Prisoners Dilemma on the Paradox of Solution

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Of all the inhabitants of the inferno, none but Lucifer knows that hell is hell, and the secret function of purgatory is to make of heaven an effective reality. ~Arnold Bennett, English novelist (1867 – 1931)

Martin A. Armstrong is a man who is spending time in purgatory—both literally and figuratively. For those not aware, Armstrong is the former chairman of Princeton Economics International Ltd. indicted in 1999 on charges of bilking Japanese investors. He languished seven years in jail for contempt of court, supposedly the longest someone has ever been held without trial in United States history. All the while, Armstrong claimed that he was innocent of the fraud itself before finally pleading guilty in 2007. He is now serving a five-year sentence for conspiracy to commit fraud.[1][2]

Said to be “bizarrre (sic) and eccentric,” this “notorious… self-professed expert in the history of money and things gold”[3] is also a prolific writer whose narrative is the kind of grist for the mill influencing Matt Taibbi’s “investigative journalism”.[4] It is therefore not surprising, given Armstrong’s incarceration and his self-claimed title as “America’s #1 Political Prisoner,” to discover that his writings are tinged with conspiracy theories. On the other hand, as Kissinger once noted, “Even a paranoid can have enemies.”[5] Regardless you are probably asking, why devote time discussing The Paradox of Solution if Armstrong’s credibility is questionable? [Article continues below embedded paper.]

The Paradox of Solution 4-18-10


To begin with, notwithstanding the background context it’s a short and interesting read, and for someone who you would expect to “rail against the machine” it comes as a surprise to learn that Armstrong defends the establishment. Well, at least in regards to the “original intent” of the Federal Reserve and his implied support for the Volker rule. On this and the U.S. Government’s evolving policy response to the financial crisis, Armstrong reveals himself to be a man seemingly caught between faith and skepticism. His voice predictably adds to the chorus of doomsayers, but then he lends ineffectual advice as to how we can avoid our fate.

Second, while some may argue that Armstrong suffers from the Dunning–Kruger effect, the literary tradition of the wise fool who “speakest but sad truths”[6] provides reason enough to read The Paradox of Solution. As William S. Burroughs’ once said, “Sometimes paranoia’s just having all the facts.” And where Armstrong’s essay becomes truly fascinating is in our humble opinion the last third of the article where he begins to discuss that “meaningless and intangible social construct,”[7] money.

When money was tangible, debasement was the game. Hence, I’m sorry, but a GOLD & SILVER STANDARD will not eliminate inflation! Those who argue for “sound money” just do not understand that what is money, is far less important than WHO controls money. Politicians from ancient times have always sought to make just a little bit more to cover their spending that has never been responsible. Some have needed money desperately to defend the nation as was the case in Athens. Others just wanted to spend more to have nice things like Nero. Regardless of the reason, it is WHO controls the quantity and quality of money that truly matters—NOT what is actually money!

There is a video on the Intertubes[8] featuring a “steel cage death match” on the subject of “inflation versus deflation” between James Grant, founder of the venerable Grant's Interest Rate Observer, and the well-respected David Rosenberg, chief economist with Canada’s Gluskin Sheff & Associates [see: http://tinyurl.com/2dbgcvb]. Say what you will about Armstrong, but in both this debate and a March 31, 2010 Bloomberg interview with Keith McCullough, James Grant had the nerve to ask a most important matter of faith, ‘what is the US dollar?’

But maybe that’s the trouble with Treasuries. The fundamental trouble is that they are IOUs denominated in a currency that nobody knows what it is. What’s a dollar? What’s a dollar? David can’t tell me. Nobody can tell me. If Alexander Hamilton were here, and unbriefed (sic) on the events of the past two hundred years, he could tell me. And what he would say is that the dollar is defined as 371 and ¼ grains of pure silver, or 24 and ¾ grains of pure gold. And it was too under the 1792 Coinage Act which Hamilton himself wrote. And those were the definitions, and incidentally, Section 19 of that landmark monetary legislation ends in these telling words, quote “shall suffer death” closed quote. Now, can you tell me what kind of felony was punishable by death under an Act to regulate the mint? The act of debasing the currency was—that was a capital offense. So watch your back Ben Bernanke [audience laughter], cycles turn. [Time: 8’50”]

Nevertheless, “cash is king,” especially in a liquidity crisis; however, for cash to function as a means to discharge debt, then the largely unasked question is: what defines cash as cash?[9] Such philosophical musings may seem from the realm of madmen or fools, but when the highly respected James Grant half-jokingly references the following satirical article by The Onion, U.S. Economy Grinds to Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion,[10] you know that something is amiss. But what exactly?

