Professor Fekete, Gold & The
Collapse of Paper Money
Darryl Robert Schoon
Sep 18, 2007
Many, including myself,
are pointing out the emperor has no clothes. But only a few,
such as Professor Antal Fekete, have the credentials of a bespoke
Professor Fekete's criticisms
of the global economy are especially compelling because they
are grounded in academic discipline and tradition. A mathematician
by training (professor emeritus University of Newfoundland),
Professor Fekete possesses that unique attribute of those
whose interests spill over into adjacent areas and bring with
them a fresh perspective to their new field.
We are fortunate Professor
Fekete chose economics as his second love - and I, more than
most, for it was the Professor that brought the Austrian School
of Economics alive for me. Best known for the brilliant ground-breaking
work of economic theorists Carl Menger, Eugene von Boem-Bawerk,
Friedrich Hayek, and Ludwig von Mises etc., the Austrian School
of Economics provides the ultimate counterpoint to today's financial
tower of hubris, built on and out of paper and even now beginning
to smolder and perhaps break out in flames.
In the spring of 2007, Professor
Fekete reviewed my book, How
to Survive the Crisis and Prosper In The Process, and
was especially approving of the sections on money and credit.
When I had presented my predictions of a coming economic collapse
at a conference in March 2007, the prevailing opinion was that
if I were right, then I was certainly among only a handful who
believed a crisis was imminent-the gold community excepted.
What A Difference A Few Months Makes
In early May 2007, I wrote
an article, Subprime America Infects Asia and Europe,
predicting that America's defaulting subprime loans would soon
surface in the portfolios of banks, insurance companies, and
pension and hedge funds in Europe and Asia and consequently damage
US financial markets in the eyes of global investors.
Summer 2007 subsequently confirmed
my predictions that global financial markets were filled with
speculative rot that had spread like the AIDS virus during the
excessive financial rutting resulting from rumors of billion
dollar bonuses being paid out by the Bally's and MGMs of international
finance (Goldman Sachs, Bear Stearns, Lehman Bros, Citigroup,
Morgan Stanley, Deutsche Bank, UBS, etc.).
Summer 2007 also brought something
even more unexpected, an invitation from Professor Fekete to
speak at Session II of Gold Standard University Live (GSUL) in
Szombathely, Hungary. When I received Professor Fekete's invitation,
I thought Session II was going to be in Birmingham, AL, home
of the Full Moon BBQ; justly famous for its slow hickory smoked
ribs and I was thinking of attending.
But with Professor Fekete's
invitation, instead of BBQ ribs in Birmingham I was to dine on
goulash in Hungary and was to come away with a radically different
view of the unfolding crisis now spreading through global markets.
For when I was in Hungary, the liquidity crisis in the world's
banking system took a significant turn for the worse.
Midsummer Nightmare 2007
The Midsummer Nightmare of
2007 might be dismissed by some as a temporary crisis of confidence,
a momentary shaking of investment bankers' confidence that is
necessary in ascertaining risk and reward in today's markets.
Indeed, it would be so if confidence
were not the very lynchpin of today's global financial system.
Since gold has been replaced by paper money and IOUs are routinely
accepted as investments, confidence has become the real currency
in today's global banking system.
When A Confidence Game Is Being Run
Nothing Is More Important Than Confidence
What actually caused the central
banks of the US, European Community, and Japan to offer liquidity
to banks in August was their realization that the banks no longer
trusted each other. When LIBOR, the interbank rate (the rate
at which banks loan money to each other began to precipitously
rise), the central banks knew a crisis of confidence was spreading.
Banks were now reticent to loan money to each other, sic
accept additional risk from other banks, at the usual rate.
Where Private Banks Fear To Tread
Central Banks Step In With Public Funds
For the moment, it appeared
the central bank response had worked. In truth, it has only delayed
the inevitable. The yield on three month US Treasuries yields
plunged from 4.69 % to 2.51 % in a few short days as money managers
feared commercial-backed paper assets were at risk and fled to
the apparent security of government IOUs. The crisis was, and
is now, beyond the ability of central bankers to fix or to contain.
