A Vote of No "Confidence", Part II

False trust placed in the dollar once was helpful to us, but panic and rejection of the dollar will develop into a real financial crisis. In the second part of this essay, Congressman Ron Paul asserts that we will have no other option but to tighten our belts, go back to work, stop borrowing, start saving. Read on…

The cost of war is enormously detrimental; it significantly contributes to the economic instability of the nation by boosting spending, deficits, and inflation. Funds used for war are funds that could have remained in the productive economy to raise the standard of living of Americans now unemployed, underemployed, or barely living on the margin.

Yet even these costs may be preferable to paying for war with huge tax increases. This is because although fiat dollars are theoretically worthless, value is imbued by the trust placed in them by the world’s financial community. Subjective trust in a currency can override objective knowledge about government policies, but only for a limited time.

Economic strength and military power contribute to the trust in a currency; in today’s world trust in the U.S. dollar is not earned and therefore fragile. The history of the dollar, being as good as gold up until 1971, is helpful in maintaining an artificially higher value for the dollar than deserved.

Foreign policy contributes to the crisis when the spending to maintain our worldwide military commitments becomes prohibitive, and inflationary pressures accelerate. But the real crisis hits when the world realizes the king has no clothes, in that the dollar has no backing, and we face a military setback even greater than we already are experiencing in Iraq. Our token friends may quickly transform into vocal enemies once the attack on the dollar begins.

False trust placed in the dollar once was helpful to us, but panic and rejection of the dollar will develop into a real financial crisis. Then we will have no other option but to tighten our belts, go back to work, stop borrowing, start saving, and rebuild our industrial base, while adjusting to a lower standard of living for most Americans.

Counterfeiting the nation’s money is a serious offense. The founders were especially adamant about avoiding the chaos, inflation, and destruction associated with the Continental dollar. That’s why the Constitution is clear that only gold and silver should be legal tender in the United States. In 1792 the Coinage Act authorized the death penalty for any private citizen who counterfeited the currency. Too bad they weren’t explicit that counterfeiting by government officials is just as detrimental to the economy and the value of the dollar.

In wartime, many nations actually operated counterfeiting programs to undermine our dollar, but never to a disastrous level. The enemy knew how harmful excessive creation of new money could be to the dollar and our economy. But it seems we never learned the dangers of creating new money out of thin air. We don’t need an Arab nation or the Chinese to undermine our system with a counterfeiting operation. We do it ourselves, with all the disadvantages that would occur if others did it to us. Today we hear threats from some Arab, Muslim, and far Eastern countries about undermining the dollar system- not by dishonest counterfeiting, but by initiating an alternative monetary system based on gold. Wouldn’t that be ironic? Such an event theoretically could do great harm to us. This day may well come, not so much as a direct political attack on the dollar system but out of necessity to restore confidence in money once again.

Historically, paper money never has lasted for long periods of time, while gold has survived thousands of years of attacks by political interests and big government. In time, the world once again will restore trust in the monetary system by making some currency as good as gold.

Gold, or any acceptable market commodity money, is required to preserve liberty. Monopoly control by government of a system that creates fiat money out of thin air guarantees the loss of liberty. No matter how well-intended our militarism is portrayed, or how happily the promises of wonderful programs for the poor are promoted, inflating the money supply to pay these bills makes government bigger. Empires always fail, and expenses always exceed projections. Harmful unintended consequences are the rule, not the exception. Welfare for the poor is inefficient and wasteful. The beneficiaries are rarely the poor themselves, but instead the politicians, bureaucrats, or the wealthy. The same is true of all foreign aid– it’s nothing more than a program that steals from the poor in a rich country and gives to the rich leaders of a poor country. Whether it’s war or welfare payments, it always means higher taxes, inflation, and debt. Whether it’s the extraction of wealth from the productive economy, the distortion of the market by interest rate manipulation, or spending for war and welfare, it can’t happen without infringing upon personal liberty.

At home the war on poverty, terrorism, drugs, or foreign rulers provides an opportunity for authoritarians to rise to power, individuals who think nothing of violating the people’s rights to privacy and freedom of speech. They believe their role is to protect the secrecy of government, rather than protect the privacy of citizens. Unfortunately, that is the atmosphere under which we live today, with essentially no respect for the Bill of Rights.

Though great economic harm comes from a government monopoly fiat monetary system, the loss of liberty associated with it is equally troubling. Just as empires are self-limiting in terms of money and manpower, so too is a monetary system based on illusion and fraud. When the end comes we will be given an opportunity to choose once again between honest money and liberty on one hand; chaos, poverty, and authoritarianism on the other.

