ON THE SELF-CORRECTING NATURE OF IRRATIONAL MARKETS

In November 2006, Professor Antal Fekete addressed the 2007 class of MBA students at the University of Chicago, the then bailiwick of Milton Friedman, the well-known academic apologist for fiat currencies.

Professor Fekete was to deliver a scathing rebuttal of Friedman’s theories. The professor, a long-time proponent of the gold standard and its role in monetary affairs, believed that John Maynard Keynes on the left and Milton Friedman on the right had given intellectual comfort to policies responsible for today’s monetary problems—the elimination of gold from the international monetary system.

But Professor Fekete did not deliver his address criticizing Friedman. The day before he was to speak, Milton Friedman passed away. Instead of criticizing Friedman, Professor Fekete instead warned the students about the fragility of today’s paper markets, markets that had become an extraordinary inverse pyramid of derivatives (then $480 trillion, now $668 trillion) and potential defaults built on irredeemable promises.

The students gave little thought to the Professor’s warnings. They had prepared too long for their chance at the brass ring offered by Wall Street investment banks, the wealthy moneychangers in the temple of fiat currencies. As about-to-be graduates of the prestigious MBA program at the University of Chicago, the students had much to expect upon graduation.

When the Professor delivered his remarks, the August 2007 credit contraction was still nine months in the future; close, but still well outside the world of possibilities the students believed real.

One student asked: “Even if you’re right, won’t the markets self-correct?”

To the true-believers in paper money, paper markets and paper profits, self-correction was the accepted ideological panacea to whatever the markets would do.

That student never expected that the coming self-correction would wipe away his expected future. That instead of a large starting salary with significant bonuses at

Lehman’s, Bear Stearns, Merrill Lynch, or Morgan Stanley, he instead would be wondering how he could repay his student loans when the bank he believed would be his future home had collapsed or merged with another institution to avoid insolvency.

At the time, such possibilities appeared improbable if not outright impossible.

Today, they have become the precursors of what is yet to be. A world so at odds with yesterday, that few can imagine what will happen next.

Dmitry Orlov is one of the few that can do so.

DMITRY ORLOV’S FIVE STAGES OF COLLAPSE

Dmitry Orlov, author of Reinventing Collapse; The Soviet Example and American Prospects (New Society Publishers, 2008), watched the collapse of the Soviet Union in the 1990s and predicted a similar crisis would later occur in America.

Buckminster Fuller had also predicted the collapse of the Soviet Union and America in 1981—the twilight of the world’s power structures—in his book, The Critical Path (St. Martin's Press, 1981). Both nations crippled by excessive debt brought on by excessive military spending (what Bucky called killingry) were fading behemoths whose passing would make way for a better world.

Orlov writes:

Having given a lot of thought to both the differences and the similarities between the two superpowers - the one that has collapsed already, and the one that is collapsing as I write this - I feel ready to attempt a bold conjecture, and define five stages of collapse, to serve as mental milestones as we gauge our own collapse-preparedness and see what can be done to improve it…

Stage 1: Financial collapse. Faith in "business as usual" is lost. The future is no longer assumed resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost

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Stage 2: Commercial collapse. Faith that "the market shall provide" is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm…

Stage 1 in Orlov’s scenario is well underway. The vast majority of investment and commercial banks are now insolvent, propped up and still in business only because of recently granted government guarantees designed to prevent workers from realizing their life savings are in imminent danger.

In Orlov’s Stage 1, savings and access to capital are lost. In modern economies, capital, i.e. credit-based paper has been substituted for real money, gold and silver. Credit-based paper money is no more real money than an image/belief in god is GOD. Savings, in mature credit-based economies as the US and UK are now virtually non-existent.

Capital is but thinly disguised credit and credit is now rapidly disappearing, a condition that will be fatal for those addicted to its continuing presence, e.g. corporations,

Governments and workers, especially in the US, UK, Europe, etc. New loan activity has fallen 91 % year to year. The consequences will be unprecedented and extraordinary.

In 2009, the economic train wreck now in motion will occur. It will not be a one time event. It will be a successive series of protracted crisis in conjunction with continuing breakdowns in access to credit, goods and services, an escalating and cascading series of previously unimaginable events.

