Mexico’s central bank contradicts itself

Monday, 26 January 2009

Hugo Salinas Price

Banco de México, Mexico´s Central Bank, has expressed the opinion that the monetization of the “Libertad” silver ounce would be inflationary and on that account, it has opposed the monetization of the silver ounce.

The Mexican Civic Association Pro Silver has always maintained that the monetization of the ounce would by no means be inflationary, because almost the entire amount of ounces which might be minted would immediately be saved for the long term. The “velocity of circulation” of the coin would be almost zero, because only in cases of extreme urgency would savers be willing to use their ounces in any payments.

Now the Banco de México is following the bad and useless example of Central Banks around the world, and has taken up the objective of introducing monetary inflation to “revive” and “stimulate” economic activity, which is contracting, much to the dismay of the Federal Government and the Banco de México.

If the Banco de México continues to insist that the monetization of the “Libertad” silver ounce would be inflationary, then why does it continue to object to the monetization of the silver ounce? Monetary inflation is what it now pursues; for that reason, it lowered the rate of interest .5%, from 8.25% to 7.75%, on January 16.

It is clear that the Banco de México is clinging to the false paradigm that money must necessarily be fiat money. Its opposition to the monetization of the silver ounce is dogmatic, ideological and lacking in any logical support.

* * *

The World Depression that has begun is a consequence of decades of creation of gigantic quantities of debt (which is referred to as “credit expansion”, because “credit” sounds better than “debt” – although these are simply two faces of the same thing.)

World debt is now unsustainable. (See my article written four years ago, June 1, 2005, ‘The international monetary process', regarding the explosion of credit and its inevitable implosion, when it should reach unsustainability. Unsustainable because the payment of interest to maintain world debt current and live exceeds the ability to pay in the whole world.)

There is no other way out of this swamp of excessive debt – and we state this categorically – other than by the cancellation of enormous amounts of debt, as uncollectable.

This will require massive bankruptcies; this is the indispensable economic medicine to restore economic health to the world. If we want to get well soon and go ahead with healthy economic activity, productive of wealth, this is what is required.

Such drastic action may perhaps be intolerable, politically. But the slower the process of wiping out debt, the longer it will take to get well.

Besides this medicine, it would be possible to cancel debt in a parallel action which might be more palatable politically: the depreciation of the currencies of the world through inflation of the money supply. This would make it possible to pay interest on the marginally bad debt and its elimination through liquidation, because the currency used would be devalued monetary units.

The combination of bankruptcies through default on unpayable debts, plus monetary inflation, might be the least painful road to the recuperation of economic health.

This process would take longer and the pain would last longer, but perhaps it would be easier to withstand, politically. The more we want to avoid pain, the longer it will take to achieve “normalcy” – the term used in the 30's. We would be in a crisis for many years.

There is no other way out: the cancellation of massive uncollectable debt is inevitable.

The gigantic creation of credit/debt during the past decades, which was enabled by fiat money around the world, allowed the world to live at a level which is now unsustainable. Huge investments were made which had no relation to economic reality; that is to say, those were malinvestments which must now be recognized as such. This is the reality which cannot be hidden; it is the elephant in the living room. The great Central Bank financiers of the world still do not wish to recognize this reality. They are beating their brains out trying to find an economic medicine which may restore economic health, but without causing pain. There is no such medicine.

The economic house has burnt down and only the ashes are left. We must recognize the facts and start rebuilding upon sound foundations. The international currency for reconstruction must be, necessarily, gold.

We arrived at paper money, fictitious money, through a series of pragmatic measures which began with the World War of 1914. These measures were based on adopting convenient arrangements from time to time as economic events unfolded. No thought was given to the principles that govern the creation of true prosperity.

The world strayed far from the fundamental economic principle that currency must necessarily be linked to gold. This experiment determined that we must now suffer the consequences.

* * *

Once the liquidation of the uncollectable credit/unpayable debt is accomplished, it will be necessary to stimulate as much as possible, but not in the “keynesian” sense of further inflation; the stimulation will have to be a stimulation of savings.

During the coming forced liquidation of credit/debt, the monetized silver ounce will protect those who save this coin: all the coins which can be minted will go directly to national savings and will protect Mexican families.

Once the phase of liquidation is over, the return to a peso linked to gold will constitute a great incentive to the creation of mass savings; gold based currency will act, together with silver for popular use, to moderate consumption and stimulate savings, the only – only – foundationn for a sustainable prosperity for Mexico.

It was the Mexican crisis of 94-95 that moved me to think about silver as money for Mexico , because I saw that what we had been missing was long term savings to finance the development of our country. This I expressed in my book of 1995, “La Plata – el Camino para México”.

Two and two are four; the world is not flat, it is round. The fact is that prosperity cannot be produced through fictions such as “fiat” money, paper or digital. It is produced by work based upon the reality of gold and silver money.

The longer the great financiers of the world postpone the recognition of reality, the longer it will the world take to emerge from the terrible swamp of Economic Depression.