In his new book “The Birth of the Euro”, Dr Otmar Issing, former ECB chief economist, forgets that money is a good that needs an anchor in reality. Money is not digits. By the same token, Issing dares not make explicit that the ECB is marking its gold reserves to market.

Money is a GOOD readily acceptable in exchange by everyone in a given geographical area, and is sought for the purpose of being re-exchanged. (1)

Money is not digits, nor a freely floating abstraction which exists in the mind only. Money does not come into existence by attempting to capture the “reality” of economic relationships into a MODEL. (2)

Money is not a wager that completely disregards the important relationship between itself, money, and prices. (3)

Money needs an anchor, an anchor in reality, not in the mind. Money cannot be itself the anchor if it has no reality. Money cannot be itself the anchor if it exists only in the (digital) mind. (4)

The central element in the economic problem of money is the objective exchange value of money, popularly called its purchasing power. (5)

Historically, the device that has evolved most frequently in many different places and over the course of centuries to give government some responsibility for monetary matters, yet at the same time limit the power thereby given to government, is a commodity standard, i.e., the use as money of some physical commodity such as gold or silver, brass or tin, cigarettes or cognac, or various other goods. (6)

In the first century AD, the stability of the currency was ensured by the natural scarcity of the metal, correctly says Dr Otmar Issing, former chief economist at the European Central Bank (ECB), whom I nevertheless quoted in note 4 contra (against) my position, in his new book “The Birth of the Euro” (Cambridge University Press, 2008).  (7)

This tradition of the gold standard anchored the exchange acceptability of the currency in the metal.

In that tradition of the gold standard, people placed trust in the lasting value of their savings, says Dr Issing correctly. (8)

In that tradition of the gold standard, stock prices were related to the intrinsic value of the company.

Under the gold standard, central banks had to intervene when the market rate of the currency fluctuated outside certain bounds (9) and thus could not direct policy towards price stability (10), says Dr Issing correctly.

This tradition of the gold standard is the antithesis of today’s system of fractional-reserve banking, leverage, and derivatives.

In today’s system, the financial industry, not just the central banks, intervenes with a view to achieving stock, and other, prices which correspond to a model which aims at capturing the “reality” of economic relationships by determining the number of fiat digits which is necessary to achieving leverage and guaranteeing a virtual return. (11)

Whereas the tradition anchored the exchange acceptability of the currency in the metal, the financial industry anchors the acceptability of fractional-reserve banking, leverage, and derivatives in the expectations of the sheeple that reality will not make the virtual system collapse.

Hence, the sheeple continued to save in “their” currency.

As the fractional-reserve banking system is collapsing, governments are now being convinced to guarantee the digits which do not exist. There is no way of course that these guarantees will lead to inflation, thereby further eroding the value of currencies.

Until some months ago, our Masters needed to display gargantuan efforts in orders to find one billion euro. These days, the banks just have to name their number into in order to get the (their) number of billion euros.

PRICE OF GOLD

Spending on gold nears $3bn as investors flee shares, says the 19 October 2008 Independent on Sunday. Gold is seen as a natural safe haven given the uncertainty in the banking system and the volatility in the stock market, says the article. (12)

Still, the price of gold is not moving, except downwards. And this at the moment that the financial system, with its fractional-reserve banking, leverage, and derivatives, is collapsing.

Whereas the price of paper gold is (more on the nature of paper gold in a moment – paragraph “Monkey see, Monkey do!”) is at the time of writing under $800 an ounce, if the holders of the certificates embodying the contracts/wagers as to the future price of gold receive delivery of the gold, they could well be able to sell that physical gold for more than $1,000 in the streets of Bombay, Shanghai, Moscow or Rio de Janeiro. This mere fact indicates that the paper-gold market is fraudulent, just like today’s guarantees by governments to guarantee the bank deposits of “their” citizens are fraudulent.

The only function of today’s financial industry, which our Masters want to preserve at all cost, is to enable the virtual paper digits, which are created out of nothing, to fly around. Those digits do not represent anything anymore and one can’t buy anything with these digits in the physical economy. This, our Masters call leverage, an arrangement that exaggerates the effect of the price of the underlying investment. By analogy, they even call this volatility.

Just try queuing at “your” bank and ask them your virtually digitised savings. Hence, the fraudulent government guarantees to guarantee these digits.

DOLLAR IS THE CENTRE

The US dollar is the centre of this financial system.

Since at least the 1920s, the USA possesses the capacity to disrupt the world economy, writes Martin Wolf this Wednesday 22 October 2008 morning in the Financial Times. (13)

Before 15 August 1971, when USA President Richard Nixon broke the Bretton Woods agreements of 1944, this centrepiece was linked to gold at fixed parity of 40 something dollar an ounce and all other currencies were linked to the centrepiece.
Nixon did never explicitly say that he severed the link of the US dollar with gold. He only repealed its redeemability, thinking that from the moment you have a claim to gold, you possess that gold, even though there is no way in which that debt could be settled by the debtor through a physical transfer of gold.

