From: Forrest Bishop (forrestb@ix.netcom.com)
Date: Sat Sep 09 2000 - 21:25:29 MDT
A poster at USAGOLD is putting out a nice little series on free
trade, markets and other:
http://www.usagold.com/cpmforum/default.html
Journeyman (9/9/2000; 15:08:05MT - usagold.com msg#: 36317)
Free-Trade V, Part 1: A Fist Full Of Dollars @ALL
http://www.usagold.com/gildedopinion/bigfloat.html
PREVIOUS INSTALLMENTS: Journeyman (09/05/00; msg#: 36076)
---------------------- Journeyman (09/06/00; msg#: 36133)
---------------------- Journeyman (09/07/00; msg#: 36204)
---------------------- Journeyman (09/08/00; msg#: 36268)
So far we've discovered in previous installments that almost no-
one likes free-trade except our schizophrenic "consumer-half".
We've also learned that the logic of "comparative advantage"
suggests we'd almost have to be crazy _NOT_ to trade - - - and
that interfering with trade is generally _not_ "in the common
interest."
Further we've learned that free markets don't exist because they
are supressed largely by a traditional alliance between "vested
interests of entrepreneurs, capitalists, land-owners, and
workers" in cahoots with governments, and that since these
supressions are administered by governments, they end up doing
very little protecting but a lot of taxing.
Additonally we found out that jobs aren't really lost, but
instead, as a result of increasing efficiencies (including better
"capital equipment"), people are just freed-up from older types
of employment and find new jobs. These gains in efficiency
result in more "stuff" produced per man hour, which is commonly
called "productivity." Increasing productivity is important, as
Alan Greenspan suggests, because "ultimately the standard of
living of human beings is determined by the output per worker."
We also saw that there are at least three logical problems with
free trade, which we labeled for convenience, "sociological"
problems, "dependency" problems, and "(fiat) currency" problems.
I'm sure by now you've probably begun taking sleeping pills just
so you can dull your insatiable curiosity, as to what's going to
happen in the next installment of this saga. Well, here's just
what you've been waiting for!!
_Free-trade and the money problem_
The essence of the free-trade money problem is that history
proves the trade value of any "fiat" (i.e. paper/megabyte)
dollar, yen, pound, etc. note, no matter what numbers and symbols
are printed on it, can and usually does go to effectively zero at
some unpredictable point, usually quite rapidly. This is what
FOA/TrailGuide means when he talks about the dollar being near
the end of it's "timeline." Additionally history proves that the
value of these fiat certificates always, _always_, *always*,
_*always,*_ *ALWAYS* *_ALWAYS*_ depreciates, that is loses buying
power year after year after year. _*EVERY*_ year. These days,
the result of this depreciation -- over-all higher prices -- is
called "inflation."
There is a common cause for both these defects in paper/megabyte
money: governments, usually these days in cahoots with so-called
"central banks," endlessly increase the fiat supply. The Law of
Supply and Demand says this increased supply will cause the
fiat's value to drop --- and it does. _*EVERY*_ year. Yearly
inflation is the incontrovertible evidence of this excessive
money creation.
When "they" increase the money supply _too much_, eventually the
value drops as everyone tries to unload the currency at once and
you get sudden hyper-inflation, what Austrian economists call the
"katastrophenhausse" or "crack-up boom." Theoretically
governments and/or central banks could control themselves and
stop issuing excess currency. But they never have.
It's the fact that these paper/megabyte notes can go to
essentially zero value that distinguishes modern "fiat" money
from "hard" money, that is, from gold and silver. Because of
gold's history and since its value is directly proportional to
its mass (weight), people inherently believe gold won't lose much
of its value -- after all, even if gold's "price" drops a little,
its _weight_ doesn't change does it?
On the other hand, modern paper-backed currency notes count
instead on symbols and government "fiats" or "proclamations"
("THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE" --
whether you like it or not, sucker) to convince people of the
paper certificates' worth and to accept them in trade. It is the
"fiat" or "proclamation" part of the package that causes those in
the know to refer to all modern currencies as "fiat currencies,"
"fiat" for short.
"Well, I think you have to define what you mean by a
free market. If you have a fiat currency, which is what
everyone has in the world --- ..." -Alan Greenspan
"That's not a free market." -Congressman Ron Paul
"That is not a free market." -Federal Reserve Chairman
Alan Greenspan, Semi-annual Humphrey-Hawkins Testimony to US
House, July 22, 1998
A five dollar gold piece weighs only about a forth as much as a
$20 dollar gold piece. A five-dollar bill on the other hand
weighs exactly the same as a twenty-dollar bill, or for that
matter, a one-dollar bill or a one-hundred dollar bill. Only the
different symbols and numbers printed on paper money convince
people they have different values -- or any value at all.
Once people lose faith in those symbols and numbers, fiat has no
weight to back it up and, government proclamation or not, people
become increasingly reluctant to accept it. An ounce of gold is
an ounce of gold, with or without symbols, with or without a
government fiat. It's a psychological thing -- but a very
powerful and important one indeed.