The economic harm done by a fiat monetary system is pervasive, dangerous, and unfair. Though runaway inflation is injurious to almost everyone, it is more insidious for certain groups. Once inflation is recognized as a tax, it becomes clear the tax is regressive: penalizing the poor and middle class more than the rich and politically privileged. Price inflation, a consequence of inflating the money supply by the central bank, hits poor and marginal workers first and foremost. It especially penalizes savers, retirees, those on fixed incomes, and anyone who trusts government promises. Small businesses and individual enterprises suffer more than the financial elite, who borrow large sums before the money loses value. Those who are on the receiving end of government contracts–especially in the military industrial complex during wartime– receive undeserved benefits.

It’s a mistake to blame high gasoline and oil prices on price gouging. If we impose new taxes or fix prices, while ignoring monetary inflation, corporate subsidies, and excessive regulations, shortages will result. The market is the only way to determine the best price for any commodity. The law of supply and demand cannot be repealed. The real problems arise when government planners give subsidies to energy companies and favor one form of energy over another.

Energy prices are rising for many reasons: Inflation; increased demand from China and India; decreased supply resulting from our invasion of Iraq; anticipated disruption of supply as we push regime change in Iran; regulatory restrictions on gasoline production; government interference in the free market development of alternative fuels; and subsidies to big oil such as free leases and grants for research and development.

Interestingly, the cost of oil and gas is actually much higher than we pay at the retail level. Much of the DOD budget is spent protecting "our" oil supplies, and if such spending is factored in gasoline probably costs us more than $5 a gallon. The sad irony is that this military effort to secure cheap oil supplies inevitably backfires, and actually curtails supplies and boosts prices at the pump. The waste and fraud in issuing contracts to large corporations for work in Iraq only add to price increases.

When problems arise under conditions that exist today, it’s a serious error to blame the little bit of the free market that still functions. Last summer the market worked efficiently after Katrina – gas hit $3 a gallon, but soon supplies increased, usage went down, and the price returned to $2. In the 1980s, market forces took oil from $40 per barrel to $10 per barrel, and no one cried for the oil companies that went bankrupt. Today’s increases are for the reasons mentioned above. It’s natural for labor to seek its highest wage, and businesses to strive for the greatest profit. That’s the way the market works. When the free market is allowed to work, it’s the consumer who ultimately determines price and quality, with labor and business accommodating consumer choices. Once this process is distorted by government, prices rise excessively, labor costs and profits are negatively affected, and problems emerge. Instead of fixing the problem, politicians and demagogues respond by demanding windfall profits taxes and price controls, while never questioning how previous government interference caused the whole mess in the first place. Never let it be said that higher oil prices and profits cause inflation; inflation of the money supply causes higher prices!

Since keeping interest rates below market levels is synonymous with new money creation by the Fed, the resulting business cycle, higher cost of living, and job losses all can be laid at the doorstep of the Fed. This burden hits the poor the most, making Fed taxation by inflation the worst of all regressive taxes. Statistics about revenues generated by the income tax are grossly misleading; in reality much harm is done by our welfare/warfare system supposedly designed to help the poor and tax the rich. Only sound money can rectify the blatant injustice of this destructive system.

The Founders understood this great danger, and voted overwhelmingly to reject "emitting bills of credit," the term they used for paper or fiat money. It’s too bad the knowledge and advice of our founders, and their mandate in the Constitution, are ignored today at our great peril. The current surge in gold prices – which reflects our dollar’s devaluation– is warning us to pay closer attention to our fiscal, monetary, entitlement, and foreign policy.

A recent headline in the financial press announced that gold prices surged over concern that confrontation with Iran will further push oil prices higher. This may well reflect the current situation, but higher gold prices mainly reflect monetary expansion by the Federal Reserve. Dwelling on current events and their effect on gold prices reflects concern for symptoms rather than an understanding of the actual cause of these price increases. Without an enormous increase in the money supply over the past 35 years and a worldwide paper monetary system, this increase in the price of gold would not have occurred.

Certainly geo-political events in the Middle East under a gold standard would not alter its price, though they could affect the supply of oil and cause oil prices to rise. Only under conditions created by excessive paper money would one expect all or most prices to rise. This is a mere reflection of the devaluation of the dollar.

Particular things to remember:

If one endorses small government and maximum liberty, one must support commodity money.

