The Gold Standard The Gold Standard Institute

Issue #33 15 September 2013 1

The Gold Standard
The journal of The Gold Standard Institute

Editor Philip Barton
Regular contributors Rudy Fritsch
Keith Weiner
Sebastian Younan
Occasional contributors Thomas Bachheimer
Ronald Stoeferle
Publius
John Butler
Charles Vollum

The Gold Standard Institute

The purpose of the Institute is to promote an
unadulterated Gold Standard

www.goldstandardinstitute.net

President Philip Barton
President Europe Thomas Bachheimer
President USA Keith Weiner
President Australia Sebastian Younan
Editor-in-Chief Rudy Fritsch


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Lifetime Member US$3,500
Gold Member US$15,000
Gold Knight US$350,000
Annual Corporate Member US$2,000
Contents
Editorial ........................................................................... 1
News ................................................................................. 3
Entrepreneurial Magic ................................................... 4
Double trouble: honest politicians on the one hand
and secrecy on the other ............................................... 5
Theory of Interest and Prices in Paper Currency Part
VI (The End)................................................................... 6
The American Corner: Rising Interest Rates Spoil
the Party ......................................................................... 10
Editorial
It is misleading to believe that Europes problems
are restricted to the peripheral nations; Europe is
sick to the core.
The birthplace of Bastiat and de Tocqueville, has
degenerated into a western showpiece for the idea
that it is the job of a government to run an
economy. While France is an obvious target, the
continent has no shortage of debt-ridden, down-at-
the-heel candidates.
Governments base the legitimacy of their intrusions
into free markets on the claim that it is to save
people from the laws of the jungle.
The picture painted is of a vicious free-for-all where,
without the tender touch of governments, the frail
and defenceless would be savaged by heartless price-
gougers where communities would be sundered by
inequalities and strife.
Like much else that emanates from governments,
this is poppycock.
History shows no supporting evidence for such a
macabre portrayal. On the contrary, in a genuine
free market people who produce are paid in gold (or
silver); nothing else is acceptable. As has been often
noted, gold can neither be debased nor printed.
What has not been so often noted is that when gold
is in circulation, it is the buyer who holds the upper
hand.
While the 19
th
century was not entirely a free market,
it was as close to it as the world has been. The
important point was that gold and silver circulated.
This led to the price of goods showing an overall
decline for decade after decade.
Arthur Toynbee, the 19th century UK economic
historian and social reformer, estimated that by 1875
the working classes had amassed savings of
130,000,000. In light of the situation that existed
just 100 years before, when most of these people had
never seen a pound let alone owned one, this is an
astonishing figure but only for those who do not
comprehend the blessings of real money.
The Gold Standard The Gold Standard Institute
Issue #33 15 September 2013 2

in those thirty years (1851-1881) the wage-
earning class had increased in number from
26,000,000 to 30,000,000 or 16 per cent; while the
wages paid to them had increased by nearly 100 per
cent. In fact the income of the working classes in 1881
was about equal to that of the whole nation in 1851,
with largely increased purchasing power, owing to
reduction in prices".
W.H. Mallock, in an extensive analysis of British
wages
The 19
th
century was a time of rising prosperity and
peaceful coexistence. Prosperous and free people do
not want war. The word unemployment had not
yet made it into the dictionaries.
Bearing that in mind, let us now return to 21
st

century France under socialist President Hollande.

The economy is collapsing under the weight of
regulatory restrictions. Youth unemployment is
26%, and has been rising every month for over two
years. Wealth creation has ground to a halt and jobs
are disappearing as a consequence of the regulatory
burdens and rising government confiscation.




The Gold Standard The Gold Standard Institute
Issue #33 15 September 2013 3



Free markets do not produce the law of the jungle
only control of the economy by governments can
degrade society to that degree.
Philip Barton





News
Forbes: Keith Weiners piece in Forbes magazine

Khaosod: Fake gold in Thailand

YouTube: A perspective on Europe from Clarke and
Dawe
WSJ: India desperately seeking foreigners who would
like what their own citizens dont rupees

Business Standard: India officially denies that it has
plans to monetise temple gold

Business Standard: Confirming that nothing is true
until it is officially denied

Reuters: A new approach in India

Business Standard: This story is a painful reminder
of a certain editors stash of gold that was hidden in
a pair of shoes; shoes that were then kindly donated
to the Salvation Army.

