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Why Does Ron Paul Think Bitcoin Does Not Fit The Definition Of Money?

27 Apr

Answer by Ron Paul, Former Congressman from Texas, on Quora,

Bitcoin is a very interesting subject because for many years in Congress, I was a champion of legalizing competition in currencies.

We have a terrible monetary system today. We have a government that purposely counterfeits and debases the currencies and I believe that the alternative would be a competition. That means that anything that wants to substitute for the American dollar should be permitted. There should be no prohibitions; there should not be a monopoly and a cartel running our monetary system because it so often benefits the privileged few. We certainly saw this in the bailing out of the financial system where the wealthy bankers got bailed out it in this recent and severe recession. I am a strong believer in competition. Bitcoin is an introduction to that.

Though I don’t personally believe that Bitcoin is true money, it should be perfectly legal and there should be no restrictions on it, there should be no taxes on it. The people who operate Bitcoin would, of course, be prohibited from committing fraud but the people should be able to have competition whether it is a basket of commodities or crypto-currencies – it should be perfectly legal. For this to operate, we need to have freedom from government intervention when it comes to the Internet. I am concerned that the government ultimately wants to curtail the Internet and there have been attempts to do so.

The internet is the salvation for those of us who believe in liberty because it is an alternative way of getting around the system not only in the spreading of our ideas in this instance but in in terms of getting around the monetary system on the whole if they do permit crypto-currencies and other forms of transactions. So, this is something that we should all be concerned about whether we endorse it or not.

What we should all argue for is the use of freedom rather than having a monetary system with regulation domination that is run by a cartel and the special interests – that is the kind of system we have today. We want a system that truly challenges the government in their ability to take care of the very wealthy at the expense of the middle class and the poor.

This question originally appeared on Quora: Why does Ron Paul think Bitcoin does not fit the definition of money?

A Sunny Place for your Money

26 Jan

January 21, 2014

Grand Cayman: In 1503, when Christopher Columbus discovered this remote island group between Jamaica and Mexico’s Yucatan, its only inhabitants were crocodiles, turtles, iguana and insects. He named it Las Tortugas.

It didn’t take long for Tortugas to become the most notorious pirate’s lair of the West Indies from where they preyed on Spanish treasure fleets sailing from Panama to Cuba – the legendary sea route known as the Spanish Main.

Sir Francis Drake showed up here in 1586 leading a fleet of 23 privateers (government-sanctioned pirates) preying on Spanish merchantmen. Four years later, Tortuga became the British colony of Cayman and so it has remained ever since.

When I first visited Cayman in 1970, it had only 10,000 inhabitants. There was one modest hotel for skin divers, the Galleon Beach. Dense storm clouds of bloodthirsty mosquitos made it impossible to go out of the hotel after dusk. Anyone who did so without a DDT smoke pot would be eaten alive.

Two things happened to change Cayman from insect hell to the world’s second most important tax haven after Switzerland, and the fifth largest banking center.

First, an intense mosquito control campaign and swamp drainage killed most of the island’s insects. Second, the British Crown colony adopted a no tax policy and removed any restraints on the flow of funds.

The New York and London principals of the West Indies port, land and shipping group for which I was working at the time sent me to Cayman to open up banks. I chartered three, including my favorite brainchild, the German-Atlantic Bank.

Would that I had stayed in the banking business. My principals had remarkable foresight. Forty-four years later, Cayman hosts almost 300 banks, insurance firms of every type, and over 10,000 hedge funds managing some $36 billion in funds, as well as registries for ships and aircraft.

The population has grown to 56,000, nearly a third of whom are expatriate financial executives. The inflow of bank business has allowed life without personal taxes and a per capita income of $47,000, giving Cayman the highest living standard in the West Indies. Over 50% of government revenue comes from the finance industry.

With its azure waters, beautiful beaches, fine hotels, well-regarded restaurants, highly developed communications and public infrastructure, Cayman is a paradise for tourists and finance.

By contrast, tax collectors everywhere hate Cayman.

The island’s ultra discreet banks are awash with hot money, particularly from Russia. In fact, almost every major business deal in Russia is run through either Cayman, Switzerland, or Cyprus (though it’s gone bust). This island is a world center for legitimate business but also financial hanky-panky and shielding money from taxes, angry ex-wives and lawsuits.

What makes Cayman so attractive is that it remains a British colony, meaning no revolutions or coups by wild-eyed fanatics. The island offers still largely impenetrable secrecy and a safe place for money. And, to quote Somerset Maugham’s wonderful description of Monaco, “a sunny place for shady people.”

Like London, Cayman pretends to be pukka British and totally legit, but not far behind the scenes it’s as rollicking a pirate stronghold as Tortuga and Jamaica’s Port Royal in the days of the famed buccaneer, Henry Morgan. Except that today’s West Indies pirates are called bankers and hedge fund managers and wear striped shirts and suspenders instead of bandanas and eye patches. Cell phones have replaces cutlasses.

But Cayman, like other tax havens, is now under heavy fire from abroad. Last year, President Barack Obama singled out Cayman as a major financial malefactor. Revenue hungry governments across the globe are closing in on Cayman.

