Monetary History in Ten Minutes

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Journal of a Wayward Philosopher
Monetary History in Ten Minutes

August 23, 2016
Hot Springs, VA

Money, moreover is the economic area most encrusted and entangled with centuries of government meddling. Many people – many economists – usually devoted to the free market stop short at money. Money, they insist, is different; it must be supplied by government and regulated by government. They never think of state control of money as interference in the free market… If we favor the free market in other directions, if we wish to eliminate government invasion of person and property, we have no more important task than to explore the ways and means of a free market in money.”Murray Rothbard

The S&P closed out Tuesday at $2,183. Gold closed at $1,343 per ounce. Crude Oil closed at $46.81 per barrel, and the 10-year Treasury rate closed at 1.58%. Bitcoin is trading around $585 per BTC today.

Dear Journal,

Little Maddie is rapidly approaching her second birthday, and I swear she is going on twelve. Like her mother, Madison is quite adept at the art of talking, and she communicates with us very well. This makes life so much easier when she tells us exactly what she wants for dinner; it makes life just a touch more difficult when she wakes up in the wee hours of the morning and tells us she wants to watch Mickey Mouse.

While this seems terribly inconvenient to her parents now, I can only imagine how immaterial it will seem when Maddie is a teenager and we just hope she comes home before the wee hours of the morning. Nevertheless, it all makes perfect sense when she looks up at us with her blue eyes shining bright and says I love you sooo much!

Moving on to finance…

Today’s journal entry is actually an excerpt from The Individual is Rising. Along with watching Mickey Mouse episodes at 5:00 in the morning, I have been working to complete the third edition of the book which will be published this Autumn. I am excited about how this edition has shaped up because it is loaded with practical philosophy, opportunities, and actionable financial strategies; more-so than the first two editions.

We will be offering an advanced digital copy of the book absolutely free to members of the Zenconomics Report before it hits the shelves at Amazon. Simply enter your name and email address into the form at the end of this entry to join our network and receive an advanced copy.

What’s so important to understand about the evolution of the monetary system is the fact that it has directly shaped the very world in which we live. Money is half of every transaction thus half of the entire economy, and most people spend most of their time working for money. Like it or not, this dynamic makes money one of the single most important items in everyone’s life. As such, we would be wise to know its story. Here’s a brief monetary history:

Prior to the rise of central planning, most of the world operated on the gold standard through which international trades were settled in gold.

While not perfect, the classical gold standard kept nations mostly honest in their financial dealings with each other. It also forced nations to live within their means because large trade deficits had to be settled in gold which drained gold from the nation’s reserves. Conversely, when a nation ran a trade surplus it received additional gold to add to its reserves. Such a system placed limits on national debt and encouraged sound finance because the incentives were properly aligned.

World War I effectively put an end to the classical gold standard. To finance the war effort, the countries involved looked to currency inflation to expand their money supply and they suspended trade settlement in gold. Most of these nations attempted to go back to the gold standard once the war was over, but the excessive money-printing distorted valuations and the necessary economic corrections were not politically desirable, so the classical gold standard was never re-implemented.

During the same time period, the shift towards central planning in America led to the creation of the Federal Reserve System in 1913. It is important to note here that the Federal Reserve (the Fed) is not a government agency, but rather a quasi-private central bank (actually a consortium of banks that act as one unit) exclusively chartered by the U.S. government to centrally manage the banking system.

Not coincidently, two centralizing amendments to the U.S. Constitution were passed in that same year. The 16th Amendment created the national income tax which brought the IRS to power. The 17th Amendment established the direct election of U.S. Senators whom were previously elected by state legislatures. This effectively snuffed out any remaining sparks of States’ rights that had survived President Lincoln’s water hose.

Though the foundation had already been set, the year Nineteen Hundred and Thirteen ramped up the centralization process and set the stage for the greatest economic boom ever witnessed. As we have seen throughout history, centralization can lead to a tremendous boom in the short term, but it is always followed by either an epic bust or a long march down the road to serfdom.

Upon opening its doors, the Federal Reserve monopolized control over the currency supply and it functioned as a banker’s bank – as the lender of last resort. Naturally this created moral hazard within the banking system as the banks were free to pyramid large amounts of debt on top of capital reserves with the Fed ready to step in and provide them with liquidity should their increasingly riskier financial bets go bad.

