Fund production, not banks

Over at Naked Capitalism I ran across this excerpt from a book about FDR and the New Deal:

[WPA] workers constructed or repaired more than 125,000 buildings, including 83,000 schools; 800 aiports; 950 sewage plants; and 650,000 miles of roads. They built or improved 78,000 bridges and 25,000 playgrounds; terraced 271,000 acres of eroded land; and taught two million people to read. They also ran a famous Federal Art Project, which hired destitute artists to create murals for public buildings, posters, and paintings. The WPA produced a highly regarded series of state guidebooks and an acclaimed collection of interviews with former slaves, and it played a major role in building the San Antonio Zoo, New York City’s LaGuardia and Washington’s Reagan airports, and the presidential retreat at Camp David.

In addition to the Works Progress Administration, there was the Tennessee Valley Authority, which provided electricity to some of the most impoverished parts of the country. Roads, bridges, and electricity increased production for decades into the future, long after the initial jobs program money had been spent.

Compare this to "stimulus" efforts today. Obama's plan, costing roughly $800 billion, spends about $80 billion on infrastructure projects, mostly for more and bigger highways rather than the things we will really need in 5 or 10 years, namely railways and public transportation. Anyway, $800 billion pales in comparison to the $14 trillion so far given to banks.

Many people have argued that the stimulus plan will do little to get us out of recession, precisely because it gives fish but no fishing poles. Meanwhile, most people are angry at the money being given to the banks. But there is another concern which is far more important: printing money to boost production does not destroy currencies, but printing money for the financiers can lead to total currency collapse.

Ellen Brown takes a close look at Germany's hyperinflation of the early 1920's, and their economic miracle of the 1930's. In both cases, oddly, the government simply printed money out of thin air. As she concludes, it's what the government does with that money that makes all the difference in the world.

The dramatic difference in the results of Germany’s two money-printing experiments was a direct result of the uses to which the money was put. Price inflation results when “demand” (money) increases more than “supply” (goods and services), driving prices up; and in the experiment of the 1930s, new money was created for the purpose of funding productivity, so supply and demand increased together and prices remained stable. Hitler said, “For every mark issued, we required the equivalent of a mark’s worth of work done, or goods produced.” In the hyperinflationary disaster of 1923, on the other hand, money was printed merely to pay off speculators, causing demand [available money] to shoot up while supply remained fixed. The result was not just inflation but hyperinflation, since the speculation went wild, triggering rampant tulip-bubble-style mania and panic.

One can hardly say that every dollar of Obama's stimulus plan will result in a dollar's worth of production. You would be hard pressed to argue that every ten dollars in stimulus money will result in a dollar of true production.

Even if we stipulated, generously, that $200 billion of the stimulus money would create real goods and services (i.e. actual wealth), this is out of nearly 15 trillion dollars so far spent alleviating the economic crisis. Mostly, we are doing what the Weimar folks did, funneling money to banks. That leaves our currency, and us, at the mercy of the financiers. People worry about China selling its dollars, but another risk is that bankers begin piling on bets against the dollar and against US Treasuries. That, as in Weimar, could ruin our currency.

Fiat currencies, backed by nothing, have worked wonderfully in some instances, and for hundreds of years in the case of British tally sticks. The trick is to print them and convert them as fast as possible into real goods and labor. As historian Webster Tarpley says, if we print our currency into oblivion while building solar arrays and maglev trains and putting in geothermal furnaces, at least in the end we would still have power, transportation, and heat.

But no. We print money and hand it to banks by the trillions, hoping against hope that Goldman Sachs never builds up a massive short position in Treasuries.

Buy real metal

I used to read Baghdad Burning, a blog written by an Iraqi woman living in (you guessed it) Baghdad, back before her family fled to Syria. If you want evidence that gold is money, and an excellent store of value, there are several telling anecdotes at her blog.

