Blockchain for Web 3.0

Since June 2020, realizing that the pandemic is highly politicized, I stopped following it. I consider it a waste of time to argue with those who are gullible to mainstream narrative. I thought the insanity will just stay for a year or two. I never expected that it will last more than two years, and still there is no indication that it will stop soon. This to me is unacceptable. I could not believe that almost every body I know would give up their sovereignty over their own body and hand the decision to the State.

Fast forward, after a year of pushing people into financial cliff, a new global trend emerged. In search for livelihood, many people around the world particularly in the Philippines have found play to earn as a viable alternative. A typical example of this is what happened in Cabanatuan City as shared by this documentary video. Of course, the hype lasted only for few months, and now that the price of the tokens involved are falling, not a few started to lose interest to this new trend.

July last year, two things happened that changed my financial direction. One is the advent of the COVID variant that caused me to stop trading the Philippine Stock market. The other one is related to Axie Infinity. My eldest son asked me a capital for his share in creating a gaming account. To make it short, these events motivated me to study blockchain and cryptocurrency. After six months of studying this new field, I stumble with two projects. One is now in an enclosed mainnet and just recently released that it will be opened either by 14 March or 28 June this year. The other one is also a young project, but already has 100 plus apps built on it.

At this point, I will just focus on the second blockchain - Hive! To give you an overview what Hive is, read this review from Finbold.

To sign in, just go to hive.io and click that red join tab on the upper right of the page. You will then be directed to a "Signup for Hive" page. Among five registration providers, choose ecency. Once you are already on the ecency page, create your own user name and sign in your email. The referred user is optional. But if you want to fill it up, you can use my user name: rzc24-nftbbg. By doing this, I will not receive any referral fee.

I hope you enjoy learning Hive. I wander on this blockchain for 6 months before a part of it starts to make sense to me. Now, I am still exploring this first blockchain for Web 3.0

Grace and peace!

COVID-19 and the Idea of Omnipotent State

While I was contemplating on the development of the trend that surrounds COVID-19 and economic shutdown, I came up with a following reflection:  

"Just an observation: I find the anatomy of the unfolding of the events since the start of covid-19 especially in relation to the character of the State both alarming and interesting. During the first two months, March and April, the posture is one of being an all-powerful and an all-knowing entity. Then around 19th of May, disappointment regarding covid-19 response became widespread and it was followed by a recognition of limitation on the part of the govt. That is somehow good and healthy to a sane society. By the end of May, there was a divergence between what is happening in the US and here in the PH. In the US, the narrative shifted from lockdown to racism, riots, and looting. Here in the PH, the rhetoric reminds us of post 911 terrorist attack. It seems to me, that due to widespread disappointment, the political and the bureaucratic class are now being exposed for all their pretensions to power and somehow their status are either being questioned or threatened. Thereby, advocates of big government have to think of some drastic measures to safeguard their interest, and of course doing all of them in the name of public safety, law, and order. God forbid that instead of freedom advancing, we will see in the days ahead, a continued and sustained attack on our freedom of expression and movement."

After posting my reflection on Facebook, my friend made a comment:  

"Magandang tingnan yung development ng estado sa OT in the case of ancient Israel. My initial observation is that: the concept of the state was somehow a late comer, instead a religious consciousness came first, and then the concept of the rule of law. It's only later that the institution of monarchy was established, and even then something that was problematized by the prophet Samuel. This observation indicates that the state in ancient Israel was never regarded as absolute and unlimited in its claims. That the Torah was given first serves to delimit and claims of the state, its legitimacy within divine ordering was framed within the provisions allowed by the covenant articulated by the Torah."

And then I replied:  

"No problem with the concept of the State in the Old Testament. As far as I know, the prevailing worldview from the dawn of human history, which includes the concept of the State is basically religious. And so the idea of the power of the Torah to delimit the power of the State in ancient Israel is consistent with such worldview. Quoting Hugo Winckler, such worldview according to Bavinck remained until the advent of 18th century, where the supranatural foundation (including the religious) of such worldview has been challenged and replaced in favor of the empirico-scientific. I suspect that in the passing of time, with the new worldview, the concept of the State has also undergone a radical change."

And then I shared with him my recent reading on welfare state 

"Just recently, I was reading a 40-page journal article on the Origins of the Welfare State in America. It was interesting how Murray N. Rothbard connected an ideology that includes postmillennial pietism, Statism, and corporate socialism to economic interests advanced by big businessmen seeking favor from the government to achieve cartelization and a growing legion of educated intellectuals and technocrats who want to restrict entry into their field via forms of licensing. Such ideology took control virtually all Protestant churches from 1830 onwards. The combination of these two forces according to Rothbard, paved the way for the existence of the welfare state. Both wealth and public opinion-molding power are at their disposal." 

"What follows afterwards is interesting. Protestant postmillennial pietism was secularized until the late 19th century. The goal was to use the power of the government 'to stamp out sin and to create a perfect society, in order to usher in the Kingdom of God on Earth.' From such goal, a concept of government evolved from a 'paternalistic mender of social problems' to a 'more and more divinized' and 'more and more seen as the leader and molder of the' society." 

"Rothbard identified a long list of names including the revivalist Charles Finney, activist women from a middle to upper class background, John Dewey, and others that contributed to the evolution of the Progressive Party launched by the Morgans in 1912. This Party spearheads the statist coalition that includes academic progressives, Morgan businessmen, social-gospel Protestant ministers, and activist women who became influential social workers who prepared the way for the success of FDR’s New Deal from 1933 to 1939. On side note, it is also interesting that Ludwig von Mises already had this concept of omnipotent State during his time. In fact, he even wrote a book in 1944 with that title describing the German State during the time of the Nazis." 

And the another friend raised a a follow-up question:

"May I know how we should perceive the empirico-scientific (what exactly characterises it) and how it challenged and replaced the power of the Torah to delimit the power of the state of ancient Israel?"

And here is my reply:

"That's actually the language of Herman Bavinck in his book The Philosophy of Revelation. Relying on Winckler, he was arguing that in the entire history of humanity, there are only two general worldviews, which he describes as "supranatural" and "empirico-scientific." The latter, from the combination of two terms themselves, you can see obviously that basically, it is naturalistic. It considers any claim beyond the realm of nature as primitive and unscientific. The concept of the Torah within that framework can be explained in naturalistic terms. To insist that the Torah is a product of divine revelation and therefore has the power to serve as a corrective to the excessive exercise in political power doesn't make sense. Such power of the Torah is only acknowledged within the supranatural worldview. But of course, this kind of thinking is no longer new. In the postmodern age, we are now witnessing the crashing of the foundation of the empirico-scientific worldview and a return to the supranatural where revelation is again recognized. But you know, even in information age, ideas need considerable time before they reach public consciousness. Still, existing institutions and policies work on the basis of the modern project."

