The Shaman's Glen

NOTE: one of my readers, Mark, was kind enough to point out a few things I completely agree with so I’m making some edits. I love it when readers help out like this! Thanks Mark.

Last week in Part 2 of this article we got to the heart of the matter on Market Price. We talked about where it comes from (Nature) and what it means (Order, Progress and Peace). As I promised, today’s Part 3 is going to talk about how Market Price gets corrupted by government-sanctioned deceptions like Fractional Reserve Banking and Fiat Currency.

In truth, there are really only three basic things that cause all the problems. The two listed above–FRB and Fiat Currency–and Regulation. The lie of Regulation is simply that the purpose behind it is to help promote safety and wellbeing, or even competition. The idea that governmental regulation could do any of those things is ludicrous; you can’t promote safety or wellbeing by theft or force, both of which are absolutely central to all government actions, and you can’t promote competition by limiting the competitors.

The real pain of these three corrupting influences, however, is what they do to Market Price. To recap why Market Price is so important, look at this. Each person considers the value of their own work and time, as well as saleable goods, in comparison to all other things they could be doing. The aggregate of all humans in society deciding for themselves how to compare those values creates Market Price. Since Market Price is an aggregate of evaluation, it fluctuates slowly (for the most part). That allows people to have a sense of trust and security in the future value of their property. This allows them to invest and save. Investing permits growth. Growth promotes progress. Progress creates real wealth. Without aggregating all of society, the evaluation becomes arbitrary and completely untrustworthy. Feelings of security vanish and investment dwindles. Growth and progress halt. Wealth dissolves. Chaos reigns. How’s that for important? Not to mention familiar…

As you know (because you’ve done the research over at Mises.org), there are two kinds of currency. Real currency uses a natural and tangible store of value determined by the Aggregate: gold. Anything will do, of course, but gold has been the one that’s actually used so that’s the one to which I refer. Fiat Currency claims to use trust in the supplier. No, seriously. I mean it. Quit laughing.

Imagine if Wal-Mart started paying their employees in Wallors. For every hour they worked they would get some number of Wallors. Wallors are bearer bonds, in essence, so the employees could trade them for favors (don’t ask) or even give them as gifts to their friends. As long as Wal-Mart exists, they say, Wallors could be redeemed for merchandise at any Wal-Mart. They assign prices to all their products in Wallors as well as Dollars so everyone knows what they’re getting.

Since Wal-Mart would then be getting these Wallors back, they would only need to print a certain amount. That would stabilize the value on the prices they’ve set. Now say an employee wanted to go to Burger King one day instead of the McDonald’s that’s in the Wal-Mart. Maybe Burger King knows that Wal-Mart will be around forever(tm) so they decide to accept Wallors as well. They set prices for their products based on their availability. This trend spreads and pretty soon all sorts of people are trading in Wallors.

Sound far-fetched? Then you haven’t been studying up on US currency. That’s exactly what US Dollars are. People trust in the government to keep the money supply stable, so they accept the Dollars as money. One big problem: the government doesn’t keep the money supply stable. In fact, they keep increasing it. For some strange reason they seem to think that money doesn’t follow the law of supply and demand. That pesky Market Price concept just doesn’t seem to sink in for them. And that’s why Fiat Currency corrupts Market Price: since it doesn’t rely on a stable backing such as gold, the source can inflate or deflate it arbitrarily. People evaluate money in terms of purchasing power, remember? When the supply of a resource is increased, the relative value per unit of that resource is decreased in direct proportion to the increase in supply. By increasing the supply of Fiat Currency, they decrease the value in proportion to the increase in supply. That’s not just economics, it is nature. Now add in to that the decision-making mechanism behind that increasing/decreasing of the supply. Remember what we said about the power of the aggregate to keep up a minimum of fluctuation? Decrease the size of the aggregate and you increase the fluctuation. That decreases the trustworthiness and the cycle we talked about above begins.

