Gold is Money


“Gold is money. Everything else is credit” — J.P. Morgan testifying to Congress in 1912.

Let’s acknowledge that although the terms money and currency are often used interchangeably, they actually have distinct meanings.

Currency has value because it has been deemed so by the government in power in that jurisdiction. Why has a piece of paper with Queen Elizabeth’s face on it considered to have value within the UK? Because that government has decreed it so. There is no intrinsic value in that piece of paper. It is only valuable because the UK government defends its value through control of its printing and severe suppression of its counterfeiting. That rectangle of paper has no practical use and only holds value because of the projection of force by the British government. That force is a two sided sword. If wielded with integrity, it staunchly defends that paper’s value.

If it is abused (and boy is it currently being abused), it is fighting a losing battle with reality. This is the major failure of fiat currency. Through the cancer of Quantitative Easing (QE), the value of the currency is being constantly diminished. The amount of currency in circulation in the UK, if properly protected, should be increased by the Bank of England roughly in line with the rise in UK GDP.

These last five years this has not been the case. QE has run way ahead of GDP, and the only reason we have not yet seen hyperinflation is because this excess currency has been diverted through the crony banking system in order to build up their depleted capital reserves (depleted because of their utter incompetence in the last property boom/bust). Everything in excess of this reserve has been diverted via the bank’s investment arm into the grossly over inflated stock market.

I’m not picking on Sterling in particular; USD, EUR and YEN are all being similarly manipulated.

Which brings us to money. The quote above from 1912 succinctly differentiates money from credit.

Note, credit not currency.

Back in J.P.Morgan’s time currency was freely exchangeable for gold at a set rate that had barely changed for 150 years since the formation of the United States. The “dollar a day” set wage for a day labourer had held steady since before the revolution. There was practically no inflation for all that time.

JPM was of course testifying against the formation of the Federal Reserve.

It went ahead anyway.

Since then, the dollar has lost over 95% of its value through systemic devaluation of the dollar. What JPM warned against has happened. Currency has been converted from money to credit.

There have been three steps to this.

The first was the creation of the Federal Reserve in 1913. Although this sounds like it is a government entity, it is not, it is in fact a private corporation owned by a conglomerate of private banks with a government monopoly to create dollar bills, to manipulate the national interest rate, and recently it has taken upon itself the right to create money out of thin air using the QE mechanism.

The next step was the confiscation of physical gold held by private American citizens by President Roosevelt in 1933 with Executive order 6102

The final step was the dropping of the gold standard by President Nixon in 1971. Prior to this anyone could go to the Fed and demand physical gold for $35 per ounce. This became unsustainable because investors lost faith in the US governments’ ability to deliver on this promise because of the over-extension of spending.

And so, what J.P.Morgan warned against has indeed come about. Currency has lost its connection to gold money and has in fact been turned into credit. That is, the currency has been turned into debt through the action of the FED.

What caused this over-spending? The ongoing Vietnam War and the financial commitments of the ‘Great Society’ introduced by President Lyndon B Johnson.

All of these steps replaced a regime of dollar value fixed to an immovable quantity of gold, with one of an ephemeral number of printed dollars printed at the discretion of a privately owned banking cartel under the influence of a political structure using it to support short term political expediency.

What could possibly go wrong?

The future of education

There is a quiet revolution in academia underway that is growing exponentially and will decimate ‘The Anointed’ class very soon. It is called Massively Open Online Courses (MOOC). Two examples that I have personally used are Coursera and the excellent Khan Academy (See the TED talk by Sal Khan in the video above. A very worthwhile use of your next 20 min) . A single inspired teacher can give the lecture once, put it online and it never has to be done again. Or as Sal puts it, “If Isaac Newton had bothered to put his ideas up on YouTube, I wouldn’t have to”.

Now subjects like Chemistry, Medicine and Engineering will always require lab time to make the principles stick.

Comparative Gender Studies, not so much.

With the accelerating deflation of the Higher Education bubble in the US and the introduction of £9,000 tuition fees in the UK, more and more students will forego traditional universities for MOOCs.

Imagine an 18 year old student considering doing Economics at the LSE. The tuition fees over 3 years will come to £27,000 and accommodation and expenses near the same again. The online Distance Learning option costs £3,807 with invigilation fees and books maybe £1,200 more.

So do you choose to go to college for 3 years and come out £50k in debt, or spend maybe 4 years to do the exact same course, while holding down an entry level job and come out at the end debt free with exactly the same degree? The lack of a £50k noose around your neck will give you a lot more options to buy your first rung on the property ladder.