One of the strongest restraints against unnecessary war is a gold standard.

Deficit financing by government is severely restricted by sound money.

The harmful effects of the business cycle are virtually eliminated with an honest gold standard.

Saving and thrift are encouraged by a gold standard; and discouraged by paper money.

Price inflation, with generally rising price levels, is characteristic of paper money. Reports that the consumer price index and the producer price index are rising are distractions: the real cause of inflation is the Fed’s creation of new money.

Interest rate manipulation by central bank helps the rich, the banks, the government, and the politicians.

Paper money permits the regressive inflation tax to be passed off on the poor and the middle class.

Speculative financial bubbles are characteristic of paper money– not gold.

Paper money encourages economic and political chaos, which subsequently causes a search for scapegoats rather than blaming the central bank.

Dangerous protectionist measures frequently are implemented to compensate for the dislocations caused by fiat money.

Paper money, inflation, and the conditions they create contribute to the problems of illegal immigration.

The value of gold is remarkably stable.

The dollar price of gold reflects dollar depreciation.

Holding gold helps preserve and store wealth, but technically gold is not a true investment.

Since 2001 the dollar has been devalued by 60%.

In 1934 FDR devalued the dollar by 41%.

In 1971 Nixon devalued the dollar by 7.9%.

In 1973 Nixon devalued the dollar by 10%.

These were momentous monetary events, and every knowledgeable person worldwide paid close attention. Major changes were endured in 1979 and 1980 to save the dollar from disintegration. This involved a severe recession, interest rates over 21%, and general price inflation of 15%.

Today we face a 60% devaluation and counting, yet no one seems to care. It’s of greater significance than the three events mentioned above. And yet the one measurement that best reflects the degree of inflation, the Fed and our government deny us. Since March, M3 reporting has been discontinued. For starters, I’d like to see Congress demand that this report be resumed. I fully believe the American people and Congress are entitled to this information. Will we one day complain about false intelligence, as we have with the Iraq war? Will we complain about not having enough information to address monetary policy after it’s too late?

If ever there was a time to get a handle on what sound money is and what it means, that time is today.

Inflation, as exposed by high gold prices, transfers wealth from the middle class to the rich, as real wages decline while the salaries of CEOs, movie stars, and athletes skyrocket– along with the profits of the military industrial complex, the oil industry, and other special interests.

A sharply rising gold price is a vote of "no confidence" in Congress’ ability to control the budget, the Fed’s ability to control the money supply, and the administration’s ability to bring stability to the Middle East.

Ultimately, the gold price is a measurement of trust in the currency and the politicians who run the country. It’s been that way for a long time, and is not about to change.

If we care about the financial system, the tax system, and the monumental debt we’re accumulating, we must start talking about the benefits and discipline that come only with a commodity standard of money– money the government and central banks absolutely cannot create out of thin air.

Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.


Congressman Ron Paul
for The Daily Reckoning
January 23, 2007

Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

We are in the Age of Mammon.

If the pollsters told the major parties they could win the White House by renouncing the Constitution, the Bible, and the Theory of Evolution…they’d do it immediately.

Consubstantiation, transubstantiation…who cares about any kind of ‘-ation’ if it doesn’t have anything to do with money?

Does anything matter more than money? Is anything more delicious than showing it off? Is there any fight more important than winning ‘effervescent supremacy’?

You don’t know what that is, dear reader? Read on…

The Chinese are still communists…but they’re heroes to every investor in the world. They’ve got the world’s most dynamic economy and its most exciting stock market. Who cares about the fossils in its government?

No. What matters now, dear reader, is wampum…bread…dough…dead presidents…moolah…

Yes, from the center of MoolahMetropole, otherwise known as London, comes news that one single employee of Barclays Capital made history last year with a paycheck estimated at three times the total remuneration of the entire executive board. Roger Jenkins took home between $70 million and $140 million last year. Good work if you can get it.

But what kind of work do you have to do to get that kind of money? Do you have to invent something like Velcro or suitcases with wheels? Do you have to write a hit song, such as ‘White Christmas?’ Do you have to make a movie like ‘Gone with the Wind,’ or start a business like Microsoft? What do you have to contribute to the wealth, health, or enjoyment of the world to earn that kind of money?

Mr. Roger Jenkins – nicknamed ‘Dodger’ – runs a part of the bank…the part that does ‘structured finance.’ What kind of dodge is that? We turn to this week’s The Business for an explanation:

"Jenkins’ division devises complex structures that are designed to improve the profitability of transactions carried out by other parts of the bank. While the transactions can take many forms, their structures have one common aim – to reduce the tax liability of clients."

