Money: Substance or Symbol - Part I

[TheGeneral]

In 1987 an attorney in Memphis, Tennessee, informed me that an Assistant US Attorney for the Western District of Tennessee had called me "the most dangerous man in the Mid-South." Imagine the terror you would feel if someone named you that. What sorts of criminals does the US Attorney's office deal with? Was I a drug trafficker? **No.** Bank fraud perpetrator? Check kiter? Purveyor of prostitutes? Pornographer? Briber of government officials? Murderer? Terrorist? Communist revolutionary? **No.** None of these. I was the quiet father of seven children and a businessman. How on earth could the Assistant US Attorney dealing with all sorts of criminals call me "the most dangerous man in the Mid-South"? How could I **be** the most dangerous man in the Mid-South? Because...

Link to full article:
http://www.theamericanview.com/index.php?id=670

[rcdavis]

Compelling article...but it does leave me with some questions. For example, sometimes banks (general term for depository firms including credit unions, savings & loans, etc.) fail or go out of business. From the article one would wonder why such would happen with such a extremely profitable situation. Anyone (especially Franklin if you're tracking this forum) care to give us some insight here?

-Ricardo

[jgist]

Originally Posted by rcdavis

Compelling article...but it does leave me with some questions. For example, sometimes banks (general term for depository firms including credit unions, savings & loans, etc.) fail or go out of business. From the article one would wonder why such would happen with such a extremely profitable situation. Anyone (especially Franklin if you're tracking this forum) care to give us some insight here?

-Ricardo

That's a good question! I'd like a greater explanation of that myself.

[Franklin Sanders]

The answer is simple: success begets excess. The savings & loan crisis of the late 1980s early 1990s is a good example. They were creating money out of thin air, so the sky was the limit -- until, of course, the clouds of bankruptcy rolled in and the sky fell. That's one of the system's inherent instabilities: success begets excess. It will always over-issue credit (because the more credit it issues, the more it profits) until it collapses. That was a major reason to put the Federal Reserve in place: to control the pace of looting & make sure it didn't "excess" itself into collapse.
-- F. Sanders

[True Blue]

So, as long as the borrower believes he owes the bank the money which the bank created out of thin air, the invented money will eventually materialize over the course that the borrower repays his loan (using Federal Reserve notes that the Fed prints in response to all such created money). But if the borrower defaults on his loan, the bank will owe that money because the Fed has already printed it into circulation and it now must be accounted for.

Allowing me license for my poor terminology, is this what you're saying?

[rcdavis]

Welcome to the forum, Franklin! We appreciate your feedback.

There are a number of efforts to circulate gold and silver: eGold, GoldMoney, the Liberty Dollar, etc. You note in the interview that part of the solution is to revive the use of gold and silver in our local economy. That's good for "small transactions" -- buying a BBQ rib lunch, a lawn mower, etc. But eventually for "good money" to push out "bad money" in the broad economy there's going to need to be a way to use "good money" as investment capital -- buying a car, a house, some equipment for my factory, etc. It appears that the bad money cartel will crush anyone trying to do so -- you experienced this personally. Any ideas of how this hurdle will be overcome?

In the King's Service,

-Ricardo

P.S. By the way, I grew up in Little Rock. What was the name of the BBQ joint you spoke of and where was it located?

[MAC]

What I want to know is how does one use gold in every day transactions? Who is going to take it and who is going to know what kind of change is needed back, etc.

When you use the gold you have bought then you have to replace it with many more $$$$.

I guess this whole thing just doesn't "click" with me!

I never could grasp inflation, deflation, recession, depression, etc., either.

[Michael A. Peroutka]

Dear Mac:

Part II of Franklin's article will be up tomorrow (I hope). It will deal with the problems of having gold and silver "accepted" in eceryday transactions. He offers some helpful hints but, please, remember that I said it won't be exactly simple or easy to do. But I believe that it is possible.

I ask you to remember that this fiat currency we use is only since 1913. Gold and silver have been used and relied upon for thousands of years.

Hope this helps. Stay tuned.

MAP

[rcdavis]

We interrupt this thread to bring you a word from our Sponsor. From the book of the prophet Habakkuk, chapter two we read:

2 Then the LORD replied:
"Write down the revelation
and make it plain on tablets
so that a herald may run with it.

3 For the revelation awaits an appointed time;
it speaks of the end
and will not prove false.
Though it linger, wait for it;
it will certainly come and will not delay.

4 "See, he is puffed up;
his desires are not upright—
but the righteous will live by his faith -

5 indeed, wine betrays him;
he is arrogant and never at rest.
Because he is as greedy as the grave
and like death is never satisfied,
he gathers to himself all the nations
and takes captive all the peoples.

