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by Free Market Duck

U.S. Federal Reserve Note:  America’s Pulp Fiction
(Jan 01, 2008)

Once you change the contractual concept of paper money from a redeemable, exchangeable promissory note to an irredeemable exchange-only note, you will have established a precedent for the destruction of all future economic contracts.

America’s “bundled” subprime mortgage slime and every nation’s Sovereign Wealth Funds are direct results of America’s new Pulp Fiction: the Federal Reserve Note.

Washington, DC – What’s the difference between today’s Federal Reserve Note (our U.S. Dollar), “bundled” subprime SIVs (Structured Investment Vehicles), and Sovereign Wealth Funds?

   The answer:  nothing.

   All three rest upon the ridiculous concept that pieces of paper, in and of themselves, obtain value by virtue of the fact that they’re printed up by a government.  The pieces of paper may say the words U.S. Dollar or Federal Reserve Note or Bear Stearns Lucky Ducky SIV Fund or China Sovereign Wealth Fund but they all have one thing in common:  they are non-collateralized contracts created out of thin air whose legal contract is one of exchange-only, not redemption AND exchange.

   What’s the diff and how did this happen?

   What today’s economists and central bankers have done over the last 75 years is to slowly change the contractual nature of paper money from a contract of a redeemable and exchangeable promissory note to a contract of an irredeemable exchange-only note.  While our parents and grandparents were apparently asleep at the political wheel, the central bankers, the Federal Reserve, changed the contractual definition of our U.S. paper money and stole our gold.

   Historically, paper money has always been a legal receipt for redemption of a hard commodity, such as gold or silver.  It was a mercantile receipt, a legal contract for redemption of a stored good at a warehouse.  A monetary warehouse is simply a bank.  As such, mercantile receipts were exchangeable in the market and served as paper money ONLY BECAUSE they were redeemable.  Today, paper money is now an irredeemable piece of paper used for forced official exchange only.  The U.S. Dollar, or Federal Reserve Note, is not a contract for redemption and exchange; it is an exchange-only contract.

   There is a big difference between a redeemable, exchangeable contract and an exchange-only contract.  The first is true paper money; the second is fiat government currency.  To not understand this important difference is to not understand basic economics.

   In other words, the important difference between a legal monetary contract of redemption AND exchange is the fact of redemption.  Otherwise, the contract, the legal piece of paper, without redemption, has no reason to exchange.  In short, legal contracts that purport to represent fiduciary media, or legal pieces of paper money without the ability for redemption AND exchange, cannot really serve as a medium of economic exchange since, without redemption, they have no value per se.  They are only pieces of paper.  Circulating tons and tons of irredeemable paper serves no economic purpose whatsoever, except to temporarily trick the people.  (Note:  This is not an assertion in economic theory that gold and silver are tradable because they have inherent value.  Gold and silver do not contain inherent value per se.  Gold and silver simply serve as a temporary store of value as subjectively determined by the consumer who anticipates a future service rendered by using these metals as money or redeemable paper contracts for gold or silver paper money.  While you can trick the public into anticipating a future service rendered by using non-redeemable paper money, they will revolt as soon as they discover the true nature of this scam.  Remove the parameter of redemption and paper money is not true paper money; it is fiat or “forced” government paper.)

   This subtle difference between contractual redemption AND exchange, as opposed to exchange-only, in the definition of paper money, is extremely important at its fundamental philosophical level.  The former – redemption AND exchange -- is an expression of individual rights and is the basis for a true free market economy with a limited government whose only role is to enforce an objective judicial system and provide national defense, while the latter – exchange-only -- is the expression of state collectivism or a dictatorial government that continually intervenes into everybody’s freedoms, leading to many disastrous and unintended consequences in the economy.

   What are the economic ramifications of redefining the U.S. Dollar, the Federal Reserve Note, from a contractual obligation of redemption AND exchangeability to a contract of exchange-only?

   First, by dumping the redemption part of the legal definition of paper money, the Federal Reserve central bankers get to keep the gold and silver for themselves.  Second, by proclaiming paper money as an exchange-only contract, the Federal Reserve central bankers get to print up as much paper money as they, or Congress, or the President, or the CIA Shadow Government want without having to tax or be accountable to the public.  Third, dumping the concept of redemption for paper money will lead to the future creation of similar paper monetary instruments in all segments of the economy which will cause all sorts of unintended consequences when prices rise or fall, defaults occur, and nobody can trace any type of collateral or redemption value for the new investment or monetary instruments.  Welcome to the current “bundled” subprime mortgage slime.  We’re already there on all three counts.