In other words, what the Dodger dodges is taxes. Readers will note that reducing the taxes of the super-rich is not exactly what economic booms are made of…at least, not usually. The cost of government projects – wars, bureaucracies, humbugs – doesn’t go down because the rich escape taxes. Instead, the money has to come from somewhere. Overall, the economy is no richer, however grateful the Dodger’s clients may be.

‘Never have so few done so little and made so much doing it,’ we said last week. We repeat it, dear reader, so you can write it down.

Money shuffling doesn’t make anyone richer. It merely moves money from the dull people who earn it to the sharp people who skim it off.

But at least the sharp people are having fun with it, this time around.

Normally, you see, rich people try to be a little discreet. They don’t want to foment envy or discontent and end up like Marie Antoinette, who famously joked within earshot of the hired help:

"Why are those women protesting?" she wanted to know.

"Because they are hungry; they have no bread."

"Then let them eat cake!"

What a wit. Too bad she had to lose her head.

But the wits who are living it up in 2007 may not be half as sharp as they think they are, either.

A survey of 294 hedge fund managers, with an average net worth of $197 million, says they spent the following amounts of money last year:

$3.9 million on fine art

$429,000 on yacht charters

$376,000 on jewelry

$204,000 on clothes and accessories.

When you’ve got it, flaunt it…is the 11th Commandment of the Age of Mammon.

Here in London, the hedge fund managers are conducting ‘champagne battles,’ according to the Sunday Times. They don’t just drink champagne; they shake up the bottles and spray each other. According to one club director, a single night battle for ‘effervescent supremacy’ set the sharpies back $150,000.

"Come the revolution…" says a disgusted friend.

More news:


Justice Litle, reporting from Reno, Nevada…

"…As far as the public is concerned, coal is the Rodney Dangerfield of fossil fuels: It gets no respect. Coal is dirty, lumpy and unremarkable. It is a game show booby prize, a punishment for bad children at Christmas…"

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening


And more views:

*** Some interesting tidbits from our friend Chris Mayer…

"We all have a stake in what happens in China. If China relied on the rest of the world for even 20% of its grain needs, there would be an incredible strain on the world’s grain producers.

"Many of the challenges China faces exist in the world at large already. Grain production per person is falling worldwide. So is cropland acreage per person. We are also approaching the limits of what fertilizers can do in terms of boosting crop yields. Plus, strong demand for biofuels – like ethanol – now competes with food demand.

"By some estimates, we’ll need to produce about 136 million tons of grain in 2007 to prevent grain stocks from falling again (they fell in 2006). Yet annual increases in grain production have averaged only about 20 million tons since 2000. That gives you something of a snapshot of the hurdle in front of us.

"The investment conclusion from all this seems to be that we are in a long bull market for grains. Expect the prices of corn and wheat to keep rising. Expect the price of meat to rise. It also seems that fertilizer producers, such as Agrium, should continue to do well. Other ancillary ideas also come to mind – shippers of dry goods (i.e., grains) and manufacturers of farm equipment.

"The potential for another 1930s-style Dust Bowl only adds to the power and durability of these trends."

*** Even President Bush is getting into the spirit of Mammon. It used to be that an American wage earner would work so that he could put ‘bread on the table.’ But that is all old hat now. Now, El Jefe tells us that people want to ‘put more money on the table.’

Ladies and gentlemen, we give you the President of the United States of America: "And one thing we want during this war on terror is for people to feel like their life’s moving on, that they’re able to make a living and send their kids to college and put more money on the table."

It is a curious thought. Why would they want money on the table? They can’t eat it. And in business, you are usually cautioned not to leave money ‘on the table.’ Putting money ‘on the table’ means it is at play. Which is the trouble for most Americans…they have too much money on the table…and not enough tucked away in their pockets.

"I think I understand what he means," writes our Pittsburgh correspondent, Byron King, "but then again maybe I don’t. What table would that be? The gaming tables at Las Vegas, or the slot machines in the gambling gold rush that is sweeping the jurisdictions of the nation? Or perhaps he means the tables that drape the pay windows at Goldman, where they hand out the cash bonuses. Or the corporate CEO tables, like the guys from Pfizer and Home Depot, who walked off with hundreds of millions after troubled tenures. Or the tables (granite counter-tops, no doubt) in the 25,000 square foot ‘spec’ homes going up in Greenwich, for sale to the hedge fund gazillionaires who suck money out of the pockets of their fellow gazillionaires. Those tables?"

