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The Short Seller's Nightmare - Thomas Q. Nichols
"What lies behind us and what lies before us are small matters compared to what lies within us." -Ralph Waldo Emerson.
Gold Bulls express frustration with the lack of exposure to the obvious and deliberate manipulation of the gold and silver markets. Its not that this interference is new, but rather that it is so obvious. While a casual reading of the Briefs in the Hove vs. BIS lawsuit certainly causes one to question motives, looming in the balance is a much larger fiasco that the gold and silver market stratagems are masking and which is threatening to be exposed. These monetary metals exert fiscal pressure in response to imbalances and even though cartels can covertly disperse these pressures temporarily, economic truth will eventually prevail and lay bare the manipulators.
We have been afforded a peek inside Enron by Frank Partnoy, a law professor and former Wall Street derivative specialist. He was one of many who will appear before Congressional Committees in the aftermath of the company's disintegration after its transformation from Energy Trader to Hedge Fund. Enron is not alone, and certainly not the largest player in the derivative markets, but of significant size to warrant attention. Major events do cause severe changes in the dynamics underpinning markets and human perceptions of value. So much for the "What Happened?"
Pro-gold advocates have been painted with the broad brush of extremism. GATA, (the Gold Anti Trust Action group), has pointed out that there exists collusion on the part of bullion banks, BIS, ESF, IMF, the U.S. Treasury, and Central Banks to suppress the price of gold. The cartel has responded by alleging the accusers are mere conspiracy theorists. Thanks to this tenacious group of gold supporters, we now know the "What Happened" and most of the "How it Happened." Let's bypass this stage of the debate and move on to the "WHY did it Happen".
Markets move up and down and fundamental factors will eventually right inequities. Profits are made in both market directions. Considering all the facts that GATA has brought to bear on the metal, the cartel is adamant about continuing the charade. If you are in the gold market for a profit motive, the decades long bear market has run its course and it is now time to become a bull and make your profits on the upside. Were it not gold and silver that was the object of these manipulations, hardly anyone would notice. However, gold is the restraint upon which the frugal keep the prodigal, and this metal is in the initial stages of unwinding decades of deception so deep in both political parties that neither will discuss it.
Valuable insight has been gleaned from the Enron caper, one of which is the profitability in writing derivatives, and another is cognizance of the age of the industry. These instruments have nominal values estimated to be in excess of 100 trillion dollars. Putting this in perspective, the total income of the United States in 2000 was 7.95 trillion dollars. Public, corporate and private debts are estimated at 16 trillion dollars and some sources cite a total of over 30 trillion when City, County, State, and Federal governments, corporate bonds, all retirement accounts, unfunded social security liabilities, pensions, etc. are all included. Which ever figure we use, 98% has been incurred since the end of WWII. Assuming the larger total debt figure, this means that since WWII, all the improvements to the railway system, to the highways and interstate highway system, to the vehicle industry, to the airplane industry, the construction industry, the manufacturing industry, the putting of men in space and on the moon, the transistor technology, the computer chip technology, the improvements in the medical and scientific arts, all the labor expended in the past 55+ years, all the raw materials we produced, everything in total, is worth 30 Trillion dollars less than nothing. Is our present economic system built to serve Man or is Man made servant to the present economic system? How else could we do all those things and have such a debt? This is gold's message and in this treatise we will show how this Nation was deliberately and purposely brought to the brink.
Once the facts are chronicled, therein will lay the propensity to unite labor, seniors, tax overhaul advocates, raw material producers, manufactures, and investors, all around a central theme. It is hoped that then will come the hue and cry to bring those responsible to account. If anything, the Enron debacle has again shown that the "Government of We the People" has become the "Government for Sale". At the last tally we saw, Enron had "assisted" half of the members of the House of Representatives, three-fourths of the members of the Senate and two Administrations. Countless other entities and PAC's have and continue to steadily buy influence from politicians. Considering all the Committees "investigating" Enron, does anyone investigate how many career politicians and bureaucrats retire multi-millionaires? This treatise will show that these politicians have the knowledge and opportunity to restore the Country, but they lack the will. Perhaps the fear to admit the injustices wrought upon the public is such that they have "thrown their hands in the air" and choose to ignore the inevitable consequences.
The title of this treatise bears special significance to the fore knowledge of those in Washington. A "short-seller" is of course a party who chooses to sell a futures contract in anticipation that the price of the underlying commodity will decrease. How many traders are aware of the Statutory provisions in the United States Code that, in certain conditions, the Government can raise commodity prices virtually overnight, requiring traders to pay, as in the case of some grains, a margin call of $29,000 per contract. These are not SEC regulations that can be manipulated, but rather Federal Statutes that can only be addressed by Congress. The Statute is not improper; the system that masks reality and requires the Statute is the problem.
Most news today is sound bites, small bits of news that has to be pieced together to form a "whole" story. If you are to understand where we are economically, you must see the "big picture." We have attempted to do that here, and this is not a short treatise for that reason and some material has not been included, however, the material we left out will comprise future (and much shorter) essays. There remains much more to this story yet to be told. Enjoy.
History is replete with accounts of deceitful men with ulterior motives who are avaricious and have designed schemes to fleece an unsuspecting public of their savings and freedom. There are however safeguards or early warning signs which signal when misdeeds are employed. An effective manipulator must first confuse the issues and misdirect attention to other parties, causes or forces. The manipulations can be continued while the victims are involved in strife and conflict among themselves. The manipulations will eventually end of course, as they all do, especially when personal ambition is exceeded by physical impossibility.
While we do not know which event will ultimately unravel this Grand Scheme, whether it be a derivative meltdown, more Enron style capers, stock market readjustment, large down turn in world economies, or military conflict, we do know that one or more will cause the correction. The 9-11 disaster received blame for a great amount of economic calamity whereas in fact the disaster only revealed market forces that were lurking beneath the surface. When this Grand Scheme is exposed it will be another mega event that gets "credit" for causing the correction. It always seems to happen this way so the seeds of destruction can be re-sown which will bear fruit in yet another generation.
By the time you have finished this treatise, these truths will manifest themselves in ways most will have never imagined. In this "modern age" we have been lead to believe that our economic system has evolved into a new-age miracle the likes of which has never before existed and modern technology now somehow renders past successes obsolete. Special self- interests expound the "exuberance and resiliency" of the "new" American economy, (to big to fail), and while at times it may spit and sputter, it will continue to march forward and upward forever. Maybe, but then again, as someone has eloquently stated: People seldom get what they want, but rather what they deserve. On the other side of the raven, there stand the "doom and gloomers", who recite equally convincing arguments that the sky is in fact falling and with it personal wealth and liberties. Personally, and the reason for this treatise, is not to become an advocate for either position, while both have fundamental merits. Rather, my purpose is to reveal an aspect of economic reality which has been completely ignored and which could very easily blind-side market participants whether they be investors or consumers. A large degree of the ignorance for past economic truth lies in a lack of understanding of economic principles and deliberate misinformation designed specifically to mislead and deceive a gullible public. Anyone trading commodities or for that matter involved in any financial markets will want to read this treatise for some profound insights which you will definitely not hear from Wall Street or Brokers, although your personal wealth is very much at risk in ways and a magnitude you never dreamed possible. You will want to print this treatise as some material refers to charts and tables on previous pages. Share this information with family and friends. It may be imperative that you take immediate steps to protect your financial health. We unequivocally guarantee revelations that will alter trading decisions.
