Retiring
by Sebastian Younan
The Australian political arena is currently in the midst of a long and drawn out debate consuming newspaper headlines and television commentary. The debate concerns the proposed changes to the national retirement age. Australia’s Treasurer Joe Hockey has indicated that the retirement age, to be handed down in next month’s budget, will be raised from 67 years old to 70 years old – starting in 2023. The proposal has created both friend and foe as all sides of the political landscape opine. Interestingly though, for all the talk that has been going on – and there has been an earful – it can all be summarised as largely non-speak as all sides seem to be agreeing with each other on principle.
Though this move is being spun as a requirement of a population which is living longer, the more economically savvy would probably realise that the Treasurer is representing a treasury which in fact has no treasure (so they will most likely mortgage the unborn with greater and greater deficits). The tragedy of this debate is not what is being said, but rather what is not being asked. This publication will ask, what will not, and answer, what should be:
1. Should there be a government supported retirement pension?
No. A government cannot guarantee a pension any more than it can guarantee the weather. In providing pension support, the government must expropriate the resources of those who are still working to support those who don’t. This is a fact, as a government is incapable of producing. By expropriating the resources of another, the government invariably violates property rights. This is a contradictory function of government. How can the government defend individual rights and simultaneously violate property rights? The answer is it cannot. One destroys the other.
2. But how do you provide a pension for those during senescence?
Like any other material good, an individual must be freely able to pursue the value they require. Retirement like any other good must be earned. No one can guarantee a lifestyle. Retirement requires one to forgo immediate consumption for the future.
3. But is it right to force those who are currently receiving a pension back out of retirement?
No. For those who are currently in a government supported retirement the government should continue to support those individuals. This is because they have been taxed in the past under the pretence that they will be able to access this support in the future. The government must uphold its obligation to those dependent upon the system (and those close to being so) but allow younger generations to leave the system.
4. Leave the system? What does this mean practically?
This means allowing individuals to be able to support themselves by their own effort. This would entail reducing government taxes and services whilst repealing most forms of regulation and government control.
5. That would be revolutionary and cause great distress, would there be anything else?
It is true that this would cause great change as individual autonomy is respected, but it would transform the society from one of dependence to one of mutually beneficial cooperation. The real distress will occur is the current trend of further control and deteriorating liberty continues.
The final requirement would require freely circulating gold and silver coinage, which is to abandon legal tender laws. This is no small or easy task. Yet the monetary system is in terrible treat of implosion under its tower of irredeemable paper. The rediscovery of a gold standard must take place with an introduction of gold bonds trading side by side with government bonds. That should allow private pension funds an opportunity to bring solvency to their funds.
6. Why are gold bonds necessary?
They are necessary as, besides those dependent upon government retirement, many individuals, believing that they were being responsible for themselves, have invested their retirement savings into funds which are themselves heavily dependent upon government bonds (consider the 30 year T bond with its declining yield as pension funds today rush in for whatever yield they can find, further flattening the yield). By allowing gold bonds to trade side by side with government bonds, these funds will be given the opportunity to rebalance their portfolios.
7. Why can’t the government merely balance the budget like it has done in the past and still continue providing pension support?
The ability to balance the budget, especially for the US government, is almost impossible as the irredeemable monetary system is predicated upon the expansion of greater and greater debt. Balancing the budget will not solve the medium to long term instability of the monetary system.
8. So without having a revolution, what can the concerned individual do to prepare for their twilight years?
Owning gold and silver as part of one’s money holding is wise. The less debt one accumulates is optimal especially as the economy slides towards deflation.
Yet one should actively inform friends and colleagues about the merit of a free society. Consider writing to your Member of Parliament or congressman expressing you concerning with the tyranny of the state. It is never too late to do the right thing.
It is most likely that the retirement pension age will be raised to 70 years old. You will hear both political sides cry wolf but you will not hear any defend the individual. In a free society the government would have no interest in the private affairs of its citizen’s retirement. To observe how far one has drifted, consider how both sides of politics believes that you are their property to dispose of.
The Lazy 1970’s vs. the Frenetic 2000’s
by Keith Weiner
Many people today see the Fed’s Quantitative Easing as money printing. They remember what happened in the 1970’s, and they instantly jump to conclusions. However, we live in a different world. To illustrate this, consider the following story about Joe, a promising and eager young manager in a struggling manufacturing company.
Joe excitedly walks into the boardroom and pitches his idea. “Let’s borrow a billion dollars. We can use it to build a massive warehouse and to buy massive quantities of our raw materials!”
The senior management team stares at him. The CEO demands, “Why?”
