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A Peso Here ...and a Few Thousand Pesos
by Professor von Braun
October 16th, 2000
One hears much being said these days about value, valuations, undervaluation and overvaluation. Stock markets it seems have been overvalued for some time now and commodities have represented fair value for several years. But the question that should be asked is what is value?
Value is what somebody is prepared to pay for something is the usual response. But is it? How do you determine value? What is value? In this time of floating exchange rates, currency debacles, maurading hedge funds, rising commodity prices, 125% home mortgages and ongoing unlimited creation of credit, what exactly is value?
Every major economic crisis comes about as a result of currencies losing their perceived value, usually quite quickly. From the Roman Empire, to the actions of the John Law-inspired Mississippi land boom, to the 1929 crash. Japan has an unresolved currency problem relating to the 1989 debacle in stocks, which itself was fueled by unlimited credit.
When currencies, which represent the means of exchange for goods and services, the basis for which they introduced, become readily available, usually at a rate that is based only on the creation of debt, problems are on their way.
The natural balance between goods sold and goods acquired (as in imports and exports) when it has been impinged upon by errant bankers always causes problems.
Today, in this wonderful world of globalization, unlimited credit, instant information and global communication it seems that the world has gotten smaller. However the basics of money creation, contrary to the opinion of some bankers, has not changed. In truth it can't change since the creation of credit is dependant upon the exchange of goods and services and the requirement for some type of banking reserve. That's why we have terms such as "the trade deficit", "the balance of payments", "gold reserves", "foreign reserves", etc.
Banks and lending organizations get into trouble when they start lending on non-productive assets. What went on in France in the early 1700's with the introduction by Law of the securitization of land-based assets was essentially the process of lending on non- productive assets. While this allowed the introduction of unlimited amounts of paper currency the activity itself was doomed from the start.
Today is not all that different. The creation of credit and the record amounts of corporate, government and personal debt are at levels we have never seen before. The creation of truly productive assets is at an all time low in relation to this. Where are the assets that generate the cash flow that supports the local population, that uses a portion of their income to repay the mortgages and pay the taxes that are required to support the government services, that create the infrastructure that allows all this to take place?
The banking system and the secondary debt markets have gone berserk once again it seems. The expanse of debt markets by way of the bond creation is out of control. A large percentage of this market consists of the "securitization" of the home and commercial mortgage markets and of credit card debt. Bankers worldwide have followed the lead of the American commercial banking industry, which itself has followed the lead of the Federal Reserve and have entrapped the consumer by creating unlimited credit, packaging it and then creating more credit by selling these dubious bonds to whomever is silly enough to buy them.
Now the problem with this activity, actually there are several problems but the most insidious problem is that these issues are denominated in currencies, the same currencies that the consumer uses to conduct their everyday business. More importantly, these are the same "credits" that Mr. & Mrs. Average Citizen" have been taught to accumulate and save towards their retirement. The concept of a constant denominator that one can use to check on ones progress towards this goal has been forgotten about. Instead most participants, that's nearly everybody over the age of twelve, have it seems embraced the central bank inspired idea that currencies only require debt to support them.
The creation and supply of goods and services has temporarily taken a back seat while the banking system has become the driver. Well the last time this happened there was a serious depression and the time before and the time before that. It is not history that repeats, it's the activity. Killing the goose that lays the golden eggs is a sure way to cut off the supply of eggs. Making it airborne and operational 24 hours a day will have the same effect, regardless of how it's described.
The fun begins when the holders of these fancy issues go to redeem them. The redemption process requires that they go to the currency markets, which are dependant upon the strength of the demand for goods and services, and attempt to convert these dubious pieces of paper into other currencies. These other currencies are in turn dependent upon the strength of the trade markets. If a country has a serious imbalance--as in imports more than it exports and is running a trade deficit that requires overseas borrowings--then there is a problem. If the banks have usurped the role of government and its respective Central or Reserve Banks and issued debt that is dependent upon the balance of payments for its conclusion then Mr. & Mrs. Average Citizen also have a problem.
Their retirement nest egg, the one they thought was going to carry them through their golden years, begins to lose its value. This is what's happening on a worldwide basis.
After the John Law debacle in the 1700's it was a long time before commercial banks were allowed back in the mortgage markets. More importantly currencies were then pegged to gold for a very long time, an event that made them "trustable" again. For many years after Building Societies took over the role of mortgage lending and banks were instructed to focus on trade, trade financing and the financing of productive assets. Unfortunately this activity, albeit a very necessary one, has been sidelined as the rush for paper profits took over. Today there are even countries that have few locally owned banks at all. Fancy that!
Eventually Central Banks will have to go back to some form of gold standard. This will be a demand forced upon them as the current debacle unravels and the full extent of the massive fraud that has been carried out on the local populace becomes apparent. It is true that rarely does one go to the dentist until the tooth actually hurts and as the pain increases the roles of Reserve and Central Banks will come under closer attention.
Meanwhile the opportunity to buy physical gold at discount prices is alive and well, even though the gold price is rapidly appreciating in some countries currencies. As we have stated in these articles many times before, actual ownership of physical metal is the key requirement. It may not be the only protection but it is one of the safest.
The Prof can be contacted by email at email@example.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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