American troops, on breaking into Iraqi homes and finding small piles of gold jewelry, assumed that this was evidence of criminal or black market activity. Only a really wealthy person would bother with so much gold, to their minds. They had no understanding of gold beyond an ostentatious display of social status. But, as our Iraqi blogger 'Riverbend' explains:

Iraqi people don’t own gold because they are either spectacularly wealthy, or they have recently been on a looting spree... Gold is a part of our culture and the roll it plays in ‘family savings’ has increased since 1990 when the Iraqi Dinar (which was $3) began fluctuating crazily. People began converting their money to gold- earrings, bracelets, necklaces- because the value of gold didn’t change. People pulled their money out of banks before the war, and bought gold instead. Women here call gold “zeeneh ou 7*azeeneh (khazeeneh)” which means, “ornaments and savings”. Gold can be shown off and worn, but in times of economical trouble, a few pieces can be sold to tide the family over.

. . .

My aunt went into a tirade against raids, troops, and looting, then calmed down and decided that she wouldn’t hide her gold tonight: her daughter and I would wear it. I stood there with my mouth hanging open- who is to stop anyone from taking it off of us? Was she crazy? No, she wasn’t crazy. We would wear the necklaces, tucking them in under our shirts and the rest would go into our pockets.

. . .

I told everyone that we looked like maids who were playing dress-up with the mistress’s jewelry… E. said we actually looked like gypsies ready to make off with the mistress’s jewelry. The ‘mistress’ called out that we could laugh all we wanted but since the jewelry was everything she had saved since 1965, we had better be careful.

Gold is valued as a store of wealth throughout the Middle East and in India, as well as in nations that have experienced hyperinflation (Germany, for instance). Because it's a longer-term store of wealth, it tends to stick around until there is an emergency. Riverbend's family had to sell gold in order to make a ransom payment to save a relative's life:

We spent the rest of the day rushing to sell gold, collect money and my uncle took a broken L. to the bank to empty the account- they've been saving up to build or buy a house. A.'s parents were soon at my uncle's house and we had a difficult time breaking the news to them. His mother cried and wanted to rush home for her few pieces of gold and his father sat, stunned, chain-smoking and trying to make sense of the situation.

These small gold trinkets were their insurance. Am I suggesting the US will turn into Baghdad? Obviously not. But the crime level in Argentina, following their currency crisis, was phenomenally high. Argentina, you recall, was once the 5th most prosperous nation on Earth. Thus the phrase "rich as an Argentine."

Here in the US, where television broadcasts the "Everything Is Normal" message, equivalent to Soma, the few investors who've heard about gold usually buy a bit of paper that claims to represent the actual thing. They say "Sure I own gold... I have X shares of the gold ETF," or perhaps they own gold certificates or gold futures or some other paper instrument. This is truly ironic. You need gold when there's a disaster. Your quarterly statement showing your gold shares isn't going to mean squat during a disaster. Can you trade that statement for groceries, gasoline, or to pay a bribe?

But even if we disregard the importance of gold (and silver) during catastrophes, we still have the very important point that all these paper peddlers have not got the gold they say they have.

Not only do the ETF's not have the gold, and not only does the Comex not have the gold they claim, and not only is the Canadian mint missing $20+ million in gold, but probably Fort Knox doesn't have the gold it says it has, either. Or-- as GATA asked in a recent piece--

Who really owns that gold? And how many people have claims to it?

. . .

And of course the gold purportedly kept by the U.S. government at both Fort Knox and the depository in West Point, New York, is never seen at all and never publicly audited. For all that is known... on Mondays an assistant secretary of the treasury may take the German ambassador to Fort Knox and show him around and say, "Take a look at your gold," and on Tuesdays the assistant treasury secretary may take the French ambassador to Fort Knox and show him around and say, "Take a look at your gold." Wednesdays may be reserved for the Swiss ambassador, Thursday for the Italian ambassador, and Friday for the British ambassador, who is almost surely in on the joke and just making a social call.

If you're going to buy gold or silver, find a local coin shop and go and buy government minted bullion coins (or old silver coins, known as junk silver). Do not buy paper promises with some loose affiliation to actual metal sitting in some vault, ostensibly. Some may want to own gold and/or silver overseas, in which case the (audited!) GoldMoney is a good vehicle, but first get the kind of metal you can drop on your foot, as they say.

What is wealth?