Since then, the ability of the USA to literally print dollars to service and repay it obligations establishes its financial and economic hegemony (backed up by the military threat implied or real), as seems thus being confirmed this morning by Martin Wolf in the Financial Times.

If the USA wanted its inflating currency remaining stably ANCHORED to its gold reserves, it should have inflated those reserves.

There were two ways to achieve this inflation of the gold reserves. Either through taking more physical gold in reserve or through letting the price of gold proportionally float to the extent that the currency was inflated.

The dollar regime has done neither since 1944.

At the end of the day, we are left with a financial system without anchor.

MONKEY SEE, MONKEY DO!

So-called gold bugs then became only interested in paper gold, that is, contracts embodying wagers as to the price of gold as it will be determined by the buying and selling of the traders of physical gold. The contracts are sold by the bullion banks to the oil producers and by the gold mines to the hedge funds. Every increase in the price of gold leads to problems for the gold mines (c.q. the hedge funds) which must then sell gold below the market price.

These so-called gold bugs were not interested in the possession of gold as a wealth reserve, but only in concluding wagers over the price of gold, paper contracts about the price of gold, in order to pocket the monetary surplus value.

By the same token, we arrived at a monetary system whereby money was disjoined from the real economy.

Hence, the economic and monetary assessments which the ECB,
which does not have to intervene when the market rate of the euro fluctuates outside certain bounds and thus can direct its policy towards price stability,
has to carry out in order to fulfill its mandate of maintaining price stability cannot be carried out in a logically sound and methodologically correct manner “under one roof”, as it were. (14)

to be continued … perhaps, some freely floating currencies have also freely floating
(i.e., not linked at fixed parity of 40 something dollar an ounce)
gold reserves, contrary to what a civil servant like Dr Issing dares to divulge.

Dr Issing seems to have forgotten that his first boss at the ECB, the late Dr Wim Duisenberg, said in his Acceptance speech of the International Charlemagne Prize of Aachen for 2002 that the euro is the first currency that has not only severed its link to gold, but also its link to the nation-state. (15)

Ivo Cerckel
Siquijor, 22 October 2008

NOTES

(1)
George Reisman, “Capitalism – A Treatise on Economics”, Ottawa, Illinois, Jameson books, 1998. 3rd ed. p. 142

(2)
Here I am paraphrasing
Dr Otmar Issing, former chief economist at the ECB, “The Birth of the Euro”, Cambridge University Press, 2008, p. 81
in order to defend a thesis contrary to Issing’s  thesis.

(3)
Here I am paraphrasing p. 93 of Dr Issing’s quoted book
in order to defend a thesis contrary to Issing’s  thesis.

(4)
CONTRA
Otmar Issing, op. cit.

p. 107
Money provides a natural nanchor for a monetary policy commitment to price stability.
IVO: only if money has value

p. 180 euro acts also as an anchor currency.
IVO: yes, because it has gold reserves

(5)
Ludwig Von Mises, “The Theory of Money and Credit”, Indianapolis, Liberty Classics, 1980, (the original second German-language edition of this book was published in 1924), p. 177

(6)
Milton Friedman, “Capitalism and Freedom”, The University of Chicago Press, 1982, 2nd ed., pp 39-40

(7)
Issing, op. cit., pp. 3-4

(8)
Issing, op. cit., p. 22

(9)
Issing, op. cit., footnote p. 169

(10)
Issing, op. cit., p. 170

(11)
Here I am paraphrasing p. 81 of Dr Issing’s quoted book
in order to defend a thesis contrary to Issing’s  thesis.

(12)
Spending on gold nears $3bn as investors flee shares
By Mark Leftly
The Independent on Sunday, 19 October 2008
http://www.independent.co.uk/news/business/news/spending-on-gold-nears-3bn-as-investors-flee-shares-965959.html
SNIP
Investors spent $2.8bn (£1.6bn) on gold on world stock exchanges in the third quarter this year, as individuals and companies fled volatile share markets.

(13)
The world wakes from the wish-dream of decoupling
By Martin Wolf
Financial Times, October 21 2008 18:50 | Last updated: October 21 2008 18:50
http://www.ft.com/cms/s/06241274-9f94-11dd-a3fa-000077b07658,s01=1.htm
SNIP
The US retains the capacity to disrupt the world economy which it has possessed since at least the 1920s.

(14)
Issing, op. cit., p. 112

(15)
International Charlemagne Prize of Aachen for 2002
Acceptance speech by Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9 May 2002
http://www.ecb.eu/press/key/date/2002/html/sp020509.en.html
SNIP
The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro.