The so-called recovery is only built on debt and printed cash declares our own Byron King. In the long term, the only option for the government to continue financing it's operations is to print too many dollars. Money printing has it's limits, however. It's Byron's opinion that at some point, perhaps very soon, the government will have to turn to more desperate measures. Namely, capital controls. In the following featured essay, Byron outlines 4 probably ways the government will take your cash and one play you can buy through your broker to prepare today. Read on...
When’s the best time to invest in something? When everyone else is trying to get their money out of it. It might go against conventional thinking, but following the crowd usually makes you miss the real opportunities. At one monetary metal conference recently, the smartest guys in the industry sat down to discuss where these real hidden gems lay.
In a 2009 article, the Huffington Post went into considerable detail about the number of people with PhD degrees in economics employed by the Board of Governors of the Federal Reserve System. This is the government’s branch of the Federal Reserve. It is not one of the 12 regional Federal Reserve banks, all of which […]
Greetings from Maine! Right now, I’m writing from within foghorn distance of the sea. And this gives me an opportunity to tell you a down east tale that should serve as a warning to every investor: Maine’s Great Gold Swindle.I’m not talking about central banks, or manipulation of today’s markets. I’m talking about something from […]
The U.S. dollar is the dominant global reserve currency. All markets, including stocks, bonds, commodities, and foreign exchange are affected by the value of the dollar.The value of the dollar, in effect, its “price” is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in […]
Let’s head back in time…In 2004, a mere decade ago, the US national debt rang the register at $7.4 trillion. That represents “debt per citizen” of over $25,000. You, me, your neighbor, your 4-yr old grandson, you name it and they’re portion of the U.S. debt is $25k.But flash forward to today and you’ll see […]
Alexander Hamilton was America’s first Secretary of Treasury under President George Washington. When he first entered office in 1789, America was an agricultural nation of just 4 million still broke from its financially costly victory over the British Empire in the Revolutionary War.The states had accumulated relatively massive debts to finance that war, which mostly […]
Remember that correction we’ve been quietly talking about over the past couple of months?Well, it might be right around the corner. Stocks waited until the last day of the month to nose-dive. The S&P 500 posted its first 2% down day since April — and the Dow wasn’t far behind. Early this morning, futures continue […]
A great technology solves a problem that we didn’t know we had. It makes us aware of deprivations we didn’t know existed until we discover the new thing. Once discovered, we can’t go back.People in the 1950s, for example, never missed the smart phone. They were pleased to have a phone at all. But today, […]
In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.The U.S. was already the world’s commercial powerhouse, having eclipsed the British […]
When you type a website address into a browser, you might have noticed that the letters “http” appear at the front. “HTTP” stands for Hypertext Transfer Protocol. In typing a Web address, you are actually sending an HTTP command to transmit that website to you. Hypertext Transfer Protocol is the means by which information is […]
In 2012, money mandarins running the European Union chose stagnation over restructuring. Here’s a consequence of that choice: expectations for a self-sustaining economic recovery keep getting crushed.Two years ago, European Central Bank (ECB) chief Mario Draghi promised to do “whatever it takes” to hold the eurozone together. He bluffed nervous investors into believing in a […]
Here’s a fun fact: Although we all hate the U.S. dollar, as it continues to hemorrhage wealth, its foothold as the world’s reserve currency isn’t going to disappear overnight.A Russian gas deal with China won’t change that — as we’ll highlight below.But before we get to the nitty-gritty, let’s dive into a story that’s right […]
Franklin Delano Roosevelt famously used the term “forgotten man” in a 1932 speech to describe those at the bottom of the economic pyramid who, he felt, government should aid.But the originator of the phrase “forgotten man” had a whole different meaning in mind. He aimed to expose the seeming good intentions of government to reveal […]
“As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding […]
The Keynesian disaster recovery plan has been to lower rates, force people to take more risk in search of yield, and entice others to borrow and spend and, magically, more jobs will be created. If people won’t buy stocks, central banks will.Back in 2011, Ben Bernanke, when asked if QE2 was driving up stock prices, […]
According to the Bureau of Labor Statistics, consumer prices are rising at a 2.1% annual rate. This suggests to us that the current stock market boom will die with a bang, rather than a whimper.Fed economists say they don’t think inflation rates are rising. They think the most recent reading is a fluke. But why […]
Real progress happens through real people, ideas, and innovations. Not by legislation argued and debated in Congress. Right now, one of the most influential technologies is changing the way people do business. And reinventing the future in the process.