Armstrong, alluding to a collective fear of what the future holds for “Western dominance,” strikes at the very heart of the matter. In hunter-gather societies, “there is no TRADE because there is no concept of the future as we understand it… In order for society to have created a concept of money, there had to have been the realization that there is a tomorrow. Something of VALUE is now to be stored and retained… Once this concept of future was born yielding the idea of VALUE, everything from banking to derivatives began to emerge even in ancient times… The concept of barter thus emerged with the concept of future. Then, money emerged as a universal language of barter… The wealth of a nation emerged from the productive forces of its people.”

According to Ludwig von Mises, “The concept of money as a creature of law and the state is clearly untenable. It is not justified by a single phenomenon of the market. To ascribe to the state the power of dictating the laws of exchange, is to ignore the fundamental principles of money-using society.”[11] Armstrong echoes this sentiment, “It is nice to create a unrealistic view of a world where all we have to do is restore a gold standard and all will be well.” But then he turns around and disagrees with Mises, “It is not what is money, but who controls it that has always counted.”

Armstrong seems to view the world as a top-down establishmentarian exercise by a political class, which in turn he rails against. But with respect to the “control” of money, it has not always been true that this was the function of government. Alessandri and Haldane (2009), who reference Reinhart and Rogoff (2009) in their paper Banking on the State, clarify monetary history for us: “From the earliest times, the relationship between banks and the state was often rocky. Sovereign default on loans was an everyday hazard for the banks, especially among states vanquished in war. Indeed, through the ages sovereign default has been the single biggest cause of banking collapse.”

John Locke once wrote, “Credit is nothing but the expectation of money, within some limited time.”[12] As Grant (1994) noted, “To credit is to believe and to lend money it is necessary to trust someone.” Yet, financial history is rife with periods when “prolonged prosperity wore down the skepticism of creditors” only to result in eras of economic hardships.[13] It seems that we have entered into such a period with Chinese officials and some leading economists wanting a greater role for Special Drawing Rights (SDRs) in foreign exchange reserves. Yet, as Aiyar (2009) noted in his paper, An International Monetary Fund Currency to Rival the Dollar? “…the SDR is not a currency in its own right. Rather, it is a derivative of four national currencies. A derivative is not a currency.”

Armstrong, to be fair, taps into the current zeitgeist of confusion regarding the Frankenstein nature of our financial system. As Selgin (2010), senior fellow at the Cato Institute, affirmed: “the Jekyll and Hyde nature of contemporary central banks… has made apparent our utter dependence on such banks as instruments for assuring the continuous flow of credit in the aftermath of a financial bust and the same institutions’ capacity to fuel the financial booms that make severe busts possible in the first place.” In that one line Selgin actually does a better job in describing Armstrong’s so-called “paradox of solution”.

In the final analysis, however, Armstrong’s ramblings are indeed perplexing. He is anti-Washington, anti-SEC, and anti-CFTC, but at the same time he wants to “regulate the REPO market to eliminate posting collateral that explodes in the middle of the night.” Is this to be done by a neutered Federal Reserve? According to Armstrong who positions himself as a Fed apologist, “The Fed is incapable to [interest rate] management and should just raise or lower the reserve ratio banks must put up at the Fed.” As the saying goes, with friends like these who needs enemies.

Maybe Armstrong is just economic literature’s “wise fool” reincarnate into real life. Albeit, the world is now a place in which Joseph Stiglitz, the Nobel Prize-winning economist and Columbia University professor, speaks against the orthodoxy of “rational expectations” asserting that economists are among those at fault for the financial crisis, which exposed “major flaws” in prevailing ideas.[14] Wise fool or not, Armstrong comes across as a man who seeks redemption by trying to save us from ourselves. Then again, the same could be said about Fed Chairman, Ben Bernanke. Perhaps Sir Walter Scott put it best in his novel, Ivanhoe: “Our heads are in the lion's mouth,” said Wamba, in a whisper to Gurth, “get them out how we can.”[15]

Footnotes:
[1] Martin A. Armstrong. (2010, April 9). In Wikipedia, Free Encyclopedia. Retrieved: May 1, 2010, from http://tinyurl.com/2847kvo.

