"When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it." [1]
Abstract
Gold and silver have both been on a tear as of late, exploding upwards in price to near blow-off levels. Many different reasons have been offered as to what precipitated these stellar performances: worries over Iraq; worries over Iran; problems in Nigeria; concerns over oil; fears of inflation with commodity prices going up to all time new highs; problems in the White House; the US dollar falling precipitously, etc.
The reasons are legion and too numerous to name. Rather than any one specific reason, it appears more plausible that a confluence of events have contributed to the angst of living in the paper fiat land of the 21st century new world order. Should be one for the history books if anyone survives to write about it.
If you listen to the news reporters on the radio and TV, they all have their favorite reason as to why gold is going up in price to 25-year new highs.
The truth be known, we too have our favorite cause or reason as to why gold and silver have been steadily rising in price. However, we are not quite sure how many are going to like it. Nevertheless, tell it we must.
Price
When we speak of price, exactly what are we referring to? A pair of new sneakers is up in price to $99 dollars a pair. The new car we want is up in price to $50,000.00
When we say up in price we are referring to price as being the amount of dollar bills needed to purchase or exchange for those items we want. We are talking about the quantity of money needed: X amount of dollars.
The greater the quantity of dollar bills needed to purchase the same amount of goods means the price has gone up. Read that again very slowly and let it sink in.
However, what makes the price or quantity of dollars needed to purchase an item with increase in the first place? Does it happen randomly by chance, or is there some sort of economical principle at work?
When two people come to trade or exchange things in the marketplace, one is a seller and the other is a buyer. Employing indirect exchange the buyer uses money to exchange for the goods he wants that the seller is selling.
The seller is willing to take the money in exchange for the goods he is selling. He does this because he has faith that he can take the money, go into the market, and purchase whatever goods he needs with the money at a future time.
The price is the agreed upon quantity or ratio of money (dollar bills) that the seller is willing to accept for his goods, and that the buyer is willing to exchange for the goods. Both must agree and be satisfied with the price before any exchange can take place.
Supply & Demand
Supply and demand obviously plays into the determination of price. If you are about to climb a very tall mountain late in the fall when temperatures are dropping you will want to have a heavy coat with you to keep yourself warm.
If there are more buyers that want to purchase the supply of available coats, the price of the coats will go up. There is more demand then supply.
If suddenly a huge shipment of coats come in, and most have already purchased their coats - the price of the new coats will go down. There is much more supply than demand.
The more evenly balanced supply and demand is - the more balanced is the price, it will not be subject to large swings up and down - all other factors being equal, which usually they are not.
The above example is just one simple example of one item in one specific situation. The economy is much more complex than the example provided.
Factors
Even within the sphere of just one item - say a particular coat - many factors go into the supply and demand of the coat that together affect the price differently in different regions.
For example: transportation is essential to move goods. Are they going by truck, train, plane, or boat? In what quantity are they being shipped? How far out of normal trade routes are the goods going? All these factors are involved in price formation. Moreover, this is just in regards to one simple item - a coat.
When one takes the aggregate prices of all goods and services in a nation's economy, or in the world economy into consideration, there is a confluence of a myriad of different variables of supply and demand that go into price formation.
Price in regards to the total aggregate of all goods and services entails a very complex set of variables. Are prices going up or down in general?
Omniscience
When discussing prices in a nation or in the world, huge volumes of many different items and an even larger volume of variables are at play. It is impossible for any one man or group of men to figure this all out.
I don't care how smart they are - how many doctorate degrees they have - no man or group of men can possibly equal the inherent knowledge of the marketplace and all of the transactions of the marketplace that contain all of the variables of supply and demand.
It is impossible. To attempt such is futile. To believe that a group of men could have such knowledge is illusionary at best and delusional at worst. Such behavior brings to mind interventional elitism: a superior class much like the priests of the Temples of old.
Only the market can possibly know what in total the market knows - to think otherwise is foolish egocentricity bordering on megalomania. This is why free markets should be left alone; without intervention by those that think they know better than the market does.
Why are we discussing this somewhat "dry" topic of price formation - because it is background information for what we really want to talk about: Gold and Silver Up In Price - What Does It Mean?
Price Formation
We have seen that individual prices can have a different set of variables affecting their quantity as opposed to overall or aggregate prices in a nation's economy.