Business Standard: Indian government creates flight
to gold; precisely what they were trying to avoid.
They know not what they do.

Business Standard: Indian gold demand increases
despite all. Finance Minister P. Chidambaram
regards gold as a non-essential. Obviously the
people know better.
The Gold Standard The Gold Standard Institute
Issue #33 15 September 2013 4

Entrepreneurial Magic
If you have read my last few articles, you may be
starting to understand the full value of Honest
Money to society and to you and ME but we have
barely scratched the surface. The well hidden magic
of Gold money emerges only once Gold is in free
circulation.
To understand this magic and its effects on society,
we need to look at a bit of history. Under the
classical Gold standard, during Peaceable Times,
major war was impossible. Not only that, but there
was no such thing as structural unemployment.
Remember, the mandate of the Central Bank of the
USA (the Fed) is to fight inflation and to fight
unemployment but both inflation and
unemployment do NOT exist under a Gold
standard. The nineteenth century had neither
inflation nor structural unemployment.
Both inflation (monetary debasement) and structural
unemployment first have to be created and then
be seen as being fought by our Heroic Bankster.
Gradually dropping prices and full employment were
the reality experienced under Gold. Inflation is the
direct result of monetary debasement and
unemployment is the direct result of the destruction
of the Gold Standard and its accompanying credit
systems.
The Big Lie operating here is well entrenched in the
collective; it takes money to make money. This
statement is one that Mr. Gman and his corporate
supporters want you to believe. After all, if it were
true, then no one without any money could ever
hope to make money or could ever hope to
compete with existing corporate players.
Furthermore, if it were true, then someone with no
money but a desire to make money would be obliged
to borrow to the loud cheers of Mr. Bankster. If
we choose to NOT believe this Big Lie, then we
can easily see examples of people who make
money without money to start with.
Seemingly magically, it takes NO money to make
money. Does this sound too good to be true? Sound
like another Ponzi scheme? Well, no in fact, using
trust based commercial credit, it is laughably simple
to make money with no money small
entrepreneurs in poorly regulated i.e. uncontrolled,
free and voluntary markets do so even today.
To bring this home, suppose you lose your job as the
economy crashes, but you are ambitious and instead
of begging for handouts, either on street corner or
from the Gman welfare, you want to start a
business and make a living without having a
traditional job. If you believe the Big Lie It
Takes Money to Make Money you will never even
start. If you see through the lie, you can start a small
business and succeed.
During the last session of the New Austrian School
of Economics in Madrid, Spain, I was eye witness to
just such entrepreneurial magic. With the financial
crisis at hand, the streets of Madrid had many
beggars clinking their cups for handouts, many
homeless people sleeping on the streets, and many
other signs of poverty. However, primal
entrepreneurship also showed up.
Rain started to fall, and in a matter of seconds there
were street vendors crying out, shouting umbrellas
for sale to an appreciative clientele. Now where
did these entrepreneurs come from, and where did
the umbrellas come from? Street vendors do not
have money to buy and hold a stock of umbrellas;
nor are they employees of conventional retail outlets;
they are simply entrepreneurs, who disdain the
dole and who are eager to earn a profit.
How do they get inventory, if they have no money
and are not store employees? Simple; through credit
based in trust. The umbrellas are on consignment
from the wholesaler; the street merchant will sell
what he can, return the unsold units and pay for
what he sold. He will make a profit on umbrellas he
sells. After all, his overhead and his costs are zero
except perhaps for some wear on his shoe soles!
Who benefits? Of course, the street vendor benefits;
if he manages to sell umbrellas, and make a profit.
Also the wholesaler benefits; he could not have
made these sales without giving his umbrellas out on
consignment without giving his trust to the
vendors. Finally, customers benefit; caught in a
sudden rainfall, many people are glad to buy an
The Gold Standard The Gold Standard Institute
Issue #33 15 September 2013 5