Interpreting the Pandemic Outside the Marxist Lens

After sharing in my Facebook account about the dismissal of the case against Rev. Rodney Howard Browne for unlawful assembly, a friend shared an article from World Socialist Website written by Andre Damon. Reading it, you will see the power of an ideology in shaping a popular narrative such as COVID-19 and economic shutdown. 

What I am going to do is to select paragraphs and sentences that I think need a critical evaluation: 

"The murderous pseudoscience of 'herd immunity' ” 

That’s what you got when you question the official narrative, “murderous”. With such a sensational title, it’s really difficult to argue when emotion dominates.

“Two developments this week have exposed this pseudo-scientific theory as false and dangerous.” 

Then convince these experts . . .

Current Quarantine Approach Wrong Based on Science

Both camps are claiming that science is on their side. Whose claim is correct?

12 Experts Questioning the Coronavirus Panic

8 More Experts

10 More Experts

“If similar figures hold in the United States, with its 330 million people, a hypothetical ‘herd immunity’ would require the sacrifice of nearly two million people.” 

If this is really true, why not throw the same argument against the early forecast based on Dr. Fauci’s science. The last time I checked it was Dr. Fauci and his group that predicted such big number of casualty, which has been invalidated after more or less two months of incoming data from the field.

“These critics point to the fact that the country has suffered a substantially more deadly outbreak than its neighbors, with 361 deaths per million people compared to Denmark (93 per million), Norway (43), Finland (53) and Iceland (29).” 

Both camps argue that life is valuable. It is strawman to say that the advocates of herd immunity value life less than those who support Dr. Fauci’s science. The goal is the same, but the means to achieve such is different. One camp advocates lockdown that complicates the health crisis into socio-psycho-economic one. The other camp advocates personal responsibility affirming that no one knows best the situation of an individual than that person himself. Besides, 361 deaths per million is less than 0.1%. Will you now sacrifice the whole of society for that 0.1%? Will the “true science” of Dr. Fauci now tramples the other sciences?

“Sweden’s wildly irresponsible policies have given ammunition to the far right internationally, which has used it as an example for arguing for a premature reopening of businesses and schools.” 

Notice the language, “irresponsible policies” and “premature reopening”. As I know, Sweden believes in responsible action, but the country would rather put it in the hands of individuals rather than in the hands of policy makers. Isn’t the re-opening over-extended? Are not two months more than enough? And besides, with the lockdown response to COVID-19, we see widespread graft and corruption and abuses of those in power. Are these the kind of results we expect from “responsible policies”?

“In accordance with the ‘brutal economics’ of capitalism, the lives lost to the COVID-19 pandemic are simply the cost of doing business. While trillions of dollars have been spent propping up financial markets, no serious efforts have been made to contain the pandemic. . .” 

So now the true color of the writer appears. His hatred of what he perceived as the current economic system of the world where he called as “capitalism” shaped the way he interprets this current pandemic. The last time I checked no capitalist has the power to inject into the economy such huge trillions of dollars. It was part of the response of government to COVID-19.

“The efforts by the ruling class to counterpose workers’ lives to their livelihoods is an entirely false choice. Both can be defended with the necessary allocation of social resources to stop and eradicate COVID-19 and all other communicable diseases.” 

Finally, he got it right! As I know, it is not the anti-lockdown who counterpose workers’ lives to their livelihoods. From the very early stage of this pandemic, the contra lockdown has been arguing that to see the issue as trade-off between life and livelihood is false. It was the pro-lockdown who wrote such false antinomy.

“But containing the pandemic requires an investment in social infrastructure that the capitalist class is not willing to make. The COVID-19 pandemic has made clear the utter incompatibility of the capitalist system with the preservation of the most basic social right: the right to life.” 

Another strawman. It amazes me how an ideology distorts the way a person interprets current events. How could he write that the capitalists are unwilling to invest in infrastructure to save lives in the midst of economic shutdown? Can capitalists invest in a time when people are held hostage and business activity is restricted? And please, don’t use that argument “right to life” against the capitalists for history tells us that socialism kills more than any other ideology. And besides, population is now more than ten times bigger than it was in the ages preceding capitalism. The mere fact that you are living today is proof that capitalism has succeeded. I think the writer does not understand that the basic features of capitalism are mass production, mass consumption, consumer sovereignty, freedom, economic democracy, and social mobility, the very things that are now prohibited in a lockdown economy. 

One last suggestion for the writer. Why not try to reread current issues outside the lens of Marxism?

Part 1's Summary

Ludwig von Mises cites historical accounts, quotes references, and utilizes reason and common sense as he compares and contrasts sociological and economic realities between liberalism (see page 60 to understand the meaning of this term as Mises employs it) and socialism. Part 1 of Socialism: An Economic and Sociological Analysis contains a rich material in answering this question: Where do ownership and property, democracy and equality, peace, femininity, marriage, family, and even sexuality (here Mises talks about free love, promiscuity, and prostitution) thrive more? Under a liberal social order? Or under a socialist social order? 

     

Marxism's Three Primary Principles

I forgot the exact time I decided to postpone my reading of Ludwig von Mises' "Socialism: An Economic and Sociological Analysis". After watching a youtube video that the leading presidential candidate was a self-confessed socialist and after stumbling with few Facebook status updates advocating socialism, they motivated me to delay no longer my reading of  Mises' book.

Digesting Mises' book on socialism is vital to have an informed understanding of the conflict between socialism and capitalism. I don't want to follow the example of what Mises describes as "irresponsible babbler" who publicly talks and writes a lot about capitalism and socialism without familiarizing himself with what the economists have to say about these issues (Ludwig von Mises, "The Anti-Capitalistic Mentality," 2008, p. 47). 

Mises' book on socialism has a credible reputation to have refuted the socialist paradise. The author argued that the central weakness inherent in socialism is  the impossibility to have a sound economic calculation and planning due to the absence of price system. As such, socialism will inevitably lead to waste of resources and poverty.   

Returning to my reading of this book, my goal was to finish it, digest its content and write my summary and reflection of it. In achieving this goal, I want to bite the 600-page book one small piece at a time. And so I want to post a series of excerpts, which I think will show the flow of thought proving the central argument of the book. And I would like to start with the "Preface to the Second German Edition" identifying the three primary principles of Marxism: 

"Thus about the middle of the nineteenth century, it seemed that the ideal of socialism had been disposed of. Science had demonstrated its worthlessness by means of strict logic and its supporters were unable to produce a single effective counter-argument. 