Yet we often find economists and other wizards of finance talking about prices in general as either rising, falling, or staying about even. Some refer to this as price inflation. Other more ambitious types refer to it as the production miracle of modern day 21st century structured finance.
However, what they really are referring to is hedonic pricing, which is sort of like making believe you are wealthier when you take a dollar out of your left hand pocket and save it by placing it in your right hand pocket: the proverbial story of robbing Peter to pay Paul.
If the supply and demand for any particular good stays about even, is it possible for that item to go up in price? This is where a subtle nuances regarding demand comes into play.
Let's go back to our example with winter coats. On average every year for the past ten years the coat manufacturer has seen the demand - the number of coats wanted by market participants, go up by about 5% per year.
The manufacturer has a good idea that the demand for coats will be the same this year. Suddenly there is a hurricane, which knocks out many oil and gas refineries, causing the price of shipping to skyrocket.
Disposable Income
The coat manufacturer has to increase his price for the coats to make up for his extra cost. Now the people that were going to buy a coat have to pay more for it. At the same time, the price for fuel to heat their homes and drive their cars has gone up significantly.
They have less disposable income (all other things being equal which once again they're usually not, as perhaps they have received raises or the price of other goods have gone down) and cannot afford all the things they want to purchase.
Now it becomes a question of whether what the people want (potential demand) is the same as what the people can afford (actual demand fulfilled by buying).
It does not do the coat manufacturer any good if 10,000.00 people merely wish they could buy his coat but none of them can actually afford to buy his coat. What one wants and what one can afford are two entirely different things.
This is why disposable income is important. This is why savings is so important. Both groups of money are readily available to directly purchase new goods and services. So far we have only taken into consideration the supply and demand for the good to be purchased: the coat.
Money Supply & Demand
In the transaction of selling and buying a coat, we have stated there is a buyer who pays money for the coat, and a seller who agrees to accept a certain quantity of money (price) in exchange for the coat.
In any exchange between a buyer and a seller, there is present the good, and there is the money exchanged for the good. We have considered the supply and demand factors regarding the coat or good - what about the supply and demand of the money to be exchanged?
For example, as we stated above, just because the public wanted to purchase x amounts of coats, this did not mean that they could afford to buy the coats, and would, therefore, actually purchase them.
However, say most of the people worked for a large computer company that just renewed its labor contract with the local union. All of the workers suddenly received raises in their pay. Now they have extra income or money to pay the extra cost of the coat that the higher fuel and transportation costs incurred.
Previously, the people's demand for the money to buy the coats with did not match their supply of money. However, after receiving increases in their pay - they now have an increase in their personal income or money supply, which allows them to purchase the coat.
Once again, we are talking about a very specific good (coat) in a very specific situation (local). Even in this simple example, we see there are many different factors that come into play.
Aggregate Variables
Imagine the factors that exist when we talk about the aggregate prices and supply and demand for all the products that a nation produces; and then add into the mix the supply and demand of the money used to exchange for those goods. It is mind boggling to consider the variables and combinations thereof.
We have seen by our example that not only is the supply and demand for the goods and services purchased important in exchange, but the supply and demand for the money used in the exchanges is important as well.
Any large shift in the supply and demand variables in both the goods and the money supply will affect the prices paid. It is obvious that any unbalanced shift in the ratios of supply and demand on both sides of the exchange can have drastic changes in the price or quantity of money needed to make the exchange.
Price Inflation
This in turns leads to the fact that if there is a large change in the supply of money as compared to the demand for money, all other things being the same, any such increase will result in an increase in the price of the goods - as there is more money chasing the same amount of goods.
In aggregate, if the total amount of goods that a nation produces stays the same, but the money supply increases by 20%, then you can rest assured that prices of those goods are going to go up.
By going up in price, we mean that it takes a larger quantity (number) of dollar bills to purchase the same amount of goods. The ratio of the supply and demand for money - compared to the supply and demand for the goods purchased - determines the price.
Monetary Inflation
Accordingly, what occurred first: prices going up, or the money supply going up?
The increase of the money supply causes a greater quantity (number) of units of currency (dollars) to be bidding for the same amount of goods.
Higher prices or price inflation is the result of certain actions and factors - namely an increase in the money supply compared to the demand for money, as compared to the supply and demand for goods.