   An example of point number one:  After removing the redemption parameter of the U.S. Dollar, America’s gold bullion -- cleverly confiscated by President Franklin D. Roosevelt in 1933 under penalty of a criminal offense -- is allegedly sitting in the airtight, watertight basement vaults of the Federal Reserve in New York.  The Federal Reserve, which by law has never been audited, has purchased and sold much of America’s gold bullion to themselves and others at artificially low prices.

   An example of point number two:  Congress runs huge deficits and future entitlements totaling hundreds of trillions of dollars, and the CIA expends billions of undisclosed, non-audited dollars for nefarious purposes all over the world not authorized by the U.S. Congress or the people of America.  Congress annually inserts over 12,000 Pork Barrel Earmarks into all appropriations bills for local pet projects as bribes to keep themselves in power.  They get away with this because America’s paper money is an exchange-only contract and has no redemption parameter.  Without a redemption parameter, the U.S. Dollar can be inflated to the Moon and back.  If Dollars were redeemable in gold, Americans would have redeemed their paper money for gold a long time ago and refused to pay taxes for Congress’ Giant Welfare State, thus asserting fiscal control over our out-of-control government spending.  But since the U.S. Dollar is not a redeemable instrument, Americans have lost total control of their own money supply and, therefore, lost control of their government.  The people cannot threaten government spending by withholding tax money because the Feds can now simply print up as much as they want.

   As to the third point, if our basic pieces of economic paper in the U.S., the Dollar or Federal Reserve Note, are not redeemable or backed by anything and exist for exchange-only, then why not extend this same concept to the mortgage, stock, and investment markets?  Guess what?  That is exactly what has happened in our current subprime mortgage slime.  The same definition for the Federal Reserve Note, exchange-only, has now morphed over to the housing and stock markets where investment funds require no collateral, or grossly over-valued pretended collateral, or are “bundled” – i.e., intermingled -- with other non-redeemable pieces of paper and sold as hedge funds.  The result is that banks and Wall Street financial institutions – all members of the Federal Reserve -- have turned into Pulp Fiction gambling houses with everybody betting on made up pieces of non-collateralized paper backing other non-collateralized paper all stacked up like dominoes ready to implode into each other.  That is, in fact, what you are witnessing in America and the world economies today.

   In short, America’s investment bankers have taken their conceptual cue from our irredeemable Federal Reserve Note, a redefined concept of paper money as exchange-only, and created “bundled” (1) subprime mortgages of irredeemable, exchange-only pieces of paper intermingled with (2) highly leveraged, borrowed amounts of irredeemable exchange-only Federal Reserve Notes, called them Structured Investment Vehicles (SIVs) and sold them to unsuspecting investors who know zippo about the true nature of money and credit.   Not only did the investment bankers adopt the new definition of investment vehicles as irredeemable exchange-only contracts – just like the U.S. Dollar -- they further compounded the problem by erroneously mathematically adding investment “apples” and “oranges,” that is, the presumed values of different types of irredeemable, exchange-only contracts (subprime mortgages plus borrowed dollars plus other debt obligations) to create their “bundled” SIVs.

   Note how one change in the definition of paper money – removing redemption -- leads to future compounded errors in economics.

   Since the investment wizards on Wall Street did not include the concept of “redemption” in their new definition of commercial paper – why should they, everybody learned at university that U.S. Dollars are for exchange-only, not redemption -- they mistakenly added up the values of all their “apples” and “oranges” (dissimilar monetary contracts) and then sliced and diced the total into separate investment vehicles that did not track individual mortgages or borrowed globs of Federal Reserve Notes – borrowed on highly leveraged margin from the Fed Reserve central bankers, I might add – and thus when the housing market crashed, nobody could trace which subprime mortgage, or fraction of a mortgage, or which borrowed fraction of FRNs, should be marked down as having defaulted.

   This then led to legal contract problems.  Since the concept of unit redemption was non-existent – just like in our U.S. Dollar – and Wall Street bankers mixed “apples” with “oranges,” neither the investment bankers selling their SIVs, or the investors themselves, could evaluate the defaulting market value of, or assign ownership to, the pieces of paper they were holding as investments.  Therefore, bankruptcy courts could not declare who held whose defaulting mortgage paper and assign responsibility because that legal concept requires the concepts of traceability and redemption, which – just like the U.S. Dollar -- are missing.