"It was at this moment that Marx appeared. Adept as he was in the Hegelian dialectic - a system easy of abuse by those who seek to dominate thought by arbitrary flights of fancy and metaphysical verbosity - he was not slow in finding a way out of the dilemma in which socialists found themselves. Since Science and Logic had argued against Socialism, it was imperative to devise a system which could be relied on to defend it against such unpalatable criticism. This was the task which Marxism undertook to perform. It had THREE LINES OF PROCEDURE.  

• First, it denied that Logic is universally valid for all mankind and for all ages. Thought, it stated, was determined by the class of the thinkers; was in fact an 'ideological superstructure' of their class interests. The type of reasoning which had refuted the socialist idea was 'revealed' as 'bourgeois' reasoning, an apology for capitalism.

• Secondly, it laid it down that the dialectical development led of necessity to Socialism; that the aim and end of all history was the socialization of the means of production by the expropriation of the expropriators - the negation of negation.

• Finally, it was ruled that no one should be allowed to put forward, as the Utopians had done, any definite proposals for the construction of the Socialist Promised Land. Since the coming of socialism was inevitable, Science would best renounce all attempt to determine its nature."

Source: Ludwig von Mises, "Socialism: An Economic and Sociological Analysis," 1951, pp. 15-16. 

Hoping for an Intellectual Recovery

Gold Money published an article two days ago about two important papers that I hope will bring reform in central banking and the monetary system of the world. I am referring to the papers that just recently came out from the Bank for International Settlements (BIS) and from the Britain's Adam Smith Institute. These papers confirm the message of the Austrian Business Cycle Theory. I wish that this is just a beginning of intellectual recovery that Murray Rothbard told us in his essay, Economic Depressions: Their Cause and Cure:

“Once again, the money supply and bank credit are being grudgingly acknowledged to play a leading role in the cycle. The time is ripe for a rediscovery; a renaissance of the Mises theory of the business cycle. It can come none too soon; if it ever does, the whole concept of a Council of Economic Advisors would be swept away; and we would see a massive retreat of government from the economic sphere. But for all this to happen, the world of economics and the public at large, must be made aware of the existence of an explanation of the business cycle that has lain neglected on the shelf for all too many tragic years” (“The Austrian Theory of Trade Cycle and Other Essays”, 1978, p. 91).

Let me just share three important paragraphs from Gold Money:

"Within one month of the Fed raising the Fed Funds rate by a miniscule 0.25%, it seems the whole world is falling apart. The usual market cheerleaders are now on record of expecting a global crisis to develop, the signs being too obvious to ignore. Markets are over-valued relative to deteriorating economic prospects. Collapsed energy and commodity prices tell their own story. Shipping rates and the share prices of US utilities (including rails and freight) are falling. The days of blaming China for a contraction of world trade are over: the downturn is now far larger and more widespread."

". . . the banking crisis of 2008 was a prelude, rather than the crisis itself. The Fed will almost certainly reduce interest rates back to zero, and reluctantly will have to consider imposing negative rates."

"The Keynesians will blame the Fed for a complete policy failure. They will argue in retrospect, as they did following the banking crisis, that the financial and economic crisis of 2016 was made immeasurably worse by the Fed raising the Fed funds rate and not pumping yet more money into the economy at such a crucial time. It's like saying alcoholics must drink more to be cured."

The Death of Money: Threats to the USD

Summary

In this article, we will continue our study of the Introduction in James Rickards' book, "The Death of Money". Last time, we had an overview of what happened in the past. This time, we will see the similarities and differences between current events and the 1970s. However, Rickards' main focus in the remaining part of the Introduction is to provide an overview of the existing threats to the USD as world reserve currency.  

Rickards claims that similarities could be seen in the decline of USD, appreciation of gold and the IMF's issuance of SDRs. The absence of inflation is the major distinction. The reasons why inflation is absent today is due to the fact that the US economy is already structurally damaged and that inflation though delayed through QEs will certainly come.

For Rickards, the impending collapse of the USD is not something new. He claims that such collapse already happened three times in the past: 1914, 1939, and 1971. Three major world events are also associated with these dates: WW1, WW2, and Nixon's abandonment of gold convertibility for the USD. As a result of such abandonment, the position of the USD as world reserve currency is now being threatened by currency war, hyperinflation, deflation, and market crash.

Currency war is a threat by way of using derivatives and penetrating exchanges in order to create public panic by selling huge number of shares. 

As for inflation, James Rickards describes it as "the stealth destroyer of savings, capital, and economic growth" (p.12). The experience during the 1970s can teach us two lessons concerning inflation: first, that it takes several years for people to realize its impact, and second, that when perception about inflation takes place, it is extremely difficult to reset. Another noteworthy observation concerning inflation is the fast devaluation of the dollar and the appreciation of gold. The major difference is that this time China, Russia, and the IMF are already prepared in facing inflation with gold and SDR.

Deflation on the other hand, is the FR's worst nightmare due to following reasons: (1.) Real gains cannot be easily taxed. (2.) Deflation increases the real value of government debt. (3.) Deflation slows down GDP growth. (4.) It also increases the real value of private debt that may result to defaults and bankruptcies. (5.) Deflation feeds on itself and is nearly impossible for the Fed to reverse. For Rickards, the only solution to avoid deflation is for the US to declare a higher price for gold. 

As a whole, market crash can be avoided if large banks are broken and most derivatives are banned. Out of the current crisis, a new monetary system could emerge which is based on gold, SDR, or a regional reserve currency. 

Excerpts

"A similar constellation of symptoms to those of 1978 can be seen in the world economy today. In July 2011 the Federal Reserve dollar index hit an all-time low, over 4 percent below the October 1978 panic level. In August 2009 the IMF once again acted as a monetary first responder and rode to the rescue with a new issuance of SDRs, equivalent to $310 billion, increasing the SDRs in circulation by 850 percent. In early September gold prices reached an all-time high, near $1,900 per ounce, up more than 200 percent from the average price in 2006, just before the new depression began" (p. 9). 

"The parallels between 1978 and recent events are eerie but imperfect. There was an element ravaging the world then that is not apparent today. It is the dog that didn’t bark: inflation. But the fact that we aren’t hearing the dog doesn’t mean it poses no danger" (ibid.). 

"To understand the threats to the dollar, and potential policy responses by the Federal Reserve, it is necessary to see the dollar through the Fed’s eyes. From that perspective, inflation is not a threat; indeed, higher inflation is both the Fed’s answer to the debt crisis and a policy objective" (ibid.). 