umbrella just when they need one without having
to hunt for a retail store in the rain.
But what about our Gman and Bankster? Do they
benefit? Mr. Gman does not; the vendor is not
licensed or authorized to sell umbrellas and thus
pays no protection fees. Mr. Bankster does not; the
vendor never borrows money, so pays no interest.
If selling umbrellas was not such a fringe activity,
Mr. Gman would undoubtedly have set up the
framework for regulating the sale of umbrellas
and tapping into the value created by the vendors
like the true parasites they are.
Can you not taste the propaganda? Studies released
by mainstream media showing that umbrellas are
dangerous; hundreds of people get hurt by an
umbrella every year Studies showing that
umbrellas are unsound hundreds of umbrellas
collapse in the wind every year. Safety standards,
testing laboratories, bureaucracy, umbrella police
just like in virtually all non fringe economic activity
today.
Compliance costs would drive the vendors out of
business and perhaps force them to join the other
beggars, clinking their cups for a handout.
Consumers could run around trying to find an over-
priced regulated, authorized umbrella in the
pouring rain. And who would foot the bill for
supporting the newly created beggars?
The idea that credit can be based on trust seems
incredible to us. But trust based credit is potentially
enormous; before WWI, all consumer trade was
funded by exactly such a trust based system of credit.
No loans, no interest payments, no collateral just
free credit that benefits all commerce, all consumers,
all entrepreneurs.
As the World economy falters, in the rest of the
world like in Spain, Greece, Ireland, and on and on,
we will all make a choice. Will we choose to be
beggars, holding out our cups in the hope that
someone puts a dime in it or will we choose to
be entrepreneurs, who see opportunity to provide
value to the markets and proceed to do so? The
future of the world economy depends on us making
the right choice; trust based credit, vs. endless debt.
It was the destruction of the trust based credit
system and its replacement by bank loans, by debt
with interest payments to Mr. Bankster that led to
structural unemployment and to the dole. We will
not solve our debt problems or our unemployment
problems until we recognize this truth and act on
it. Just as the world needs Gold money, it needs
Gold based credit Gold is synonymous with
Trust.
Rudy J. Fritsch
Editor in Chief
Double trouble: honest politicians on
the one hand and secrecy on the other
A couple of months ago I reported on the new
honesty Europeans have experienced of late: the case
in point having being Cyprus, the perfect laboratory
setting for an ordered expropriation of bank
customers and savers. (Clever gold investors, of
course, did not suffer any losses).
One has to admit that these measures were taken in
a speedy, cautious and very clever manner. The
public outcry one would have expected did not
materialise. There was no significant resistance by
the suffering party. Only with the benefit of
hindsight can one appreciate how well this
experiment was executed. The European population
has been prepared for the moment of truth in a
rather smart way just like the frog sitting in a
slowly heating glass of water.
In Europe the day of reckoning is approaching fast.
On September 22, Germany, at once the leading
economy and sugar daddy, underwriter and payer-of-
last-resort, holds a general election. (As an Austrian
native I have to add a less significant event: Austria
holds general elections one week after Germany.
Austria, too, is a net contributor to the European
Union, albeit on a smaller scale. However, Austrian
citizens also feel the pain.) Commentators agree that
the German election will mark a watershed for
Europe. Afterwards will be payday. The warnings
from the system have been unequivocal and
unambiguous.
The Gold Standard The Gold Standard Institute
Issue #33 15 September 2013 6

The new honesty of politicians and mainstream
media has been augmented by the new omert on
the currency crisis. Indeed, the finance minister is
constantly reminding the electorate that new
guarantees and payments to bankrupt Mediterranean
countries have to be reckoned with, but the ailing
top-down currency euro is not mentioned at all. The
propaganda manifests itself in silence. Not one
journalist neither from large, mostly state-
controlled print media, nor private and state TV
stations asks during one of the all-too-frequent
election programmes about the poor health of the
euro. As mentioned earlier, this collective silence is
part of the honesty. Better to remain silent rather
than lie is the new motto.
Honesty and silence about the euro are not the only
actors in this bizarre theatre play on Europes day of
reckoning. There is another completely new
phenomenon. The formerly always eager-to-rule
German socialists have cast the unpopular, past his
sell-by date former finance minister Peer Steinbrck
as their challenger to the incumbent chancellor
Angela Merkel. Thus, they clearly show their lack of
interest in ruling the country: at least during the next
election period. They have given up the fight before
it even started. But even there the oddities do not
end. The stability-seeking and foreign popularity-
craving chancellor has let it be known that she wants
to remain in office for only two more years. Here at
last, not only professional sceptics get suspicious.
One cannot help but ask some hard questions such
as:
What was the purpose of the Cyprus
experiment?
Why are the Social Democrats not seriously
seeking power?
Why the warnings about guarantees and
payments and, at the same time, the de-facto
ban on talking about the sick euro?
Why does the chancellor wish to remain in
office for only two more years?