The source of information for this treatise is taken from the historical record of the United States and all sources are identified so the reader is not asked to take them without examining the information for yourself. John Maynard Keynes' much-revered concept of "deficit finance" for creating investment, which then is somehow supposed to be the engine that moves the economy, does not provide a means to repay the debt. It is sold as a perpetual motion machine, but we have 30 trillion dollars of debt that prove otherwise. Abraham Lincoln stated, "Labor is prior to and creates all capital. We will examine an "earned income" based economic approach which was implemented by the U. S. Congress for monetary stabilization in 1942, its significance to world economics, and why it was shelved in favor of the predicament we find ourselves in today. You may find it disconcerting that the political establishment in Washington knows exactly how to correct the morass in which we find ourselves. While this treatise is of some length, the basic background is necessary for the reader to grasp the significance of the economic principles behind an exchange-balanced economy, how these principles interact with all wealth and how these principles could be implement literally overnight, with major consequences for anyone on the wrong side of a trade. Rather than bore the reader with complicated and mystical theoretical abstractions, we have reduced these economic principles to basic scientific mathematical calculations. The reader can simply "do the math" to see the logic of our founding fathers to create a nation based upon 'Peoples Capitalism'. In a previous essay, I stated there are three questions we must ask ourselves in order to understand our economic riddle:
1. What is Money?
2. What is it Worth?
3. How does it get into Circulation?
That essay dealt partially with the first question and we will now address all three simultaneously. Before we begin, some points which may further pique your interest which are currently the subject of much written and verbal communication concerning economic and monetary issues, and a brief comment:
- The US Dollar (strong dollar) is going to crash and take the economy with it.
- The US dollar and the Euro are competing for dominance.
- Total public and private debt is unsustainable.
- The US budget is going to experience huge deficits.
- A Stock Market crash is immanent.
- We are at the start of a bear market in stocks that will last as long as the Bull market (about 20 years).
- The "boomers" in the Stock Market, the 'buy and holders', will have no one to sell to when they retire.
- The Federal Reserve must continue to inflate the money supply at unprecedented levels.
- Large US Banks are on the verge of collapse.
- The entire World is on the verge of an economic Depression.
Any and/or all of these scenarios could happen, but only if we, by deliberate, conscious choice, allow them to happen. The foundational economic principles of the American economic system were designed to prevent any of the above conditions. Since we are taking about economics, we need to first define what that is; as per Webster's Dictionary- economics: the science that deals with the production, distribution, and consumption of wealth.... In that economics is a "science", it follows that it is governed by laws and is provable. Individually and corporately we determine our financial viability by examining our Balance Sheet items, assets and liabilities, and our Cash Flow Statement. As a Nation we must do the same to see where we have been and where we are headed. By utilizing scientific means we can ascertain the steps needed to correct imbalances as they appear. Obviously, this is not being done today and the ramifications are far greater than we are being told. An economy is "an exchange of goods and services and not a traffic in money". This treatise will show where the "train left the tracks" nearly 50 years ago and how and why the American public and the World has been deliberately deceived. The result of the derailment is coming back to haunt us as the disruption will cause massive social/political convulsions unless quickly reversed.
Gold and silver are two precious metals that have both industrial and monetary value and significance. Volumes have been written about these two metals and how special interests have manipulated and orchestrated this market for ulterior motives. The GATA, Gold Anti-Trust Action group, and their loyal army have done the most work in bringing these revelations to the light of day. Yet the public still does not see the picture, or more pointedly, the establishment media does not want to pursue these facts and make them front page headlines. The gold army is 'at the door' of exposing the largest quagmire to ever hit the banking industry. We say quagmire because their practices and methods are calculated and deliberately orchestrated to enslave humanity for global objectives. In this treatise we will explain economic principles using agricultural commodities because the correlation of the basic raw material to consumer products to national income is somewhat more readily visible with food and fiber products than with other raw material products. The effect is the same, just more visible and once the reader sees the connection, then it becomes more apparent why the gold and silver prices are being manufactured and manipulated.
The source for the information and facts presented herein are rooted in a previously orchestrated depression, the one of the 1930's. The Raw Materials National Council of Sioux City, Iowa, did extensive research work during that depression era which represented a factual presentation of the United States as a business. This work revealed a Natural Law of Exchange that operates constantly in our Private Enterprise economy and constantly applies to all nations of the world regardless of their economic premise. By persistent and patient application of the science of arithmetic, rather than theory based upon "utopian dreams" or exploitation, basic and constant ratios were uncovered. A much more detailed description of their work is contained on our web site at NorthernLightsReserch.com and we will provide an overview in this treatise. As we are indebted to them for their insights and commitment to pursuing economic freedom, we have at times quoted their material extensively herein. As a summary of their work, suffice it to say that the relationships of raw material income and farm income to national income had been checked for several years with leading businessmen and economists in the United States. No one has ever been able to successfully refute their analysis or conclusions. When America last operated under a balanced exchange equation, each gross farm dollar translated into a dollar of factory payroll, and the overall national income multiplied according to farm income times 7; the ratio was 1-1-7. Service industries and sales each added to the price but not to the product. (A similar definite ratio exists between all raw material income, adding mining, forestry, fishing, etc., to agricultural income, the national income was approximately 5 times the total, or, a ratio of 1-1-5, using gross income figures for all raw materials. The reason agriculture's ratio is higher is because much more agricultural wealth is consumed (destroyed) each day, breakfast, dinner and supper. In fact, this research was the foundation for National legislation that required their findings to be the basis for 'dollar value determinations' and stabilization during World War II. "With the definite relationship of Agricultural income, all raw material income and factory payrolls to National income, it makes it possible to operate our National economy on the same actuarial basis that we operate Life Insurance Companies. Using the commodity index as a guide, we can determine the price for basic materials in direct proportion to the National Income required to operate the nation as a business, without the need for any debt."
The American people have become a group of specialists and have forgotten that each group is interwoven with every other group in an indivisible economy, with each group a multiple of the complete economy of the United States. As special groups gain advantage over each other they immediately find that other elements of our economy, those which furnish the markets, do not keep pace with them in the consumption of goods and they all fall back in what is usually called a recession. Today, this is being manifested or masked by the tremendous debt carried by consumers and also the necessity to lower prices of goods and even provide zero per cent financing in order to generate sales. In fact a recession is nothing more than an unequal price balance between groups. Utilizing the 1-1-5 ratio, if one sector of the economy is short-changed, the entire economy suffers as a result, and it becomes necessary to "borrow" from tomorrow to pay for today's needs because of the lack of earned income.
The research work of the Raw Materials Council proved that the answer to the economic riddle had been obscured by a lot of theory and political philosophy that never has worked in maintaining a stable price level or sustained prosperity. With an ample supply of raw materials and labor, proper pricing of goods and services should automatically create the income to exchange and consume our production.
This proper pricing, parity prices, are not price controls, rather parity means price balancing. The consumer price index is established by the competitive selling price of finished goods and it is the changes in this (or similar) index that determine par prices for raw commodities. Parity simply means giving value to money in the form of goods and commodities--units of wealth--not in giving value to these essential things in terms of money. Parity means balance, equal exchange value, without which one party to a transaction is certain to be "shortchanged".
It is a simple fact that the financial measure of our economic welfare, whether individual, corporate or governmental, consists of adding up two columns of figures--income and disbursements. Regardless of what our theories may be these two totals tell the story of our economic well-being.
Income consists of 1) primary bartering power, which is created by the production and sale of the materials of new wealth--the things which we obtain from the earth, the farms, mines and seas-and, 2) earned income, which is derived from wages, interest and profits.
