How Your Wealth is Under Attack

“It finds that the IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak.  The banner message was one of continued optimism after more than a decade of benign economic conditions and low macroeconomic volatility.  The IMF, in its bilateral surveillance of the United States and the United Kingdom, largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth.  The belief that financial markets were fundamentally sound and that large financial institutions could weather any likely problem lessened the sense of urgency to address risks or to worry about possible severe adverse outcomes.  Surveillance also paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies.”

Those words come from the Independent Evaluation Office of the International Monetary Fund (IMF).

It’s contained in a report released a month ago titled, “IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07”.

The report also states:

“The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink… a general mindset that a major financial crisis in large advanced economies was unlikely… Weak internal governance, lack of incentives to work across units and raise contrarian views… also played an important role, while political constraints may have also had some impact.”

Well that’s hardly surprising.  We could have told them that without writing a fifty-nine page report.

But despite the IMF’s failure to foresee the economic problems, in April 2009 the G20 agreed to give it even more money… to not see the next problem.

As the British Broadcasting Corporation (BBC) reported at the time:

“To help countries with troubled economies, the resources available to the International Monetary Fund (IMF) will be tripled to $750bn.”

So there’s the punishment for failing to alert the markets to the collapse of the global economy.  Have another $750 billion.  And keep up the good work… by not saying anything next time either.

Let’s be honest.  That’s what the IMF cash git is.  A payoff… hush money.

The last thing politicians and central bankers want is for an organisation they fund with taxpayers’ money, to point out flaws in the economy and banking system.

Because if it did, it would make it harder to justify their inflationary policies.

And it would also reveal the real solution.  The solution they don’t want anyone to know about – free banking.  Because with a free banking system, there’s no government interference, there are no central banks, and there’s no backstop or bailout for private retail banks.

Bankers would shudder at the thought.

Now, by free banking I don’t mean free bank accounts for everyone.  And I most certainly don’t mean a government operated “People’s Bank”.

That type of policy can only make the problem worse than it is.

No.  What’s needed is a competitive banking system.

A system that’s free from political and central bank manipulation.

A banking system that does little more than act as a warehouse for your savings.

One that provides financing to businesses and individuals without the need to fraudulently create money from thin air.

The only way this could happen is with less government intervention, not more.  So the chances of it happening without a major economic revolution are pretty slim.

The negative impact of government involvement in banking and the money supply is highlighted in Murray N. Rothbard’s excellent “A History of Money and Banking in the United States: The Colonial Era to World War II”.

You can buy the hardback copy on Amazon (as your editor did), or if you’ve got more sense you can click here and download it to an e-reader for nothing!

If only your editor had more sense!  But the hardback version is nice.

Anyhoo, we’ve only just started to tuck into it.  But already we’ve read a few treats that highlight the problems caused by government manipulation of the money supply.

Take this for starters.  It’s a perfect example of why even a government mandated national currency isn’t required.  As long as you’re using a currency that has real value:

“It is important to realize that gold and silver are international commodities, and that therefore, when not prohibited by government decree, foreign coins are perfectly capable of serving as standard moneys.  There is no need to have a national government monopolize the coinage, and indeed foreign gold and silver coins constituted much of the coinage in the United States until Congress outlawed the use of foreign coins in 1857.”

Article 1, Section 8 of the US Constitution even recognises foreign coins had an important part to play in the fledgling republic.  Although the framers of the Constitution undoubtedly made the mistake of giving the new Congress powers:

“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”

But even more important is the historical proof that politicians and bankers always meddle with the value of money.  And they’ll always think they can get away with it.

It’s proof that today’s politicians and central bankers are doing nothing different to the wigged and powdered gentlemen of two centuries ago.  Read the following and see if it rings any bells – apologies in advance for the long extract:

