Archive for February 25th, 2009

Fiat economics and the nature of the state

February 25, 2009

Unsustainable Indebtedness

While much has been made of the levels of consumer indebtedness of the past several decades, and particularly over the past 5-10 years, not nearly as many have focused on the true debtors of our economy: corporations and the state.

This succinctly written piece addresses the issue and is worth a complete read. A few excerpts follow:

US businesses went in for “Cash Management” – which was supposed to minimize cash balances – short cash – and go long on purchasing short-term or overnight debt from banks to meet coming maturities. Holding plain cash or checking account balances was old fashioned.
Worse, businesses also wanted to expand at all costs. Extend more credit – short your merchandise and go long on accounts receivable – in order to increase sales. Car manufacturers had their own financial arm, to enable them to short their own excess production of autos, and to go long on debts due from customers up to six, seven years out.

The phrase ‘going long’ on debt accurately describes the position of not only financial institutions, but nearly all major corporations in the United States and, as we have found out, internationally. But financial institutions in particular are in a uniquely vulnerable position when they are ‘short’ cash. Why? Because of the dreaded ‘run on the bank’ – which we have seen transpire in fits and starts going back to when money market funds finally broke the buck, when several large depository institutions were run down (Washington Mutual and Wachovia come immediately to mind) and currently with the dwindling solvency of both Citicorp and Bank of America.

The squeeze on those who shorted cash is now tremendous. The figures on outlandish leverage in US banks and the figures on household debt illustrate the situation. The Fed and the ECB are trying to meet and overcome the short squeeze by providing enormous amounts of money, available at the banks, in an effort to provide funds to those who are trying to cover their shorts on cash by going long – obtaining cash – to cover their long positions on debts owed.
The enormous increases in cash available at the banks are insignificant in comparison with the prevailing enormous shorts on cash and long positions in debt. The squeeze is implacable.
In effect, everyone on God’s green earth is trying to obtain cash – going long on cash – in order to cover their long positions on debt.
What we now see is the opposite effect – the deflationary environment created when both corporations and individuals turn on a dime, moving from long debt/short case to short debt/long cash. The dramatic slowdown in the velocity of money creates a deflationary dynamic of depressionary proportions.

The author describes this as follows:

“Cash is being hoarded by banks and consumers alike” means “Banks are going long cash and shorting debt (trying to reduce their leverage) and consumers are saving cash (going long on cash) and shorting spending.”

Deflation and Depression are actually a manifestation of a massive short squeeze on cash in an attempt to reduce a gross and unsustainable long position on debt.

The problem, however, is that the United States central bank (the Fed) and the ECB have indicated they will stop at nothing in their attempt to get the credit bubble started again. And this is where I take issue with the long-term deflationists:

Bringing all the massive liabilities of the banking system onto the Treasury’s indebtedness – while the corresponding assets are worth far, far less than these liabilities – will solve nothing.

While I agree that the additional money creation and pseudo-nationalizations will solve nothing, I disagree with the implicit argument, as oft-repeated by many known deflationists (many of whom I greatly respect), that government cannot ‘print’ its way out of this current deflation. In a fiat-based, fractional reserve economy, the state can absolutely print its way out of a deflationary environment. In fact, our government, as I type this, is running the proverbial printing presses at record pace. The inevitable result of all this, of course, is price inflation. So while Peter Schiff may have got his timing wrong, and misjudged how poorly overseas economies and currencies would fare relative to ours, he is dead-on right in his warnings of the dangers of hyper-inflation.

Political economy

The problem in the deflationist argument is not economics. The economics are sound. The problem is we are not dealing with an economy. Rather, we are dealing with a political economy. The differences cannot be overstated. Within the bubble of our fake-money fiat economy, even a contraction of the total supply of money and credit (the textbook economists definition of inflation) can still lead to price inflation, or even hyperinflation. This is known as an inflationary depression. How this might happen is something that the author and I can agree on:

The driving force behind the rise in the price of gold at this time is not the fear of inflation but rather the fear of placing cash where there is a possibility of default. Only physical gold in possession is free of this risk.

I may add that even national treasuries do default on their bond obligations (Nouriel Roubini just confirmed this) and can and do default partially by devaluing their currencies. The world is gradually realizing this and this is propelling investors into gold.

Could it be there is Method in the government’s Madness? Perhaps the unspoken idea is to save some critical institutions by bailouts at all costs and then – the Treasury defaults later on this year?

Game over

The big risk, and the one nobody in the Mainstream Corporate Media is talking about, is the risk of loss of confidence in U.S. treasuries. If this happens, you will see massive devaluation of the dollar – and all other fiat currencies. If the state, already in debt and spending at warp speed, can no longer borrow, its game over.

