Sovereign Man Notes From The Field By Simon Black
December 17, 2015 Byron Bay, Australia
This is how I would explain the Fed’s rate hike to a space alien
When you think of the word ‘money’, the first thing to come to mind is probably those pieces of paper in your pocket.
High school economics textbooks teach students that ‘money’ is a medium of exchange, a store of value, and a measure of account.
And while all that fancy-sounding language may appropriately describe the ways in which we use money, they do not define what money actually is.
Money is not a medium of exchange. Nor is it the paper in your wallet.
In actuality money is a unit of measurement.
Just as a kilogram represents a unit of measurement for mass, or a mile represents a unit to measure distance, money is a vastly important measure of economic value.
This idea of measuring economic value was something passed down from the ancient Greeks thousands of years ago.
They minted coins to define units of measurement for economic value, and they developed the concept of the marketplace as a way for the public to fairly and efficiently determine the economic value of a particular good or service.
There was no more guesswork; the value of a quart of olives, or a single sheep, could be quickly assessed and easily communicated across an entire society.
And this idea of measuring economic value became just as important to the development of civilization as standard measurements for mass and length.
It would be next to impossible for a team of carpenters to build a house or bridge without first agreeing on standards of measurement.
If I defined distance based on the width of my thumb, and you defined it using the length of your cat, we’d hardly be able to communicate professionally.
Similarly, we could never expect the modern economy to develop and flourish without first agreeing how to measure economic value.
And this is what’s so terribly wrong with our modern financial system.
We have ceded control of this definition of economic value to an unelected committee of bureaucrats.
I’ve long been critical of this, and I’m convinced that if benevolent space aliens visited our planet, they would be utterly bewildered at our financial system.
Now, in fairness, the same thing has happened with other units of measurement.
The International Bureau for Weights and Measures has given us a very clear definition for a meter and kilogram.
But it’s different with money.
In the United States, for example, the Mint and Coinage Act of 1792 very precisely defined the unit of economic value in America: 371.25 grains of pure silver.
And this definition lasted from the birth of the nation all the way up through it becoming the largest economy in the world.
But today it is no longer the same. The dollars you have in your pocket have nothing to do with silver anymore.
Americans’ standard measurement of economic value is now exclusively controlled by the Federal Reserve. And they are not shy about changing it.
Yesterday the Fed unsurprisingly announced that they were going to raise interest rates for the first time in nearly a decade.
In doing so, they have effectively changed the value of money and hence adjusted the unit of measurement for economic value.
Strangely, the Fed views this as one of its missions; they openly acknowledge that they strive for an annual inflation rate of 2%.
2% might not sound like much, but over the course of time it really adds up. It means that within a single lifetime, your unit of economic value will be reduced by more than 75%.
Just imagine if a committee of unelected bureaucrats periodically made significant changes to the value of a gallon.
Or if their stated goal was to reduce the value of a kilometer by 2% per year.
It would be utterly ridiculous, affecting the lives of just about everyone. Some would be better off, some would be worse off.
Taxi drivers, for example, would make a lot more money at the expense of their passengers if the value of a kilometer were debased.
The distance between Point A and Point B would increase when expressed in kilometers, so you’d be paying more every time you jumped in an Uber.
Similarly, shipping companies would make more money at the expense of producers who have to transport their products.
Money is no exception. Whenever central bankers adjust the unit of measurement for economic value, there are winners and losers.
Banks and governments tend to do very well when their friends at the central bank manipulate the value of money.
And as you can imagine, the average guy on the street is not the winner.
So it’s no surprise that the middle class in the Land of the Free is no longer the largest segment of the population, according to a recent report by Pew Research.
Or that more than 50% of Americans have less than $1,000 in savings.
Or that the birthrate in the Land of the Free is nearing an all-time low, due in large part to the rising costs of having a child.
That’s our financial system. It’s is based on unaccountable, unelected committees deciding who wins, and who loses.
And they’ve decided that you’re going to be a loser.
Once you understand this simple truth, you have a very important choice to make: let them continue to determine your economic future, or take charge of it yourself.
