent book, The Coming Generational Storm, which describes the financial problems facing the next generation of Americans. Scott looks at the situation as a matter of fair play. One generation – the baby boomers, primarily – are stealing from their own children and grandchildren, he says.

"Conventional politics is an unending argument about Haves and Have-nots," he writes. "Are the Haves getting more? Is it too much? Why isn’t there more sharing with the Have-Nots? The Haves/Have-Nots argument works to completely obscure another discussion; the Nows and Laters. We’re the Nows; our children and grandchildren are the Laters. Decade after decade, the Nows have taken from the Laters."

The Nows have promised themselves so much of our children’s money, Scott explains, that the poor kids will have to pay tax rates of 69% in order to close the "fiscal gap" between what is expected in revenues and what is expected in benefits.

Presiding over the whole nation of Nows is a man who says he believes deeply in conservative principles. Yet he has encouraged the biggest expansion of government spending and debt in history. A single piece of legislation proposed by the Bush administration and elaborated by Congress, one that provided drugs for old people at young people’s expense, added $6 trillion to the fiscal gap. Bush could not summon up the courage to veto it. In fact, the pusillanimous "war president" couldn’t manage to veto even a single of one of the moronic and expensive acts of Congress to cross his desk.

Instead, he cut taxes on current voters…a move that will get him votes from the faithless Nows but also will add trillions to the bill the next generation must pay.

More news, from our man-on-the-scene Eric Fry:

———————

Eric Fry, from lower Manhattan…

– Hurricane Ivan continued thrashing about in the Caribbean yesterday, vying to become one of the most destructive storms in modern history. "Ivan the Terrible" unleashed his "Cat-5" fury on whatever unfortunate land mass happened to block his path and kicked up huge waves, as if the Caribbean were his personal bathtub. The massive tempest also kicked up huge fears about the safety of crude oil supplies in the Gulf of Mexico – home to 25% of total U.S. production.

– Ivan’s menacing approach into the Gulf triggered hurricane-force trading activity throughout the energy markets, as crude oil futures jumped $1.06, to $43.87 a barrel, on the New York Mercantile Exchange. The gold price drafted behind the rallying energy markets, gaining $2.20, to $406.00 an ounce.

– Over in the stock market, Nasdaq stocks outpaced their stodgier Dow counterparts for the third day running, confirming our distinct impression that animal spirits are reviving on Wall Street. The Nasdaq Composite Index added 16 points, to 1,910, while the Dow gained less than 2 points to 10,314.

– The modest gains in the stock market encouraged even more widespread complacency among investors, as the VIX index of option volatility fell to a new eight-year low. In other words, investors are feeling pretty comfortable. They may not be making much money in the stock market these days, but they certainly aren’t worried about losing it…and that’s not a good sign. Widespread complacency on Wall Street often signals imminent danger.

– Board up the portfolios, folks, foul weather may be approaching…

– Ben Inker is a heretic, says The Christian Science Monitor. What heinous misdeed did the poor chap commit to elicit such condemnation? Did he urge folks to ignore the teachings of Mary Baker Eddy, founder of the Christian Science movement? Did he condemn spirituality in all of its forms? No, says the Monitor, Mr. Inker "scoffed at the buy-and-hold strategy of traditional [investment] advisers."

– Egads! Stone the blasphemer!!!

– It gets worse; Mr. Inker flatly disavowed faith in stocks for the long haul and urged his fellow investors to abandon the U.S. stock market entirely. Ben Inker, director of asset allocation for Grantham, Mayo, Van Otterloo & Co. (GMO), a money-management firm with some $85 billion in assets, recommends a 0% allocation to U.S. stocks. This is heresy, to be sure. But let he who has never entertained a similar thought cast the first stone.

– "A small but vocal band of heretics is calling into question not only the profit potential of stocks, but also the foundation for conventional wisdom about investing," writes Christian Science Monitor correspondent Eric Troseth. "Modern portfolio theory holds that investors reap the greatest return with the least risk when they allocate their money among diverse classes of assets, hold them for the long term and rebalance the portfolio when the various classes of assets stray too far from their original allocation."

– "To make it work," says Troseth, "you need to own asset classes that don’t move in lock step, make accurate estimates of their future returns and use a very long time horizon. Thus, investors should never try to get in and out of the market at specific times, the theory holds. Instead, they should ride the inevitable ebb and flow of prices. If they have allocated their money correctly, some portion of their portfolio will almost always be making money."

– Of course, some portion is likely to be losing money as well. Mr. Inker, bless his soul, objects to the "losing money" portion of modern portfolio theory. He believes that investors should try to avoid investing in things that seem more likely to deliver losses than profits over the short term.

– "A rational investor figures out how little they are willing to have in U.S. equities and goes there," says Inker. "As an individual, zero is a good number."

– We don’t know if U.S. stocks will rise or fall tomorrow, anymore than we know whether Ivan will beat a path toward Cancun or Corpus Christi. But we do know that buying expensive stocks – like sailing into a hurricane – is generally a bad idea.

– Is a zero allocation to expensive stocks any sillier than a "zero allocation" to sailing into a hurricane? Does anyone ever advise, "Sail into a hurricane with only 40% of your family. That way, you can be sure that some portion of your family will be doing well?"

– Avoiding expensive stocks may seem like heresy to the lumps, but here at The Daily Reckoning we embrace such sensible heresies as articles of faith.