Money is not capital

We are already seeing this with the Euro as the storm clouds gather on the Eastern horizon. Should confidence in the dollar (soon to be the last remaining fiat currency of any value) crumble, you will see a flight to hard assets that makes the commodities bubble of last summer look like a hiccup. Capital will flow into precious metals, industrial metals and oil. The price of oil, even amidst declining demand and industrial output, will rise. The price of gold will double, or potentially triple. All this simply because the dollar (or the Euro or any other fiat currency) is not capital. MONEY IS NOT CAPITAL. It is a piece of paper representing a promise to pay. It is debt. And while the monopoly of this money domestically (due to legal tender laws) encourages its use, international capital is dependent on the dollar only so long as it is perceived as a convenient and liquid store of value.

Therefore, the price of gold, silver, oil or a number of other tangible assets does not really rise or fall at all. An ounce of gold is worth the same today as it was in Babylonian times. What changes is the perceived value of a given fiat currency note. In this manner do we ‘value’ gold, or any other hard asset, in terms of the dominant fiat paradigm.

As I have stated before, the problem with the deflationist position is not one of economics, but rather of imagination. Trust that the state has no such failure – legions of staff work day and night for our overlords in Washington to imagine new and creative ways to beg, borrow and steal in order to spend, inflate and protect not you, the American, but their positions of power.

The nature of the state

Such is the nature of the state. We underestimate the lengths the state will go to at our own peril. Remember that the modern American state, the strong federal government, is able to sustain itself only in cooperation with the central bank (the federal reserve). Through the creation and control of fiat money, the state exerts its control through confiscatory taxation and enforcement. This dynamic builds and feeds upon itself until the out-of-control state can no longer contain itself – it can only expand, at the expense of the States or, more specifically, the People. Make no mistake: this is a zero-sum game. Every time the state drafts new legislation, it costs us money. But with each act of the state, we lose much more than money – we lose liberty. We lose this liberty by ceding further power to the state to tax, collect and enforce. No longer do the States and the people stand as a bulwark against the expansionist state. This is a civic duty of every American – to fight against the inherently expansionist central state:

A Republic, madam. If you can keep it…. –Benjamin Franklin

As discussed earlier on this site, deflation adversely effects the very wealthy – the core constituents of our current crop of ‘politicians’ dependent, as they are, upon campaign donations and lobbying money. Inflation disproportiately effects the middle class. The simple reason why is that the wealthy own assets, and the middle class owns money. Do not fool yourself into thinking that the federal government will not, if pressed to make a decision, choose inflation –even hyperinflation- over continued, sustained asset price deflation.

Of course, nowhere have the two things that would empower the middle class – the group thing standing between a corporatist state and the full consolidation of its power. 1) A complete and long-term income tax holiday, thereby allowing the earners of wages to keep the fruits of their labor to do with as they see fit. 2) The elimination of the UNCONSTITUTIONAL central bank and, with it, fiat currency and fractional reserve banking. These two actions would return us to Constitutional economic principles. But suggestions to do so (other than Rep. Ron Paul) are nowhere to be heard.

Those who underestimate to what lengths the state will go to consolidate and expand their power in the event of continued economic crisis and collapse, including creating massive inflation through which the People must suffer, have not read their history, and have not been paying attention to current events. The central state is expanding at an alarming rate, and control of commerce, money and the overall economy are the tools of that expansion – tools sadly ceded to the state by the People. It is time to take them back. Lest we forget the true nature of any central state when threatened with its own survival, I share the following from Roberto Vacca:

The rapid return to universal penury will be accomplished by violence and cruelties of a kind now forgotten. The force of law will be scant or nil, either because of the collapse or disappearance of the machinery of state, or because of difficulties of communication and transport. It will be possible only to delegate authority to local powers who will maintain it be force alone.

… people will endure hardship, and for the greater part of their time they will be labouring to satisfy primitive needs. A few will have positions of privilege, and their work will not consist in… cultivating the soil or in building shelters with their own hands. It will consist in schemes and intrigues, grimmer and more violent than anything we know today, in order to maintain their personal privileges.

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Flash forward to 2009 – Views from an American Patriot

February 25, 2009

 

(Note: the following is my response to a remark made in another forum by a gentlemen attacking my previous article on the national guard training for gun confiscation as “propaganda”, and defending the federal government.  Further, this uninformed antagonist cited the tired example of the Whiskey Rebellion as ‘evidence’ of our Founders’ intent.  As always, I encourage reader comments from both supporters and antagonists.  However, antagonists will have to come armed with more facts than they can gather from ‘wiki’, or they will simply be embarrassed)

 

Good morning.  I was hoping the statists did their homework.  However, I see no new wisdom is forthcoming.  So let me address this to all the statists and pseudo-Americans out there.  Feel free to google any sentence in my post to confirm I have not plagiarized or simply copy/pasted from some rudimentary wiki-type source:

 

Our Founding Fathers, generally speaking, were an anti-statist lot.  Despite the compromises that resulted in the Constitution of the United States, the anti-federalists and federalists alike were united by a fundamental distrust of government that ran consistent, in both word and deed, during the debates of the era when these great men were charged with creating a government from the aftermath of the revolutionary war.  In some cases, they built upon and refined the institutions and traditions of English common law.  Other cases, they built upon the independence and frontier spirit of the colonial culture of the time. 

