Gold and Fiat Currencies - The Confidence Game
By Tony DiCicco
This essay represents my views on the "management" of gold and fiat currencies. Throughout history this "con" and its variations have occurred many times - robbing the hard-earned money of its citizens, and creating ever-greater wealth accumulation for the already wealthy.
Historically, the strongest and most stable currencies were those backed by gold and silver. It was this gold/silver backing that gave the currency its intrinsic value. In most cases, a country's currency was actually gold or silver coins. Gold and silver have always been a universal form of money and measure of wealth providing stability in an otherwise unstable world. Today we are told that gold and silver as a monetary value is obsolete, and that fiat currency can perform the same function and have the same safety as a gold/silver backed currency.
Fiat currency is simply the printing of a currency out of thin air with no intrinsic value. The "con"fidence is that the country's currency is "valuable" because of the country's economic and military strength. This has been the "sales pitch" or con allowing the removal of gold and silver backing for the U.S. dollar. Yet, all the other cases of fiat currencies met with disaster if you look back in history, but this time is different. So we are told.
The acceptance or con of a fiat currency is nothing more than a sales job. Having a background in sales, it's very obvious. For example, if I were to tell people that there is life on Mars and the inhabitants are living underground so they cannot be seen by our telescopes, you would think I'm crazy. The "con"fidence in what I said would be zero. However, if you were to watch the evening news and a prominent scientist also said there were inhabitants on Mars, your "con"fidence would go to perhaps 15%. The next morning you read in the newspaper a story about this claim of "Life on Mars" and start thinking about it a little more, your "con"fidence may climb to 25%. At lunch with your co-workers, a discussion about Mars develops and there is much debate about what the Martians breathe, eat and how they live. This is simply trying to justify what you've been told. Now your "con" fidence climbs to 35%.
When you get home, the President of the United States is on television and says there is life on Mars as "proven" by scientists seeing little footsteps on the surface of Mars through more powerful telescopes. As you listen to the story you hear about the atmosphere on Mars, the ice crystals and water supply and other facts that support this claim. You talk to several people on the telephone that believes this story and you begin to "rationalize" the story. Now your "con"fidence really jumps to perhaps 75%, hard to believe but verified, so it must be true!
The bottom line is people are NAÏVE and will believe ANYTHING if told enough times and somehow this information has been repeated and "verified". Let's look at some recent examples.
The Stock Market in the U.S.
Many claim the American stock market has been the greatest Bubble in history. While others claim it was justified because of the wide spread sales of computers, increased productivity from computers, the Internet, just-in-time inventory and other factors. The fact is the epic growth of the U.S. stock market was a con. There was a fair amount of growth that can be attributed to the previously mentioned reasons, but the Bubble and excesses were a con! The people that still believe in this con are the same people that are waiting to recover their losses in Amazon, AOL, Dell, and hundreds of other companies. The people that recognized the stock market bubble as a con rode the momentum until they began to see the con fading and sold. For proof of the con, just look at all the tremendous insider selling that has taken place and still continues.
Prior to the 90's, stock market investors were concerned about EPS and book value, something that was "irrelevant" for dot.com companies. The growth of dot.coms was from "momentum" buying, I buy for $50. and you buy for more, making me money. A true Ponzi scheme sold on hype and greed.
For this con to be successful, there had to be many key players. The companies themselves had to learn new tricks. Instead of raising money the old fashion way by issuing more shares and diluting share prices, they borrowed money. The greatest tool of all used by companies was Pro Forma Earnings. Like Magic, pro forma created earnings that didn't exist. The television stations also played a very important role in the con. It was critical that they supported the con or else their advertisers (who were the companies in the con) would go somewhere else. It was also important for the SEC and government to stay away and in some cases ease regulations to perpetuate the con. Of course, because of Enron and other companies ripping off billions of dollars in retirement funds, the government is "looking into it". Is the con still active? You bet! Just ask the people that still own some dot.com stocks praying to recover their losses. In time, they will accept the fact that they were suckered and accept their losses.
Back to Gold and Fiat Currencies.
My point was to simply show how a "con" works. You need a few details, some promoting by key players, greed, and mass psychology goes to work causing people to believe in a fantasy. Right now, we are in the greatest con in history: fiat currency. The fact is the U.S. is printing new dollars at an unprecedented rate. Normally, you would find the currency depreciate in value because of it's dilution. This is where "management" of the con comes into play. First, you must create and develop the con, then you must manage it. What have always been the red flags for a depreciating value of a currency: rising gold and silver prices and rising interest rates (U.S. bonds). The feds have been able to easily control the short-term rates, but to control the long bond it is much more difficult. The answer: announce that the treasury bonds will be discontinued to attract buyers and lower the yield. The biggest "management tool" has been with gold and silver prices because as a currency depreciates from printing more and more, it would cause the price of gold and silver to rise. But if gold and silver prices went up, that would send a warning signal that the currency value is going down.
The answer was to depress the precious metals price. The method was to flood the market with the metals through central bank selling. With fiat currency, the gold/silver isn't needed to back their paper. After all, people have "con"fidence in their paper as actually being valuable.
The winners and losers of the Con.
Eventually, this con will end and there will be winners and losers. First the winners.
They will be those that have been accumulating very cheap gold and silver over the last several years. There is a risk/reward ratio that must be considered. The risk of gold going to zero value is nil, none, it will never happen. The risk of fiat going to zero value historically is VERY high. Have times changed where fiat will always have value? History says no, paper currency ALWAYS goes to its intrinsic value of paper. But as long as the con is alive, fiat has value.
One question you must ask yourself is this: If the central banks are selling all this gold and silver; who's buying it? I would tend to say that the same people that are telling the central bankers to sell it are also the same people that are buying it. These are very smart and wealthy people that know this con will eventually end and when it does, they want to have gold, not paper. If you had a choice of having your wealth in paper or gold, which would you choose when the con is over?
Who will be the losers? EVERYONE with no gold and/or silver in their possession will lose.
When will the Con end?
When enough people realize the con for what it is, it will end. Usually a con ends when it becomes wide spread and people begin to realize it for what it is. That is slowly happening now, as more and more people around the world have started buying gold. The U.S. has been printing more and more new money because they are desperate to keep the con alive. Now, we also have the Japanese government desperately printing money to save their stock market like the U.S. has been doing. The Japanese people are slowly realizing the value of gold. When governments have to manipulate markets, whether stock, bond, currency or gold, these are signs of desperation.
The world's economies are very fragile and the governments are desperately plugging holes as they appear. Soon there will be an event that brings down the dam and the economies of the world: my bet is an interruption in oil supply.
Without oil, the Japanese might as well stay home as they import all of their oil. The economies of the world are too fragile to be able to withstand a disruption of oil. A sudden surge in oil prices due to a shortage will weaken the fiats value as inflation soars. But as inflation soars, so will the value of gold. As the value of paper declines and the value of gold climbs, latecomers will trade their paper for gold.
When the fiat currencies/economies collapse, the governments will blame the "terrorists". But the people responsible for the fiat con and its management will be secure. They will be protected from harm and poverty because they have built walls surrounding themselves with gold.