From Monetary Metals comes another excellent piece on the “megatrend of our era”, capital consumption. This article greatly simplifies the concept by the use of examples.
Interest rates falling ‘to zero and beyond’ are as termites eating away at the foundations of civilization.
Read it all here.
As usual, Keith Weiner has taken a somewhat contentious area and reduced it to a simplicity. Read it all HERE.
[Editor’s note: The following is a letter written in 2004 responding to an article by Mr. Rittenouse in Countryside. This letter has been divided into two parts: Part 1 — Money and Part 2 — Conspiracy.] Thomas Allen
Mr. Rittenhouse pooh-poohs the thought that some cabal may be working to control governments and the world. Some high and mighty people disagree with him. Here is a sample of what some of these important people have said about this cabal. I dare say; these people had much more insider information than Mr. Rittenhouse.
Arthur Schlesinger, Jr.: “We are not going to achieve a new world order without paying for it in blood as well as words and money.”
Supreme Court Justice Felix Frankfurter, “the outstanding power behind the New Deal”: “The real rulers in Washington are invisible, and exercise power from behind the scenes.” At a dinner party, Frankfurter was asked who ran the United States; he replied, “The real rulers of a nation are undiscoverable.”
John F. Hylan, mayor of New York: “The real menace of our Republic is the invisible government which like a giant octopus sprawls its slimy length over our city, state and nation. . . . At the head of this octopus are the Rockefeller-Standard Oil interests and a small group of powerful banking houses generally referred to as the international bankers [who] virtually run the U.S. government for their own selfish purposes.”
After observing governmental leaders of the United States consistently making concessions to the Soviet Union, James Forrestal, the first Secretary of Defense, commented, “These men are not incompetent or stupid. They are crafty and brilliant. Consistency has never been a mark of stupidity. If they were merely stupid, they would occasionally make a mistake in our favor.”
President-elect Ronald Reagan: “I think there is an elite in this country and they are the very ones who run an elitist government. They want a government by a handful of people because they don’t believe the people themselves can run their lives. . . . Are we going to have an elitist government that makes decisions for people’s lives, or are we going to believe as we have for so many decades, that the people can make these decisions for themselves?”
A few years after resigning as President, Richard Nixon wrote, “The nation’s immediate problem is that while the common man fights America’s wars, the intellectual elite sets its agenda. Today, whether the West lives or dies is in the hands of its new power elite: those who set the terms of public debate, who manipulate the symbols, who decide whether nations or leaders will be depicted on 100 million television sets as ‘good’ or ‘bad.’ This power elite sets the limits of the possible for President and Congress. It molds the impressions that move the nation, or that mire it.”
Jim Kirk, who had been a member of the Students for a Democratic Society, Communist Party, and the Black Panthers, said about the control of radical left groups: “Young people have no conception of the conspiracy’s strategy of pressure from above and pressure from below. . . . They have no idea that they are playing into the hands of the Establishment they claim to hate. The radicals think they are fighting the forces of the super rich, like Rockefeller and Ford, and they don’t realize that it is precisely such forces which are behind their own revolution, financing it, and using it for their own purposes.”
Nicholas M. Butler, president of Columbia University, said to the Union League of Philadelphia: “The old world order died with the setting of the day’s sun and a New World Order is being born while I speak.” Butler was “J.P. Morgan’s chief spokesman for ivied halls.”
Edward Bernays, chief advisor to William Paley, founder of CBS: “Those who manipulate the organized habits and opinions of the masses constitute an invisible government which is the true ruling power of the country. . . . It remains a fact that in almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons. . . . It is they who pull the wires which control the public mind, who harness old social forces and contrive new ways to bind and guide the world. . . . As civilization has become more complex, and as the need for invisible government has been increasingly demonstrated, the technical means have been invented and developed by opinion may be regimented.”