“We need to have a stockpile at every level. We should start with 3 months of raw materials, and a three-month buffer of work-in-progress in between every one of the 27 steps of our manufacturing line. And even better, we need to warehouse finished product. We shouldn’t ship anything that hasn’t been sitting for at least 4 months. Ideally six, but we can start with four.” Joe has the bit in his teeth now.
He rushes on. “Bernanke has printed so much money, and Yellen is going to continue. We already have massive inflation and it’s going to get worse! By borrowing to buy stuff that is only going up in price, we can make extra profits and protect ourselves from supply shocks as the cost of commodities rises out of sight!”
The CFO leans over to whisper in the ear of a young assistant, Bill. Bill does a quick Google search and finds the price of copper, which is one of the most important raw materials the company buys. Bill puts the copper chart up on the screen. It has fallen a third over the past few years.
Joe will be lucky to remain employed when he leaves the room. To be fair to him, his mistake is simply to try to implement a business strategy around what most casual observers and many economists believe.
Sometimes, the best way to debunk an idea is to take it seriously.
Though it makes no sense today, holding inventory was not the crazy idea of a young fool back in the 1970’s. It was how many businesses conducted business. In that era, the game was to accumulate inventories. The more, the better. First people were trading excess cash for inventories. I can recall my parents stockpiling things like canned tuna fish. It was better to keep one’s wealth stored in a durable food product than in a bank account. Consumer prices were rising about 20 percent per year.
Next, companies began selling bonds to finance inventory growth. This pushes down the bond price, which is the same thing as pushing up the interest rate. And of course it pushes up prices.
In the 1970’s, cash was trash. Inventories rose relentlessly in value, at least as measured in terms of the dollar. This, by the way, is a great example of how irredeemable money distorts the economy. You aren’t producing any more, or creating any kind of new wealth, and yet, you are rewarded with a profit.
Now we have the opposite condition. Since the interest rate began falling in the early 1980’s, companies have been finding ways to reduce inventory accumulation. The Lean manufacturing movement began to gain acceptance at this time. Lean, also known as the Toyota Way, defines inventory—such as work-in-progress sitting on a shelf—as waste. Lean is all about eliminating waste.
Today, cash is king. Excess inventory quickly becomes obsolete.
Companies are not borrowing to hold inventory, but to expand production when they can make a profit above the cost of capital. Since the interest rate keeps falling, the hurdle to get over for minimum acceptable profit keeps going lower.
Think of it this way, if you manufactured handheld electronic devices, would you want to keep inventory a minute longer than you had to? Of course not, because your competitor is about to release a new model that will make your product less desirable, or even unsalable. How about clothing? Cars?
In the 1970’s, the interest rate was rising. When a worn-out plant needed replacing, it may not have been feasible to borrow to replace it. That’s because the new interest rate was much higher than at the time when the plant was first acquired, a decade or more earlier.
This is the connection between the rate of interest and the rate of profit. It’s impossible to borrow at a higher rate than the profit one hopes to earn. A rising rate will therefore lead to rising margins, and a falling rate to falling margins.
Other than the problem of financing plant replacement, business was easy. Sleepy conglomerates had travel policies that allowed managers and executives to fly first class, even for domestic travel. With the cost of borrowing rising all the time, profit margins were expanding. And there was the kicker, holding inventory before selling it fattened margins further.
Business had a lazy pace to it, as I look at it today (though business managers at the time might not have agreed with that characterization).
In comparison, today it is the opposite. Limitless oceans of dirt-cheap credit issue forth, like effluent from the world’s central banks. The problem is not replacing worn-out plant when the cost of capital is higher. The problem is that every competitor has ever-cheaper cost of capital. The challenge is that rapid product cycles are driving rapid obsolescence. It is harder and harder to recoup design and tooling expenses. Inventory that sits for a week may have to be liquidated at a massive discount. Profit margins are under constant pressure.
Business executives routinely fly coach, even for international travel.
If the word for the 1970’s business environment was lazy, the word for today’s climate is frenetic.
Neither is the ideal behavior for a rational enterprise. They are the direct fault of the regime of irredeemable paper money.
Everyone’s attention is misdirected towards prices. Is the Consumer Price Index rising? Is it rising more than expected? How about the producer price index? Is that dropping into the dread D-word—deflation?
It’s the greatest economic sleight of hand ever perpetrated.
Instead of zeroing in on prices, we should be looking at the enormous distortions of our centrally banked irredeemable currency. We have bubbles, malinvestment, insolvencies, volatility, with exponentially rising debt and derivatives outstanding.
The Gold Standard #41 – May 2014
Gold Standard… In a Sound Bite?
As Editor-in-Chief of the Gold Standard Institute, I have written many articles explaining and expounding on the Unadulterated Gold Standard, on how the world economy is doomed to collapse unless an ultimate extinguisher of debt… Gold… is re-introduced into the system.