The cause is the increase in the money supply relative to the demand for the money. Price inflation is the result of monetary inflation. Nevertheless, what exactly is monetary inflation?
Is it simply an increase in the quantity of money available? The answer is no, not exactly.
It is the result the increased quantity of money has on the quality of the money.
The quantity is the number of units of money. The quality of money is the PURCHASING POWER of the money - what the money can purchase.
The quantity of money is of little import if its quality is deteriorating. As the money loses purchasing power, it takes an ever-greater amount (quantity) of money to purchase the same amount of goods.
Currency Debasement
This is debasement of the currency - the loss of purchasing power because of too much money supply compared to the demand for money. This is the true culprit - the thief that comes in the darkness of night and steals our wealth.
From this we see that prices do not go up as much as the value or purchasing power of our money goes down, which in turn makes the quantity of units of money go up (price) needed to purchase the same amount of goods.
When paper fiat debt-money can be created at will by the click of a computer key - the point of no return has already been reached. Our present day monetary system of paper fiat debt-money is beyond repair.
The only thing left to do is to return to a system of Honest Money - the hard currency system of our Constitution - a system of Gold and Silver coin.
Now comes that which led up to all this - something not often said, and even less seldom understood - and almost never properly addressed in one's financial and monetary affairs.
Recall that prices go up because the purchasing power of the money goes down.
This is why price inflation in a result not an effect. Price inflation is the result of monetary inflation.
There are other types of inflation as well: asset inflation, wage inflation, speculative and highly leveraged derivative inflation that affects international "hot" money flows via the new age carry trades.
None of these inflations can exist without monetary and or credit inflation first rearing its ugly head. They are all siblings of the creature of monetary inflation.
So now we see the reason why general overall prices go up: it is because the money supply increases more than the demand for the money increases, as compared to the supply and demand for goods and services.
Hence, there is a ratio of a ratio at play: the supply and demand of money compared to the supply and demand of goods.
Divine Knowledge
We have found there are three major ratios that affect prices: the ratio of the supply and demand for money, the ratio of the supply and demand of goods, and the ratio between these two supply and demand equations.
The ratio of these two ratios is one of the main data points that determine if general prices are rising or falling. However, is it possible to figure out this ratio? The government says it is. The economists who make their livelihood by predicting such rarified data points seems to believe it can be done. Myself - I'm a bit skeptical.
To believe that a group of 12 men: the Federal Reserve Board of Governors, can possibly calculate any of the above statistics, let alone the ratio of one to another - is absurdity run amuck. Delusions of grandeur come to mind. It is nothing but elitism pure and simple.
Furthermore, why would anyone want to know those statistics and information even if they could? The answer is because, as all good financial wizards know - they must be in possession of the Holy Grail that mere mortals are not aware of.
Otherwise, they would not have the power and control over the people that all good wizards must have. The overlords would not be able to pontificate on subjects that the common man has little, if any, experience of. They would not be in possession of the money power.
Just as the priests of the Temple used the arcane knowledge of the stars and planets to mesmerize and hold sway over the citizenry, so too do todays wizards of finance use esoteric and unintelligible economic measurements such as hedonics to hold control over the people.
In addition, the people receive the information in a foreign language called Greenspeak. The goal is to present an illusionary charade of complexity so convoluted that the people quickly acquiesce to any possibility of ever being able to figure it out, let alone understanding and employing it.
In the end, the people cherish and choose protection over freedom and liberty. We sheepishly agree with our overlords that it is best to leave it all in the hands of the elite masters of the Temple; and that we should be grateful that we have them to protect us from ourselves.
Inflation
We have established that price inflation is a result not a cause. The cause of price inflation is the monetary inflation that comes first: a rise in the money supply greater than the demand for money.
This is no different from the fact that deflation is the result of the inflation that came before. If you want to alleviate deflation then you must alleviate the inflation that leads to it.
The increase in the money supply in excess of the demand for money will cause prices to rise. By rising prices, we mean that it takes a greater quantity or number of units of the currency to purchase the same amount of goods.
As an example - I go to my local car dealership to buy a new car. The price of the car is $25,000.00. To make a living I am a landscaper. This means that winters are slower in income then summers. Because I have not been working much, I pass on buying the car.
When fall comes, I go back to the car dealership, having saved some money to go towards paying for the car, which I still need a loan for in order to be able to buy the car. The price of the same vehicle is now $30,000.00 dollars.
