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"Paper Money Don't Hold"
Monday, June 19, 2006, 03:00 PM

I play the game of a rich boy, I buy everything I can. My bankroll is a foot thick, I'm a wealthy man.
A million dollar reserve note is right there in my hand. And I can't stand to think ... it's all that I've got.
Take away all my silver, take away all my gold.
And hand me a stack of paper – Paper money don't hold. Paper money don't hold.

Montrose, “Paper Money”

About twenty years ago, Billy Crystal (the comic actor, not the notorious spawn of Trotskyite loins)
recalled a conversation in which a daughter asked him: “Daddy, was Paul McCartney in another band
before `Wings'?”

In a similar vein, I can imagine some aficianados of classic rock asking: “Hey, was Sammy Hagar in
another band before Van Halen?”

Indeed he was – but back in the early 1970s, he was known as “Sam” Hagar, frontman and chief lyricist for
legendary guitarist Ronnie Montrose's eponymous band.

As the excerpt above from the title track of the band's sophomore record indicates, the “Red Rocker” might
very well be a closeted disciple of Ludwig von Mises.

National Review recently published its list of the top fifty conservative rock songs, and I'm not surprised to
report that Montrose's anti-Federal Reserve protest song didn't make the cut. This is because NR's chief
economics commentator is inflation groupie Larry Kudlow, whose idea of a rockin' good tune is “I'm
Forever Blowing Bubbles.”

Well, you act as though you don't remember the way it all used to be
Now one man, he locks up the money, another man holds the key.
My car cost me fifteen grand, some say I got a deal.
Melt it down – I've got a thousand pounds of junk, and ten dollars worth of steel.

Hagar wrote those lines just as the OPEC oil embargo began driving people out of their Detroit-built land
yachts and into motorized rickshaws built in Japan. Something similar is happening now as the price of
Bush's idiotic Iraq war is being passed along at the pump. But that's not the only place price inflation is
being felt.

“Consumer inflation jumped again in May as higher prices for gasoline, housing, and other items push up
costs at a faster pace than workers; wages,” reported USA Today on June 15, citing Labor Department
statistics. “In addition to gasoline, prices rose for clothing, medical care, used cars, food, housing, and
education.... Wages have not kept up with price gains. Adjusted for inflation, average weekly earnings for
hourly workers fell 0.7% in May, the biggest decline since September.”

This helps explain why millions of American households continue to borrow money even after sixteen

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consecutive interest rate increases from the Fed.

“Growing U.S. household debt has been the single biggest driver of global growth in the last five years,”
points out Los Angeles Times columnist Niall Ferguson. “When Americans do finally stop borrowing and
start saving, the effects could be bigger than the [central bankers] anticipate.”

Not one to leave any morsel of misery off the menu, Ferguson points out that “29% of borrowers who took
out mortgages in the U.S. last year have no equity in their homes or owe more than their house is worth.”

Thus it's hardly surprising that “foreclosures, defaults and motivated/desperate sellers are responsible for a
sizable increase n the number of homes on the market,” as investment analyst Joel Bowman reports. The
Commerce Department informs us that “there was a four-month supply of unsold homes available in
April,” he continues. “Also for sale, still, are 128,000 brand new homes – the highest inventory in history....
Almost 40% of single family homes ... are now categorized as 'extremely overvalued' according to a new
joint report by financial services firm National City Corp. and the research firm Global Insight.”

A concerted effort is underway to rescue the imperial fiat currency from its richly deserved demise, but this
cannot last. Ferguson, an arch-imperialist, desperately wants the US to embrace its imperial role, but even
he has doubts that the pretense can endure much longer:

“After all, an empire can continue to collect its tribute only if the pax it provides is real and has legitimacy.
Unfortunately, the American project of transforming and stabilizing the Greater Middle East has run into
increasingly obvious trouble.... Indeed, mounting political risk in the region has been one of the drivers of
higher oil prices this year, another source of renewed volatility.”

“One way to understand the problem is to adopt a much longer-run perspective than investors and traders
generally take,” Ferguson continues. “Go back to the first age of globalization, in the years from around
1880 to 1914. Then, too, there were pronounced declines in financial volatility in stock and bond markets.
Interest rates were low and stayed low despite rising commodity prices. Those were good times in the City
[of London]. Those good times ended with a bang when Europe went to war in 1914. Overnight, liquidity
dried up, forcing the major stock markets quite literally to close their doors. Volatility rocketed. It turned
out that investors had mistaken liquidity for security. They had failed to price in the real possibility of a
military challenge to Britain's imperial hegemony.”

For all of Washington's vaunted military might, the only way it can score unambiguous victories is to
knock down trivial figures like Zarqawi, who was propped up like the titular stiff from Weekend at

All that stands behind the paper dollar is the credibility of the federal government – at least, its ability to
impose its will on those who resist its decrees. With its supply of trivial threats running low, Washington
may soon find that its reputation as the world's hyperpower is as inflated as the dollars it inflicts on the

As Montrose sagely advised, “Paper money don't hold” -- and neither will the illusory prosperity we've
experienced as the price of empire continues to make itself felt.

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