Why Saving Doesn't Work

Everyone you have ever known has told you to save money.  This begs two questions: what do they mean by 'save' and what is 'money'.  Of course, everyone knows, right?  Wrong.

First of all, the act of saving money is an attempt to defer the redemption of production.  To explain that more clearly requires an answer to the second question.

Money in the modern sense, as in paper, fiat money, has no value.  It represents a token or marker for production.  In essence, a dollar represents, say, one burrito's worth of production.  The benefit of a common exchange currency is a reduction in the amount of exchange tables necessary to facilitate exchange.  This means that things are priced in a common value measure rather than in terms of other goods.

Now, when an employee gets paid, he/she receives compensation for production.  He/she can then redeem that compensation for other peoples' production.  That covers two of the aspects of money, that of common valuation and currency.  The remaining aspect is the one we need to discuss, which is preservation of wealth.

Fiat money, by its very nature, has no value.  Its use is by fiat, an order of the government.  It is not a factor in production nor is it something that anyone wants for any use other than money.  In some ways, as a currency, this is a good thing, as it is, theoretically, not subject to variations in value due to demand for whatever commodity was chosen as money.  For instance, when gold is used as a currency, the variation of the value of gold leads to variations in pricing and valuation that lead to instability in the market.

Now, to discuss savings.  Savings are funds of some sort set aside to be consumed at a later date.  These funds are typically deployed in some sort of investment vessel.  When they are not, they are deployed as fiat funds by default.  The problem is, of course, that those funds are not value themselves.

If you just save money by stuffing cash in a pillow, that cash represents current production, not future production.  In the future, there is no guarantee that production will remain the same.  As an example, a quantity of funds equal to 1/10th the production today may be equal to 1/12th in the future.  This is one reason savings don't work very well.

In our current economic environment, production in first world countries is fixing to fall.  No matter what the savings, there will only be so much production to go after.  The result of this is that savings will be less useful.

More immediately, there is not enough currency in the banking system, according to those who control these things, and so they will make more.  This will increase the amount of currency in relationship to production, which will continue to fall for the foreseeable future.  In the end, this will lead to massive inflation.  Savings denoted in dollars will be reduced in value.

Quixotically, even though in the future there will be more dollars chasing less production, leading to price increases, real values will fall because total production will fall faster than prices will rise.  What this means is that stocks will also be worth less.

Commodity prices will fall in real production terms as well for some time.  In the future, expect to see them rise.  Since commodities are part of the production process, they represent real savings.  In the case of precious metals, they also represent things people want.  In the future, as the dollar goes to zero value as it must, expect gold, silver and platinum to gain in value in both real terms, as compared to production, and in nominal terms, as compared to the dollar.

However, if you really want to save money for your future, invest in people.  Create a business that does something that needs to be done.  Get people you can trust in it.  When things go bust, your company will survive.  When you go to retire, you will have built real wealth that you can live off of.

No, Really, Inflation Hurts You but Helps Them

I know I keep harping on inflation.  Many people do.  Some may think I'm just trying to sell gold.  In reality, I think that most people who are 'gold bugs' are just trying to convince others of the importance of hedging their savings.  Much of the arguments presented here are counter-intuitive but make sense.  This is a sort of compendium of the reasons I don't like inflationary practices.

First, we'll consider the effects of inflation on banking.  Initially, inflationary policies can seem great, or people would not tolerate them.  True inflationary policies start with something called 'fractional reserve banking'.  This is a system where banks build capital out of deposits and then loan out a part of the capital on the theory that not everyone will want their money back at once.  Initially, nobody thinks this is inflationary because, technically, there's the same amount of money out there; it's just all being used instead of some being saved and some being used.

The problem is that the money that is deposited in the bank in a liquid account, an account that is expected to have funds available at any time, are funds that someone counts as liquid money.  That means they compare value based on what they have in liquid funds for their daily transactions.  At the same time, someone else borrows that money and spends it, meaning the money is at once available to be spent and spent.  This does not inherently increase price, as the money is only spent once so the price is not directly bid up.  However, the person who has the money may have bought the item at a lower price were the loan not available and the higher price not sustainable.  In other words, it does increase the amount of money available to spend, which has an upward pressure on prices, particularly capital goods prices.

So, the first evil of inflation in money is obviously inflation in prices.  This causes 'capital misallocation', causing sound companies to have trouble competing with those who do not have any problem carrying a high debt load.  Since the work must be done by a laborer, that laborer is not doing other work.  Misallocation has workers chasing rainbows, making things people may or may not want based on future income projections and what monetarists think are appropriate loans.  Thus do we have an average of, what, eighteen months in business for a new gas station.  It also means established mom and pop gas stations can't compete with slick new stations built on credit that have bought their stock on credit.

So, we come to another evil of inflation, that of driving the small business man to the margins.  Anyone with a dream and a prospectus can get a small business loan to open a new business.  What this means is that a family business, which may or may not be able to acquire funding, must compete with a business that is just starting with a good prospectus.  The business that is starting may even use the mom and pop business' numbers to justify their existence.