“Massachusetts was accustomed to launching plunder expeditions against the prosperous French colony of Quebec.  Generally the expeditions were successful, and would return to Boston, sell their booty, and pay off the soldiers with the proceeds.  This time, however, the expedition was beaten back decisively, and the soldiers returned to Boston in ill humor, grumbling for their pay.  Discontented soldiers are ripe for mutiny, so the Massachusetts government looked around in concern for a way to pay the soldiers.  It tried to borrow £3,000-£4,000 from Boston merchants, but evidently the Massachusetts credit rating was not the best.  Finally, Massachusetts decided in December 1690 to print £7,000 in paper notes and to use them to pay the soldiers.  Suspecting that the public would not accept irredeemable paper, the government made a twofold pledge when it issued the notes: that it would redeem them in gold or silver out of tax revenue in a few years and that absolutely no further paper notes would be issued… The issue limit disappeared in a few months, and all the bills continued unredeemed for nearly 40 years.  As early as February 1691, the Massachusetts government proclaimed that its issue had fallen ‘far short’ and so it proceeded to emit £40,000 of new money to repay all of its outstanding debt, again pledging falsely that this would be the absolute final note issue.”

There you have it.  Hopefully you’ll agree it was worth it.

The upshot is that prices soared and the paper money became almost worthless.

But, as is always the case with inflation, not everyone loses out.  Those left holding the worthless bits of paper did poorly.  But, as Rothbard notes:

“[S]ince the paper was issued to finance government expenditures and pay public debts, the government, not the public, benefited from the fiat issue.”

In other words, the government was paying its bills with paper money it was deliberately devaluing.  The government was clearing the slate with creditors, but doing so with devalued paper money.

Reading through the long quote above, you should be able to draw plenty of parallels to US Federal Reserve chairman Ben Bernanke and his money-printing programme.

The promise to redeem the paper notes is broadly the same as the Fed’s current bond buying programme.  Investors who buy bonds from the US government have the safety net of knowing the Fed is standing ready to buy $600 billion worth of bonds with freshly printed money.

The trouble is, between buying the bonds from the government and getting paper money back from the Fed – redeeming the bonds, the value of those invested dollars has diminished… thanks to the creation of new dollars.

Once governments and central bankers get into a hole of issuing more debt and more new money to pay off old debt liabilities, it’s hard to get out.

That’s why they don’t bother trying.  Instead they dig deeper, hoping if they push the problem out further into the future someone else will deal with the it.

But, as Rothbard says, the decline into an inflationary blackhole doesn’t have to take long.  In a different attempt at a fiat currency, the US Congress began issuing paper money:

“The issue of this fiat ‘Continental’ paper rapidly escalated over the next few years.  Congress issued $6 million in 1775, $19 million in 1776, $13 million in 1777, $64 million in 1778, and $125 million in 1779.”

He goes on:

“The result was, as could be expected, a rapid price inflation in terms of the paper notes… By the spring of 1781, the Continentals were virtually worthless, exchanging on the market at 168 paper dollars to one dollar in specie.  This collapse of the Continental currency gave rise to the phrase, ‘not worth a Continental.’”

So, at the beginning of the US Revolution, the money supply was just $12 million.  Six years later it was over $225 million – about 90% of it backed by nothing more than a government promise that the paper money would retain its value.

As usual, the government broke its promise.  You would have needed 168 paper Continental dollars to get one silver dollar in return.  Yet just five years before the exchange rate was one-for-one.

If you’d held on to silver dollars during that time you would have been fine.

That’s how inflationary monetary policies change the value of the dollar in your pocket.  And it’s been going on in Australia and elsewhere for at least the last forty years.

And sadly the devaluation continues today.  Perhaps at a much faster pace than before thanks to US and European money-printing.

But that’s not all, unfunded government liabilities, especially in the US – but here too – will ensure governments and central bankers need to increase the money supply by many times over the next twenty years.

Not that they’ll blatantly admit it.  They’ll do it under the disguise of supporting economic growth and financial stability.  In reality it’s all about pushing the problem out to the future while at the same time destroying your wealth.

And of course, lining the pockets of the politicians and bankers who get their hands on the newly printed money first.

But not only that, the destruction of personal wealth has the feedback effect of making individuals even more reliant on government support.  Support that no government can afford.

The moral of the story is that protection of your assets and wealth is just as important as accumulating new assets and wealth.

Because every day central bankers and governments – despite their cozy exterior, [Ed note: cue tears Julia and Tony] – are working against you to destroy your wealth while lining their own pockets…

You’ve been warned, so do something about it and protect your wealth.
Regards,

Kris Sayce
for Money Morning Australia

Tagged as: bank, coin, economy, global, government, imf, inflation, International Monetary Fund, money