I am shocked and say to the salesman - "what happened, I was in here earlier in the year and that same car was only $25,000.00 - did they change something on or in the car?"
"No" says the salesman, "it's the same car." I reply, "then what caused it to go up in price?" "It's called inflation kid - everything goes up in price," bellows the salesman as he walks away.
As the salesman said: it's the same car, nothing is different about it. It is not more valuable now then it was 8 months earlier - it just costs more.
What makes the car cost more money is the value or purchasing power of the money used to purchase the car has gone down, causing a greater number of units of the currency needed to purchase the same amount of goods, i.e. the car.
Currency Debasement
This is true for almost all rising prices - they are the result of monetary inflation that debases and lowers the purchasing power of the unit of currency. Since 1913, the U.S. Dollar has lost 95% of its purchasing power. The Fed has been doing one hell of a job.
This is the reason why cars now cost what houses used to cost. This is why houses that used to sell for $100,000.00 now cost a million. This is why a wedding that used to cost a couple to a few thousand dollars now cost $30,000.00. This is why you can go broke trying to send two or three kids to college, as a small fortune is now needed to pay the cost.
A can of coca-cola is the same as it was back in 1950. In 1950, the soda cost $10 cents. Today the can of soda costs 100 cents. If the manufacturer is doing their job correctly, they should have learned by now how to produce the can of soda for LESS than it cost back in 1950. The increased efficiency of production should lessen the price - not increase it.
It is because the Fed, and its proliferate creation of excess money and credit, that things have gone up so much in price. The things are generally the same things. The loss of purchasing power causes the need for more units of money (quantity) to pay for the same amount of goods.
The businessman knows that the money he accepts in exchange for his goods has lost purchasing power; therefore, he demands a greater quantity of it, so that when he goes to buy goods in the market, he will have enough money to do so.
The Price of Gold
What about gold, does gold go up in price because the value of the money used to purchase it goes down? Yes - that is the exact reason why gold goes up in price. Gold goes up in price commensurate with the loss of purchasing power of the dollar.
Now the part that many do not want to hear - but it is the truth, and if more people realized it, we would be much better off: monetarily, financially, and economically. We would not accept the unacceptable.
It does not increase one's wealth to buy gold and hold it for one or two years; and to then sell it for paper fiat dollars. Gold, and all other goods, go up in price because the quality or purchasing power of our money goes down.
As we have shown, this means that a greater quantity of units of money (price) is required to buy the same amount of goods. This is currency debasement or loss of purchasing power.
The quantity of the money supply can, and does, affect the quality or purchasing power of the currency.
If the supply/demand ratio of money is greater than the supply/demand ratio of goods and services available for purchase - the price of the goods goes up.
This is true for gold as well - because gold is priced in dollars.
If one purchases gold for $500 dollars an ounce, and the price goes to $1000 an ounce, it is because the purchasing power of the dollar has fallen that the price of gold goes up.
If one sells their gold after it has gone up in price, and accepts fiat dollar bills in exchange for the gold, then they have not increased their wealth or purchasing power.
They are accepting a larger quantity of dollar bills to make up for the quality (purchasing power) or value that the unit of currency (dollar bill) has lost. This is one of the secrets the guardians of the Temple do not want us to know.
This is the reason why we have said that a gold standard that backs the currency, even if it is backed 100%, is not a viable solution for the debased and near worthless condition of our monetary system. It is beyond repair and needs to be replaced - not backed. Our currency is no longer worth backing with gold - if ever it was.
As the US Constitution and THE COINAGE ACT OF 1792 mandate - our monetary system is based on a silver standard, with a bimetallic system of silver and gold coin.
Do not believe that the price of gold and silver going up in dollar bills that are constantly losing value or purchasing power is beating the system of paper fiat. All it is doing is allowing one to tread water and to keep up with the devaluation of the currency.
Do not sell your silver and gold for paper fiat debt-money. Do not exchange your precious metal futures or options for dollar bills - make them deliver the metal to you - make them honor the contract by fulfilling their obligation. Keep them honest - demand Honest Money.
"Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose." [2]
Come visit our new website: Honest Money Gold & Silver Report
And read the Open Letter to Congress
[1] Frederic Bastiat, The Law
[2] John Maynard Keynes, The Economic Consequences of the Peace
