Punchinello’s Chronicles

May 11, 2011

Gold Standard? Not So Much

Filed under: Word of the Day — Punchinello @ 5:40 pm
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Steve Forbes has come out with a statement suggesting that the US will likely go back to a gold standard. Several potential 2012 presidential candidates are also jumping on this bandwagon. I have to admit that not so long ago, I would have thought this was a great idea. But I’ve taken the time to learn a bit about economics, and I now understand that a gold standard would be foolish.

What’s money in the first place? Money is simply stored work and effort. It’s a symbolic “something” that’s easy to carry around and exchange in various ways. Paper money (cash) is easy to use between people for everyday transactions. Checks are useful to mail payments. Electronic transactions use digital numbers to represent whatever money is in a bank account. All in all, money is “something” that we can give to folks or get from folks, and use it to buy stuff.

We “get” money through some sort of work and effort. If we have no money, then we have to somehow figure out a way to get shelter from the weather, put clothing on our body, grow food, collect water and all the other basics of survival. The next step up is to grow or build enough surplus that we can trade our surplus for someone else’s surplus. Trading and barter make up a basic, primitive economy.

The problem with barter begins when we have a larger society, separated by geographic distance. The next immediate problem is when needs are separated in time. For example, if you mow someone’s lawn today, you might not want to immediately trade that service for a fried chicken dinner. So how do you store your lawn-mowing work until such time as you want the chicken dinner?

Another example would be that you want to trade your lawn-mowing service for a sweater made by someone 500 miles away. It’s not so easy, first because of your having to travel the distance to mow their lawn, and secondly because they might have someone closer at hand. Not to mention the travel involved to pick up the sweater. You want a way to assign your work to “something” that you can put in the mail.

Money is a way we can store our work and effort so that we can postpone an exchange. We can store up a lot of work in order to exchange that work for something more “expensive.” Maybe the knit sweater is worth 4 mowed lawns. How do you do that, unless you postpone getting the sweater until after you’ve mowed the person’s lawn four times.

A better way would be to mow four different people’s lawns in one afternoon, then trade all that work for one sweater. Now the problem is that you only mowed the sweater maker’s lawn one time. What about all that work you did for the three other people?

Throughout history, people have come up with a symbol of some sort that represents value. The value is work and effort. We might say that mowing one lawn is worth 1 pearl, 15 shells, 40 beads, 2 packs of cigarettes, 12 bullets, 2 rabbit pelts, or whatever else we want to make up. What matters is that EVERYone agrees on the basic symbol.

The problem with assigning a symbol is that we also have to work out some kind of formula that connects the symbol with work and effort. How many plastic beads will equal one mowed lawn?

Another problem is the exact specification of the symbol. What kind of plastic, in what colors, made under what sort of engineering specifications?

Finally, we have the problem of counterfeiting, where someone can make copies of the symbol we’re using for money, but there was NO work or effort behind the symbol.

Imagine if someone started manufacturing plastic beads by the truckload, and used them to buy real goods and services! This is what the Federal Reserve is doing, in cahoots with the US Treasury when they both print dollar bills that have no connection to gross domestic product (GDP).

The key here is the connection between a money symbol and the underlying, real-world goods and services. There must be a true connection between work and effort produced by real people, and the “something” the society is using for money.

Until I did some studying and learning, I thought that a good money symbol should also be limited in access and quantity. Gold, for example, is limited. There’s only a small supply of gold in the world, therefore it would be very hard to counterfeit. But there’s a fundamental problem with that concept!

  • What happens when there are more and more goods and services, and more and more work and effort, but there’s only a limited amount of gold?

It isn’t the symbol that matters. It’s who controls the symbol!

Back in 1913, the United States made a decision to use a Gold Standard for money. That simply means that the US assigned 35 pieces of paper to equal 1 ounce of gold. They called the pieces of paper “dollars.”

Now comes the major, major, really big problem: Who connects how many pieces of paper with how much work and effort?

There are two basic theories about how to assign work and effort to a monetary symbol. The one theory comes from John Maynard Keynes and gives us the Keynesian school of economic theory. The other theory is from Friedrich August Hayek, producing the Free-Market Capitalism school of economics.