   As stated above, once you change the contractual concept of paper money from a redeemable, exchangeable promissory note to an irredeemable exchange-only note, you will have established a precedent for the destruction of all future economic contracts.  That is exactly what we have done in the U.S. and global economies.  And this one conceptual change in the contractual definition of paper money is the root cause of our current global recession.  Not understanding this important point, the Federal Reserve’s injection of trillions and trillions of more exchange-only paper money into the U.S. economy is not only NOT the solution, it will compound the current recession since exchange-only paper is not true “capital.”  True capital money contains the parameters of redemption AND exchange because redemption means redemption for the stored value of an existing commodity such as gold.

   A few words about the difference between today’s irredeemable paper money and true capital wealth:

   When the U.S. Dollar was both redeemable (in gold) AND exchangeable, then spending the gold money by free market entrepreneurs was good for the economy since they were expending real capital.  It is a serious mistake, however, for government economists or the central bankers at the Federal Reserve to assume that simply injecting and spending trillions of dollars of irredeemable, exchange-only paper money is equivalent to private entrepreneurs expending redeemable, exchangeable paper money backed by gold or other capital.  Injecting tons of exchange-only paper money into the economy is simply hyper-inflation of the paper money supply, which will produce nothing but hyper-inflation of the prices of all goods and services.

   After producing a recession with interventionist monetary regulations, the typical government solution of freezing wages and prices while injecting tons of irredeemable paper will push America’s recession into a prolonged depression requiring martial law, rationing, and the loss of most individual freedoms.  In fact, as a reductio ad absurdum, it can be shown that the loss of individuals freely choosing their own private money and paper money is the basis for the loss of all other freedoms.  The freedom of voluntary trade is one of our basic inherent freedoms.  Lose that and you have lost everything else.  Freedom of trade has unfortunately been usurped by the redefinition of our national Pulp Fiction, the U.S. Dollar, from a redemption AND exchange currency to an exchange-only currency.  And it was done on purpose by those who want to control the economy to gain advantages for themselves.  In the long run, however, they will have destroyed the global economy for everybody.  In effect, they are committing economic murder of the population and economic suicide for themselves.

   So, what’s the worst that can happen?

   The worst that can happen is to expand the concept of exchange-only fake money to an even bigger fiasco.  Such as…

   How about the creation of Sovereign Wealth Funds, government-held investment money created out of thin air that each interventionist nation can “invest” into their own and other nation’s private companies?  This is the ultimate in state collectivism, Big Brother printing up as much irredeemable paper money as it wants to compete with business in the global market.  This is simply an extension of the same concept of printing up irredeemable paper money for use by the people but now the governments which are supposed to objectively adjudicate free trade in the market get to compete in the game itself.  That’s like football referees jumping into the Super Bowl in the third quarter to play positions of quarter back or tight end while still officiating the game.  The result would be a joke and would encourage everybody to just dump all the rules and cheat.  Sound familiar in today’s markets?

   Similarly, the result of Sovereign Wealth Funds – nations competing in what’s left of the free market -- will produce economic disaster and is tantamount to an international monetary Print Off Contest (since nations can print up their own irredeemable money at will).  The concept of Sovereign Wealth Funds, irredeemable paper money invested by nations into the market, is the ultimate absurdity in our Global Pulp Fiction Contest.  Eventually, every nation will renege on other nation’s Sovereign Wealth Funds invested within its borders for real or imagined national security reasons and the current global recession will worsen, turning into trade protectionist wars that may ultimately morph into military wars.

   In summary, the world’s “bundled” subprime mortgage slime and every nation’s Sovereign Wealth Funds are direct results of America’s new Pulp Fiction: the irredeemable Federal Reserve Note.

   So, what’s the solution?

   The solution is to go back to the legal definition of paper money as a redeemable, exchangeable contract, not an exchange-only contract.  Redemption should be a 100% gold backed, private monetary standard with no fractional reserve banking.  Fractional reserve banking is the illegal practice of issuing more paper receipts than the stated amount of gold in the bank, commonly referred to as fraud.  Same reason why it’s illegal to counterfeit a million copies of the pink slip to your ’57 Chevy and sell those copies to everybody in the hood, dude.  A million people would think they’re holding the pink slip to a ’57 Chevy while, in fact, they’re only holding paper.  Look in your wallet.  It has already happened.  You’re only holding paper, not real money.  Not the ’57 Chevy and not gold.

   Time to get rid of our current exchange-only U.S. Dollar that essentially says, “Hi, I’m Mickey Mouse, America’s Pulp Fiction.” – FM Duck

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