Disbursements include everything on the "outgo" side of the ledger, whether in the accounts of an individual or government.
The amount of primary bartering power, or primary income, depends upon two things--the number of units produced and the price received for them by the producer; simply stated: Production x Price = Income. In the processing industries and professions, hours or days of labor times the rate of pay for services rendered, or fees in the case of professions, govern the amount of income.
The Raw Material Council's conclusion was: "It is therefore fundamentally necessary that the total annual production of goods and services rendered, times price, plus wages, interest, fees and profits must create an income large enough to pay for all the costs of operating the nation as a business. The total must pay for the costs of government; pay the cost of producing raw materials and for their processing and distribution. Otherwise, we cannot have a sound, solvent economy." (We have provided a mathematical illustration of this principle later in this treatise.)
In the past 12 months this Nation has gone from supposedly having a budget surplus to having to inject hundreds of billion of dollars of additional debt into the economy from the Federal Reserve to operate our Federal Government. By all indications, it will again take all of that amount and more of additional debt injection this year to keep the 'ship afloat', plus additional billions of debt for the private and corporate sectors as well. In retrospect, the Raw Material Council's research surrounding the events of 1929 revealed that the depression of 1929 was attributed to the Stock Market Crash, but that was the finale of the show, not the opening act. The opening act was a reduction in raw material prices, starting in 1925 and culminating in 1929. The reduction in raw material prices can be attributed to our financier's desertion of "People's Capitalism" in search of what they thought were higher profits in other lands.
Instead of developing the United States, they invested their money in foreign sources of raw materials, sugar plantations, mines, oil wells and so on. After bringing their various projects into production they faced the problem of marketing and turned their eyes to the United States. Through one method or another, tariffs were reduced and evaded by depressing prices in other countries. Raw materials started to flow into the United States, destroying the foundation of our domestic income. The Council's research showed that as little as 2% unregulated imports would destroy domestic markets and exchange relationships. Doesn't NAFA, WTO, fast-tract trade authority and free trade all sound like failed experiments we tried before? It appears our national leaders are implementing trading procedures identical to those of the 1920's, and the results will be much more severe. In that era a larger segment of the population had agrarian roots whereas today the majority reside in cities. In that we know from history what the result will be of employing the failed policies of the past, the question we must ask are WHY are these polices being pursued and for whose benefit? In a Free Trade speech in Brussels in 1848, Karl Marx stated: "The protective system is conservative, the international system on free trade is destructive and for that reason and that reason alone, I am for free trade because it will hasten the day of the economic revolution."
What is Money?
The Raw Material Council highlighted the fact that numerous research groups, representing various organizations, make little, if any, mention of foreign exchange and its effect on our economy. Money has been represented as a 'mystical creature' that ordinary people know little about. When we look at money as a "medium of exchange" we get a clearer picture of the past, present and future. Recently Alan Greenspan was touting the strength of the dollar versus the Euro and Europeans and made similar characterizations about their medium of exchange in relation to ours. The representations are misplaced. The two Continents could just as well have been exclaiming the supremacy of the Fahrenheit temperature scale versus the Centigrade scale and vice versa. Just because the temperature reading, as measured by the respective scales, goes up or down, it does not mean the measuring device is nearing destruction, but rather, the "environment" upon which the readings are taken is changing.
We should look upon money in the abstract in the same way that we consider a pound weight or a yardstick or thirty-six inches. The Bureau of Weights and Measures requires that the exact length of one yardstick to be thirty-six inches and it is irrelevant how many of them there are in the world. Yet, the record of foreign exchange and its measure of value of goods and services has been one of seeming confusion and chaos. "World economy is an exchange of goods and services with money the measuring stick of values". Therefore, if the earnings of nations are to have stability, the value of goods and services must be measured with a stable yardstick.
Money came into being as a means of facilitating the exchange of goods produced in an amount above the individual's needs. The merchant gave it as a receipt for goods delivered and the receipt could be used in exchange for other goods. In order for the "dollar" to crash, it must become something that it is not: wealth. Money is a medium of exchange and completely worthless unless we produce commodities for which it may be exchanged. An economy, (Webster's: a system of producing, distributing, and consuming wealth), on the other hand, if not represented by equal exchange, can and do crash. The reason that money has the appearance of wealth is because people don't have enough in sufficient quantity to adequately provide food, shelter and clothing, and the general public today is far removed from the raw material production to provide these necessities for themselves.
The Raw Material Council's research from the early part of the past Century provided the foundation for the adoption of National Legislation for "regulating the value of money". Just before World War I we had what can be called a normal period of sustained world prosperity. A "normal period" can be defined as any period of five years or more in which we had a sustained prosperity with full employment, a balanced national budget and an expansion of production to take care of the increase in population and to utilize the increase in technological improvement.
We have had two such periods early in the 20th century, one in 1910-1914 and the other in 1925-1929. The average price level in either period can be used as a yardstick to measure subsequent price ratios and dollar values. The price levels of both periods were directly or indirectly the result of world prices. The Council's research further indicated that during "normal periods" the inter-relationships between commodities, be it BTU's or calories, also reflected approximate relationships between groups of commodities. For example, 1 oz. of GOLD was equal in value to 10 barrels of OIL. 1 barrel of OIL was equal in value to 2 bushels of WHEAT.
During the period from 1910-1914 the price of corn on the farm averaged 57.4 cents per bushel, cotton 12.4 cents per pound, silver (the monetary medium for a large part of the world's population) 57 cents per ounce and gold $20.67 per ounce. The average price level can be called parity or the point of equal exchange for the two commodities and the two metals as monetary measures. The price of gold was the result of an agreement as to the value of gold in maintaining what was called the "gold standard." The price was fixed by government fiat. Silver, (the monetary medium of the nations who had no gold) was allowed to fluctuate on the market along with other commodities, such as the two mentioned.
At this same period of time the English pound was valued at $4.87. On this basis an ounce of gold could be exchanged for 166 pounds of cotton while the English pound would buy roughly 40 pounds. We will use cotton as a matter of illustration, although other commodities or weekly payrolls of labor could be substituted for comparison.
With the coming of World War I, commodity prices and the price of silver advanced and we had what is called inflation. The value of gold remained unchanged, as the price was fixed at $20.67. On the basis of the average commodity price level in 1910-1914, as 100, commodity prices in 1919 had risen 220 per cent. This meant that in 1919 it took $2.20 to buy the same amount of commodities that $1.00 would buy in 1910-1914.
The number of dollars, which represented national income, advanced in ratio to the increased commodity prices and in 1919 our national income was $69.9 billion, as compared to $31 billion during the 1910-1914 period. This was an increase of approximately 225 per cent in total income.
Silver had advanced to keep pace with commodity prices and in 1919 was worth $1.25 per ounce as compared to 57 cents per ounce in 1910-1914. The purchasing power of gold lagged behind because it had not increased in value and in 1919 it required roughly 2.2 ounces of gold to buy the same amount of cotton as in the pre-war period.
The depression/recession of 1920-1921 in the United States and throughout the world as brought about by the International financiers trying to re-align the price of silver with the old price for gold. This drop of silver prices reduced the purchasing power of the silver nations and commodity prices dropped rapidly. The drop in commodity prices automatically destroyed the income in ratio and in 1921 our national income had dropped to $59 billion from a high in 1920 of $71 billion.
