Author Topic: This is an interesting read, and history behind a common expression  (Read 2482 times)

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Offline 5412

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Hi,

I am catching up on things and just read a daily report from the Sovereign Society.  Following is a blurb from thier January 4th newsletter that is really interesting and applicable to many of us today.

regards,
5412

The Sovereign Society Offshore A-Letter
Friday, January 1, 2010


Getting the Short End
of the Treasury Stick

An Uncensored History of Government Debt…

By Matt Collins


One of the biggest lies in history is the idea that government debt is a “safe haven.” Today, at the beginning of this New Year, we’re going to revisit one of The Sovereign Society’s favorite “hidden histories” for the real scoop…

It was one of the greatest heists in history.

The scene? London, 1660. The perpetrator? King Charles the II...of England. The loot? All the gold he could con out of the country's goldsmiths, bankers and businessmen in a lifetime. The tool?

A stick. A Tally Stick.

Tally Sticks were a brilliant invention. But they were also insidious, as they formed the foundation for the fiat currency systems we still have today. One where the root of a currency's value is in a promise from a faceless institution, and not in the actual value of a tangible object…

Counterfeit-proof Receipts for an Illiterate Public
Put into use about a thousand years ago, they were a common sense solution for a young, "gold and goods" economy where gold was scarce. By the time of the heist they were used in everyday transactions.

Here's how it worked…

When a loan was made, the debt was carved in a standard fashion on the surface of a small (preferably hazel-wood) stick, and then the stick was split in half through the center of the carving.

The longer end of the IOU was given to the purchaser, and its handle was called the 'stock'...the root of the word's use in today's markets.

Even a mostly illiterate public could read the amount scratched into the wood, and the stick would only fit perfectly with its original other half. That way, when the debtor returned with the money (or goods) owed, the sticks would be matched and the debt would be "tallied."

In that fundamental use, they worked perfectly. But of course - as is governments' way - the King was tempted to stretch those bounds…

King Chuck to the Rescue...of Nobody
Charles II ruled at a time when royal power was still based on a "divine mandate". His government and institutions - and indeed he himself - saw the King as a "Chosen One."

Which was a real shame for him…because it bound him to the laws of Christendom. And Christianity at the time still forbade lending or borrowing with 'usury' (interest). So he had trouble in terms of "living like a king" and financing several failing wars against various neighbors.

Instead he turned to the trusted tally...and the keen idea of selling his (government) tallies (debt) at a discount. That way, he could allow his lenders to profit without charging interest...it's the basis for government debt being sold at a discount today.

And he could issue advance tallies for 'emergency spending'...an idea that proved all too tempting. He sold the tallies collected by his Excheqeur (tax collector) from the country's Sheriffs, essentially trading future tax receipts to the country's goldsmiths (bankers) for quick cash.

The tallies were receipts for taxes to be paid later in the year...and this is a crucial part of the story. They weren't trading on the value of the objects being traded, but on the cost of waiting for a return and the government's ability to collect taxes and keep honest.

But if the government is not honest, this is an outright Ponzi scheme...one where new debt issue could theoretically pay for passing bills, for a while.

The King realized that he'd stumbled onto something big. He could wage all the war he wanted and pay his bills with hazel-wood sticks. The King spent and spent, and the goldsmith's vaults filled up with more and more sticks.

But didn't the Goldsmiths get Wise?
Well, yes and no. Yes, they did get wise - which we'll talk about shortly - but they also had a reason to play along.

As we discussed in the last 'lies' report, goldsmiths were handing out certificates for fractional gold reserves and inflating the young economy in a con all their own…one called "fractional reserve banking". And since the King played along with their early building of a banking system, they played along with the "sticks-for-gold investment strategy".

But as mentioned above, they did get wise. At least the market did…

Buyers started attaching larger and larger discounts to the King's debt to offset the perceived risk in loaning money to the King. The discounts prompted the King to issue even more tallies to reach the same desired return, promising out more future tax revenues just to meet his short-term spending desires.

But remember, only the discount was changing here. So even though he was getting less and less in return for his sticks, he still had to fulfill them at face value…an obligation that soon overwhelmed the King's income.

By the time the whole Ponzi scheme came to an end, the King's sticks were trading at a 10% discount (to put that into perspective, short-term T-Bills have recently traded with discounts of one-tenth of one percent or less). The payments on his newer issues trading at that discount soon outmatched all the Kingdom's tax revenues, effectively bankrupting his Excheqeur, derailing his Ponzi scheme, and threatening to put the monarchy in the poorhouse.

So with the stroke of a pen, the King simply declared those debts illegal and ceased payment. It is – as they say – good to be the king.