Now, some say that the lower prices and better service are the reason the new store wins, but we're reaching another evil of inflation.  Inflation drives capital investment.  A loan, once executed, in an inflationary enviroment will reduce in liability for the life of the loan, meaning that as time goes on, the cost to the business from having taken out the loan is reduced.  So, the business now has to consider buying a machine that, say, makes ten tortillas an hour or paying a man that makes ten tortillas an hour.  The machine's cost is now fixed, meaning its cost will not go up over time, and, in a relative sense, will actually go down as it is amortized and the loan is reduced through the magic of money being worth less.  However, in the same environment, the employee will require constant increases in pay, both for senority and for inflation.

Really, there was a time when a given job was paid a given amount for the duration of a man's life.  Wage increases came from climbing the ladder, not senority.  However, these days, any raise less than the rate of inflation is a de facto pay cut, so employees have come to expect a 3% raise per annum, which has been below the actual rate for some time, but that's another argument.

Now, the employer will seek every way he can to reduce his headcount so he can reduce the constant increasing costs.  He also can purchase the device on credit, saving his capital for other uses.

So, the increase in inflation causes a reduction in employment particularly among unskilled and semi-skilled labor.

Which brings us to another evil: the rich get richer.  We already discussed how the poor get poorer, but now we'll deal with how the rich get richer.  If I were an investment banker, I would be able to make interesting bets using 'leverage'.  For instance, during the heyday of the 'Yen carry trade', investment bankers borrowed Yen at around 1% from the Japanese interbank system.  They then bought US T bills at around 4%.  Say they put down a million dollars to borrow nine million, which is conservative.  Their ten million dollars will add on three hundred thousand more than the interest cost on the original loan.  This means their original million dollar stake is turning 30% per year.   Get this: they can double down on the gains after a little over three years and start making six hundred thousand a year off of two million.  Essentially, at 30% per year, you double your money every three years or so, meaning you are rapidly unable to secure loans to match your available funds, which means you have to park them somewhere, which severely distorts other investments by driving down yields.

So, the rich get richer by getting inflationary funds first.  This is the point to remember, that the banks and bankers always get the money first, before the rest of us see it lose purchase price, so they get to buy with new dollars amounts of stuff that we would not be able to buy with the same money because by the time we get it, the value has been reduced.

So we come to the middle class.  The lower class depends on social security for their retirement, among other things.  They do not necessarily make investments.  The middle class makes investments.  Well, with the bankers having money to drive investment, and, indeed, so much money that they can afford to drive markets if they want to, and also they can afford to lose.  This means they will chase slimmer margins and wildcat on riskier investments.  The middle class cannot afford this, so their money has to chase more stable investments, which often end up losing money in the long run because there is simply too much money to invest.

So, over the long run, the middle class loses purchasing power in its savings, although its debt load is reduced.  The lower class loses income and has a hard time obtaining assets.  Those with access to the money gain more money.

So, what is to be done?  Well, we could just wait.  The kind of people who are ok with making money without producing more value tend to also get greedy.  Sooner or later, they push the whole thing too far and the value of money begins to plummet in an inflationary spiral.  Alternatively, their entire house of cards evaporates and the whole thing spirals into deflation, causing the rich to lose their lunch either way.  The middle class, those with skills, often do well in either case because someone must do the things that keep the cogs moving in this world.  However, the lower class with no mobility and few options begin to riot.  Thus begins a period of civil unrest that seems to source from intractable social issues but is really driven by the most fundamental need of man, which is to be secure about his house and possessions, and to have some of the things he thinks he needs for the good life.

We are seeing this progress in France right now.  The United States is a long way behind, but the trajectory is the same.  Both countries have been pursuing ever more regulated and redistributionist economies, to the point where France has essentially a one month guaranteed vacation and no way of firing a new hire.  This means, of course, that jobs are very scarce.  So, there are a lot of young men with nothing better to do with their lives than pursue Islamic superiority.  Were those young men employed, they'd have less energy to devote to burning half the city.

A similar situation obtains in the United States, where drugs are a result of urban decay due to majestic mismanagement of urban funds, the availability of wellfare, and the prohibition of drugs.  Each leg is a part of what allows the situation to continue.  Cities raise taxes to help pay for the corruption, graft, and mismanagement common to cities these days, which drives both businessmen and wealthy out of cities.  Thus do the lower class move in, property values plummet, and cities are forced to raise taxes even higher to meet the new demand on law enforcement and so on caused by the collapse of the culture.  At the same time, people cannot find work, so go on wellfare, which provides an incentive in many cases to raise a larger family and avoid marriage, as both result in effectively lower payouts.  This destroys the family unit, causing an increase in crime, as the lack of an effective father figure is the number one determining factor in the potential for criminal activity in young males.  Now, with nothing to do and no effective discipline, the young man turns to the fabulous world of drugs where he can make it big, since he has no other real opportunities.  Since the city has mismanaged itself so badly, and is not paying its employees, particularly police, enough, the criminal element can pay off the police force in many cases, and soon it becomes very nearly impossible to stop the decline of the city.