This drop in income resulted in bank failures, foreclosures and a large number of bankruptcies. Revision of our tariff structure in 1921 protected us against the low silver price (cheap commodity imports) and in the period of 1925-1929 we had a new "normal period" with the wages paid for labor, industrial prices and farm products in balance. The new price level was 169 per cent of the 1910-1914 level. This new price level was not inflationary because the incomes of our various groups had risen proportionately and assumed a new exchange ratio. Gold had not been revalued and in 1925-1929 an ounce of gold would purchase only about 100 pounds of cotton versus the 166 pounds in 1910-1914 period. This did not affect our prosperity, however, because very few of our population were engaged in gold production. Silver, because of the revaluation by financiers, dropped to 60 cents per ounce in the 1925-1929 period.
In our domestic economy, with the increased commodity prices and an increased unit production, we had marked prosperity. With an average of $78 billion of national income during the 1925-1929 period we liquidated some of our war debt and at the same time had enough purchasing power to develop the automobile industry on a large scale and make automobiles part of our living standard. This would not have been possible if prices had been allowed to return to the 1910-1914 level. It is a good example of how a higher price level can bring about prosperity if the prices received by various groups are kept in balance. In 1919 our Public Debt was 27.3 billion dollars and in 1929 that debt had shrunk to 16.9 billion dollars.
The 1929 depression was caused by forcing commodity prices to conform to the monetary base of silver and gold at the old 1910-1914 level (60 cents and $20.67 respectively). The new drop in commodity prices threw International exchange into a state of chaos. England was forced off the gold standard in 1931 and substituted a combination of silver and commodities for the gold standard. Her gold was used trying to create a reserve of commodities in order that she might use these reserves to stabilize commodity values.
In our own nation the drop in commodity prices created a severe deflation and in 1932 our income had dropped to a low of $39.9 billion from a high of $83 billion in 1929. This loss of $43 billion per year income threw millions out of work and we had the worst depression in the history of the United States. It was merely a monetary condition, as our raw material production in 1932 was quite similar to 1929.
After the election in 1932, the Roosevelt administration took some steps to remedy the situation. In regard to foreign exchange they decided to revalue gold from $20.67 to $35.00 per ounce, or 169 per cent of the 1910-1914 level, thus restoring its relationship to the 1925-1929 price level of other commodities. In other words, they felt that with the new gold price, commodity prices would come back to the 1925-1929 normal. If other nations had co-operated and at the same time increased the price of silver to 97 cents per ounce, or 169 per cent of the 1910-1914 level, there would have been a chance of restoring the ratios between money and commodities that existed in 1910-1914. Instead, other nations sold us their gold, thereby removing backing for their currencies and commodity prices didn't recover.
The Raw Material Council presented their findings to several sessions of Congress throughout the 1930's. As a result, the U.S. Congress in 1938 required the continuous computing and monitoring of parity prices for over150 agricultural commodities using the 1910-1914 period. After WWII broke out, members of the Raw Material Council again took their research work to the U.S. Congress, specifically to the Banking and Currency Committee, not the Agricultural Committee. The Banking and Currency Committee was created in 1865 and its jurisdiction included the legislation that created the Federal Reserve in 1913 and the establishment and operation of the Federal Reserve banks since that date. Formal jurisdiction of the Committee was defined to include the following subjects:
- Banking and currency generally.
- Control of price of commodities, rents, or services.
- Deposit insurance.
- Federal Reserve System.
- Financial aid to commerce and industry,
- Gold and silver, including the coinage thereof.
- Issuance of notes and redemption thereof.
- Public and private housing.
- Valuation and revaluation of the dollar.
The work of the Council was on the monetary end of the economy and their research proved that by manipulating the prices of raw materials, earned income is eliminated, thus forcing people to borrow money to provide for necessities. Banks, fearful of not getting repaid, would not make loans necessary to prosecute the war effort. The Council's work proved that if farm prices were supported at 90% of parity the Nation would have the earned income for stability. The result was a monetization of farm raw materials, the Steagall Amendment to the War Stabilization Act of 1942, (P.L. 77-144). For a brief period of American history, Congress took control of "regulating the value of money" away from the Federal Reserve, but it only lasted about 10 years. As was true of most legislation passed during the War period, the Steagall Amendment carried a "sunset" provision for termination two years after the War ended.
The third act of the First Congress was a tariff law to prevent cheap foreign goods and debased foreign currencies from determining the value of American money. It has always been the government's job to regulate that value of money (protect the public), and failure to regulate that value today constitutes gross dereliction of duty of all those in the House, Senate, and the Administrations as well.
It goes without saying that winners write the History books and history, or vested self- interests who re-write history, have not been friendly to the parity concept and its purpose. Parity is openly discounted and the Steagall Amendment is given a "brush off" as a short-term measure to deal with farm surpluses. Pundits claim that the Steagall Amendment was implemented to solely assist farm income during WWII, however they fail to explain the fact that Steagall was originally implemented almost six months prior to our entering the War and six months later modified by increasing the parity requirements. Steagall is the reason for the assumption that wars bring prosperity, when in truth, parity prices allowed an equal exchange economy which included servicing the costs associated with the War effort. During WWII the Public Debt increased by about $220.5 billion dollars and that Public Debt started to decrease after hostilities ended. During the localized Vietnam conflict, from 1956 to 1973, the Public Debt increased by about $193.2 billion and has increased exponentially ever since to today's level of $6 Trillion. Given all this negativity, the United States Department of Agriculture is still required to compute parity prices, although the parity computations used today are far different than those under the Steagall Amendment.
Law of Markets
"Say's Law of Markets said that division of labor sets up reciprocal markets for each of the divisions of labor automatically. Those who farmed, for instance, provide the market for those who made tools-and those who neither farmed nor manufactured were in effect supported as a service industry by the productive elements in society. The justification for the school teacher, the preacher, the policeman, the doctor was seated in the fact that service industries allowed farmers and manufacturers to be even more productive, having had service work taken off their hands. Economists in effect said that since division of labor set up reciprocal markets, and since human wants could not be satisfied, there could be no such thing as under consumption or overproduction or unemployment. We know it has never been quite that simple. Ignorance of equitable exchange between the various divisions of labor has caused recessions and depressions because of the failure to regulate the value of money.
Primary production--that is, taking raw materials from mother earth-comes first. You can easily trace man from hunter to farmer. He took food and raw materials from nature, and the equation in terms of bookkeeping was man debited, nature credited. The farmer no longer made his own clothes or made his own tools. He did not build his own farm equipment, but depended on the man in the city to handle that for him. That is what is meant by division of labor. But the only new thing that entered the economic equation continued to be raw materials, farm crops, iron ore, timber, coal, wool for a coat or cotton for a workers clothes-man debited, nature credited! Division of labor aided efficiency, but in a physical sense manufacturing, trades, and services simply added to the price, and not to the raw materials in the product. Except for farming, mining, forestry, fishing, all other equations in the economy read: man debited, man credited- a wash! There never has been and never will be a profit to an economy that does not read man debited, nature credited simply because nature is not paid back.
This is quite different from the economics of an individual. An individual can make a profit at the expense of another, but the transaction is still a wash as far as the economy is concerned--man debited, man credited! If prices in exchange are at par, then production in fact sets up the credits for consumption of production (as will be shown in the example in a few paragraphs below).
Unfortunately, institutional arrangements-- trading houses, banks, government itself-- have been used not to assure par exchange, but to enhance predatory business profits, and, in the case of government, social programs are implemented to keep the worst effects of predatory profits from showing. That is why we have institutionalized poverty, low cost housing, relief checks, Medicare/Medicaid, food stamps, and government as the employer of last resort." (From "Parity, the Key to Prosperity Unlimited", by Charles Walters Jr.)