———————

Bill Bonner, back in Paris…

*** "A bomb went off at the Australian Embassy in Jakarta, Indonesia last week," reported Chris DeHaemer, founder of the Taipan group’s RedZone VIP. "It killed 8 and wounded more than 60. The Jakarta Stock Exchange (JSE) took the blast full force. Shares got creamed and it looked like it would be another post-terrorist sell-off. But something strange happened. The market recovered nicely and ended almost flat."

"As the news spread in the U.S. the next day, the most popular American Depository Receipt (ADR) – P.T. Telecom (TLK:NYSE) – was down only 2.38%. I took this to mean that the blast was priced in and there was a hidden reserve of buyers who wanted to get in before the September 20 presidential election."

"I instructed my readers of The RedZone VIP to buy the October TLK 17.50 call options with the goal of selling into the beneficial surge of a peaceful presidential election on September 20."

"P.T. Telecom (TLK:NYSE), has been a consistent winner as a blood-in-the-streets proxy for Indonesia (a country with historical bouts of gore and asphalt). Today, Red Zone VIP readers are up 35% as it ticks above $17.50."

*** More from Martin Spring in China:

A new report by GFMS (the precious metals consultancy), the World Gold Council and China Financial Services suggests that China’s "vast appetite for gold" could see the country’s consumption of the yellow metal rise from the current 200 tons a year to 600. That would add about 12% to current world demand.

This assessment is based on the expected continued high growth rate of the Chinese economy, its fast-rising imports of natural resources of all kinds, its exploding middle class (one expert predicts this group to grow from 194 million to 560 million by 2010), and the final stage of deregulation of the gold market, which is not yet readily accessible to individuals.

Wang Zhe, president of the Shanghai Gold Exchange, told the London Bullion Market Association’s annual precious metals conference I’ve been attending in Shanghai that there is "great potential for gold demand" in China for these reasons: Although Chinese are big savers, their current investment choices are unsatisfactory, interest rates paid on savings are low, the stock market is bearish and there is a bubble in real estate.

Domestic savings currently stand at 12 trillion yuan (about $1.5 trillion), which "suggests great potential for individuals to invest in gold. Once a private gold market is opened, it will draw a great deal of investors to trade and hold gold as an asset."

Historically, the Chinese have a special interest in and love for gold. In their tradition, gold is associated with wealth, luck and happiness.

Current opportunities for individuals to invest in gold are "quite limited" because of restrictions remaining from the days of total state control, but those restrictions are on the way out as financial markets are liberalized.

Recent research showed that 20% of the population would like to invest in gold, to the extent of between 10-30% of their financial assets.

Gold price fluctuations provide opportunities for profit (the Chinese are notorious gamblers).

As a consequence of poverty and prohibition of private gold ownership in the past, gold holdings per person are low – in 2002, only an average of 0.16 grams, compared with a global average of 0.49 grams. "If that amount could increase by an average 0.01 (grams per person), domestic gold demand would increase by around 1,300 tonnes."

One reason for projecting a coming leap in demand is that in India, gold consumption after liberalization jumped from 200 tons a year to between 500 and 600, despite a much lower per capita income. However, "The whole culture and ethos of gold in India seems so utterly different to that of China that any such gross comparison must be misleading," warns the GFMS/World Gold Council study.

Of course, potential demand in China is only one of the factors affecting the outlook for the precious metals, but it could be the most important positive, given the accumulation of negatives, particularly for gold.

There are no signs that the central banks of Asia, despite their enormous foreign reserves, are going to diversify out of dollar assets into the yellow metal. The Central Bank of China, for example, having accumulated foreign reserves of $440 billion, holds less than 2% in gold.

The best hope for the gold price is continued dollar weakening. My friend, Canadian analyst Martin Murenbeeld, told the Shanghai conference that on reasonable assumptions about economic growth, the United States’ foreign trade deficit would grow to $1 trillion a year by 2008 – unless the dollar weakens considerably, which therefore seems probable.

*** "The sermon was given by an American, I think he is the bishop for the Episcopal Church in Europe…" Elizabeth reported, after attending services at St. Paul’s Cathedral in London. Maria has begun going to school in London. Her mother escorted her to her enrollment this past weekend. "He began by saying, ‘I know that in these times of terrorist attacks throughout the world, our Christian faith, with its emphasis on mercy and forgiveness, doesn’t seem to have much relevance.’"

"I guess he was setting you up for the…’Oh yes, it does’…antithesis," we replied. "A classic Cartesian speech development. Thesis…antithesis…synthesis. Sounds dangerous, though. How can you synthesize Christ’s message?"

"Well, he didn’t even try. The sermon went off in a different direction. He didn’t say much of anything."

Again, the clergy surprises us. Dead bodies pile up around them, but few clergymen seem to notice. More than 1,000 U.S. soldiers have been killed in Iraq. Between 11,000 and 14,000 Iraqi civilians – innocent men, women and children – have been offed. Whether killing these people makes the world safer, or more dangerous, we don’t know. We didn’t think it was our place to ask. What kind of a man would kill an innocent child – even if it really would make his own sorry derriere more secure?

Nor do we claim to be experts on Christianity. But we could have sworn there was some interdiction against killing people in there somewhere.

America’s clergy – like its politicians, economists and opinion mongers – have a strange kind of faith.