"This pro-inflation policy is an invitation to disaster, even as baffled Fed critics scratch their heads at the apparent absence of inflation in the face of unprecedented money printing by the Federal Reserve and other major central banks. Many ponder how it is that the Fed has increased the base money supply 400 percent since 2008 with practically no inflation. But two explanations are very much at hand—and they foretell the potential for collapse. The first is that the U.S. economy is structurally damaged, so the easy money cannot be put to good use. The second is that the inflation is coming. Both explanations are true—the economy is broken, and inflation is on its way" (ibid.). 

"The coming collapse of the dollar and the international monetary system is entirely foreseeable. This is not a provocative conclusion. The international monetary system has collapsed three times in the past century—in 1914, 1939, and 1971. Each collapse was followed by a tumultuous period. The 1914 collapse was precipitated by the First World War and was followed later by alternating episodes of hyperinflation and depression from 1919 to 1922 before regaining stability in the mid1920s, albeit with a highly flawed gold standard that contributed to a new collapse in the 1930s. The Second World War caused the 1939 collapse, and stability was restored only with the Bretton Woods system, created in 1944. The 1971 collapse was precipitated by Nixon’s abandonment of gold convertibility for the dollar, although this dénouement had been years in the making, and it was followed by confusion, culminating in the near dollar collapse in 1978" (pp. 10-11). 

"This book limns the most imminent threats to the dollar, likely to play out in the next few years, which are financial warfare, deflation, hyperinflation, and market collapse. Only nations and individuals who make provision today will survive the maelstrom to come" (p. 11). 

Financial War 

"Are we prepared to fight a financial war? The conduct of financial war is distinct from normal economic competition among nations because it involves intentional malicious acts rather than solely competitive ones. Financial war entails the use of derivatives and the penetration of exchanges to cause havoc, incite panic, and ultimately disable an enemy’s economy" (p. 11). 

"The modern financial war arsenal includes covert hedge funds and cyber attacks that can compromise order-entry systems to mimic a flood of sell orders on stocks like Apple, Google, and IBM" (ibid.). 

Inflation 

"Critics from Richard Cantillon in the early eighteenth century to V. I. Lenin and John Maynard Keynes in the twentieth have been unanimous in their view that inflation is the stealth destroyer of savings, capital, and economic growth" (p. 12). 

"Inflation often begins imperceptibly and gains a foothold before it is recognized. This lag in comprehension, important to central banks, is called money illusion, a phrase that refers to a perception that real wealth is being created, so that Keynesian 'animal spirits' are aroused. Only later is it discovered that bankers and astute investors captured the wealth, and everyday citizens are left with devalued savings, pensions, and life insurance" (ibid.). 

"Two lessons from the 1960s and 1970s are highly pertinent today. The first is that inflation can gain substantial momentum before the general public notices it. It was not until 1974, nine years into an inflationary cycle, that inflation became a potent political issue and prominent public policy concern. This lag in momentum and perception is the essence of money illusion. Second, once inflation perceptions shift, they are extremely difficult to reset. In the Vietnam era, it took nine years for everyday Americans to focus on inflation, and an additional eleven years to reanchor expectations. Rolling a rock down a hill is much faster than pushing it back up to the top" (p. 12). 

"More recently, since 2008 the Federal Reserve has printed over $3 trillion of new money, but without stoking much inflation in the United States. Still, the Fed has set an inflation target of at least 2.5 percent, possibly higher, and will not relent in printing money until that target is achieved. The Fed sees inflation as a way to dilute the real value of U.S. debt and avoid the specter of deflation. Therein lies a major risk. History and behavioral psychology both provide reason to believe that once the inflation goal is achieved and expectations are altered, a feedback loop will emerge in which higher inflation leads to higher inflation expectations, to even higher inflation, and so on. The Fed will not be able to arrest this feedback loop because its dynamic is a function not of monetary policy but of human nature" (p. 12). 

"As the inflation feedback loop gains energy, a repetition of the late 1970s will be in prospect. Skyrocketing gold prices and a crashing dollar, two sides of the same coin, will happen quickly. The difference between the next episode of runaway inflation and the last is that Russia, China, and the IMF will stand ready with gold and SDRs, not dollars, to provide new reserve assets. When the dollar next falls from the high wire, there will be no net" (ibid.). 

Deflation 

"The United States would have experienced severe deflation from 2009 to 2013 but for massive money printing by the Federal Reserve. The U.S. economy’s prevailing deflationary drift has not disappeared. It has only been papered over" (p. 13). 

"Deflation is the Federal Reserve’s worst nightmare for many reasons. Real gains from deflation cannot easily be taxed. If a school administrator earns $100,000 per year, prices are constant, and she receives a 5 percent raise, her real pretax standard of living has increased $5,000, but the government taxes the increase, leaving less for the individual. But if her earnings are held constant, and prices drop 5 percent, she has the same $5,000 increase in her standard of living, but the government cannot tax the gain because it comes in the form of lower prices rather than higher wages" (ibid.) 

"Deflation increases the real value of government debt, making it harder to repay. If deflation is not reversed, there will be an outright default on the national debt, rather than the less traumatic outcome of default-by-inflation. Deflation slows nominal GDP growth, while nominal debt rises every year due to budget deficits. This tends to increase the debt-to-GDP ratio, placing the United States on the same path as Greece and making a sovereign debt crisis more likely" (ibid.). 

Deflation also increases the real value of private debt, creating a wave of defaults and bankruptcies. These losses then fall on the banks, causing a banking crisis. Since the primary mandate of the Federal Reserve is to prop up the banking system, deflation must be avoided because it induces bad debts that threaten bank solvency" (ibid.). 

"Finally, deflation feeds on itself and is nearly impossible for the Fed to reverse. The Federal Reserve is confident about its ability to control inflation, although the lessons of the 1970s show that extreme measures may be required. The Fed has no illusions about the difficulty of ending deflation. When cash becomes more valuable by the day, deflation’s defining feature, people and businesses hoard it and do not spend or invest. This hoarding crushes aggregate demand and causes GDP to plunge. This is why the Fed has printed over $3 trillion of new money since 2008—to bar deflation from starting in the first place. The most likely path of Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation. The operative assumption at the Fed is that any inflationary consequences can be dealt with in due course" (ibid). 