Manly P. Hall, 33rd degree Freemason and a member of its inner circle, and probably the greatest Freemason of the twentieth century: “There exists in the world today, and has existed for thousands of years, a body of enlightened humans united in what might be termed, an Order of the Quest. It is composed of those whose intellectual and spiritual perceptions have revealed to them that civilization has secret destiny. The outcome of this ‘secret destiny’ is a World Order ruled by a King with supernatural powers. This King was descended of a divine race; that is, he belonged to the Order of the Illumined for those who come to a state of wisdom then belong to a family of heroes-perfected human beings.” He also wrote, “. . . It is beyond question that the secret societies of all ages have exercised a considerable degree of political influence. . . .”
Winston Churchill admitted the existence of conspiracy when he wrote in 1920, “From the days of Spartacus-Weishaupt to those of Karl Marx, to those of Trotsky, Bela Kun, Rosa Luxemburg, and Emma Goldman, this worldwide conspiracy for the overthrow of civilization . . . has been steadily growing.”
According to Lenin, the Communist Party could not survive without conspiracy. He wrote, “Conspiracy is so essential a condition of an organization of this kind that all other conditions . . . must be made to conform with it.”
In a speech in 1931 before the Institute for the Study of International Affairs, the historian Arnold Toynbee said, “We are at the present working discreetly with all our might to wrest this mysterious force called sovereignty out of the clutches of the local nation states of the world. All the time we are denying with our lips what we are doing with our hands, because to impugn the sovereignty of the local national states of the world is still a heresy for which a statesman or publicists can perhaps not quite be burned at the stake but certainly be ostracized and discredited.”
ABC commentator Cokie Roberts remarked, “Global bankers are really running the world.”
James Warburg, son of Paul Warburg, the author of the Federal Reserve System: “We shall have world government whether or not you like it — by conquest or consent.”
Benjamin Disraeli, Prime Minister of Great Britain: “The world is governed by very different personage from what is imagined by those who are not behind the scenes.”
Benjamin Disraeli: “The governments of the present day have to deal not merely with other governments, with emperors, kings and ministers, but also with the secret societies which have everywhere their unscrupulous agents, and can at the last moment upset all the governments’ plans.”
Franklinton Delano Roosevelt: “Nothing just happens in politics. If something happens you can be sure it was planned that way.”
Franklin Delano Roosevelt: “The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the Government ever since the days of Andrew Jackson.”
Elliot Roosevelt, son of Franklin Roosevelt: “There are within our world perhaps only a dozen organizations, which shape the course of our various destinies as rightly as the regularly constitutional government.”
William Colby, CIA Director: “Sometimes, there are forces too powerful for us to whip them individually, in the time frame that we would like. . . . The best we might be able to do sometimes, is to point out the truth and then step aside.”
Gary Allen, a historian of conspiracies: “. . . many of the major world events that are shaping destinies occur because somebody or somebodies have planned them that way. If we were merely dealing with the laws of average, half of the events affecting our nation’s well-being should be good for America. If we were dealing with mere incompetence, our leaders should occasionally make a mistake in our favor. . . . we are not really dealing with coincidence or stupidity, but with planning and brilliance.”
Andre Baron: “Remember that the constant rule of the secret society is that the real authors never show themselves.”
If these quotations do not suggest a conspiratorial cabal, then the origins of the Federal Reserve System should. The essence of what eventually became the act that established the Federal Reserve System was written by Paul Warburg of Kuhn, Loeb and Co. Assisting him were Henry P. Davison, senior partner of J. P. Morgan and Co.; Charles D. Norton, president of (Morgan’s) First National Bank of New York; Frank A. Vanderlip, President of (William Rockefeller’s) National City Bank of New York; Benjamin Strong, vice-president of (Morgan’s) Bankers Trust Co.; A. Piatt Andrew, Assistant Secretary of the Treasury; and Senator Nelson Aldrich, Morgan’s leading representative in Washington. This group met in secret in 1910 on Jekyll Island and drafted what eventually became the Federal Reserve System.
The conspiratorial historians may be wrong, but the evidence strongly suggests that they are right.
Copyright © 2004, 2019 by Thomas Coley Allen.