With the Fed’s banking cartel established, member banks could lever up their balance sheets for outsized profits with the knowledge that the Fed would print money for them to prevent bank runs. This was sold as a progressive feature of the system, but in reality it incentivized unsound lending practices and credit expansion en masse. We are still living with the effects of this moral hazard today, and we saw in 2008 that significant losses within the banking sector will be socialized to perpetuate the system.

The Fed quickly took on additional functions as America moved further towards coerced collectivism in 1933 with the onslaught of the New Deal. To support the myriad of New Deal welfare programs, Franklin Delano Roosevelt (FDR) issued an executive order that closed the domestic gold window and criminalized the private ownership of gold by American citizens. This was done because the domestic gold window limited inflation since Americans could redeem paper dollars for gold at any time. This direct redemption of dollars for gold served to contract, or deflate, the money supply which limited the Fed’s ability to monetize government debt.

With Americans no longer free to redeem their dollars for gold, the Fed could backstop the New Deal programs by inflating the currency supply with little resistance. Foreign central banks were still allowed to redeem dollars for gold, however, which served as a partial constraint to the inflationary regime.

In 1944, representatives from 44 nations of the world met in Bretton Woods, New Hampshire to discuss a new international monetary system needed to replace the classical gold standard which had been dismantled by the world wars. The agreed upon ‘Bretton Woods System’ established the U.S. dollar as the international reserve currency.Bretton Woods

As the world’s sole reserve currency, the dollar replaced gold as the medium for international trade settlement. This meant that all international goods would be bought and sold in U.S. dollars no matter which nations were doing the buying and selling. The dollar would remain pegged to gold at $35 per ounce and other nations could redeem their dollars for gold through the ‘gold window’.

The dollar’s convertibility into gold on demand was to serve as a ‘check’ on the United States to prevent excessive currency inflation. This greatly accelerated the adoption of the Bretton Woods System as the gold window served as a promise to the international community that the U.S. would maintain the value of the dollar.

The Bretton Woods System bestowed an enormous privilege upon the United States as it created a global demand for dollars. Since all international trades would be settled in dollars, all nations would need to hold U.S. dollars to facilitate foreign trade.

This dynamic rendered trade deficits irrelevant for the U.S. Under the gold standard, trade deficits necessitated an outflow of gold from reserves. Under Bretton Woods, trade deficits necessitated an outflow of paper dollars created from nothing. In other words, the U.S. was in the advantageous position of swapping fiat scrip for tangible foreign goods and electronics.

This artificial global demand for dollars is what powered the United States’ “guns and butter” campaign which ramped up in the 1950’s.

The Great Society programs expanded upon the domestic welfare state and the undeclared wars in Korea and Vietnam launched the warfare state and the rise of the military-industrial complex. As you can imagine, a policy of welfare and warfare is not cheap and it must be financed.

The United States financed its guns and butter by selling Treasury Bonds and inflating the currency supply. Under Bretton Woods, other nations were happy to buy U.S. debt because they needed to increase their dollar holdings. And the United States was able to run trade deficits with other nations without hindrance because they could send newly created dollars overseas rather than gold from reserves.

The Federal Reserve began to function more and more as a big government financier during this time period as it ramped up the currency inflation to support the welfare/warfare state. The United States did not experience drastic price increases domestically, however, as most of the inflation was in effect exported overseas due to the international demand for dollars.

As the undeclared war in Vietnam continued and the Great Society programs expanded, other nations began to fear that excessive currency inflation in the United States would lead to a re-valuation of the dollar to gold. They recognized that the dollar was now overvalued at $35 per ounce of gold because of the Fed’s activities so foreign nations began to increasingly exchange dollars for gold through the gold window. Here’s former French President Charles de Gaulle in 1965:

“The fact that many countries accept as principle, dollars being as good as gold, for the payment of the differences existing to their advantage in the American balance of trade… this fact leads Americans to get into debt and to get into debt for free at the expense of other countries… We consider necessary that international trade be established as it was the case before the great misfortunes of the world, on an indisputable monetary base, and one that does not bear the mark of any particular country. Which base? In truth no one sees how one could really have any standard criterion other than gold!”