Remember, though, that it is built on three things, mismanagement, wellfare and drug prohibition.  Remove any of those three things and the problem will largely be reduced.  Remove two of them and the problem pretty much goes away.  If you remove the prohibition on drugs and the wellfare, the families will be forced to move to find income, as drug money dries up due to large pharmaceuticals easily out competing drug cartels and the families no longer having wellfare.  This means much more vacant city area, which is potentially a good thing, as that will allow businesses to move back in at a much lower stated value, so lower tax.  Also, as their tax base dries up, the city will be forced to scale back on everything, including corruption, which will cause some of the more corrupt officials to seek graft elsewhere.

Should the city become better managed, as New York did, it can more effectively deter crime.  This did reduce drug trafficking.  However, were drugs legal, and deterrence more effective, crime would largely go away.  Ditto better management and no wellfare, as workers would once again have to move out to pursue income.

All of this has a point.  Redistributionist and deficit spending policies are essentially inflationary.  If someone takes a dollar from me and gives it to someone else under the guise of social wellfare, they have taken production from me and given it to someone who did not produce.  Now I am forced to compete with that person for goods that have been produced.  However, the actual amount of goods produced has not changed; the percentage that those who have produced goods get of the amount produced has gone down, which is an increase in price from their perspective.  This is not monetary inflation; this is actually reduction in production leading to price inflation.  Were that dollar not redistributed, it is likely that the other person would be force to produce something for his money, leading to greater production, however marginal, and a reduction in prices as a result.  The funny thing is that it is actually additive.  Every extra thing he produces lowers effective prices for everyone else as well as himself, so he gets more of the pie by producing more.  Every thing he gets for free reduces the pie for everyone so his portion of the reduced pie is worth less.

That is redistribution in a nutshell.  Deficit spending is another evil that is related to inflation.  It is inexorably causative.  What that means is that every dollar the government borrows to spend it does so on its name, not on any assets, for it has no negotiable assets.  Thus are those dollars essentially created out of thin air.  As a matter of fact, they are created out of thin air in literal fact more often than not, as the federal reserve bank commonly creates batches of treasury bills with which to swap banks for their (failing) loans, which the federal reserve bank now calls 'assets'.  However, the treasury bills authorize the congress to spend money that was swapped to banks.  So, they loan money to the government and then trade that loan to a bank for other assets which are really debt.  I can't make this stuff up.

Without deficit spending, the war on drugs would not be worthwhile.  The Department of Homeland Security would not be possible.  The war in Iraq would be laughable.  All of those 'mandates' cause deficit spending because 'we have to' and 'think of the children' or whatever.  The problem is that they are enormously costly with little obvious benefit.  The only concern, that it may need to be paid back, is put to rest on the idea that the money is decreasing in value so it doesn't matter.  However, as above, this causes a misallocation of resources.  Money is spent on boondoggles that help a minority of the voters because it can be.  Were no debt spending readily available, as the founding fathers envisioned when they said money shall be of gold or silver, there would be great difficulty in deficit spending as it would require the acquisition through loans of physical gold and silver rather than the mere construction of virtual money by the minting of electrons as is common today.  This would go a long ways towards curbing government spending, as it would be constrained to the tax base at the very least.

The funny thing to me is that we have way, way more 'dollars' floating about than paper currency.  As a matter of fact, there is very little paper currency actually in circulation, because each paper transaction represents money that could not have had a fractional reserve transaction on it so isn't making a bank money.  Further, paper money is expensive to count and handle, whereas electronic money is simplicity itself to count and handle.

Also, a government that has sufficiently tied up the ways and means of its citizens can track their movements, which is invaluable to law enforcement tasked with rooting out drug users, drug dealers, and those who may have seen a naked person under the age of 18, which are apparently the most important problems facing the country today.

Were there free money, there'd be no way to gain such control.  This would mean that crime would pretty much have to involve a wronged party to be discovered, which, in my humble opinion, is a far nicer society than the one we live in.  This is, to me, the greatest evil of the fiat money system, that it can be so easily tracked.

What is really going on, again

The bureau has been under the radar for a bit, due to a need to complete several projects that have been overdue for a bit.  Such is the nature of the computer business.

So, what is happening now?  Much as predicted in these releases, the trend of inflation coupled by deflation continues.  Property values continue to decline in much of the country while income remains largely stagnant and jobs go away.  This is pretty much textbook stagflation, and now, even the mainstream news media has somehow cottoned onto the happenings and goings on.  So, the bureau will not dwell too much on it, and will hold itself to a single 'I told you so'.

The middle eastern conflagaration continues pretty much as planned.  Iraq continues to appear calmer as ethnic groups relocate in order to form enclaves and the US forces manage to convince locals to fight a common enemy, 'Al Qaeda' in Iraq, a group only loosely related to 'Al Qaeda' worldwide.  Of course, prior to the misadventure in Iraq, there were no 'Al Qaeda' in Iraq, so add that to the failures of this administration.

