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THE
ROCKET SCHOOL OF ECONOMICS


Carrying a Big Stick.
by Professor von Braun

November 9th, 2002

We are all familiar with the "big stick" concept and its use by the US over the last 100 or so years. If there was a non -compliant country somewhere on the planet then call the navy and send a battleship or two to assist in the compliance process. Quite simple really!

However the world has changed since the early 1900's. We now have instant communications, instant money transfers and instant news coverage. So the surprise element is not quite as useful as it was back in the "old" days. Which sort of suggests that current users and or implementers of the "big stick" policy might want to think again.

Perhaps the correct question they should be asking themselves is: "Is this big stick really a big stick?" Every stick has two ends. Battleships can't sail without fuel and fuel has to be paid for. Now looking down the barrel of a sixteen-inch gun was a very good incentive to accept the currency of the owner of that barrel and needless to say the "big sticks" of the "old" days had no problem obtaining fuel. But is this the case today?

George W's problem, although he does not realize it yet, is that the key ingredient to his "let's invade the world" policy, which is the US dollar, has already invaded the world without his permission. Imagine that!

Some one should have told him about this "dollar invasion" and this significant error that has occurred within the "big stick" policy. In the original handbook of the "big stick" policy it clearly says: "send in the battle ships first, then follow it with the coin of the realm!"

Now the problem with this apparently unofficial dollar invasion of the rest of the planet is what George W does not quite understand. The fuel for his battleships is being paid for with borrowed money, borrowed from people who don't share his enthusiasm for the "big stick" policy formulated by his earlier predecessors. Which is a pity, as it gives George W a small problem. Should he succeed in annoying his lenders they may decide to sell the notes they hold which will weaken his currency and increase his fuel bill. No problem?

Well as long as there are other buyers for all these US dollar denominated IOU's, (the ones that are really nothing other than a promise to pay a promise to pay a promise), that could come on the market there is no problem. But if the buyers decide not to play then George W has a problem! A problem, which will get larger in tandem with the unwillingness of other parties desire to hold these IOU's.
A rapidly depreciating currency could be the result and given the speed at which news travels these days, that is a very difficult event to hide.

Now in the original handbook of Big Stick policy rule 2 clearly states: "make sure that you have an alternative form of payment" which of course, in the good old days was gold. If you were going to bribe a local ruler gold worked just fine, whereas paper currency usually was unacceptable. Now the question George W should be asking is: "Do I have any alternative forms of payment? Or will the rest of the world continue to accept my IOU's and refrain from redeeming them?"

Could it be that someone else, perhaps an investment banker type with a Wall Street address, masquerading as a secretary of something, has his hand on one end of the big stick? Rule 3 of the original Big Stick handbook clearly states: "Do not let investment bankers, especially J. Pierpont Morgan, any where near the big stick!"

Has George W read the original Big Stick handbook? We hope so! We also hope that the holders of all these US dollar denominated IOU's continue to be willing to hold them as they too have issued their own IOU's based upon the IOU's they already hold from the US. How would they redeem their own IOU's if they can't redeem the IOU's they hold as collateral? With difficulty one would imagine.

Now should this scenario begin to appear one would have to wonder about the investment communities willingness to continue to hold a potentially depreciating paper asset that is not redeemable for anything of alternative value and ask the question, what would happen to the price of the rogue alternative, the one which is referred to as the barbaric relic, gold?

No doubt the issuers of all these IOU's will attempt to allay the arising of any investment communities doubts about the redeem ability of said IOU's and it could result in a last ditch attempt to banish the rogue alternative by creating the perception that there is an endless supply, but George W would be wise to ensure that he has some gold somewhere, just in case.

So too should any astute investor that is holding IOU's that are not redeemable for anything other than more IOU's!


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

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  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
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