The European Union, of which Britain pretends on occasion to be a member, is beating the war drums over Cayman’s tax haven paradise, but Her Brittanic Majesty’s government refuses to extend EU law to Cayman. Some gestures to control the flow of hot money are being made, but Cayman remains open for business at a time when many other tax havens are being slowly shut down.

Cayman has been a brilliant success story. Columbus and Drake would be proud. What a pity Cayman’s model was not emulated by Jamaica, which is near national bankruptcy and suffering 50% unemployment.

 

The Best of Eric Margolis

Questions About Bitcoin, Alternative Investing Lead to Freedom Fund

19 Dec

Published by The Daily Bell – December 09 2013

Bitcoins: A Fully-Compliant Currency The Government Can Love … All of bitcoin’s benefits to the establishment revolve around its blockchain. In simple terms, a blockchain is a registry of all transactions carried out in bitcoins. Thus is resolved the problem of double-spending one particular bitcoin: It can’t be done (at least in theory) due to the blockchain. But the blockchain is in fact a register – a trail – of bitcoins. So it’s a relative cinch to piece together each and every transaction of any particular wallet in the bitcoin universe. And since exchanges need detailed personal information about a bitcoin user in order to comply with money-laundering laws before issuing a new user with a wallet, the government or other interested parties could determine what any one particular person has been doing in the bitcoin marketplace. – Blacklisted News/Gonzalo Lira

Dominant Social Theme: Are you ethical? Okay, then go live in a “green” hut and give government every cent you’ve got so the bureaucrats can reintroduce feudalism.

Free-Market Analysis: Let’s start with bitcoin. Then comes a bigger announcement … We’ve been skeptical of bitcoin for years. The smug techno-geekness of bitcoin’s backers irritated us, especially when we realized what they were supporting – a system that keeps track digitally of every single transaction ever made on the Internet.

You can see above that Gonzalo Lira has figured it out, as well. Those who blithely defend bitcoin without fully evaluating both the pros and cons of its technological stance are doing the freedom movement a, well … disservice, in our humble opinion, and apparently Lira’s, too.

That makes at least two of us against the rest of the libertarian world that is still a good deal enamored of this monetary marvel. Of course, it doesn’t hurt that bitcoin has recently hovered around US$1,000 a coin, a price that has sent people scurrying to garbage heaps to try to dig up old bitcoins now worth millions in aggregate.

One of these stories received wide attention recently. A fellow supposedly discarded an electronic cache of bitcoins years ago and then decided to search a dump to see if the coins were still there. This story – and we have our doubts about it – was all over the mainstream media, which is not a good sign.

Does anyone really believe that if bitcoin was a subversive, government-altering currency the mainstream media would be covering it so closely, or The Bernank would be issuing positive-sounding statements about it?

  • One of the main sources of bitcoin’s super-secret protection is DARPA’s TOR facility. It always struck us as a bit odd that bitcoin users were depending on a military protocol for their protection – especially Silk Road.
  • Then there’s the initial bitcoin Creation Myth. This has to do with an inscrutable Japanese techno-genius dropping bitcoin rules into the ether where they were gradually discovered and applied by a growing number of enamored acolytes.
  • The blockchain has always bothered us because what is indecipherable now may not be in a decade. Who knows how technology changes anonymity over time? We did find out that doyenne of alternative currencies, UNESCO”s Margrit Kennedy, has been preaching LETS trading systems that are backed enthusiastically by her former UN employer – probably because they also demand a general ledger. This is most helpful, of course, when the government wants to investigate for non-payment of taxes, etc.
  • It always seemed to us – throughout this ongoing bitcoin mania – that gold and silver were perfectly good alternatives to a wretchedly complex digital system. Granted, they are not directly as fungible as bitcoin, but they’ve been around for millennia. That’s more than bitcoin’s few years.

For all these reasons, we had reservations, which continue today, about bitcoin. Is it a system developed and placed on the Internet to anticipate the expansion of REAL alternative, digital currencies? Is it a kind of Trojan Horse, meant to provide the banking industry with a way to nullify a potential challenge – and regulate it – before something else comes along that is more challenging?

These may sound kind of hypothetical, but this iteration of The Daily Bell has certainly tried to speak to the expansion of alternative investing by setting some specific criteria. One powerful criterion would be “ethical” – as has been mentioned in past articles – and involves picking and choosing investments based on their ability to support freedom and free markets.

Bitcoin may offer profitability, but perhaps there is a “cost” attached that might – just might – involve a reduction of personal and monetary freedom in the long term. Does this sound counterintuitive? Perhaps so. But despite its success, High Alert Capital has not recommended it or taken a position in it thus far and probably won’t in the near future.

High Alert Capital, a funding mechanism for alternative investments that are often mentioned in The Daily Bell, utilizes the VESTS system to determine promising products and services. The idea is that the Internet Reformation is collapsing some elite promotions while doing less damage to others. Using VESTS, we want to ascertain first of all whether a given dominant social theme is profitable and then, just as importantly, determine whether it is worth participating in.