As the world gets more digital, people forget about the benefits of transacting in cash. And government officials know that.
The experts will tell you the recession is over, but they’re only torturing the data to hide the truth. The economy never recovered from the downturn it experienced. But the downturn happened in 2000, not 2008. The country’s been in the middle of a 14 year recession and hardly anyone knows the truth.
Every time Bitcoin crashes, it winds up at a price greater than it’s previous high. Yet the experts still call it a currency fad that will fade away. But a little over a year since it really took up, the digital currency is still going strong, and is once again seeing its price rise. But is there another reason why people are buying Bitcoins.
All paper currency has a shelf life. It could be 5 years or 500 years, but at some point, the value of any paper currency eventually reaches zero. That's why, for centuries, people have turned to one shiny metal to safeguard their personal store of wealth. And, as Jim Rickards explains, you still have that option. Read on...
Edward Snowden’s one year visa in Russia expires at the end of next month. With only a few weeks left before he finds himself without a safe country to live in, he sat down to give an exclusive interview. Here are the most important things he wants you to remember from his recent sacrifice.
It’s a destructive cycle that comes around everytime your politicians ask you to take to the polls. The government’s meddling creates unexpected problems that eventually overshadow the planners’ original intentions. But that only leads the way for even more interventions.
Politicians love inflation. It’s a way to pay for the government’s debts without upsetting the public by raising taxes, or their special interests by cutting government. So they’ll flood the economy with easy money and eat away at your savings. But that’s only part of the story...
Obama recently claimed this was the “Decade of the Brain”. But it not the first time the government made that promise. The last time they did it, they wasted millions of your tax dollars. Now they’re back for round two. But this time, their failure could mean more than squandered money. It could mean making Alzheimer’s even worse for those who suffer from it.
“So we have, indeed, had a disappointingly slow recovery, and our consistent expectations for a pickup in growth have been dashed over a number of years… And the labor market is behaving in some perplexing ways and showing patterns that are novel.”–Federal Reserve Chairperson Janet Yellen in a speech to the Economic Club of New […]
Many people complain about government control of currency, but only a few do something about it. I’m not talking about movements to “audit the Fed” and such. I’m talking about real innovation that makes an end run around the government’s iron grip on the monetary system.
A few of us old folks might like to return to the days of slapping a silver dollar on the bar for a shot of whiskey, but the younger techno-savvy generation sees paying for their Negroni cocktail with virtual currency from their hand-held device. To serve this market, a new world of virtual currencies has popped up spontaneously.
In a debate, Mitt Romney said, “You couldn’t have people opening up banks in their garage and making loans.”
Really? Some people are thinking precisely along these lines and even going further to create new units of accounting.
You might think these people are crazy. After all, to be a proper money, a currency must have a nonmonetary value, a high value per unit weight, a fairly stable supply and be divisible, durable, recognizable, and homogeneous. Gold and silver fit the bill perfectly. But does that mean something else (or a variety of things) can’t?
Money develops from being the most marketable good that in turn is used for indirect trade. Historically, that has been gold and silver. However, governments have worked very hard to demonetize gold and silver with taxes on precious metals and legal tender laws. And while a few people swear by storing their wealth in gold and silver, in relation to all other financial assets, the percentage of portfolios invested in precious metals is only 1%.
The idea that government is going to re-shackle its currency to gold anytime soon, when the only way federal governments are staying in business is with an unfettered printing press, is naive. Governments always have driven and will keep driving the value of their currencies to the value of the paper. It may take decades, it may take centuries, but it will happen eventually.