Keynes tells us that a central authority, a government or state will determine how much symbol should equal how much work and effort. This has become known as “top down” economics, where someone at “the top” tells everyone else at “the bottom” how much money they can have for how much work and effort.

Free-market capitalism tells us that “the market” will determine how much symbol will equal what amount of goods and services. This “market” means every individual in the society, working on their own, in their own self interest, figuring out how much they’re each willing to exchange for whatever they want.

Hayek’s concept has become known as “bottom up” economics. The individuals at the bottom of the process each, individually determine prices and value, which eventually comes together to form statistical “market prices.”

When the US government made the determination that 35 dollar bills will equal 1 ounce of gold, that was a top down decision. When the State of Illinois government tells you that 1 hour of work and effort will equal $8.25 (eight and a quarter pieces of paper), that’s a top down decision.

Everything is still okay, as long as whomever at the top makes sure that the number of symbols (paper dollars) matches up with the amount of work and effort being produced by the entire society. In theory, the amount of money in circulation is supposed to match up with the total production of everyone in America’s work and effort. That total production is the gross domestic product — the GDP that you hear about all the time.

  • When money symbols can increase with the amount of goods and services, we have fiat money.

A gold standard would mean that “someone” would have to be in charge of storing all the gold somewhere. That gold would be the representation of real work and real effort. That “someone” would then issue pieces of paper (dollars) in an exact formula. Back in 1913, you could take 35 pieces of paper, go to “someone” and redeem the paper for 1 ounce of gold. The gold (in theory) was stored in Fort Knox.

What happens if that group or person who stores the gold is corrupt? What if they start printing more dollar bills then there actually is gold?

It’s no different than when a corrupt person or group prints more pieces of paper than there actually is real production!

It doesn’t matter if we use gold or we use yours and my work and effort to “back” the value of our dollars! Nobody cares, and it means nothing at all to the world economy! What matters is ONLY that the amount of symbolic money matches the real, underlying “stuff” the money symbolizes!

Bottom-up economics, as advocated by Hayek and the Chicago School of Economics is pretty simple. For each person’s work and effort, the servant government then produces “money.” Only after a product or service has been created does “someone” produce the money to match that real stuff!

  • Top-down economics allows whomever is in control to produce arbitrary amounts of money. In theory, that will therefore cause products and services to magically appear! (In the same way, producing more and more gasoline will cause new cars to magically appear.)

Every time you hear about “stimulus” and how QE1 or QE2 or QE-whatever will “grow job and stimulate the economy,” you’re hearing the fantasy of Keynesian economics. They believe that printing more money will somehow produce more real-world work and effort.

At the same time, more and more people are doing NO work, expending NO effort. Unemployment benefits, welfare, food stamps, and every other government benefit or entitlement program is producing yet MORE paper money without a connection to goods and services.

Going to a gold standard would do absolutely nothing! Zero, zilch, nada! In fact, what it would do would be to limit even more the free market determination of prices and value. What if you want to start a business and borrow some money for a machine? What if there isn’t enough available gold to generate the money for you to borrow? Then what?

The solution is NOT a gold standard! Instead, the solution is to get rid of the corruption taking place in the government and the banking system. People should be in jail by now! Remove the phony statistics from the Bureau of Labor & Statistics. They’re busy telling us how all the magic money pouring into the economy “matches” the GDP! It’s total hogwash designed for a single purpose: to give the super-rich more and more paper money.

We can use gold, silver, wooden sticks, or Kryptonite as the underlying basis of our money. It doesn’t matter! What matters is only who controls the supply of that underlying basis. When you and I, in a a free market, with only the most basic regulatory oversight systems — when we control the supply (and demand) of money, then we’ll have a solid economy!

Government should serve the people, not the other way around! And that service is to only print new money whenever new products, goods and services enter into the market. That’s it! That’s all she wrote! No more, no less, but a government BY the people, FOR the people, which SERVES the people.

Okay…that’s the end of my rant for now.


July 30, 2009

Fractional Reserve Banking – Theory vs Truth

Filed under: Surely a Jest? — Punchinello @ 3:20 am
Tags: , , ,

Let’s all keep in mind that banks only make money from interest on loans. Investment banks have another rip-off scheme, making money on derivatives. That’s not what I want to talk about though. Instead, I had a chance to again hear about the unbelievable and outright robbery going on in our banking system. It’s been going on for as long as banks have existed, but with the accompaniment of the Federal Reserve (the Fed), it’s why we’re in the situation we’re in today.