We know, for instance, that global warming is a central elite meme and that people like Al Gore have made fortunes endorsing it. But global warming – AKA climate change – is also very destructive of personal and socio-political freedoms.

And now an announcement.

As part of this “ethical” consideration, High Alert Capital is going to be breaking new ground shortly by launching a one-of-a-kind “socially responsible fund” with a twist. So much ethical investing has revolved around funds that take an anti-market approach and seek to invest in companies and systems that alleviate “carbon pollution,” for instance. Not this fund.

THIS fund will be a TRUE ethical investing fund. It will encourage freedom-oriented technology of all sorts. Like-minded investors – presumably those who read The Daily Bell – will finally have a place to put some funds if they wish.

Some may put a lot of funds in, as they are enamored of certain opportunities. Others may want to contribute simply to register a protest and show that there are still people who consider freedom to be a primary ethical consideration.

Think of it as a stick in the eye of major corporations that have taken to announcing en masse that reducing “carbon pollution” is part of their core corporate mission.

You can be sure that the senior partners of High Alert Capital shall be working hard to winnow real, freedom-oriented products worthy of support.

They will seek to profit from ideas that fit within a route defined by their “moral compass” – and those ideas are distinctly different from mainstream ones. Maybe bitcoin will ultimately make the cut and maybe not. But the considerations of this fund will be new.


Conclusion

All are welcome to come along.

Published by The Daily Bell – www.thedailybell.com – All Rights Reserved.

My Concerns About Bitcoin

19 Dec

December 18, 2013

Within the liberty community, there is a raging debate about the merits and future of Bitcoin. Because Bitcoin has been by far the best investment of this decade, that debate is quickly making its way into the mainstream as well.

Many smart folks whom I like and respect are enormous proponents of this digital currency. Some of them go so far as to say that Bitcoin will fundamentally break the power of the State by undermining its ability to control money. This a laudable goal indeed. Bitcoin is also the first exposure that many people have had to the idea of competing currencies, which is a welcome development.

Nevertheless, I have some serious reservations and concerns about Bitcoin.

While digital currencies like Bitcoin may play a role in a future monetary system, I still tend to believe that gold and silver will reemerge as the dominate forms of money, and it is the precious metals which will eventually overwhelm and supplant government issued fiat currencies.

First of all, as the hard money camp points out, money, i.e. a society’s medium of exchange, emerges on the market. It is not introduced from the top-down, but comes forth from the bottom-up. No one “invents” money, not even governments. Throughout history, governments have taken control of the currency, and then gradually weaned them off of their precious metal backing.

When presented with this argument, Bitcoin supporters claim that the first people to start using gold and silver as money did indeed introduce them into the market. The problem with this argument is that no one planned on whatever commodity being used as money. Folks simply begin trading this particular item because that good happened to be the one that everyone else would accept. It was the society’s most marketable commodity.

Bitcoin supporters claim that its value is derived from the fact that Bitcoin can be exchanged. In other words, it is a form of money, which is what makes it valuable. Again, this argument puts the cart before the horse. Gold and silver became money because of their value as commodities, not the other way around.

We often hear that gold and silver have intrinsic value. This statement is false. Austrian economics teaches us that value is subjective. Nothing has intrinsic value. Goods only have the value that individuals assign to them.

Nevertheless, human beings have desired the precious metals for thousands of years. This track record proves that the metals have value in and of themselves. Conversely, what gives Bitcoin its value? I assert that folks value Bitcoin because it is not the Dollar or the Euro or the Yen. Unlike gold and silver, folks desire Bitcoin because of what it isn’t, not because of what it is.

This brings us to a very important question: if the precious metals were actually allowed to compete in the market as money, would there even be a need for something like Bitcoin?

There is another concern about Bitcoin that gnaws at me. Control of money is the State’s most important tool for maintaining power. Controlling money allows governments to engineer society, rewarding the politically connected while keeping the underclass content. It gives government the ability to promote the illusion that there is such as thing as a free lunch, and that the State is the fountainhead from which all good things flow. Thus, governments will crush anything that undermines their control over money. Absolutely no competition in this area is allowed.

Of course, hard money–gold and silver–is the ultimate competitor to the State’s fiat currencies. For this reason, Western governments* have long exhibited outright hostility to the metals:

  • •From 1933 until 1975, it was illegal for US citizens to own gold bullion.
  • •The world’s governments and central banks actively manipulate the price of gold through market interventions like the now defunct London Gold Pool.
  • •Officials such as Ben Bernanke ridicule gold, saying that central banks hold it is reserve not because gold is money, but as a matter of “tradition.”
  • •In the US, gold and silver are taxed at prohibitive rates compared to other investments.

If you need any more evidence of the government’s hatred and fear of the precious metals, just read what U.S. Attorney Anne M. Tompkins had to say during Bernard von NotHaus’s counterfeiting trial. She described the Liberty Dollar–a privately issued currency backed by precious metals–as “a unique form of domestic terrorism” that is attempting “to undermine the legitimate currency of this country.”