The answer to the currency question may not be to reform government in a way that it can’t reasonably be reformed, but to turn loose entrepreneurial genius to solve the problem and create a quality product. There are plenty of government roadblocks, but every new innovation encounters government resistance. Entrepreneurs persevere. However, this is a particularly risky area. There are currency entrepreneurs sitting in jail for competing with the government.
In 2009, Japanese programmer “Satoshi Nakamoto” (not his real name) was designing and implementing Bitcoin. It’s not for the faint of heart. It’s proven to be highly volatile. But it’s also proven to be very useful in a digital age.
Some people in the free-market community don’t know what to think of Bitcoin and have dismissed it. They say no currency can exist that doesn’t have a prior root in physical commodity.
That is because, as Robert Murphy summarized Ludwig von Mises: “We can trace the purchasing power of money back through time until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained.”
The naysayers contend Bitcoins never had a nonmonetary commodity value. The case for it is then dismissed without thought or argument. However, Mises built his “regression theorem” on the work of Carl Menger, the father of Austrian economics and subjective value.
In Menger’s view, economizing individuals constantly look to make their lives better through trade. These individuals trade less tradable goods for more tradeable goods. What makes goods more tradeable, Menger emphasizes, is custom in a particular locale.
“But the actual performance of exchange operations of this kind presupposes a knowledge of their interest on the part of economizing individuals,” Menger writes. But Menger goes on to explain that not all individuals gain this knowledge all at once. A small number of people recognize the marketability of certain goods before most others.
These might be considered currency entrepreneurs. They anticipate consumer needs and demands, and as is the case with any other good or service, these entrepreneurs recognized more salable goods before the majority of people.
“Since there is no better way in which men can become enlightened about their economic interests than by observation of the economic success of those who employ the correct means of achieving their ends, it is evident that nothing favored the rise of money so much as the long-practiced and economically profitable acceptance of eminently saleable commodities in exchange for all others by the most discerning and most capable economizing individuals.”
For example, cattle were, at one time, the most saleable commodity and were thus considered money. Although cattle money sounds unwieldy, the Greeks and the Arabs were both on the cattle standard. This currency had four legs that could move itself, and grass was everywhere, so feeding it was inexpensive.
But then the division of labor led to the formation of cities, and the practicality of cattle money was over. Cattle were no longer marketable enough to be money. Cattle still had value, but, “They ceased to be the most saleable of commodities, the economic form of money, and finally ceased to be money at all,” Menger explains.
Then began the use of metals as money: Copper, brass and iron, and then silver and gold.
But Menger was quick to point out that various goods served as money in different locales.
“Thus money presents itself to us, in its special locally and temporally different forms, not as the result of an agreement, legislative compulsion, or mere chance, but as the natural product of differences in the economic situation of different peoples at the same time, or of the same people in different periods of their history.”
So while people contend that money must be this or must be that, or come from here, or evolve from there, Menger, the father of the Austrian school, seems to leave it up to the market. When a money becomes uneconomic to use, it loses its marketability and ceases to be money. Other marketable goods emerge as money. It’s happened throughout history and likely will continue, despite government wanting to freeze the world in place to its liking.
Which brings us back to Bitcoin, what the European Central Bank (ECB) calls in its latest report “the most successful — and probably most controversial — virtual currency scheme to date.”
Ironically, while some economists are pooh-poohing Bitcoin, the ECB devotes some of their lengthy report to the idea that the Austrian school of economics provides the theoretical roots for the virtual currency. The business cycle theory of Mises, Hayek and Bohm-Bawerk is explained in the report and Hayek’s Denationalisation of Money is mentioned.
The report writers indicate that Bitcoin supporters see the virtual currency as a starting point for ending central bank money monopolies. Like Austrians, they criticize the fractional-reserve banking system and see the scheme as inspired by the classic gold standard.
Bitcoins are already used on a global basis. They can be traded for all sorts of products, both material and virtual. Bitcoins are divisible to eight decimal places and thus can be used for any size or type of transaction.
Bitcoins are not pegged to any government currency and there is no central clearinghouse or monetary authority. Its exchange rate is determined by supply and demand through the several exchange platforms that operate in real time. Bitcoin is based on a decentralized peer-to-peer network. There are no financial institutions involved. Bitcoin’s users take care of these tasks themselves.