"In such a circumstance, the only way to break deflation is for the United States to declare by executive order that gold’s price is, say, $7,000 per ounce, possibly higher. The Federal Reserve could make this price stick by conducting open-market operations on behalf of the Treasury using the gold in Fort Knox. The Fed would be a gold buyer at $6,900 per ounce and a seller at $7,100 per ounce in order to maintain a $7,000-per-ounce price. The purpose would not be to enrich gold holders but to reset general price levels. Such moves may seem unlikely, but they would be effective. Since nothing moves in isolation, this kind of dollar devaluation against gold would quickly be reflected in higher dollar prices for everything else. The world of $7,000 gold is also the world of $400-per-barrel oil and $100-per ounce silver. Deflation’s back can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35.00 per ounce, a 41 percent dollar devaluation. If the United States faces severe deflation again, the antidote of dollar devaluation against gold will be the same, because there is no other solution when printing money fails' (p. 14). 

Market Collapse 

"The solutions to this systemic risk overhang are surprisingly straightforward. The immediate tasks would be to break up large banks and ban most derivatives. Large banks are not necessary to global finance" (p. 14). 

"The case for banning most derivatives is even more straightforward. Derivatives serve practically no purpose except to enrich bankers through opaque pricing and to deceive investors through off-the balance-sheet accounting. Whatever the merits of these strategies, the prospects for dissolving large banks or banning derivatives are nil. This is because regulators use obsolete models or rely on the bankers’ own models, leaving them unable to perceive systemic risk. Congress will not act because the members, by and large, are in thrall to bank political contributions" (p. 15). 

"Banking and derivatives risk will continue to grow, and the next collapse will be of unprecedented scope because the system scale is unprecedented. Since Federal Reserve resources were barely able to prevent complete collapse in 2008, it should be expected that an even larger collapse will overwhelm the Fed’s balance sheet. Since the Fed has printed over $3 trillion in a time of relative calm, it will not be politically feasible to respond in the future by printing another $3 trillion. The task of reliquefying the world will fall to the IMF, because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of SDRs, and this monetary operation will effectively end the dollar’s role as the leading reserve currency" (ibid). 

Other Threats 

"Russia and China are hardly alone in their desire to break free from the dollar standard. Iran and India may lead a move to an Asian reserve currency, and Gulf Cooperation Council members may chose to price oil exports in a new regional currency issued by a central bank based in the Persian Gulf" (p. 15) 

"If the dollar collapses, the international monetary system will collapse as well; it cannot be otherwise. Everyday citizens, savers, and pensioners will be the main victims in the chaos that follows a collapse, although such a collapse does not mean the end of trade, finance, or banking. The major financial players, whether they be nations, banks, or multilateral institutions, will muddle through, while finance ministers, central bankers, and heads of state meet nonstop to patch together new rules of the game. If social unrest emerges before financial elites restore the system, nations are prepared with militarized police, armies, drones, surveillance, and executive orders to suppress discontent" (ibid.). 

"The future international monetary system will not be based on dollars because China, Russia, oil producing countries, and other emerging nations will collectively insist on an end to U.S. monetary hegemony and the creation of a new monetary standard. Whether the new monetary standard will be based on gold, SDRs, or a network of regional reserve currencies remains to be seen" (pp. 15-16).

Guide Questions:

1. What are the similarities and the major difference between 1978 and recent events?

2. What changes took place among the three financial assets in 2011?

3. Why inflation is missing in recent financial events? What are the reasons for such absence?

4. Give the three dates where the financial system collapsed in the past. What three major events are associated with this financial collapse.

5. What are the four major threats to the dollar's supremacy?

6. Briefly explain your own understanding of currency war. 

7. What is the unanimous opinion of economists concerning inflation? 

8. What is "money illusion"? Why do you think the majority find it difficult to liberate his mind from such illusion?

9. What two lessons can we learn about inflation from the 1960s and 1970s?

10. What similarities and major difference Rickards anticipates that will happen between now and the 1970s once inflation occurs? 

11. What is the FR worst nightmare? Why?

12. For Rickards, what is the only solution to avoid deflation? 

13. How about the remedy to market collapse?

14. What are the potential alternatives to the existing dollar supremacy? 

Source: Rickards, J. (2014). The Death of Money: The Coming Collapse of the International Monetary System. New York: Penguin Group.

Death of Money: Revisiting the Past

Summary

Important financial events took place between 1977 to 1981 such as the nearly cessation of the USD as world reserve currency in 1978, 50% loss of USD's purchasing power, 50% US inflation, IMF's issuance of 12.1 B SDRs, and the 500% appreciation of gold from 1977 to 1980. The US Treasury responded immediately by issuing government bonds denominated in Swiss francs. 

The threat to USD status as world reserve currency was the natural outcome of President Nixon's abandonment of its connection to gold in August 1971. Without the firm decision of President Ronald Reagan and Fed Chairman Paul Volcker, there was no way that the USD could be saved. Both Reagan and Volcker introduced monetary and economic reforms, which include 19% rate hike, and cutting taxes and regulations. As a result, the USD rallied 50% and gold price dropped 60% in March 1985, and inflation dropped from 13.5% in 1986 to 1.9% in 1980, and the age of King USD had begun in 1986. 

Excerpts

"Few Americans in our time recall that the dollar nearly ceased to function as the world’s reserve currency in 1978. That year the Federal Reserve dollar index declined to a distressingly low level, and the U.S. Treasury was forced to issue government bonds denominated in Swiss francs. Foreign creditors no longer trusted the U.S. dollar as a store of value. The dollar was losing purchasing power, dropping by half from 1977 to 1981; U.S. inflation was over 50 percent during those five years. Starting in 1979, the International Monetary Fund (IMF) had little choice but to mobilize its resources to issue world money (special drawing rights, or SDRs). It flooded the market with 12.1 billion SDRs to provide liquidity as global confidence in the dollar declined. We would do well to recall those dark days. The price of gold rose 500 percent from 1977 to 1980" (p.8). 

"While the dollar panic reached a crescendo in the late 1970s, lost confidence was felt as early as August 1971, immediately after President Nixon’s abandonment of the gold-backed dollar" (ibid.).  

"The subsequent efforts of Fed chairman Paul Volcker and the newly elected Ronald Reagan would save the dollar. Volcker raised interest rates to 19 percent in 1981 to snuff out inflation and make the dollar an attractive choice for foreign capital. Beginning in 1981, Reagan cut taxes and regulation, which restored business confidence and made the United States a magnet for foreign investment. By March 1985, the dollar index had rallied 50 percent from its October 1978 low, and gold prices had dropped 60 percent from their 1980 high. The U.S. inflation rate fell from 13.5 percent in 1980 to 1.9 percent in 1986. . . . By the mid-1980s, the fire was out, and the age of King Dollar had begun" (p. 9).  

Guide Questions

1. What important financial events took place between 1977 to 1981?

2. What was the immediate response of the US treasury to prevent such threat?

3. What caused the USD crisis between 1977 to 1981?

4. How was the USD saved? 

5. What were the results of the decision of Reagan and Volcker?

Source: Rickards, J. (2014). The Death of Money: The Coming Collapse of the International Monetary System. New York: Penguin Group.