On the other hand, government and central bank officials have given Bitcoin lukewarm approval. Ahead of congressional hearings into Bitcoin, Bernanke wrote a letter to the Senate Committee on Homeland Security and Governmental Affairs saying that digital currencies such as Bitcoin “may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.” During the hearings, the Department of Justice stated that Bitcoins can be “legal means of exchange”

Perhaps it’s my conspiratorial side, but something smells fishy here. If Bitcoin is as dangerous to the State as its proponents in the liberty movement claim, why isn’t the State already moving to crush it?

All this excitement about Bitcoin may divert interest away the precious metals, which is probably exactly what the State wants. Meanwhile, all the money that could potential flow into Bitcoin is money that will not flow into the precious metals, meaning that fewer folks will own the ultimate money.

While I wish Bitcoin and its supporters success, and I love the idea of competing currencies, I fear that Bitcoin will act as a foil for the real once-and-future money–gold and silver.

———————————————————————————

*While the Chinese government appears more sympathetic to gold, many (including myself) suspect that the goal of the Chinese is to introduce a gold-backed currency to rival the dollar. The Chinese are not goldbugs. They recognize the importance of issuing the world’s reserve currency in positioning themselves as a new superpower.

 

The Best of Glenn Jacobs

Glenn Jacobs [send him mail] is the actor and wrestler Kane. Visit his blog.

Copyright © 2013 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit and a live link are given.

 

Bitcoins: The Road to Investment Hell Is Paved With Good Intentions.

9 Dec

http://www.garynorth.com

Gary North – December 03, 2013

Recently, the Economic Policy Journal ran an article, “Is Bitcoin Money: What Economists Have to Say.” The editor asked a dozen economists. Two said “yes, Bitcoins are money.” Here is the answer of one of the “yes” economists.

Yes. Bitcoin is money because it is limited in amount by internal characteristics enforced by the laws of mathematics and thermodynamics that is not subject to counter-party risk or anyone’s liability and it also functions as a currency because it acts as a medium of exchange.

I had never heard of the gentleman. I can say this: nothing in his defense of Bitcoins as money is even remotely Austrian. It ignores the market.

The other one defended her “yes” position with a statement about what money is, not what Bitcoins are.

Money becomes real when people have faith in it. Governments have no monopoly on that which is why they spend a lot of time putting many symbols of faith and trust on the currency from pictures of sovereigns like the Queen or the President to hidden symbols of power like pyramids and seals. They would not need to if it stood on its own. Faith can be earned and it can be lost. The problem with bitcoin is that people are afraid a power outage or a hacker or bad management could erode or destroy the value of a bit coin. But, then again, governments are doing their best to erode confidence in fiat money too.

Everyone else said “no.”

There are public defenders of Bitcoins. Several are mostly libertarian programmers. They do not appeal to economics or to economic history. They appeal instead to the good intentions of the programmers who are using Bitcoins.

What I am waiting for is a detailed defense of Bitcoins from an Austrian school economist or economic historian. I want to see how the Bitcoins market corresponds with the Austrian school’s thesis of the regression theorem: money as a market product that has come in response to the transition of a widely used commodity into money.

The defenders of Bitcoins must deny the Menger-Mises regression theorem. They must affirm what Hayek called constructivist rationalism: the imposition of a man-made plan to create a new social order. He associated this impulse with the state. But defenders of Bitcoins say a genius created a new money.

Here is this thesis, as stated by programmer Paul Rosenberg.

Gary begins by quoting old definitions of money. There is nothing particularly wrong with those definitions, but are they supposed to negate progress for all time? To freeze the world in place? Should they make any new adaptation evil? I hardly think that was their intent.

Here it is, in no uncertain terms. The Menger-Mises regression theorem was good for its day, but we live in a New World Order, a world of digits. Now we must abandon the old Menger-Mises theorem.

He quoted me:

Here is the central fact of money. Money is the product of the market process. It arises out of an unplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production, because it increases the size of the market for all goods and services.

He says that “Bitcoin is nothing but the operation of market forces — there is zero coercion involved.” True. But it is not money.

“Bitcoin is utterly decentralized — there is no center at all.” True, but it is not money.

“Bitcoin is utterly unplanned — it involves a million people, all doing their own thing.” True, but it is not money.

As for speed, the Bitcoin idea was created in the 1990s and has been implemented for almost five years. How slow is slow enough?

Think of this! Almost five years! But are Bitcoins money? No.

Bitcoin is not being used as money. It is being used as an investment asset. It is in the midst of a mania — the desire to hold digits, in order to make money in dollars. Digits are the asset. The dollar is money. It is not the other way around.

He quotes me:

No one says, “I think I’ll invent a new form of money.”

Then he responds: “Yes, they do! That’s precisely what the first person to use gold did!”

First, he is making this up. He has no idea what the first person who used gold as money did or thought. His version is based on constructivist rationalism. One lone genius thinks he will change the world by inventing money. He does it.

He did it, according to Menger and Mises, by using a commodity that was already in heavy demand by the free market.

Second, Rosenberg could as easily have begun with the person with no gold. He had something to sell, but he could not find a trading partner who had anything he wanted to buy . . . except gold. He said, “I will take gold in exchange.” The other person agreed. We have no way of knowing which of them said, “I think I’ll invent a new form of money.” I think it is likely that neither of them did. They just worked out a deal.

