Here is a plea
From my heart to you
Nobody knows me
As well as you do
You know how hard it is for me
To shake the disease
That takes a hold of my wealth
In situations like these
On this blog I write mostly about two things: the dollar and gold. The disease and the cure. On the dollar side, I usually focus on the inflation-deflation debate and my view that hyperinflation is both imminent and inevitable. On the gold side I focus mostly on freegold, the impending emergence of a physical-only gold market, and also on the tremendous benefit of holding physical gold through this transition.
These two subjects relate fractally to everyone. What is best for the individual producer/saver. What is best for the various collective producer/saver groups. And what is best for the entire planet. This is not a patriotic issue. It is common sense!
Today we have a disease that has crippled our global economy. All existing real-world capital is still out there, but for some reason it won't circulate. Forcing paper capital through our planetary veins is not a solution any more than transfusing water to replace the blood stream would keep a dying man alive. We need real blood to survive. This is a natural law.
Our disease is a parasite which has spread throughout the entire circulatory system, collecting and clotting blood in only non-vital, non-productive organs like the appendix and Goldman Sachs. To cure this disease we will have to remove the parasite, the diseased organs, and transfuse new, healthy blood. This disease is in violation of natural laws, and its cure will be a natural solution.
"Early in life there is one thing that people learn about natural laws: laws of nature do their own enforcing, and when not obeyed, they do their own punishing. The mere attempt to disobey a natural law, intended or not, exposes a person to whatever punishment that law imposes."
-Richard W. Wetherill (1906-1989) Quote found in an advertisement in Scientific American, Sept. 2009, p. 103
Let us imagine this long, stringy parasite as a Matrix that is covering the entire planet. Yes, like the movie.
Today, all of our perceptions exist inside this Matrix, the "transactional currency matrix". A transactional currency is any medium of exchange. It is any currency used to transact the exchange of real goods needed for life, liberty and the pursuit of happiness. The exchange, or flow, of these real goods is the life blood of our global economy. The flow of purely symbolic digital currency units used as an arbitrary unit of account at that fleeting moment of exchange, is not life blood. But according to Ben Bernanke, it is.
Ben Bernanke has announced that he conquered the recession by creating enough new symbolic digital currency units to raise the nominal GDP. Wow! With his mouse and keyboard, Ben has raised the sea level of this arbitrary unit of account by which we measure the GDP. So now the recession is over, huh?
Well, a recession is two or more quarters of contracting GDP. So, I guess if Ben printed the GOV and PPT enough dough to stop that GDP mess, then it must be over. Hooray!
While we're on the subject, let's take a quick look at a couple more definitions. A "depression" is a contraction of real GDP growth of 10%. And a "Great Depression" is a contraction of real GDP growth of 25%. But what happens if they just keep on printing money, so that in the accountants' fancy books, nothing contracts ever again? All is well. Right?
In his ongoing series of interviews focused on the inflation-deflation debate, Jim Puplava's latest offering is a "face to face debate" between Daniel Amerman (who's writings heavily influenced my popular post, All Paper is STILL a short position on gold) and Mike Shedlock (Mish). This program is good and worth your time:
The Great Deflation/Inflation Debate with Daniel R. Amerman & Michael 'Mish' Shedlock
WindowsMedia MP3 RealPlayer WinAmp
One thing that Mish has difficulty understanding is the sheer frivolity of a completely unbacked, purely symbolic currency. Sure, it has lasted for 38 years now. And sure, it supports a matrix of great weight that has its tentacles in every corner of the world. But neither of these weighty arguments changes the core nature of the dollar to anything more than a purely symbolic idea or thought. Mish just doesn't get this point. To him, the weight of the world scrambling for dollars as global credit and debt collapses makes the dollar as good as gold.
And here is something I think they both missed in this debate. See my diagram above. They both seem to agree that the Fed is the fulcrum between the global dollar matrix and the value of the dollar. Daniel Amerman argues that the Fed can crush the dollar's value at will. And Mish argues that the sheer weight of the global matrix prevents the Fed from having any control over the value of a dollar.
The way I see it, the Fed is not the fulcrum. As I have said many times, first in The Judgement of Value, the Fed makes your money, but it cannot tell you what it is worth. That judgement of value is reserved for the recipient of those dollars. The Fed has no control over the value. In fact, I believe the weight of the Fed itself belongs on the side that puts constant downward pressure on the dollar, 24/7. And everything the Fed does adds weight to that side. Here is how I see the fulcrum...
The dollar is "out on a limb" in the truest sense. And its fate lies mostly in external factors. Sure, the US could decide to devalue the dollar. But all it can really do is create more of them. The rest of the world must decide if that is enough to devalue. In this sense, Mish is right. The Fed has less control than it thinks. But Dan Amerman is also right. The dollar is nothing but a concept, a thought, an idea, a purely symbolic unit of account, and if the world decides it is not worth its weight, it will quickly hit the floor.
This part is important, because most people don't get it. The US dollar IS our debt to each other and to the world. The US dollar is backed by all the goods and services WITHIN the United States. Legal tender laws say it is so. The dollar currently buys many things outside of the United States, but there is no law that says it always will. The only law protecting dollar holders all over the world says that their dollars can be exchanged INSIDE the US. So when Ben Bernanke issued $500 billion in swaps to 14 different foreign central banks in 2008, each one of those dollars became a new claim against us, the US. It is here in the US that those dollars are legal tender. No where else. No where else in the world is anyone required by law to accept those dollars for real goods and services.
