Thursday, January 28, 2016

#67 A Statement On Fiat Money

The other day I happened to listen to a podcast by Mike Adams, the Health Ranger. You can listen to it here.

In this discussion, I could agree with just about everything Mike discussed. Some of the same issues he discussed we deal with here, but when he or anyone attacks fiat money as the cause of our current monetary and economic problems or those equally misinformed idiots (the proper term to use as it is used throughout this blog) who talk about “debt free money” or those who say they want “Constitutional money,” they are simply showing that they do not understand money at all.

All money represents debt, therefore to even consider a debt free money is an absurdity. It shows that the person saying such things is without understanding. Money is the accounting invention that we use as a means to split barter so that we avoid whole barter. The pieces of the system, the tokens, are just used as pieces in a game. Money is the entire system of accounting for transactions in trade of which the individual pieces are just tokens. If there were no tokens there could still be money. It would be as entries in a ledger. Indeed, double entry bookkeeping is itself an essential part of any money system. This is discussed better by many people, including E. C. Riegel. All money represents unsettled transactions and all money is backed ONLY by what it buys. So anyone who tells you otherwise or adds something superfluous to the basic definition of money is either a liar or a misinformed idiot, take your pick. We advise, please don't be either.

There are of course the “gold bugs” out there too and the “precious metals is the only real money” advocates. These people are likewise showing their ignorance and some of them their stupidity when they make statements such that “using precious metals in trade is a two party transaction” when it obviously is not; the third party in a trade involving precious metals is the person you bought your metals from. So please, let's not allow such deceptions into our discussions about money.

The only reason fiat money ultimately fails is because governments issue it, period! There are no other reasons to deny fiat money whatsoever.

I let that statement stand by itself. I invite anyone who has read this blog thoroughly and understands its proposal completely, not some slimy young know it all who can't get the “money as a commodity” concept out of his head. I invite anyone to contend with me on this issue by any historical documentation they can find. But one caveat; I wont accept a fiat currency that has failed that was issued by any government. Try and find a fiat currency that has failed that wasn't issued by a government. You wont find any, so don't waste your time and stop listening to the uninformed claptrap of those who only parrot what idiot economists say.

There are in fact several alternative fiat currency systems around the world, one in Switzerland, that started in the 1930's that I believe is still in use, though of course the community they serve is quite small. Some fiat systems have gone out of use, not failed, simply because people found the accounting too burdensome and had to quit without finding a replacement. In such cases, the community just couldn't make the transition away from the government's fiat currency.

Likewise the idea that any government can issue interest free money, said to be without debt, Lincoln's greenbackism, is likewise ... sorry Bill Still, but you are incorrect here ... no better than interest bearing issued fiat money and sooner or later such money would fail just the same and for the same reasons; governments issue it. 

Governments spend money on what they want first, not what the people want and they have no means of recapturing the value represented by the money they spend into an economy, because again as E. C. Riegel noted, governments do not have anything they can sell back into the economy that anyone wants to buy.

Governments tax back a portion of what they spend, but all that goes to pay off the interest on the money borrowed from a central bank. As we have demonstrated and it can be shown to be true elsewhere, all this interest comes out of money that was never created in the first place, so therefore it must be procured from each of us by a process of competition for that which is on purpose in limited supply and yet essential to settle our terms of barter. None of that is fair, honest or sensible and only benefits one class of people; the bankers.

Please understand that no matter how much money is ever created in this manner, there is never ever going to be enough to pay off all debts. Well, what happens when one can't pay off one's debts? Real assets are seized. This of course is never right or fair and amounts to theft by the money lenders who may very well have intended that in the first place, though they may protest otherwise.

There was thus always a clear mathematical reason why usury was forbidden and that reason should be respected. One respects nature, well at least until recently, and as we all know it is never advisable to traduce natural laws, though of course there are always those who would try. Some of these actions we would of course describe as criminal. To be discriminating, to discard the criminal, is actually a good thing. Please don't be fooled by people who dishonestly try and twist concepts, like saying that all fiat money is bad without also admitting that the reason it has been bad is that all of it was issued by some spendthrift government.

