Thoughts on Markets

Monday, May 19, 2008

Precious Metals vs. Unbacked Paper Currencies II

This is a continuation of the discussion from the previous post. It is important that all of us understand the impact on our lives of unbacked paper currencies. On the last post, the fractional banking system was discussed and it is hoped that each of you see the advantage to the banking industry. They issue unbacked currency with each loan they make. The currency costs them nothing and yet they required the borrower to repay the loan with interest. It is virtually a license to steal in violation of the Eighth Commandment: "Thou shalt not steal."

Today, it is important to see the impact of unbacked paper currencies on the statistics which the governments of the world publish. For example; let us consider the Gross National Product (GNP). This is sold as a measure of the value of all goods and services sold by the businesses within a nation. Of course, it is measured in the unbacked paper currency of that specific government. Here in America, the unit of measure would be dollars.

To understand the impact, let us consider the cost of gallon of milk. A gallon of milk now cost approximately $3.50. If the price of milk were to rise to $4.00, we would say that there was a price inflation in the cost of milk of 14.29%. Looking at the GDP, the milk component would show an increase of 14.29%. However, if over the same period of time, the supply of unbacked paper currency increased by 14.29%, the GDP would still show on the surface an increase of 14.29%. Upon closer examination, though the GDP did show a positive growth, one could see that the increase came, not as actual growth of GDP, but as a direct result of the increase in the supply of paper currency. Thus, we would have a false picture of prosperity due to the manipulation of the currency by the bank.

The bible constantly warns, as follows: "Ye shall do no unrighteousness in judgment, in meteyard, in weight, or in measure. Just balances, just weights, a just ephah, and a just hin, shall ye have: I am the Lord your God, which brought you our of the land of Egypt. Therefore shall ye observe all my statutes, and all my judgments, and do them: I am the Lord." (Lev. 19"35-37)

When the purchasing power of paper currencies is continually manipulated by adding or reducing the supply of the currencies, the result is unequal weights. The currency is unstable. Whereas, the word of God requires a stable currency. The advantages of a stable currency are many.

First, an individual is encouraged to save and be frugal, because he knows that the currency will earn a constant interest or dividend over time and increase his savings. Second, he can plan for the future based upon a currency of constant value. He can foresee to a good extent his future needs and build capital to meet these needs. This is particularly important for businesses. Third, the savings and investments made in accordance with plans for the future will be the source of capital for existing businesses to grow and for new businesses to start.

A stable currency is an important biblical foundation block for a free market which will encourage competition yielding ever better products in wider variety and at ever more reasonable prices. The successful manufacturers and businesses will continually have a greater demand for more workers at stable and increasing wages.

Looking at the precious metals this morning, we are seeing gold at $903.60 and silver at $16.92. They were up higher over night, but have dropped a bit since the markets opened in New York. The dollar is lower today. Both seem to be testing the possibility of moving higher. Remember that both are political metals. Therefore, central banks and governments detest the possibility the gold will become, once again, a monetary metal. They want the price to remain lower than the market would put it to maintain their monopoly on what the call money: in our case, the dollar.

Keep looking to King Jesus for His way and His peace in the face of all types of storms in our lives. Each challenge is a blessing, because it gives us the opportunity to grow more like Him.

Best to each, Doug

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