Wednesday, August 17, 2011


News on Thursday that the Swiss central bank is prepared to consider temporarily pegging its currency to the euro sent the Swiss franc diving by as much as 6 per cent against the euro and 5 per cent against the US dollar.

While linking the franc to the euro would not happen overnight, and would face steep legal and political hurdles – a change to the Swiss constitution is required for starters – a peg would spell the death of another safe haven for investors.


Why would they be thinking about doing this?

[With] both the dollar and the euro weighed down by a deepening debt crisis, the historically stable Swiss franc has rocketed in value over the past year. It has gone up 21 per cent against the euro and 29 per cent against the dollar since the start of the year, as the two graphs below show.

The Swiss said that they are forced to violate their monetary constitution, because the irresponsible practices of the United States and European Union monetary authorities are driving so many dollars and euros into Swiss francs that the franc has appreciated to astronomical heights and is threatening Switzerland with the collapse of their export markets and Gross Domestic Product.

The EU says it has no choice but to bail out its private banks as that is the policy of Washington, DC, and that it must print euros in order to bail out the banks. This policy is in violation of the charter of the European Central Bank, but what do rules and laws mean in today’s world? Nothing whatsoever.


Oil producing countries such as Saudi Arabia and Qatar have their currencies in a fixed peg to the dollar. If the dollar depreciates too much in currency markets, the price of oil tends to go up. In other words, oil producers can compensate for US dollar devaluation by hiking the oil price of their main export.


Years ago China pegged its yuan to the US dollar, not to protect its currency from rising as a result of flight from the dollar, but in order to demonstrate that the money of what was seen as a questionable communist currency was "as good as the US dollar."

Not long ago China was forced off the fixed peg by the amount of Chinese money creation necessary to maintain the peg. China substituted a "moving peg" that allows the Chinese currency to slowly appreciate against the dollar. The Chinese currency is rising as the dollar falls, but the "floating peg" is behind events. Consequently, China’s currency is undervalued with regard to the "superpower" dollar, and China is importing inflation by having to create yuan in order to maintain the floating peg as the dollar is declining faster than the peg.

Paul Craig Roberts – Reagan Asst Treasury Secretary

Okay, I got about half of that. And what I really picked up on is this: wealthy Americans are stashing even more of their money in Swiss bank accounts so when the dollar tanks, they’ll have francs.

I can tell you this, as well: they are buying up land in Central America.

The Creature from Jekyll Island:
A Second Look at the Federal Reserve
(2002 – G. Edward Griffin)

Regular type indicates text directly quoted from the book. Where the words are my own, type will be italicized.

Installment 7
Chapter 8 – Fiat money

The two characteristics of fiat money…are (1) it does not represent anything of intrinsic value and (2) it is decreed legal tender. In other words, it is whatever the rulers decree to be money. And by law, you are required to accept and acknowledge it as such, even though you know it is actually worthless. As Marco Polo claimed about the Chinese emperor who created a system of fiat money, this is true alchemy.

The first fiat money in the US was created in Massachusetts. Massachusetts soldiers periodically made raids on Quebec, and when they returned empty-handed after one such raid, demanding to be paid for their efforts, there was no money in the coffers.

So they decided to simply print paper money. In order to convince the soldiers and the citizenry to accept it, the government made two solemn promises: (1) it would redeem the paper for gold or silver coin just as soon as there was sufficient tax revenue to do so, and (2) absolutely no additional paper notes would ever be issued. Both pledges were promptly broken. Only a few months later, it was announced that the original issue was insufficient to discharge the government’s debt, and a new issue almost six times greater was put into circulation.

Most of the other colonies were quick to learn the magic of the printing press…Next came the disappearance of gold or silver coins which went, instead, into private hoards or to foreign traders who insisted on the real thing for their wares.

In 1737, Massachusetts devalued its fiat currency by 66%. The promise was made that after five years the new money would be fully redeemed in silver or gold. The promise was not kept.

By the late 1750s, Connecticut had prices inflated by 800%. The Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 2300%.

And we can see why there have to be laws to make people use the stuff.

By this time, coins had completely disappeared from the scene….Most of them had been exported to other countries.

It has been shown that, even in colonial times, the classic booms and busts which modern economists are fond of blaming on an “unbridled free market” actually were direct manifestations of the expansion and contraction of fiat money which no longer was governed by the laws of supply and demand.

Of course, the Bank of England stepped in and put a stop to their colonies’ use of fiat money (the Bank of England issued its own). Apparently the colonists weren’t as threatened by the Bank of England, for they went back to using the coins they had hoarded instead of using the English paper. If you didn’t have coin, perhaps you had tobacco, and that worked, too, being officially adopted as money by both Virginia and Maryland.

Tobacco was used in early America as a secondary medium of exchange for about two-hundred years, until the new Constitution declared that money was, henceforth, the sole prerogative of the federal government.

Somebody should tell the Federal Reserve, which is a private enterprise, that money is the prerogative of the federal government.

So, things are getting back in shape and foreigners are willing to trade again when the colonies restore coin and leave off the funny money from the printing presses. And then…the war for independence. War costs money. Lots of money.

By artificially increasing the money supply….the real cost is hidden from view. It is still paid, of course, but through inflation.

At the beginning of the war in 1775, the total money supply stood at $12 million. [In five years the total was $425 million -] an increase of over 3500%. And, in addition to this massive expansion…on the part of the central government…the states were doing exactly the same thing. It is estimated that [by] the end of 1779, the total money supply expanded by 5000%. [At the same time] shoes sold for $5,000 a pair. A suit of clothes cost a million.

Fiat money is the means by which governments obtain instant purchasing power without taxation… It is, in fact, “collected” from us all through a decline in our purchasing power. It is, therefore, exactly the same as a tax, but one that is hidden from view, silent in operation, and little understood by the taxpayer.

An increase in fiat money in today's news is called "quantitative easing." Watch for it.

...but hey, do what you will anyway.

No comments:

Post a Comment

Comments are moderated. There may be some delay before your comment is published. It all depends on how much time M has in the day. But please comment!