As a result of this run on the dollar, the United States’ total foreign reserve gold coverage had diminished to 22% by 1971.

On August 15, 1971, President Richard Nixon closed the international gold window and implemented domestic wage and price controls in the United States. Nixon assured the world that the gold window would only be closed temporarily and that the dollar would be redeemable in gold again at some point in the near future.

Your dollar will be worth just as much tomorrow as it is today.” Nixon proclaimed on television with a straight face. “The effect of this action, in other words, will be to stabilize the dollar.

Prior to closing the gold window, Nixon and his Secretary of State Henry Kissinger struck a deal with the Saudi Royal Family. The agreement was that the Saudis would price all international oil sales exclusively in U.S. dollars and they would refuse settlement in all other currencies. In return the United States would provide military protection for Saudi Arabia and supply the Saudis with military-grade weapons. By 1975 all OPEC nations, not just the Saudis, had agreed to settle oil trades exclusively in dollars.

This deal effectively kept the U.S. dollar as the world’s reserve currency, even with the breakdown of the Bretton Woods System, as all other countries needed to obtain dollars in order to purchase oil from the largest oil producing nations in the world. Of course the gold window was never re-opened, and the United States’ welfare/warfare state has exploded with the removal of the last honest restraint on money-printing.

So this is where we stand today – in the midst of a global fiat monetary experiment.

Since 1971 the U.S. dollar and all other currencies have been fiat currencies backed by nothing and created from nothing. With all ties to gold removed, the U.S. and many other nations have been ferociously inflating their currency supply which has resulted in the explosion of prices across the board. This is why you could purchase a hamburger for a quarter in 1971, but you are lucky if you can purchase a cheap gumball for a quarter today.

The deliberately obscured fact is that this is not a case of rising prices, but rather of your dollars becoming worth less and less, thus requiring more dollars to buy the same item of value. We have been conditioned to believe rising prices are a good thing, or at least normal. But prices do not naturally rise year after year; especially as increased productivity, automation, and mass production lower the costs of manufacturing and distribution. Price inflation is ultimately an artificial monetary event and not a natural process.

To come full circle, the U.S. dollar has lost 98% of its value since the adoption of central planning and the creation of the Federal Reserve System in 1913. Stated another way, the dollar could purchase on average 50 times more goods and services back in 1913 than it can today. Despite Nixon’s proclamation on national television, the value of the U.S. dollar fell off a cliff.

While incomes in general have also risen during the last 100 years, their rise has not kept pace with the dollar’s loss of value. This is the primary reason households now require two wage earners to make financial ends meet.

The rise of economic central planning and the global fiat monetary system has also led to an explosion of debt, especially in the Western economies and Japan. Without hard money restraint, nations have been able to finance deficits and run up enormous debt that can never possibly be paid back…

More to come,

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Joe Withrow
Wayward Philosopher

For out-of-the box coverage of market updates, major events in the financial markets, the evolution of monetary policy, and how to position your finances to benefit from developing macroeconomic trends, please join the Zenconomics Report!

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The Plight of the Founder

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Journal of a Wayward Philosopher
The Plight of the Founder

August 10, 2016
Hot Springs, VA

Why don’t you judge for yourselves what is right?” – Jesus of Nazareth, Luke 12:57

The S&P closed out Tuesday at $2,181. Gold closed at $1,338 per ounce. Crude Oil closed at $42.69 per barrel, and the 10-year Treasury rate closed at 1.545%. Bitcoin is trading around $590 per BTC today.

Dear Journal,

My mind wanders off of the beaten path once again this week as I finish up A Lodging of Wayfaring Men by Paul Rosenberg for the second time. As I read this book, I can almost ‘see’ the plight of the founder as it has played out over and over again throughout human history.

In order to understand the plight of the founder, we must first understand a key function of life… all life. The basic laws of thermodynamics tell us that closed systems naturally evolve towards a state of maximum entropy; entropy being the amount of energy not available for work.

Life systematically reverses entropy. Continue reading “The Plight of the Founder”

Ten Things To Do Instead of Voting

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Journal of a Wayward Philosopher
Ten Things To Do Instead of Voting

August 4, 2016
Hot Springs, VA

Every election is a sort of advance auction sale of stolen goods.” – H.L. Mencken

The S&P closed out Wednesday at $2,163. Gold closed at $1,364 per ounce. Crude Oil closed at $41.08 per barrel, and the 10-year Treasury rate closed at 1.54%. Bitcoin is trading around $584 per BTC today.

