Currency Crisis In A Nutshell

INFLATION-DEFLATION IS THE PROBLEM, & COMMAND THE SOLUTION:

Abstract: A situation similar to the one we have today developed in the Third Century of Imperial Rome. Rome’s economy had outgrown its currency. There were three solutions to the problem. One was chosen by the Tang, paper. Another by the Franks, invasion.

Rome, under Diocletian, unable to grow the currency, chose the third way. Command and control of a barter economy. So, ironically, those who advocate the gold standard in the USA, such as Paul Ryan (candidate VP) are partisan of a Soviet style economy. Instead we have to make banks and financiers regurgitate the money they create just for themselves.

***

Starting in the Third Century, Rome, the world’s largest economy, was increasingly run on the gold standard. With disastrous results.

Gold Solidus: JULIAN THE PHILOSOPHER EMPEROR.

Caption reads: FLavius CLaudius IVLIA NVS (Flavius Claudius JULIA NUS) P P AVG (Princeps Populus AUGustus). VIRTVS EXERCI-TVS ROMANORVM (Strength Roman Army). (Pearl-diademed, draped and cuirassed bust right.) 

A Franco-Australian collaboration on Greenland ice cores showed that from 366 BCE to after 36 CE, a period when Rome was at its peak, 70 percent of the global atmospheric lead pollution came from the Roman operated Rio Tinto mines in southwestern Spain (that can be seen from some characteristic isotopes ratio).

The Rio Tinto mining region was the richest source of silver in Antiquity. Some 6.6 million tons of slag were left by Roman smelting operations there. Rio Tinto was exploited by slaves with extremely short life spans. It was a vision of hell, the sky was black, fires everywhere, to the horizon. The rio ran red, still does.

The Romans worked Rio Tinto until Rio Tinto was exhausted with the technology they had (shortly after 36 CE). The mine re-opened in recent times, with powerful machines replacing slaves (and ‘Rio Tinto’ is well known to precious metal investors). 

The demand for silver increased dramatically after precious metal coinage was introduced in Greece around 650 BCE (although Sparta insisted to use iron for coinage: that was paper money, Fiat Currency, Spartan style). Ionian Greece, in particular Phocaea, and Lydia used Electrum, a naturally occurring alloy of gold, silver and other metals.

Interestingly, judging from the Greenland ice cores, the peak of Roman mining pollution was in 79 BCE. That is nearly two centuries before the maximum of the extent of the Roman empire under Trajan (originally a Spanish general) and his successors, the Antonine emperors. 79 BCE was not the peak of the Roman economy, that was reached later. But it is about when Sulla became dictator. This is an important hint.

Just when the commons ran out of coinage, greedy plutocrats monopolized worth. A co-dependency pattern repeated nowadays.

The smelting of lead-bearing ore declined sharply after the fall of the Roman Empire but gradually increased during the Renaissance of the Middle Ages. By 1523 CE, the last year for the Greenland ice analysis, atmospheric lead pollution had reached nearly the same level recorded for the year 79 BCE, at the Roman peak.

So what happened? Rome used three precious metals: gold, silver, and copper. The first was used to make a coin, the Aureus, renamed the Solidus under Diocletian.

The Roman currency crisis of the Third Century was caused by Rome being, de facto, on the gold standard. The Romans had run out of the most precious metals to make small coins with. That left a currency too small for the growing Roman economy. Diluting the precious metal content of the coinage commoners had to use was no solution: it created obdurate inflation (while the gold solidus kept on being made and used for another 7 centuries, it was used only for big transactions).

Diocletian and his colleague “solved” the crisis with a command barter economy. In other words, Diocletian invented the Soviet system. So ironically, that is what going back to the gold standard would force the economy into.

Around 284 CE, the Roman economy had become too big for the amount of currency that could be created from precious metals. Emperor Diocletian solved this with a command barter economy. Even armies started to get paid in kind (say with food instead of coinage; that led to a de-professionalization of the army; soldiers had to marry and live with their families; the Franks under Charles Martel, four centuries later, would re-professionalize the army by getting precious metals in churches).

