Kitchen Table Talk

I titled this "Kitchen Table Talk" because I have had variations of the following conversations at the table and because this is where the grassroots movement has to come from in order to turn our society around. What I have found in my discussions with friends and family, especially when they find out that I trade in the futures markets, is that I cannot say things like "the economic system of the west is going to collapse if we do not get rid of the central banks." I have said this in the past but what happens is the average person's belief system rejects it. This is because the statement is too powerful and cannot overcome their daily programming from the mainstream media propaganda machine.

What I do now is to try to talk about the words we use and let the ideas about how much trouble we could be in come from their own thoughts. With a little time and coaching I seem to be able to get through to them that we are in more serious trouble that it seems from listening to the mainstreasm media.

So what I wanted to do here is to share with Gold-Eagle readers some ideas about how to discuss these topics using simple concepts. Being a mid-western boy from Michigan, I like to keep things simple.

Money - Part I

At New Year's Eve dinner I asked my friends "Where does money come from?" My veterinary friend, college educated, did not know, No one volunteered an answer. Of course most readers of Gold-Eagle know that in today's world money comes from debt. I explain that every time someone takes out a loan from the bank new money is created.

But I also like to try to explain to them why this is a system in self-destruct mode. So I describe the following scenario. Assume that 8 people are sitting around a kitchen or dining room table.

"Let me describe our monetary system in simple terms. Pretend we are our own little community. We need something to allow us to do business together. We need a form of money. So, I will be the central bank. I will loan all of you 100 Dave Notes (DN) at 5% per year in exchange for the right to some of your property.

"Now, we all do business with each other for 1 year. After the year is up you all owe me 105 DNs. See the problem? You may be able to pay me back to original 100 DNs. But where does the other 5 Dave Notes come from? It can only be worked off. You will be my slave until you work off your debt. Or you can exchange me some of your personal property."

At this point you get a lot of heads nodding and the idea sinks in. Then we continue.

"Now, let's say that Mary is an astute business women and she has 150 DNs and Tony only has 50 DNs. Mary can pay me back the 105 DNs or she can pay me only the interest of 5 DNs or something in between. Let's say she only pays the interest. Tony on the other hand, needs more money to stay in business, so Tony, I'll tell you what, I will loan you another 100 DNs at 5% and next year you will owe me a little more than 215 DNs total or 15 DNs in interest.

"Now, something very important just happened here. What was it? (Pause) We just INCREASED THE MONEY SUPPLY. What's this called? Inflation. Each new loan, without an equal loan payoff, increases the money supply.

"So in our little community we now have 895 Dave Notes floating (Mary paid me 5) instead of the original 800.

"Now, what would happen if all of you tried to pay me the full amount of your loans? (Pause) Two things, first, you cannot. There is not enough money to pay all the loans off plus interest, therefore, I will continue to make new loans to people in need. Second, if you do pay off most of your loans, there will not be any money in circulation to do business. If you pay me back a substantial portion of the loans, there will be no money and we will have to revert back to a barter system. It is not in my best interest, as your banker, to have you pay be back the loans in full because I cannot collect any interest.

"So the next time a politician says that he wants to pay off the national debt, either he is a liar or he does not know what he is talking about, probably both."

This little scenario has worked quite well in describing to lay people how our current monetary system works.

Money - Part II

No discussion about money would be complete with defining what money is. I had an offer to go on CNBC Europe late last year and wanted to appear during Thanksgiving as the US markets would be closed and we could take a quick vacation to London. But after the tragedy of September 11, CNBC Europe changed their format and I thought my time on the show would be limited (2 minutes).

If I had gone on the show, I was prepared to discuss certain topics such as the one above. I also wanted to have a discussion on just what is money. This is how the discussion might have gone.

Picture Dave and Nigel, the host, sitting at the table.

Dave: "Nigel, all day long we talk about money. Let's define money."

Nigel: "OK."

Dave: "Here I have a pen. Give me your pen and I will give you mine. Now, what did we just do here?"

Nigel: "We exchanged pens."

Dave: "Yes. In more formal terms we made a 'trade'. People love to trade. We have been trading one thing for another with each other for thousands of years. What I did was I used my pen as a 'medium of exchange.' I could use my pen to trade for anything that you thought was of equal value at this given moment. For example, I could trade my pen for maybe your tie. This is the first requirement of money, it is a 'medium of exchange.' Now, let's switch pens back."

We switch the pens back and I continue.

Dave: "Now, let's say that my pen is deemed twice as valuable as your pen. So in order to make a fair trade I have to break my pen in half. But what happens if I break my pen in half. It will not work anymore. It loses its 'value'. My half of pen is not equal in value to you as your pen. So the second requirement of money is that it be 'divisible.' My pen fails this test and therefore would not make it in the marketplace as money."

Now I pull out a Pound Note.

Dave: "Let's take this Pound Note. I can exchange it for your pen easily, therefore it can be used as a medium of exchange, correct? Now, if I tear it in half, does it still hold its value?

Nigel: "No."

