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by Free Market Duck

Wherein lies the value of today's paper money?...
or, the root cause of today's monetary crisis and impending recession - Part 1
(Sep 15, 2007)

Newcastle, England – Depositors lined up to pull their money out of Northern Rock PLC, one of England's largest mortgage lenders yesterday.  In an unprecedented monetary move, the Bank of England "injected" an undisclosed amount of "liquidity" -- a euphemism for printing up and doling out more "non-backed paper money," specifically, the British Pound -- into Northern Rock to stem the run on the bank.  Northern Rock has 25 billion Pounds in deposits and 87 billion Pounds in residential mortgage loans, much of the latter bundled as commercial paper and sold to other institutions as backing for still more commercial paper.  The blind leading the blind with no "mark to market" valuation since the paper is not really traded.

   Last week, depositors in the U.S. lined up around the block to pull their money out of Countrywide S & L, America’s largest sub-prime mortgage lender who recently borrowed $12 billion at not-so-good interest rates to bail itself out of pending bankruptcy.  In a pretended show of faith in the Federal Reserve's lowered interbank fund rate change from 5.25% to 4.75% and 30-day extension to pay back the loan, Bank of America pretended to "borrow" $2 billion from the Feds and "loan" it to Countrywide to stem Countrywide's bank run by depositors.

   Meanwhile, the U.S. Federal Reserve and European Central Bank, and the Bank of England have been "injecting" massive amounts (hundreds of billions of dollars weekly) into their respective monetary systems to convince citizens that all is well in the global economy.

   What is the common thread running through all of the above economic crises?  All of the paper money and commercial paper, from the U.S. dollar to British Pounds to the Euro to sub-prime mortgages to bundled bonds of re-sold sub-prime mortgages to regular mortgages to hedge funds and derivatives created out of any of the above, are non-collateralized pieces of paper.

   Non-collateralized, non-backed PAPER.  Why?  Because that's what's pushed by econ profs at all the universities, central banks, governments, and national legislatures.  Non-collateralized, non-backed currencies and commercial PAPER is the economic policy du jour.

   Even the housing mortgages and especially the sub-prime mortgages are mostly just paper, since they were over-bloated loans for hyper-inflated housing prices in a now collapsing real estate market.

   None of the paper money currencies in the above discussion, the U.S. dollar (Federal Reserve Note), the Euro, or the Pound, is backed by gold, silver, or any other hard commodity.  All paper currencies today are non-collateralized, fiat (forced by the government) paper.

   Many economic boob-heads with PhDs in Quantitative Economics from leading universities will erroneously reply:  But wait, Mr. Duck, the Federal Reserve Note is backed by America's GDP.  To which Mr. Duck replies:  Au contraire, mes amies, because the Fed Reserve does not own every individual's house, car, computer, or private property and thus cannot offer each individual's private property as collateral for the paper Federal Reserve Note.  There is no true relationship between the amount of paper currency printed up by governments and said government’s Gross Domestic Product (GDP), which itself is a bogus economic calculation by erroneously assigning historical exchange ratios (prices) to one or both sides of the trillions and trillions of historical market trades or presumed market valuations which change minute by minute.  GDP is not collateral for fiat currency, period.

   Now that we have put that canard to rest -- the false notion that paper money can be collateralized by a nation's GDP, we must ask the question that free market and all other economists have asked since time immemorial.  Namely, wherein lies the value of money?  And more specifically for today's economic crises, wherein lies the true value of paper money?

   Let's start at the beginning and keep it simple.  Let's discuss the philosophical concept of value as it pertains to money.

   (Stay tuned.  The true definition of value in economic theory is not what you think it is.  Value evolves into exchange ratios (prices) and requires freedom and free markets to create market prices.  Value refutes the labor theory of value AND the commodity theory of value.  The true definition of value shows how trades are unequal not equal, and why -- if we keep on the current path -- we are headed toward a huge recession fueled by those monetary manipulators who are supposedly saving us.  How can one save oneself and one's family jewels during the coming crisis when the government suspends habeas corpus and enacts martial law?)  To be continued tomorrow... -- FM Duck

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