Then there’s my absolute favorite source of laughter ever. When I first heard about Fractional Reserve Banking I thought either I was hearing it wrong or that the professor was insane and unqualified (both, since most professors are one or the other). I admit I’m still no expert on it because it seems so completely outlandish that I can’t believe my understanding could be correct. Here’s the gist of it, though: You let me hold $10 worth of bearer bonds (Federal Reserve Notes in this case: remember that these originally were actually backed by gold) for you with the understanding that I’ll loan it out and give you back $11 in a month. I take that $10 and loan it out to five different people with the understanding that each will give me back $11 in two weeks. Wait! you say, That math isn’t right! Each recipient would only be getting $2!

Nope, I take your $10 and loan that same $10 out to five different people. $10 each. I have $10 but that has now become $50. Even weirder, because of some serious math-magics, when those people pay back their loans in two weeks, I now have $15! Each one took their $10 loan and used it for whatever. They gave me back $11 each. The $10 from the original was bogus but the $1 interest remains. I do the same thing again the next two weeks and now have $20. I give you back your $10 plus a $1 in interest and pocket the remaining $9. All the while the other $40 I loaned out (of nowhere) is still prospering and growing in the same fashion.

Now that’s a horrible simplification, obviously. It makes the truth much worse that the original $10 was Fiat Currency which came out of nowhere. That’s all insane, but it’s merely more of the Fiat Currency problem of Market Price corruption. The real corruption from Fractional Reserve Banking comes from how the funny money flows.

Since all the Fiat Currency comes from the Federal(tm) Reserve (don’t believe the lies; the Treasury prints the money on order from the Fed. That’s why they’re called Federal Reserve Notes and not Treasury Notes), they flow from the Federal Reserve into their member banks. This is before they’ve been multiplied by Fractional math. Big corporations and other banks get them as loans at that point. They’ve been multiplied only slightly so their value is still based on the supply prior to that dilution. This means that their money is at purchasing power X. The higher level banks then apply Fractional math and loan out the money further. Mid-level banks and companies get that money at a diluted level. That would be at purchasing power X/5, for instance. At each step the banks get smaller as do the borrowers. At each step the dilution becomes more dramatic as does the reduction in purchasing power.

Set aside how unfair that is for the moment. Think only of the effect on Market Price. People who get the money earlier in the process get a different view of the purchasing power of their money than people who get their money later in the process. That concept of purchasing power of the money directly affects their concept of the value of their time, energy and property. That causes an artificial and rapid distortion in the Market Price aggregate. That’s another fluctuation and we’ve already discussed the outcome of unnatural fluctuations.

Think more deeply for a moment on that last idea. People at the top of the chain develop a different set of criteria for considering the value of their resources than do the people at the bottom of the chain. There are two different kinds of resources available here. Let’s equate them to the two kinds of energy so we can keep this simple: There are Potential resources which are kept in reserve for progress, and there are Kinetic resources which are actively being used for current necessities. The ratio between Potential and Kinetic is hugely different between those at the top and those at the bottom because those at the bottom have to spend all they get on just keeping food on the table. That’s natural and therefore reasonable and respectable. The problem is that with the massive and arbitrary fluctuations in Market Price caused by the three factors we discussed above, there is also a very different basis for evaluating those resources.

The way we evaluate our Potential resources defines our perception of wealth. Wealth, sans arbitrary and artificial Market Price fluctuations, comes from resources which are applicable to progress. When you add in those Market Price fluctuations, however, the perception of Wealth changes.

In Part Three we’ve talked about how Fiat Currency, Fractional Reserve Banking and Government Regulations cause artificial fluctuations in Market Price which brings about chaos. In Part Four we’ll talk about Wealth and why the corrupted perception of Wealth is what gives greed a bad name.

As always, thanks for reading. You do make this all worth it. Please leave any thoughts or questions you have in the comments. If you’ve followed my blog at all you know I try to respond to every comment directed at me.

In part one we discussed why socialism will never, and can never, exist in a free society. In the end, the problem is conflicting goals. What we need is some way for people to quantify the relative values of their goals. The easiest and most rational method of doing so is the fixing of a “price” to each goal.

