Blog: Spirit of Money, Financial Fluidity
by munificent

Creation of Money

This is the best and most honest evaluation I have seen on the truth of Fed Reserve, and interest rates. Greenspan and Bernanke- truly the power is limited. This is, from my study, the truth of US and our financial irresponsibility!

Date:   11/8/2005 2:08:21 PM   ( 16 y ) ... viewed 1168 times

Our comment today is from John Pugsley, Chairman of the Sovereign
Society and a leading author on economics, investments, and free markets.
He is also the founder of The Bio-Rational Institute.
COMMENT: Behind the Interest Rate Curtain.

Dear A-Letter Reader:
Economists and market analysts are effusive about the appointment of Ben
Bernanke to the post of Chairman of the Federal Reserve System. The hope,
as expressed by the majority of economists and market analysts, is that the
new monetary wizard will be able to fine-tune interest rates so that the American
economy will continue to grow at a sustainable, non inflationary rate.

He won't.

The financial world may be convinced that central banks have it within
their powers to create endless, sustainable economic prosperity simply
by adjusting interest rates, but it's not true. In the same way that the
"all powerful" Wizard of Oz was simply a man behind a curtain pulling
levers to project the illusion of powers that he really did not possess, the
central bankers of the world are fake wizards, all involved in deception.
However, in this case the motive is malevolent, rather than benevolent.

Allow me to pull back the curtain. In spite of what the Fed says in its
press releases, The Federal Reserve does not set interest rates. It creates
money. It does this by buying Treasury debt. That is basically all it does.
The only power Mr. Bernanke will have, aside a stream of soothing
double-talk, is to vary the speed at which money is created. He can press
on the accelerator, and he can ease up. Interest rates are simply a consequence
of this action.

Now to the point. Money creation is pure theft.

Imagine that you are a counterfeiter and go into a small town with a suitcase
filled with counterfeit cash. You dine extravagantly, drink the finest wines,
buy a dozen new suits, an expensive car, the latest computer, and a half
dozen Rolex watches. Local business owners are ecstatic. You've created
a mini-boom! You leave town with your booty, and the money is soon
discovered to be counterfeit. It is declared worthless. The merchants who
accepted the fake bills have been duped. Defrauded. Counterfeiters are thieves.

It makes zero difference whether the piece of currency is printed by you
or by Ben Bernanke. It is still just a piece of paper with less utility than toilet
paper. In both cases the goods and services it buys are consumed, and all
the seller has is paper. As economist Ludwig von Mises once quipped,
"Government is the only entity that can take a perfectly useful commodity
like paper, slap some ink on it, and make it totally worthless."

The Fed has succeeded for the past twenty years in vastly expanding the
money supply without those dollars being declared worthless. First, the
dollars circulate, are generally accepted by the other citizens, and only
gradually lose purchasing power (price inflation) as more and more of them
are printed. Price inflation has further been delayed as citizens around the
world have chosen to hold dollars as "reserves."

The money is printed. Around the world people are holding it, like the
merchants in the small town, thinking it has value. It is inevitable that those
holding hoards of paper dollars, will eventually discover the counterfeiter's
game, and try to dump their dollars, and the value will begin to fall. When,
no one can know, but we can guess that after more than 20 years in which
the rate of money creation has dramatically exceed the rate of price inflation,
we are closer to the moment at which the curtain will be pulled.

What can an individual do to avoid the inevitable consequences of this
malevolent wizardry? Understand the difference between 'virtual' wealth
and real wealth.

Real wealth is comprised of all of the goods and services that we use.
It is those things with "utility value." Cars, carrots, houses, gold, copper,
etc., have real utility. On the other hand, 'virtual' wealth includes those
things like cash, bonds, and other IOUs that only have value because
people have confidence that they do.

At some point, confidence will come to an end. Virtual wealth will vanish,
just like virtual reality disappears when the computer is shut off. Those
holding real wealth will survive, and those holding wealth in the virtual
world of fiat currencies will lose.

At the Sovereign Society we believe that individuals must place high
confidence in real wealth. That's why our investment strategies emphasize
natural resources as well as the companies that produce them, while our
holding strategies emphasize international diversification. We remain
skeptical of the ability of any Federal Reserve Chairman, no matter how
highly respected or credentialed, to continue the game.

If you'd like to read this coming issue of The Sovereign Individual and
learn more about money creation, consider joining The Sovereign Society
by clicking here: The Sovereign Society.

John Pugsley, San Diego, California
Chairman, The Sovereign Society Ltd.

For insights on the evolutionary roots of money and freedom, sign up for
The Bio-Rational Institute's FREE e-letter

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