A Letter: Money and Conspiracy: Part 1 — Money
A Letter: Money and Conspiracy
Part 1 — Money
Thomas Allen
[Editor’s note: The following is a letter written in 2004 responding to an article by Mr. Rittenouse in Countryside. This letter has been divided into two parts: Part 1 — Money and Part 2 — Conspiracy.]
The following are a few comments on Mr. Rittenhouse’s article “Commodities, Fiat, and Theories,” which appeared in the July/August issue.
In defining money, Mr. Rittenhouse gives three components that an item must meet to be used as money. It is used as a medium of exchange, a store of value, and a unit of account. Federal reserve notes, which are what passes for money today, meet only two of these three criteria. It is not a store of value. Since the beginning of the Federal Reserve System in 1914, which has a governmentally protected monopoly on issuing (creating) money, the dollar has lost 95 percent of its value. Over this period, an ounce of gold is still worth an ounce of gold. In dollar terms, an ounce of gold equaled about $20 in 1914; today, it equals about $400 [at the beginning of 2019, it buys about $1280 in federal reserve notes]. Thus, gold has retained its value. It is far superior to federal reserve notes as a store of value.
Furthermore, if federal reserve notes, which are instruments of debt, were the market’s first choice of money, the government would not have to make them legal tender. The legal tender law requires people to accept the governmentally declared money, federal reserve notes, in payment of debt or to forego payment of the debt.
What made gold and silver money, along with the other items that Mr. Rittenhouse lists that have been used as money, is that they had other uses. Gold and silver are commodities that can be used for something other than money. That they can be used for other things gives them intrinsic value. Before we became so sophisticated, people would never have thought of voluntarily using paper for money because paper has such low intrinsic value. (The paper that was used for exchange was redeemable in gold or silver.) The intrinsic value of a $10 bill is the same as that of a $100 bill. They both use the same amount of paper and ink and cost the same to make. The lack of intrinsic value necessitates legal tender laws.
Mr. Rittenhouse identifies problems with counterfeiting gold coins or stamping gold coins with a higher weight and purity than it actually has. Paper money has the same problems. There are licensed counterfeiters, which in the United States is the Federal Reserve System. There are unlicenced counterfeiters, who are the people that the Treasury Department goes after. In a society accustomed to a gold coin monetary system, detecting a counterfeit gold is easier for more people than detecting high-quality counterfeit money. (This is especially true when a situation like the one that occurred at the end of World War II. At the end of World War II, the United States gave the Soviet Union the plates and paper needed to print U.S. occupational currency.)
What Mr. Rittenhouse writes about the Federal Reserve controlling the money supply as a matter of law is true. His claim that federal reserve notes are fiat currency and that people are required to accept them under the penalty of law is also true. The Federal Reserve may be doing a good job of controlling, i.e., increasing the money supply, but any good counterfeiter could do that. However, it has been an extremely poor steward of the dollar having destroyed 95 percent of its value.
Mr. Rittenhouse goes on to describe the Kondratiev Wave. Like him, I am not sold on this theory. The stories that I read today arguing that we are in the trough the Kondratiev Wave are similar to those that I read in the 1970s. (When corrected for inflation, a bottom in real terms occurred in the 1970s, but was masked by inflation.) If the bottom occurred in the 1970s, then according to the timeline of this theory, the next bottom should not occur until circa 2020. Many of the current advocates of the Kondratiev Wave are predicting that gold like everything else, except the dollar, will decline in value.
Paper money always loses value over time and eventually becomes worth no more than its Btu content or toilet paper. (In Zimbabwe, a roll of toilet paper has 720 squares and cost 10,000 Zimbabwean dollars. So, if one changes his $10,000-note in the one thousand $10-notes, he has 720 sheets for wiping and $280 left over for spending. [This was in 2004 before Zimbabwe’s hyperinflation began really to accelerate.]) An ounce of gold remains an ounce of gold forever. Paper money loses value because the government, through its surrogate central bank, can print money easier than it can raise taxes.