Price, in the real world, is about opportunity cost. If you have Goal A, the question you have to ask yourself is what are you willing to give up to achieve it? What you are willing to give up is the opportunity cost. The price of Goal A is giving up of Goal B.

Let’s look back at nature for our first example. I want to do this because it removes morality and makes it a very simple equation. In our example we look at a bird building a nest. The bird has several goals. First, the bird wants to stay safe. Second, the bird wants to gather food. Third, the bird wants to find a mate. Lastly, the bird wants to gather materials for the nest. She can gather food and materials, to some degree, at the same time so our bird doesn’t have to give up one for the other. Building a nest is an important part of finding a mate so by doing one she works towards the other; there’s nothing being given up. In order to gather materials for the nest, however, she has to leave the tree and quest the neighborhood for straw and bits of stuff. That means putting herself in harm’s way. Cats, dogs, people with brooms, cars and all sorts of other nasty things are out there just waiting for her to show her face. So she has to decide between building a nest and staying safe. Safety is the opportunity cost, and the price, of building the nest.

In the human world, however, there is the concept of abstraction. That helps us out enormously. We can consider abstractions of opportunity costs and prices. Our advanced intellect permits us to look at things of relative importance and relate them to each other in different ways. We can abstract our wish to have a house to the amount of time and energy it would take to build it. We can compare that amount of time and energy to the amount of time and energy it would take to do something else. Those abstractions allow us to find common ground not only internally for ourselves, but communally with other humans. I put more value on the having of the house than you put on the time/energy it takes to build it. If I can find something you value more than the time/energy of building me a house, but that I value less than the having of said house, we can trade and both of us are happier for it. Barter system.

It would be easier for us all if we could agree on a particular abstraction, though. Something that throughout our whole culture, and hopefully throughout all cultures, we all agree is at least somewhat desirable. If we could do that, then we could use another human concept, “symbology”, to decide on consistent prices for our time. Enter “gold”.

All down through history humans have accepted gold as desirable. It’s been used in art, cosmetics, tools, jewelry and, in more modern times, technology. While there are situations when it has obviously been less desirable than other things (water in the desert, for instance), it has on a cultural level always been accepted as universally transferable. That’s why it has been a basis for barter. The easiest way of using gold for barter is to make it into small, solid units. Dust would work but that would hard to keep track of. Jewelry would work but then the artistic qualities would interfere with the raw trade value. So ingots are best.

Once gold gets turned into ingots, we then have to have some way of confirming that the gold is real. Since not everyone can carry around a chemistry set, the best way is by reputation of the person confirming the gold. One takes their ingots to a respected gold-smith. The gold-smith tests it for authenticity. If the gold is pure, s/he puts his/her stamp on it. It becomes a coin. The respect and reputation of the holder of the stamp becomes the guarantee of authenticity of the coin. The fact that gold is easily melted means that if that smith’s reputation becomes soiled one can take their gold to another, more respectable, smith for re-coining.

Now we have coins. I have twenty gold coins guaranteed by someone you trust. You have the time and materials necessary to build me a house. A third guy has a car. Car guy wants the coins, you want the car and I want the house. You know how this part works. The barter system just became a money system.

Expand that to thousands of people. Millions. Billions. Each person thinking about how hard it is to get coins versus how hard it is to carry out whatever goal they have on their minds. If I get one coin every week and it would take me ten weeks to build a house, then that house is worth ten coins to me (hugely oversimplified but I hope you get the point). If someone else can build that house in five weeks and will do that for me in return for the ten coins, I can give him the ten coins and save five weeks of effort! But what if there are ten people saying they will build me that house in five weeks? Which one gets my coins? The one who requests the least of them, obviously. If one of them says s/he’ll do it for 9 coins, they made a deal. They also just told the rest of the builders they need to lower their prices if they want to keep up.

And suddenly there is a Market Price.