Without resorting to conspiracy theories I am
content to say that a currency event of unparalleled
dimensions is in the offing. Will it be accompanied
by the loss of civil rights and expropriations? Will it
dwarf all past upheavals? Will the incumbent
chancellor have to flee as a consequence so that the
opposition can stage a plausible new beginning?
Without any doubt, in Europe a sea change will take
place in September after the elections. We will have a
hot autumn not only with regard to property and
investments, but also as concerns the political set-up
of the next few decades. Very soon we will know
whether Europe will deteriorate into a pseudo-
democracy with dictatorial tendencies, or whether we
will live in a civilised society characterised by
solidarity: of the stronger with the weaker both
within one country as well as across the continent.
As we all know, hope dies last.
Thomas Bachheimer
President The Gold Standard Institute Europe
Theory of Interest and Prices in Paper
Currency Part VI (The End)
In Part I, we looked at the concepts of nonlinearity,
dynamics, multivariate, state, and contiguity. We
showed that whatever the relationship may be
between prices and the money supply in
irredeemable paper currency, it is not a simple matter
of rising money supply rising prices.
In Part II, we discussed the mechanics of the
formation of the bid price and ask price, the
concepts of stocks and flows, and the central
concept of arbitrage. We showed how arbitrage is
the key to the money supply in the gold standard;
miners add to the aboveground stocks of gold when
the cost of producing an ounce of gold is less than
the value of one ounce.
In Part III, we looked at how credit comes into
existence via arbitrage with legitimate entrepreneur
borrowers. We also looked at the counterfeit credit
of the central banks, which is not arbitrage. We
introduced the concept of speculation in markets for
government promises, compared to legitimate
trading of commodities. We also discussed the
prerequisite concepts of Marginal time preference and
marginal productivity, and resonance.
In Part IV, we discussed the rising cycle. The central
planners push the rate of interest down, below the
marginal time preference and unleash a storm whose
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Issue #33 15 September 2013 7

ferocious dynamics are more than they bargained
for. The hapless subjects of the regime have little
recourse but they do have one seeming way out.
They can buy commodities. The cycle is a positive
feedback loop of rising prices and rising interest
rates. Ironically, their clumsy attempt to get lower
interest results in rising interest. Alas, the cycle
eventually ends. The interest rate and inventory
hoards have reached the point where no one can
issue more bonds or increase their hoards.
In Part V, we discussed the end of the rising cycle.
There was a conflict between commodity speculation
and leverage. Leverage won. Liquidations impaired
bank balance sheets, and the result was a spike in the
interest rate. It finally rose over marginal time
preference. Unfortunately, it rose over marginal
productivity as well. Slowly at first, the bond market
entered a new bull phase. It becomes ferocious, as it
pushes down the interest rate which bleeds
borrowers of their capital. Companies find it harder
to make money and easier to borrow. They are
obliged to borrow to get a decent return on equity.
In short, they become brittle.
In this Part VI, we look at The End. At the
beginning of Part I, I noted in passing that we now
have a positive feedback loop that is causing us to
spiral into the black hole of zero interest. In
astrophysics, the theory says that a black hole is a
singularity with infinite gravity at the center. There is
a radius called the event horizon, and everything
including light that gets inside this radius is doomed
to crash into the singularity.

