It should surprise few that, immediately after going through security at the Denver Federal Reserve building, I was given a bag of “free” and worthless money.
“Currency shreds,” the bag says, “are created from notes no longer fit for circulation. There is approximately $165 of unfit currency in this bag.”
Just another day at the Fed.
“In the history of American politics,” Thomas DiLorenzo writes on the Lew Rockwell blog, “the statists have always been advocates of a central bank, whereas the defenders of liberty — libertarians — have opposed it. Legalized governmental counterfeiting has always been every totalitarian’s dream and every right-minded libertarian’s nightmare.”
On top of recklessly manipulating the money supply and causing boom-and-bust cycles for more than a century, DiLorenzo explains, “the Fed ‘has supervisory and regulatory authority over a wide range of financial institutions and activities.’ That’s an understatement if ever there was one. Among the Fed’s ‘functions’ are the regulation of:
- Bank holding companies
- State-chartered banks
- Foreign branches of member banks
- Edge and agreement corporations
- U.S. state-licensed branches, agencies, and representative offices of foreign banks
- Nonbanking activities of foreign banks
- National banks
- Savings banks
- Nonbank subsidiaries of bank holding companies
- Thrift holding companies
- Financial reporting procedures
- Accounting policies of banks
- Business “continuity” in case of economic emergencies
- Consumer protection laws
- Securities dealings of banks
- Information technology used by banks
- Foreign investment by banks
- Foreign lending by banks
- Branch banking
- Bank mergers and acquisitions
- Who may own a bank
- Capital “adequacy standards”
- Extensions of credit for the purchase of securities
- Equal opportunity lending
- Mortgage disclosure information
- Reserve requirements
- Electronic funds transfers
- Interbank liabilities
- Community Reinvestment Act sub-prime lending demands
- All international banking operations
- Consumer leasing
- Privacy of consumer financial information
- Payments on demand deposits
- “Fair Credit” reporting
- Transactions between member banks and their affiliates
- Truth in lending
- Truth in savings
The Fed is the perfect example, of course, of Hayek’s fatal conceit, in which the few imagine they can design the economy in a way that’s better than the market could absent central control.
But there’s a reason why the Fed believes they can manage the economy… their models have always told them so. They’ve always been told that the impossible is possible. And they dutifully believe these universal “truths” to be gospel.
“An equilibrium model like the Fed uses in its economic forecasting,” Jim Rickards said recently in the Daily Reckoning, “basically says that the world runs like a clock. Every now and then, according to the model, there’s some perturbation, and the system gets knocked out of equilibrium. Then, all you do is you apply policy and push it back into equilibrium. It’s like winding up the clock again. That’s a shorthand way of describing what an equilibrium model is.”
But that’s not how the world works. And if your representation of reality is off, it doesn’t matter how smart you might be. You’re not going to get the result you want. If you use a map of New York City to get around downtown Denver, for example, you’re not going to get to where you need to go.
“I’ve met any number of governors and senior staff at the Federal Reserve,” Jim goes on. “They’re not dopes. A lot of people like to ridicule them and say they’re idiots. They’re not idiots, though. They’ve got the 160 IQs and the PhDs. Every year, however, the Fed makes a one-year forward forecast. In 2009 they made a forecast for 2010. In 2010 they made a forecast for 2011 and so on. The Fed has been wrong seven years in a row by orders of magnitude.
“I just laugh. How many years in a row can you be wrong and still have any credibility?
“But they’re not dopes — they are really smart people. I don’t believe they’re evil geniuses trying to destroy the world. I think they’re dealing in good faith. If they’re so smart and they’re dealing in good faith, though, how can they be so wrong for so long?
“The answer is they’ve got the wrong model. If you’ve got the wrong model you’re going to get the wrong result every single time. The Federal Reserve, policymakers, finance ministers and professors around the world use equilibrium models. But the world is a complex system.”
Problem is, chaos, not a strong economy, is the most likely result of Fed-meddling.