The Death of Money

The Death of Money is all about the death of the USD, the collapse of the existing monetary system, and the emergence of a new system. This will take place once confidence in USD is lost, and without an alternative currency to replace the USD, the financial system will crash. James Rickards describes the impending collapse of the current monetary system as unprecedented. He identified the existing and impending threats to the USD include currency war, deflation, hyperinflation, and market collapse.

The book also shows to investors the overview of risks in the current financial system and the best strategies to protect themselves financially. The book's message is timely in a time that investors are confused. The author describes the current state of existing monetary system as out of control. He mentions at least five factors that contributed to such chaotic condition and investors' confusion: altered state of global economy, the emergence of new players, "shifting allegiances, political ineptitude, and technological change" (p.16). 

Guide Questions:

1. What is the book all about?

2. Why the international monetary system will collapse? 

3. What are the existing and impending threats to the USD? 

4. Why do you think James Rickards describes that the collapse of the existing monetary system is unprecedented?

5. How can the book help investors? 

6. What made investors confused about the current financial system?

7. The author said that the existing global economy has been replaced. What do you think was the prior economic system before it has been replaced? And how would you describe the current system?

Source: Rickards, J. (2014). The Death of Money: The Coming Collapse of the International Monetary System. New York: Penguin Group. 

The Danger of Ignoring the Past and the Wisdom of Economists

"Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression. Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit." 

(Source: Ludwig von Mises, The Theory of Money and Credit, 1953, p. 21)

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As Ludwig von Mises concluded his 1934 Preface to the English edition of his book, he emphasized once again the danger of increasing credit expansion, which will eventually end into economic crisis. I wonder why after more than eight decades and with the accessibility of information in our time, the wisdom of the Austrian school of economics is still largely ignored by academic institutions and policy makers. I cannot avoid but to think that perhaps the political control of money is really addictive on the part of government officials and those who benefit from the system. Perhaps, it is really such a great temptation that is too difficult to resist. And so regardless of setting up parameters to avoid the abuse of this power, history teaches us that government's control over the monetary system has always been abused to the detriment of the people's welfare.

Credit Expansion, Economic Crisis, and War

"The dislocation of the monetary and credit system that is nowadays going on everywhere is not due . . . to any inadequacy of the gold standard. The thing for which the monetary system of our time is chiefly blamed, the fall in prices during the last five years, is not the fault of the gold standard, but the inevitable and ineluctable consequence of the expansion of credit, which was bound to lead eventually to a collapse. And the thing which is chiefly advocated as a remedy is nothing but another expansion of credit, such as certainly might lead to a transitory boom, but would be bound to end in a correspondingly severer crisis." 

"The difficulties of the monetary and credit system are only a part of the great economic difficulties under which the world is at present suffering. It is not only the monetary and credit system that is out of gear, but the whole economic system. For years past, the economic policy of all countries has been in conflict with the principles on which the nineteenth century built up the welfare of the nations. International division of labour is now regarded as an evil, and there is a demand for a return to the autarchy of remote antiquity. Every importation of foreign goods is heralded as a misfortune, to be averted at all costs. With prodigious ardour, mighty political parties proclaim the gospel that peace on earth is undesirable and that war alone means progress." 

(Source: Ludwig von Mises, The Theory of Money and Credit, 1953, pp.20-21) 

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The role of the depreciation of local currency exerts big influence in an attempt of any nation to boost its export industry and to reduce importation of foreign products. Ludwig von Mises is clear at this point that this is one of the short-term effects of currency devaluation. However, such a stance is inimical to the interest of countries that rely more on their exports to strengthen their economy. If Mises' description therefore of the situation of global economy during his time is also appearing in our time particularly in relation to the way nations see the international division of labor and the importation of foregin goods, it is no wonder that we also have been hearing in our time the message that progress can only be obtained by means of war. In fact, not a few analysts are making a parallel between what's going on right now in global economy with the period prior to WW1 and WW2. 

The two paragraphs above tell us about the interlocking connection among the condition of money, credit, and the economy. In particular, Ludwig von Mises talks about the dislocation of money and credit due to credit expansion. He even told us that "It is not only the monetary and credit system that is out of gear, but the whole economic system" due to the abandonment by the policy makers of his time of the principles that made capital formation and growth possible during the 19th century. Reading this, I see Mises as prescient as if he is also describing our time. 

And then Mises proceeds to defend the gold standard that those who blame it for falling prices were actually mistaken. It was not the fault of the gold standard that prices fall. Instead, he identified credit expansion as the primary culprit. 

What is tragic is that further credit expansion is perceived as the solution while ignoring the fact that it was the source of economic malaise in the first place. For majority of policy makers today, this faulty idea still remains. Yes, as we've seen in the formation of two recent bubbles (tech bubble and housing bubble in periods prior to 2000 and 2008 respectively), this credit expansion have resulted into "transitory boom," which will unavoidably lead to an economic collapse far worse than the two previous ones. 

The Superiority of the Gold Standard

"Gold is not an ideal basis for a monetary system. Like all human creations, the gold standard is not free from shortcomings; but in the existing circumstances there is no other way of emancipating the monetary system from the changing influences of party politics and government interference, either in the present or, so far as can be foreseen, in the future. And no monetary system that is not free from these influences will be able to form the basis of credit transactions. Those who blame the gold standard should not forget that it was the gold standard that enabled the civilization of the nineteenth century to spread beyond the old capitalistic countries of Western Europe, and made the wealth of these countries available for the development of the rest of the world." - (Source: Ludwig von Mises, The Theory of Money and Credit, 1953, p.19) 

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What does Ludwig von Mises want to communicate through the above passage? How would you interpret it? And how is it relevant to the existing monetary system? 

The passage talks about the superiority of the gold standard over any form of political intervention in monetary affairs. Yes, Ludwig von Mises acknowledged that the gold standard is not perfect. However, he saw it as the only way to emancipate the monetary system from political control. It is implied in his words that the political control of monetary system is a threat to credit transaction for its very basis is unreliable. And then he concludes that those who dislike the gold standard have actually lost any historical sense. He cited the 19th century wealth formation and expansion as the outcome of following the gold standard.