Black Hole
For years, I have been thinking that this is a perfect
analogy to the falling rate of interest. At zero interest
on long-term debt, the net present value is infinite.
There is a positive feedback loop that tends to pull
the rate ever downward, and the closer we get to
zero the stronger the pull. But an analogy is not a
mechanism for causality.
In the fall of 2012, I attended the Cato Institute
Monetary Conference. Many of the presenters were
central bankers past or present, or academics who
specialize in monetary policy. It was fascinating to
hear speaker after speaker discuss the rate of interest.
They all share the same playbook, they all follow the
Taylor Rule (and indeed John Taylor himself
presented), and they were all puzzled or disappointed
by Fed Chairman Bernanke not raising interest rates.
Their playbook called for this to begin quite a while
ago now, based on GDP and unemployment and the
other variables that are the focus of the Monetarists.
Then it clicked for me.
The Chairman is like the Wizard of Oz. He creates a
grand illusion that he is all-powerful. When he
bellows, markets jump. But when the curtain is
pulled back, it turns out that he has no magical
powers.
At that conference, after hearing so many speakers,
including some of Bernankes subordinates, discuss
when and why and how much the rate should be
higher, I became certain that it is not under his
control. It is falling, falling.
1

One cannot go from analogy to theory. It has to be
the other way around. And yet, the black hole
analogy corresponds to the falling rate in several
ways. First, zero interest is like a singularity. I have
repeatedly emphasized the fact that debt cannot be
paid off; it cannot go out of existence. It is only
shifted around. Therefore, regardless of whatever
nominal duration is attributed to any bond or loan, it
is in effect perpetual. At zero interest, a perpetual
debt has an infinite net present value.

1
To briefly address the 80% increase in the 10-year interest rate
over the past few months: it is a correction, nothing more. The
rate will resume its ferocious descent soon enough.
The Gold Standard The Gold Standard Institute
Issue #33 15 September 2013 8

The next part of the analogy is the strong
gravitational pull from a very far distance. The rate
of interest has indeed been falling since the high of
16% in 1981, and it was pulled in to a perigee of
1.6% before making an apogee (so far) of 2.9%. The
analogy still holds, objects spiral around and into
black holes; they do not fall in directly.
There is also a causal mechanism for the falling
interest rate. As discussed in Part V, the interest rate
is above marginal productivity. So long as it remains
there, the dynamic is given motive power. In Part V,
we discussed the fact that due to the arbitrage
between interest and profit, at a lower interest rate
one will see lower profit margins. This is what puts
the squeeze on the marginal business, which
borrowed previously at a higher rate. The marginal
business is unable to make a profit when competing
against the next competitor who borrowed more
cheaply.
It is worth saying, as an aside, that this process of
each new competitor borrowing money to buy
capital that puts older competitors out of business
who borrowed too expensively is a process of capital
churn. It may look a lot like the beneficial process of
creative destruction
2
, but it is quite different. Churn
replaces good capital with new capital, at great cost
and waste.
In falling rates, no one has pricing power, and
generally one must borrow to get a decent return on
equity. The combination of soft consumer demand,
shrinking margins, and rising debt makes businesses
brittle.
Consumer demand is softened by the soft labor
market. The labor market is soft because there is
always a tradeoff between labor and capital invested.
For example, in India Wal-Mart does not use
automation like it does in the US. Labor is preferred
over capital, because it is cheaper. With falling
interest rates, capital equipment upgrades become a
more and more attractive relative to labor. Many
attribute the high unemployment to high minimum
wages and generous welfare schemes. This is part of

