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Compounding to the Downside!
by Professor von Braun

August 2nd, 2008

We are currently witnessing the unraveling of the fiat monetary system, the one that began with the formation of the Federal Reserve in 1913 and was enhanced with President Roosevelt's confiscation of the capital of the American people in 1933, when gold ownership was made illegal. President Nixon's closing of the gold window in 1971 further unleashed the fiat system from any remaining constraints and what we have had since that time is a monetary system that is a pseudo monetary system.
How can you settle a debt with another debt? How can you settle any transaction when there is no definable form of settlement? What is the dollar actually worth? How can one measure one's wealth when it is priced in something that is an IOU nothing?
The great Ponzi scheme that has been foisted on the people of the world by various Central Banks, who by the way, should have known better, is over. No longer can they 'create' wealth by inflating the prices of non-productive assets such as real estate.
As it is said in the nursery rhyme: "Old mother Hubbard went to the cupboard and found that the cupboard was bare!" There is no capital left, and the savings of the people are no more, having been stolen in 1933, then continuously debased through to today, to the degree that there is nothing left to recapitalize the banking system.
The solution can not be provided by the problem and the problem is the fiat monetary system and the inherent weakness within that system is what is now being exposed. The capital is gone, it is exhausted and all the Sovereign Wealth Funds on the planet can not put Humpty Dumpty together again. Even the term 'Sovereign Wealth' is a misnomer, as there is neither a "sovereign" nor do they hold accumulated "wealth."  Rather what they do hold are debt instruments, by way of either US Treasuries or US mortgages, which are none other than an indirect tax on the American people.
We are being told that there is a credit contraction, one that will end 'shortly' ­ whenever that may be, but at the heart of what is unfolding is the monetary system itself and that will not be an easy fix.
To truly provide credit requires capital. Capital and productivity go together but the banking system, as it is today, does not support productivity. Inflating the purported value of non-productive assets by increasing the size of the mortgages attached to these non-productive assets is, as we are beginning to see, a recipe for financial disaster.
Any monetary system that excludes the settlement of a transaction with a neutral item such as the precious metals, is not a monetary system at all. If a transaction is not settled, it is not a transaction as you can not repay a debt with another debt! You can not have a 'balanced' balance sheet if the items on both sides of the balance sheet are debt instruments.
The very idea that a bank can make a loan to some entity and then call it an asset is absurd. It is a liability and if it is denominated in a fiat currency it can never be repaid. At best it can be transferred to another party for a larger 'amount' and kept on the books of the issuer.
What we are beginning to see now is the inability of Mr. Fiat to transfer the debt to another party, in part because there are no other 'parties' left. 
All the 'credit' which has been extended is now being seen for what it is. It never was credit per se, rather it was the creation of more debt, dependent upon its 'repayment' by the creation of even more debt by the issuers of that debt.
This has been described as the expansion of the banking system and was deemed to be a necessary component of a sound economy, but how can you have a 'sound' economy when the heart of the economy, the banking system itself, is dependent upon the issuing of more debt to save itself from its original folly, which is the creation of the debt in the first place, without the capital, by way of reserves, to replenish any losses that may arise?
Who is going to replace the tenants that have walked from their mortgage obligations? Who is going to become the issuer of another mortgage to any potential new tenants thereby providing a transfer of an item on somebody else's balance sheet?
Where is the required capital going to come from? If the majority of the people have no savings (that's capital), if there no longer is any equity left in the real estate, if there no longer is a banking system that has capital, then what happens next?

The 'problem' can not provide the solution! That's akin to pouring petrol on the fire.
The early warnings given by Thomas Jefferson, in relation to banking and central banking in particular, are now becoming factual.

Thomas Jefferson: "The central bank is an institution of the most deadly hostility existing against the principles and the form of OUR constitution. I am an enemy to all banks discounting bills or notes for anything but coin. If the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."

When the principle unit of account becomes unaccountable, which essentially is what a fiat system is, there is no way to measure it's true worth. When you have a situation involving something that can not be measured then it can not be held to account.
Counting IOU's and calling the results of that count 'capital' is a disaster awaiting to happen. And that may well be what is unfolding.

The Prof can be contacted by email at

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

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs

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