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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 2

(Sep 16, 2007)

Newcastle, England – As I said in Part 1 yesterday, in order to understand the root cause of today’s monetary crisis and impending recession, we must understand what is meant in economics by the concept of value, especially as it pertains to money (a commodity) and paper money (a receipt for said commodity).

   Remember that the common thread running through all of today’s monetary and economic crises is:  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.

   Why?

   Because the power brokers in charge of each nation know that in order to take control of the people and markets of any nation, one must first re-define the concepts of money and paper money.  One does not have to use the military or use force to take over a nation or an economy.  All one has to do is to re-define the concepts of money and paper money.  And to do that, one must obfuscate the definition of value, where value comes from, and wherein lies true value as it pertains to money and paper money.

   In the old days, economists argued that value resided in labor per se.  Karl Marx argued this point and, in fact, the entire notion of Marxian socialism rests upon this erroneous notion.  But Austrian free market economists long ago dispelled the labor theory of value with the following irrefutable truth:  Value does not reside in any labor or commodity per se but rather it resides in the qualitative expectation of a service rendered to each participant in an exchange, or market trade.  Example:  A million men can dig a million holes in the middle of the desert, expending tons of labor but rendering no service to anybody.  The value of their labor is zero.  And yet, the Rolling Stones rock and roll group can expend very little labor to produce a recording of I Can’t Get No Satisfaction and earn millions of dollars from consumers who apparently can get satisfaction and freely vote with their wallets for their expected service rendered to them.

   We are not talking about someone’s opinion of what is fair or not fair regarding how hard somebody worked and received nothing while others barely lifted a finger to earn millions.  The market is neutral on this issue.  The point is:  in economics, which is essentially the study of qualitative human action (not coincidentally the title of Austrian free market economist Ludwig von Mises’ brilliant economic treatise, Human Action), value resides not in labor per se but rather in service rendered as determined by the qualitative judgment of each trader.

   Taking it one step further, for the same reason that value does not reside in labor per se, value also does not reside in any commodity per se.  Which means, of course, value does not reside in gold or silver per se either but rather in the service rendered by those commodities, especially as in their use as money or a temporary medium of economic exchange.

   Without belaboring the point and historical evolution regarding why gold and silver have been chosen as money over other commodities such as tobacco, wampum, diamonds, wheat, and tomatoes, free individuals have chosen gold precisely because of the service it renders, the value, to them as a temporary medium of economic exchange.  In short, gold is money and money must be a commodity that free individuals qualitatively determine will render a service to them.

   Because gold as money is heavy, people invented warehouses to store the gold and received mercantile receipts to redeem the gold money by any bearer of the paper receipts upon demand.  Paper money is simply a paper contract for redemption of a stored commodity, pure and simple.  Redeemable paper money provided a service, a value determined by the consumer, and so banks were born to replace the warehouses.  In the beginning, banks issued 100% backed gold certificates.  That is, no fractional reserve banking in which banks issue more gold certificates than the stated amount of gold stored in the bank.  (Today fractional reserve banking is a joke since there is no gold backing the paper and so the act of backing non-redeemable paper with more non-redeemable paper is truly a nasty joke played on the public.)

   Before continuing with how paper money has cleverly been redefined and thus the underlying concept of value has also been redefined, note that in each market exchange or trade, the value of each trader’s commodity or service is not equal but rather unequal, and, in fact, that is precisely what drives the exchange process.  That is, each trader qualitatively values the service he expects to receive higher than what he gives up, and vice versa for the other trader, such that the qualitative values are unequal prioritizations of each trader.  However, the exchange creates an exchange ratio, or market price, that, delineated in true money which, by definition, must be a specific amount of a measurable quantity of weight and fineness to be meaningful – e.g. 1 troy oz of .999 fine gold – is the free market mechanism by which all prices are created.  Destroy that process and you destroy the free market.