2
Joseph Schumpeter coined this term in 1942 in his book
Capitalism, Socialism and Democracy (1942)
it, but it does not explain unemployment of skilled
workers and professionals.
As the interest rate falls, the marginal productivity of
labor rises. This may sound good, and people may
read it as productivity rises or average
productivity rises. No, it means that the bar rises.
Each worker must get over a threshold to be
employed; he must produce more than a minimum.
This threshold is rising, and it makes more and more
people sub-marginal.
Unemployed people do not make a robust bid on
consumer goods.
The next-to-final element of the analogy is the event
horizon. In the case of the black hole, astrophysicists
will give their reasons for why everything inside this
radius, including light, must continue down into the
singularity. What could force the interest rate to
zero, once it falls below an arbitrary threshold?
Through a gradual process (which occurs when the
rate is well above the event horizon), the central
bank evolves. The Fed began as the liquidity
provider of last resort, but incrementally over
decades becomes the only provider of credit of any
resort (see my separate article on Rising Interest
Rates Spoil the Party).
Savers have been totally demoralized, discouraged,
and punished. Borrowers have become more brazen
in borrowing for unproductive purposes. And total
debt continues to rise exponentially. With lower and
lower rates offered, and higher and higher risk, no
one would willingly lend. The Fed is obliged to be
the source of all lending.
A proper system is one in which people produce
more than they consume, and lend the surplus,
which is called savings. The current system is one
in which institutions borrow from the government
or the Fed and lend at a higher rate. Today, one can
even borrow in order to buy bonds. Most in the
financial industry shrug when I jump up and down
and wave my arms about this practice. Other than a
bank borrowing from depositors (with scrupulously
matched duration!) there should not be borrowing to
buy bonds. A free market would not offer a positive
spread to engage in this practice, and rational savers
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Issue #33 15 September 2013 9

would withdraw their savings if they got wind of
such a scheme.
Thus, the system devolves. Sound credit extended by
savers drives a proper system. Now, the Fed
becomes the ultimate issuer of all credit, and this
credit is taken from unwilling savers (those who hold
dollars, thinking it is money) and is increasingly
extended to parties (such as the US government)
who havent got the means or the intent to ever
repay it.
The actual event horizon is when the debt passes the
point where it can no longer be amortized. Debtors,
especially the ultimate debtors that are the sovereign
governments, and most especially the US
government, depend on deficits. They borrow more
than their tax revenues not only to fund welfare
programs, but also to pay the interest on the total
accumulated debt.
That singularity at the center beckons. Every big
player wants lower rates. The government can only
keep the game going so long as it can refinance its
old debts at ever-lower rates. The Fed can only
pretend to be solvent so long as its bond portfolio is
at least flat, if not rising. The banks balance sheets
are similarly stuffed with bonds. Businesses, long
since made brittle by three decades of falling rates,
likewise depend on the bond market to roll their old
bonds by selling new ones. No debt is ever repaid,
because there is no mechanism for it. An ever-
greater total debt burden must be refinanced
periodically. Lower rates are the enabler.
Recall from Part IV that the dollar system is a closed
loop. Dollars can circulate at whatever velocity, and
they can circulate to and from any parties. For
interest rates, what matters is whether net credit is
being created to finance net increases of
commodities and inventories, or whether net sales of
commodities are used to finance net purchases of
bonds. The spreads of interest to time preference,
and productivity to interest determine the direction
of this flow.
So long as the interest rate is higher than marginal
productivity and marginal time preference, the
system is latched up. So long as the consumer bid is
soft and getting softer, marginal productivity is
falling. So long as debtors are under a rising burden
of debt, and creditors have the upper hand, then
time preference is falling.
The final element of our analogy to the black hole is
that, according to newer theories that may be
controversial (I dont know, I am not a physicist,
please bear with me even if the science isnt quite
right) if enough matter and energy crash into the
singularity quickly enough, then it can cause an
enormous explosion.

Black Hole Ejecting Matter and Energy
Here is my prediction of the end: permanent gold
backwardation. The lower the rate of interest falls,
the more it destabilizes the system because it makes
the debtors more brittle. The dollar system has, to
borrow a phrase from Ayn Rand, blackmailed people
not by their vices, but by their virtues. People want
to participate in the economy and benefit from the
division of labor. Subsisting on ones own efforts
alone provides a very low quality of life. The
government forces people to choose between using
bogus Fed paper vs. dropping out of the economy.
People naturally choose the lesser of these two evils.
But, as the rate of interest falls, as the nominal
quantity of debt rises, as the burden of each dollar of
debt rises, and as the debtors incur ever-greater risks,
the marginal saver reaches the point where he
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Issue #33 15 September 2013 10