Third, he adds this.

I’m sure some people will think of Bitcoin as an investment (which it is not) or that it is an arbitrage vehicle (which it is not) and will do stupid things. Some people always do stupid things. So what?

It is clearly an investment. It is in a mania stage. He can close his eyes, clap his hands, and say “Tinkerbell is not an investment,” but she is.

I and many others have been saying that Bitcoin is a crypto-currency, not an investment. We’ve also warned incessantly that it is new and has enemies. In a How to Use Bitcoin report we issued just last week, we said “This is not a place for the timid,” and, “There are no guarantees.”

Mr. Rosenberg calls himself a cryptohippie. He runs a cryptography service called Cryptohippie (www.cryptohippie.com). My assessment: its name targets a narrow audience: hippies who are interested in crytography and privacy. This is not the average Joe.

If the average Joe does not use a supposed currency to buy most of the things he buys, then it is not a currency. This is Austrian school monetary theory. Accept no substitutes!

Rosenberg writes:

Bitcoin is not important because its price is rising — it’s important because it takes the control of money away from the cartel.Concern with the dollar equivalent is a fetish, a distraction. The purpose of Bitcoin — the intent of Satoshi — is not to play price games, but to dis-empower the fiat cartel.

He also writes: “The purpose of Bitcoin — the intent [of] Satoshi — is not to play games, but to dis-empower the fiat cartel.”

The intent of Satoshi Nakamoto, who Rosenberg says has disappeared, is economically irrelevant. Only geeks have heard of him. The crucial economic issue is the imputation of value by investors and owners of Bitcoins. What motivates them? A fast buck! A lot of fast bucks! Bucks are money. Bitcoins aren’t.

We know this from its volatility: the desire to own an investment asset class that promises to vastly outperform any other asset class.

The programmers and cryptographers are on the sidelines, telling us that this is all about this or that or the other. But the markets tell a different story. This is a mania. Bitcoins did not go from a price of $50 for 10,000 in 2009 to the price of an ounce of gold in late November 2013 based on what the mysterious Mr. Nakamoto thought he was doing.

To the cryptographers who want to be Austrian school economists, I say this: begin with Menger and Mises on the origin of money. Do not begin with Mr. Nakamoto.

Note: he is now a billionaire — in dollars. Bitcoins have been very, very good for him.

© 2013 GaryNorth.com, Inc. All Rights Reserved. Reproduction without permission prohibited.

1974 Enders To Kissinger: “We Should Look Hard At Substantial Sales & Raid The Gold Market Once And For All”

5 Dec

 

Tyler Durden's picture

Submitted by Tyler Durden on 11/30/2013

Four years ago we exposed what appeared to be a ‘smoking gun’ of the Fed’s willingness to manipulate the price of gold. Then Fed-chair Burns noted the equivalency of gold and money, and furthermore pointed out that if the Fed does not control this core relationship, it would “easily frustrate our efforts to control world liquidity.” Through a “secret understanding in writing with the Bundesbank that Germany will not buy gold,” the cloak-and-dagger CB negotiations were exposed as far back as 1975. Recently, we exposed Paul Volcker’s fears of “PetroGold” and the importance of the US remaining “masters of gold.” Today, via a transcript of then Secretary of State Kissinger’s 1974 meeting we see how clearly they understood that demonetizing gold was a critical strategy to maintaining a dominant power position in the world, and “raiding the gold market once and for all.”

 

Burns’ 1975 Smoking Gun…

On June 3, 1975, Fed Chairman Arthur Burns, sent a “Memorandum For The President” to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon’s actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971. In a nutshell Burns’ entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would “easily frustrate our efforts to control world liquidity” but also “dangerously prejudge the shape of the future monetary system.”

Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished. The problem with accounting for gold at fair market value: the risk of massive liquidity creation, which in those long-gone days of 1975 “could result in the addition of up to $150 billion to the nominal value of countries’ reserves.” One only wonders what would happen today if gold was allowed to attain its fair price status. And the threat, according to Burns: “liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, out efforts and those of other prudent nations to get inflation under reasonable control.” Aside from the gratuitous observation that even 34 years ago it was painfully obvious how “massive” liquidity could and would result in runaway inflation and the Fed actually cared about this potential danger, what highlights the hypocrisy of the Fed is that when it comes to drowning the world in excess pieces of paper, only the United States should have the right to do so.

Lastly, the memo presents a useful snapshot into the cloak-and-dagger, and highly nebulous world of CB negotiations and gold price manipulation:

“I have a secret understanding in writing with the Bundesbank that Germany will not buy gold, either from the market or from another government, at a price above the official price.”

Volcker’s 1974 “PetroGold” concerns…

First, here is what the S intentions vis-a-vis gold truly are when stripped away of all rhetoric:

U.S. objectives for world monetary system—a durable, stable system, with the SDR [ZH: or USD] as a strong reserve asset at its center — are incompatible with a continued important role for gold as a reserve asset.… It is the U.S. concern that any substantial increase now in the price at which official gold transactions are made would strengthen the position of gold in the system, and cripple the SDR [ZH: or USD].

