Michael Fitzsim...'s  Instablog

 

Gold is trading over $1200/oz. The Federal Reserve is holding Interest rates at 0% in an attempt to re-inflate the economy. President Obama is continuing and expanding the Bush administration’s policies of deficit spending, corporate bailouts, and war. What better time to review a book that explains it all and recommends a solution? Ron Paul’s book End the Fed does just that: abolish the Federal Reserve and go back to hard money based on the gold standard.

 

Paul’s book begins by explaining why all Americans should care and why abolishing the Federal Reserve is a good idea:

·        It would bring an end to dollar depreciation

·        It would prevent the funding of continual unnecessary wars

·        It would enable real freedom and protect our liberties

·        It would stop the skyrocketing growth of debt

·        It would force government to live within its means

·        It would end the ability of the Fed (and the government) to control the people through a monopoly on money and credit

·        It would stop the Fed from serving the interest of the elite (executives of AIG, Goldman Sachs, etc.) while enacting a sinister tax on the middle class by diluting the value of the dollars they save.

 

Paul explains how Ben Bernanke and the Fed can print trillions of dollars and distribute them to its cronies with absolute no oversight by Congress. It is not only unconstitutional, it’s immoral.

 

          Paul then gives a very interesting historical perspective on the history of the Federal Reserve and its record: a U.S. dollar today that is worth $0.05 compared to its value when the Federal Reserve was created. The Federal Reserve’s policies are a form of financial socialism for the rich and powerful.

          A discussion follows about Paul’s childhood experiences with money, his main influences (Ludwig von Mises and Murray Rothbard among others) and Austrian economics. Paul explains how the Fed’s ability to print money out of thin air has enabled wars and empire building. If the government had to pay for these wars by taxing its citizens and living within its means, Paul doubts the American people would be so willing to support unnecessary, unproductive, and economically corrosive wars.

          Paul points out that after every major crisis, be it America’s many wars, 9-11, the dot-com bubble, or the meltdown in 2008, the response has always been more monetary expansion and more power to the Federal Reserve. He contends that it is impossible to solve the economic and political problems by turning to the unconstitutional institution that is most responsible for creating all the problems in the first place.

          How ironic it is that a supposedly “free market capitalistic” country like the U.S. has a central bank setting interest rates? Paul contends this is a form of price-fixing and central economic planning. Only the Federal Reserve can create new money out of thin air, inflate the currency, in complete secrecy, and totally without oversight or supervision. Indeed, Karl Marx’s Fifth Plank of the Communist Manifesto states:

 

          “Centralization of credit in the banks of the State, by means of a national bank with state capital and an exclusive monopoly.”

 

In other words, authoritarian rule is enabled by control of money by an institution like the Federal Reserve. Lenin was reported to have said the best way to destroy capitalism is to debauch the currency. Further, the Federal Reserve corrupts politicians by allowing them to substantiate themselves (and their egos) with unbridled spending, bribery, and immorality. Who can forget December 16, 2008 when Bush rationalized his bailout plan for corporations and their executives by proudly announcing “I have abandoned free market principles to save the free market system.” Paul says this is astounding and preposterous! I say we call it what it is: fascism. And the Federal Reserve enables it and supports it, all in complete secrecy and with no Congressional oversight and no transparency.

          The U.S. Constitution is clear on the matter. Article I, Section 10: “No state shall …. make anything but gold and silver coin a tender in payment of debts.” Paper money is therefore unconstitutional. Period. Further, the Constitution is quiet on the matter of a central bank. However, the Tenth Amendment states: if a power is not “delegated to the United States by the Constitution,” it doesn’t exist. Since the Federal Reserve is not mentioned, logically its existence and power is unconstitutional. Even if it was, it still could not legally repeal the legal mandate for gold and silver coins. There is nothing “Federal” about the “Federal Reserve”, and there is surely nothing in “Reserve”. The term “Federal Reserve” is an oxymoron. Paul also notes how the Supreme Court has consistently bowed to political and corporate pressure by misinterpreting the Constitution on this very straightforward and important issue. Power corrupts. Absolute power corrupts absolutely and the Federal Reserve has absolute power. Is it any wonder that Greenspan and Bernanke are men with extraordinary egos? They are more powerful than the elected President.