But what about the market price of gold? How is that set? That’s both the most simple thing and the most complex thing about economics, which is why I think so many people have such a hard time understanding why free markets work. Here’s the secret: the market price of gold is never set. Gold is the universal exchange medium. Asking about the market price of gold is like asking to measure a 12″ ruler. We quantify gold by purchasing power, not market price. We measure everything else by market price in terms of gold, we measure gold in terms of purchasing power.

Here’s another secret: the relative purchasing power of gold has never changed in all of human history. The relative purchasing power of one ounce of gold was the same in ancient Rome as it is now. The key term there, for the doubters, is “relative”. Our quality of life is much higher now than it was then and we have technologies now that simply were beyond their imagination (that’s called “progress”) but the relative purchasing power of gold was essentially the same. One ounce of gold would buy a person a comparable amount of goods or services. A sword instead of a gun. A horse instead of a car. A fine suit instead of a toga. But if you can compare the goods the same amount of gold would buy it then as now. And that’s why there is no market price of gold. It is the ruler against which we measure all other things.

Never willing to leave well enough alone, however, we stupid humans decided to abstract things yet another step. We started to symbolize gold with paper. Gold is heavy and hard and carrying a bunch of it is a bit of a strain, so instead people would put their gold in well protected buildings and get receipts for it. Those receipts could be traded in place of the gold. If I had a receipt for 10 ounces of gold, that was just as good for a lot of people as though I had the physical gold.

Just as when the Emperors of Rome were in charge of gold and started clipping the coins or diluting the purity, however, when more modern governments took charge of the receipts they started to do some different funny stuff. They started off with “fractional reserve banking” which is a rich persons way of saying “FRAUD”. They then convinced folks that fiat currency was a good idea.

So many other places and so many other people expound upon those two ideas that there’s no way in hell I’d be able to give you a better understanding of them. Check my side-bar for links to places with great descriptions (in particular I recommend Mises.org).

Here in Part 2 we talked about how the concept of Market Price evolved as well as why it’s a natural concept. We talked about real money and started to discuss Fiat Currency as well as Fractional Reserve Banking. While I can’t kid myself that I’d be able to do as good a job as others of helping you understand those last two, Part 3 will be about my thoughts on why those things are lies and how they corrupt market price.

Thanks for reading. I mean that. I’d really appreciate it if you could leave any thoughts or suggestions you might have in the comments.

Nice title for a socialist article, don’t you think?

“But wait!” you say, “You’re not a socialist!” Nope, I’m not. And this isn’t a socialist article. In fact, this is exactly the opposite. In Part 1 I’m going to try to explain why socialism cannot possibly work.

Socialism is primarily based on two opposing ideas. First, socialism holds that hierarchs impose all hierarchies (and that all others become ostensible slaves to those hierarchs). Second, socialism holds that it’s possible to end all hierarchies by educating people about its benefits.

Let’s take a look at each of those ideas separately before we get to explaining why they can’t work together either. Read the rest of this entry »

I’ve commented in passing during conversations as well as on this blog about the rights of owners of property. I’ve implied a specific definition for ownership while talking about government intervention and such. I don’t think I’ve really been very clear about my opinions on private property, ownership, rights and the way those three relate, however, so I want to clear all that up.

There are three kinds of property holders. There are borrowers, renters and owners.

If someone has some property and you would like to make use of that property, you can ask them to let you use it. If they agree, they can pass that property into your possession without charge with the understanding that the property is still theirs and you must return it eventually. At that point, you are the borrower of the property.

If someone has some property and you would like to make use of it, you can ask them to let you do so temporarily in exchange for a fee of some kind. If they agree, you pay them in some way and you gain access to the property under the terms of the contract. At that point you are the renter of the property.

If someone has some property and you would like to make use of it, you can ask them to let you do so permanently in exchange for a fee. If they agree, you pay them and they turn over all their rights to the property. At that point you are the owner of the property. (Keep in mind here that we’re only talking about exchanges at this point, not gifts, homesteading or “first use” acquisitions. We’ll get to those in a later article.) Read the rest of this entry »