The most intellegent article on money and value I've ever read

A note from a friend who I consider the money guru of the United STates

Too long and probably boring, but why don’t they teach this stuff to our kids anymore??? 

     Call it money, wealth, medium of exchange. Whatever you want to call it, it plays a vital role in just about everyone’s life. Here in our capitalist-becoming-socialist society it ranks right up toward the top, in most cases just below family, health – other similar essentials to freedom and our pursuit of happiness.

      But for something of such immense importance, it is astounding how little we know about money.
And we should … more so today than ever before.

      So today I’m going to put on paper some things that should be taught in grade school – but isn’t, as is the case with so many crucial subjects in today’s culture. The old saying goes, “Ignorance is bliss.” If that’s the case, our recent grammar- and high-school grads must be the most blissful citizens in history.

      We can’t turn on the TV, pick up a newspaper or sit in a barber chair without hearing speculation over “the collapse of the dollar” or “government default” or something to do with our enormous and quite probably unpayable debt. How the heck are we ever going to put our nation back on sound financial footing? What is to become of our kids and their kids and their kids’ kids?

      Right here let me confess: Beats me! Our government leaders don’t know either. Nobody knows.  Our president has brought us bias and ignorance and we have entered The Era of Trial and Error. Policymakers and our leaders (and their acolytes, the “media”) keep up the pretense that all is well but anyone with an IQ north of seventy knows better. They tell us they know exactly what they’re doing when in reality they are standing in the dark, totally bewildered, fully focused on feathering their own nests while there are a few feathers left.  So far their remedies on our behalf have been totally error.

     It’s hollow solace, but the U.S. isn’t the only nation that is close to imploding. The whole free world is in trouble – bankrupt. We’ve indebted ourselves into oblivion.  Granted this world-disorder began forming a long time before we were even born, probably in June 1914 when Austrian Archduke Franz Ferdinand and his wife were assassinated, leading to a chain of events that ultimately resulted in World War 1. By the fall of 1918 16-plus million people had been killed and the Russian, Ottoman, German and Austro-Hungarian empires had collapsed. (In case you ever feel the uncontrollable urge to relieve yourself on the radical assassin’s grave in Bosnia -- this guy whose actions precipitated WWI -- his name was Gavrilo Princip.) But when he pulled the trigger nations got their first real taste of deficit spending and have subsequently polished the practice to a fine art. As usual, America led the way. And they didn’t even have credit cards back then to speed them toward impoverishment !
    

     When WWI ended in the fall of 1918, the last country left standing on its financial feet was Great Britain. The rest – even though they were the victors – had hocked the kitchen sink to pay for the war. Naturally, London became the financial capital of the world.  Britain’s sterling was the World’s Reserve Currency.  Since history was first recorded, gold has played an active role in the currencies of the world and Britain’s sterling was wisely backed by gold held by the Bank of England.
 
     But slowly the U.S. dollar began regaining its footing. As a relatively young nation, we had resources to sell, mortgage, lease out and otherwise encumber and we lost no time in so doing. Throughout the 1920s the dollar and the sterling competed for world dominance. By 1931 the dollar had taken the lead thanks to Churchill’s blunder in pegging the sterling to gold at an unrealistic rate back in 1925. Without going into the details and as a result, the U.K. began their Great Depression three years before the rest of the world (no, it wasn’t old Herbie Hoover who started it).

     The rise of the dollar and the decline of the sterling continued until the start of WWII in 1939. Due to the costs of this new war, Britain was forced to suspend people’s ability to convert sterling into gold merely by walking into a bank. The relationship of gold to a country’s overall currency was removed and the beginning of “fiat” currency was undertaken. Okay, enough already with the foreplay, so let’s get to the more-modern status and deterioration of our money.

     At the end of WWII, the victor-nations had been more or less reduced to shambles (”broke” would probably be a more fitting description). Most of Europe was bankrupt. Though the U.S. held a bunch of their IOUs, when a borrower has no assets, IOUs aren’t worth much to the creditor.  In 1944 – a year before the end of WWII – the Allies had met in Bretton Woods NH to try to agree upon a series of new rules for the post war international money system. The official name was the United Nations Monetary and Financial Conference. One lasting result of the meeting was the creation of the International Monetary Fund (IMF). More on that in a moment.

      Bretton Woods achieved some success, creating rules that lasted until 1971 when President Nixon had to sever the link between the dollar and gold. Taking the U.S. off the gold standard was his only quasi-legal means of preventing a run on Fort Knox (which incidentally now held only one-third of the gold necessary to cover the amount of U.S. dollars floating around in foreign hands. (Hey, nothing changes. The citizens weren’t paying attention and the politicians ignored the gold requirement, using the opportunity to pilfer our nation's gold with impugnity).

