Wednesday, November 3, 2010

More Antal Fekete Fallacies

This is in response to Dr. Fekete's editorial at The Daily Bell, and a further response to some of his positions regarding Real Bills.

The editorial at the Daily Bell can be found here:

Dr Fekete: “I made the central point that the source of commercial credit is not saving but consumption.”

Fekete’s most fundamental flaw is that he confuses money with savings. It is the same flaw behind every Keynesian and Monetarist. It is the flaw behind Bernanke and Greenspan. However, he does not limit himself to this one flaw.

He goes on to use an example of disappearing banks. Paper is wealth. However, his example is flawed. If banks disappear, the wealth does not. There are still farms. There are stores of grain. The previously built factories still exist. My home still provides shelter.

The problem is he cannot be more precise in his example – because it would expose the fraud of his claim, quoted above. In his example, we all starve if the banks disappear, except for the miracle of RBD. However, as is clear, starvation may (or may not) come only to the extent that real wealth disappears. If the real wealth disappears, his Real Bills will not save him, as SOMETHING must fund production. The worker must eat while he is engaged in producing something else for later consumption.

It is unequivocally true, that if all the WEALTH disappeared, there absolutely must be savings to support production. I can’t fund a fishing net unless I have caught and saved enough fish to last the ten days it will take me to fabricate the net. But Fekete cannot make this more accurate observation, because it would expose him.

Fekete confuses financing with funding. He makes the case that real bills can finance the production of goods, but there is no funding to support this financing. Funding can ONLY come from savings. Paper cannot fund production. Only goods ready to be consumed can fund production.

Consider: while a good is in production, those employed in producing that good must eat. By definition, they cannot eat what they are producing, as it is in production. They cannot trade it for food; after all it is in production. Without someone previously having saved food, where would they get their food?

Will they eat real bills? Of course not. But perhaps they could trade the bills for food. In that case, someone had to SAVE food for there to be a trade. Financing is not funding. This is the exact same false belief system of Ben Bernanke. By creating money, we will increase the economy. But the money doesn’t satisfy the need for food. Only food does.

More importantly, now inflation is absolutely introduced into the system. The bills, drawn on unfinished goods that are not ready for consumption, are an increase to the money supply – competing to purchase the food someone else has saved. The paper Real Bills are now competing with the previous stock of money. By definition prices will be higher than they otherwise would be SOLELY due to the introduction of this fiduciary media. This conclusion is unavoidable.

The entire motivation for RBD is to fund something that (supposedly) otherwise could not be funded. Fekete is clear: absent RBD, there would be many not able to compete in the market to purchase previously finished goods available for consumption. How does this not raise prices higher than they otherwise would have been absent RBD? Every economics discipline recognizes that the moving of the demand line higher raises prices for a given supply. The supply of finished goods has not changed, yet the demand curve has shifted. This is the consistent and unavoidable result of relying on paper printing for “money.”

Fekete goes further to argue that there isn’t enough gold coin to satisfy the funding needs of production. But gold doesn’t fund anything in the basic sense – one cannot eat gold. Gold historically has been used as a store of wealth and medium of exchange, with the benefit of Mother Nature providing the discipline to minimize the manipulations of man. Gold does not fund production – actual goods fund production. Fekete ignores this most basic fact of survival.

There is no distinction between the funding of working capital and fixed capital. In both cases, savings of previously completed goods MUST be consumed while the production is performed. Whether for a week or five years, the worker must eat while he is in the process of manufacturing a good not yet ready for final consumption. From where will he get the food, unless someone has previously saved it?

Further, it is claimed that Real Bills serve as a clearing mechanism. But this is a solution looking for a problem. Gold can clear, as can any other object society chooses to use as money can clear.

I will clarify. There are these things called computers. These computers can hold records of gold (or other specie) balances for individual account holders. The gold holdings of each individual account holder can be divided and subdivided almost infinitely, as the computers can handle an infinite number of digits to the right of the decimal, thus dividing the gold into infinite fractions of ounces or grams. Gold is, both physically and virtually, quite divisible.

There is modern communication technology. This technology allows instant communication anywhere around the globe. It is capable of handling countless billions of transactions per day – or per hour or minute, if you like.

The physical gold does not have to move a billion times per day. Balances can be netted daily or otherwise as the market determines. Private clearing houses can be established to net the balances. See what James Turk is doing. Is this not a living example of how gold can be directly used as money?

Antal Fekete, like Ellen Brown, is (to take one from Dr. North) a wolf in sheep’s clothing, and should be recognized as such. Like Ellen Brown, he starts by speaking the language of sound money, the disasters of the current banking system, etc. This draws people in. “He doesn’t like Ben Bernanke. He doesn’t like the banking cartel.” However, he takes Ellen Brown one step further – to draw in the seemingly hard-money crowd. “He believes gold is the ultimate extinguisher of debt” This sounds good to people, he is talking about the problems of the current system correctly. He mentions gold.

Once he has them in the tent, he sells them a bill of goods (a Real Bill of goods?). He promises wealth simply by the creation of paper. He says this paper will create wealth without inflation. He says we don’t have to rely on savings for credit. Once he has them in the tent, he talks like a central banker. Any apologist of a central bank uses the exact same words, and these words have the exact same meaning and will produce the exact same results.


  1. There is not a problem if bills of credit, backed by gold, operate in the market place instead of literally carrying around gold. Proper bills of credit are in essence contracts to pay in gold. Private insurance will used as surety which can operate to enforce contracts and go after counterfeit bills. A bad reputation in the marketplace will be as scorned as a 450 FICO score, and perhaps be tabulated similarly in regard to one's credit risk. The real issue is not whether there is a central bank or paper money. Bills of credit should be based on having fractional gold in reserve for such bills. If bills are allowed to exist as multiples of gold reserves, then there must not be a central bank or the whole economy is open to manipulation and eventual totalitarian control of fiscal and monetary policy as we have today (and as we did before we even got completely off the gold standard in 1971). Personalities (ie. Fekete, North) are not the issue. Let us think for ourselves. The crux of the matter is whether a true system of weights and measures, most likely incorporating gold as a safe and steady standard, ought to be fractionalized as to the issuance of credit. Logically, morally, and based on historical experience, it appears not, for once the 'cat is out of the bag', and such fractionalization is permitted, then on principle, why cannot any amount of fractionalization be permitted. Then you would be back to the credit bubble explosion that Von Mises is famous for exposing: the greater the credit expansion bubble, the greater the crack of doom.

  2. "Logically, morally, and based on historical experience, it appears not, for once the 'cat is out of the bag', and such fractionalization is permitted, then on principle, why cannot any amount of fractionalization be permitted."

    Absent a government enforced backstop, who would be doing the "permitting" of any amount of fraction?

    I find the market as the best force for regulating this activity. Fraction all you want, but neither the banks nor its customers get big brother to cry to.

    The "cat out of the bag" is when government is used to backstop the fraction. THIS is what should be disallowed, and an honest government committed to protection of property rights has no business in the business of money and banking.