Simon Black Founder, SovereignMan.com
In yesterday's note I wrote to you about how silver has held its value for 23 centuries based on the price of barley in ancient Babylon.
The math in the article is completely accurate, however I noticed a mistake in the way I explained it. I’ve fixed it now, so if you're curious to see the full calculation, SEE BELOW to get your math on.
Excerpt From Previous Post: LINK TO PREVIOUS POST
The ancient Babylonians quoted grain prices in shekels, a unit of weight equivalent to 8.33 grams of silver.
Over the 3+ century period between 384 BC and 60 BC, for example, the price of barley averaged 0.02053 shekels per quart in Babylonia.
At 8.33 grams per shekel, this would be equivalent to about 0.171 grams of silver per quart, or about $3.75 based on today’s silver price.
[Editor’s note: We had a type-o in the original article. The math in this article is accurate, but the above statement about $3.75 per quart was referring to the price per shekel, not the price per quart as it states. Scroll to the bottom if you want to see the full calculation.]
After converting the unit of measurement from ancient quart to modern hundredweight (cwt), that means that barley in Babylonian times sold for $5.23 per cwt when priced in today’s dollars.
And according to the US Department of Agriculture, yesterday’s price for barley was… $5.25 per cwt.
Amazing. When denominated in silver, the price of barley is almost exactly the same as it was thousands of years ago.
In other words, if a farmer from 23 centuries ago had sold a quart of barley, he would have received 0.171 grams of silver.
Fast forward to today and that 0.171 grams of silver would buy almost the exact same amount of grain as it did 23 centuries ago.
This is an important reminder, especially today as the entire financial system waits with bated breath to see if the US Federal Reserve will raise interest rates for the first time in nearly a decade.
It’s ultimately a complete farce. Our entire financial system is based on awarding total control of our money to a tiny, unelected committee of bureaucrats.
They have the power to conjure trillions of dollars, euros, yen, pounds, renminbi, etc. out of thin air that are backed by absolutely nothing other than a thin veneer of confidence.
Civilizations have been experimenting with this model for thousands of years. And every single time it has failed.
Future historians will certainly wonder why we chose a financial system based on a model with such a long history of failure, and why we gave control of our savings and economic activity to unelected bureaucrats who are consistently wrong.
When you step back and look at the big picture, this system is totally mad. And full of risk.
Governments are insolvent. Central banks are nearly insolvent. Banking systems are extremely illiquid. National pension funds are insolvent.
And their solution is to keep borrowing and printing more money.
Look, holding some physical cash does make sense right now as a *short-term* hedge against risks in the financial system.
If the GFC 2.0 hits, you’ll be glad that you’re holding some physical cash (more on this soon).
But how much do you think your paper currency will be worth 23 centuries from now? Or even 23 years? Or potentially even 23 months?
Bottom line– you’re not protected unless you own some real assets. Gold. Silver. Land. Productive business. This should be part of any rational person’s Plan B.
Ready for the math?
Our goal with this exercise is to convert the price of barley in Ancient Babylon from shekels per ancient quart to dollars per hundredweight.
Price of barley in Ancient Babylon: 0.02053 shekels per ancient quart
1 shekel = 8.33 grams of silver
1 gram of silver = $0.45 on December 16, 2015
Therefore 1 ancient quart (qa) of Barley in Babylon sold for 0.02053 shekels/qa x 8.33 g/shekel x $0.45/g = $0.07695/qa
Now we have to convert from ancient quart (qa) to hundredweight (cwt), the measurement used to quote prices today:
1 bushel = 32.68 qa
1 kilogram of barley = 0.045833 bushels
1 cwt = 45.36 kilograms
(note: these are known constants, not calculations)
Therefore 1 hundredweight = 45.36 kg/cwt x 0.045833 bu/kg x 32.68 qa/bu = 67.94 qa/cwt
So if the price of 1 qa in Ancient Babylon was $0.07695 per qa, then the price per cwt is
$0.07695 per qa X 67.94 qa per cwt = $5.23 per cwt
In other words, the price of barley 23 centuries ago was 0.0253 shekels per quart, which after we do the math and conversions, is equivalent to $5.23 per hundredweight in today’s dollars based on the silver price from December 16, 2015.