As Joseph Schumpeter put it: – “The process of Creative Destruction is the essential fact about capitalism”.

Money given to banks is a LOAN

loan application

There has been a lot of controversy recently with the ‘Bail-in’ of the Cyprus banks. What this entailed was any deposits under €100,000 were fully protected, everything over this amount was discounted by 47.5% (for now), all shareholders and junior depositors were wiped out and all senior bond holders (i.e. French and German banks) were compensated 100%. This procedure was financed by a €10 Billion loan to the Cypriot government, to be repaid by the Cypriot people at roughly €12,500 for every man, woman and child in the country plus ongoing interest.

Now the fact is that this is an inversion of the internationally accepted hierarchy of rights on the insolvency of banks. In this agreed model the hierarchy should be as follows:-

  1. Depositors under €100,000 (to be made whole by a national deposit insurance scheme if capital remaining is insufficent)
  2. If any capital remains, deposits over €100,00 in proportion as to what is left in equity
  3. If any capital remains, Senior bond holders in proportion
  4. If any capital remains, Junior bond holders in proportion
  5. If any capital remains, other creditors in proportion
  6. If any capital remains, shareholders in proportion

The third place in the hierarchy has been pushed to the top and has taken all the remaining equity in the insolvent banks leaving ECB loans to cover both their shortfall and that of the under €100k depositors, partially cover the above €100k depositors and screw the rest, all at the expense of the Cypriot taxpayer, who will be paying off this loan for at least the next 20 years.

It is obvious that this deal was hammered out and forced down the throat of the Cypriot government by the ECB under severe pressure from the indebted French and German banks who engaged their wholly-in-the-pocket national politicians to lobby for them at the European level.

So national politicians, perceiving their self-interest in keeping this creeping Euro financial disaster from their own doorsteps by supporting their national banks, have forced a reversal of the standard norms in order to fully compensate their own banks at the expense of the Cypriot depositors and taxpayers.

This ‘bail-in’ model with reversed hierarchy has been quietly adopted by national governments around the world with no media scrutiny and zero public awareness.

So expect the Cyprus deal to be repeated in a country near you in the near future.

Now in My Ideal World™ the original hierarchy should prevail and the public should be fully informed of the actual position of their deposits at their local banks. Deposits are a loan to the bank as has been established in law for two centuries. If you put your money in a bank and expect interest, you have to accept some level of risk because there can be no profit without risk. Your bank is only able to pay you interest because it loans out your money to businesses and house buyers at a higher rate, keeping the difference as its profit. There is an inherent risk in this, as we have found out over the last five years.

Senior bond holders need to accept their place in this heirarchy and not  try to skew the system in their favor by lobbying through their in-house politicians, and the public need to inform themselves of the facts of the situation so that they are not bamboozeled by their bought-and-paid-for political class.

If you put your money in a sealed container and bury it at the end of the garden you will have no bank risk and you will also earn no interest, in fact your stash will lose value over time due to inflation.

Now, if it were up to me, I would create a higher level in the above hierarchy with level 0

0.  Current account holders who earn no interest and pay an annual fee for banking services

These top level customers should have the highest priority above all others, as they get no interest (in fact they pay for their banking services), and should, in turn, face the least risk.

Bottom line is that bank customers need to make themselves aware of the inherent risk they take on by LOANING their money to a bank, and divide their money between current and deposit accounts and multiple banks in order to mitigate their risk. This is not super-complicated and anyone with over the €100,000 savings level should be financially sophisticated enough to take on this relatively simple task.

Debt or Deficit?

Debt or Deficit?


But it really is very simple.









It is not.


This deceit is deliberate.

But you already know that politicians are professional dissemblers, right?

After the money’s gone


You may ask yourself, what is that beautiful house?
You may ask yourself, where does that highway go to?
 -David Byrne-


Both are half right.


Wartime Debt



The back slope of the Laffer Curve had been reached.








This will not end well.

Letting the days go by, let the water hold me down
Letting the days go by, water flowing underground
Into the blue again, after the money’s gone

David Byrne

Shame on you!


“Shame on you!


And you know what? We should be ashamed.


Until the dead hand of the state got involved.





Where is the shame?



Where is the shame?


Where is the shame?





Where is the shame?


They’re the ones who should be ashamed.