In the Seventh Century the Tang dynasty in China solved the problem in the modern way, by creating a “fiat currency” from paper notes. (It would lead to catastrophic inflation under the Yuan, six centuries later, and a reversion to metal, when the silver from Potosi became available). In the Eight Century, the Franks solved the currency problem for their growing economy by going where the Romans had not dared to go,  and seizing silver mines in Eastern Europe.

For all its grand philosophy and thinking, Athens would probably not have amounted to much, if not for its silver mines. It’s actually the discovery of a new silver mine that allowed Themistocles to propose to build a 200 trireme fleet to fight off the Persians with. Thanks to her silver, Athens could buy a lot, including wheat far away, in the Black Sea region (hence the far flung Athenian empire).

We are presently in a crisis similar to what struck Rome, a dearth of money for the real economy. Indeed,  banks have diverted money creation away from the real economy, which is starved of investments (that is money and credit, from banks, for private industry).

The situation is even worse in Europe. In the Eurozone, states are supposed to be borrowing from banks. And the banks are unwilling to lend, as they have better things to do with their money, such as investing in derivatives. The result is a dearth of Euros (relative to the size of the Eurozone economy) and an overvaluation of the euro relative to the USA Dollar.

At least in the USA, the UK and Japan, central banks create as much fiat currency as needed. it’s all backed up by the mighty Pentagon, creating a virtuous, and, or vicious circle (depending upon one’s perspective).

In early 2011, Mr. Paul Ryan, chairman of the House Budget Committee, gave Ben Bernanke, the Federal Reserve chairman, a warning: “There is nothing more insidious that a country can do to its citizens, than debase its currency.”

Never mind that France clung to the gold standard in the 1930s much longer than the USA, Britain and Nazi Germany, with disastrous results. This essay demonstrates something even more insidious that a country can do to its citizens: not having enough currency. And this is what is happening now. So Mr. Ryan is as wrong as wrong can be.

The unwillingness of banks to lend to the real economy, and the division of the economy between real and virtual makes us presently suffer both from deflation (in the real economy) and inflation (in the fake economy)

The way out is to print more, but, using command to send money that is created to the real economy and not to the fake world of derivatives and the like (as is presently happening). A good way to start is by taxing financial transactions, just like any other transaction is taxed in the real economy. The French financial transaction tax passed in France on August 1, 2012.

However banks did not fall on the heads of the French. According to The Economist, August 18, 2012, the French real estate market is still twice more overvalued than the British real estate market. In Britain, finance reigns, contributing 10% of GDP, in endless conspiracies.

And the other great temple of greedy financiers who give society meaning, the USA, sees, according to The Economist, a real estate market undervalued by 20%. Thus the real estate index is at 80 in the USA, and 145, in France.

Now remember that the wealth of common people is mostly in real estate. Hence a country where finance is repressed, such as France, sees much more wealth going to commoners than it does in the USA.

Some are sure to come up with GDP per capita at this point, and point out that the USA GDP is larger than the French. But that means nothing: a country with more traffic jams and expensive health care and education will see a big GDP, just like somebody with dilated cardiomyopathy, will have an enormously enlarged heart.

(Moreover the French GNP numbers are 10% higher than the GDP numbers…)

And it gets worse, because the French true ownership rate is higher than that of the USA. There is only that much wealth to go around (as the Gini Index observes). If most of the wealth goes to plutocrats, it does not go to the People, and vice versa.

Conclusion: The People on which the Wall Street empire reigns is naked, and that is because the financiers stole it. At least, relative to the French. Everything is relative, as long as there is life and it breathes… A Soviet style economy, as unknowingly advocated by the likes of Mr. Ryan, would bring with it the attending ominous fate of tyranny and theocracy (Stalin, Ibn Saud, Putin, etc.)