With gold, "the buck stops here." People have always accepted
gold as payment in full and always accepted it in trade. In
practice gold has _never_ acted like an IOU that might not be
good anymore. Fiat eventually always has. And additionally, if
history is any guide at all, because of "inflation" you can be
absolutely certain those fiat certificates -- unlike the gold --
you've been stashing under the mattress will buy less at year's
end than they do today. Fiat virtually NEVER goes up in terms of
what it can buy -- except in rare cases when productivity in
isolated products temporarily out-runs money-supply inflation.
You can see why accepting fiat IOUs for your savings in lieu of
gold, like accepting a promise to deliver food later instead of
taking delivery and storing it yourself, can be risky. The real
essence of the situation is that as long as all the links in the
supply chain from producer to your dinner table are sound,
everything's OK. But what if the IOUs go bad?
There is indeed a potential problem with free trade directly
related to the above considerations - - - especially if you're
using what amounts to fiat IOUs which are very widely accepted in
trade outside the country of orgin. Like the dollar is.
Remember, these megabyte IOUs have no floor value. Unlike gold,
they can drop to zero value in a crack-up boom. And once
attuned, _everyone_ can see that zero-value potential, especially
once a crack-up boom actually starts.
If "foreigners" were holding hard money -- gold or silver
remember -- they wouldn't be likely to believe it's value could
go to zero and so suddenly try to unload it, thus causing the
fabled "crack-up boom." But if they're holding paper/megabyte
fiat money and realizing its value is based only on the symbols
printed on it and thus _could_ drop to zero, they easily might
decide to unload it.
Thus free trade -- using gold -- poses no threat to your domestic
money system. A so-called "trade imbalance" or "current account
deficit" won't lead to the sudden loss of value in your gold
denominated savings and buying power. And a "current account
deficit" is much more easily understood as "gold shipped
overseas."
On the other hand, if you've been sending those megabyte-paper-
fiat symbolic IOUs overseas in return for imported goods (instead
of sending gold), the "foreigners" holding these IOUs could very
logically decide to suddenly repatriate them. This would cause a
sudden drastic depreciation in the trade value of the actual
paper currency (or accounts of any kind denominated in that
currency) that you hold. The value of these accounts _could_ go
to virtually zero remember, creating major havoc in your life and
your country -- and in the case of the "dollar," in the whole
world. THUS A MAIN PROBLEM ASSOCIATED WITH "FREE TRADE" ISN'T
REALLY A PROBLEM WITH FREE TRADE AT ALL: IT'S A PROBLEM WITH FIAT
CURRENCY INSTEAD.
Large numbers of people recognizing that there is an over-supply
of fiat money and recognizing that the currency is over-valued
and a crack-up boom _could_ start is often enough to start one.
This is the condition, like a supersaturated solution, when a
single event, a single crystal, dropped into the mix can start
the sudden percipitation of the fiat to the bottom of the beaker.
This is the current situation with the "dollar."
If you want to understand the implications of this huge overseas
build-up of paper/megabyte dollars (and it is huge) as a result
of record "trade imbalances" check out "BIG-FLOAT: The American
Damocles," by L. Reichard White, available at:
http://www.usagold.com/gildedopinion/bigfloat.html
Or alternatively click on the (same) link in the header to this
message.
There's another fiat money related trade problem we already know
about: If you've gotten addicted to trading with either your
shoemaker, or your friendly mechanized mid-west mega-farm, and
haven't been making shoes or growing food yourself - - - and
anything disrupts trade, especially all of a sudden, you've got
the dependency problem. And if your neighbors depend on trade
for their income, you've all got "sociological" problems!
Usually this doesn't happen, but there is one thing that can very
severely disrupt both shoe trading and wheat trading, not to
mention every other kind of trading all at once and all-of-a-
sudden. Yep, katastrophenhausse! This is particularly true if
the trade is cross-border trade with folks using different
national brands of money. If everyone were using gold-backed
currency, of course, crack-up booms simply wouldn't ever happen.
And any remaining trade disruptions that DID happen would not be
related directly to the value of the money. Nor would they be
"systemic."
COMING NEXT: Free-Trade V, Part 2: A Few Dollars More - _Micro-
economic trade effects of California's secession_
Regards,
Journeyman
=======
"In the absence of the gold standard, there is no way to protect savings
from confiscation through inflation. There is no safe store of value. If
there were, the government would have to make its holding illegal, as was
done in the case of gold [Soviet Union, 1929; USA, 1933]. If everyone decided,
for example, to convert all his bank deposits to silver or copper or any
other good, and thereafter declined to accept checks as payment for goods,
bank deposits would lose their purchasing power and government-created bank
credit would be worthless as a claim on goods. The financial policy of the
welfare state requires there be no way for the owners of wealth to protect
themselves.
"This is the shabby secret of the welfare statists' tirades agains gold.
Deficit spending is simply a scheme for the "hidden" confiscation of wealth.
Gold stands in the way of this insidious process. It stands as a protector of
property rights. If one grasps this, one has no difficulty in understanding
the statists' antagonism toward the gold standard."
--Alan Greenspan, "Gold and Economic Freedom", 1966
-- Forrest Bishop Chairman, Institute of Atomic-Scale Engineering http://www.iase.cc
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