Dear Journal,

Election season is now in full swing here in the U.S. – much to the agony of those of us who believe in human liberty, voluntary association, and participatory networks.

Once again the intelligentsia have convinced people that their future hinges directly upon the outcome of the next presidential election, and inevitably we non-voters are denounced for lack of patriotism by the 40% of the population who still place their faith in the voting booth. Naturally, our first reaction is to stand up for ourselves and explain our position:

“The essence of politics is coercion and, if necessary, violence…”, we attempt to explain in vain. Continue reading “Ten Things To Do Instead of Voting”

The Infinite Banking Concept: Privatize Finance and Become the Bank

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The Zenconomics Report July Issue

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Journal of a Wayward Philosopher
Zenconomics Report July Dispatch

July 28, 2016
Hot Springs, VA

The S&P closed out Wednesday at $2,166. Gold closed at $1,348 per ounce. Crude Oil closed at $42.00 per barrel, and the 10-year Treasury rate closed at 1.51%. Bitcoin is trading around $657 per BTC today.

Dear Journal,

The July issue of the Zenconomics Report has gone out to members of our network. In this issue:

The state of the sovereign debt markets… Negative interest rates come to Canada… Japan’s new “stimulus” announcement… the ECB may soon expand its QE program… Capital flight into U.S. markets… Alan Greenspan publicly endorses a return to the gold standard… Brexit updates… How to build a small fortune in 3-5 years… the Zenconomics Report Model Portfolio updates

Our model portfolio is off to a good start, and we added one additional position this month. The model portfolio is constructed according to the Beta Investment Strategy, and we have several other positions on our radar currently. Frankly, we expect this portfolio to skyrocket over the coming years as debt continues to build and negative interest rates continue to spread.

The Zenconomics Report is 100% independent, and all opinions are our own. It is also 100% free, though it is only available to members of our network. For access, simply sign-up using the form below.

We will also send you two free reports as a ‘thank you’ for subscribing.

Assess, Mitigate, Implement, and Prosper is a report detailing the concept and implementation of asset allocation.

The Zenconomics Guide to the Information Age is a 28 page report covering money, commerce, jobs, Bitcoin wallets, peer-to-peer lending, Open Bazaar, freelancing, educational resources, mutual aid societies, the Infinite Banking Concept, peer-to-peer travel, Internet privacy, and numerous other Information Age tips and tricks with an eye on the future.

To financial freedom!

The Beta Investment Strategy

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Journal of a Wayward Philosopher
The Beta Investment Strategy

July 22, 2016
Charlotte, NC

Most people think the secret to making money by investing is to find the stock that will go up. They all want to be an alpha investor, the big man on campus… That’s the whole game, they believe – seeking alpha… But the trouble with alpha is that it is unreliable… In the long run, it’s beta that makes fortunes, not alpha. Every study proves it… A beta strategy is completely different from an alpha strategy. Instead of trying to beat the market, you make the market your friend. It’s not your enemy. You don’t try to beat it; your just want to join it. And go along with it.” – Bill Bonner, Family Fortunes: How to Build Family Wealth and Hold on to It for 100 Years

The S&P closed out Thursday at $2,165. Gold closed at $1,332 per ounce. Crude Oil closed at $44.56 per barrel, and the 10-year Treasury rate closed at 1.56%. Bitcoin is trading around $655 per BTC today.

Dear Journal,

Wife Rachel and I are back in the Queen City for the weekend with little Maddie in tow. Accustomed only to mountains, pastures, and the wide-open spaces of the countryside, Madison stares up in awe at the tall buildings that loom overhead. Accustomed only to backwood country roads, her father tries very hard not to curse at all of the other motorists he shares the highway with.

We travel back to the city of our marriage this weekend to celebrate a soon-to-be new addition to the world of humanity. Friend Wade will soon be a poppa!