My outlook on the dollar is pessimistic. The dollar is going down and gold up. Debt is going to drive the dollar down. Before this run is over, which will last another five to ten years, gold is going to $5000 an ounce assuming things do not get really bad [my timing was off considerably for the dollar amount or for the years]. (The run is not over until the DJIA can be bought for an ounce of gold, which means stocks have a long way to fall and gold has a long way to rise.) If things get really bad, then gold is going beyond anyone’s wildest speculation. The wildest speculation that I have come across made by a person who follows the gold market is $111,000 per ounce. This should be a floor. If things get really bad, Mr. Rittenhouse is correct in that all our lives will be in great danger.
Gold is probably the hardest market to trade or to invest in. In stock, bonds, real estate, and all other markets, the trader or investor has to fight his greed or his fear — never both together. In gold, he has to fight both at the same time. When gold is sky-high, greed enters as it does in other markets. Yet, when gold is sky-high, it is there because of fear.
The bottom line is spend your federal reserve notes but save your gold. Use federal reserve notes as a purchasing medium, and use gold as a store of value.
Copyright © 2004, 2019 by Thomas Coley Allen.
We frame it that way, because nearly everyone loves to tout GDP (though some do so only when it suits their political agenda). It is fashionable to say variously that the Fed is doing a good job, Obama did a good job, and Trump is doing a good job. This is because GDP is up. It’s also because stocks and real estate are up. And because employment is up.
We have shown that assets go up because interest rates go down. We have shown that GDP is not necessarily a measure of new production, that consumption of old capital is added in as well. We have shown that consuming capital is labor-intensive. That is, consuming capital provides jobs.
Suppose someone earns $60,000. He could spend $100,000, by withdrawing $40,000 from his savings. Next year, he could spend another $100,000 if he racks up $40,000 in credit card debt. The first year, he consumes his own capital. The second year, he consumes someone else’s capital. At best, he will have to pay this capital back by consuming less than his income for several years (and he likely will not repay it).
It is harder to see it when there are 300,000,000 people aggregated into a single statistic. A household budget is not so complicated. Macroeconomics is rather more so.
We looked at the concept of a national balance sheet. If we could see how much spending is really capital consumption, then we could subtract that amount from GDP.
Or more.
Let’s look at a simple example. Harry Hapless is sailing in the south pacific, and a storm causes his boat to run into a reef. It sinks, and he swims to a nearby island. Devastated, he doesn’t know what to do other than accumulate food. So he spends his days spearing fish, and letting them dry in the hot wind which seems to constantly blow. The first year, he catches 730 fish. He eats one every day, and dries one to keep for later.
What is the GDP of his island? The economy—such as it is, with only one person and only the one commodity—has produced 730 fish. However, it consumes only 365. Is GDP 730 or 365? We’ll get back to that.
In any case, the next year, Harry looks at his heap of dried fish, and decides he does not have to work. So he sits on a rock, staring at the horizon in despair of ever seeing a rescue ship. Each day, he eats one fish.
In order to discuss GDP for this island, we need to drill down into what it means. We won’t debate this based on the conventional definition. We have already shown in prior essays that the conventional definition is, at best, misleading. We want to drill down to the root. What ought we to be measuring?
GDP contains two important concepts. Let’s look at the second one first: product. Isn’t it interesting that a concept that is nominally about production has come to mean consumption?
Anyways in year one, production is 730. In year two, it is 0.
The other key concept in GDP is: gross. Compare and contrast with net.
In year one, gross production is 730. Or perhaps in the context of national account statements, this is akin to gross revenue. This was correctly stated as 730.
And net is now clear: net income. This is what’s left after consumption. In year one, gross production is 730, and net income is 365. Simple.
In year two, gross production is 0. But the net is actually -365. That is, we did not produce but we consumed. We removed 365 fish from the balance sheet, and got poorer (and closer to the edge of starvation). It is possible for those who do not toil, to eat! To consume without producing (in the present). At least for a while. They can consume what was accumulated in happier times, while the dried fish—the accumulated capital—holds out.
If Harry’s friend, David Dismale, were to look at the GDP of the island, he might say that GDP was 365 in each year (depending on factors outside the scope of this simple example). Does that feel right? Does it pass a basic sniff test?