Earlier in this treatise, it was stated that we have become a group of specialists and each group is interwoven with every other group in the indivisible economy. By way of illustration, we will look at a commodity, wheat, and its final product, a loaf of bread. Obviously, the farmer did not produce the wheat for the loaf of bread all by himself. Labor from a manufacturing plant built his tractor and other farm implements, refineries and truckers supplied his fuel and fertilizers, other laborers supplied his cloths and groceries, still others built his home and farm buildings, while others staffed schools, libraries, law enforcement agencies, hospitals and so on. Although some of these laborers, (the farmer is also only a laborer applying his talents and capital to the soil), may not realize that they are helping the farmer produce the wheat and therefore, in the long run, must be paid by him. The farmer too, may not fully realize how many people helped him produce that bushel of wheat and therefore have earned a share in the price he receives. The farmer and all of his helpers should receive a share of the bread that is the finished product of the wheat. They should get no more and no less than they have coming. Since we use money as our 'medium of exchange', the farmer must sell the wheat for enough so that he can pay his helpers and himself enough so that each can go and buy their fair share of the bread they helped produce. Simply stated: Production times Price = Income
The same story is true for all raw material producers -- ranchers, miners, fishermen, lumbermen, etc. None of them did all the work themselves. They all had helpers. The big important difference is that the raw material producer gets the money first. He must get enough not only for himself, but also enough to pay his helpers so that they can buy their fair share of what they helped to produce. Lets now put this information into practical use in a simplistic illustration: A bushel of wheat (a raw material) will produce 70 one pound loaves of bread (a finished product). Today a bushel of wheat sells for almost $3.00 per bushel and one pound loaf of bread sells for almost $1.00. That means we will have to generate an income of $70.00 in order to be able to buy all the bread we are able to produce from a bushel of wheat. 70 loaves times $1.00 per loaf = $70.00. The price of wheat is $3.00 times the trade turn multiplier of seven (Raw Material Council research) equals a national income generated by the bushel of wheat of $21.00; in other words, we are short $49.00 from buying the bread produced from one bushel of wheat. We have a money supply of $21.00 with which to purchase $70.00 worth of bread. Where else can we get the $49? To the rescue comes Mr. Greenspan and his private Banking group, the Federal Reserve. In the last fiscal year they had to pump in hundreds of billions of dollars of public and private debt, in addition to all the tax revenues spent, so we could consume raw material production and service past debt infusions on groceries consumed but not paid for in previous years. These Bankers have job security for the foreseeable future or at least until they acquire title to all the peoples' assets, with the aid of our elected officials in Congress. We can no longer charge groceries at the local store, but rather we have to pay with cash or plastic and Washington "beats its chest" exclaiming to us how "cheap" our food is. Consumers have to finance appliances, furniture, cars, homes, and so forth to mask the huge shortfall in income to consume our food products and other raw materials. If a consumer defaults on loan payments these consumer items can be repossessed.
Later in this treatise we will cover today's actual parity price levels for various commodities and their ominous significance in the larger scheme of economics, but for now, we'll state the present parity price for a bushel of wheat is about $14.46, depending upon which index is used. Thus, $14.46 times the trade turn multiplier of seven, equals a national income of $101.22, to purchase $70.00 worth of bread from the one bushel of wheat. Of course under parity, the price of a loaf of bread would rise slightly to reflect an increase in the price of wheat, wages and fuel etc., but the parity price of the bushel of wheat would cover all these costs, with a remainder left over for national savings. This is why the Public Debt amounts decreased in the 1925-1929 period and the 1946-1950 period when we operated under parity prices.
From John Myers's recent article "Lessons of the Great Depression", http://www.dailyreckoning.com/home.cfm?loc=/body_headline.cfm&qs=id =1607,
"The lifestyle of borrowing and spending still hasn't really gone out of fashion - at least for consumers. The fact is Americans are addicted to spending, even if it is off the back of borrowed dollars. Since 1960 consumer credit has risen from $56 billion to today's total of $1.6 trillion. The government is hoping that with interest rates at 40-year lows, Americans will continue to borrow and spend.
"During the Credit Age, buying and having the means to buy had little to do with each other. Since 1960 consumer credit has risen by a factor of 29, but real non-farm compensation has increased by a factor of 10. That means that for the majority of Americans, their debts have increased three times faster than their wages." (At the same time real farm compensation has declined, as has mining, timber, etc.)
Since we do not have the income to consume the bread from the bushel of wheat, so-called surpluses of agricultural products appear because we cannot 'consume' this production, and our 'government experts' then tell us that Congress must write another 75 Billion dollar Farm Bill to take land out of production and continue to support prices at levels which insure that more surpluses mount, and to fund the Food Stamp Program, the School Lunch Program, and Emergency Supplemental Income Relief for Producers. The Government planners then force the public to borrow consumer credit, if eligible, to purchase consumer goods, and at the same time, tax the consumers to pay for Government Programs to Raw Material producers that are designed to fail. Moreover, wealth transfers, in the form of additional taxes, are necessary to pay for social programs for the institutionalized welfare society. The entire process is asinine.
Supply and Demand
Typically when producers complain of low commodity prices they are met with the deafening excuses of "supply and demand". The gold and silver bulls have proven beyond doubt that demand for these two metals has outpaced supply for at least a decade, and yet gold and silver prices do not rise. The GATA group has proven that the reason for this anomaly is price manipulation made possible with "paper" gold and silver. When true supply and demand forces attempt to take prices higher, the cartel steps in to sell "paper" gold and silver to depress the price. The cartel has had a good teacher because the same operation has been working magnificently for the grain trade for 40 years. In the agricultural sector, grain traders sell "paper" grain, which they do not yet own, 12 months into the future.
In order for true supply and demand to work for raw material production, it would involve only the producer and end user. Division of labor in agriculture, forestry, mining and fishing has allowed an exodus of manpower from these occupations and into other pursuits, leaving a very small percentage of the work force in these basic industries. Yet, it is the income of these basic industries that determines our level of employment and national income. Social justice demands a floor be placed under basic commodities to protect the public from predatory business profiteers. Supports are already in place for some commodities but their present unrealistic values only insures economic failure.
Returning once again to the work of the Raw Materials Council, they developed an economic program based upon 1) Parity prices for raw materials; 2) A new minimum wage law that tied the minimum wage to the basic full parity prices, and; 3) A World equity of trade, where the United States would pay all counties of the world the full American parity price for all raw materials imported in this country, but only on a Barter System Basis, meaning in exchange or trade for American goods and jobs at full honest U.S. domestic market parity prices. There would be no tariff taxes accumulating in the Federal Treasury, only goods imported and goods exported.
In 1942 the Council's position for a prosperous post-war era after WWII was:
- "As our payment for services in this war the rest of the world should agree to correct its foreign exchange from one of exploitation to one of equity. Gold, silver and six basic commodities such as corn, cotton, wheat, oats, barley and flax should be stabilized at a price level in balance with the 1925-1929-price level as an average. (With gold and silver revalued at $35 per oz. and $.97 per oz., respectively) If the commodities index at the close of the war in the United States is 10 per cent above the 1925-1929 level then these two metals and the basic commodities should be stabilized at 10 per cent above the 1925-1929 level. This stabilization would give the world a sound monetary medium for all nations. It would give the world a price level that would permit prosperity and development. The curse of the world has been exploitation of peoples through low prices and the resulting wars."