To come back to the situation in Rome, the increasing debasement of the Denarius, the common currency, relatively to the 80% pure gold Solidus could have been solved by introducing paper money. But that would have required a stronger state. It was, precisely, an occasion to get a stronger state. The Tang were able to organize a paper money currency, precisely because they had a strong state, with formidable sovereigns such as empress Wei.

Rome did not seize the opportunity to go to paper money. instead Rome went for theocracy, and its living descendants are Putin’s Russia, and various Islam theocracies, wobbling between cretinism and civil war.

And thus what the fanatics of the gold standard are proposing is actually a weaker state. It does make sense: most of the right wingers in the USA who are for the gold standard are also proposing to weaken the state.

They much prefer the jungle, and its law. 

***

Patrice Ayme

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20 Responses to “Currency Crisis In A Nutshell”

  1. Paul Handover Says:

    It may be a relevant comment to your post, but yesterday I was talking with an accountant in the UK who was saying how difficult it was for good, creditworthy people to get home mortgages. She mentioned one couple who have been unable to get a mortgage on a 30% loan to value ratio.

    • Patrice Ayme Says:

      Paul: It is very relevant. The deflation is caused by the banks being unwilling to lend, to the real economy. That is to real people, real couples, and especially small and medium companies (which can expand only from bank loans; although in the USA some get money from conspiracies in “venture capital” and “IPOs”).

      Instead the banks got used to inflate the shadow banking through derivative activities (750 trillion dollars of them). Nobody really knows what is going on there. It allows banks to claim profits, and this advantages decisions makers making their pseudo decisions pleasing the hyper rich they rub elbows with. (Obama used to golf a lot with mr. Wolf, head of UBS USA, now more or less recognized as a criminal organization, even by USA authorities. Wolf lost his job.)
      PA

    • EugenR Says:

      Dear Paul, the reason the banks do not wish to give mortgages is; this kind of loans are carrying risks. The banks get used to make profit on treasure securities of governments like Greece, Italy etc. They also get used to give mortgages without to check the credibility of the clients because they sold the mortgage packet or insured it in AIG. To make it short they long time ago lost their ability to evaluate credit risks.
      So after all this, how in the hell should they take risks and give loans to someone even if creditworthy?

  2. Old Geezer Says:

    The reason John Maynard Keynes called gold a “barbarous relic” is that it’s supply cannot rapidly grow or contract as required by the prevailing economic activity in order to maintain stability.

    Which is why there were a half-dozen financial panics in the latter half of the 19th century.

    Fiat currency is the BEST POSSIBLE currency to have, as long as the printer is diligent to keep its value from inflating (or deflating).

    Deflation was the scourge of the 30s depression (the FIRST GREAT DEPRESSION) because the US Government insisted upon NOT pumping the falling economy with cash.

    “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”.” – Andrew Mellon, US Treasury of the Secretary

    Well, it didn’t quite work out that way.

    So credit Bernanke with NOT following that advice, ulike the Brits and the EU people who drank the kool-aide.

    So why are investors around the globe swallowing up T bills (at 1.8% for 10 year bonds) when Bernanke has vowed to print even more dollars?

    One must assume that dollar denominated government securities are still the safest bet, and that demand is so low (and likeley to remain so for years to come) that inflation is just not very likely.

    We wait.

    And we see.

    • Patrice Ayme Says:

      Dear Old Geezer: All very true, what you said.
      Ok, let me emphasize the following, more or less in between the lines of the essay:

      FIAT currency is all about military power, and the willingness and capability to use it decisively INSIDE out. That’s why France, Germany and the USA have negative or very low interest rates. Nobody doubt that, if push comes to shove, these countries will use military force to set things financial right.(Or at least France and the USA will, and the German dobberman will follow…)

      T bill investors trust that there will a USA or French money tomorrow, come what may… That’s what is meant by the safest…

      Between the lines in what I said about Rome, was the fact, that Rome was incapable to use military force against her own plutocrats. Why?(my computer is refusing to type the interrogation sign… I am waiting for windows 8 to buy a new one…)
      Because starting when Tiberius allowed plutocrats to default and then replenished them (just as ‘we’ did in 2008), the plutocrats were really in command. The emperor was really ‘first’ among plutocrats.

