Wednesday, September 24, 2008

Central banking, like our interventionist foreign policy, enjoys bipartisan support. Only cranks look askance at the unspoken assumptions of the power elite. The power elite wants to keep it that way.

The source of the financial markets' current rot lies in the Federal Reserve Bank management's of the money supply. Fiat currency, fractional-reserve banking and legal tender laws have effectively nationalized the currency. Has nationalization of anything ever done anybody--aside from the State and its politically-connected special interests--any good? I'm guessing your average Russian doesn't think so.

Abolish the legal tender laws. A system of competing currencies will arise. Most likely, under conditions of free banking and open competition, people will exchange their paper dollars for money with intrinsic worth. Society's most marketable commodity (probably a precious metal like gold or silver) will emerge as currency. Governments hate honest money and precious metals because increases in the money supply (i.e., counterfeiting) enable them to pay their bankster and military-industrial complex pals without directly raising taxes. (Governments understand that confiscatory taxation fosters rebellion and black markets.) The banksters and military-industrial complex honchos get the new money before it has a chance to circulate through the economy, raising the general level of prices. The rest of us get the new money later, paying the hidden tax of higher prices.

Austrian School economists (visit if you're interested) have long warned of the dangers posed by government or central-bank control of the money supply. Increases in the money supply and easy credit are responsible for the boom-bust cycle. Inflation erodes the value of our savings, thereby undermining the incentive to save and decreasing the pool of investment capital, hampering economic growth. Fiat currency works (to the extent it ever really works) only so long as legal tender laws prop it up and the people retain their misplaced faith in the issuing government's prudence and solvency. For obvious reasons, people in this country are starting to lose that faith.

The price of gold is more than a psychological indicator. Investors know that gold has intrinsic value. If the Federal Reserve can restore faith in its fiat dollars, gold will go down in price; but the FED can't strengthen the dollar without jacking up interest rates, which will bring this economy to its knees.

The FED is between a rock and a hard place. Investors are betting the FED will continue to inflate or keep interest rates artificially low. (Interest rates in a free economy are determined by the supply and demand for savings, not the whims of central bankers.) Inflation and easy credit may keep the economy afloat but they risk destroying the dollar. If the dollar goes bust, those who hold gold will be laughing all the way to bank (or the few banks, at any rate, that survive the international monetary collapse). The rest us will be using our paper dollars to heat our homes, as did Germans in the dark days of the Weimar Republic.




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