[2] “Japanese Regulators Get a 2d 'Scalp' Under Their Belts.” Stephanie Strom, New York Times, September 17, 1999. http://tinyurl.com/2edlqwk

[3] “The Enigma of Martin Armstrong.” January 04, 2009. http://tinyurl.com/2595sb4

[4] “What Is Ture/Slant?” Matt Taibbi, Taibblog http://trueslant.com/matttaibbi/

[5] Source: “His Legacy: Realism and Allure.” Time.com, Jan. 24, 1977. http://tinyurl.com/2d8smj4.

[6] Scott, W., Sir, 1771-1832. Ivanhoe, by Sir Walter Scott. 39015036703273. Edinburgh, A. & C. Black.

[7] “U.S. Economy Grinds to Halt As Nation Realizes Money Just a Symbolic, Mutually Shared Illusion.” The Onion, Inc., Issue 46-07, February 16, 2010. http://tinyurl.com/ycy9bct

[8] Etymology: chiefly Internet slang, humorous, from the “Series of tubes” analogy used on June 28, 2006 by then United States Senator Ted Stevens to describe the Internet.

[9] Frankfurter, Michael “Mack” (2010). “The Mysterious Case of Hamilton’s Monetary Enterprise, the Financial Instability Hypothesis, and Exter’s Inverted Pyramid.” Draft Article, February 15, 2010. http://docstoc.com/docs/25405145

[10] “U.S. Economy Grinds to Halt As Nation Realizes Money Just a Symbolic, Mutually Shared Illusion.” The Onion, Inc., Issue 46-07, February 16, 2010.

[11] Von Mises, Ludwig and Greaves, Percy L. (1978). “On the Manipulation of Money and Credit.” Dobbs Ferry, N.Y.: Free Market Books, p. 69.

[12] Source: “Pleas for peace and union against political intolerance and sectional animosity: Speeches of Thomas F. Bayard, R. E. Withers, S. B. Maxey in the Senate of the United States, March 30, 1876, with the speech of George S. Boutwell.” Harvard University, 1876. Digital Copy, p. 74. “Speech of Hon. Thomas Francis Bayard, of Delaware, in the United States Senate, May 27, 1878.”

[13] Grant, James (1994). “Money of the mind: Borrowing and lending in America from the Civil War to Michael Milken.” New York: Noonday Press, pp. 5 & 8.

[14] “Stiglitz Says Crisis Exposed ‘Major Flaws’ in Economic Ideas.” Scott Lanman, BusinessWeek, January 2, 2010.

[15] Scott, W., Sir, 1771-1832. Ivanhoe, by Sir Walter Scott. 39015036703273. Edinburgh, A. & C. Black.

References:
Aiyar, Swaminathan S. (2009). “An International Monetary Fund Currency to Rival the Dollar?” The Cato Institute, Center for Global Liberty & Prosperity, Development Policy Analysis, No. 10, July 7, 2009.

Frankfurter, Michael “Mack” (2010). “The Mysterious Case of Hamilton’s Monetary Enterprise, the Financial Instability Hypothesis, and Exter’s Inverted Pyramid.” Docstoc, Draft Article, February 15, 2010. http://docstoc.com/docs/25405145

Grant, James (1994). “Money of the mind: Borrowing and lending in America from the Civil War to Michael Milken.” New York: Noonday Press.

Von Mises, Ludwig and Greaves, Percy L. (1978). “On the Manipulation of Money and Credit.” Dobbs Ferry, N.Y.: Free Market Books.

Haldane, Andrew G. and Alessandri, Piergiorgio (2009). “Banking on the State.” Bank of England. Based on a presentation delivered at the Federal Reserve Bank of Chicago twelfth annual International Banking Conference on “The International Financial Crisis: Have the Rules of Finance Changed?” 25 September 2009.

Reinhart, C. M and Rogoff, K (2009). “This Time is Different: Eight Centuries of
Financial Folly.” Princeton University Press.

Selgin, George (2010). “Central Banks as Sources of Financial Instability.” The Cato Institute, The Independent Review, V. 14, N. 4, Spring 2010, pp. 485-496.