At times this whole financial crisis can seem surreal. How is it that everything is going wrong at the same time?

Bank runs lurk in the EU; Gold is taking off towards $2k an ounce; China is suspending exports of vital raw materials; Russia is suspending exports of agricultural goods; Many people are warning of hyperinflation in the United States; 2010 saw over 3 million foreclosures in the U.S. and 2011 looks to be worse; Unemployment everywhere is getting worse; Food prices are rising everywhere; Riots are breaking out; Country by country are falling into bankruptcy like dominoes.

It makes you wonder sometimes if we’re all just a collective Chicken Little running around making gloom and doom predictions. Has the recent recession made us unreasonably paranoid? Are we reading the data with the preconception that they will reveal a glass that’s half empty?

It is in this context that I’d like to point you to one of my favorite videos on the internet.

Understanding the reality and the depth of the crisis at hand requires an understanding as to what money is, what credit is, and how the two have been completely distorted over the last hundred years or so.

There is something on the order of $300 trillion worth of U.S. dollar debt in the world (debt denominated in USD) while there is only on the order of less than $20 trillion U.S. dollars in existence.

Those numbers should send off alarm bells that something is completely out of whack.

These problems are real. They are not exaggerated.

A perfect storm is coming. Protect yourself with gold.

Paper bugs are in denial

Some people just refuse to accept reality.

Why is the price of gold increasing? “Because everyone is buying it,” some will say. Okay, but that still begs the question.

Why are they buying it? “Um, um, dunno. It must be a bubble, people are entering into the market under speculative intentions.” First of all, this mainstream regurgitation completely ignores the fundamental facts surrounding metal stocks. They are very undervalued. Nothing about the gold surge says “bubble.” The price of gold will inevitably be subject to corrections in the next ten-plus years of this gold bull market. Smart savers will see these corrections not as a time to run scared, but as an indication to buy more of the stuff at a discount.

Paper bugs are simply denying what gold bugs have known all along.

Gold is real money. It is rare, it is valuable in and of itself, it is easily divisible and it has been the most constant store of value throughout all of human economic history.

What fiat currency can claim to have lasted more than a mere few decades, let alone for thousands of years? Fiat currencies are a joke. Paper bugs refuse to admit what a joke they are. They think fiat currencies are “the next best thing,” the inevitable result of civilization advancement. “Modern economies can only function on a fiat currency of paper money,” they regurgitate. What a laugh. Do they offer any economic justification for this? Or do they just assume that you will take those phony words as gospel just as they have?

How real money works

Fiat currency is paper. Paper is paper. What kind of value is that? Paper is made from trees in abundance with no regard to the price level of the currency being produced. See, with a real money, the more valuable it becomes the more incentive there is to produce it. That leads to increased production, and an increase in supply. Econ 101 students can surely understand what an increase in supply leads to. That’s right! Increased supply leads to a decrease in price. This decrease in price leads to a decrease in production, and on and on.

This whole process establishes an equilibrium between money production and its value. Hence, the value of gold remains constant.

If you saved an ounce of gold in the year 1750 then it will be just as valuable in 1800–and 2010 for that matter. In fact, increased efficiency over those 50 years would lower production costs and ultimately your ounce of gold will buy more after those 50 years than it would when you had saved it (as it happens, those efficiencies are brought about by investment which was made possible through your saving that ounce of gold).

This equilibrium is maintained solely by the marketplace, meaning it happens naturally. It leads to a stable price level and incentivizes saving, which leads to economic growth.

Fiat currency

But what happens when money is dictated by fiat? That is, what happens when government passes legal tender laws declaring that you must use the money they want you to use, which happens to be the money that they–and only they–can produce? Well, first they are going to want to produce lots of it so that they can spend it on programs that will keep their constituents happy. These are things like retirement benefits, paving roads, keeping us safe from terrorists and providing low-interest loans for education, homes, cars, etc.

These services keep politicians in office. They want to stay in office because it’s easier to provide services when you are forcing your financiers to give you their dough. The other option for politicians is to quit office and get a job where they can only be compensated through the free will of the other party in an exchange (this is known as the private sector). They don’t want to do this. They are incapable of dealing with such a challenge. They must stay in office as long as possible.

The plethora of programs is the key for receiving votes and ultimately remaining in office. But they can only provide programs through tax revenue as the political class doesn’t actually generate wealth of its own.