prefers gold without a yield and with price risk too,
over bonds even with a yield. We are in the early
stages of this process now. A small proportion of the
population of Western countries is buying a little
gold, typically a small proportion of their savings.
What happens when this process accelerates, as it
must inevitably do? What happens when people will
borrow dollars to buy gold, as they had borrowed
dollars to buy commodities in the postwar period?
By then, the bond markets may be so volatile that
this could cause a spike in interest rates. Or it may
not. It will pull all the remaining gold out of the
bullion market and into private hoards. At that point,
gold will begin to plunge deeper and deeper into
backwardation. As I explained in my dissertation, a
persistent and significant backwardation in gold will
pull all liquid commodities into the same degree of
backwardation. Desperate, panicky people will buy
commodities not to hoard them or consume them,
but as a last resort to get through the side window
into gold after the front door is closed. When they
cannot trade dollars for gold, they can trade dollars
for crude oil and then trade crude oil for gold.
Of course, this will very quickly drive prices of all
commodities in dollars to rapidly skyrocket to
arbitrary levels. At that point, there could even be a
short-lived rising cycle where people sell bonds to
buy commodities, or this may not occur (it may be
over and done too quickly).
In any case, this is the final death rattle of the dollar.
People will no longer be able to use the dollar in
trade, even if they are willing (which is quite a
stretch). Then the interest rate in dollars will not
matter to anyone.
My description of this process should not be taken
as a prediction that this is imminent. I think this
process will play out within weeks once it gets
underway, but that the starting point is still years
away.
The interest rate on the 10-year Japanese
government bond fell to 80 basis points. I think that
the rate on the US Treasury can and will likely go
below that. We must continue to watch the gold
basis for the earliest possible advance warning.
This completes the series on interest and prices. There is
obviously a lot more to discuss, including the yield curve and
what makes it abruptly flip between normal and inverted, and
of course mini rising cycles within the major falling cycle such
as the one that is occurring as I write this. I would welcome
anyone interested in doing work in this area to contact me at
keith (at) goldstandardinstitute (dot) us.
Dr. Keith Weiner
Dr. Keith Weiner is the president of the Gold Standard Institute USA,
and CEO of Monetary Metals where he write on the basis and related
topics. Keith is a leading authority in the areas of gold, money, and credit
and has made important contributions to the development of trading
techniques founded upon the analysis of bid-ask spreads. Keith is a sought
after speaker and regularly writes on economics. He is an Objectivist, and
has his PhD from the New Austrian School of Economics. He lives with
his wife near Phoenix, Arizona.
The American Corner: Rising Interest
Rates Spoil the Party
The big news in America is that the rate on the 10-
year Treasury bond has risen dramatically from
around 1.6% to over 2.9%. This is 130 basis points
from a starting point of 160, or an increase of more
than 80%!

So naturally, the financial media are discussing the
essential issues. They have commentators
philosophizing about whether the tapering of
Quantitative Easing is priced in (an invalid
question, as I argue in my in the Theory of Interest
and Prices). They credulously entertain the view that
it signals economic recovery. If the economy were
really recovering for four years, there would be no
need for such hype.
On CNBC this week, Larry Kudlows guest was a
sell-side analyst. He worried that either the absolute
level of the rate, or the speed with which it has risen,
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Issue #33 15 September 2013 11