In today’s monetarily debased markets, credit has become essential for all commercial activity. This dream of bankers is the nightmare of producers and savers. Credit becomes compounding debt which becomes bankers’ profits also resulting in increasing defaults and bankruptcies.

Modern economics is not rocket science. It’s an abomination on the economic body of mankind.

Stage 2 in Orlov’s scenario will follow in the wake of Stage 1.

Stage 2 is closer today than it was yesterday. The end game predicted by some will now become the reality for all. The predicted events have no basis in recent memory for those who will be affected. The three hundred year old world founded on credit-based paper money is ending. The world’s central banks which substituted paper for gold are finding themselves unable to solve the problems their fiat money has created. The consequences are far greater than people can imagine—a limitation that will not prevent them from happening.

GOLD, SCISSORS, PAPER

We who have grown up in the world of credit and debt have no memory or real understanding of the role that gold played in monetary affairs prior to the substitution of central bank credit-based paper for sound money. When the connection was cut between gold and money, few understood the consequences, consequences which are now upon us.

Uncle Milton and Uncle John

Gave much thought to what was wrong

But their bright ideas about the public purse

Have now made things so much worse

Discussion of the monetary role of gold and silver has been expunged from discussion in today’s universities. One of the world’s great economic thinkers whose writings consistently predicted today’s collapse, Ludwig von Mises of the Austrian School of Economics was never accorded a paid position in an American university.

Although given the status of a visiting professor by New York University, Mises was not paid a salary and had to depend on outside assistance in order to survive.

That far lesser teachers were salaried in America is an indication why today most American economists are unable to adequately explain or solve our economic problems

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PUTZES FROM PRINCETON

The influence of the US military-industrial complex over academic discourse, while exceedingly effective, has come at a considerable cost to the nation. President Dwight D. Eisenhower warned of this possibility in his Farewell Speech to the nation in 1961.

Freedom and intellectual inquiry are not unrelated—nor are tyranny and blind obedience.

Professor Fekete’s intended address at the University of Chicago was titled Where Friedman Went Wrong and included the following quote from Professor Walter E. Spahr, Chairman of the Department of Economics at NYU from 1927 to 1956:

What is the meaning of a gold standard and a redeemable currency?

It represents integrity.

It insures the people’s control over the government’s use of the public purse.

It is the best guarantee against the socialization of a nation.

It enables a people to keep the government and banks in check.

It prevents currency expansion from getting ever farther out of bounds until it becomes worthless.

It tends to force standards of honesty on government and bank officials.

It is the symbol of a free society and an honorable government.

It is a necessary prerequisite to economic health. It is the first economic Bulwark of free men.

Professor Spahr’s eloquent words are a timely reminder of the importance of the gold standard and do much to explain how we have arrived at our current circumstances.

The gold standard is the constraint upon bankers and government that would have prevented the disaster that is now upon us; and, now in 2009, it is too late to undo what they have done.

Professor Spahr understood that the essential role of gold in monetary systems is to prevent bankers and government from overstepping the bounds of sound governance and prudent banking, bounds, which if undone, will bring ruin to the nation and to its people. When President Nixon severed the ties between the US dollar and gold—as encouraged doing so by Milton Friedman—the very fears of men such as Spahrs and Fekete were set in motion. Now, three decades later, the results are in.

Financial markets are frozen, global trade is slowing rapidly, governments have debased their now fiat currencies and the collective excesses of government and bankers have brought the world to the edge of another Great Depression. The warnings of those such as Spahr and Fekete were not heeded. Indeed, they were not

even heard. The suppression of open dialogue and issues contrary to the purposes of corporate, banking and government interests carried over into colleges and universities as well as the media. It has cost America dearly.

Only When Freedom Is Lost Do the Reasons for Its Absence Become Clear

It is increasingly clear that today’s crisis is rapidly approaching that of an emergency—the prerequisite for Universal Emergence.

Let us stand aside and help its birth. A new and better world is on its way. Gold and silver will help in the interim.

Darryl Robert Schoon

www.survivethecrisis.com

www.drschoon.com

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