To protect yourself from Fed-influenced chaos, Jim recommends investing in precious metals. You probably know his stance on gold ($10,000+), but Jim rarely talks about gold’s silver-haired stepchild. Even though, he believes, silver could be the future of money. (He’ll tell you all about why silver is set to be future money in his featured article below.)
“I rarely discuss silver,” Jim wrote to readers of Rickards’ Intelligence Triggers. “Some assume I dislike silver as a hard asset for your portfolio. That’s not true. In fact, in an extreme crisis, silver may be more practical than gold as a medium of exchange. A gold coin is too valuable to exchange for a basket of groceries, but a silver coin or two is just about right.
“If Hillary Clinton wins, that probably means a pickup in Senate votes for Democrats and a bipartisan infrastructure spending bill. If Donald Trump wins, he has already promised massive infrastructure spending, starting with ‘The Wall.’
“Either way, we’re looking at more spending, bigger deficits, more money printing and, eventually, more inflation. The market’s anticipation of this outcome, starting in mid-November, will be a powerful tailwind for silver.”
Moreover, Jim says, silver could be pushed back into becoming the future of money. Today, to show you the hows and whys, we invite Rickards to explain.
[Ed. note: Before you buy another ounce of ANY precious metals, Rickards has an important announcement in the short video below. In the video you see below, Rickards is reporting in from a gold vault in Switzerland to tell you the shocking secret NOBODY seems to understand about gold. To watch, simply click the screenshot below.
Silver — Once and Future Money
Before the Renaissance, world money existed as precious metal coins or bullion. Caesars and kings hoarded gold and silver, dispensed it to their troops, fought over it, and stole it from each other.
Land has been another form of wealth since antiquity. Still, land is not money because, unlike gold and silver, it cannot easily be exchanged, and has no uniform grade.
In the fourteenth century, Florentine bankers (called that because they worked on a bench or banco in the piazzas of Florence and other city states), accepted deposits of gold and silver in exchange for notes which were a promise to return the gold and silver on demand. The notes were a more convenient form of exchange than physical metal. They could be transported long distances and redeemed for gold and silver at branches of a Florentine family bank in London or Paris.
Bank notes were not unsecured liabilities, rather warehouse receipts on precious metals.
Renaissance bankers realized they could put the precious metals in their custody to other uses, including loans to princes. This left more notes issued than physical metal in custody. Bankers relied on the fact that the notes would not all be redeemed at once, and they could recoup the gold and silver from princes and other parties in time to meet redemptions. Thus was born “fractional reserve banking” in which physical metal held is a fraction of paper promises made.
Despite the advent of banking, notes, and fractional reserves, gold and silver retained their core role as world money. Princes and merchants still held gold and silver coins in purses and stored precious metals in vaults. Bullion and paper promises stood side-by-side. Still, the system was bullion-based.
Silver performed a leading role in this system. This is seen in the success of the Spanish dollar, an eight-real coin, called in Spanish the real de a ocho, or piece-of-eight. The Spanish dollar contained 0.885 ounces of pure silver. It was a 22-karat coin with a total weight of 0.96 ounces (once an alloy was added for durability).
The Spanish Empire minted the real de a ocho to compete as currency with the Joachimsthaler of the Holy Roman Empire. The Joachimsthaler was a silver coin minted in the St. Joachim Valley (thal in German). The word Joachimsthaler was later shortened to taler, cognate with the word “dollar” in English.
Both the Spanish piece-of-eight and the German taler were predecessors of the American silver dollar. Spanish dollars were legal tender in the United States until 1857. As late as 1997, the New York Stock Exchange traded shares in units of one-eighth of a dollar, a legacy of the original silver piece-of-eight.
Similar silver coinage was adopted in Burgundy, the Netherlands (called the leeuwendaalder or “lion dollar”), and Mexico from the seventeenth century. Spanish silver dollars were widely used in world trade. Silver was almost the only commodity accepted by China in exchange for Chinese manufactures until the nineteenth-century. China put its own chop on the Spanish coins to make them a circulating currency in China. If gold was the first world money, silver was the first world currency.