      The Franks had no such qualms. Per the nature of the Imperium Francorum, new men (or women!) were coming to the fore, all the time, and thanks to military prowess, not fortune. So Charles Martel nationalized the numero uno plutocratic organization, the catholic church… To pay a vast army for the destruction of the Muslims invaders, something that Rome/Constantinople had proven unable to do…

      When the Frankish government was saying such and such a coin was worth such and such, so it was. And only the government created money. Others who tried were, by law, boiled. ALIVE. So they could meditate upon the error of their ways, and beg for mercy.

      HMMM… Maybe such is the solution of the banksters’problem: boiling…. That would be more constructive than steaming with rage…

      Inflation is confined to financial derivatives and the like. And the more those inflate, the more the rest of the economy deflates… even Krugman has no understood that one… Or maybe does not want to… Lest he thinks lowly of his Pluto friends…
      PA

    • Old Geezer Says:

      Dick Durbin said, when asked about why Congress could not do something after the Lehman crash, said,

      “And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place,”

      So like the Plutos of ancient Rome, the banksters of the modern West are in charge. And, it is THEY who (I believe) are behing the wars in the middle east. These wars are for the control of oil and the control of access to that oil, rather than about the oil itself. Banksters only want the oil to be denominated in US Dollars so as to create a perpetual global demand for them. Otherwise, they will naturally be worth LESS.

      But not WORTHLESS. That could happen, of course, but not for a very long time. Which is why global money will buy dollar and EURO denominated notes even though they pay a pittance.

      THEY WILL BE HERE TO PAY OFF.

      Return OF investment is often more important than return ON investment, especially at turning points in history.

      Which is where we are.

      This century, we will be at peak oil, peak population, peak resource exploitation, peak CO2, etc.

      The idea of perpetual growth is no longer possible, And while I am optimistic that the world will figure it all out, it is also clear to me that the old paradigm is not the way of the future.

      While we wait to see what is, those T Bill rates look better and better.

      • Patrice Ayme Says:

        dear Old geezer: agreed. The Lehman case is beyond belief. Fuld and its two closest associates walked off with 5 BILLION dollars. Logically, those belong to the public. They are left alone, because digging through their exploits would start to unravel the global financial conspiracy. Also the SEC was on the premises and the Fed fully cooperated. So any trial would expose the entanglement of public government officials and the politicos with private banksters… For the sake of Treasury bonds.

        The financial plutocracy collaborates and is entangled with the Military-Industrial Complex, MIC, and the fossil fuel plutocracy, plus the security establishment (CIA, intelligence agencies, various military types). And they think long term, on the scale of many decades. The case of Iran is revealing. Messing up with Iran started in 1930s. It reached a fever pitch to throw out democracy from the country, then the MIC invested enormously under the Shah’s bloody, torturous dictatorship, and so it went.

        Sometimes, like in Rome, various plutocratic currents are at odds, such as when the French brought back Khomeiny to Teheran. They were afraid the IsraeliS would shoot down the plane, so they stuffed it with famous people… (I read, I forgot the source) Later though the French helped Saddam Hussein as if he were the best friend they ever had (true he had given hospitality to Khomeiny, for years…) Times of Iran-Contra…

        Too many crises piling up, something may well happen, so the MIC will thrive…. And when one has a look at the Putinocracy, or the Maocracy, let alone the crazed plutotheocrats in Pakistan, it’s hard to disagree. Pakistan is piling up nukes as fast as it can, as attacks again military bases become ever bolder. It is case where a preemptive strike may be what the doctor ordered…

        Although, as far as the MIC is concerned, it may be even better if there was a real (nuke) war. Hence the hundreds of millions sent to Pakistan by the USA MIC to its Pakistani colleague, to perfect Pakistani nukes… Hard to see why this is not extremely high treason.
        PA

  3. Paul Handover Says:

    Patrice, in reading your reply to mine, especially, “Instead the banks got used to inflate the shadow banking through derivative activities (750 trillion dollars of them). Nobody really knows what is going on there. It allows banks to claim profits …”, I realised that I don’t properly understand what the banks are doing when it is described as ‘derivative activities’ and how they can make profits from so doing, or continue to make profits, assuming that is the case?