So back to a proper reckoning of this macroeconomic statistic in the real world. It is not precise, and not really accurate, to say our rising-GDP economy is fake. Real people are flying on real planes to real hotels and eating real food in real restaurants that employ real chefs. Now we can express it more clearly. It’s not fake, it is unsustainable, based on consumption of capital.
The GDP statistic is not fake. We are sure that the government economists who gather and tally the data do so to the best of their ability. That’s not the problem (in the US, we will not discuss the incredible nominal GDP of the nominally communist countries). The problem is that GDP is a socialist tool touted by socialist tools (in many cases, unwittingly, AKA “useless idiots” as Vladimir Lenin is believed to have sneered).
A proper accounting of economic activity does not add consumption of capital—i.e. destruction—to production. GDP could be said to be a fake statistic, in the sense that it is measuring production + destruction.
If we can distinguish gross from net, and production from consumption, we might just have something.
We might have something like a national income statement, and a national balance sheet. The income statement could account for revenue and expenses. And the balance sheet would measure changes in liabilities and assets—i.e. equity, i.e. capital.
But we live in a world where this is actively avoided. The government keeps its books on the cash basis. This is illegal for any private business of more than $5 million revenues, or any private insurance business. Yet when the government takes in a dollar of insurance premium, against a certain obligation to pay $100 next year, it blithely books only the $1 income. Thus many people will insist that the government ran a budget surplus under President Clinton. We assure you that it was no surplus, if you account for the liabilities that were accrued during that time.
And we live in a world where credit is deemed to be money, where credit taken without means or intent to repay is called borrowing, where an increase in all asset prices due to a drop in the interest rate is deemed to be increasing wealth, where an endless game of musical chairs, each party buying the same chairs from the previous at higher prices is deemed to be investment, where eating the seed stocks is deemed to be economic growth, where the central bank’s interference in the market is deemed to be stabilizing the economy.
It should not be a surprise that those who profiteer on this system have developed a language to reinforce it. George Orwell was on to something, when he coined the term Newspeak. According to Wikipedia:
“…Newspeak limits the user’s communications (thought, spoken, and written) with a vocabulary that diminishes the intellectual range allowed…”
We propose to induct the word “GDP” into Newspeak. If one is limited to arguing if GDP has gone up or down, then one is left to assume up is good. At least it’s good, if the one double-plus-ungood thing does not occur: inflation. Rising prices are the one thing of which Newspeak allows criticism, or we should say, to which Newspeak deflects all would-be critical thought.
Keynes and Orwell would be looking at us, smiling, “good, good…”
And this is why we need to return to the gold standard: to return to honesty in credit.
Well, wasn’t this an interesting week! The price of gold was up a pedestrian $10, mere noise in the long-term signal. But in silver, we see plus one dollar. It was practically inevitable with the gold-silver ratio at an all-time high, after a big run up in the gold price with no corresponding run in silver. When the silver speculators get their game on, they can push the price up far more in percentage terms than in gold (which is a much larger, deeper, more liquid market).
This will be a short Report, due to Keith’s challenging travel schedule.
Monetary Metals is excited to be bringing the first gold bond to market. Please contact us if you are interested in investing.
Now let’s look at the only true picture of supply and demand for gold and silver. But, first, here is the chart of the prices of gold and silver.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio dropped substantially this week.
Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold price.
We see little change in the scarcity of gold (i.e. cobasis), and the price did not change that much either.
The Monetary Metals Gold Fundamental Price fell $4 to $1,403. We note that the fundamental is below the market price for the first time since the end of 2017 (which was a brief spike down in the fundamental, a flash in the pan).
Now let’s look at silver.
With silver, we can see the scarcity continuing to follow the dollar price. That is, silver becomes scarcer when it sells, and more abundant when it is bid up.
The Monetary Metals Silver Fundamental Price moved up just as much as the market price, one dollar: from $15.52 to $16.50.
The Monetary Metals calculated fundamental gold-silver ratio fell from 90.6 to 85.0. If this, too, is not just a flash in the pan, watch out!
© 2019 Monetary Metals