Thursday, August 27, 2009
No Free Lunch
Modern fiat currencies are not going to disappear, no matter how hard Obama and Bernanke try to destroy them. They are simply too good of a medium of exchange. The ease with which labor is divided over the whole globe and capital exchanges are transacted across thousands of miles, instantaneously, is a planetary first! It is a marvel of the modern computer age!
Even in collapse, man has shown his resilience in using these modern fiat mediums. Just look at Mexico. Still using the peso, albeit in a slightly different form. Mexico is proof that in most cases there is a riverbed somewhere down the waterfall. Zimbabwe is proof that this is not always the case.
The electronic form of fiat digits occupies no physical space whatsoever. Think about this. And even the paper form can explode in face value and continue holding only the same amount of space. So as a medium of exchange, it does not really matter the value of each individual digit. I can do a good day's work for you and you may pay me $100 or $1,000,000,000, depending on the value of each digit. The value of the digit doesn't matter. The currency still functions fine as a medium of exchange.
Then of course there are adjustments to be made. Like "lopping off zeros" and printing colorful new bills. In the virtual world of electrons these adjustments a are minor task for a computer programmer. You see, managing a fiat currency is easy. Heck, even Gideon Gono and Ben Bernanke can do it!
Here is the problem though, kids. Most mature investors retain their life savings fully invested within the financial industry, denominated in dollars, and will not get off these tracks even when they see the train coming. They will stay there because it is impossible for them to believe they occupy the wrong position! Who can blame them or call them fools? They have been trained their whole life to believe in saving for the future inside of a monetary system that serves no purpose other than as a medium of exchange.
Worse, they perceive that all of their assets are correctly valued by this system that does not care about the value of a digit. How can they possibly be correctly valued in a system that only functions properly as a medium of exchange, not a store of value? How can assets meant to be stores of value be correctly valued when denominated in a unit whose value DOESN'T EVEN MATTER in the context of its primary function? They can't. They shouldn't. They aren't. And soon this FACT will be known by everyone.
This fantasy illusion that the dollar can be a store of value is built upon a foundation of raw sewage, that all people in the world using the dollar in its PRIMARY FUNCTION will continue to act NORMALLY no matter what happens. That homeowners will continue to make dollar payments on loans that are twice the size of their house. That retirees will continue to buy and hold crappy investments. That toxic financial instruments will continue to yield interest and trade at par even when the underlying cash flow has been declared DOA. That holders of physical gold will continue to surrender their precious at the rate of one ounce per 950 US dollars. That oil producers will continue to ship oil to the US military at the rate of one barrel per 70 US dollars, even when those dollars smell like fresh ink. That a nation of 1.3 billion will continue to work their hands to the bone in exchange for US dollars that stink of wet ink. And that the entire planet will continue to honor the US leadership with the amazing privilege of being the only entity in the entire solar system that gets a free lunch.
You see, the truth of the matter is that there is no free lunch. Yet the US federal government is now funding its fantastical folly at the rate of TRILLIONS per year through the Federal Reserve's printing press, nicknamed POMO. If the dollar doesn't collapse in purchasing power, this could go on FO-EVAH!! Free lunches for everyone (in the United States)!!! We can all work for the government!! Be a G-man! A nation of G-men!! How cool would that be? Look, they make more DOLLARS too...
There is only one way this madness stops. It is not going to stop by Ben Bernanke telling Obama "no more!" It is not going to stop by Congress suddenly slashing its pork-laden budget to sustainable levels. It is not going to stop by the real economy suddenly rising to the occasion. Yet it WILL stop soon. This insanity is sucking the very air out of the global economy like a pyromaniac's fire that extinguishes itself in an airtight space once the air is gone.
It is a truth about inflation and hyperinflation that only the VERY FIRST entity to use the newly created money profits from the exercise while everyone else suffers. This is because newly created money draws in real economic goods and services to the printer at the same rate as they were offered in the open market before that new money was created. And the printer receives this SUBSTANTIAL PORTION of the real economy at precisely ZERO cost when that new money comes via Ben's mouse named POMO. This 'first spender' effect can be seen both in the BOOM TOWN that Washington DC has become in the middle of a damn depression, and in the LAVISH lifestyles lived by Gideon Gono, Robert Mugabe and all of Mugabe's cronies and friends.
If you can imagine the real economy, the gross national product of everyone's efforts in the whole country for one year, as a bloody red flow animated on a map of the United States, then imagine that at least 20% of this lifeblood of the US (all goods AND services) are flowing right into Washington DC! No wonder 3 out of 10 people in this country work for the government! No wonder DC is the only place in the country that is THRIVING right now. It is receiving 20%+ of EVERYONE'S efforts at ZERO real cost. Is that freaking amazing or what??!!
Is anyone getting the feeling that something just isn't right here? I sure am. And I'm not here to talk about karma or some kind of magic universal justice. I am here to talk about the invisible hand of the planetary market organism. It is this giant invisible hand that is moments away from cutting off the power.