    Could do with a tutorial! 😉

    • Patrice Ayme Says:

      dear Paul; nobody understands what the banks are doing. Not even the bankers do. What banksters know, though, is they can FAKE profits that way. They also can use tremendous leverage to threaten to disrupt markets, the same tactic as terrorists use when they threaten to explode a school bus. I use to talk a lot about the subject, around the time of the inauguration of Obama. But, when I understood that he was on the side of the banksters, willingly or not, wittingly, or not, I mostly dropped the subject. When i say things about it to Per Kurowsky, he ignores my comments, and I saw Krugman look completely baffled, at the London School of Economics, when a student suggested the fractional reserve system was at fault (my very old, present, and future line!), so Obama is in good company….

      The “currency crisis in a nutshell” is a new approach to the subject. The Romans ran out of precious metals, thus currency, for their growing economy. We have a similar crisis, with FIAT money! As I explained in the past, that deliberate financial conspiracy started in France. Then it extended to the EU, and the USA (using derivatives)… anyway, agreed, tutorial needed. Worldwide.
      PA

      • Paul Handover Says:

        Thanks Patrice. There are times when I so much want to crawl into a hole. Trust me, this is not typical of one who has for so many years of his life wanted to engage in the issues that surrounded me. Now all that seems to enable me to function as a thinking individual are my writings and sharing thoughts and ideas with other open individuals.

        Beyond that, Oregon beckons with it’s tillable land, water and sufficient room for me, Jean and our dogs to get lost in, metaphorically if not physically!

        In my rational moments, I understand the end of an era time that we are living through and how uncertainty and chaos are attributes of such times. In my less rational moments, I do wonder. Reminds me of the little quip as to why this planet has not been visited by alien life-forms. Answer: they saw no signs of intelligent life!

        PH.

  4. Roger Henry Says:

    The policies that Romney and Ryan advocate will reduce even more drastically the money available to the real economy. The whole idea is to enhance the power of the Corporate Monarchies by diminishing the power of government except in the role of supporter of the military. However, weak economy eventually= weak military. This is a self destructive strategy.

    • Patrice Ayme Says:

      Dear Roger: Agreed 100%. It is clear that they advocate the implementation of a disaster.

      This being said, Obama came to power, and basically did not do what he said, or what he made believe that he would do. What Romney would do is, accordingly, not clear. After all he invented Romneycare (aka Obamacare, aka ACA). His main economic adviser, Mankiw is pro economic expansion, even if it means inflation (he is keeping that train of thought underground). (That was the old line of the 1950s and 1960s, which was correct…)

      I am not advocating to vote for Romney, I am condemned to vote for Obama, and to advocate that others ought to vote similarly. I am just saying that we have not JUST stagflation, but deflation-inflation. A new entity. Some areas need deflating (finance) others reflating (heavy industry, real, real heavy; sustainable, but heavy: trains, thorium, algae fuel batteries, new materials for space elevators, and the like etc.).