As promised, Obama will be no better, talking up attacking Pakistan for their own good.  Well, one of your analysts at the bureau spent formative years in Pakistan, as well as India.  The bureau can think of nothing dumber than trying to 'fix' Pakistan.  In other words, after decrying the war in Iraq, this fool wants to attack Pakistan, which has even less to lose and has nuclear weapons.  No kidding.

And, as usual, lefties twitter on about civil liberties and women's rights, failing entirely to notice that one of the worst offenders against both is actually Saudi Arabia, our 'friend'.  Ron Paul stood up with his teeth in his mouth in a presidential debate and pointed out that Saudi Arabia is the largest single funder of state sponsored terrorism in the world, yet remains our 'friend'.  Iraq has traditionally not been engaged in state sponsored terrorism, posed no threat to the US, yet we attacked it.

The bureau has, of course, held for some time that a golden opportunity to achieve detente with Iran was squandered by the administration.  The opportunity still exists.  There is tons of disiniformation about Iran floating around, but I wish to counter it all with one point: President Ahmanijad or however you spell it came here.  Bush did not travel to Iran.  The president of Iran was so concerned with efforts to avoid war with the United States that he travelled to the United States to speak with the American people because our administration is so hopelessly pigheaded that not only does it rattle sabres, it ignores overtures to peace.

I'm not saying the guy is a saint; he's said things that any self-respecting Jew would take offense to, such as denying the holocaust, but in the grand scheme of things, he made the effort and the Jews did not.  Which one is really the bigger culture?  Which one really wishes peace?

And, as previously noted in the annals of the bureau, he doesn't really run the country.  The ayatollahs or however you spell it do.  So, there are at least three major opinion blocks, those of the president and his constiutents, those of the ayatollahs and their constituents and those of the common guy trying to stay alive and make a buck.  None of them have said anything to lead the bureau to think they'd be so stupid as to attack the United States now or in the future.

Talk continues of Iranian supplies to Iraqi 'insurgents'.  First, the Iraqis are not 'insurgents'.  After much nuanced discussion amongst the illustrious analysts at the bureau, it has been determined they are 'partisans', people who belong to a given party in the three way civil war the US is trying to stop.  The US does not constitute a legitimate authority to anyone in that country except the few patsies we have turned our backs on at the earliest convenience.  Therefore, we are usurpers and the term 'insurgent' refers to a rebel against an established, legitimate government, which we are not.  Neither, of course, is the Maliki government.

As for Iranian supplies, it has been shown time and again that the supplies are either not from Iran or are things that can be bought in Iran.  This is not the Iranian government selling supplies to people killing Americans, it is the Iranian government selling supplies, something that happens in every country bordering Iraq.  One doesn't really have to wonder why Iran is being singled out; the US appears to want war with Iran and damn the reasons, exactly as it did with Iraq.  After all, even the staunchest Iraq war apologists now cling to the 'we broke it so we must fix it' argument for continuing the war, as every single argument they have advanced has been shown to be the flimsy tissue it was.

Now, for the quotidienne dire prediction: approval ratings for congress and the president continue to fall.  As unemployment climbs, this will become a volatile situation.  It is from this mix that social unrest comes.  Expect more and more widespread rioting.  Expect increased crime.  Expect our idiotic and morally bankrupt government to respond by tightening the garrotte already firmly emplanted in our larynxes which will, no doubt, increase the violence of the predictable response.  So far, they have done little but make it unpalatable to fly and presume to watch everything we say and do.  They have also shielded their lackeys in business for shamelessly handing over our information.  At some point they will do something that annoys more than the middle class.  At that point, the fuse will be ignited.  It is from such fuses that new countries arise; it has happened in Russia, France and Germany.  The bureau is not predicting that sort of thing yet, but the possibility exists.  Were it to happen, it would be interesting to see how the United States were to break up.

The Problem With Loan-based Stimulus

So, we've been giving loans to everyone who will take them on the theory that it will drive capital consumption by the masses. What that means in simpler terms is that people will buy houses and cars and other expensive things. This is considered a good thing because this will allow those who make those things to keep their jobs. It is, however, a slow poison in the long run.

In the near term, things seem grand. More things get bought, inventory drops, businesses sense a trend and hire more workers. This is always the first thing in an inflationary boom. The changes, however, are due to mispricing of the cost of money, something that cannot be sustained. The eventual end of such a 'crack-up boom' is inflationary ruin. But, that is not the point of this essay. The point of this essay is the near term results of such a policy.

On the first month after having bought a car or house, the owner's disposable income is reduced by the amount of the monthly payment. That is the rub. See, prior to having bought the thing, the owner had presumably more disposable income. This is, of course, assuming the owner traded up. Now, once having bought the thing, the owner has lost income and will thus reduce his purchasing of less expensive things.