This program represented honesty and fairness, so naturally it would have to be modified to allow predatory business profits at the expense of both the importing and exporting countries. First of all, the price of gold would have to remain fixed and not allowed to rise. (This was a repeat of the disastrous lesson learned in the 1910-1914 to 1925-1929 periods, which we discussed earlier). Secondly, dictate the idea of parity prices for raw materials on a World -Wide basis for individual nations and regulate the value of their foreign exchange with us based on their parity price index. Foreign currencies would then have a par value to their commodities. Finally, scrap the American parity price concept after the program is formally adopted, effectively devaluing the U.S. dollar. The name of this International Program was called the Bretton Woods Agreement, July 22, 1944. Part (a) provided for the International Bank for Reconstruction and Development, Part (b) provided for the International Monetary Fund, Part (c) is the Act passed by Congress, and you can read it at our Web site: http://www.northernlightsresearch.com/index.html. Part (b) Article VIII, Section 5, deals with the Nations reporting requirements so a parity price index could be maintained for each Nation so no one could "cheat". Part (c) The Act, Section 5, deals with the formal restriction that the U.S. could not alter our parity price concept, which we belligerently did anyway in 1949. (The lender of last resort can do whatever it wants). See Agricultural Adjustment Act of 1949.
It is often stated, inaccurately, that America defaulted on its dollar obligations in 1971 with the collapse of the Bretton Woods Agreement. Actually, the plug was pulled on Bretton Woods in 1971 because America defaulted on its dollar obligations in 1949. The Bretton Woods concept of a level playing field for foreign exchange provided that trading accounts for balance of trade would be settled with gold or the World Reserve currency, United States dollars, valued with gold at $35 per oz. The United States scrapped its dollar monetization in 1949 by abandoning the parity concept, and the Viet Nam War and Great Society programs of the 1960's expanded the Public Debt. These measures undermined the dollar in relation to other currencies that were fixed. As a result, foreign countries, notably France under Charles de Gaul, demanded gold rather than dollars to balance of trade. As the case then, the same is true today, foreign exchange debts are settled in gold, and thus the draw down of public gold reserves presently occurring as GATA has repeatedly pointed out. To put this in dollars, the Public Debt declined from $269.4 billion in 1946 to $257.4 in 1950, for a reduction of $12 billion. This was a period of parity prices, or a "normal period", as per the definition above. From 1950 to 1971 the Public Debt increased by $166.7 billion, with the abandonment of the parity concept. The clock continues to tick, with the Public Debt now at $6 Trillion, all thanks to the abandonment of parity prices.
By establishing parity prices based upon a sound base period, all commodities were tied together, and more accurately, supported by a floor. The commodities determined the value of the dollar, and therefore, the dollar was "as good as gold."
The Abandonment of American Parity
The Steagall Amendment to the War Stabilization Act expired in 1948 and was extended one year. The Agricultural Adjustment Act of 1949 provided for a 60 - 90% sliding scale parity formula. Whereas previous parity computations were based on a "normal period", i.e. 1910-1914, the 1949 act abandoned the "normal period" requirement and replaced it with the "adjusted base price" concept. The result was the substitution of true parity for "transitional" parity In a nutshell, this new parity computation is explained by Charles Walter Jr., in "Parity, the Key to Prosperity Unlimited".
"...The decision was made that agriculture would henceforth be the shock absorber for the rest of the economy. When the 1949 law was passed for agriculture - the 60 to 90% of parity law - it contained a provision that the parity base year would be moved forward every decade. So you had this situation: 1947-49 might be a fair base period - relative balance in much of the economy! But a decade later 1957-59 = 100 became the base period because of this law. We remember it well. Under the earlier base period, corn was $2.04. When 1957-1959 became the updated parity base year, they simply reduced corn to $1.55 and called it full parity. They took 49 cents off a bushel of corn with a lead pencil this way. You have here complete dishonesty and this very dishonesty is used to discredit the parity yardstick."
"QUESTION. Has the parity base period been moved since then - to 1967-1969, for instance?"
"ANSWER. Yes. And each time it has been moved, they've called everything even at 100. In other words, when they move the base period they rig the figures and call whatever the prices are for that year 100, even though they might have been quite lower. They do this after the fact. This is the reason farm prices are expressed at 77% of parity or 80% of parity when if fact, in terms of honest parity, they're much under par with the rest of the economy." See www.envirotext.eh.doe.gov/data/uscode/7/1304.html, or visit our Web site.
The Decade of the 1970's
Much has been written about the decade of the 1970's from an investment perspective relative to the Stock Markets. However, when you examine this decade from an exchange-balanced perspective, the view takes on a different texture. During the 1960's, America's role in Vietnam and the Great Society Programs here at home were costing us about $166 billion of public debt that was not being serviced. Stated another way, from the inception of the Bretton Woods Agreement, our Public Debt doubled from 1944 to 1971. Bretton Woods was scrapped in 1971 because those foreigners who understood our mischievous economic policies would have eliminated our gold reserves. (Foreigners could trade their commodities for undervalued, in terms of US dollars, gold). Conversely, the market price of wheat decreased in price by about 10 cents per bushel over those same 26 years. The economic conditions of the early 1970's are very similar to today, except today's distortions are significantly and dynamically greater.
In the early 1970's, the Soviet Union was experiencing significant food shortages. In 1972 they began to market their gold through Zurich, Switzerland. Through this new market, the Soviets employed an economic principal of their former Premier Lenin: "Sell gold at the highest price and buy goods at the lowest price". This philosophy was the backdrop for the Russian Wheat Deal that caused such a stir during the first half of the decade. The U.S. Government negotiated grain contracts with the Soviets and the American grain trade sold the grain, which they did not yet own. These sales amounted to ¼ of the American wheat crop, as total Soviet grain purchases climbed from 55 million bushels in one year to 599 million bushels the next. Wheat prices in this Country went from $1.10 per bushel to slightly over $5.00 per bushel over a four-year period.
To pay for these commodities, the Soviets utilized the reckless imbalance in the world foreign exchange markets. Rather than sell their gold, the Soviets borrowed Eurodollars, using their gold as collateral, and purchased American farm products with the Eurodollars. Initially, they purchased the wheat for about $2.00 per bushel and the price of gold was about $50 per oz.
After the devaluation of the U.S. dollar in 1973, gold went to $180 per oz. and the Soviets obtained their wheat needs for under $1.00 per bushel in real terms, or less than half of the stated cost. In 1973 the Arab countries cut oil production to seek a fair return for their products that are priced in U.S. dollars. Those of us who remember the Energy Czars under the Administrations of the 1970's, and their gas rationing and allocation programs, certainly have a healthy sense of apprehension and skepticism for today's Office of Homeland Security. Today the world stage is set for exactly these types of events to re-occur, only on a proportionately much larger scale.
The Federal Government implemented wage and price controls in 1973 to achieve specific purposes unrelated to their stated objective of controlling inflation. Decades of sterile Government Farm Programs had disrupted balances of crop and resource allocations that the free market would have mandated. Farmers were paid to divert valuable income generating assets to idle ones because of a lack of parity and such dislocations of resources take years to correct given the seasonal nature of the industry. Price restrictions were placed on meat not to control inflation but rather to break our domestic livestock feeding industry-we did not have sufficient feed for our livestock operations. The shortfall in domestic livestock numbers was relieved by cheap imports. Additionally, under the guise of economic sanctions, embargoes were placed on further sales of American farm products to rebuild domestic supplies (in Government parlance, "surpluses") of basic farm commodities, all specifically designed to break market prices.