Rachel comes bearing gifts for the mother-to-be Kristi and her soon-to-be son, Thomas. I come to share a stiff drink with Wade and tell him how amazingly hard child-rearing is. Madison has been instructed to wake up crying at 3:00 am to hammer home my point. Continue reading “The Beta Investment Strategy”

Cede Not the Power Within

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Journal of a Wayward Philosopher
Cede Not the Power Within

July 13, 2016
Hot Springs, VA

Our integrity sells for so little, but it is all we really have. It is the very last inch of us, but within that inch, we are free…. An Inch, it is small and it is fragile, but it is the only thing in the world worth having. We must never lose it or give it away. We must never let them take it from us…” – Valerie, V for Vendetta

The S&P closed out Tuesday at $2,152. Gold closed at $1,335 per ounce. Crude Oil closed at $46.80 per barrel, and the 10-year Treasury rate closed at 1.51%. Bitcoin is trading around $660 per BTC today.

Dear Journal,

I’m not exactly sure where this entry is going to go. As regular readers know, I sit down weekly to write about whatever is on my mind.

No script. No filter. No agenda other than the spreading of ideas.

I do try to tie these entries in with one of my books or finance courses for commercial purposes so I can tell wife Rachel that I did some work today, but I am not always successful in that endeavor.

What’s on my mind this week is power – personal power. Continue reading “Cede Not the Power Within”

Become a Creator

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Journal of a Wayward Philosopher
Become a Creator

July 8, 2016
Hot Springs, VA

Let them be creators, not followers. Followers have a certain mentality, and independent creators a quite different mentality. We want creators – people who find solutions by themselves, who have their own conceptions of right and good, and who are capable of independent, righteous action. Followers don’t do that. To get the creator mindset, you have to get out of the way and let them rise to the occasion. Make sense? ” – Phillip Donson, A Lodging of Wayfaring Men

The S&P closed out Thursday at $2,097. Gold closed at $1,362 per ounce. Crude Oil closed at $45.14 per barrel, and the 10-year Treasury rate closed at 1.39%. Bitcoin is trading around $652 per BTC today.

Dear Journal,

Wife Rachel took it upon herself to take me out on a date earlier this week! She had recently discovered a picturesque country inn nestled in the heart of Virginia’s Blue Ridge Mountains, and she thought it was just the place for me. So we traveled an hour’s worth of winding country roads even deeper into the mountains of Virginia on a misty Tuesday night. Continue reading “Become a Creator”

The Zenconomics Report June Issue

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Journal of a Wayward Philosopher
Zenconomics Report June Dispatch

June 28, 2016
Hot Springs, VA

The S&P closed out Monday at $2,000. Gold closed at $1,330 per ounce. Crude Oil closed at $46.71 per barrel, and the 10-year Treasury rate closed at 1.46%. Bitcoin is trading around $650 per BTC today.

Dear Journal,

There will be no official entry today. Instead, I would like to invite you to subscribe to the Zenconomics Report in time to receive our first official issue. We will be sending out the monthly dispatch on June 30 to members of the Zenconomics Report mailing list.

The Zenconomics Report will cut through all of the noise, clap-trap, hoop-la, misinformation, and propaganda circling the financial markets. The financial media typically analyzes the markets from a binary perspective of “good versus bad”, often with an underlying agenda to push. This does seekers of financial information a major disservice, and it sets them up to crash and burn when the next Black Swan makes its appearance.

The digital age has made information nearly free for everyone with an internet connection, but this created an unforeseen problem. With the flood gates of information open, how do you know what information is good and what information is not so good? Continue reading “The Zenconomics Report June Issue”

Bitcoin and the Crypto Revolution

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Journal of a Wayward Philosopher
Bitcoin and the Crypto Revolution

June 22, 2016
Hot Springs, VA

Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative. ” – Nassim Taleb, Author of Antifragile: Things That Gain from Disorder

The S&P closed out Monday at $2,088. Gold closed at $1,271 per ounce. Crude Oil closed at $48.95 per barrel, and the 10-year Treasury rate closed at 1.70%. Bitcoin is trading around $670 per BTC today.

Dear Journal,

Bitcoin flirted with $800 last week before dropping all the way down to $630. Today it is hovering around $670. Such volatility is usually feared by the general public, and it is often cited as one of Bitcoin’s weaknesses. To me, this volatility is a beautiful example of price discovery in one of the freest markets on Earth. Continue reading “Bitcoin and the Crypto Revolution”