The owner bought the thing on credit from a financier. The money backing that loan came from nowhere essentially, so any interest rate above zero will provide profit to the lending institution. In other words, if the Fed requires a 1/10th of a percent reserve on the loan, assuming simple interest, in a year the institution has gotten, say, 5% of $100,000, the principle, or $5,000. Reserve on such a loan is $100. The amount they have made is 5,000% on the loan, essentially.

Now, as appalling as it is that a financier can make that kind of profit for essentially zero risk, what is far more interesting is the fact that the house is bought. No more work will come out of it, despite money being paid. In other words, the work has been sunk, so in the near term at least, there's no more work to be done and no more money to be made by anyone else. That income from the purchaser is now officially in stasis.

You'd think that most of that money, being interest, would get spent by the financier, but this is seldom the case. Financiers are in the business of making money and building financial empires, so very little of their income is normally consumed. Thus, the replacement consumption from their spending does not even begin to match the loss of spending from the original transaction.

Now, once everyone has the widget on credit, spending simply stops. Nobody has any more negotiable income so nobody can assume any more credit. Until they're done paying something off, they're eating ramen and beans. Thus does the middle of the industrial pantheon commence to evaporate.

So, what is an economy to do? Well, according to 'helicopter Ben' Bernanke of the Federal Reserve Bank, one can simply drop cash from a helicopter. Far easier to limit the cost of extent loans, hence bankruptcy laws. However, the only way to reduce the cost to society of such a monstrous blunder is to reduce the comparative size of debt, which pretty much requires massive inflation such that the loan burden shrinks at an adequate rate compared to wages to help the average person increase negotiable funds.

Of course, the result of an inflationary boom has been thoroughly discussed. Almost to death. Still, a few salient points need mentioning: the wage earner gets replaced by cheaply-financed machines, the fixed-income people, such as the aged, eat cat food, the young become discouraged from saving. Pretty much what we see now.

Here we go again

I watch political and economic news with the hope of finding trends and preparing for them. I am also active on political issues and place bets (investments) on economic beliefs. I have been trying to make a buck and protect myself, in other words.

What I have noticed is a startling ignorance everywhere. This is unsurprising, given that the average person does not have the information nor the time to discover the information. I am, right now, avoiding work I ought to be doing to write this, for instance.

This ignorance is abetted by the constant barrage of information and disinformation in the various media. Some of this has been improved on the internet, if people are willing to correlate sources. However, the internet has also enabled anyone to post without doing adequate fact checking, as in this blog, where we strive to high-quality guesses. Of course, real news hacks seldom fact check anymore.

As a matter of fact, 'news' is often nothing more than whatever the AP, UPI, etc., are running. Other 'news' often is loaded with the reporter's bias, his editor's bias, and the blinders of the expected target audience. The reasons for this are myriad. Quite often, the reporter thinks he/she has a burden to improve the lot of mankind. Quite often, news media have financial pressures to respond to. Quite often the group the media is targeted to and responds to is insular. It is not necessarily clear that a given piece is a 'hit piece'.

I have made no secret about being a Ron Paul supporter. I have his yard signs. I am not quite aligned with him, I being anarcho-capitalist and he Republican paleo-conservative, but we're going the same direction right now. Nobody else except Dennis Kucinich appears to be even remotely close to where I stand, at least from the two major parties. If Ron Paul does not make it, I shall vote Libertarian as I have the last few elections, unless he runs third party or independent.

That being said, I obviously do not believe the years old newsletters are any big deal. Some of it is offensive, no doubt, but several people I've read have indicate that much of the stuff is out of context, much of the stuff is not that offensive, and all of it was not written by Ron Paul. Oh, well. I don't really care. At this point, a racist, offensive person who is capable of reigning in the federal excess is superior to a nuanced, careful politician who will only make things worse. With politicians, we have to pick and choose, looking for politicians that have what we need. That is why I support Ron Paul.

To me, however, it is interesting the amount of effort and ink being expended attacking Ron Paul's character, not on any real issues, but on some old newsletters. Then there is the insular nature of most Republican and Democrat communities, where someone says a half-truth and the megaphone of the discussion groups turns it into a lie. The most amazing untruths are being parroted as if so, such that Ron Paul is a socialist/leftist/statist that I just read at one of the emptier sites, an assertion that was left unchallenged due to the site restricting posting to members only.

I will close by simply saying that people need to determine what they wish to see in a government, then pursue that through their only means, voting. To do this, the voter must understand how a candidate actually stands on the issues. Otherwise, we, as a nation, risk being led by painted faces right down the garden path to servitude.

Economic Silliness

I have for some time now been a proponent of commodity-based money. Specifically, I am for 'free money', which means unregulated money, spontaneously issued, where the market decides which is acceptable and which is not. Under such a system, commodity-based money becomes the likely solution so that notes issued from any source are exchangeable so long as the source is trusted.