In other words: gold can not be allowed to dominated a “durable, stable system”, and a rising gold price would cripple the reserve currency du jour: well known by most, but always better to see it admitted in official Top Secret correspondence.

 

Specifically, this is among the top secret paragraphs said on a cold night in March 1968:

If we want to have a chance to remain the masters of gold an international agreement on the rules of the game as outlined above seems to be a matter of urgency. We would fool ourselves in thinking that we have time enough to wait and see how the S.D.R.’s will develop. In fact, the challenge really seems to be to achieve by international agreement within a very short period of time what otherwise could only have been the outcome of a gradual development of many years.

 

And Now Kissinger’s 1974 Transcript…

Via Mike Krieger’s Liberty Blitzkrieg blog,

The following excerpts are from a transcript of a 1974 meeting held by the then Secretary of State Henry Kissinger and his staff. This particular meeting was held on April 25, and focused on an European Commission Proposal to revalue their gold assets. What follows is an incredible insight into the minds of powerful American leaders scheming to maintain power and show other nations their place. What is most significant is how clearly they understood that demonetizing gold was a critical strategy to maintaining a dominant power position in the world.

So to those who continue to say that “gold doesn’t matter” because it hasn’t been used as an official asset in the monetary system for decades, I say give me a break. In fact, the reality of gold having been largely demonetized makes it an even greater threat going forward if the U.S. does not have all the gold it claims to, and other nations have more than they admit to.

Thanks to In Gold We Trust for bringing this to my attention. Choice excerpts are provided below, and breaks in the conversation are denoted with an “…” Enjoy.

Secondly, Mr. Secretary, it does present an opportunity though—and we should try to negotiate for this—to move towards a demonetization of gold, to begin to get gold moving out of the system.

Secretary Kissinger: But how do you do that?

Mr. Enders: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.

Secretary Kissinger: But the French would never go for this.

Mr. Enders: We can have a counter-proposal. There’s a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.

Secretary Kissinger:  Why are we so eager to get gold out of the system?

Mr. Enders: We were eager to get it out of the system—get started—because it’s a typical balancing of either forward or back. If this proposal goes back, it will go back into the centerpiece system.

Secretary Kissinger: But why is it against our interests? I understand the argument that it’s against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?

Mr. Enders: It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We’ve been trying to get away from that into a system in which we can control—

Mr. Enders: Yes. But in order for them to do it anyway, they would have to be in violation of important articles of the IMF. So this would not be a total departure. (Laughter.) But there would be reluctance on the part of some Europeans to do this. We could also make it less interesting for them by beginning to sell our own gold in the market, and this would put pressure on them.

Mr. Maw: Why wouldn’t that fit if we start to sell our own gold at a price?

Secretary Kissinger: But how the hell could this happen without our knowing about it ahead of time?

Mr. Hartman: We’ve had consultations on it ahead of time. Several of them have come to ask us to express our views. And I think the reason they’re coming now to ask about it is because they know we have a generally negative view.

Mr. Enders: So I think we should try to break it, I think, as a first position—unless they’re willing to assign some form of demonetizing arrangement.

Secretary Kissinger: But, first of all, that’s impossible for the French.

Mr. Enders: Well, it’s impossible for the French under the Pompidou Government. Would it be necessarily under a future French Government? We should test that.

Secretary Kissinger: If they have gold to settle current accounts, we’ll be faced, sooner or later, with the same proposition again. Then others will be asked to join this settlement thing.

Isn’t this what they’re doing?

Mr. Enders: It seems to me, Mr. Secretary, that we should try—not rule out, a priori, a demonetizing scenario, because we can both gain by this. That liberates gold at a higher price. We have gold, and some of the Europeans have gold. Our interests join theirs. This would be helpful; and it would also, on the other hand, gradually remove this dominant position that the Europeans have had in economic terms.

Mr. Rush: Well, I think probably I do. The question is: Suppose they go ahead on their own anyway. What then?

Secretary Kissinger: We’ll bust them.

Mr. Enders: I think we should look very hard then, Ken, at very substantial sales of gold—U.S. gold on the market—to raid the gold market once and for all.

Mr. Rush: I’m not sure we could do it.

Secretary Kissinger: If they go ahead on their own against our position on something that we consider central to our interests, we’ve got to show them that that they can’t get away with it. Hopefully, we should have the right position. But we just cannot let them get away with these unilateral steps all the time.

Full transcript here.

 

Bitcoins: The Second Biggest Ponzi Scheme in History

1 Dec

Gary North – November 29, 2013

I hereby make a prediction: Bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff. (It will never rival Social Security, however.)

To explain my position, I must do two things. First, I will describe the economics of every Ponzi scheme. Second, I will explain the Austrian school of economics’ theory of the origin of money. My analysis is strictly economic. As far as I know, it is a legal scheme — and should be.