How about our existing monetary system? Is it not under political control? Many people are not aware that the existing fiat currency is not actually an outcome of free-market monetary system; it is a product of the policy of interventionist government. Our money therefore is not a market money, but a political one. This explains the existing chaos both in the economic and monetary affairs of nations for these two are inseparable; money is the lifeblood of the economy. Once you tamper with it, you are overturning the foundation of society. John Maynard Keynes put it this way: 

“There is no subtler nor surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Race to the Bottom

"Today we see considerations of the value of money driving all other considerations into the background in both domestic and international economic policy. We are not very far now from a state of affairs in which 'economic policy' is primarily understood to mean the question of influencing the purchasing power of money. Are we to maintain the present gold-content of the currency unit, or are we to go over to a lower gold-content? That is the question that forms the principal issue nowadays in the economic policies of all European and American countries. Perhaps we are already in the midst of a race to reduce the gold-content of the currency unit with the object of obtaining transitory advantages (which, moreover, are based on self-deception) in the commercial war which the nations of the civilized world have been waging for decades with increasing acrimony, and with disastrous effects upon the welfare of their subjects." - (Source: Ludwig von Mises, The Theory of Money and Credit, 1953, p.18) 

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In today's text, Ludwig von Mises mentioned a kind of "race" and "war" related to monetary system. I think such race and war did not stop in his time, but have been continuing to the 21st century. They might have changed in external forms, but the susbtance remains the same. I see the relevance of the text in relation to a popular idea in our time, the reality of the so-called "race to the bottom". 

Today, the concept of race to the bottom is understood in different ways. In Financial Times, it is defined as:

"The situation in which companies and countries try to compete with each other by cutting wages and living standards for workers, and the production of goods is moved to the place where the wages are lowest and the workers have the fewest rights."

This is not the kind of race I see in reading Mises' text. The race that Financial Times describes pertains to a situation related to competition, the reduction of "wages and living standards of workers", and the transfer of goods and services to areas "where the wages are lowest and the workers have the fewer rights." To me, such definition paints a negative impression of those who are perceived to have authority in reducing the salary and the living standards of workers. The definition fails to account the source of the reduction of wage and living standard, which the Mises' text can provide. 

Another definition of "race to the bottom" is given by Wikipedia:

"The race to the bottom is a socio-economic phenomenon in which governments deregulate the business environment or taxes in order to attract or retain economic activity in their jurisdictions, resulting in lower wages, worse working conditions and fewer environmental protections. An outcome of globalization and free trade, the phenomenon may occur when competition increases between geographic areas over a particular sector of trade and production." 

In this definition, Wikipedia is more specific than the Financial Times in identifying the kind of situation where this race is taking place. Wikipedia is clear in describing this race as a "a socio-economic phenomenon" and adds four more ideas to competition, lower wages and "worse working conditions". These are "deregulation", "fewer environmental protections", "globalization", and "free trade". Again, this definition fails to explain the root cause of lower wages and worse working conditions. 

The above definitions are consistent with the dominant intellectual framework in our time, which is anti-free market at its core. In the case of our text, the kind of race Mises was describing was related to the reduction of "the gold-content of the currency unit." We do not have this kind of race in our time for currency these days are no longer connected to gold. What nations are doing now is they are competing with each other in devaluing their own currencies. And since nothing backs up these currencies except the governments themselves, our race at present is far worse than Mises' time. 

Mises saw that during his time the act of nations to race with each other in reducing the gold-content of currency was economically disastrous. Today, since all currencies are no longer connected to gold, would it not be logical to say that the continuation of the existing monetary system is more economically disastrous? 

Nations pursued the above race to attain transitory advantages. They include boosting the export industry, restricting import of foreign goods, easing the financial burden of local companies with big debts, preventing the fall of wages, and maintaining the prices of goods and services. For Ludwig von Mises, this pursuit is based on self-deception for in reality by doing this, nations are engaged in "commercial war," which is economically disastrous to their citizens.

Fiat Currency and Politics

"At the very moment when the manipulation of purchasing power is declared to be a legitimate concern of currency policy, the question of the level at which this purchasing power is to be fixed will attain the highest political significance. Under the gold standard, the determination of the value of money is dependent upon the profitability of gold production. To some, this may appear a disadvantage; and it is certain that it introduces an incalculable factor into economic activity. Nevertheless, it does not lay the prices of commodities open to violent and sudden changes from the monetary side. The biggest variations in the value of money that we have experienced during the last century have not originated in the circumstances of gold production, but in the policies of governments and banks of issue. Dependence of the value of money on the production of gold does at least mean its independence of the politics of the hour. The dissociation of the currencies from a definitive and unchangeable gold parity has made the value of money a plaything of politics." - (Source: Ludwig von Mises, The Theory of Money and Credit, 1953, pp. 17-18) 

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Not many people today are aware that the existing monetary system called the "managed fiat currency standard" is actually not a result of the decision of the market, but of the political class. That's why it's difficult to understand intellectuals who blame the market for the present economic chaos. This only shows that mainstream education has been successful in its goal of mind control. 

As we've seen already in previous post, government's use of inconvertible notes leads to currency devaluation. In reality, this political act is a manipulation of the purchasing power of the consumers. It is not the fault of the market that prices of goods and services are increasing unnaturally. Politics play a big role in it.

Prior to 1971, though the value of US dollar in relation to gold had already declined dramatically, at least, some measure of limitation on politics was still maintained. After President Nixon disconnected the US dollar from gold, the political control of money has been completed. The present turmoil both in the larger economy, the stocks and the financial markets are just inevitable consequences after more than four decades of ignoring sound money. 

Ludwig von Mises was emphatic that what endangers the value of nations' currencies are "the policies of government and banks of issue." In order to discontinue this subtle erosion of the value of money, the way is to return to the gold standard. This will stop the "value of money a plaything of politics". Only under the gold standard that the manipulation of the purchasing power of consumers by politicians can be terminated. Understanding therefore this "old monetary system" is the way to arrest the monetary devaluation that is continually destroying the people's purchasing power. This will liberate money from political control. 

Short-term Benefits of Currency Depreciation

"In Central Europe, the first country to follow Great Britain's example was the Republic of Czecho-Slovakia. In the years immediately after the War, Czecho-Slovakia, for reasons of prestige, had heedlessly followed a policy which aimed at raising the value of the krone, and she did not come to a halt until she was forced to recognize that increasing the value of her currency meant hindering the exportation of her products, facilitating the importation of foreign products, and seriously imperilling the solvency of all those enterprises that had procured a more or less considerable portion of their working capital by way of bank credit. During the first few weeks of the present year, however, the gold-parity of the krone was reduced in order to lighten the burden of the debtor enterprises, and in order to prevent a fall of wages and prices and so to encourage exportation and restrict importation. Today, in every country in the world, no question is so eagerly debated as that of whether the purchasing power of the monetary unit shall be maintained or reduced." - Source: The Theory of Money and Credit, pp. 16-17

The passage is about the short-term benefits of currency depreciation. All in all, Ludwig von Mises identified five immediate benefits so far: 

1. Assisting export industry

2. Restricting import of foreign goods

3. Easing the financial burden of local companies with big debts

4. Preventing the fall of wages, and 

5. Maintaining the prices of goods and services. 

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During his time, Mises mentioned Czecho-Slovakia as the country which adopted this policy of currency depreciation after the example of Great Britain. Previously, Czecho-Slovakia practiced the stronger currency policy. But after witnessing the impact of a strong krone on both export and import, the government decided to change its direction.