Now, the end of this is that we have, say, a gold-based currency circulating. Oddly enough, the primary argument I receive about this idea is that there is 'not enough gold in the world to cover the US economy'. This argument has been made by people otherwise quite intelligent, so seems to me to be based on a massive misunderstanding of money.

It is based on the idea that gold is currently priced correctly, but the relationship of money to gold is such that there is only enough gold in the world for a tiny percentage of the dollars out there at the current rate. This is the inherent value fallacy on first blush.

The inherent value fallacy holds that money has an inherent value. This is the primary fallacy on which economic redistribution plans are based. The idea is that a dollar is worth some irreducible amount and thus transferring a dollar from one person to another forcibly transfers that worth from one person to another. In a reasonably healthy economy, as any bank robber will tell you, this works. The reason is that the damage done by the transfer is small enough to not damage the system as a whole.

However, on a larger scale, we find that money is worth nothing more or nothing less than what people will give for it, just like every other commodity. Fiat money is confidence-based; it is worth what the receiver is confident he can get for it. Its primary value is that it is uniform, meaning each dollar is exactly the same as the next, so denominating in dollars makes it easy to make comparisons between choices.

But, if we forcibly transfer funds from one group of people to another, as our current economic system does all over the place, we devalue money itself. Those who consume do not produce as much as they consume while those who produce are not able to consume as much as they produce, leading to a disincentive to produce, as well as competition from non-productive factors for production. It is precisely this competition that leads to price inflation, which must be remedied with monetary inflation.

Now, gold is something that does have inherent value. It is a valued commodity, not a piece of paper, or worse, neatly arrange electrons. This means that gold does not lend itself to rampant monetary inflation. What this means is that fiat money stock has increased at a far raster rate than gold stock and hence the disparity between what money exists and how much gold exists.

Of course, there is really no problem; in order for gold to provide adequate backing for the dollar, gold merely has to increase in price relative to the dollar. Bad for the dollar, but good for holders of gold...

The next argument, smugly delivered, is that this means that the average citizen cannot afford an ounce of gold, if that ounce is now worth $1.2 million or whatever. This much is pretty obviously true, but the answer requires examining the common uses of money, which include currency, settlement and wealth preservation.

Currency is the most common use of money. This is trade. I receive dollars for my work and spend them for things I need. For currency, just about any script will do; it needn't be all that reliable of a money, as it only has to be redeemable as long as it takes for the retailer to redeem it. So, any bank should be able to emit notes based on gold that are redeemable when you pile enough of them together for some amount of gold. Otherwise, you simply use them to spend and acquire assets as you would dollars. In other words, for the common man, there really isn't any difference between a gold-based economy and a fiat-based economy when money is viewed as currency.

Settlement has been a common use of gold. At the end of the day, when international banks need to settle accounts, it is often easier for them to use a common value to settle with, and gold provides that. Essentially, each bank tallies how much it has been paid from another bank and how much it has paid the other bank, finds the difference and either bills the other bank that much in gold or pays it in gold. In a fractional reserve system, the actual use of gold for this is tiny, hence the low price of gold relative to the dollar. In a fully-backed world, the gold required would be much higher. This also does not affect the average man.

Wealth preservation, however, does, and here is where fiat money is truly pernicious. For starters, fiat money always declines in value over the long term because monied interests prefer it that way and the lumpen is in debt up to its eyebrows anyway, something inflation helps with, as each reduction in the value of the money causes a reduction in the amount they actually owe.

However, keeping money in those same dollars is not a good idea for precisely that reason, so people are driven to acquire assets and leverage themselves (borrow money) to buy more on the theory that money is cheap and easy to repay later. This means there is little money left for emergencies. There is also little money for opportunities. All of which means that insurance gets a larger share of the economy.

Another problem is that banks tend to make money no matter what the value of money in a fiat system because they can borrow at one rate and lend at another. This allows them to pocket the difference, which is making money. So, if they borrow money at 3% and lend it at 5%, even though money may lose half its value during the period of the loan, they still make the 2% in money that is now worth half what it was. However, they made that money not by working, producing value, or investing money; they made it by borrowing money that sourced from the fed, so was not backed by value, and loaning that, something nobody but bankers can do.

What this tends to do is make it hard for anyone but bankers to make money in investing. Bankers can borrow money at an artificially low rate, allowing them to invest for artificially low returns, often lower than real inflation, because they make money on the difference. The rest of us have to invest our real money, which means we lose money over the long haul, rather than make it. This is true of the stock and bond markets.

It is not, however, true of commodities, and this is where we see their scheme coming apart. The only bet the average investor can take short of being a sole proprietor or major partner in a business that does not allow outside investment, is in gold or silver, which are not investments in the normal sense in that they do not make money.

However, as fiat money decreases in price, its utility as a store of value will also decrease, driving more and more people to transfer fiat store into gold, silver, palladium and platinum, the traditional 'money metals'. This drives the value of the money metals up as it drives the value of the dollar down. However, the value of the dollar tends to decrease more slowly than the value of the money metals increases, causing those holding money metals to see the value they hold increase in purchasing power, meaning that during an inflationary crisis, money metals do qualify as an investment.