6 "Will not all of them taunt him with ridicule and scorn, saying,
" 'Woe to him who piles up stolen goods
and makes himself wealthy by extortion!
How long must this go on?'

7 Will not your debtors suddenly arise?
Will they not wake up and make you tremble?
Then you will become their victim.

8 Because you have plundered many nations,
the peoples who are left will plunder you.
For you have shed man's blood;
you have destroyed lands and cities and everyone in them.

9 "Woe to him who builds his realm by unjust gain
to set his nest on high,
to escape the clutches of ruin!

10 You have plotted the ruin of many peoples,
shaming your own house and forfeiting your life.

11 The stones of the wall will cry out,
and the beams of the woodwork will echo it.

12 "Woe to him who builds a city with bloodshed
and establishes a town by crime!

13 Has not the LORD Almighty determined
that the people's labor is only fuel for the fire,
that the nations exhaust themselves for nothing?

14 For the earth will be filled with the knowledge of the glory of the LORD,
as the waters cover the sea.

Any resemblance between persons and/or nations today and the ones spoken of by the Lord is purely intentional. May we take hope in His promises and walk by faith, not by sight.


-Ricardo

[deskjockey]

Originally Posted by rcdavis

Compelling article...but it does leave me with some questions. For example, sometimes banks (general term for depository firms including credit unions, savings & loans, etc.) fail or go out of business. From the article one would wonder why such would happen with such a extremely profitable situation. Anyone (especially Franklin if you're tracking this forum) care to give us some insight here?

-Ricardo

Ricardo, the banks and even savings and loans can only lend out a portion of their deposits that is less than 100%. Therefore they are not creating money by lending but only utilizing the deposits on hand. Regulations do not permit them to create money by loaning in excess of deposits. The savings and loan crises was created by a couple of events. Reagan basically gave them a pass, wink and nod to loan as aggressively as they wanted in hopes of stimulating the economy. You’ll remember the Keating 5 (McCain, Glenn, Deconcini etc) that would tell the regulators to back off of the banks during audits and were prosecuted for such.

This environment created what is known in economics as moral hazard and began a new phenomenon of S & L's going to brokerage houses selling billions weekly in hot CD's for deposits and then lending it on insane projects appraised at $125% or more of true market. The riskier the condition of the bank the higher the yield of the CD, the more they sold, (because it was insured). It was a horrific moral hazard. Basically the banks realized there was really no downside because the Feds would guarantee the deposits and great upside if they go for broke and win.

Of course the Federal givernment in theory was backing all this lending. I say in theory because the congress sets limits on the amount the Feds stand prepared to bailout an agency. The agencies charge the institutions a corresponding fee for the amount in the fund to be able to put SPIC, FDIC, SLIC etc on the front door. These are quasi givernment institutions but legally are not backed by the givernment except as to any limit congress may choose to offer. So technically your $100,000 deposit insurance is not federally guaranteed, it is guaranteed by an agency that has a non-obligatory federal guarantee for some set limit which was easily exceeded by an industry default as occurred in the 80’s. But as I learned in the early 70’s, they have no spine, so they automatically can be counted on to raise the agency guarantee at taxpayer expense to bail out the industry for bad loans.

Well what happened is that some of these projects never cashed flowed and the agencies were being emptied out and the Feds stepped in for additional hundreds of billions to bail out the agencies. Now the auditors were unleashed and the banks were thrown into default all over the place as the properties were now appraised at market. Hence forth the agencies set tight regulations on appraisals and most banks work from an approved appraisal list.

Creating paper or money averages about 2.5% a year and is a function of the treasury printing paper. However, money supply can jump all over the place and is a different animal. For example you'll remember Greenspan's irrational exuberance warnings in the late 90's. Well this wasn’t a function of creating money so much as increasing money supply. This is usually done by the Feds buying back bonds and putting cash into the system. It ran at 15% during this period that he hoped to hold off the Asian crises from impacting our economy. The market collapsed naturally as soon as he cut back on the supply. He knew he was pumping money into the system and people were putting it in stocks so he continued his warnings knowing he would cut back on supply.

I don’t want to get into the nuances of the issue, but the 2.5% creation of money by printing paper is a tax on the rich who tend to hold larger cash balances. It also however is a tax on foreign governments that also hold huge dollars as their reserves backing their own currencies. That is part of what the EU wants to get into, the ability to have their currency be used as a backing of foreign money and get a free 2.5% tax by printing paper. Part of the Saddam problem and the Arab problem was they were beginning to switch from dollar based currencies to Euros. Saddam was leading the charge. It has been said China has been easing out of dollars in favor of Euros, while telling the world they remain loyal to the dollar. And smart they were to go that way as the dollar has slid compared to the Euro.

Well, enough economics for today. Hopefully there is something lucid there for you.