Remember, though, the primary goal for the politician is to keep his ass in office and out of honest work. Raising taxes, even if it is to administer cozy programs, will not sit well with constituents. The politician is faced with a dilemma: how can you provide programs while keeping taxes low? Finding the answer to this question would be like finding the holy grail for the politician.

It turns out that the holy grail is money itself. If the politician holds a monopoly on money production, while forcing everyone to use that money, then they can spend as much as they can produce without burdening their unsuspecting voters with high taxes. In order to produce more they will surely want that money to be made of paper. Brilliant!

This is called fiat currency.

Fiat currency does not last. When Roman bureaucrats needed more money they simply debased metal coins by mixing more valuable metal with less and calling it the same coin.

American political money-producers have done the same with the penny, converting it from a copper coin to a much cheaper nickel coin coated in copper to give it that color. They then claim it is the same coin and holds the same value. But a penny in 2010 does not buy what a penny could buy in 1900.

So who are they fooling? Answer: plenty of people. Enough anyway to keep the party going until it all collapses around us and we one day realize that the “money” we have been using actually has no value. American politicians have done this with pennies, nickels, dimes and quarters (which used to contain silver).

More recently, currency production has forged ahead with the development of our financial digital network. This allows politicians to produce currency by simply typing a few keys on a keyboard. Market forces leading to monetary-price-equilibrium and price stability are completely disconnected from this process.

Disaster is inevitable all because politicians seize the power they need in order keep their jobs. They force compliance to their money rules and are allowed to kick the can and while neglecting the economically absurd policies that will end in disaster only once they are safely out of office living in their vacation home in the Caribbean.

What’s more, we further empower them through our ignorance–nay, our willingness–to support their crackpot ideas.

Paper bugs are everywhere

The paper bugs that I have run into of late happen to be New Zealanders. I live in New Zealand. These paper bugs echo the rallying cry of the New Zealand government and believe the same half-truths that socialists and statists the world over have succumbed to.

This proves the point that most people are easily seduced by the State, not matter where they are from. It also suits my purpose well because many of us have already seen the various charts and read the data showing the drop in the value of the U.S. dollar since the inception of the Federal Reserve System. It’s time for something new.

Paper bugs in New Zealand, like all paper bugs, are in denial. They refuse to accept the reality that paper currency will constantly–if not always consistently–be debased so long as a centralized authority, answerable to nobody, controls the production of money.

It doesn’t just occur in during a gold bubble (not that we are experiencing this now). Rather, debasement is a constant theme over the course of the short lifespan of a fiat currency. It simply cannot hold up to the time-tested value of real money.

The value of NZD has consistently diminished over the course of the last 40 years. The recent acceleration is not a bubble phenomenon. It is not a craze. It is a direct result of an accelerated inflation of the money supply by New Zealand's central bank. This is the same thing that has driven the decline in the value of the NZD for the last 40 years. It is only more pronounced today because the root cause is more intense.

At least it’s somewhat comforting that the Savings Working Group doesn’t just assume compulsory saving will help “address New Zealand’s dismal savings record.” Although, it’s possible that mandatory saving requirements would improve the rate of savings, that doesn’t mean the overall economy would be better for it. In fact, the inevitable unintended consequences of all government interference in the market points to the opposite being true. That is, a government mandate for individuals to under-consume and save would almost certainly be detrimental to the overall economy.

Of course, all things being equal, under-consumption leads to investment which leads to prosperity. But all things are not equal. This is just another example of the endless tinkering that planners engage in to undo the problems they caused with their last round of tinkering.

So how about savings? Me being the simple-minded fool that I am imagine that the best way to encourage savings is to raise interest rates (or more specifically, releasing the central bank’s strangle hold on rates and allow the market to determine them). This will make it more attractive for individuals to under-consume and realize some legitimate gains on their savings. Surely, Savings Working Group will find some merit to this solution:

“The group estimates interest rates are 1.5 to 2.5 percentage points more than they should be.” Interest rates are too high? …Not exactly what I had in mind.

Looking at the entire passage we can see how they arrived at this conclusion.

The group has met twice so far and has taken a wide macro-economic look at the issues facing New Zealand, putting much of the blame on the poor performance of the tradeable export sector over the past decade, he said.

This has encouraged foreign investment and local reliance offshore debt, which in turn lifted interest rates and the strength of the kiwi dollar, which fed the imbalance further, he said. The group estimates interest rates are 1.5 to 2.5 percentage points more than they should be.