Now, were gold to become the currency, the increase in value of an ounce of gold purchased cheaply now would be truly staggering...

Inflation A' Comin'

Right now, we are witnessing asset deflation coupled with price inflation. In other words, the things we own are worth ever less while the things we must buy keep getting more expensive. If left alone, it would reach a new equilibrium eventually. However, it will not be left alone.

First, banks are heavily leveraged right now. This means they have borrowed money to make money. As asset prices depreciate, their portfolios depreciate as well. Values become 'marked to market', meaning sold and a price established, rather then held with an estimated value. When this happens, the average sale price becomes the value of the asset.

Now, with the subprime collapse and the collateral reduction in high-end properties due to uncertainty and unemployment, banks are seeing massive chunks of their portfolios drop in price, which puts them in a net loss position. Further, they are required to maintain minimal reserves against just this sort of situation, and those reserve requirements are a percentage of their total outstanding debt, modified by assets. As the asset value decreases, the asset to debt ratio grows and the reserve requirements increase, meaning banks cannot loan any more money, and, indeed, must borrow to cover what they've loaned already.

When the banks won't lend to each other and there's no other source of income, such as foreign investors, money becomes hard to get. This drives down the cost of capital investments and assets, as purchasers dry up due to lack of funds. Of course, this becomes an overall drag on the economy as companies begin to run out of orders for capital goods as their assets depreciate as well.

In order to prevent a death spiral, the federal reserve in concert with the treasury and a compliant congress will inflate the economy by any means necessary. Expect federal mortgage aid. Expect bailouts, both public and private. Expect a tax rebate coupled with more credits aimed at low-income households. Expect bold new government programs. Expect none of this to really work.

However, the other side, where things are getting more expensive to buy, things we need every day and are not optional, expect that trend to continue unabated. The very measures the administration will use to fight deflation will by their very nature drive inflation. Since the asset depreciation is a form of deflation, it will be fought with more money in the system in order to enable higher prices.

This will happen not because it is necessarily beneficial, but because the ones who control whether it will happen are the ones who will feel the most pain if it happens. In other words, the ones in charge of the money supply are bankers, and they are the ones who are being hurt the worst.

Don't get me wrong; inflation will make my life much easier. I have a fixed apr mortgage. If the dollar falls, my house gets relatively cheaper. Many people are in this same position, many of them with houses they can no longer afford. This will be the populist justification, as wages go up due to inflation. For a time, this will be considered a good thing.

The problem is, of course, that any inflation may end in runaway inflation, which results in the destruction of the economy, and, often, violence. The collapse of the Weimar Republic and the subsequent rise of Hitler was partly a result of the Weimar hyperinflation. The reign of terror in France was due partly to a destroyed economy due to mismanagement and inflation. Mismanagement and inflation brought down the Roman empire.

This is, in the opinion of the Bureau, the strongest argument for free money. Not hard money, free money. Money needs to be created outside the government and not be in the control of the government. The government should pick either gold, silver or platinum and use it for all their accounts. This means all receipts and all payments are to be in the metal of the land. Actually, I prefer a specific alloy of the three to reduce the effects of volatility. The government should not coin money; the money should be value in weight and the government taxes and so on should be in weight of metal, not some abstract amount.

Wells Fargo Sux

They have one job as far as I am concerned: turn my paycheck into cash. However, despite that it is a company check drawn on a corporate account, they insist on calling a company officer before cashing, something my company has told them not to do because it inconveniences everybody. This is part of the bank's ongoing anti-fraud stuff wherein they do their level best to not honor any of their agreements. It's not bad enough that they charge $5 for the privilege of getting my money, they also now take an hour to cash a check. When I informed them this was basically 'normal bank bullshit', we agreed I need not darken their door because the 'will not service me', which was odd, because as far as I could tell, they had not serviced me until my boss called and read them the riot act, reminding them that it was a corporate account with a large balance that could be moved elsewhere.

I hate banks in general. They get a significant amount of income from fees these days, hence a fee for every little thing. The rest of their income comes from making sure they never have to give out cash. Chase has reduced the amount you can take out of an ATM, for instance. I have a prepaid debit card now. Not only can I take out as much as I like when I like, although ATMs are limited to a generous $500, I pay no fees above the fee for having the card and loading the card, which are both cheaper than my Wells Fargo bank account had been, but my card works everywhere with no fraud restrictions. I cannot count the times Wells Fargo shut off my card for some fraud suspect or another, such as trying to buy fuel out of state...

Feh. If banking regulation means anything, which it doesn't, banks ought to be required to pay the full amount, in cash, on any presented check drawn on their bank. Instead, they increasingly demand that you have an account for everything, which kind of defeats the purpose of having an account, because if I cannot write a check that is immediately cashable for an amount in my account, then why have an account? Why not simply carry the cash? Morons.