PONZI ECONOMICS

First, someone who no one has ever heard of before announces that he has discovered a way to make money. In the case of Bitcoins, the claim is literal. The creator literally made what he says is money, or will be money. He made this money out of digits. He made it out of nothing. Think “Federal Reserve wanna-be.”

Second, the individual claims that a particular market provides unexploited arbitrage opportunities. Something is selling too low. If you buy into the program now, the person running the scheme will be able to sell it high on your behalf. So, you will take advantage of the arbitrage opportunity.

Today, with high-speed trading, arbitrage opportunities last only for a few milliseconds seconds in widely traded markets. Arbitrage opportunities in the commodity futures market last for very short periods. But in the most leveraged and sophisticated of all the futures markets, namely, the currency futures markets, arbitrage opportunities last for so brief a period of time that only high-speed computer programs can take advantage of them.

The individual who sells the Ponzi scheme makes money by siphoning off a large share of the money coming in. In other words, he does not make the investment. But Bitcoins are unique. The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits. Then, by telling his story, this individual created demand for all of the digits. The dollar-value of his share of the Bitcoins appreciates with the other digits.

This strategy was described a generation ago by George Goodman, who wrote under the pseudonym of Adam Smith. You can find it in his book, Supermoney. This is done with financial corporations when individuals create a new business, retain a large share of the shares, and then sell the stock to the public. In this sense, Bitcoins is not a Ponzi scheme. It is simply a supermoney scheme.

The Ponzi aspect of it comes when we look at the justification for Bitcoins. They were sold on the basis that Bitcoins will be an alternative currency. In other words, this will be the money of the future.

The coins will never be the money of the future. This is my main argument.

THE AUSTRIAN SCHOOL’S THEORY OF MONEY’S ORIGINS

The best definition of money was first offered by Austrian economist Carl Menger in 1892. He said that money is the most marketable commodity. This definition was picked up by his disciple, Ludwig von Mises, who presented it in his book, The Theory of Money and Credit, published in 1912.

In that book, Mises argued, as Menger had before him, that money arises out of market transactions. That which did not function as money before, now functions as money. Something that was valuable for its own sake, most likely gold or silver, becomes valuable for another purpose, namely, the facilitation of exchange. People move from barter to a monetary economy. This increases the division of labor. As more and more people use the money commodity in order to facilitate exchanges, the division of labor extends, and as a result, people’s productivity increases. They can specialize. This specialization produces increased output per person, and therefore increased income per person.

In this scenario, something that had independent value becomes the focus of traders, who find that their ability to buy and sell increases as a result of the use of this commodity. Money develops out of market exchanges. Money was not used for its own sake initially, but it becomes widely used as money as a result of innumerable transactions within the economy. (I discuss this in my chapter in Theory of Money and Fiduciary Media, published by the Mises Institute in 2012.)

Here is the central fact of money. Money is the product of the market process. It arises out of anunplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production, because it increases the size of the market for all goods and services. No one says, “I think I’ll invent a new form of money.”

Note: any time you see a proposal of a new form of money, hold on to your old form of money.

The central benefit of money is its predictable purchasing power. A monetary commodity is not easy to produce. The cost of mining is high. Money is slowly adopted by a large number of participants. These participants use money as a means of exchange. Why? Because it was valuable the day before. They therefore expect it to be valuable the next day. Money has continuity of value. This is not intrinsic value. It is historic value. So, a person can buy money by the sale of goods or services, set this money aside, and re-enter the markets in a different location or in a different time, in the confidence that he will probably be able to buy a similar quantity of goods and services.

Money is not accumulated for its own sake. It is accumulated to buy future goods and services. It is useful in the facilitation of exchange precisely because its market value varies little over time. It is the predictability of money’s market exchange rate that makes it money.

BITCOINS ARE NOT MONEY

Now let us look at bitcoins. The market value of one bitcoin has gone from about $2 to $1,000 in a year.This is not money. This commodity is not being bought for its services as money. It is unpredictable to a fault.

Admittedly, those who got in early on this Ponzi scheme are doing very well. They will probably continue to do well for a time. As more people hear about this investment, which is justified in terms of its future potential as money, more people will buy it. Late-comers are not buying it because they understand its potential as future money, any more than the late investors in Charles Ponzi’s scheme thought they were buying into the arbitrage potential of foreign postage stamps. They are buying Bitcoins because we are in the midst of a Ponzi scheme mania. They will continue to buy because they think this time it’s different.

This digital so-called money will not be used to facilitate exchange. Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000. This is the classic mark of Ponzi scheme psychology.People do not buy the investment for the benefits that the investment provides as an investment, in other words, because it is a capital asset. They buy it only because it has gone up in price. They expect this to continue.

Here is the Austrian school’s theory of money. People buy money because it has not fallen in price. But it has also not gone up in price much, either. It is predictable. Why? Because it is held in reserve by a large number of people over a large geographical area. It has become money through tradition, through experience, and through endless numbers of exchanges on a voluntary basis. It has proven itself in the marketplace as a means of facilitating exchange, and thereby as a means of preserving value over time. This is not the characteristic feature of a Bitcoin. People are not buying it to serve as money; they are buying it because they are in the midst of a mania, and they are gambling that the number of buyers will continue upward forever.