With that single stroke he stole a huge amount of the country's gold - having already spent it - and forced the young economy to fall flat on its face. The King's various creditors ended up on 'the short end of the stick' (again, this is the source of that expression) and all credit in the country evaporated pretty much overnight.

But Wait 'til you Hear What Happened to the Sticks...
The sticks were still in use for over a century afterward...the Bank of England even had some on their books when they opened in 1694. But in 1834, Parliament ordered all the sticks be destroyed and the system finally retired.

The men at the furnace were happy to comply...and so too - apparently - were the sticks themselves. The fire overwhelmed the Parliament building's basement furnace and burnt the building to the ground.

I'm not kidding. You Think that Might've been a Sign?


This is the history of government debt. And it's important to remember that even government debt is not risk-free. Governments have been known to default on debt. Russia, Ecuador, Chile...and many more have defaulted just in the last century.

Why don't you hear about it? Why are government bonds always called "risk-free" or "Inflation-Protected Securities"? Why don't they come out and tell you that government debt has a reckless - even disastrous - past?

Because it's Bad for Business.
And it really kills the Ponzi scheme.

If a government is facing serious trouble, it's almost a universal truth that they need (or desire) more money. But if they're honest about their troubles, the market might affix a greater discount to their debt...leaving them with less money.


Offline Chris_

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Re: This is an interesting read, and history behind a common expression
« Reply #1 on: January 07, 2010, 11:25:58 AM »
Interesting story........as an aside, are you aware that there is ONE historical national leader who absolutely demanded that his empire incur absolutely no debt whatsoever?

He was fanatically paraniod about it, and financed everything with cold cash (or the equivalent thereof) for his entire reign.........

And he almost made it work........

doc
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Offline Eupher

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Re: This is an interesting read, and history behind a common expression
« Reply #2 on: January 07, 2010, 11:38:56 AM »
Interesting story........as an aside, are you aware that there is ONE historical national leader who absolutely demanded that his empire incur absolutely no debt whatsoever?

He was fanatically paraniod about it, and financed everything with cold cash (or the equivalent thereof) for his entire reign.........

And he almost made it work........

doc

Sounds like Napoleon....
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Offline Chris_

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Re: This is an interesting read, and history behind a common expression
« Reply #3 on: January 07, 2010, 11:47:41 AM »
Sounds like Napoleon....

Give the man with a horn a cigar........

doc
If you want to worship an orange pile of garbage with a reckless disregard for everything, get on down to Arbys & try our loaded curly fries.

Offline 5412

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Re: This is an interesting read, and history behind a common expression
« Reply #4 on: January 07, 2010, 12:06:28 PM »
Interesting story........as an aside, are you aware that there is ONE historical national leader who absolutely demanded that his empire incur absolutely no debt whatsoever?

He was fanatically paraniod about it, and financed everything with cold cash (or the equivalent thereof) for his entire reign.........

And he almost made it work........

doc

Hi,

Sure wish he won, the French are one of the most socialist countries in the world now.

No I did not know that, very interesting.

regards,
5412

Offline Chris_

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Re: This is an interesting read, and history behind a common expression
« Reply #5 on: January 07, 2010, 12:42:46 PM »
Hi,

Sure wish he won, the French are one of the most socialist countries in the world now.

No I did not know that, very interesting.

regards,
5412

The downside is that he financed his empire by looting and pillaging most of Europe to do it, but he never borrowed a dime (or a Franc)......

doc
If you want to worship an orange pile of garbage with a reckless disregard for everything, get on down to Arbys & try our loaded curly fries.

Offline DumbAss Tanker

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Re: This is an interesting read, and history behind a common expression
« Reply #6 on: January 07, 2010, 02:35:29 PM »
It does bear saying that most of France was too bankrupt to buy debt on any terms, the wars of the Republic were financed by confiscated Aristocrat wealth with the former owners killed or fled to boot, the Empire's wars financed with foreign loot and a rigid controlled trade system (The "Continental system"), and France did pay a terrible price in the blood of its populace for Napoleon, down to drafting 16-year-olds to feed the slaughter by the end. 

There's a lot more to quality of life than complex fiscal and monetary policy issues.
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That here, obedient to their law, we lie.

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Offline The Village Idiot

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Re: This is an interesting read, and history behind a common expression
« Reply #7 on: January 18, 2010, 12:33:07 AM »
The downside is that he financed his empire by looting and pillaging most of Europe to do it, but he never borrowed a dime (or a Franc)......

doc

he just stole it.

Now look up the origin (european) of the word Outlaw.