will interrupt the bull market in stocks. Why is he
concerned? Higher rates may discourage companies
from borrowing to buy back their shares and issue
dividends. I have previously written about this
madness.
It is a strange politically correct world that makes it a
taboo to say the simple truth. Unfortunately,
freedom of speech in America is slippingat least
on controversial topics that matter. It may still be
legal, but there is a very real chilling effect. In a
crony system, ones career is at risk to say the
unpopular. So the gentlemen in the club safely
confine their discussion to the M1 and M2 measures
of the money supply, and the number of angels that
can dance on the head of one pin.
Lets take a step back from the noise. In the real
world, every change in the interest rates destroys
capital. To avoid this, firms hedge using derivatives.
The good gentlemen in the club do sometimes
acknowledge the derivatives problem, but never the
cause, never why derivatives grow and grow and
grow until they are now estimated to be approaching
one quadrillion dollars. Those who sell these hedges
must, themselves, hedge. They can push risk around
and around in a circle of the big multinational banks.
They cannot eliminate it.
Historically, the Federal Reserve has exhibited what
Ill call bipolar interest rate disorder. They vacillate
between bingeing and purging. First they try to
encourage the economy to grow by offering a
buffet of too much credit, dirt-cheap. Then with
pangs of regret if not guilt, they try to fight
inflation by raising the price of credit. This leads to
a bogus debate among economists: which evil should
the Fed be pursuing at any given moment. Wall
Street, of course, has a strong bias towards more
credit, dirtier and cheaper. So do politicians seeking
reelection.
Today, these two false alternatives are called
stimulus and austerity. Fans of the latter
sometimes fantasize about a mythological place like
Atlantis or El Dorado. It is called the Exit.
Unfortunately, the Fed cannot sell their bonds. If
they reversed from big buyer to even a small seller, it
would reignite the very conflagration they fought in
2008. Leveraged market players would be unable to
sell new bonds to pay their old bonds when due, and
would therefore be forced into default. Talk of a Fed
exit is a smokescreen.
Lets take a further step back. The collapse of the
Soviet Union proved that central planning doesnt
work. It cant even deliver simple goods like food.
The Fed is the central planner of something much
bigger and vastly more complex. Money and credit
are the foundation of our economy, and everything
else depends on them.
The issue is not what the Fed should do next!
We should be discussing how to transition from
irredeemable currencies to a free market based on
gold without collapsing the financial system. I wrote
a paper proposing how to do this. There may be
others with good ideas. Lets begin the discussion.
Unfortunately, few want to risk their careers. I am
not sure what would be worse: the cowardice of
remaining silent in the face of a Big Lie, or the fact
that saying the truth would indeed jeopardize ones
career in finance or economics.
We should be talking about the evolution of the Fed.
Lets not get distracted by conspiracy theories,
stories about banking families and creatures from
islands with unfortunate names. And no, the Fed is
not a private cartel.
The Fed began in 1913; it was the liquidity provider
of last resort. If a bank needed gold, it could take
Real Bills to the Fed, who would buy them at a
discount. The government should have no role in
the financial system at all, but Fed v1.0 was not the
destroyer of markets as Fed v8.2 is today.
Subsequently, they began to buy government bonds.
Incrementally, over many decades, the Fed evolved
into the central planner it is today. Some of these
steps were by presidential decrees, some were Acts
of Congress, and of course the Fed took new powers
for itself at opportune moments.
Today, there are many distribution channels, but the
Fed is the only provider of credit of any resort.
Should they cease issuing new credit, every bond
market in the world would seize up followed
immediately by the default of every bank, insurer,
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Issue #33 15 September 2013 12

annuity, and pension. Despite the Feds record
pumping of credit effluent, some bond markets are
beginning to collapse anyway, along with the national
currencies backed by those bonds.
We face a bitter dilemma. Without credit, large-scale
production is not possible. The economy would
devolve into medieval villages, with subsistence
production done on family farms and workshops.
On the other hand, continuing a system based on
ever more counterfeiting will destroy more and more
capital until the economy collapses.
Markets are being slammed back and forth between
austerity and stimulus, between credit
contraction and credit expansion. The number of
units of the Feds credit paper required to buy an
ounce of gold has long been rising. In other words,
those units of credit were falling in value. But in the
past few years, one has needed fewer of them to
trade for gold. One day, traders are borrowing freely
to speculate in the markets, driving prices up. The
next, they are squeezed in a vice, desperate to roll
over their liabilities, or if they cannot, to sell assets,
especially assets that do not have a yield.
In conclusion, here is what I think the Fed should
do. The Fed should go on buying bonds and doing
what it has to do to keep the system going. No one
wants the system to collapse. We should all be clear
that the Fed is doing nothing more than buying time.
We need to use that time to transition to the gold
standard, to begin the process of gold and silver to
circulate, to develop a market for lending and
borrowing gold. We need to repeal the capital gains,
VAT, GST, and any other taxes that make it
impractical to use gold. We need to repeal laws that
force creditors to accept paper as payment in full.
We need to develop the institutions such as gold
banking and Real Bills.
Dr. Keith Weiner