Then, people are very taken in by ideas they assume are real alternatives to the present monetary order when they are not. The so called “Austrian” school has taken in many. It advocates usury as part of their understanding of a good monetary system. They support banking as it presently exists, virtually unchanged except to perhaps prefer that bankers assume far less risk. These are the same folks who demand a return to gold and the notion of a gold backed limited quantity money supply as if scarcity of the money has anything to do with economics or trade when it actually does not, or to put it better certainly does not need to be. We already countered Rothbard here 

So let's put some more flesh on our contention: we say, along with E. C. Riegel, that no real honest money needs have any intrinsic value in itself whatsoever. We say that if it did, whatever that intrinsic value would be would affect the transactions in which it participates.

For instance, if I'm selling something and someone desires to make me a payment in dollars, there would be a price in dollars for that means of payment and if they decided to pay in precious metals they might get a better deal if precious metals were rising in price as measured in dollars. I'd likely not be willing to take any precious metals if I knew that their relative value against dollars was going down.

I hope this makes sense so far. I also have to remind people that all prices of precious metals are determined by people in far away cities over whom no one has any control. So holding gold or silver can be and right now is a losing proposition simply because the brokers in these foreign places have determined their relative prices and not you or me.

Whether it's Keynes and his fiscal pumping of fiat currency in when markets are down and taxing back when they are high, as if he or anyone really knows what the equilibrium price on anything relative to anything else can or should be, or the “Austrians” who advocate nothing really but a return to horrible 19th century money and banking, there is no help relying on the bankers' dialectic. Why get yourself stuck on the horns of their dilemma?

If you really want something better, you'd better be prepared to come up with another standard for your money. And E. C. Riegel did that, which is why this blog exists. He based his idea of money on a single transaction at a particular TIME to which all other transactions using his money would relate, calling it a Figure 1. Riegel chose to base his money, the Value Unit or Valun, on the dollar's purchasing power at the end of a particular fiscal year; 1939 or a later year.

We guarantee that even if we'd chosen a dollar in 2011, that we'd have seen a fall in the dollar against the Valun by now. But we chose a different approach because we wanted to slay both monetary dragons at once, both the Keynesian and the “Austrian” and to do that we fused the two together by saying that our proposal would base our Value Unit or Valun on a transaction involving paper money and precious metals at a particular TIME. We chose 2 November 2011 because it is an easy day to remember and because our chosen start position or Figure 1 was $2,160 which has special significance as that is the geometric number of years in an Age, so that's an easy number to remember. We said that 1,000 Valuns at 2 November, 2011 would equal $2,160 on that date.

So being theoretical, following our ongoing experiment, how much was a Valun worth in dollars at inception? $2.16. How much is a Valun worth today? Nearly $3.00. What would happen should the price of gold exceed the inception price of $2,160 an oz? Whatever that new high for gold would be, would become the new Figure 1 for all Valuns. We would never allow the inception price of gold to dollars (or any other currency) to be set lower. That would go against the design of the system and destroy the community's confidence in the money's purchasing power.

Yet governments and banks have in the past devalued money for the most absurd reasons, usually having to do with a government's inability to pay off debts or for bankers to secure repayment with real assets; think what happened in Iceland and Greece as two recent episodes.  Devaluation was threatened as a means to "save the banking sector."  In Iceland's case, they wanted to make the Icelandic currency cheaper prior to the country entering the eurozone so a few could profit from the exchange, while in Greece, they wanted exactly the opposite; for Greece to leave the euro and return to a devalued drachma.  

Fiat issue in the Valun system is proposed to take two forms, both described
by E. C. Riegel in some detail, as if he were just sketching them out. First for the indigent, the impecunious, the poor; they would be allowed to issue their own money, but only as much as the community deemed acceptable to maintain a minimum subsistence. Second, one would issue Valuns that one worked to bring into existence, by a “self financing” of labour concept that is one of the most strikingly original features of the proposal.

Understand that while the first means allows the poor to live some kind of life, presumably all the labour anyone would perform would demand more money than the poor get to issue and that's fine up to the point where the business costs out their products in terms of Valuns to determine how much something would fairly sell for in Valuns. Obviously if something costs too much in competition with someone else's product then it wouldn't make sense to even produce them, or at least one would have to have a unique feature that would make the product worth the extra Valuns.