I have written about the technical aspects, the moral aspects, the historical aspects… yet people still resist, still don’t want to know. They hope that hope alone will keep them out of trouble… and at best, most want a quick and easy explanation of why we should bother with Gold; in effect, they ask for a sound bite.
Well, that is easy enough… here is the sound bite; “Gold, the Real Thing!”… end of sound bite.
Of course, without the megabuck ad campaign to spread and hammer it home world wide, like the better known ‘It’s the Real Thing’ sound bite, the ‘Gold, the Real Thing!’ sound bite is of little use. People will have to figure out the need for honest money for themselves; no economic or monetary revolution will be started from above; changes must start from grass roots.
Only a widespread understanding of money and credit will change the system. Only popular, overwhelming demand for Gold (and Silver) money can save the world from economic chaos. Instead of fiddling with sound bites, let’s look at the core issues; why is Gold essential for economic survival.
Some people, in good faith, suggest that ‘Gold should be money… look at how it’s kept its purchasing power for thousands of years’. This is a good sentiment, but it has cause and effect mixed up; Gold should not ‘be money’ because it has kept purchasing power… rather, Gold has kept purchasing power because it IS money.
We must understand this both intellectually and viscerally. That ‘Gold IS money’ is not just another sound bite but a hard fact. We must understand what money actually is… and why Gold is money. As J. P. Morgan famously stated, ‘Gold is money… everything else is credit’. To put it bluntly, bank notes, Dollar bills, all forms of Fiat currency are IOU’s; that is, credit (debt)… and circulating debt notes cannot extinguish debt, they simply shuffle debt around.
Money and debt are polar opposites, like water and fire. Just as water extinguishes fire, so money extinguishes debt… real money that is, not debt notes masquerading as money. Bank notes are assets in the hands of the holder… that is, a Dollar bill is an asset in the wallet of the consumer… but the very same Dollar bill is a liability of the Bank of Issue, called the Central Bank.
The liabilities of the Bank of Issue… that is, bank notes… Dollar bills… are balanced by assets. This is the very definition of a balance sheet; liabilities and assets must balance. And what assets does the Bank keep on the asset side of its balance sheet? Why, Treasury bonds… and Treasury bonds are also IOU’s. Indeed, the very same bonds that are assets of the Bank are liabilities of the Treasury.
It is crucial to understand how Fiat currency is created. The creation of paper currency is not simply a question of ‘printing’ more and more; that is not how the system works. Currency is borrowed into existence. More specifically, the Treasury prints a bond… a promise of future payment, with interest, and the Bank of Issue buys this bond… with freshly created bank notes. The Bank indeed ‘prints’ new currency… but only as a match for the bond it purchases… no more, no less… or its books would no longer balance.
So you say, what does all this mean? Why is this method of creating Fiat currency a problem? Well, there are several problems, any one of which is lethal by itself. First, don’t just blame ‘profligate politicians’ for our daunting debt tower… rather blame the system. Remember, every Dollar bill in existence has to be balanced by a Dollar of bonded debt; so, as more currency is created more debt is created simultaneously.
There is a one to one correspondence between currency in circulation, and debt. For example, if there are one hundred monetary units of Dollars… say each monetary unit is a trillion… then there must be one hundred monetary units (trillions) of debt. If the ‘profligate politicians’ were to actually pay down the debt, say reduce debt by half; from one hundred monetary units to fifty… then bank notes would also be reduced by half. A devastating deflation would result from the disappearance of half the circulating currency… the disappearance of fifty trillion Dollars.
Just as new bank notes are created by the bank of issue to buy new treasure bonds, if any existing bonds were repaid, the bank notes balanced by the bonds would go back to cyberspace, where they come from. Such a drastic reduction of the money supply would cause a devastating economic collapse… a Greater Great Depression.
Under our Fiat system no debt can ever be retired. Any talk to the contrary is but a smoke screen. Unfortunately it gets worse; bonds command interest either in the form of periodic payments from the borrower to the bond holder, or in the form of a discounted purchase price and a higher pay back at maturity.
For example, if there are one hundred units of currency that is balanced by one hundred units of bonded debt, and the rate of interest is five percent, then the borrower (treasury) needs to pay five monetary units of interest yearly… or something like fifty monetary units at maturity. But wait… where exactly will notes to make this payment come from? Remember, the currency in circulation is exactly equal to the sum of the bonds in the balance sheet… new currency must be created to pay interest due.
To create new currency under the Fiat system, bonds need to be written… new currency must be borrowed into existence. The debt must grow year by year to avoid interest payment default. This is the real reason that banks of issue like the Federal Reserve are fighting desperately to keep interest rates low, regardless of damage done to the economy. A low interest rate reduces… but does not eliminate… the need for new money/debt creation. The debt tower must continue to grow, without limit, or face default.