There are some clever deflationists that will tell you that the dollar is going to rise in value giving Ben, Tim, Barack and the entire DC gang a lengthy free lunch, all because of the giant debt overhang in the economy that backs the US dollar. The thinking goes something like this. The world is full of debt. The dollar is backed this debt, and is therefore balanced by it. As long as the debt remains, it must be serviced with dollars which drives up the demand for dollars, and therefore the value of dollars. If the service of the debt starts to fail then the dollar will start to fall making the service of the debt easier (with cheaper dollars) and the service will then resume, raising the dollar back up. I call this the see-saw theory. I see what you're saying, now let me saw it in half.
You see the biggest debtor of all is the very printer of the currency all that debt is denominated in. And this debtor is now picking up ALL of the slack left behind by everyone else. Only his debt service will never fail, because he can print that service with the click of a mouse. And since he doesn't have to seek dollars on the open market, his debt has the OPPOSITE effect of all other debt. Instead of driving up demand for the dollar, it drives it down (and drives up supply at the same time)!
Normal debt = dollar demand up, dollar supply down.
US Fed Gov't debt = dollar demand down, dollar supply way the f up!
As the dollar starts to fall in value, this has no effect whatsoever on the ability of the world's biggest debtor's ability to service it, and therefore has no see-saw-leverage effect that raises the value of the dollar back up. Instead, it has the exact OPPOSITE effect... once again. Because now this biggest debtor must print even MORE dollars to suck in the same SUBSTANTIAL AMOUNT of the real economy at ZERO cost. It is a brutal cycle, and it has just begun! Notice that I said substantial AMOUNT this time, and last time I said substantial PORTION. That's because as this cycle proceeds, the AMOUNT of the real economy that the government sucks in at ZERO cost actually grows in proportion to the real economy that is shrinking. If the deflationists are right, then someday we WILL all be G-men!!
Additionally, there are some misinformed hyperinflationists that believe hyperinflation will be our savior. That it will alleviate all the debt and free up the housing market to rise once again. In response to this view, some deflationists have argued that hyperinflation or currency collapse will never come in time to save the debtors. Very quickly, I would like to dispel this malformed (from both sides) argument. Hyperinflation, by its very nature, will come well before all of the debts are cleared. It will be "the cleaner" called in by the invisible hand to mop up the massacre. But it will not deliver a free lunch to the many debtors who have no real savings, and certainly none in REAL money. They will find out that even though their debts are now payable in much smaller dollars, that even those smaller dollars are hard to obtain in necessary quantities. They will wish they had hoarded some miniscule savings in physical gold before the crash with which to settle their debts. As hyperinflation or currency collapse takes hold, they will find that debt settlement requirements race just slightly ahead of the ability to pay through normal economic means. You see, hyperinflation is really just a deflationary collapse party with Gideon Gono or Ben Bernanke spinning the tracks we all dance to.
"So what are you saying FOFOA? Just spit it out already!" Okay. Here is what I see coming. I see the US dollar, a medium of exchange, devalued by the external world sometime soon and its CHARADE as a store of value exposed and brought to conclusion. This is the only way I think things can play out now based on what I have seen over the past year. Furthermore, I believe there will be a flood of "dollars" as the dam breaks, spilling from the make-believe $600Trillion+ financial paper economy into the $60Trillion global REAL economy. And I believe a highly disproportionate amount of this flood will be absorbed by gold! I believe this may actually be a primary plan for some very large physical gold holders in some very high places. In fact, I would bet on it!
Furthermore, I believe that if you are not already positioned in the safety of real physical gold when this happens, you will not be able to get there until after the flood recedes. I believe that things could get ugly and life could get real hard if and when this all goes down. But I also believe that having some gold will make life easier on you, by quite a lot. Of course there are some other obvious preparations that everyone should make, like stocking up on food and water, the necessities of life. But it is very expensive and difficult to prepare in a survivalist kind of way for every possible scenario. Some can do it and that is a great thing. But for the rest of us, gold is a good substitute for the unknown. A substitute with tremendous upside potential at this particular time in history!
I have made a few 'survivalist' purchases myself, that go beyond metal and beyond the norm. I have a specific thought and use that goes with each one. In most cases they are items that could a) become very useful in a lifesaving way under certain scenarios, and b) become valuable for barter because they will be scarce. I do not recommend these items for everyone because we all have our own unique situation. But this list should at least give you some food for thought, and I'm sure some of you all can add more things in the comments. Anyway, here is my short 'beyond gold' list:
Guns, including large home protection and small concealable
A concealable bulletproof vest
Plastic water storage
Water purification tablets
A portable ceramic water filter
Freeze dried food
There are some other low cost, low probability, high impact items that I like. These include IOSAT tablets and surgical kits. They say it is easier to find a doctor than it is to find a doctor and an OR! Others, like my gasoline will definitely be used in one way or another. The generator is still in the box, so it could be a barter item or a necessity at some point. Who knows? But I doubt it will lose value like the dollar will.
So there you have it. No Free Lunch! For ANYONE! Do what you can to take care of your family. And if you think the government will carry you through this on its own Free Lunch program, guess again! The power is about to be extinguished by a giant hand.
PS. Here are some online vendors that I have used successfully. These are not recommendations nor are they paid advertisements. They are simply where I bought my sh-t.