But to me, it is interesting that the 'mighty' Wells Fargo is #2 in the subprime lending market and is now getting awfully tight with the cash...

What Is Really Going On

Every so often, the Skip Bureau publishes its best guess as to the actual happenings in the world, not that reported by media, your brother-in-law, or other reliable sources.

So, Bhutto was assassinated in Pakistan. Curiously, legitimate opponents of Musharraf have been dropping like flies, to legal problems, or, er, like flies. However, Musharraf's hold on Pakistan remains tenuous. It has been apparent to the Bureau since the beginning of the misadventure in Afghanistan and the global war on ragheads that Musharraf would not long endure. He has always been nothing more than the puppet of the Bush administration, and is unpopular amongst some very hard men. It appears on first blush and with nothing even remotely approaching evidence that some intelligence agency or agencies have seen fit to help him remain in power.

Now, given the previous paragraph, one would normally point at the CIA or Pakistani Intelligence, but there are a lot of potential candidates. India, for instance, is situated to make inroads into Pakistan, having much more money available and an improving governing process. China has an interest and China's intelligence capability in wet work is pretty much unknown at this point, but they have steadily been improving their assessment capability, and one should not be surprised at effective field work from them. Of course, the CIA is a suspect, as they treat Pakistan like a back yard, having operated there for decades now, due to Afghanistan having been a front line in the cold war.

On the economic front, the dollar continues to fall, but all other currencies fall as well. China is forcing its currency down as a 'race to the bottom' with the dollar. The Euro is falling more slowly than the dollar. Ditto the Pound, Loony, so on. However, the global resource boom continues, driven, mostly, by falling currencies. The risk is that the falling currencies will misprice commodities and cause an eventual over-production in commodities, pretty much as inflation has caused an over-production in everything else so far. However, for those of you out there trying to avoid losing your shirts, the key thing to remember is that all paper money is inflating and thus losing value. None of them are safe.

On the US political front, it is appearing more and more that Obama may win the presidency. Ron Paul has made major inroads and still remains viable for the nomination, and the Bureau makes not secret about supporting him. However, many of the voters that Ron Paul needs are also possible Obama supporters, and Iowa has shown Obama can win them.

On the plus side, it appears Giuliani may be done for. This is a positive outcome of the Paul campaign, in that Paul and Giuliani compete for substantially the same Republican vote, that of the socially liberal fiscal conservative Republican. These have almost entirely gone to Ron Paul due to his superior record in civil liberties. Giuliani has to count on 'blue state Republicans', which are getting pretty thin on the ground anyway.

As for Iraq, it has become clear that genocide has reduced violence. After all, there's nobody left to kill in much of the country...

There are some improvements attributable to better management, but they all end up being in the vein of working with the locals, which often means surrendering key goals the administration had prior to the repurposing of the war. What this means is that many of the left's ideals, such as feminism, are going to be ignored in the final settlement in Iraq, pretty much as the Iraqis want it.

Iran continues to puzzle the stunted analysts in DC. What every person who analyzes anything in the Middle East must understand is very few arab countries have anything remotely approaching a unified government. In most cases, there is a secular government, which in Iran is Ahmanijad or however you spell it, and then there is a much more powerful group, which in Iran comprises the Ayatollahs or however you spell it. Many countries are essentially in multi-way civil wars.

So, Ahmanijad is the president of Iran, which is a bully pulpit, but does not reflect the feelings of the people or even the position of the religious leaders. The truth is that Iran as a country holds no real ill will against the United States. However, they are, understandably, nervous, given what has happened in Iraq.

No matter how much one may argue the US had ever reason to attack Iraq, nobody outside of the US concurs. Basically, the US has been seen as an aggressor, attacking a country for little more than failure to abide by a technicality in an agreement with the UN. It was pretty apparent to anyone interested in intelligence that Iraq never posed any real threat to the US, being one of the better run countries in the middle east.

In the same vein, Iran poses no serious threat to the US or its interests. However, it is refusing to 'play nice', which offends sensibilities in the neocon camp. Iran does, however, pose a threat to the US if mishandled. Iran has a virtual lock on the Strait of Hormuz, making potential losses high without an overland trek to get to Iran. The US military is, of course, not in any shape to fight Iran anyway.

The US military is in bad shape. Aircraft are running high hours. Ships are old. Morale is low due to extended deployments. As long as we continue to pretend our soldiers are not permanently deployed professional soldiers, we will have morale problems. As long as we put off spending to fund necessary repairs, we will have equipment failure, which, by the way, will exacerbate morale problems.

Fortunately, a corner seems to have been turned, with the National Intelligence Estimate showing some signs of a revolt against the once solid Bush regime. The drubbing the Republicans are receiving by the Democrats in terms of primary turnout shows that this neocon adventure may be nearly over. The Bureau does not, however, expect any improvement with a Democratic administration, harkening back to the days of Clinton and his progression of stupid interventions, one of which, Somalia, is a textbook example of how to ruin a country.