Dave: "So the paper money fails the second requirement. But our governments have a way around this, don't they. They create another note or a coin and, by government 'fiat' put a 'value' on the note or coin of one-half the value of this original paper Pound note. Smart people in government, no?

"Now the third requirement is this. Let's say that I just found this Pound note in my sock drawer and it is 30 years old. 30 years ago, this piece of paper would buy me quite a bit, right? I mean, quite a bit more than it will today. So the Pound note has lost its 'value' over time. This is the third requirement of money.

"So we have three basic requirements for money: 1) it must be a substance that can be easily used as a medium of exchange, 2) it must be a substance which is easily divisible and 3) it must be a substance which holds its value over time. As you can see, the Pound Note, has failed to meet these requirements."

I pull some shiny stuff out of my pocket.

"Now, look at these two gold coins. One is a full 1-ounce coin and the other is a ½ ounce coin. Beautiful aren't they? Now, do these coins pass the three requirements for money? Well, I can trade this coin for your pen again, although you will be getting the better end of the deal. But they can easily be used as a medium of exchange. They are divisible since this 1-ounce coin can be melted down and use to create 2 of these ½ ounce coins. And because gold must be mined we cannot easily create it, therefore they will hold their value over time. In fact, 1-ounce of gold in 1800 would buy basically the same amount of goods as 1-ounce did in 1900. During that time in the US we had numerous attempts to use paper money and all of them failed but gold held its value."

At this point we probably, if not sooner, would go to commercial break and I would be escorted to the door. But it is fun to imagine.

The point is that you can do this same scenario at home as you try to educate your loved ones.

Wealth

This has to be one of the most misused words of the later half of the 20th century along with 'freedom' but don't get me started on that.

We have all heard too many times the phrase 'The Wealth Effect.' What is wealth? What makes a society wealthy? I will give you my description and you can fill in your own.

A society is wealthy when each citizen has an equal opportunity to achieve that which they dream. A society is wealthy when it can produce more than it can consume. A society is wealthy when the individuals will put their life on the line to protect their freedom.

How does a society become wealthy? It becomes wealthy through saving its unused 'capital' and investing it in productive endeavors that enhance the lives of the individual members of the society. This cannot be accomplished through central planning but only through the free choice of the members of the society. Remember, a society, broken down to its lowest common denominator, is a collection of diverse individuals.

How does a society NOT become wealthy? I would argue that a society cannot increase its overall wealth by trading pieces of paper amongst the individuals. I mean dollars for stocks and bonds, etc. Yes, some investment in a company's bonds or stock that pay interest or dividends out of profits is welcome. This is a true investment in the productive aspects of a society as you are paid to hold that stock or bond and share in the profits. But buying the stocks of companies that pay no dividend and which you can only enhance your personal balance sheet buy finding a buyer willing to pay more in the long run does not increase the wealth of a society.

A society cannot increase its overall wealth buy trading houses amongst the individuals while increasing the overall debt burden of the society. How can we increase our overall wealth just by moving into a larger home while taking on a bigger mortgage? If this can be done without increasing the overall debt burden, i.e. through savings, then more people will be happy homeowners and we will have more respect for private property. This will increase the wealth of the society. But increasing the debt burden while moving into bigger homes does not increase the overall wealth of the society.

A society can only increase its overall wealth when it can continually lower the amount of effort (the 'cost') required for the production of the things that the individuals desire. I do not wish to make this sound like a simple task. It is not. There will be failures along the way as people compete to make these things. But this is the price of taking risk. Some humans love to take risks, other do not.

Since we have just passed through a stretch of time where much effort was expended in overproducing things that our society may not have fully demanded, we must now pay the price for that foolishness. The more risk that was taken, the higher the reward or the more painful is the price to pay.

But the society can become wealthier even from times of euphoria turned despair if the individuals reflect back and learn the lessons to be learned and make sure they do not happen again. However, if we fail to look back and learn the lessons in order to prevent the euphoria from happening again, if we instead lay down and scream "I am a victim" and look for scapegoats then the society as a whole will become less wealthy.

Value

What does the word 'value' mean? This is one of those words that we do not discuss the meaning of much but yet it is basic to all of our activities because we only do those things that each and every one of us individually deems 'valuable' to our existence and well being. Everyday, we make decisions based on what we deem as valuable.

For this word, I will gave another table talk. Same 8 people sitting at the table but this time, instead of being the banker, I am the baker.

"OK. I am the baker. But, because of my limited technology, I can only bake one loaf of bread per day. Now, since all of you like bread, you will trade me something that you and I agree to be of equal value for one piece of my bread.

"After some time and with much hard work, I come up with a technological breakthrough that allows me to make 20 loafs of bread per day instead of just 1.

"Since I can make more bread per day using the same amount of effort I need to get rid of my bread. So you will now be able to trade me things of less value than before for a whole loaf of bread.

"What happened? Because I can make more bread using the same amount of energy each loaf of my bread has less 'value.' Anytime we can create more of something using the same amount of energy (cost) that something loses value. I like to call this 'commoditization' of a product. DRAMs have been 'commoditized' while '55 Chevy's have not.

