Tuesday, June 29, 2010

Mad World

With a fresh round of "balance sheet money" petrifaction and conversion into "base money" through QE seemingly on the horizon, it may be time to take a fresh look at the most important and frightening situation that the Western public simply does not get. That the Fed and the ECB have been postponing (and ONLY postponing) the total collapse of our debt-driven economy and the entire international monetary and financial system (the $IMFS) that, without their actions, would have already collapsed.

This postponement has been effected only by piling on more of the same debt, on top of an already-too-big mountain of debt. Sterilization schmerilization. If the Fed and the ECB had not intervened on such a massive scale, everybody in the entire Western world would have already lost their illusory wealth two years ago.

How can the Western public possibly imagine what is coming? Some imagined something back in September and October, 2008, but then it didn't come. Now it is much worse, yet no one sees it coming this time. Western paper wealth is a complete mirage, more now than ever, yet they sit tight after receiving the gift of two more years to understand and prepare.

FOA wrote back in April of 2001, "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

"Buying it outright for cash" is exactly what QE is. "Dumping it on your front lawn" is what the Fed and the ECB are doing right now. Not literally, of course, but they are dumping non-contractible, petrified base money on top of your paper wealth, diluting it in ways you will only see once, once it is too late to do anything about it, that is.

Bernanke wrote in 2002, "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost" in a speech entitled "Deflation: Making Sure It Doesn’t Happen Here." Today he is putting his theories to the real-world test, doing exactly what he said he would do back in 2002.

Optimistic deflationists like Ambrose Evans-Pritchard and Andrew Roberts at RBS see this as a good thing. Pritchard writes, "The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes." And Roberts says this is the Fed tack "which I personally prefer". [1]

More realistic (in my opinion) deflationists see the necessity of credit contraction, economic contraction and defaults to cleanse the system. But what all deflationists seem to miss is the fragility of the US dollar as the linchpin holding the entire global financial system together. And what they seem to either not realize or completely ignore, or perhaps avoid, is that Bernanke is testing the strength of this rusty old pin with every move he makes.

Gargantuan efforts have been made to extend the mirage and pretend it is real. It is not. And although this façade of paper wealth is accepted at face value by the vast majority, the rot suffered underneath through the process of extension is nearly complete.

Most readers do not understand the serious nature of what I write. They still react with a skeptical mind to my story, and to the story presented by ANOTHER and FOA, as if they were some kind of a speculative exercise for investors.

All the so-called expert economists won't dare to present today's historically dramatic situation in its correct, very alarming context. And those who do understand what is actually happening should be utterly - speechless -. People, including the experts, just don't want to believe what they are seeing. And they refuse to analyze the true implications of this dire situation.
"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again." [2]

Never mind that money velocity can reverse in one day when panic is involved. [3] The above is, in a nutshell, the $IMFS. "The only default option left is to crank up the printing presses again." Read that sentence a few times more just to be sure you get it.

This is exactly how the $IMFS reacts to each and every mole that pops its head up. They react so quickly that they forget the last mole never actually went away. It disappeared from view, therefore we carry on and pretend it is gone. This game of printing press Whack-a-Mole gives off the paradoxical feeling of safety, as if nothing ever crashes.

Can you see yet how ridiculous this whole paradigmatic façade is?

How about all this "gold bubble" talk? I will remind you that there were very few people that even knew what a bubble was back in 1999 and 2000 when the US stock market was hitting its ALL TIME HIGH and gold was at its ALL TIME LOW.

Then along came ANOTHER and FOA with over 1,000 delicious, free pages explaining exactly why physical gold taken into your own possession was the buy of the century. The general public completely missed this opportunity (so far) and now they provide the "bubble talk" necessary to cast doubt on the truth of the situation. Yet these same people are still trapped in their loss-making Ponzi bubble paper, with nary a glance at gold's outstanding performance.

And remember, to date this is only paper gold that is performing. Paper with only a fragile and fractional parity attachment to the real thing. Physical gold HAS NOT EVEN HAD ITS DAY IN THE SUN YET.

But even if you are blind to the real story of physical gold, and are simply following the technicals of the paper-gold bull-run, the signs are everywhere and amazing. Just have a look at Jesse and his fantastic charts. (And I am not saying Jesse is blind to the physical gold story. He most certainly is not.)
So we seem to have almost ten more years of upside ahead of us, and could be considered to be at the halfway point.

Gold has been gaining, on average about 70% every three years. So what is the end point?

Just for grins, I would expect gold to hit $6,300 near the end of this steady bull run, but the bull market will end in a parabolic intra-month spike towards $10,000. This is likely to occur around 2018-2020.

Long term forecasts are fun, but there are so many exogenous variables that it is very hard to say what will happen even a few years out. Let's see how this breakout goes, and where we are at then end of this year first. The charts will inform us of any major trend changes. Charts provide perspective more than prediction.

Exogenous variables indeed! The above is, of course, the "paper gold story." It is the best case scenario for the powers that be and the paper-bugs. It is what the technicals indicate to a "gold bull" should the whole rickety paper gold structure hold. But what it doesn't take into account is the "gap up" when the physical gold market severs its parity relationship with processed, bleached pulp promises.

If Jesse's technical signs were aimed at paper-Ponzi investments, people would be lining up at the Ponzi window. But in gold, alas, it must be a bubble.

So what is necessarily implied by the failure of paper promises to deliver physical gold during a financial panic? And from the other side of the coin, what is necessarily implied by an overnight 50X revaluation in only one, single, physical asset? Please think about these questions.