Additional Bitcoin supply can only be created by “miners” solving specific mathematical problems. There are somewhere around 10 million Bitcoins currently in existence, and more will be released until a total of 21 million have been created by the year 2140. According to Bitcoin’s creator (whomever he or she is), mining on Bitcoin provides incentives to be honest:
“If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or by using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth”.
The ECB’s report explains that Bitcoin supply is designed to grow in a predictable fashion. “The algorithms to be solved (i.e., the new blocks to be discovered) in order to receive newly created Bitcoins become more and more complex (more computing resources are needed).”
This steady supply increase is to avoid inflation (decrease in the value of Bitcoins) and business cycles caused when monetary authorities rapidly expand money supplies.
Bitcoin has become the currency of the online black market. For instance, The Silk Road (the Amazon of the illegal drug trade that can only be accessed through private networks using the IP scrambling service called Tor) only accepts payments in Bitcoin. However, as the ECB report points out, there are only about 10,000 Bitcoin users, and the market is illiquid and immature.
So why does the ECB give a damn about Bitcoin and other virtual currencies? The central bankers are worried that they are not regulated or closely supervised, that they could represent a challenge for public authorities and that they could have a negative impact on the reputation of central banks.
At the same time, the report makes the point that “these schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers.”
The report says big players in the financial services arena are purchasing companies in the virtual payments space. VISA acquired PlaySpan Inc., a company with a payment platform that handles transactions for digital goods.
American Express (Amex) purchased Sometrics, a company “that helps video game makers establish virtual currencies and… plans to build a virtual currency platform in other industries, taking advantage of its merchant relationships.”
This would dovetail with American Express’ entry into the prepaid credit card business. Banking industry insiders are upset with Amex and Wal-Mart, that also is offering prepaid cards, because these prepaid accounts would amount to uninsured deposits, according to Andrew Kahr, who wrote a scathing piece on the issue for American Banker.
Kahr rips into the idea with this analogy:
“To provide even lower ‘discount prices,’ should Wal-Mart rent decaying buildings that don’t satisfy local fire laws and building codes — and offer still better deals to consumers? And why should Walmart have to honor the national minimum wage law, any more than Amex honors state banking statutes? With Bluebird, Amex can already violate both the Bank Holding Company Act and many state banking statues.”
Kahr is implying that regulated fractionalized banking is safe and sound, while prepaid cards provided by huge companies like Amex and Wal-Mart is a shady scheme set up to rip off consumers. The fact is, in the case of IndyMac, panicked customers forced regulators to close the S&L by withdrawing only 7% of the huge S&L’s deposits. It was about the same for WaMu and Wachovia when regulators engineered sales of those banks being run on. Bitcoin supporters, unlike the general public, are well aware of fractionalized banking’s fragility.
Maybe what the banking industry is really afraid of is the Amexes and Wal-Marts of the world creating their own currencies and banking systems. Wal-Mart has tried to get approval to open a bank for years, and bankers have successfully stopped the retail giant for competing with them.
However, prepaid credit cards might be just the first step toward Wal-Mart issuing their own currency — Marts — that might initially be used only for purchases in Wal-Mart stores. But over time, it’s not hard to imagine Marts being traded all over town and easily converted to dollars, pesos, Yuan, or other currencies traded where Wal-Mart has stores.
Governments are destroying their currencies, and businesses know it. Entrepreneurs won’t just stand by and theorize. They’re doing something. They recognize a market opportunity. The banking industry realizes it. As Mr. Kahr concluded his article that calls for an end to all uninsured deposits: “Otherwise, we might have an unregulated Facebook or Google of payments, even PayPal, quickly becoming both highly vulnerable and TBTF. (It could actually be run by someone wearing a hoodie, without tie or even white shirt!)”
Here at LFB, we don’t know what tomorrow’s money will be. Digits and computer algorithms? Silver and gold coins engraved with someone wearing a hoodie, perhaps? What we know for sure is that we’re rooting for enterprising entrepreneurs to give the government a run for their money in the money business. Watch this space.