Banks are told by the Fed that they must keep a certain percentage of their deposits in the vault, on reserve. That number can go up or down, and currently stands at about 3%, to simplify things. But let’s say I’m wrong, and let’s say the banks have to keep 10% of their deposits in the vault. That’s $100 for every $1,000.

The remaining $900, in this example, is money those banks can lend out. They use it to make loans…and interest.

Here’s what I learned today. Way back when the Fed was created (1917), it was meant to be a way to help build the economy. After all, if ALL the money people deposited stayed in the vault, there wouldn’t be any money for loans. And loans, for the most part, are good. At least they are when they’re for real things, borrowed by real people, who really can pay back the loans.

Suppose John plants a few acres of land with corn. At harvest time, he brings in lots of bushels of corn. That’s real corn. John did real work, digging real dirt, and planting real seeds. He farmed the land for the summer, spending real time. When it came to harvest, he really did sweat and exert muscle power to get those bushels of actual corn.

John goes to Mary, and offers to sell the corn for $1,000 in money. Where does that money come from?

Mary goes to the US Treasury and says she needs $1,000 in Federal Reserve notes. Those are legal contracts indicating that “somehow” the United States will replace each dollar note with “something.” Let’s say Mary offers 1 oz. of gold in exchange for the $1,000. Presumably, she could get back her gold.

Mary gives John the $1,000, which is as good as gold. If John wanted to, he could go to the US Treasury and exchange the paper for gold. Fat chance! Not any more. But that’s not important right now.

What we now have is $1,000 in notes. They’re given to John, and he gives Mary the corn. She uses it for whatever. John takes the $1,000 and puts it in the bank. Fractional reserve deposits mean that the bank only has to keep $100 in the vault. They can now make loans with $900.

Okay. The original theory means that real corn and real work created a real product. That real product was symbolized by $1,000 in paper money. But that paper money was “backed” by actual product. It could have been gold, or it can be the Gross Domestic Product (GDP). In the latter case, John’s real work and real corn is “creating” the $1,000.

We use paper money as a convenience. It’s easier to handle than actual gold. It’s also easier for John and Mary to handle when they go to the store and buy paint or a hammer.

Originally, the bank was allowed to lend out $900. But that meant that the entire $1,000 actually represented something real. By lending out the money, hoping John wouldn’t suddenly want back his entire deposit, other people could start farms or stores.

10% is 10%, right? That’s what the bankers decided. And who would know?

The reality is utterly astounding!

Instead of FIRST getting $1,000 as a deposit, THEN lending out $900, the banks decided that the entire $1,000 was “really the same as” 10% of what they “likely would have later.”

Suddenly, the entire $1,000 became the fraction. The reserve. The 10%.

That meant the bank “felt” it could lend out $9,000! That’s NINE THOUSAND dollars! Why? Because “really,” the bank had $1,000 on hand (in the vault), and that’s the ten percent the Fed required.

Nobody ever asked about any of this. Why? Because economics is too hard to think about! And, it’s not taught in grade school.

The fundamental lie or problem with all this is that it complete disassociates REAL product from actual money! In the original theory, the corn John harvested was $1,000 worth of actual product. The bank kept 10% of that REAL product in the vault, and lent out the other, remaining 90%. But when you total it all up, it all came back to REAL corn!

This new “scheme” that’s been going of for at least a hundred years (actually, a whole lot longer), means there’s $9,000 of NOTHING in the bank!

Where does the bank get the NOTHING that gets turned into $9,000? Why…from the Federal Reserve banking system!

The Fed writes a check to the US Treasury, which then prints $9,000. The bank adds those pieces of worthless paper, disassociated with any kind of make-believe reality, to the $1,000 REAL dollars and, wah-lah! $10,000! Out of thin air!

Where does the Fed get the money to write the check? The answer is they don’t have to have money. Their check is as good as money, which is why the Treasury then prints the money, the Federal Reserve Notes that “act as if” they’re actual money. In other words, the Fed has a bottomless checkbook. It never runs out of money because it isn’t actual money in the first place. It’s just a smile and a promise of nothing.