   In other words, qualitative valuation of service rendered is the only method by which markets can legitimately create market prices, usually driven by knowledge of supply and demand or good or bad guesstimates of future expected values, which translate into profits or losses.  If a government or government entity intervenes into this price creation mechanism, it destroys all market calculation and forecasts.  In short, destroy price calculations and you destroy the market or at least cause unforeseen market dislocations.  This is precisely why all attempts at socialism must fail.  Socialism inherently destroys the very mechanism, from the concept of value to the creation of market prices representing true supply and demand, and thus destroys exactly what it needs to survive.  Thus socialism, and all forms of economic collectivism, are inherent self-contradictions at their lowest fundamental level:  i.e., the theory of economic value.  (Note:  we will not venture into the even more fundamental philosophy of individual rights and freedoms upon which rests the moral philosophy of exercising one’s inherent rights to freely value exchanges and thus the concept of freedom of exchange.)

   Back to the scene of today’s crime:  wherein lies the value of today’s paper money and how redefining money and paper money are the root causes of today’s monetary crisis and impending recession.

   Citizens impute value, a service rendered or to be rendered, to gold money and to gold certificates for many reasons such as storage of savings and so on.  Other individuals, such as bank robbers, have cleverly devised methods by which to separate fools and their money without actually pulling out any guns and issuing robbery notes to bank tellers.  These latter individuals have invented central banks and redefined the concepts of value, money, and paper money.  The new private corporation of central bankers in the U.S. call themselves the Federal Reserve and they convinced legislators that (1) gold money can be dispensed with, (2) paper receipts for gold money can also be dispensed with, and (3) value per se resides in the new non-backed paper money called Federal Reserve Notes.

   I repeat:  the central bankers of the private corporation called the Federal Reserve have now redefined economics theory back to the erroneous labor theory of value and commodity theory of value in which they claim value resides in paper per se.  This is an astounding accomplishment in economics.  A group of greedy bankers have convinced nearly everybody in America that value per se resides in paper.  Paper which is not a receipt for any commodity.  Paper which somehow obtains its value by the mere fact that it is created out of thin air at 4-cents per each denominated bill from $1 to $100 or more.  Paper which pretends to be backing for more of the same paper (fractional reserve banking) and the volume of which can be increased or decreased by a group of bankers who can dole it out to their subsidiary banks and investment institutions on Wall Street essentially at will.  Paper which is doled out to the U.S. Congress for deficit spending.  Paper which is doled out to the U.S. Congress for billions in sneaky earmarks for states to finance local projects and thus keep politicians at all levels in power by bribing citizens with “free” pork – and also get around the prohibition of state and local governments printing up their own money.

   By redefining the concepts of value, the U.S. dollar and all other fiat currencies and commercial creation of non-backed paper such as sub-prime mortgages and derivatives have flooded the international markets.  By this clever redefinition of value in economics, the central bankers and power brokers – with the consent of the current crop of PhD economists – are hyper-inflating all manifestations of commercial paper (including all national currencies) and setting the global economy up for a huge recession, which must inevitably result.  Remember, they are also destroying the very market mechanism, the creation of prices, that all businesses need to react, calculate, and forecast vis a vis supply and demand.  In essence, by destroying the concept of value, the Federal Reserve and other central bankers, are destroying what’s left of the free market and also everybody’s freedoms as governments respond to the impending economic crises.

   And what is it that the power brokers are offering to “solve” their created monetary and economic crises?  “Injecting more liquidity” – i.e. printing up even more devalued, non-backed paper money and dumping it into the global economy to supposedly solve all the existing economic ills, which are the result of previous injections of non-backed paper money.  Legislators, economic pundits on TV talk shows, Wall Street Journal editors, PhD economists and the central bankers are not only clamoring for the injection of more and more Funny Money, they want the Federal Reserve to “manage” the free market (an oxymoron since free markets aren’t “managed”) by intervening into the market mechanism that creates prices without realizing that they are destroying the very mechanism that creates a free market, a free market they need to solve the problems they already created.  Ingesting more arsenic does not solve one’s current problem of arsenic poisoning.

   Why has all of this happened?  Follow the money.

