2011 – The year when money starts to die

Posted: 2011-01-07 15:56:53 UTC-08:00

Finance and Economics

Between 1716 and 1720, John Law tried to rescue the French government from bankruptcy with a scheme that came to be called “The Mississippi Bubble”. His strategy was to set up two entities: a bank whose purpose was to issue paper money, and a company whose primary but undeclared function was to refinance government debt.  Law realised that he had to confiscate all gold and silver other than smaller quantities, and force French citizens to pay their taxes and buy shares in the Mississippi Company, only with the bank’s newly issued notes. These were the three essential elements of his scheme.[i]

This is precisely what central banks in the US, Europe, Japan and the UK are doing today. They are rigging the markets by buying government debt at artificially high prices with freshly created paper money, having previously excluded gold and silver from any role as legal tender.  The following quote from John Law, could equally be attributed to a central banker of today: “An abundance of money which would lower the interest rate to two per cent would, in reducing the financing costs of the debts and public offices etc. relieve the King.” This is quantitative easing, pure and simple, and John Law had fully anticipated modern central banking.  Law’s scheme ended in disaster and as a precedent for today’s central banking this should worry us greatly.

Many of us recognise the government debt bubble, which ensures that today’s rulers are relieved by the artificially low cost of their debt.  But most of us are unaware of the other bubble, that of the value of money, which is also held up at artificially high levels.  The money bubble is inflating primarily in quantity rather than price, making it easier to deceive the public. There is also a fundamental difference from the usual bubbles, which end with a collapse while money’s value is unaffected: in this dual bubble both  debt and money will eventually collapse together; the former as nominal yields rise and the latter being reflected in rising precious metal prices.

In Law’s time, it was made illegal to hold more than a minimal quantity of gold and silver coinage.  Today the central banks have had a different approach, removing gold and silver from circulation altogether.  Naturally, central banks have also convinced themselves that precious metals are now redundant, fully replaced by paper money, so they have carelessly reduced their own holdings to suppress prices.  At the same time commercial banks offering gold and silver accounts have developed large uncovered liabilities with their customers through their fractional banking practices.  Through these uncovered, undeclared positions, the strategy of depressing bullion prices has become dangerously dependant on confidence remaining in both the central banks and the banking system.

We can expect the collapse in money values to be reflected in gold and silver prices rather than other paper currencies, and the warning signs are now upon us. Bullion has been climbing in value for a decade, and in 2010 buyers found it regularly difficult to get physical metal delivered to them by the banks. It is becoming clear that the ability of the central banks to keep a lid on bullion prices is at last coming to an end.

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