The question arises, well how does the state pay for itself in a Valun system? This is simpler than it seems too. If states had recourse to no other money than the people's money that they issue, the governments would truly be at the mercy and sufferance of the people, not as it is now. Governments would have to borrow money as zero interest loans since usury is not allowed and pay it back by taxing the people for it. It would be pretty obvious that if lending were high and taxes were high, that the people would certainly scream louder than now for the heads of their states.

The result would of course be that states would have to get out of certain businesses and allow private enterprise to take over those activities. In fact there's probably little that any state needs to do other than protect its citizens from loss of life liberty or property without due process of law. Try and get any government anywhere to abide by that restriction under the present system. It's simply not going to happen.

With more freedom, more competition, an end to monopolies and the end of government coercive measures, things would sort themselves out according to the wants of the people, not their governments and certainly not those who society owes everything to under the present system; the bankers.

One of the core features of the present system is that nowhere is labour rewarded adequately for what it sacrifices in time and effort, sorry. And we certainly do not include all those positions where
people are paid far more than their work is worth, sorry. And yeah, we're being sarcastic. There are always calls to raise the minimum wage when all that does is raise the price level for everything. We'd rather see people decide in each instance just how much each job is really worth. They can't do that now. If they did, perhaps less foolish, stupid and dangerous jobs wouldn't even exist as they would never pay for themselves in an honest monetary system. I hope that's understood.

People get so distracted by the tokens of a money system and assume that those by themselves are the money. No, those are only token pieces of the entire monetary system. Gold and silver coins as they circulated through that system were likewise just the tokens of that system which happened to be made of gold and silver. Ancient Spartans made theirs out of leather and some other communities used seashells or even bails of cotton or tobacco. There is no fundamental difference and moreover such discussions attempt to ignore the real elephant in the room; usury. We're sorry, but until that dragon is slain, there can be no fundamental change whatever.

So, if money need have no intrinsic value, then the cheapest form it can take the better. Printed paper certificates looks to be an adequate representation. But let's make them more beautiful than any of our present money and let's use one side of each bill to advertise a member business, since another aspect of money and economy that is often neglected is the community the money serves. Let there be so much difference in these designs that no counterfeiter would ever be able to keep up with all of them. We explained all of this in other papers.

Money is created and it is also destroyed. One way money is definitely destroyed is in depreciation of a capital asset, a machine or property that loses its value over time. If I bought a car for $40K but had run it for 100,000 miles, even if I kept the car in very good condition, it would still have lost a portion of its initial cost to me. That money is lost for good. Another way money is lost is when I paid too much for labour or that labour didn't produce a result that enabled me to recoup the loss, in some cases affecting the viability of the business itself.

Let's say I paid someone $80 to clean my gutters and downspouts simply because I couldn't get someone I knew who I could have had do it for $40. I'm out that extra $40. If I paid someone to work on a product that was expected to net my company $200,000 a year but that product fell behind schedule so that it wouldn't even be worth anything when released as it had been made obsolete by the time it was ready for sale, again, I'd be out whatever money was risked to make that $200,000. That's the way things go.

How much more extra money does one expect to see floating around chasing goods in a government issued system? Far more since the government spends money on things that are probably never supposed to be used; all military industrial gadgets, weapons, etc. There's where your inflation comes from and as long as there is inflation and more debt than there is money, everyone must race to catch up so that only a few at the top (the true “useless eaters' of society) can live nice easy lives of luxury on the backs of the rest of the people.

Also, and this too must be mentioned often; reliance on gold and silver does not guarantee an end to inflation. In the 16th century where only silver and gold were used, there was a 100% inflation entirely due to the import of gold into Europe from the New World. The gold bugs conveniently never mention that because they don't want their idealistic bubble burst. These are people who bought high and held for decades simply because they couldn't sell for what they bought their dang pieces of metal for, who still cling to the idea that their “money” is the only real stuff. They are ... mistaken.

So honestly, do you want something better? You must ignore what the cheats, liars and other so called “experts” have to say and just go by common sense. In a Valun system, if you are poor, old, weak, disabled, etc. the system will help you. But if you have skills, talent, ambition, drive, the desire to really do something exceptional, you will be able to and no government will be able to stop you. But of course you'll probably never be as rich as a Gates, Buffett or Soros to name just a few, though I might be surprised. The people who finally decide to go to and develop the moon or Mars may defy my expectations.

David Burton

Current Hypothetical Value of a Hypothetical Value Unit

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