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What came first?
by Professor von Braun
March 30th, 2006
In this technological and electronic age of instant everythings we tend to forget that fiat currencies are a product of the banking system and are a means to facilitate trade, trade in commodities in particular.
The commodities came first and for many years currencies were commodity-backed, backed by gold and/or silver, and redeemable for gold and silver.
For some time now we have had a monetary system that is backed by nothing other than a promise to pay a promise. So far it appears to have worked and peoples 'wealth' is calculated in the coin of the realm, in most cases, the US dollar. This 'wealth' consists of real estate, stocks and bonds, and ownership of tangibles or hard assets has been discouraged by the banking/political system for some time.
Currently we are seeing commodities at or near all-time price levels in terms of the price paid. Numerous 'reasons' such as economic demand, shortages in supply, China, the weather, etc., are being given by the pundits as to why this is so.
What we are now seeing is a diversification by the 'smart' money people, away from paper assets into hard assets -- a back to the basic's move if you wish, whereby the risk of a debacle in the banking system is being recognized and reduced in part by a move into the more traditional hard assets. The investing public, it seems, are oblivious to this event -- having been distracted by cell phones, the internet, CNBC, rising real estate prices, promises of pensions and medical care, and a complete lack of understanding of what a fiat monetary system actually is.
Meanwhile the Central Bankers, all whom have signed on to the idea of print, print, print are powerless when it comes to rectifying the situation that they are now facing. Having created a banking system based or built on the production of hard assets, then removing the promise to redeem in gold aspect, the only remaining option is to inflate or die. And that option is becoming increasingly over used.
Even the idea of diversification is perhaps better described as having no choice other than to secure commodities, since there is not a viable monetary system anywhere on this planet that offers an alternative to the dollar.
Rising commodity prices are signaling both the recognition of the inherent weakness of paper currencies and the urgent need to do something about the situation; in this case, an out of control banking system that does nothing other than inflate and destroy real wealth.
Being concerned about interest rates, or collapsing real estate prices, or declining stock markets, or a dollar collapse is in this writer's view a red herring.
The real game that is now being played is "What will you have left when it's all over?" It better be something tangible and non-perishable, something that some other party actually has a need for. And that something is commodities. The purchase of precious metals, both gold and silver has been (and still is) recommended for some time with the proviso that one takes delivery. Owning commodities (with possession) removes the inherent liability connected to paper assets. Various investment fads may come and go but commodities are the base upon which industrial production is built. Regardless of what is being produced, a metal component is required.
Promises to pay promises to pay, often referred to as non-redeemable IOU's, are not going to help your portfolio of assets, especially when there is no demand for them.
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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