*** "Complacency can be a self-denying prophecy," says Larry Summers.

We had to struggle with the phrase for a few seconds. We think it would make more sense if he had said, "Extremely bullish expectations can be a self-denying prophecy." But what can you expect from a Harvard man? Like the president, Summers can’t seem to express himself in a clear sentence.

What he means is that when people are extremely complacent, and expect things to work out well despite the actual fundamentals of the situation, they do such reckless things that they doom themselves to failure, thus denying the prophecy.

Another way to put it is this: Success is self-limiting. When a man enjoys a little success…he reaches further. If he buys a stock and it doubles, he considers himself an investment genius and buys more. If he seduces the heavy hairdresser, he next aims for the slim girl at the cinema. If he holds up a liquor store and gets away with it, he begins studying the bank.

Eventually, his reach exceeds his grasp.

So too, in markets do trends tend to run to the point where they can go no further. Then, since history must continue…since markets must go somewhere…and since there must be a yin for every yang…they begin to go in the opposite direction. Tides come in and then they go out.

There are limits to how much people can pay for a stock or for a gallon of gasoline. There are limits, too, to the cycles of optimism and pessimism…and there’s a limit to the amount of liquidity that be put into a financial system.

We saw yesterday how long some of these cycles can be. If Dan Forshee is right, the broad market in real estate in America, takes as long as 120 years to go from peak to peak. The last peak, he says, was just before World War I. Since then, real estate investments, adjusted for inflation, have gone down most of the time.

This is not good news for us. We do not like stocks. So we have put most of our free money in property. We own office buildings in Baltimore where our business is located. We own a family farm not far away. In addition, we have property investments in Canada, Nicaragua, Panama, Ireland, Argentina and France. If this stuff goes down for 100 years, this will prove to be the worst investment strategy ever devised. Our stock of humility will soar…right up until the moment we drop dead and are tossed into a pauper’s grave.

Most of our property was bought at what we thought were near-distress prices. In fact, so successful were we at real estate investment – until recently – that we began to think we were pretty good at it. We grew careless. Complacent. As reckless and as dumb as any poor lump ever mentioned in these Daily Reckonings.

In France, we have just suffered a huge loss (huge for us). We bought a building to be used as a seminar center. We found an architect to renovate it. We signed the papers and prepared to write a check. But when the time came, we found that the final check was far…far…larger than what we expected. In fact, rotten wood, rotten politics, and rotten heads in the building trades caused such staggering cost over-runs that the building can never really be profitable. What’s more, we still have not been able to work our way through the bureaucratic maze so that we can put the place into use. It stands empty…with the heating system sizzling away, in order to keep the new paint from cracking.

The loss is painful. It’s bad enough that we are losing money. What is worse is that we have called into question our own judgment, if not sanity. We wrote five years ago that ‘chateau’ was the French word for ‘money pit.’ Now, we’ve proved it, digging our own hole deeper and wider than any we’ve ever seen.

*** "How is school going?" we asked Henry last night.

Henry was having trouble in school a few months ago. This was very unusual, because Henry, 16, has always been a good student and a good kid. We went to visit the school, to try to figure out what was going on.

What had happened, we learned, was a combination of things. First, coming back to the school after a year in England, he seemed unsure that this was where he wanted to be.

Then he got on the wrong side of his English teacher when he pointed out to her that she was making mistakes. His English teacher is French. She doesn’t speak English as well as Henry does and seems a little defensive about it. Henry did not realize the awkward position he had put her into when he openly challenged her competence.

Meanwhile, he has been doing badly in math. We feel sorry for the boy; he stays up ’til midnight every night, working on his math homework and still does not get good grades. Nor are we able to help. The problems are far more difficult than any we can recall. The school prides itself on its math scores – as many top French schools do – and is one of the toughest in Paris.

"If you’re going to succeed in this school," said the math teacher without smiling, "you’re going to have to work on these problems as if your life depended on it."

We have never seen anything like it. The teachers and administrators really seem to think that doing well in math is a matter of life or death importance. We don’t know quite what to make of it, except we are glad WE don’t have to go to that school.

"Oh…it’s okay. I got a good grade on my last math test this week."

"What about English?"

"That’s okay too…I’m learning to keep quiet."

The Daily Reckoning