The decade of the 1970's was not good for the Stock Market because of the disproportionate income distribution between sectors of the economy. While agriculture enjoyed a brief period of "parity prices" in 1973-1974, those gains could not be shared throughout the entire economy, as they had to compete with the inflationary policies of the Federal Reserve. The Federal Reserve was simultaneously increasing the money supply by 10% per year and the conditions were highly inflationary. Double-digit interest rates drained any gains to the economy for deliberate, self-serving reasons to discredit parity. Source: Minutes of President Ford's Cabinet Meeting of March 12, 1975, Secretary of Agriculture Earl Butz: http://www.ford.utexas.edu/library/exhibits/cabinet/750312.htm
"Secretary Butz: Well, Mr. President, it looks like this. There has been a fourteen percent increase in price of food in 1974 over 1973. 80% of that increase has come after the product has left the farm. This can be accounted for by higher wages, higher transportation costs, and higher fuel costs. While the increase has slowed down some, it has not stopped during the first quarter of 1975. It appears that food prices will be up 1 ½-2% over the last quarter of 1974. So the increase has slowed down markedly. It is interesting to note that the index of prices paid by farmers is up 12%, but the index of prices received by farmers is down by about 15%. There is also a decline in grain. The statistic that you will find interesting is that 17% of the take home pay of the average American will go for food. This is down slightly over 1973 and also interesting to note is only Canada and the United States are nations below 20% of take home pay going for food. This can be attributed to several things. One third of the meals are currently eaten outside of the home. Looking toward 1975, we anticipate a leveling off or decline in food prices. There will be more (imported) beef eaten by Americans this year by about seven pounds per capita for the year. However, Americans will eat less (domestic) pork and poultry per person and the (imported) beef will be relatively cheap. Fruits and vegetables will generally be less expensive and of course Mr. President, you know about our peanut problem. We have had one for years. The area where we will be shortest in everyday diets will be on grain-fed (American produced) beef. Mr. President, you can expect a record wheat crop. Since 70% of all wheat in America is winter grown, that crop is already in." We have had a 6% increase in acreage, and 400 to 500 million bushels of grain above last year's crop, so we will have a record crop. We currently have 4 million acres in soybean cultivation. So we hope as we look toward 1975, the escalation of food prices is behind us. (Emphasis added)
The President: Are the farmers happy, Earl?
Secretary Butz: No sir, they aren't.
(Editorial Note: This meeting is in early March, at which time the winter wheat crop has not yet broke winter dormancy and they are calling the crop "made". This is the kind of information the grain trade uses to depress prices.)
Grand Schemes Have Consequences
The following table presents the economic problems we face in the terms of earned income. The money has to be earned into the economy if we are to consume the production and not have surpluses (under-consumption due to lack of buying power). The Government is acutely aware of how this works, especially the Banking and Currency Committee and the Council of Economic Advisors. Recall that the Banking and Currency Committee wrote the Steagall Amendment to the War Stabilization Act of 1942. Through the years economists and accountants of the Arthur Anderson "variety" have been in the employ of our Federal Government to implement stratagems to confuse and discredit the parity concept. Parity is determined by labor and industry as the result of charges added to raw materials on their way through the economic cycle and final sale at the market place. It is a measuring device and does not become obsolete because of the age of the base period, shifts in population, or improvements in technology. Parity does not go out of style, but what does change is the greed in men's hearts to gain economic advantage.
Federal Law requires the United States Department of Agriculture to continuously compute current "parity prices" for agricultural products using the 1910-1914 base period, with a healthy dose of government 'adjustments'. This USDA parity is called a "transitional" parity as was discussed earlier in this treatise. True parity prices as computed by USDA are also included in the chart below. We have included all these figures and you can see the dire condition of the agricultural community in America, and by extension, the dire condition of the American economy.
The Story of Economic Destruction
Gold bulls have reported how the gold and silver demand has exceeded production for the past decade, and yet, due to market manipulations, prices have made it unfeasible to operate mines that lose money. Mines have closed or merged and new projects have been delayed. The same is true in all basic industries in their response to market forces. In agriculture, Government farm programs distort production and supply and producers respond by shifting land use to "market oriented" production. A point we need to examine is the dislocation of supplies of raw materials due to external distortions. The above table reflects the parity value of a selected group of commodities in relation to a "normal period". Today, things are far from normal. Should events suddenly unfold which cause prices to rise to parity levels, capital would be available to employ additional workers; incomes would be available to purchase additional food and clothing items, transportation needs, etc. Considering the present malinvestment in basic industries, demand would likely cause prices to exceed the parity prices listed above until production could reach demand. The parity prices are a floor under commodities, not a ceiling. Rising price levels of raw materials is not bad, as long as labor participates in the rising price level to have the income to purchase the finished goods.
If you recall the points we raised about the 1970's, our "planners" realized that unless the livestock-feeding sector was drastically reduced, the nation would not have the grain production for which parity prices provided the market. A fair exchange-balanced economy would be contrary to the objectives of those in the money lending businesses and those who made their profits off trade exploitations, therefore, economic controls were implemented at the Federal level to severely hamstring the livestock feeding industry.
I would also ask you to recall our discussion regarding creation of earned income; Production x Price = Income. In our example with the bushel of wheat and the loaf of bread, it was shown where at today's prices we are presently short $49 to consume the production from every $3.00 bushel of wheat. Now, lets look at this from another viewpoint:
100% Production x 100% Price = 100% National Income to consume the products
Presently, several Federal farm programs control the production of basic agricultural crops and indirectly control livestock production. One program in particular probably has the most notable effect and for our purposes we will look at its impact on our National economy. The Conservation Reserve Program (CRP) pays producers to idle acreage in return for "rental" payments from the Treasury. The program mandates that no more than 25% of the land in a County can be enrolled, and for our purposes of demonstration we will use the maximum, thus, our formula above, when combined with the average true parity price for commodities in the above table, (18%), becomes:
75% Production x 18% of a Price = 15% of the Income to consume the products.
Agriculture, the largest industry in America, is only being allowed to create about 15% its share of income to operate a sound solvent economy! Is it any wonder we have 30 TRILLION dollars of total debt? The facts are much worse and will be covered in future articles.
The world is becoming a much more uncertain place. Economic conditions are causing formerly rational people to do irrational things to respond to their environment. Someone has described the three levels of conflict in society as economic, political and finally, military. In today's world nations are competing against one another viciously in the trade area to keep their peoples employed and daily needs met. In the early part of the 20th Century Nations employed tariffs to protect themselves against unfair competition from cheap imports. We abandoned those tariffs and allowed free trade to wreck our domestic markets. Today, they are no longer called tariffs because of the stigma attached to the word by some groups, so we now have 'competitive currency devaluations' to accomplish task of opening markets which would otherwise be protected. These programs rely on exploiting labor so the products can be manufactured at reduced costs. Ideally, financiers can loan money to the nations manufacturing the goods to offset income losses, and loan money to the importing nations to buy the goods. The lack of an exchange-balanced economy requires the shortfalls to be serviced with debt. Asia recently went through a period of these devaluations and it appears it is time for another round, and specifically with Japan, our Treasury Secretary O'Neal has endorsed the yen devaluation. The immediate impact in this Country has been the destruction of our textile and steel industry, along with thousand of good paying jobs. But these orchestrations of the world labor market can only go so far. Secretary of State Colin Powell's recent comments have an ominous warning: "Terrorism really flourishes in areas of poverty, despair and hopelessness, where people see no future".