Here is a typical mainstream treatment of "survivalists," courtesy the Wall Street Journal:

We're not talking about the extreme end, the "preppers" who are "New Mattress Stuffers" gone wild. They believe you have to be ready for a return to an almost primitive state of existence and survival.

No... that's wrong. Just because I value wheat and firewood does not mean that I expect to return to the Dark Ages three years from now. What it means is that I looked at the money accumulating in the checking account and tried to think how to convert binary digits into real wealth. That is, into things that human beings have always needed to survive and to be comfortable and happy. I bought military surplus wool blankets for $20 each. The first time I bought wheat, I got 50 pounds of the highest protein, longest shelf life (10+ years), organic wheat for $28 (it now sells for twice that). The pressure canner was a couple hundred dollars. The rechargeable batteries and solar battery recharger were maybe $100 or $120. I also bought a lot of classic literature and games. Was my money seriously better off sitting in a Chase account getting no interest, awaiting devaluation and bank holidays?

[Yes, I also own gold and silver. But at some point I realized you can't eat it, wear it, or use it to keep the rain off.]

The mainstream news engages in a kind of propaganda that disparages those with historical perspective, those who are not convinced that all is well simply because Twitter is still functioning and the ATM still spits out bits of green cotton. When I was growing up I read the Little House books several times over. The Ingalls family didn't live in the Dark Ages, they lived 150 years ago. And they nearly starved (and froze) to death, one winter. Trains that had been expected to deliver food were trapped in impassable snow-filled gullies and could not get through until May. They braided hay to burn in their stove in lieu of wood. A different year, locusts decimated their crops. Once, when the girls were left alone and a blizzard came up, Laura brought the entire woodpile into the house, terrified of freezing to death as some neighboring children had. She might have been 10 or 12 at the time.

Similarly, I've read 19th century novels in which one's proximity to the fireplace conveys one's social status. Warmth, it turns out, has long been a privilege. Were the gentlemen of 19th century Britain primitive savages? Hardly. In historical terms, the temporal distance between us and them is but the blink of an eye.

A bewildering tide of new technologies has made most Westerners believe that concerns about heat, clothing, shelter, and food are now, thankfully, obsolete. In fact, says the Western establishment, such concerns are absurd and paranoid. To put aside a month's worth of food for one's family is, according to the Wall Street Journal and every other mainstream news outlet, simply loopy. And yet, a 19th century man would not be able to comprehend our trust, our blind faith that the grocery store will always be chock full of food, the electricity will always be on, the gas or oil will always be there to fire up the furnace and keep us at 72 degrees. Americans used to value self-sufficiency. Now we laugh at it.

I watched a YouTube video put up by a Serbian man who had undergone Yugoslavia's currency failure in the early 90's. He talked about a pensioner who had used his entire month's check to buy a pound of good salami and a loaf of bread. The pensioner then went home, ate a couple of salami sandwiches, and hung himself. He left a note, saying "I don't want to die of starvation." This happened in the late 20th century, in Europe. It did not happen in 1702 or in Sao Paulo or Mumbai.

The mainstream media tries to laugh at "preppers" by implying, more or less: "Come on, now, your iPhone still works, doesn't it? The sports are still on TV, right? You can still buy 1,200 different food-like items at your local supermarket, eh? So let's not be paranoid!"

What I have is not paranoia. It's a respect for the human condition in history. It has very little to do with fear. It has to do with my understanding that 0's and 1's in a computer at a bank are intrinsically worthless. People who understand this take different routes: some buy junk silver, some buy wheat and a grain mill, some buy real estate in foreign countries and enough gold to bribe their way out of a failed state should the very worst somehow occur. Some do all of the above. But the point is, the 0's and 1's in your checking account -- and even moreso the binary digits in your 401k -- are purely theoretical and could lose all value in a moment.

Have some respect for your ancestors. Think about what they would have considered "wealth" and what they considered to be insurance against hardship. Stop putting unmatched funds into your 401k or tying up cash in stupid CD's and money markets. Stop being smug about your lifestyle, here at the apex of an empire, here in the last heyday of the Cheap Oil age. Buy a few real goods as a gesture of respect to those who have gone before you.