Moreover, strong krone that time would also mean putting the domestic companies, which depend on bank credit for their working capital on a serious financial risk. And so krone was depreciated in order to reduce the financial burden of these local companies.

Reading this section, I realized that during Mises' time, currency depreciation was a hot issue in every country. Today, yes, it's becoming hotter in countries that are aware about what's going on in global economy. How about in the Philippines? Is this the kind of issue that is now being publicly debated? Why not? Are we not part of the global economy? Or do our policy makers think that our economy is too strong and protected from currency depreciation? In fact, not many Filipinos are aware that we are following the same path as the United States in terms of monetary depreciation. 

Currency depreciation is a serious monetary and economic issue that affects our standard of living. Politicians cannot see the long-term detrimental results of such monetary policy for they only focus on immediate results. I wish and pray that the deafening silence about this very important subject will soon be stopped. And that the Lord will raise political leaders that truly understand this topic and will bring it into public attention. 

Monetary Depreciation

How about the text below? How do you understand this passage? And why is its message relevant for our time? 

"But the motive for recent experiments in depreciation has been by no means fiscal. The gold content of the monetary unit has been reduced in order to maintain the domestic wage-level and price level, and in order to secure advantages for home industry against its competitors in international trade. . . . In this case, however, Great Britain began by abandoning the old gold content of the pound. Instead of preserving its gold-value by employing the customary and never-failing remedy of raising the bankrate, the government and parliament of the United Kingdom, with bank-rate at 4.5 per cent, preferred to stop the redemption of notes at the old legal parity and so to cause a considerable fall in the value of sterling. The object was to prevent a further fall of prices in England and above all, apparently, to avoid a situation in which reductions of wages would be necessary."

"The example of Great Britain was followed by other countries, notably by the United States. President Roosevelt reduced the gold content of the dollar because he wished to prevent a fall in wages and to restore the price-level of the prosperous period between 1926 and 1929."

(Source: The Theory of Money and Credit, p. 16) 

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In the above text, Ludwig von Mises continued his explanation about monetary depreciation as the unavoidable outcome of government's utility of inconvertible notes. Here, he indicates that the government's intention in depreciating the currency is not primarily fiscal, that is, not related to the increase of tax collection and to the increase of spending ability. The motive says Mises is threefold: to influence the level of workers' salary, to maintain the prices of goods and services, and to protect local industry from its foreign competitors. The last is the essence of protectionism and a favorite tool of an interventionist government. This shows that a country that practice this does not really have a free market economy. This reminds me of Hitler's style, the other face of socialism. 

Currency devaluation during Mises' time was done through the reduction of gold content in monetary unit. In our time, it's different since as far as I know, no existing currency is backed up by gold since 1971 when President Nixon disconnected the USD from this precious metal. However, the act of monetary depreciation remains. The external form of this depreciation is different, but the essence of the act stays the same. 

I think the text is relevant to our time for we are facing the same issue in today's monetary system. As England depreciated its sterling/pound in the past, the US has been depreciating the dollar for so long. I think we are touching the root of the existing crisis in global economy. Since money is the lifeblood of the economy, it is difficult to see the solution to the present problem economic as long as both governments and central banks of the world are committed to currency devaluation.

Government's Unlimited Source of Fund

"When governments do not feel strong enough to procure by taxation or borrowing the resources to meet what they regard as irreducible expenditure, or, alternatively, so to restrict their expenditure that they are able to make do with the revenue that they have, recourse on their part to the issue of inconvertible notes and a consequent fall in the value of money is something that has occurred more than once in European and American history" (The Theory of Money and Credit, p. 15).

I'm having difficulty "decoding" the meaning of this long sentence by Ludwig von Mises. What is he saying here?

The way I see it, Ludwig von Mises combined four ideas in one sentence: 

1. About government's hesitation between taxing the people and borrowing money or restricting its expenditures with the available funds provided by current taxes, 

2. That if a government is not satisfied between these two options, it will choose to fund its programs using "the issue of inconvertible notes," 

3. That resorting to such way of providing fund for its expenditures will result to currency devaluation, and 

4. That this kind of government action is not new, but has a root in European and American history.

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The most difficult part in the above sentence is to exactly find out the meaning of "inconvertible notes". I googled it, and what appears are links to the definition of "convertible notes". I googled it again and add Mises' name, and there we can see links to his book The Theory of Money and Credit, but still I cannot find the exact meaning of the term "inconvertible notes". And so I decided to just deduce its meaning from the definition of convertible notes. 

Reading the Financial Times, I see that "Convertible notes are often used by angel investors who wish to fund businesses. . ." These "notes are structured as loans at the time the investment is made." These notes are described as "convertible" because they can be "automatically converted to equity" later on. 

Now, let us return to the meaning of "the issue of inconvertible notes" that will be used by the government to fund its expenditures. Who will issue this inconvertible banks? The central bank? Why these notes are described as "inconvertible"? I do not know the exact answer. All I can do is guess. Perhaps unlike the convetible notes, these inconvertible notes cannot be converted into equity. But I assumed that they can be converted into cash. For if not, then how can a government provide a fund for its expenditures? 

To me, I understand inconvertible notes as a form of loan that will be used by the government for its programs, which will be financed by the people through taxes in the future. The quote also talks about three ways the government fund its expenditures:

1. Through direct taxation,

2. Through direct borrowing, and

3. Through the issue of inconvertibles notes, which to me is a form of indirect taxation and indirect debt.

Directly taxing the people and borrowing money are better ways to source out fund in a sense that it is obvious and the taxpayers can see their impact on their personal and family expenses. And because of this, each individual and family can adjust financially. This I think what makes inconvertible notes dangerous. I wonder how many citizens understand its nature. But Mises is clear that once the government used this credit instrument, the outcome is monetary depreciation. So inconvertible notes are also taxes, but done in an indirect way that make them invisible. I suspect that the use of these notes has a lot to say about monetary corruption and the ongoing crisis in global economy. Utilizing this tool, politicians can expropriate the people without the latter knowing how it is being done. Government has found people's pockets as an unlimited source of fund.