One particular place where this is troubling is with the two nuclear neighbors Pakistan and India where these two nations are rubbing shoulders over an adjoining piece of real estate that both claim. Another area is North Korea. We mention these threats because of their ability to move markets. In addition to nuclear exchanges, we also face biological possibilities. To assess the market impact of one or both of these, look at a grain price chart from the Chicago Board of Trade for the period surrounding April 26, 1986, the date of the Russian nuclear accident at Chernobyl. Wheat, for example, rose over a $1 per bushel in a short period of time, and this was a localized accident.
Let us do a little review. We have described a lot of conditions that would have a dramatic impact on market prices, including production dislocations, currency devaluations, military conflict involving nuclear or biological agents, and we could also include weather events. In the 1970's three different Administrations imposed embargoes on American Agricultural products without anywhere near the imposing circumstances measured here.
The reader has noticed that we haven't said much about USDA's "transitional" parity computation in the above chart. We would have to admit that the mathematical calculations we explained earlier concerning the trade turn, $9.58 x 7 = $66.99, comes much closer to covering the costs of the bread produced from a bushel of wheat, $70.00, versus the $2.89 x 7 = $20.23, using December 2001 market prices. We have shown in this treatise that parity is a well-known concept in the Halls of Congress and with the Council of Economic Advisors. So what is the significance of USDA's computations? As in the 1970's, unless full parity prices are established, additional debt has to be injected into the economy to offset the income shortfall. More money chasing fewer goods is inflationary and the parity concept can again be discounted.
With all the talk of commodities being in a 20-year bear market and continued commodity deflation, what's the chance of commodities ever reaching parity, let alone "transitional" parity? Recent news reports concerning the independent review of certain Financial Statements of the Enron Corporation reveal that Arthur Anderson did reveal certain facts that might not have been obvious at first blush, its just that they were buried on page 48, in footnote 16, or thereabouts. I recently re-read a Risk Disclosure Statement from a commodity broker. There is a lot of fine print stating that commodity trading is risky etc. etc. etc. There is even an opening paragraph that states: "This brief statement does not disclose all of the risks and other significant aspects of trading in futures and options". Fair enough. But, when certain conditions exist which would place my financial condition in extreme peril, they should be identified. Nowhere in the Risk Disclosure Statement is there a reference to 7 USC 1310 "American agriculture protection program", wherein: in the event of an embargo due to short supplies, the Secretary of Agriculture will on the day of the embargo, set the loan level at 90% of parity. The loan level becomes the market price because it is now the support level and if the market is lower, the producer can forfeit the commodity to the Government, shielding it from the market.
In mathematical terms this would represent a margin call of about $29,000 on each and every "short" contract of wheat. The law applies to wheat, corn, grain sorghum, soybeans, oats, rye, barley, rice, flaxseed, and cotton. This is not a SEC regulation would could be applied or admininistered by the Exchange, but rather a Federal Statute. There can be no doubt that Washington is fully aware of the importance of parity prices.
To show the insanity in our "redistribution of wealth programs" that comes out of Washington, we again call your attention to the above chart of commodity and parity prices. One can see the dire condition of the agricultural industry and the fact that it can only be sustained by infusions of more debt. Presently Congress is considering a new Farm Bill, one that is designed for 10 years at a cost of about $75 billion per year. Control of Congress by one political Party or the other may very well come down to victories in farm states and farm state issues in the November elections. A Congressional candidate certainly would not want to appear anti-farm, so the more subsidies to their constituents the better. Lets do the math and see what this new farm bill will cost the Nation:
- http://www.usda.gov/agency/obpa/Budget-Summary/2003/2003bud sum.htm#fun
The American farmer produces about 2.2 billion bushels of wheat per year, about 9.5 billion bushels of corn, and 2.7 billion bushels of soybeans. Full parity prices on these three commodities would generate a National income of $199 billion, or over two times more than the $75 billion cost of the Farm Bill. The economy consists of the bushels of wheat, the tons of iron ore or coal, the board-feet of lumber, the pounds of meat, the barrels of oil, etc., that people trade. Man debited, Nature credited. These units of raw materials-new wealth-are transformed by industry into other forms of wealth and become permanent assets of society. The Government payments to producers do not 'turn over' in the economy. It is simply spent in an attempt to make up the shortfall in production costs. With wheat, for example, the subsidy would amount to a payment of about 50 cents per bushel. What taxpayers are not told directly is that the lion's share, over 70% of the $74.4 billion, does not go to farmers. Those funds appropriated in this Farm Bill go to pay for the costs of the Food Stamp Program, School Lunch Program, the WIC Program, the Forest Service, Foreign Ag, Rural Development, wages and compensation for Department employees, all under the guise of "farm subsidies". The Farm Bill is not only "anti-farmer"; it is also "anti-American".
The reader has no doubt heard or read all the hype about: American Agriculture-Super Market to the World, or one American farmer feeds himself and about 80+ other people. Well dear readers, hype is all that it is because it is not true. The books have been "cooked" to make it appear so. Without imports we cannot feed ourselves, and recall that it only takes 2% imports of a commodity to destroy domestic markets. It is not what we don't know that get us in trouble, but rather it is what we thought we knew, that wasn't true. This treatise is already of considerable length so this subject will be covered for our subscribers in the upcoming treatise "The Land of Pharaoh", and we invite readers to visit our site to subscribe. You will understand how close we are to placing embargoes on Agricultural products.
The Raw Materials National Council of Sioux City, Iowa, was succeeded by NORM (National Organization for Raw Materials) in the early 1960's. The NORM organization has proposed the National Economic Stability Act to implement the research of Raw Material Council. We have more details of this proposal on our site.
The gold cartel is artificially holding down the price of gold and inflating the currency at the same time. The inflation has not shown up (yet) because we export it, by purchasing cheap foreign manufactured goods and sending our dollars overseas. Those goods compete with domestically manufactured and produced goods, forcing American manufacturers to lower their prices until bankruptcy. This manufactured appearance of low inflation rates and stability invite foreign currency flows (our dollars returning home) into our Bond and Stock Markets, and while public attention is focused on the Wall Street circus, the Nation is being looted. There is a "head of steam" building behind the price of gold valued in U.S. dollars because these manipulators have distorted economies and monetary systems on such a clandestine scale. World wide, these globalistic policies have uprooted social and political establishments and their pleas for help fall on deaf ears, or worse, they are given more of the same poison. While we watch from afar as Argentina introduces a new currency, our thoughts should turn to our 30 trillion dollar debts and ask ourselves: How far away from a new currency are we? The gold cartel has their sights set much higher than simply the gold and silver markets.
In examining the material in this treatise one can see how we have become the most fantastic debt fueled economic system the world has known, and why we experience one economic and monetary crisis after another. This crisis is a cancer that has adversely affected the actual raw material production sector of all world economies and we have yet to reap the whirlwind. While we sit safely and smugly within our borders, an angry and turbulent world waits....
We invite you to help us, by supporting our efforts in bringing you these resources to protect your inheritance, and enhance your retirement. The human race does not understand money or its effects. Presently, we are developing treatises that flow from the material presented here: 1) The Cruel Tax Hoax; 2) The Land of Pharaoh; and, 3) Cooking the Books. Annual e-mail subscriptions are available for $65 per year, (or $75 for regular mail), for the monthly Newsletters, weekly Musings and Alerts. This treatise represents the foundation for our work, and given the complexity of the subject, the necessity for its length. We are incorporating charts and graphs in our future materials for visual emphasis.
Northern Lights Research
February 15, 2001
Thomas Q. Nichols
©2001-2002 Northern Lights Research