It’s only fair



Good morning Sir, how can I help?…

Your wages have been halved you say, well let’s take a look at your file. Ahh yes, I see here that the new approved wage rate for your work category has been set at a new level…

Yes, it’s half what it was before…

No, I don’t know how you can feed your family on that amount…

Well you wouldn’t want to go back to the bad old days when footballers (hhhaaaach, spit), sorry, when footballers earned hundreds of times what a nurse earned, now would you? Under the new order, it’s been decided that footballers should earn one hundred pounds a week plus an orange at half time, which is less than what a nurse now earns, which is only fair, no?…

Your wife is a nurse you say, and now she earns one hundred and ten pounds a week…

She gets a free orange every week doesn’t she?…

Well yes, there are two oranges in my lunch box right there, but we government workers do a very important job and it’s only fair that we get extra oran…I mean…recognition…

Yes it is very good work if you can get it…

You want to work here you say? A very good choice Sir. Ahh, well I see here on your file that you were noted as holding um…unorthodox views, so no, you can’t apply for government work.


No more Crony Capitalism

Crony capitalism

Every western government now owns a plethora of nationalised banks. How hard is it to pick one, make it an ultra-safe National Bank, ban it from being involved in stock market or derivative trading and demand that it maintain a massive capital adequacy ratio. Given its ultra conservative nature, it could offer the safest borrowers the best terms, its depositors the safest haven and offer the most secure, though not the most exciting, returns to shareholders. It would be a boring and stodgy but secure investment opportunity that would be very welcome to investors in the current volatile market. Most banks used to be like this a generation ago.

In the future, any bank that fails can have its serviced loans and any remaining deposits folded into the National Bank, as the FDIC does so efficiently in the U.S. currently. When the crisis is over, slowly divest the government’s shares in the National Bank to the widows and orphans investment market.

Anyone who wants better returns is free to go to the open market to find it, but should expect no government backed bailout. If you want easier credit terms, the market offers plenty of choice, but at significantly higher interest rates to cover the extra risk. If the deposit interest rates on offer are too dull, you’re free to put your money elsewhere on the understanding that you stand to lose every penny if your bank implodes. If the stock price gain and dividend is a big yawn, you’re free to go to the lightly regulated banks, but be fully aware that you could lose it all. Don’t come crying to the taxpayer via the government if it all goes tits up.

If any other bank wants to compete with the national leader and avail of government deposit insurance, and some building societies and credit unions may well do, no problem, so long as they are prepared to submit to the much higher capital ratios and more restrictive rules required for a National Bank. Leave the market open for any banks to do whatever they want, but make sure that its depositors, bondholders, shareholders and counterparties are fully aware that they are on their own if the bank implodes through mismanagement and that none of the losses will be covered by the taxpayer.

Make every single bondholder, depositor and shareholder, read and sign a clear simple one page statement in plain English and large text that they understand this before their money can be accepted.

Let’s have a proper free market and not the crony capitalism we have now. Let investors diversify their investments according to their own risk appetite and not expect some other sucker to come in and bail out their bad decisions. It would be a salutary lesson in hubris and it’s consequences every decade or so.

Let’s finally be rid of the cancer of the too big to fail banks.

Where’s the wealth fund?


John Maynard Keynes was an English economist and academic who lived from 1883 to 1946. He was hugely influential in the foundation of modern macroeconomics. This is the study of economics on a national and international level, as opposed to microeconomics which is the study of interactions between individuals or companies. His theories have given rise to the ‘Keynesian school’, one of the main schools of economics, though there are other competing ones such as the Chicago school and the Austrian school.

It is important to understand that, despite the fact that economists use highly intricate mathematical models and theories, theirs is not really a mechanistic science in the way that physics or chemistry is. People are not like machines where a given input equates to a predictable output. If there is one thing that we all know is that people are capricious. At times we move like great shoals of fish, seamlessly and in unison, and at other times it’s like trying to herd cats. We are given to extremes of emotion. We sometimes fall into a mania of overconfidence and greed and at other times we are paralyzed by fear and disillusion. Economics is really a social science, in that it describes both the initial actions of human beings and their reactions to economic incentives. At least, it tries to describe it and given the difficulty in doing so, a number of different theories have grown up around the study of these unpredictable creatures.

The Keynesian school is one of these theories. It follows Keynes’ theory of how to best understand it. His principal idea was that aggregate demand should be moderated by government action. Aggregate demand is an economist’s way of describing the economic cycle. When the economy is booming, it has high demand and when it is in recession it has low demand. Keynesian theory says that it’s a duty of government to act as a counter-cyclical agent to the economic cycle, so when the economy is booming, the government should draw down liquidity from the economy, meaning it should spend less than it receives in taxes and put the surplus aside into a rainy day fund. In practical terms this means that it should use the tax surplus to pay down national debt and once a reasonably small debt is left to facilitate the national pension fund market, say 20% of GDP, it should begin to create a sovereign wealth fund to put aside the surplus to invest abroad. At the same time, this drawing down of liquidity should moderate the boom.

