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Through the Looking Glass?
by Professor von Braun

August 23rd, 2008

The financial markets appear to be imploding and we hear that rescue plans and bail outs are the order of the day. But do we know exactly what is the problem?

Let's start with mortgages, credit markets and house prices, along with Fannie and Freddie. In addition, one needs to remember that the word 'reserve' and the word 'capital' are associated with something that implies not being a liability. Debt, regardless of who issues it, is a liability to both the issuer and the holder of the note.

The US banking system has little by way of reserves and is fast running out of capital, with little prospect of being able to raise more. The sovereign wealth funds have been bitten once already and are now 'twice' shy!

The mule that has been the backbone of the banking system, the housing market, is in serious trouble and attempts that have been made to-date to fix the problem are not working, nor will they work until the provider of the solution figures out what exactly the problem is.

The real issue is the fiat monetary system, the one which was foisted on the American public by the quiet introduction of the Federal Reserve Act in 1913. The confiscation of gold by President Roosevelt in 1933 removed gold from both the banking system and private ownership and removed the necessary function of settlement. How can you settle a debt with a piece of paper that has no inherent value attached to it?

In 1971 President Nixon closed the gold window, effectively derailing the Bretton Woods agreement reached in 1944. This move effectively removed even the concept of settlement among Central Banks of various countries.

The non-redeemable currency concept was, over the following 20 years, adopted by all central banks on a worldwide basis, with apparently little regard for the inherent flaw contained within the fiat system.

Essentially the fiat monetary system is a financial bubble machine, one that can only continue as long as it is inflating asset values -- assets that it has deemed to be worthy of debt -- and once the debt has been issued, since settlement is not a requirement, it must be reissued again and again. Real estate, both residential and commercial, are non-productive assets and the banking industry has, since 1971 been focused on inflating the value of non-productive assets to maintain the appearance of making a profit.

The consumer, the wage earner, the payer of the mortgages, has been increasingly utilized as the provider of a return to the mortgage industry by playing the home ownership game, quite willingly one might add.

Bankers and politicians have become very skillful at dissociating key words from their original meanings and replacing them with wonderful concepts that disguise the true meaning of what the word originally meant.

Take the term credit card for instance. A credit card is a generator of debt and has nothing to do with credit. Home ownership has nothing to do with actually owning a home, rather it has every thing to do with assisting in making an apparent profit for a bank. The word profit used to mean providing fresh capital, which was distributed to shareholders as a return on their investment of capital in an entity that then proceeded to make a profit.

It seems that both the banking industry and politicians, the people elected to public office, supposedly to protect the people from unsound banking practices, have been working together, promoting the misuse of the English language when it comes to financial terms. The net result of this is the financial debacle that has appeared as a result of unregulated lending practices, aided and supported by those who should have known better.

Fannie and Freddie hold approximately 50% of all mortgages issued in the USA and they are insolvent. They also have been selling foreclosed houses for 90% less than what they sold for 2 to 3 years ago. House prices are falling, new mortgages are difficult to obtain, and the largest holders of these mortgages are in the process of destroying the value of the other 50% of the mortgages they don't own. In addition to that unfolding debacle many of the other issuers of mortgages also own Fannie and Freddie paper by way of either 'preferred' shares or debt instruments which are losing value.

Now the housing debacle needs to be recognized for what it is, a banking debacle having its origins from within the fiat monetary system itself. How is it possible to fix this problem? Basically it isn't possible. What is required is a major clean-out of all debt instruments and a return to the settlement of all transactions after 37 years without it.

This will not happen overnight, and much hardship lies ahead. All issuers of debt instruments are suspect, mainly because settlement was not taken into account and there is no means for settlement to take place. All holders of these debt instruments can expect to receive nothing in return -- absolutely nothing!

Banks will fail and estimates of these coming failures made to-date are meaningless. People talk about strong banks being able to take over weaker ones and that is pointless, simply because not all the providers of the mortgage payment will be able to pay. Why would you want to invest in something that is losing value, value that is meaningless since it is merely an appearance generated by the fiat system, which itself is in trouble since it is the cause of the apparent increased value?

Nobody has any real capital and without capital the fiat game can not be restarted. President Roosevelt took care of that in 1933 when he confiscated the citizens wealth. That was the turning point that made US citizens slaves of the fiat banking system, dependant upon IOU's for payment and for their future 'capital' requirements.

Destroying the credit markets via unsound lending practices has essentially bought the fiat monetary game to a halt.

The Prof can be contacted by email at

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

Return to the The Gilded Opinion Index Page

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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