"Can the same thing happen with today's paper or digital money? Go back to the table talk about money. What happens when a new loan is taken out and the money supply increases? Each original Dave Note loses a little more of its 'value' because new Dave Notes are created with no effort.

"The same thing happens in real life. Each time more money is created, the money in circulation loses value. Take the price of your house. What did you pay for it 30 years ago? $50,000US. What's it worth now? $250,000US. What has changed? Basically nothing as far as the house is concerned. (An assumption on my part but necessary for the discussion.) But the 'value' of the US dollar has DECREASED because the money supply has increased so much. The 'value' of your house has not increased, it's the 'value' of the medium of exchange, the dollar, which has decreased."

In 1960, my mother bought the house we grew up in for $13,000US (at 3%). In 1994 she sold that same house for $86,000US. Did a new driveway, a one-car garage and a small enclosed porch in the back increase the 'value' of the house by a factor of 6.6? Or did the 'medium of exchange' lose 85% of its 'value?'

Productivity

Most of us are aware that the productivity 'miracle' in the US was a fraud. Now, I have had conversations in the past with people who fear the gold standard. One of the reasons given is that since the money supply would grow ever so little on a year-over-year basis (2% maybe), we as a society would experience very slow growth for very long periods of time. In other for some people growth in the wealth of the society is analogous to growth in the money supply. Or we need a paper money and central bank in order to 'fine-tune' the ups and downs of the economy and this would not be possible with a strict gold standard.

I believe this to be an error in logic when you put together the scenarios above. As we continue to improve our technology, which continues to LOWER the cost of producing goods, we do not need the money supply to grow at a substantial or even less than substantial rate.

Let's combine the scenarios of Money and Value. Each of the 8 people starts with 100 Dave Notes. They must pay me 1 Note per week for bread each day. After a time I expand my production based on my productivity improvements. (Of course, I used some of this money for my R&D and some I recirculated in the society.) Now they do not have to spend so much for bread each week. This raises their living standards because they have extra money to spend on other goods and services, which is the REAL WEALTH EFFECT. We have increased the wealth of the society WITHOUT increasing the money supply or the debt burden. A constant money supply is nothing to fear (unless the society is already buried in debt).

Central Banking

My first scenario above outlines, in a crude way, the function of a central bank. Control of the money supply (and the members of the society) through the use of debt. For this topic I will use the US Federal Reserve as my example.

It is said that the US Federal Reserve is not a part of the US Government. Most people do not know this. When I was living in Chicago in 1999 I picked up a copy of the Chicago phone book and looked in the blue 'government' section for the US Federal Reserve phone number. It was not there. Then I looked in the 'white' section and lo-and-behold, there it was in the 'private' section of the phone book.

The US Federal Reserve is neither 'federal' nor does it have any 'reserves'. It creates 'money' out of thin air. The US Federal Reserve was charted on Dec. 24, 1913, the same year the income tax amendment to the Constitution was adopted. Let's look at the history of the US since the creation of the Federal Reserve:

Founded 1913
1910s - World War I
1920s - Roaring 20's
1930s - Great Depression and expansion of the welfare state as FDR breaks dollar link
               to gold for citizens
1940s - World War II
1950s - Korean War
1960s - Vietnam War and Great Society further expansion of the welfare state
1970s - Massive inflation as Nixon breaks dollar link to gold for non-citizens
1980s - Beginning of the loss of manufacturing jobs in US, countrywide debt defaults
               begin
1990s - Gulf War, various countries default on debt, Asian crisis, Dot.com bubble,
               LTCM
2000s - ?????????

Not a pretty sight is it?

It has always been my contention that the major purpose of a central bank was to allow a country to fight a war. Without the ability to sell an infinite amount of bonds to someone who can create 'money' out of thin air, countries even as large as the USA could not afford the cost of war. Why? Because war is destruction. As we just discussed., the way to make a society wealthier is to increase the production of goods the society uses to improve its standard of living. Manufacturing the implements of war and using them for destructive purposes is EXACTLY the opposite of this concept.

Summary

As you can see, it is possible to discuss these important concepts using simple scenarios that the average person can understand. We need to have these conversations all across the globe NOW before we get too far done that abyss. We need to educate people. That's the beauty of the internet. We can reach so many people with our ideas and take them back and discuss them with our friends and family.

We must go back to producing things instead of trading pieces of paper with each other. If we had sound money, money that held value over time, the members of society would not need to chase the phony riches of Wall Street in order to 'fund their retirement' since the money saved from 1980 would be worth the same in 2010.

It is going to require a lot of pain to fix the mistakes of the last 100 years. We must get rid of the central banks. We must get back to sound money and small, limited, constitutional government. We must get across to people the importance of basic fundamental principles like private property rights. We must destroy the welfare state.

And we must do it quickly.

I hope this helps. And I hope you have luck in your kitchen table talks with your families and friends.

David M Champeau
[email protected]