Silver’s popularity as a monetary standard was based on supply-and-demand. Gold was always scarce, silver more readily available. Charlemagne invented quantitative easing, or “QE,” in the ninth century by substituting silver for gold coinage to increase the money supply in his empire. Spain did the same in the sixteenth century.
Silver has most of gold’s attractions. Silver is of uniform grade, malleable, relatively scarce, and pleasing to the eye. After the U.S. made gold possession a crime in 1933, silver coins circulated freely. The U.S. minted 90% solid silver coins until 1964. Debasement started in 1965.
Depending on the particular coin — dimes, quarters, or half-dollars — the silver percentage dropped from 90% to 40%, and eventually to zero by the early 1970s. Since then, U.S. coins in circulation contain copper and nickel.
From antiquity until the mid-twentieth century, citizens of even modest means might have some gold or silver coins. Today there are no circulating gold or silver coins. Such coins as exist are bullion — kept out of sight.
Is it time to add silver to your portfolio?
At Intelligence Triggers, we use a method called causal inference to make forecasts about events arising in complex systems, such as capital markets. Causal inference methodology is based on Bayes’ Theorem, an early 19th century formula first discovered by Thomas Bayes. The formula looks like this in its modern mathematical form:
In plain English, this formula says that by updating our initial understanding through unbiased new information, we improve our understanding. I learned to use this method while working at CIA, and we apply it at Intelligence Triggers today.
The left side of the equation is an initial estimate of the probability of an event happening. New information goes into right hand side of the equation. If it’s consistent with our estimate, it goes into the numerator (which increases the odds of our expected outcome). If it’s inconsistent, it goes into the denominator (which lowers the odds of our expected outcome).
In this case, we have used the formula to estimate the probabilities of a significant rise in the price of silver in the next six months. We estimate a 60% probability that the price of silver will increase at least 25% in the next six months. That’s a strong enough signal to trigger a “buy” recommendation using our proprietary Kissinger Cross methodology.
We update our forecast continually based on new information. What are some of the data points included in our most recent updated forecast?
- The price of silver has shown great resilience in the face of significant headwinds. Silver has backed off a bit from its recent high of $20.37 per ounce on July 13. But, it’s holding around the $19.50 per ounce level, the highest price in two years. This is true despite a bearish commitment of traders report from the COMEX, approaching futures expiration (usually a time for downward price pressure by shorts), reduced Brexit fears, increased COMEX margin requirements, a stronger dollar, and a new round of tough talk from the Fed about rate hikes coming in September. Normally, any one of these factors would be enough to push silver significantly off the recent highs. The fact that silver has been resilient in the face of all six factors at once is a bullish sign
- In addition to holding up well in the face of bearish factors, silver is set to get a boost from several bullish factors that have not yet been fully priced in by the markets. Despite the recent strong dollar and tough talk from the Fed, the U.S. economy cannot afford a strong dollar. The strong dollar is deflationary and pushes the Fed further away from its inflation targets. The Fed will not raise rates in September (and probably not for the rest of this year). Once that dovish signal gets priced in by the markets, the dollar will weaken and the dollar price of silver will get a boost
- Regardless of which party wins the U.S. presidential election in November, the U.S. is set for a round of helicopter money (fiscal stimulus monetized by the Fed) in 2017. If Hillary Clinton wins, that probably means a pick-up in Senate votes for Democrats and a bipartisan infrastructure spending bill. If Donald Trump wins, he has already promised massive infrastructure spending, starting with “The Wall.”
Either way, we’re looking at more spending, bigger deficits, more money printing and, eventually more inflation. The market’s anticipation of this outcome, starting in mid-November, will be a powerful tailwind for silver.
[Ed. note: As you know, this prediction applies to gold as well. But you won’t hear the FULL truth about what’s going to happen to gold until you see Jim’s latest announcement from one of the most secure gold vaults in Switzerland. Click here to watch it now.]
for Laissez Faire Today