You borrow $9,000 to buy a motorbike. You’ll be paying back that loan forever, with interest! The bank pockets the interest. What happens if you pay back the loan?

You’ve actually paid back $9,000 of NOTHING. And how does the bank make any kind of interest or money on NOTHING? They don’t! So they really, really don’t want you to pay back that loan! And that, my friends, is what’s known as “consumer spending.”

When you bought a bike or car, you actually could expect to pay the loan back in a few years. So the banks gave us revolving credit cards. That way, you don’t have to go through a loan application, and you can borrow money to buy a hamburger. When you pay back the minimum payments, you’re only paying back part of the interest.

Ergo, ShaZAM!…you have a never-ending loan! The bank gets never-ending interest, and there’s ZERO money anywhere!

The absolutely mind-numbing truth of all this is that it’s not only legal, it’s why we have trillions of dollars in bailout money, loans to banks, and new worthless money from the Fed. All because bankers decided that instead of keeping 10% of what really exists, why not say that what actually exists is only 10% of………….something?

What’s that something? Nobody knows. It’s a total mystery!

March 27, 2009

We’re Co-Signing on Federal Reserve Loans?

Filed under: Surely a Jest? — Punchinello @ 4:03 am
Tags: , ,

I was listening to Coast-to-Coast tonight, hearing from Andre Eggelletion all about the Federal Reserve System. That’s “The Fed” to most of us who hear about things on the news at the top of the hour. Frankly, I’ve never paid much attention to the Federal Reserve. Actually, none at all.

I took out a $1 bill and really looked at it. By gosh, it’s issued by none other than the Federal Reserve! So what is this thing?

I’m still not sure. It’s a semi-private organization, basically the Central Bank of the United States. But nobody really reports to anyone in the government. Oh, there’s “oversight” by some congressional and senate committees, but what if the people running the Fed (Board of Governors) don’t feel like explaining anything?

Nothing we can do about it.

Then I got to looking at how the Fed controls our money system. In fact, the Federal Reserve tells the US Treasury that it wants X amount in money (coins and bills). The Treasury, through the US Mint, creates those coins and money. They sell it to the Fed, and charge only about 4-cents/dollar for the labor and work.

Now all this X amount of money goes into the bank. That’s the Federal Reserve bank. When my bank needs new money, it gets it from the Fed. When I go and get $10 from my bank’s ATM machine, it spits out Federal Reserve notes.

What’s that money backed by? Nothing, really, other than some sort of vague calculation as to how much the Gross Domestic Product (GDP) is rumored to be. At the moment, the entire US is worth about $51-trillion. At least that’s what somebody at the Federal Reserve calculates. Who, and how do they make that calculation? Who knows?

Oh, and by the way, the New York regional Federal Reserve bank holds about 80% of the loans and other stuff in the overall balance sheet. That means that whatever was or is majorly important in New York (like Wall Street), somehow is sucking money out of the Federal Reserve System.

How or what? Nobody knows. It’s a mystery.

Good stuff. So now I know that my money isn’t really American money. It’s Federal Reserve notes, theoretically guaranteed by the US economy.

Then I figured I’d go see how much money currently the Feds have “lent” to somebody. Who? Nobody knows, it’s a mystery. When Congress asked Federal Reserve Chairman where this money went, Ben Bernanke pretty much told them to take a flying leap. He doesn’t have to report to anyone, so “Nobody’s the Boss of Me” was the main idea.

But could we at least know how much?

$11.6 Trillion Dollars!

Holy Crap! I thought we were dealing with only about $2-3 trillion from the bailout packages and junk? Apparently not.

When the Fed decides to lend money to other banks and companies, it basically is saying that we, the taxpayers, are going to guarantee that loan. That means you and I co-signed on the loans. We’re liable for that money if it doesn’t get paid back by “whomever.”

I think I’m gonna have to read a book about the Federal Reserve. It’s so weird, so complicated, and so incomprehensible, it’s nervous-making. If 12 people can set the total amount of money floating around in the entire economy, and they don’t report to anybody, what then?

Well, I guess then they’d be like the Illinois Tollway Authority. They’re not elected either, and nobody controls any of the decisions they make either. So what, the entire United States is being run by, like, 50 people who nobody knows and who don’t report to anybody? Yikes!

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