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Introducing GATA''s Treasurer, John Meyer
A BACKGROUND POSITION PAPER TO ESTABLISH THE MOTIVATION FOR THE GREATEST
FINANCIAL SCANDAL OF OUR TIME
John Meyer, GATA's Treasurer
The destruction of our monetary system is one of the most overlooked and
misunderstood yet important issue facing the world.
The Bubble.com mania of our financial markets is the result of a
monetary system, which is anchored to an irredeemable dollar, as the
reserve currency. The dollar as the reserve currency forces other
countries to accept our paper as payment for their goods and services.
The United States need only issue more government paper, IOU Nothings,
calling them money. Jacques Rueff named this dirty little secret -
THE MONETARY SIN OF THE WEST. It is a strange system that tolerates
debt and penalizes surpluses.
The reality is that the greatest crisis in credit since the 1930's is
underway. The parallels abound . While the problem may appear to have
begun in Asia, in fact its origin is a monetary system which allows the
U. S. Deficits without Tears. Every major nation in the world has
suffered as they have been forced to import our inflation (i.e. buy
dollars and U. S. debt) because it is the foundation of the worlds
Power-elites of Washington and Wall Street do not wish to acknowledge or
understand that the root cause of these crises is monetary. In using a
paper monetary standard we have destroyed the means of any objective
economic calculation. Fifty years ago money was defined as a store of
value. Todays dictionary defines money as a medium of exchange. Without
value, money is incapable of transmitting a value judgement between
consumers and producers or between investors and the capital markets.
Markets have become casinos.
In the absence of sound money fiduciary assets denominated by that fiat
currency are eventually devastated. In the end, stock and bond markets
have never been the sanctuary, but rather the killing fields. Paper
money, equities and government bonds are only indirect claims on wealth
dependent on the performance and worth of others. Fiduciary assets are
only indirect claims on wealth.
The Russian default launched us into a new phase of this monetary
meltdown, which directly impacts the derivative arena. Default has been
staved off for decades through credit expansion - bail-outs. New debt
piled on the old. Finally, when the excesses are too great and the
economies too anemic and incomes are insufficient, default becomes a
final solution. Defaults abruptly expose the systemic weaknesses. Since
derivatives are leveraged contracts dependent upon an underlying
asset, default immediately wipes out that derivative. The Wizards
computer model programs are not programmed for events that might cause a
non-standard deviation movement.
The devaluation disease is now attacking Latin America and has already
had its first victim in North America, LTCM. The Asian currency epidemic
was merely the first act in a play destined to take down the U. S.
Dollar. We have entered the most dangerous period in economic and
monetary history. Ironically, gold holds less appeal to the Western
world than anytime in history. The monetary mischief of competitive
currency devaluations continues unchecked. Every financial firebreak
that governments or the IMF have constructed have been overcome. The
ultimate threat to the dollar that the American controlled IMF has been
laboring to prevent is the repatriation of all those U. S. Dollars held
Hold in your mind the stakes and the nature of the game when reflecting
on the price of gold. Remember that the U.S. is the worlds greatest
debtor with a soaring trade deficit. Consider what would happen if the
U. S. was prevented from increasing its debt. If foreign dollar holders
refused to hold U.S. paper. What would happen to our interest rates if
we had to finance domestically these debts. Interest rates might reach
double digits. Observe that every rescue has entailed more debt.
Debt is merely an advance on real wealth, which is unproduced. The
reason gold is not part of the world financial system is simply because
it is not a liability. They cant print gold. Gold is not a promise -
its real wealth. So we have been experiencing a serial debt crises
caused by too much debt and insufficient income. You issue more debt,
devalue currencies and raise interest rates thereby weakening the
economy and its ability to produce the real wealth and income necessary
to service the debt, which was the original cause of the crisis. This is
a vicious circle and true monetary insanity. ,p> The gold market is
deeply depressed by an unprecedented volume of short selling, fed by
central bank gold loans and swaps. The uncharacteristic performance of
gold during recent crises simply demonstrate the skills of the
propagandists and short sellers. With the monetary system facing the
greatest defaults since the 1930's, the manipulation of gold, the
ultimate preserver of wealth serves precisely to conceal the bankruptcy
of our current monetary system.
THE THEORY OF MONEY
Is money an economic good or is it merely some floating abstraction? Why
do we need money? How did it emerge historically? Carl Menger, the
founder of The Austrian School of economics, in his "Principles of
Economics" defined the origin of money by introducing the concept of
liquidity to commodities (i.e. Theory of Marginal Utility) and his
integration of it into value and price theory. Recognizing the
subjective and dynamic nature of economics and the marketplace he
observed that commodity spreads did not fluctuate uniformly. Further
this spread was impacted differently according to the volume of the
transaction. Thus commodities and other assets could be classified
according to liquidity.
The Principle of Declining Marginal Utility recognized the hierarchy of
economic goods relative to liquidity (i.e. spread and exchange or
transaction loss relative to volume). Economic goods can be given
priorities of usefulness in an exchange economy. It is possible to rank
assets and commodities in terms of their declining marginal utility. The
process eventually evolves to an economic good with the slowest
declining marginal utility. That one is destined to be money. Menger
observed that money possesses a Constant Marginal Utility.
Money owes its value to the fact that, despite its abundance and its
steady increase, it continues to be in demand. Observe that gold is the
most abundant commodity known to man. Nearly all the gold ever produced
still exists. Why? It is unlike all other commodities. The ratio of
production to stocks or total supply is a low number. The reverse is
true for all other commodities. It is never in backwardation to the
dollar. Its rate of interest is substantially lower. Clearly, gold is
not like any other commodity. Incidentally, this is why conventional
commodity supply demand analysis is totally flawed.
Once civilization progressed beyond a barter economy some indirect
method of exchange had to emerge. It became economic for producers with
an excess of product to hold a commodity with the least risk of exchange
loss. Indirect exchange emerged before the concept of money. But
liquidity theory was the key to determine WHAT THE MARKETPLACE WOULD
ELEVATE TO THE STATUS OF MONEY.
Money being the most liquid of all commodities (i.e. the most constant
It is important to understand the nature of an economic transaction. It
is an exchange of goods and/or services. To exchange a product for a
note is an incomplete transaction. A note represents a promise in the
future and is dependent upon many things. A note is only representative
of a potential undelivered wealth, a good or a service. Today's "money"
is not payment. The transaction is completed only by the exchange of
goods or services at some future date.
THIS IS WHY MONEY IS AN ECONOMIC GOOD AND ONLY A COMMODITY MONEY CAN
LEGITIMATELY BE MONEY. MONEY MUST SERVE AS BOTH A STORE OF VALUE AND A
MEDIUM OF EXCHANGE. IT MUST COMPLETE THE TRANSACTION.