 

The Whiskey Rebellion is often brought up in statist circles as a ‘proof’ of the intentions of our Founders, and of George Washington in particular, in terms of setting precedent.  However, the truth is more complicated, and sheds light on true American political culture.  While ‘wiki’ is a popular source for snippets of information, I would suggest, instead, no greater authority than Murray Rothbard (Austrian economists will recognize Rothbard as a towering figure of both economics, free-market anarchy and anti-statism).  The following article serves to highlight the Whiskey Rebellion in the context of the time.  Take your time and read it; it is fairly succinct.

 

http://www.lewrockwell.com/rothbard/rothbard1.html

 

This article demonstrates the Agorist tendencies pervasive at the time of the founding of our nation.  These Agorist sympathies were shared to a large extent by our Founding Fathers.  I provide several quotes to back this up:

 

“The refusal of King George II to allow the colonies to operate an honest money system, which freed the ordinary man from the clutches of the money manipulators, was probably the prime cause of the revolution.”

-Benjamin Franklin

 

“We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude.  If we run into such debt, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our calling and our creeds… [we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers… And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for [another ]… till the bulk of society is reduced to be mere automatons of misery… And the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.    

– “Thomas Jefferson, Letter to Samuel Kercheval, Monticello, July 12, 1816

 

“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children wake up homeless on the continent their fathers conquered.”

-Thomas Jefferson

 

The anti-tax positions held prior to, during and after the Revolution speak to these sympathies and are addressed by Rothbard.

 

That our Founding Fathers were minarchists is indisputable.  But one must understand that within each minarchist is a touch of the anarchist.  One does not “propose” anarchy as a system of government.  Anarchy, by definition, is the anti-system.  Instead, one chips away at the state as much as possible, much like an anarchist or agorist might.  If one chips away at the state enough in the direction of anarchy, one arrives at minarchy.

 

(There are many misunderstands associated with the term “anarchy”.  For more information on this subject, please see here:, here:, and here: )

 

Our Founders, and Jefferson in particular, envisioned a political culture that was always in flux.  Our Founders understood the inherent problems of a federal state – the ‘mission-creep’ and relentless expansion of power inherent in central government.  The bulwark between this expansionist dynamic (understand that the state can only expand at the expense of the people – this is indeed a zero-sum game) were the States or, more specifically, the People.  Rothbard’s summary of the Whiskey Rebellion serves to illustrate the independence and fortitude of the American people of the time relative to their understanding of their civic responsibility to resist the state and its encroachment upon individual liberties in the form of regulation and taxation.  (Up to and including tarring & feathering tax collectors).  Further, the article demonstrates the lack of both enforcement and compliance typical of the time.  Therefore, the ‘flux’ referred to above is the constant, vigilance of the People and the battle against the state.  Often this battle manifests only in minor acts of civil disobedience or tax revolt.  On the other hand, Jefferson (and others) understood this battle would occasionally break out into something larger.  Some additional quotes on this:

 

“Guard with jealous attention the public liberty. Suspect everyone who approaches that jewel. Unfortunately, nothing will preserve it but downright force. Whenever you give up that force, you are inevitably ruined.” -Patrick Henry

 

“I ask sir, what is the militia? It is the whole people. To disarm the people is the best and most effectual way to enslave them.” -George Mason

 

“Democracy is two wolves and a lamb voting on what to have for lunch.

Liberty is a well-armed lamb contesting the vote.” – Benjamin Franklin

 

This is a famous one, although many omit the full paragraph and quote only the last few lines, therefore depriving the reader of full context and intent:

 

The people cannot be all, and always, well informed. The part which is wrong will be discontented, in proportion to the importance of the facts they misconceive. If they remain quiet under such misconceptions, it is lethargy, the forerunner of death to the public liberty. … What country before ever existed a century and half without a rebellion? And what country can preserve its liberties if their rulers are not warned from time to time that their people preserve the spirit of resistance? Let them take arms. The remedy is to set them right as to facts, pardon and pacify them. What signify a few lives lost in a century or two? The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.  – Thomas Jefferson 

 

Therefore, the minarchy designed by our Founders -again, by both word and deed- was understood to be a prize not just fought for once and won, but rather one that required constant vigilance and anti-statist activity on behalf of the populace: resisting, first by ballot and then by disobedience, the encroachment of the state upon our liberties.

 

Flash-forward to 2009.  What might Jefferson think of Barack Obama?  Of George Bush?  Of Pelosi, Dodd, and Frank?  Of any of our current or recent crop of political overlords?  What might he think of our tax code?  What might he make of our code of laws – a code that could be stacked floor to ceiling in the Empire State Building?  What might he think of the enforcement of these laws via multiple, overlapping ‘law enforcement’ agencies (agents of the state)?  And what might he suggest be done about this?

 

I will leave you to ponder this.  But in conclusion, I will share one more quote for those who would accuse me, and many others like me, of being anything other than an American Patriot:

 

“You need only reflect that one of the best ways to get yourself a reputation as a dangerous citizen these days is to go about repeating the very phrases which our  founding fathers used in the struggle for independence.”

-Charles Austin Beard