   The U.S. is not in Iraq to create a “democracy” for the Iraqis or to protect Americans from The Terrorists.  The U.S. created The Terrorists as previous puppets in the Middle East when we paid Osama bin Laden and Saddam Hussein to fight the Iranians and the Soviets.  The U.S. is in Iraq today as part of its unstated deal with the OPEC oil monopoly in which the Saudis agree to only sell oil to buyers using dollars – hence petro dollars – in exchange for the U.S. using its military to protect the Saudis from the Iranians and anybody else.  It’s an oil deal, folks.  A petro dollar oil deal.  The U.S. power brokers are not only redefining value as it pertains to money and paper money, they are forcing others to use their Funny Money Federal Reserve Notes in all types of economic transactions, including purchasing war equipment, and spending hundreds of billions of dollars for unaccountable projects in the Middle East.  Follow the money.  The Defense Dept has not successfully passed a GAO audit, or even got close to passing any internal or external audit, of the money it has spent for the last ten years.  Now you know why we went off the gold standard.

   By redefining the concept of value, the average citizen has lost complete control of his assets and freedoms.  How can you vote no on government spending by withholding monetary support when your money is not gold and the power brokers can print up more paper at will?  When the Fed hyper-inflates the fiat money supply, it is a de facto devaluation of your unit dollar.  Old folks lose value as their savings devalue since a continual increase in the paper money supply causes a general rise in prices.  Young people are pushed into higher tax brackets as their salaries increase (or try to increase) to keep up with price inflation.  This is called taxflation.  Legislators bringing back hundreds of millions of dollars in pork do not help the citizens in any state but rather causes even more price inflation.  There is no such thing as a free lunch and your legislators are doing you a great disservice by playing the earmark game.

   So, we have now answered the question:  Wherein lies the value of today’s paper money?  The answer is:  nowhere, value doesn’t reside in paper money.  Value resides in service rendered as determined by you, not the Federal Reserve’s National Wallpaper.  Printing up more Funny Money is not the solution to today’s monetary crises or economic problems.  No nation can enrich itself by printing up more and more fiat currency.

   In summary, value has been redefined and so has your money and paper money.  The power brokers are making lots of paper money profits and transferring that fake money into hard commodities, your commodities, such as real estate, corporations, gold, etc.  How ironic it is that the political power brokers and Federal Reserve central bankers move their Funny Money profits into hard commodities such as gold which they claim has no value as money.  What a clever scheme.  Watch what they do, not what they say.  The central bankers and their Wall Street subsidiaries and investment institutions creating non-collateralized commercial paper are getting rich, dumping their paper onto other unsuspecting investors in a game of musical monetary chairs and then throwing their hands up in the air pretending like our current economic crises are the result of some mysterious virus falling down from Mars or somewhere.

   By creating non-collateralized paper money out of thin air, the Fed Reserve sells it at interest to the U.S. government and other "investors" and calls it our National Debt.  You, the unsuspecting public, get to repay this National Debt at interest by being taxed to death.  When other nations "invest" in this debt, they are essentially holding our National Debt.  Currently, China holds some $2 trillion of our National Debt.  If China chooses to dump it all at once, since they are losing value through continued monetary and price inflation, it would devastate the U.S. economy. 

   So how do you protect yourself and your assets?  We are not licensed investment counselors and do not give specific advice on what to buy or sell but you now have enough economic information to make those decisions for yourself.  Now you know what is really going on vis a vis the War in Iraq.  Even Alan Greenspan, former Chief of the Federal Reserve, just said it’s unfortunate that most people don’t know that the real reason we are in Iraq is for the oil – by that he means the petro dollar arrangement with OPEC and how we must protect this "deal" with our military at all costs.  Now you know how a redefinition of value in economics changed the definition of money and paper money and how that changed the definition of commercial paper in the stock market.  You now know the difference between money and paper money, gold and gold certificates, monetary inflation and price inflation and how the power broker politicians and central bankers are lying to you.  Hint:  as free market economist Milton Friedman said, “Just because the government writes ‘cheese’ on a piece of paper, that doesn’t make it so.” – FM Duck

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