Monday, August 30, 2010
John Law’s Ponzi Scam
John Law said that he had discovered the philosopher’s stone. He went on to say, "I can tell you my secret!" The financier went on to say, "It is to make gold out of paper." Today we call it a "Ponzi Scheme."
Just as David Stockman stated in a recent New York Times op-ed piece, "Four Deformations of the Apocalypse." The G.O.P. has followed the exact same financial plan as John Law, the Scottish mathematician and gambler was an adviser to the Regent of France, who struggled to repair the nation's finances, ruined in the wars of Louis XIV.
Whereas money was previously seen as a store of value, Law saw it just as a medium of exchange. He wrote that, “Money is not the value for which goods are exchanged but the value by which they are exchanged; the use of money is to buy goods, and silver, and gold, while money, is of no other use.” (Just like Glen Beck is preaching “Buy Gold” on his TV show)
The problem is that from time to time, investors will want to realize those claims and will be disappointed when they cannot do so; the higher the claims are relative to Gross Domestic Product, the greater the disruption and loss of confidence when those periods financially crash; just as they occurred in the last years of G.W. Bush’s administration.
Allow me to approach this topic from another direction. During the Civil War, the Southern Confederacy was selling bonds backed by their cotton crop resources. Britain being a large importer of this cotton for their value added textile industries, invested in these bonds. When the Union North blockaded the Southern ports and General Sherman slashed and burned the cotton fields, the bonds were rendered worthless and the South’s monetary system crashed. In the mean time, Britain soon found alternative cotton sources in Egypt, India and China.
Just as our recent monetary value was based on our G.D.P. only to have U.S. Multi-National Corporations transfer the value add industries into foreign interests such as China, so goes our monetary stability.
As I have often referred to the book, "An Inquiry into the Nature and Causes of the Wealth of Nations," (generally referred to by the short title "The Wealth of Nations") is the masterpiece of the Scottish economist and moral philosopher Adam Smith, who in summation stated that the true wealth of a nation is based on its ability to have the “Value Added” industries that convert raw material into viable product. For the last couple of decades but more during the G.W. Bush administration’s period, these value added manufacturing industries have been moved to China by U.S. Corporations. This is why China is now moved into the position of second largest financial market and will take over the number one position replacing the United States in the next decade.
Today it is not uniquely tangable to see that as China is seeing double digit financial growth while the citizens of the United States are enduring layoffs, and the devaluation of their personal wealth.
Be prepared to start hearing the slogan, “Viva la Revolution!” yet once again.