We are not in the middle of
a "correction" as many hope. We are at the end of the
largest credit cycle in history, built on decades of credit and
debt (from central banks) slowly replacing savings and productivity
until the amount of credit and debt has overwhelmed the ability
of producers and savers to service it. We are at the end of the
cycle, not the middle, and endings, as we all know, are quite
different than what one wishes.
There is no means of avoiding
the final collapse of a boom brought about by credit (debt) expansion.
-Ludwig von Mises
Those who traveled to Szombathely,
Hungary to hear Professor Fekete were not the usual crowd one
finds gathered around the water cooler swapping stock tips. They
had come from as far-away as Australia, America, and as close
as Austria, but all shared the feeling that a collapse of debt-based
capital markets was approaching.
And as we listened to Professor
Fekete lecture on "The Structure of Capital Markets"
and "The Productivity of Capital versus Time Preference"
etc., the global capital markets outside our lecture room were
beginning to falter and stumble-the Midsummer Liquidity Nightmare
of 2007 was fully underway.
When one runs with the crowd,
commonly-held denials and beliefs are sufficient to justify dangerously
complacent attitudes and opinions. At this time, America, and
indeed the world, is clearly blind to what awaits it.
The idea of catastrophic economic
change is today viewed as an improbable event, much as the collapse
of the levees in New Orleans was viewed prior to 2005. After
a week in Szombathely, Hungary, it is evident, however, that
a coming economic collapse is as certain as was the collapse
of New Orlean's levees.
Will the Chickens on the Kentucky
Colonel's Farm Escape?
It is at times like this that
one wonders if the citizens of Pompeii noticed any unusual volcanic
activity prior to the deadly eruption of Vesuvius; and, if so,
did they shrug it off as but another necessary release of volcanic
pressure or did some heed its warnings and leave in time to escape
Human nature rarely seems to
change and if today is any indicator of the past, it is safe
to assume Vesuvius did indeed erupt in the days prior to its
catastrophic explosion; but that most ignored its warnings and
perished; and, now, much like the citizens of Pompeii, America
is about to get an unexpected "crash" course in economics
and will suffer the consequences of its continuing denial. The
past is indeed prologue if not heeded.
Professor Fekete has announced
Session III of Gold Standard University Live will be held February
2008 in Bessemer, Al (near Birmingham and the Full Moon BBQ restaurant).
For those interested, contact GSUL@t-online.hu
Darryl Robert Schoon
About Darryl Robert
In college, I majored in political science with a focus on East
Asia (B.A. University of California at Davis, 1966). My in-depth
study of economics did not occur until much later.
In the 1990s,
I became curious about the Great Depression and in the course
of my study, I realized that most of my preconceptions about
money and the economy were just that - preconceptions. I, like
most others, did not really understand the nature of money and
the economy. Now, I have some insights and answers about these
2005, Marshall Thurber, a close friend from law school convened
The Positive Deviant Network (the PDN), a group of individuals
whom Marshall believed to be "out-of-the-box" thinkers
and I was asked to join. The PDN became a major catalyst in my
writings on economic issues.
When I discovered
others in the PDN shared my concerns about the US economy, I
began writing down my thoughts. In March 2007 I presented my
findings to the Positive Deviant Network in the form of an in-depth
148-page analysis, "How
to Survive the Crisis and Prosper In The Process."
to my presentation, though controversial, generated a significant
amount of interest; and in May 2007, "How To Survive The
Crisis And Prosper In The Process" was made available at
www.survivethecrisis.com and I began writing
articles on economic issues.
in the book and my writings has been gratifying. During its first
two months, www.survivethecrisis.com was accessed by over 10,000
viewers from 93 countries. Clearly, we had struck a chord and
www.drschoon.com, has been created
to address this interest.