Ok, so basically what this group has concluded is that New Zealand’s export sector is struggling due to a strengthening currency. This implies a reduction in income, which of course makes it difficult to save.

First of all, the numbers on household income do not support this. Income has significantly and consistently been on the rise in New Zealand over the last decade–the same time frame where savings has been in an apparent free-fall.

It’s true that this rise in household income is purely nominal. Don’t be confused by the claim that “the Kiwi dollar has increased in value.” It hasn’t. What has happened is that New Zealand’s currency is losing (or winning, depending on how you look at it) the global race towards currency debasement. Relative to other currencies, the Kiwi dollar has generally been strengthening, but it still buys less goods and services than it did a decade ago due to the Reserve bank’s inflationary policy. That is, against other inflated currencies it has strengthened, but against commodities and actual goods it has weakened. Governments and central banks all over the world are addicted to currency debasement, and New Zealand is no different, except that we are slightly more intelligent by engaging in debasement slightly more conservatively.

This brings us right to the second problem with the group’s findings which has to do with an overarching fallacy that is so pervasive in this world of Keynesian nonsense. I hear all the time how New Zealand monetary policy needs to be geared towards a weak currency in order to support the export market, and that that would be great for the overall economy. This is absurd.

Why would any nation desire a weak currency? Why would any nation choose to diminish the purchasing power of their money? Admittedly, there are certainly a few special interests who would benefit, or think they would benefit, from such an arrangement–namely, some exporters and their supportive industries who are too lazy, unwilling or incapable of adjusting to new market conditions by improving their products, moving into different spaces, or finding new customers. But what about importers? What about retailers? What about households? Why are we supposed to automatically assume that high incomes can only be achieved by propping up the export industry? And I don’t want to hear this garbage about how “New Zealand is an export country.” That doesn’t even mean anything. All countries are “export countries.” All economies, all markets are in search of buyers. Nobody, save for the hermit hiding away in the mountains, produces a good or service solely for their own consumption.

So the question for New Zealand to answer is, “what goods and what services does New Zealand produce that others may want?” Cheap labor seems to be the immediate answer spewed by the supporter of the aforementioned export-friendly monetary policy. It is wrong. It is a cop-out. It is unimaginative. It is completely devoid of any real economic comprehension. It is just regurgitation of Keynesian nonsense. Besides, if cheap labor really were a competitive advantage to pursue then why don’t we devalue our labor completely by abandoning our factories and discarding all our tools and capital equipment. Then our labor will be so cheap that prosperity will be endless!

Taken to this extreme we can see how nonsensical our ideas about the economy have become. But these are the very fundamentals that neo-Keynesianists want you to take as gospel! They are insane!

A strong currency means that that currency is desirable. Plain and simple. Why would New Zealand not want their dollar to be desirable? A desirable Kiwi dollar means that foreigners want to hold that Kiwi dollar. How do they get their hands on it, then? Answer: they sell New Zealanders goods and services. New Zealanders, equipped with ample purchasing power, will experience a standard of living that no weak currency could provide. What do foreigners do with the Kiwi dollar once they get their hands on it? What can they do with it? Answer: they invest it in New Zealand! Sweet! This investment leads to capital expansion, better products manufactured in New Zealand, better services offered, and ultimately a higher income.

This is starting to sound much better than propping up an inflexible export industry with a weak currency policy. And all it took was some reasonable economic understanding, and the impetus to challenge the half-truths shat out by Keynesians.

Stop talking about the desirability for a weak Kiwi dollar. I am sick of hearing it.

The fact that the Government runs the schools is the one overarching problem with the entire education system. Government run schools do three things.

1. Most estimates for the cost PER STUDENT-PER YEAR are around $13,000 nationwide. Some studies have a much higher figure but we’ll be “conservative” with that number for now. In order to pay for this “education” the Government drains families of their money through property taxes and other forms of legal plunder. This overpriced and unjustified expense is one of the reasons both heads of house are forced to work full time jobs. In turn, there is less time for parents to spend teaching and nurturing their children.

2. “Perception equals reality.” Since the parents are not writing a check directly to the school there is a perception that the Government run school is free. The idea that parents are not paying for this service detaches them from taking responsibility and truly owning the results.