 

          Paul explains how and why gold was chosen by men (not governments) to be money because it possessed all the qualities desired to enable commerce and trade. Gold was naturally selected by the people and was used in trade exchange for more than 6,000 years. In 4000 B.C. the Egyptians were using gold bars as money. The Byzantine Empire thrived for six centuries on a gold standard. Then, Nicephorous III Botaniates reduced the amount of gold in then the world’s most used coin in order to fight a war with the Turks. The war was lost and so were the Byzantine Empire and its currency. Historically, fiat currencies (like the paper U.S. dollar) have always failed as money. Gold has always prevailed.

          Paul then presents several cases to support a gold money standard:

·        the philosophical case (morality and the moral hazard of the Fed)

·        the constitutional case

·        the economic case

·        the libertarian case (why real money protects freedom and liberty)

 

Each case alone is very compelling. Taken together, how can one not agree that the Federal Reserve is simply a dysfunctional, unconstitutional, and dangerous entity which merely serves a small group of highly powerful, unsupervised, and very secretive select few at the expense of the middle class?

          Unfortunately, the last chapter of the book, “The Way Out” is too short. To abolish the Federal Reserve in today’s world will be challenging. Since the U.S. dollar is the world’s reserve currency (at least for now…), transitioning to a monetary standard backed by gold and silver will be a delicate maneuver, although it must be done to preserve American liberty and freedom and prevent authoritarian rule. Americans wealth must be fairly preserved during the transition and Paul is light on the details.

          Paul may have also pointed how America’s addiction to foreign oil has exacerbated the problems of the Federal Reserve. The two major financial crises (now and in the late 70’s early 80’s) were preceded by high oil prices that strained the trade deficit and therefore required more money being printed, inflation, and U.S. dollar depreciation.

I’m also surprised Paul didn’t focus more on the major individual players in this fiat money façade. Paul adequately explains how Greenspan and Bernanke are completely over their heads and incompetent. He also correctly identifies how promoting Geitner to Secretary of the Treasury after Geitner was wrong on everything for the previous15 years proves the system is totally corrupt. However, Paul doesn’t touch on an obvious coincidence: it seems a very small group of people are over represented not only in the making U.S. economic and monetary “policy”, but also appear to be over represented in benefitting greatly from these same policies. Greenspan, Bernanke, Milken, Madoff, Shapiro(head of the SEC and “dear friend” of Madoff), Greenberg(AIG), Benmosche (AIG), Lloyd “doing God’s work” Blankfein (CEO, Goldman Sachs), Gensler (CFTC), Feinberg (the so-called “pay czar”), and many others. Is this mere coincidence or is there something more sinister afoot here? How ironic that the fascist policies now dominating the U.S. economic landscape are apparently being developed by people who should be most familiar with Nazi fascism and its dire consequences? It’s very hard to understand.

In conclusion, Paul makes a clear case that the U.S. must abolish the Federal Reserve and go back to money standards based on gold and silver. For those who agree, you must contact your elected officials and insist they support Paul’s legislation to audit the Federal Reserve. This is a first step toward the transparency so desperately needed: how much money is being created, who gets it, and why? Without this transparency, the great American democratic experience is doomed to failure. The time is ripe for change as the American people are sick and tired of a dysfunctional government, a dysfunctional economy, and seeing their hard earned dollars being devalued and eaten up by inflation. On the other hand, shinning a light on the Federal Reserve’s inner workings will bring about reform and a shift to real hard currency money. Paul and his supporters should work harder on explaining and publishing exactly how this transition should occur in order to insure a smooth transition. It will certainly be a challenge given today’s realities. However, if Paul is going to promote the cause of “Ending the Fed” (which I certainly agree with), he needs to do a better job of outlining and explaining exactly how to go about it without exacerbating the current economic turmoil. Regardless, this is a fascinating and very informative book. I highly suggest any patriotic American read Ron Paul’s End the Fed. He will certainly get my vote the next time he runs for President!

