Thoughts on Markets

Saturday, May 17, 2008

Precious Metals vs. Unbacked Paper Currencies

The Kitco.com graphs of gold over the recent years is very interesting. They clearly show the long term progress of gold against the depreciating U.S. Dollar. The 1 Year Gold shows rather drastic drop in the price of gold from its march 18th high. However, as you progress to the 5 and 10 year graphs, you should find that the correction does not seem nearly as severe. It is important that you understand that gold is a longer term holding designed to preserve wealth.

Recall, too, that all precious metals retain their value over time against the unbacked paper "money" of all nations. These pretend monies are used to defraud the citizens of value. By inflating these currencies, at will, the citizens are are robbed of purchasing power, so the price of all goods and services on the market escalates as the supply of paper currencies increases. It is equivalent to a secret or hidden tax. More on this, below.



One should ask himself why governments and banks use the false or counterfeit currencies. First, both desire a monopoly on what is used as money in the market place. Second, they, particularly the banks desire a guaranteed source of perpetual profit. Third, the governments want more control over the people and their wealth. This is the case in every nation in our world. Let's examine these in more detail.

A monopoly on "money" can only be maintained when the government and central bank are the only entities which can produce the currency. Thus, governments by FIAT decree state on the currency: "This note is legal tender for all debts public and private." Certainly, by power and force of government, these are the currencies which must be used for all debts public and private. By the way, each of us should recognize that our Federal Reserve Note is actually a note. A note, in financial terms, is a debt. However, in the case of our individual notes, all have a payment schedule and stated rate of interest. Wouldn't it be nice if we could have a note on a new automobile without any payments or interest due. That is, in fact, what the Federal Reserve Note is.

Guaranteed perpetual profit is given to the central bank through the fractional banking system. The fractional banking system gives banks the opportunity of creating currency with every loan they issue. When deposits are made into each bank, only a portion of that deposit must be retained by the bank. For example; when a 16% reserve is required of the bank, for a $100 deposit, they must keep only $16 in reserve, and $84 is loaned out. The $84 dollars is then deposited in a bank, $13.44 is required for the reserve, and $76.50 can be loaned out. When all transactions with the original $100 deposit is considered, the banks will have created $525. Think about it, were the reserve requirement to be lowered to 10%, the banks would be able turn the $100 into $1000 creating an additional $900. "Where's beef?" Oops, I mean where's the profit? Well, the bank created dollars out of nothing, lent those dollars to individuals and businesses and charged them interest. What a deal! They have no cost and collect interest. That is perpetual profit until the whole house of cards falls.

Government control of citizens and businesses is exercised through selective taxation, subsidies to selected industries, and welfare. Given that government has the capability to arbitrarily chose rates of taxation and to levy taxes upon or favor by low taxation certain income level citizens and industries, they can direct individuals and businesses into certain areas to lower their taxation. Further, as is the case today with ethanol, they can encourage certain industries over others. The welfare systems can provide "benefits" to selected groups among the citizens. I suspect that special tax incentives, subsidies, and welfare could well be used to obtain votes in elections. Certainly, the opportunity is there for such activity.

Were governments to operate in accordance with the Word of the Sovereign Ruler of all nations, they would limit their scope of activity to protection of the life, liberty, and property of their citizens and businesses. They would not intervene in the market place, but would punish those who commit crimes in financial transactions. Thus, they would protect, not regulate and exercise ungodly control of markets. The bible clearly favors the foundations of a free market: private ownership of property, stable currency, limited government, and self-discipline exercised by citizens. Would that we would return the the limited government envisioned by our Constitution.

More on Monday. We will look to the manipulation of statistics that paper currencies place in the hands of governments and banks.

I urge you to keep a long term view of the precious metals as all paper currencies of the world are on a shaky, ungodly foundation which has definite cracks beginning to show.

Go and join in corporate worship of King Jesus and earnestly pray that He will intervene in the affairs of man and bring about a return to a more godly government in every nation of the world.

Best to each, Doug

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