The economic cycle will of course inevitably turn to recession. Then the government can make use of the surpluses it put aside during the good times. It can now draw down the money it had previously saved in order to stimulate the economy during the bad times. Given that the debt to GDP is at an ultralow level, there is plenty of room to maneuver, by raising debt, if required. It can now use this cash to, for instance, support the construction industry through a program of investment in infrastructure. It can build roads, bridges, hospitals and schools which provide direct and immediate employment to an under-utilized construction sector, while at the same time producing assets that have a positive value to the nation. This also has the positive effect of injecting much needed liquidity into the economy.

The problem is that the economy tends to run on a six to ten year cycle, but politics runs on a four or five year cycle. They are misaligned. A politician’s principle incentive is to get re-elected. So if during his tenure, the economy is booming, he damages his chances of re-election by ignoring calls to use the current surplus to spend on new social programs and new entitlements. It is very difficult politically to ignore calls for more spending on this or that new initiative while the national coffers are overflowing. ”It’s only fair”, his constituency and his opponent in the next election will say. A brave and principled politician would explain that the surplus needs to be set aside for the inevitable future downturn and should not be frittered away.

When was the last time you encountered a brave and principled politician?

So we now find ourselves where we are. No politician dared to put money aside during the good times because he was constantly watching his back, watching for his re-election chances. And thus no surplus was created. So now we hear the current crop of politicians saying, “Well, Keynes said we should be stimulating the economy during the downturn”.

True, but where’s the money you should have put aside in the good times to pay for this?

Keynesian economics is a two way proposition. You only have the right to call for deficit spending in the bad times if you had the balls to resist the call to overspend during the good times.

Wheres the wealth fund you should have created?


Update: Click on the image above to view a cool video on the difference between the Keynsian School and the Austrian School of economics.

Pick your poison


When you put yourself into the position that many of the western central banks have done with massive unsustainable national debt near, at, or well past 100% debt to GDP, you leave yourself vulnerable to any shocks that come along. And believe me, there are many shocks in the pipeline.

The main problem here is that central banks throughout the western world are dependent on private capital, via the bond market, to make up the difference between tax receipts and day to day spending. They have all been doing this for decades, so the annual deficit has each year added to the national debt which has grown relentlessly. This is why the debt levels are so high. The patience of the bond market has been sorely tested and will soon reach a breaking point. When this breaking point arrives, few will be prepared to buy any more treasury bonds and their prices will plummet. The interest rate, its corollary, will soar. The central banks will then find themselves in a bind.

There are three, and only three, ways out of this bind.

1/ An individual, who finds himself in debt, can do the responsible thing which is, try to reduce his spending, raise his earnings and accept the fact that he will have to grind through this for many years in order to repay his freely accepted debts. On a national level this means raising taxes, reducing entitlement spending and biting the bullet, accepting that things will be tight for years until the debt is down to a manageable level. All the while begging the forebearance of your creditors to allow you the few years breathing room needed to bring tax receipts and spending in line. This is the path that Ireland has chosen. The absence of demonstrations or riots in the streets of Dublin shows that the Irish people have accepted this grim burden.

2/ Another individual may say “There is no way I can pay this, I’m filing for bankruptcy”. On a national level this means defaulting on the debt, saying to your bond holders that they have to accept pennies on the dollar, or nothing at all. Take it or leave it. Along with shafting their bond holders, they are now in a position that they can no longer go to the bond market in order to finance their deficit (the difference between what the government spends each year and what it receives in tax revenues) which means they have to suddenly bring their spending and tax revenues in line so that they do not need to go to the bond market to make up the difference. This means that tax rates soar, entitlement spending plummets and no national consensus is there to accept this new reality. Hence, riots on the streets and stories of extreme hardship abound. This is what Greece has done.

3/ The final option is monetisation. This option is not available to individuals, only to sovereign governments with control of their own currency, so not Ireland or Greece, being tied to the Euro as they are. Monetisation is basically printing as much money as the government needs and ignoring the need to get spending in line with tax receipts. This is the most dangerous choice as it inevitably leads to hyperinflation as the market is swamped with currency with no actual value to back it up. I’m looking at you America.

So there are the three choices, pay the debt, repudiate the debt or inflate the debt away. There are no good choices, only varying degrees of bad.

Pick your poison.


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