Update: Audit the Fed – HR 1207 and S 604 has
317 Co-sponsors in the House
30 Co-sponsors in the Senate

This is great news: House and Senate members are (finally) paying attention!


Disclosure: Long gold.

Disclosure: Long Gold

I'm constantly amazed at the inability of US economic and financial "expert policymakers" to understand the true reason behind gold's big move: OIL. The inflation adjusted high for gold was set in January 1980 at $2,290 an ounce. It is  not a coincidence this high was set just after the oil crisis of the 1970's. The US was lucky then: it had Paul Volker at the Federal Reserve and it had the oil reserves of Alaska and the North Sea coming online. The combination of Volker's high interest rates and new domestic oil supplies saved the day. Unfortunately, neither of these two solutions will bail America out this time. Once again, as history repeats itself, gold prices are taking off after the 2008 oil crisis which saw oil prices of $145/barrel. Why is it so hard for the Harvard B-School "experts" and the pundits on CNBC pundit to understand this very simple cause and effect?

US policymakers seem intent on devaluing the US dollar to improve the trade deficit. I'm just an engineer, but I wish one of these expert economists would explain to me how this currency devaluation "strategy" will work since:

• oil is the biggest component of the US trade deficit
• oil is priced in US dollars and therefore
• the price of oil rises as the value of the dollar falls!

This is so obvious, yet the "experts" at the Federal Reserve, Treasury, and in the White House seem completely oblivious to this fundamental and inconvenient truth. Either they are oblivious, or, there are conspiracies afoot to ignore the truth about the country's dependence on foreign oil. Is this because they're in the pockets of big oil? Because they want to make the military happy by fighting foreign oil wars? Both? Your guess is as good as mine. Regardless, not solving its dependence on foreign oil is destroying the America's currency and economy. If not solved, it will eventually destroy its Democracy as well.

Brazil suffered devastating economic hardships in the 1970's as a result of its dependence on foreign oil. Their oil bill doubled within a year and set off uncontrolled inflation, which reached 110% in 1980. They saw a sharp increase in short term foreign dollar denominated debt to pay for the oil (sound familiar?). This led to 15 years of economic instability. Contrary to the US, Brazil identified the problem, attacked the problem, and solved the problem. The country adopted natural gas transportation and leveraged its ethanol capabilities. Brazil reformed it banking system and passed balanced budget policies. Today, Brazil is self sufficient with oil and will soon become a major oil exporter. The real currency is strong, and the country was one of the last in and first out of the current economic crisis. Why is it that Brazilian policymakers could identify and correct their oil problem but America, with all its Ivy League economists, cannot?

Gold is up $19 this morning, no doubt in part due to Iranian war games being held to show the extent to which they will try to protect their nuclear infrastructure. Faced with US forces on its western border (Iraq) and on its eastern border (Afghanistan), oil and natural gas rich Iran is clinging to their nuclear infrastructure in a last ditch effort to protect themselves from the fate of their neighbors. If protecting their homeland is the goal, Iran's rhetoric on the destruction of Israel was akin to shooting themselves in the foot. While Israel may or may not have the capability to take out Iranian nuclear facilities, it is clear the US must get involved if there is any hope to protect the strategic Straits of Hormuz through which much of the world's oil flows. However, it is not a given that the US can prevent Iran from bottling up the Straits. What will happen to oil and gold prices if this conflict takes place? What will be the corresponding impact on the US economy? For a country that uses 25% of the world's entire oil supply, and imports 65% of that, a war in Iran cannot be a favorable development.

Meantime, US policymakers continue to print money as fast as possible thinking they can solve a commodity problem (oil) with monetary and fiscal hijinx. It cannot be done! Officials have high sounding debates about whether or not the biggest threat is inflation or deflation. Who cares! The biggest threat is America's reliance on foreign oil! It's the oil stupid! The U.S. imported 357,000,000 barrels of oil in September, 2009 sending $24,700,000,000 overseas.  This continues...month after month, year after year. By God, when are US policymakers going to do something about this?