3. Government run schools essentially have what amounts to a monopoly on the education industry in the United States. Private education does exist but it is faced with unfair competitive advantages held by Gov. run schools. Government run schools don’t pay taxes which reduces their costs. They also have the Government printing press at their disposal. Also, the perception of being “free” attracts more suckers to put up with their miserable results. One RULE that ALWAYS applies when a monopoly has taken hold applies here: “Lack of competition will lead to a reduction in quality of service while increasing the cost.” It’s that simple. This monopoly must end so the free market can facilitate a level playing field which would drive down the prices for alternative forms of education.

The Solution: Let families keep the $13,000 which they’ve been flushing down the toilet of Government education. Here’s why:

1. Parents will have the financial means to choose the education they want: home school, private school, boarding school, GOVERNMENT SCHOOL (if they want).

2. This education families choose will yield better results and cost less. To paraphrase Milton Friedman, “When you spend your own money on yourself you will get the best value while maximizing results.” As I’ve discussed Government schools are a colossal waste of money and have yielded shameful results. If these families are writing a check to an educator of their choice they will make sure the child is getting a proper education for their money.

3. Parents would work less and be home more. The positive results of this will be immediate. In the current climate the window for families to spent time together is between 7-8 am and 6-10 pm. Parents and kids don’t become strangers. Parents will have a better opportunity to keep their kids out of trouble. Last but not least: Less expense ($13,000) = less work = less stress = happier family.

4. The social climate around the country will improve. There is way too much fighting over what is taught in public schools. Should our kids learn creationism? Is health class too graphic? Should we focus on alternative life styles? What bull shit fable are we going to learn in “history” class? It’s ridiculous! If people are choosing who educates their children these would not be issues. This has become more troublesome with the introduction of Federal standards and Federal curriculum. Basically a suit in Washington decides what EVERY CHILD IN AMERICA can and can’t learn. **See Ref. Below**

5. The “exceptional” will excel and the average will get what they paid for. This is related to #3 and #4. Government run schools are a place where MOST (not all) great brains go to die. They are dragged down by the monotony and “neutrality” of public schools. They are not challenged they are “drugged.” The exceptional are the ones who will one day drive forward civilization with their ability to solve problems, innovate, invent and produce greatness. By holding them back we are hurting the future.

The average will maximize their ability: see #3.

6. We will save hundreds of billions of dollars. The government is broke!!!!! It has gone broke with failed attempt after failed attempt to adequately replace what the free market could provide. This point ALONE should end all arguments. If you have NO MONEY stop SPENDING MONEY.

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**Ref#4:**

“…a suit in Washington decides what EVERY CHILD IN AMERICA can and can’t learn.”

There is a reason people don’t know what the Federal Reserve is when they graduate: They don’t want you to know that money is literally created out of thin air.

There is a reason people don’t learn to manage their money when they graduate: Debt, Borrowing and Spending drive this house-of-cards economy so the more people in debt the better.

There’s a reason States Rights are not brought up in MOST civs/government classes: They want the President to userp unconstitutional powers, control industry, and dispense favors to their political allies.

There’s a reason books by Freidric Bastiat, Henry Hazlitt, and Murray Rothbard are never discussed: They want to shut out alternative thought. They want to produce obedient lemmings with homo-genus ideologies who do not question the All Mighty State.

Not PC has covered the many occurrences of the broken window fallacy since the earthquake in Christchurch. For an entertaining twenty minutes of laughing at mainstream, Keynesian-regurgitating idiots check out the updates along the bottom at Not PC.

The prize so far goes has to go to the Treasury–in conjunction with ANZ bank–in trying to predict the impact the earthquake would have on GDP.

The Treasury and ANZ Bank had a stab yesterday at quantifying the impact of the Canterbury earthquake on gross domestic product.

Both concluded that while the near-term impact is unambiguously negative, the recovery work needed would boost GDP over a longer time frame.

I admit, it can be difficult to see this preposterous notion for what it is. I mean, the clean up effort does take care of employment, and it does produce something. But remember, what is being produced was once standing, it is merely being replaced. And the employment that goes into the reconstruction is employment that is now not working towards producing something else.

The explication made by government and bank officials that the earthquake will improve GDP is utter nonsense. If it weren’t, then we would cheer an even bigger quake that levels all of Christchurch, Auckland, Wellington and Nelson. Think of all the cleanup required! What a great boost to the economy that would provide!