The Fed, in all its wisdom, is now telling us "Economics is Hard." And the BIS says, "powerful measures have strong side effects, and their dangers are beginning to become apparent."

The BIS goes on to say, "The financial disruptions in the first half of 2010 have brought the fragility of the industrial world’s financial system into stark relief: a shock of virtually any size risks a replay of the events we saw in late 2008..."

"...Unlike then, however, we [Central Banks] have hardly any room for manoeuvre. Policy rates are already at zero and central bank balance sheets are bloated." [4]

Here is the situation: The system would have collapsed, paper wealth would have burned, your savings, pensions and paper promises would have disappeared, and physical gold would have gone to the moon two years ago if the Central Banks had not taken extraordinary measures. But these actions only made the system more fragile and raised the risks to new heights. And today the Central Banks have "hardly any room for manoeuver," so says the Central Bank of Central Banks.

Even our own Fed is saying, "Economics is hard." Sheesh!

Does this sound scary? A little creepy perhaps? It should. If you really take the time to understand what is happening, you should be utterly - speechless -.

But on the flipside, holding physical gold in your own possession will convey to you a sense of security rather than that sense of fear and loathing brought on by the system. Holding gold brings calm and peace of mind. Holding gold brings the power of money creation back to the people. The old saying really is true – he who holds the gold makes the rules. So please, in this time of great uncertainty, hold gold, and make your own rules.


[1] RBS tells clients to prepare for 'monster' money-printing by the Federal Reserve
[2] Ben Bernanke needs fresh monetary blitz as US recovery falters
[3] What Obama Does Not Know
[4] BIS 80th Annual Report


erik said...

Sure glad to read more FOFOA in an otherwise Mad world.

costata said...


Good to see you posting again after a successful campaign.

Harvey Organ's blog has good coverage of the scramble for physical PMs.

Game on, methinks.

GG said...

"...rickety paper gold structure..."

Love it! Rickety, tottering, dying...I think these words are applicable to the entire global economy today.

GG said...

All I can say is...


Nic T.R.G. Salad said...

Another excellent piece. And I can't think of a more fitting song to summarize this global disaster than "Mad World".... except for the original version performed by Tears For Fears ;-)


Michael H said...

Off topic, but very interesting:

Jesse posted a link to a paper by Jim Rickards -- "Economics and Financial Attacks".

In the section titled "Collapse of the US Economy and Collapse of the US Dollar as a Reserve Currency," Rickards outlines the possibility of a new gold-backed currency replacing the dollar. As an example, he speculates that Russia could set up such a currency very quickly, and a revaluation of gold up to the nosebleed levels of $4000 / oz (sarc) would devastate the dollar financial system. In his example, the dollar-gold exchange rate would change but the gold-oil exchange rate would stay constant.

He says that the US could prevent such an outcome by preempting it and issuing its own gold-back dollar. "There's always enough gold, it's just a matter of price." To critics who would say that the gold-back system failed in the 1930's, he replies that the problem then was that gold was not correctly valued. The system he describes sounds very much like freegold. Has he been reading A / FOA / FOFOA?

Rickards also describes a 'Death by a thousand cuts' interest rate attack by China, whereby China progressively shortens the maturity of its Treasury portfolio. This would give China flexibility to reposition its reserves out of Dollars (and into ... ?) as their Treasuries mature, without selling outright and without taking capital losses on their Dollar holdings.

As an aside, if the US is thinking about its own vulnerability to financial attack, I have to wonder if US-national security interests have been behind the PIIGS-Euro problems. The resulting dollar bounce and flight to 'safety' of treasuries has been very convenient for the US power elite.

Jesse's post:

Rickards' paper:

erik said...

If you live near the GOM it ain't good.....


mortymer said...

If you know what to look for and you have the right angle, signs are now everywhere...
If you have never had doubts about present fundamentals then you are like many people around who are confused and are wandering what is going on. Even mainstream economic news. Mainstream news... (!) ...and gold still sits idle like nothing happens?
The window of opportunity still wide open!
I am not sure if to be more amazed about the situation we are in or about gold not moving yet.

S said...


The paper ponzo is the only game in town until something changes and that change will not be born by the Fed/US/Western Banks. Watching the Fed or some chart is next to useless as it indicates very little. Gold flow information is worth its weight. And those flows show the clear dicotomy that exists between the core and the periphery (not to mention the corresponidng inflation problem). Who will strike first?

Airedale said...

FOFA is a Bad Blogger,

Interesting story from The James Joyce Table of LeMetropole Cafe:

"Chris Powell sent out a dispatch today containing a very good article by Ambrose Evans-Pritchard, regarding comments by Fed Economist, Kartik Athreya.
Dr. Athreya made the effort to condemn economic bloggers as chronically stupid and a threat to public order, and had the gumption to infer that economics is far too complex for mere mortals to understand."
Bad Bloggers!

mortymer said...

Offtopic but interesting...
wiki - History of the Soviet Union (1985–1991)

"The Soviet Union's dissolution into independent nations began early in 1985. After years of Soviet military buildup at the expense of domestic development, economic growth was at a standstill. Failed attempts at reform, a stagnant economy, and war in Afghanistan led to a general feeling of discontent,"
... :o)

Angel Eyes said...

The move back to reality from fantasyland is gonna be tough for those whose fantasy has been like a dream.

Of course, those (billions) of us who never left the real world, to enter into that dream of consumerism and debt slavery, are going to be pleasantly surprised.

Exorbitant privilege has about run its course.

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