     Let’s talk for a moment about this IMF. Formed in 1945, their purpose was to provide dollar reserves to any member-country that couldn’t otherwise pay its legal obligations. The agreement was that such a country could borrow enough to return itself to a surplus in return for which that country would agree to “structural reforms.” The backing for this entire program was the good old U.S. dollar, pegged forever (so it was believed) to their disappearing gold in Fort Knox. It should make you mad as hell to know that, from 1950 until 1970 – while the U.S. was on the gold standard – the gold in the U.S. dropped from 20,000 metric tons to under 9,000 metric tons. I assure you the number of U.S. dollars in the world did not drop accordingly as the gold standard required. Actually, the dollar amount increased.

     Thanks to the non-federal Federal Reserve, in the late 1940s the U.S. had the only theoretical “dollar printing press.” Back then, as I said above, we also had over 20,000 metric tons of gold in Fort Knox. The rest of the free world had about three dollars and twenty-five cents and maybe a couple of ounces of gold. It was kinda’ like trying to start a poker game where only one player had all the chips.

     But in the international world of finance, nothing remains static for long, especially when the U.S. government has a heavy hand in the mix -- there is too much room for corruption. Oversight is almost non-existent. In 1969 the IMF invented their Special Drawing Right (SDR).  SDRs are easy to understand in both concept and practice: Like the U.S. dollar, SDRs are backed by NOTHING. They can be issued in unlimited, unsupervised quantities by the IMF without any voting or debate Since the IMF is not a country, it never has a trade deficit, so in theory can never go broke. Their SDRs exist much like today’s dollar … solely in a computer.

     So, back in 1971 the U.S. virtually ran out of money. The gold-standard made it illegal (wink, wink) for the nation to print more dollars than their gold could back up so Nixon took the U.S. off the gold standard and gave the nod to the Fed to clean the cosmoline from those printing presses.

    Following America’s lead, in 1973 the IMF removed any tie they might have had between gold and their SDRs. By 1975, the original Bretton Woods system was ash canned. In the next financial panic coming to a neighborhood near you, you can bet your sweet elbows SDRs will be issued by the unbacked trillions to provide the 188 member-nations enough liquidity to keep their doors open a while longer. All together now, join in:  ♫ “Oh sweet gold, where have you gone?” ♫

     Of the 188 member nations, the IMF has only four that vote:  The U.S., U.K., Japan and Europe. But China, while not meeting all the IMF criteria, isn’t going broke as fast as those four and is expected to be added. Money talks … even when it’s just IOUs from the United States.  Last week the IMF head Christine Lagarde said, “The IMF staff assesses that [the Chinese currency] meets the requirements to be included in the SDR basket as a fifth currency along with the British pound, euro, Japanese yen and the U.S. dollar. At first glance, this seems like no big deal. Nobody actually uses the IMF’s currency.”  Just wait, Christine!
     So to wind up, the International Monetary Fund (IMF) is expected to soon bless China’s currency, the yuan (AKA renminbi), with official reserve currency status. For months there have been wild stories floating around the financial world that the IMF’s move will result in massive — and potentially destabilizing — shifts in foreign-exchange markets. One of the more sensational versions of this story implies the dollar’s reserve currency status will be threatened triggering a collapse in the value of the $USD, and a global currency crisis. I really don’t think that’s gonna happen…

     But there’s something you should know. These SDRs are not magic money. Like the U.S. dollar, they’re only make believe. You’re going to hear things about this “New World Money.”   You’re going to be invited to buy Exchange Traded Funds (ETFs) based on these SDRs. Hey, they might be a good investment -- it’ll depend on how good the salesmen are. And if they sell like hotcakes, there’ll be people who’ll make a bunch of money. But just remember, for every person who makes money, there’ll be those who’ll lose an equal amount. And always remember: these Wall Street snake-oil salesmen are pretty crafty – especially when their joined at the hip with the top guys in our administration. But hey, if you think you’re craftier than they are, take ‘em on. And lotsa’ luck!

     In closing remember, there are hundreds of elements of value in the world. Food and water top the list. Somewhere up near the top are real mediums of exchange like gold, jewels, stuff you can walk into a store somewhere in the world and exchange for life-sustaining necessities. Before you invest the family fortune in anything without any intrinsic value (like SDRs, bitcoins, etc), ask yourself what you can trade it for. The U.S. dollar is backed by the full faith and credit of the U.S. government. SDRs are backed by the full faith and credit of the IMF. The Pyramid Scheme was backed by the full faith and credit of Bernie Madoff.

 ... ’Nuff said?