      Obama pretty much insured rent to banks, through housing (and is now paying the price). Romney always advocated to drop the market, namely the banks. On that point I was totally against what Obama did, when he did it (it’s in my essays around 2009-2010). Obama claimed to be helping the homoowners, but truly, thanks, in part, to foot dragging, was helping banks.

      indeed, should there be sequestration, defense would meet Armageddon January 2, 2013… Otherwise the F35 will do this all by itself…
      PA

  5. EugenR Says:

    Dear Patric, i just published an article about the subject of how fiat money could solve all our economic problems. It takes some sarcasm to read it correctly.

    https://rodeneugen.wordpress.com/2012/08/03/an-advice-to-central-banks/

    I have a excellent plan to solve the monetary problems caused by sovereign debts in Europe. Most of the central banks activity is the trade with the Government trusties. Trade with these trusties is also the main source of profit of the commercial banks and source of the inappropriate behavior of the bankers. To prevent situation, when only French or Russian stile revolution can change the political social evil the activity of these institutions causes, the best would be to let the central banks to purchase all the freely marketed government securities. If this step would cause some increase in inflation pressures, the minimum reserve rate requirement should be raised accordingly. By this step could be achieved several goals.
    1.Reduce the government debts and the interest payments that burden the national budgets. (The interests paid to the central bank will be registered as Government income).
    2.The banks would lose a chalk of their activities, where they can make profit without risk, which is translated later to unjustified reward to the executives and managers.
    3.The Central Bank would have much better control on the credit volume. It could pour directly money in the system by printing it, and sucking it out by increasing the Reserve Rate Ratio.
    4.To prevent from government to misuse the system of unlimited “free money” to spend, the government expenses and deficit should be controlled directly, by limiting it to the level of economic growth plus half of the inflation rate.
    5.The only reason to increase the deficit above the mentioned limit would be war, and this should be financed directly by tax increase on the companies and wealthy. This would make wars very unpopular among the decision makers, and it is also only for good.
    6. The most important result of the above proposed changes in Commercial Banks – Central Bank relation, will be probably the increased stability of the commercial banking system.

    The only problem not solved by such a change of the system is, what will do all the unemployed bankers.

    • Patrice Ayme Says:

      I maybe wrong, but it seems to me that this is what is called “Quantitative Easing”. That brought 5 trillions to USA banks by some reckoning (of the TARP overseer).
      In any case a whole bunch of Germans (not so much Merkel herself) around the Bundesbank, have balked at more QE after BCE head Dragghi indulged in 2 bouts of it, for a trillion Euros…

      At this point the worst problem is that a whole bunch of Germans don’t understand they are playing with fire. As I explained in earlier essays, the ECB system was set-up by French Socialists who thought smart to duplicate the system installed by Pompidou, an employee of Banque Rothschild…

      Right now, bankers are pocketting the money, and look happier than ever (except Swiss bankers who the USA first of all, and others such as Germany, esp. the SPD, and France are pressuring; the USA motivation seems more to grab market share than having justice triumph everywhere.)
      PA

      • EugenR Says:

        Dear Patrice,
        Quantitative ease is a story by itself. If you read the following article, you will see clearly in the charts, how all this easing money went back to the federal reserve. Lately Ben Bernanke started to pay on the reserve deposits low interest rate. Probably i am to stupid to understand this.

        https://rodeneugen.wordpress.com/2012/07/15/the-real-us-government-debt/

      • EugenR Says:

        Sorry this is the right chart;

        • Patrice Ayme Says:

          Dear Eugen: Very nice chart. I love it. Very instructive. One has to realize that banks and the private financial system are incredibly leveraged on the Monetary Base. The numbers are all over the place. they want to claim 1 to 10 (as if they respected “Basel III”). But it’s probably more like 1 to 30.

          And the main point is that the banks have a fiduciary mission to create money for the real economy, and they don’t respect it. So the money in circulation in the real economy is indeed crashing, while the created money goes all bank to bank, shadow or not. The “leaders’ are incredibly non cognizant of what is going on. And this extends to the likes of the honorable Paul Krugman.

          BTW, real leaders, such as Thesmistocles, had very advanced economic theories. And they acted on them, differently from the decomposing deers in headlights we now enjoy.
          PA

  6. Paul Handover Says:

    When Patrice writes ‘ferocious‘ it’s not an understatement!

  7. Waltz, $treet! Perish, People! « Some of Patrice Ayme’s Thoughts Says:

    […] I explained, the Roman empire’s economy ran out of currency in the Third Century. What was needed was a […]

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