America is in serious trouble. Following George Bush, who I believe was the worst President in US history, we quite likely have a candidate for the 2nd worst President in Barack Obama. Bush was obviously tied at the hip to oil power and led us into the wrong-headed war in Iraq. While getting his hands on oil reserves might seem strategically logical for a country dependent on it, it took millions of barrels of oil off the market at precisely the same time that Chinese oil demand was skyrocketing. The result, in addition to supply demand problems, was an additional geopolitical risk premium being added to each barrel of oil and wah-lah! We have $145/barrel oil and record oil company profits. Too bad the rest of the American economy had to pay the price. Bush's only attempt at energy "policy" was the idiotic ethanol mandates (mostly from made from corn) while simultaneously slapping fees on imported Brazilian ethanol which is made more sanely from sugar cane. The ethanol mandates only exacerbated the country's inflation problem by causing massive dislocations in the food chain. Enter Obama and Energy Secretary Chu. Both are in love of the oxymoronic myth of "clean coal" and neither has done anything to reduce foreign oil imports. Obama has never uttered the words "natural gas transportation" and Energy Secretary Chu should give back his Nobel prize after famously being quoted as saying he is "agnostic" about natural gas transportation. How on Earth can the US solve its energy and economic problems when the two most important energy policy decision makers are "agnostic" about natural gas but are in love with the myth of "clean coal"?

Adding to US policy problems in the executive and energy departments is the worst Federal Reserve chairman in US history (Greenspan) being followed by a candidate for the 2nd worst Federal Reserve chairman (Bernanke). One can only hope that Ron Paul is successful in opening up the secrecy and publicizing just how bad Federal Reserve policy is and who is profiting the most from it. Let me give you a clue: it is NOT middle class America. Like Greenspan, Bernanke too never speaks about the need to solve the foreign oil problem in order to bolster US financial health. What kind of fiscal and monetary credibility do these officials have when they never push strongly to solve the foreign oil crisis which is at the root of US economic decline?

The only way to solve America's economic problems is to reduce foreign oil imports and rely on domestic energy sources. The only way to do this is by adopting and implementing a strategic long-term comprehensive energy policy like this one: http://thefitzman.blogspot.com/2008/08/strategic-long-term-comprehensive-us.html. The US consumes 70% of its oil in the transportation sector. Logically, the only way to reduce foreign oil imports is to reduce oil (gasoline) usage in the transportation sector. The only domestic fuel capable of doing that is natural gas. American's could easily be refueling NGVs in their home garages while they sleep at need with clean, cheap, and abundant natural gas. All we need are policymakers to stop ignoring the foreign oil crisis that is staring them right in the face every day. Perhaps President Obama should invite Brazilian President Lula to the White House and get a friggin clue. You'd have to live on the moon to not realize the US (and the world) is awash with abundant, clean, and cheap natural gas!

Meantime, what can Americans do to protect themselves from the foreign oil crisis and a government that has declared war on it citizens and is intent on devaluing the dollar? Buy gold and silver bullion. Buy oil stocks such as Petrobras (PBR), Exxon Mobile (XOM), ConocoPhilips (COP), Chevron (CVX), BP, and StatOil (STO). The foreign oil companies are paying good dividends and can provide more upside due to US dollar weakness. Good luck with your investing, and if you care, contact your local Congressman or Congresswoman and implore them to support the Natural Gas Act and that you want them to adopt and support strong natural gas transportation policies. Otherwise, the American oil crisis will continue to push gold higher and higher. So hold on to your gold and don't sell it until you see the US adopt natural gas transportation. If that day every comes, sell your gold because the US economy will thrive, inflation will fall, and balanced budgets will be possible. Natural gas transportation could usher in an era of unfettered economic prosperity that few people today can even imagine.

The author owns gold and oil stocks.

in this article:

http://www.theglobeandmail.com/blogs/jeff-rubins-smaller-world/get-ready-for-triple-digit-oil-again-soon/article1343977/

i like how rubin thinks wrt oil, however, there is no reason why tankers can't run on natural gas engines, they just haven't been up to now. however, the LNG tankers XOM designed to ship qatari LNG run their engines on nat gas.