In 1912, J.P. Morgan said: “Gold is money. Everything else is credit.” Today, if you ask most people, “What is money?” they will answer that money is the generally accepted medium of exchange. If you ask Google Images, it will show you many pictures of green pieces of paper. Virtually everyone agrees that money means the dollar.
What does it mean to have a dollar? If you hold a piece of paper with green ink on it, which says “ONE DOLLAR”, you may notice that it also says, at the top, “FEDERAL RESERVE NOTE”. Note is a word for credit. The dollar bill (bill is also a word for a credit instrument) is a credit of some kind, the credit of the Federal Reserve.
With the Federal Reserve's bond buying program continuing unabated, in spite of its talk of inflation being under control and its tapering being in the wings, many investors today are, rightfully worried about inflation and the value of the dollar.
The paper itself has no value, apart from that it is the obligation of a party whose full faith and credit is beyond question. It would be something like the fallacy of reification, to confuse the green piece of paper with the monetary value it represents.
The Layers of Dollar Perversity
There are three layers of perversity to this.
One, when you get a loan, you are borrowing dollars. Those dollars are, themselves, the liability of a bank -- which the bank backs with its own holding of dollars. These are either government bonds, or else Fed credit-dollars which are backed by government bonds.
In the act of borrowing, you are committing to repaying the lender in units of credit owed by the government.
Two, when you are in debt, you must obtain enough dollars to service your debt. You are obligated to pay at least the interest, if not amortize the principal. If you fail to do so, then the bank will seize your business, house, or other assets. Therefore, every debtor must work hard. Every debtor must produce as much of the goods or services that he is in business to produce, in order to generate sufficient revenue. From this revenue, he subtracts his costs. Net of costs, the revenue must be at least the interest expense.
Most people, once they see the nature of the dollar scheme, wonder why the dollar still holds such robust value. And we see the answer in this perversity of the system: Every debtor—which is nearly every producer—is working as hard as possible to produce and sell its products for dollars.
Three, the producers depend on the availability of dollars for them to obtain, to service their debts. These dollars are not objects that can freely move. They are the credit obligations of third parties, and ultimately the government. And they do not move freely, they are pulled in tension by every debtor.
The debtors rely on the ultimate borrower, the government, to borrow more. And on the Fed to monetize that greater debt. The deeper the debtors go into debt, the more this unhealthy reliance. And, the lower the interest rate falls, the deeper into debt they are all lured.
If this is not perverse, then what is? Where’s J.P. Morgan when we need him?
This is why I believe thoroughly in the value of gold and take every opportunity to educate the retail and institutional investors who I serve as CEO of Monetary Metals, about its value. In 2012, in fact, I founded the Gold Standard Institute of Phoenix, Arizona.
This is a 501(c)3 tax-exempt educational organization dedicated to spreading awareness and knowledge of gold, and to promoting the use of gold as money. The Gold Standard Institute serves the public and promotes the general welfare through dissemination of gold’s virtues and its role in a society that values liberty and justice for all.
Keith Weiner PhD is founder and CEO of Monetary Metals (www.monetary-metals.com) and president of the Gold Standard Institute USA. Keith is an authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith speaks and writes on economics, markets and money.
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