Here is an economic fact: the number of fools is limited. They are a scarce economic resource. As the price of bitcoins rises, more fools will be lured into the market. But this is a finite market.

In other words, bitcoins cannot possibly fulfill their supposed purpose: to serve as an unregulated currency unit. Bitcoins are not an alternative currency. They are something you buy in the midst of a mania, and you will sell at some point in order to get back your money. You are thinking of buying Bitcoins, not because Bitcoins will serve as a means of exchange, as originally argued, but because you want to get back lots more money than you paid for them. In other words, Bitcoins are not money; dollars are money. There has been no challenge from Bitcoins to the reign of the dollar.

JUST SAY NO

When you see an offer of an investment which inherently cannot possibly exist on its own merit, and yet lots of people are coming into the market to buy the item, you know, without any question, that this is a Ponzi scheme. In other words, people are buying into the program, not because of an arbitrage opportunity, and not because of a capital breakthrough in terms of technology, but because somebody else bought it cheaper yesterday. You buy it today, not because you think it is going to offer a stable value, but because you think you’re going to make a bundle of money when more people come into the market. Again, this is the classic mark of a Ponzi scheme.

In order for Bitcoins to become an alternative currency, there will have to be millions of users of the currency. There will have to be tens of millions of users of the currency. They will have to develop in a market on their merit as money, not as an investment of dollars in order to get more dollars back. It would have to develop through exchange, not bought as an investment. In other words, the free market will have to adopt Bitcoins as a means of increasing the division of labor.

Bitcoins are not increasing the division of labor. They are bought on the basis that somebody can get into a game of musical chairs. Instead of running out of chairs, leaving one person the great winter, the promoters started with a given number of chairs, and then they hoped that lots would come and bid on the chairs. “If we issue it, they will come.” This took place. The promoters creators are now very rich, as measured in dollars.

The fact of the matter is this: Bitcoins will not increase the division of labor by serving as an alternative currency. Inherently, Bitcoins have made their mark, not on the basis of their stable value in exchange, that is, their value in increasing the division of labor in alternative markets that do not use the dollar. On the contrary, Bitcoins are being purchased for one reason only: to get in on the deal. Buy low; sell high. Buy with what? Dollars. Sell for what? Dollars.

The mania has destroyed Bitcoins’ use as money. Bitcoins are too volatile in price ever to serve as a currency.

Which is money: dollars or Bitcoins? The answer is obvious: dollars.

This is a Ponzi scheme.

WHAT GOES UP COMES DOWN

This will lead to the ruination of more people than any private Ponzi scheme in history. There will be the poor schnooks to get in at the end, paying perhaps thousands of dollars per Bitcoin. Then the market will unravel. It will unravel for the same reason that all Ponzi schemes have unraveled: not enough new buyers. When the new buyers do not show up in great numbers, the holders will start to dump them. What went up in price, as measured in dollars, the real money, will come down in price.

This mania is going to be the stuff of best-selling books. This is going to be this stuff of Ph.D. dissertations in economics and psychology. This is going to be the equivalent of Mackay’s book, Extraordinary Popular Delusions and the Madness of Crowds.

The interesting thing is the mania started among the most technologically sophisticated people on earth: computer techies. The techies who got in early are going to be fabulously wealthy . . . if they sell. But the poor schnooks who come in at the and are going to lose money. Collectively, this will be the greatest single scheme for lots of people losing money that we have ever seen. This Ponzi scheme is not illegal . . . yet. It will spread. It has gone viral.

Any time you buy an investment, you had better have an exit strategy. There is no exit strategy for Bitcoins.

You must get out at the top, or you lose your shirt.

CONCLUSION

Anytime that anybody tries to sell you an investment, you have to look at it on this basis: “What are the future benefits that this investment will give final consumers?” In other words, how does it serve the final consumer? If it does not serve the final consumer, then it is a Ponzi scheme.

Bitcoins cannot serve the consumer. There is nothing to consume. The only way that Bitcoins can work to the advantage of the consumer is that they provides the consumer with increased opportunities, based on Bitcoins’ function as money. But the fundamental characteristic of money is its relatively stable purchasing power.

Bitcoins will never achieve this. It is a mania going up. It will be a mania coming down. It will not increase the division of labor, because people will recognize it as having been a Ponzi scheme, and they will not again buy it. They will not use it in exchange. Companies will not sell goods and services based on Bitcoins. Bitcoins have to have stable purchasing power if they are to serve as money, and they will never, ever achieve stable purchasing power.

Whenever somebody tries to sell you an investment that is based on the economic analysis of a market — an analysis that cannot possibly be true — do not buy the investment. This is a simple rule. I adhere to this rule.

There has to be an economic justification for a capital investment, and there is no economic justification of buying Bitcoins as an alternative currency. That was how Bitcoins were initially sold, and it was impossible as an economic concept from the beginning. The Austrian theory of money shows why.

I do not invest in capital that has no economic justification other than the greater fool theory. There are too few fools to keep the scheme going.

Bitcoins are not illegal. They should not be made illegal. They should merely be avoided.