So when the world was in dire need of $500 billion, it should have come to our markets and bid up the value of our dollar at the window! Just like Ben said it would! But instead, Ben DOUBLED the number of outstanding, external claims on goods and services within the United States. Did our economy double to cover (back) these new claim checks with real goods and services? Nope, the opposite happened. Our economy shrunk. And that is the way things are going, have been going, and will keep going until the dollar hits the floor.
Of course Mish would argue that these trillions being created by Ben are offset by the credit contraction. But there is a qualitative difference between new dollars created through credit, and those claims created by Ben Bernanke. When new dollars are created through the credit system, they are backed by expanding asset values and by the debtor's promise to work them off. When Ben creates dollars to swap with Europe they are backed only by our countries' contracting economy. So in my view, what Mish sees as a mitigating or balancing factor, I see as an exacerbating one.
Mish is right. It boils down to definitions. And Dan Amerman is right too. The focus must be on what the individual investor can do to protect his wealth. What they avoided (seemingly at all costs) was specific questions and answers. Is it best to hold dollars? Or is there something better? Mish would tell you to hold dollars. Dan Amerman will tell you there is something better. I am here to tell you that even though they wouldn't say it, the answer is so very simple, physical gold.
Read my post All Paper is STILL a Short Position on Gold to learn why it is so simple. You don't need a fancy derivative specially positioned to make money in inflation. Not this time, anyway.
The world is now aligned for the emergence of Freegold. There is almost nothing left standing in the way anymore. The time has arrived that the world will shake the disease that drains real wealth from every corner of the globe in a futile, desperate effort to preserve a failing system of oligarchical centralized banking.
As we wait for the next shoe to drop, be it an unexpected collapse of the banking system, an organized bank holiday, an over-expected collapse of the stock market, an overdue collapse of the bond market, a collapse of the paper gold market, a collapse of the currency exchange markets, a planned devaluation, or something else entirely, we must use this time given us to prepare for the worst. What comes at us is the extreme end of the high impact, low frequency end of the Martenson spectrum. It is an event of the rarest possible nature, certainly once in a lifetime, probably once in a century, and perhaps even a one of a kind.
And as for impact, it will be complete. Entire fortunes accumulated over centuries will vanish overnight. And new fortunes will be created in a sweeping transfer of stored wealth from those holding paper to those holding physical gold. This will be a natural event, even though it does have a few "giant" advocates. A natural response to the decades-long violation of natural economic laws. As the global economic organism, the collective mind of the planet comes to the epiphany that paper debt pyramids aren't worth the paper they are written on, this will happen.
And because it is such a complete impact and absolutely the rarest of events, you cannot possibly prepare too early or too much. Mish says that you are a fool to play the inflation trade until it comes time for the government and the Fed to devalue the dollar. He says that you need not worry about the inflationary impact on your savings until all the consumer debt is cleared from the system. This is possibly the worst advice ever. Would you let your children play in a forest because the forest fire still looks like it is a couple miles away? Would you play football at the edge of the Grand Canyon? Would you take your kids swimming at the edge of a giant waterfall?
As Daniel Amerman says, the United States has no choice now but to keep its dollar-denominated promises and obligations with the printing press. Perform in form, default in substance! But if the external world does not devalue the dollar, the US will be able to perform in form AND substance, through only the printing press, while the rest of the world ships us the goods and services we require to maintain our high standard of living. This is the outcome Mish describes! Sure, he'll say it can't go on forever. But how long? I say no longer. It is done. D-U-N done! But the deflationists say it can continue at least 4 or 5 more years. Most of them believe it will be at least a decade before we see hyperinflation or a total collapse of the dollar.
"Perform in form, default in substance" has already begun. It is underway now. Bernanke is trying to hide it, but doing a poor job. It won't last long. Perhaps weeks. "Perform in form, default in substance". This is the final, terminal stage of the disease. Our creditors know they are already being screwed with every Fed purchase. But as long as they continue to judge the dollar valuable, the US default will remain focused outward on the world, spewing massive losses on everyone but the United States itself. But once the dollar is judged valueless, in that instant, the focus will reverse and nature will impose her justice.
It is now that the world is going to shake the disease. And once it does, we will finally have a tradable wealth asset, existing along side and providing balance to our transactional currency. No more will common working men and women be relegated to saving only a transactional currency while the truly rich save real wealth. "Finally, we will all have a wealth reserve that places our footing in life on equal ground with the giants around us. Gold! Understanding the events that got us here and how they will unfold before us is what the GoldTrail is all about."
"Hear me now, what the wealthy and powerful know: real value does not have to always be stated or converted throughout time. It need only be repriced once during the experience of life, that will be much more than enough!"
Finally, here are three concepts to keep in mind as you wade through the barrage of conflicting information day in and day out.
1. Paradigm shifts happen very fast with a distinct element of surprise. As Richard Maybury says, sentiment can turn on a dime. And when it does, that which seems solid can crumble in an instant. For a scale example please see Bear Stearns and Lehman Brothers.
2. Natural paradigm shifts are preceded by a "head fake". In the moments before a tsunami, the water recedes. In the moments before hyperinflation, you will be faked out by pseudo-deflation or rigged stability. For an example please see Argentina and Zimbabwe...
3. Natural paradigm shift transitions, by design, surprise and financially destroy the vast majority while only the smallest minority gains greatly from them. Even some of the staunchest honest money advocates may find that things won't play out as they had expected. Can you imagine the crushing disappointment? In one of Another's very last published messages sent to his American friend FOA, he said this...
"Truly, this failure of current gold will be reflected as anguish in these western goldbugs, both bankers and investors... Your work, good man, has been as trying to reconcile the religions of this world. Telling both they are just, while only one can be right in the end. So it is in this day of gold."
Another's message was to take physical gold into your physical possession. This, he said, will explode in real value as paper wealth burns in the great fire that is coming.