The pundits will suggest fine, then let’s just ‘inflate the debt away’… by ‘printing’ money to reduce the real value of debt outstanding. Of course, if you understand the need for every new dollar in circulation to be borrowed into existence, you see that this is impossible. By the flawed and over simplistic quantity of money theory, if we double the currency in circulation then we reduce purchasing power by half; twice as much ‘money’ chasing the same quantity of goods.
Clearly, even if we ignore the flaws of the quantity theory, a theory that ignores velocity of circulation, this scenario cannot work. If we wish to double the currency in circulation from one hundred units to two hundred… hopefully reducing the purchasing power of currency by half… then we must also simultaneously double the debt. Debt grows with the growth in currency. Halving purchasing power is matched by doubling of debt. We are stymied.
No payback of debt is possible, growth of the debt tower is built into the system, and inflating the debt away cannot work. The Fiat system has no escape; the world economy is doomed to ever growing debt and is doomed to destruction. The only viable alternative is to change the system. Replace debt ‘money’ by real money, money that will actually extinguish debt.
Then the question may arise, why Gold? Why not platinum, or some other valuable commodity… perhaps even commodities that are consumed, like grains or crude? Why indeed… aside from the historical fact that God has been and is money, the reality is that Gold is the most plentiful substance on earth… measured by its stock to flow ratio. That is, the stock of Gold officially known to exist above ground in refined form represents at least eighty years of mine supply. To double the existing Gold stock would take, at the current rate of extraction, at least eighty years.
This is crucial, and is the heart of why Gold is money; platinum for example has a few months of supply on hand; same for crude, grains, copper… indeed all other commodities except Silver; and Silver is the only monetary metal on Earth other than Gold. The enormous, order of magnitude greater stocks of Gold and Silver on hand ensure that any fluctuation in supply… like a mine closure, or the discovery of a new ‘bonanza’ will have negligible effect on the quantity and value (purchasing power) of existing stocks.
In contrast, all other commodities are subject to extreme volatility due to growth/decline in consumption, and growth/decline in supplies. Gold and Silver are immune to such effects; this is why Gold has held its purchasing power for over two thousand years. We need bother with no other commodity; Gold and Silver are money, nothing else is.
This is the bottom line; Fiat cannot continue indefinitely, Gold and Silver are the only monetary metals that can rescue the economy from collapse. How do we get from here to there? This is the key question, and unless we have a reasonable method of transition, we will inevitably go through the wringer. Chaos will arrive either in the form of an enormous deflationary collapse, the ‘Greater Great Depression’, or in the form of runaway hyperinflation like Weimar on steroids… or both!
If the transition is planned and done systematically, most of the pain can be avoided. We must start by rescinding the legal tender laws that force Fiat currency into its monetary role. Gold and Silver must be allowed free circulation, as an alternative to existing Fiat paper. Gold and Silver in circulation must be in the form of physical coins with only a mass and fineness embossed on the coins; no ‘face value’ denominated in Fiat. It is ludicrous that one ounce Gold coins have an embossed face value of fifty or a hundred Dollars… while an ounce of Gold trades for over one thousand dollars.
Once Gold and Silver are again understood to be money, the real job can begin; the reduction of the enormous debt tower, without a devastating debt collapse. This will be accomplished by the introduction of Gold Bonds. Bonds denominated in Gold units, bonds that mature into physical Gold, bonds that pay interest in physical Gold… Gold Bonds that can be exchanged over time for existing Fiat bonds, Fiat bonds that otherwise can never be repaid.
Once a Gold bond matures, it is paid in full; the debt represented by the Gold bond is finally, fully extinguished. The value of Fiat bonds will indubitably decrease (in Gold terms) once real bonds are available as an alternative. The value of Fiat currency will indubitably decrease (in Gold terms) once real money is in circulation once again. Thus can the transition from Fiat to honest money be accomplished with minimum pain and without economic disaster.
The availability of God bonds requires an income (by the issuer, the treasury) in Gold; a country like Australia, as well as other countries with a Gold mining industry appear to have an inside track here; a natural supply of Gold is at hand. In reality, mine supply is unnecessary. It is easy enough for any country to obtain Gold, by trading for it.
Trading value for value is the fundamental reality of world trade; Gold is simply the guarantor of honest dealing. The discipline of Gold overcomes any temptation to run a trade deficit. Gold focuses attention on the real economy, on wealth creation rather than on speculation.
Time is running out; how much longer can we continue to ‘kick the can’ into the future, passing our self-created problems on to our children and grandchildren? I suggest not much longer. The fuse is lit, and the economy is well on its way to blowing up. I suggest we start the transition now, before it’s too late.
Rudy J. Fritsch
Editor in Chief
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