Jack Heald

Lacking an understanding what money is and does, you cannot begin to understand why gold is historically the best money. The qualities that all good money will ideally posses are:

1. Durability – does it rust? rot? corrode? melt?
2. Divisibility – does its value change when divided into smaller units? Two halves of one cow is not nearly as valuable as one whole cow.
3. Portability – Can it be easily transported?
4. Non-counterfeit-ability – the reason for this attribute should be obvious
5. Homogeneity – are different units of the same size essentially identical? Not all oranges are identical, nor are all cows. OTOH, gold is gold is gold is gold.

Gold has been the preferred form of money for 5000 years because it is a commodity that possesses all of these qualities.

All fiat currencies are portable, homogenous and divisible. But they are easily counterfeit-able, (just crank up the printing press and make more!), and not remotely durable.

Look at the list of hard commodities traded on the Chicago Mercantile Exchange and you will see things that have been used as money over the millenia. They all have drawbacks of one sort or another, except for gold.

Silver is closest, but it has industrial as well as monetary uses. This dilutes its value as money. Platinum is similar to silver, but much rarer than gold. In fact, all the industrial and rare-earth metals share gold’s qualities, but they all have significant industrial use. Gold is nearly useless as an industrial metal. Strangely, that lack of industrial value actually increases its usefulness as money.

Oil is very close as well. It doesn’t degrade over time, is very easily divisible, and impossible to counterfeit. But because it is a liquid, it tends to be difficult to transport. And of course, like silver, it also has great industrial use.

Salt used to be money, but it lacks durability. Get a good rainstorm or flood and your money literally dissolves before your eyes. Livestock and agricultural commodities have also been used as money, but they all lack one or more of the qualities that gold possesses.
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Commodity-based monies impose fiscal discipline on governments. If a government wants to run a deficit, they have to come up with a way to collect actual money. They can take it from the people by force, but they cannot create it out of thin air.

Imagination-based monies, (fiat), impose no such discipline. With a fiat money, government is free to run up huge debts, and then pay them off with money they create out themselves. This makes it much easier to do incredibly stupid things, like start crazy wars, support military bases in 159 countries around the globe, and bail out giant banks that make crazy, risky bets and lose.

From the very beginning of the financial crisis, the source of the problem has been evident: big banks committed systemic fraud to cover up their stupid business decisions, and made stupid business decisions to cover up their systemic fraud. (That puts the phrase “circle jerk” in a whole new light, doesn’t it?) When the government gave money to JPMorgan to buy Bear Stearns, (so that Bear Stearns didn’t have to go through the indignity of a bankruptcy), and then gave money to Fannie Mae and Freddie Mac, so that they didn’t go bankrupt, and then gave money to AIG so that they didn’t go bankrupt, and then gave hundreds of billions to various international banks so that they didn’t have to go bankrupt, We The People should have gotten the picture. The federal government exists to serve the banks.

The banks have to be stopped. The government won’t do it, so we will have to.

Here’s a modest proposal – a thought experiment if you will.

Suppose everyone who had a credit card with BofA, Chase, Citi or JPMorgan just quit paying their credit card bills – and deposited the money they save into a locally owned and operated bank? What would be the effect? Well, to start with, you’d deprive these companies of cash. They are already teetering on the brink – and they need to be pushed over the brink.

But if the Too Big To Fail banks fail, won’t that bring the global financial system crashing down?

Uhm, no. It will bring the insolvent banks crashing down. It will expose for all the world to see which banks are insolvent and which aren’t, and when that is done, the solvent banks will be standing and able to service the legitimate needs of business and consumers.

This idea that the world NEEDS these big banks is just stupid. The world needs trustworthy, solvent banks, not banks that – in spite of their great corruption and egregious insolvency – are just Too Big To Fail. We need insolvent banks to fail.

Suppose everyone who has money in one of those TBTF banks withdrew it and bought physical gold instead? Wouldn’t that apply even more pressure to the bad banks and make the good banks more obvious? Many of the TBTF banks have leased out the gold they claim to have in reserve. Such a move would drive the dollar-price of gold even higher because the liars would be forced to buy gold on the open market in order to meet their obligations. Of course, they couldn’t actually do it and would be driven into bankruptcy – which is what we want. No government oversight required – just consumers and businesses exercising their power of choice.

As it is, the bad banks who have engaged in rampant fraud, deceit and corruption, have been propped up with taxpayer money, and the good banks that are run by honest, competent and ethical people are being forced to compete in an arena where the BAD GUYS get bonuses instead of prison terms. Since the government won’t punish them, we will have to.

Here’s a cool video that helps us visualize the RBNs (Really Big Numbers) that the math geniuses running the country are busy juggling.

Here’s a quote from Nassim Nicholas Taleb, a new addition to my “favorite authors”:

What makes us fragile is that institutions cannot have the same virtues (honor, truthfulness, courage, loyalty, tenacity, generosity ) as individuals.

I have long sensed that institutions are fundamentally corrupting, but Taleb identifies why – institutions are incapable of human virtue.

If you haven’t read his Fooled By Randomness or The Black Swan, you are missing two intellectual treats.

…from Nassim Taleb.

Well worth the time.

This made me laugh out loud.

First, Bear Stearns made a bunch of stupid bets on sub-prime mortgages, and you – the American Taxpayer -  bailed them out to the tune of $29 billion in guarantees to JPMorgan, (who bought Bear Stearns only on the condition that the government assume that debt.)

Then, Fannie Mae & Freddie Mac made a bunch of stupid bets on subprime mortgages and you – the American Taxpayer – bailed them out to the tune of $800 billion.

The Lehman Brothers went belly up, which forced AIG to pay billions of dollars in claims on credit default swaps – claims they were unable to pay, so you – the American Taxpayer – bailed out AIG to the tune of $145 billion.

Then the Big Wall Street Banks went kablooie, because they made stupid bets and you – The American Taxpayer – bailed them out with $800 billion in loans. (No, you will not see any return on that “investment”, other than the comfort of watching Goldman Sachs give out $14 billion in bonuses last year.)

Then, Chrysler and GM both came to Washington with their hands out because they made stupid agreements with the UAW and stupid inverstment decisions, and you – the American Taxpayer – bailed them out with “only” about $20 billion.

What have you – the American Taxpayer – received for all this largess doled into the laps of these idiot gamblers? You have the worst economy since the great depression. You have over 22% of the population “under-employed”. You have plummeting home values. You have more tax. You have known tax cheats heading Treasury and the IRS.

Now Greece is going to go bankrupt, and guess who is going to bailout that government? The IMF gives money to Greece. 20% of the IMF’s funding comes from the US Taxpayer, so you – the American Taxpayer – are now sending $7 billion to the Greek government so it can pay its bills.

Spain, Portugal, Ireland, Italy, France and the UK are in line for the same thing.

What can you do about it?

You could start by re-reading the US Declaration of Independence and contemplating this phrase:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

When the colonists determined that the government of Great Britain – their government – had become destructive to the very people it was supposed to protect, they moved to “alter or abolish” that government and establish a new one that would be most likely to secure their life, liberty and happiness.