Tuesday, March 3, 2009

Bankrupt Economics

Self Destructive Behavior

Have you ever known someone in serious financial trouble? Someone who has dug themselves into such a giant hole of debt, and is now facing income adversity, that they are a likely candidate for bankruptcy? Have you noticed that they always seem to go on a spending spree right before bankruptcy? It's like a last hurrah. They will go out to expensive dinners, buy a new TV, buy some new clothes, take a vacation, and generally top off their already maxed-out credit cards.

This is a psychological implosion. They know they should be cutting up credit cards, saving whatever money they can, and stop spending on anything but necessities. But the overwhelming feeling of looming disaster makes those positive steps seem like merely a drop in the bucket. So instead they go hog-wild in the opposite direction. The thinking is, "If I can just keep spending like there's no tomorrow, then I must not be completely broke". The problem is that there is no tomorrow, financially speaking, for these people. They are accelerating toward their own financial death.

Desperate people act desperately and with reckless abandon. This desperation and reckless abandonment of responsibility is never directed towards fixing things. On the contrary it is intentionally ignoring the problems. Which of course only speeds up the process and makes it more painful.

This is our Congress and our Treasury that I speak of.

Debt Denominator

What most people don't understand is that it is the denominator of this debt that is at risk. This debt is denominated in dollars. The dollar only still has value because of the international confidence in the US Government to be responsible, which allows things like oil and gold to be priced (denominated) in US dollars all over the world. The dollar only has value through its usage in the global marketplace. This confidence is ending right now. The real value of a paper dollar without this international backing is zero. That is where it is headed. What is $10 trillion times zero? It is zero.

When the dollar finally dives in value it will be very fast and will catch everyone off guard. It will wipe out state's debt, our national debt, and all other debt denominated in US dollars. It will also wipe out anyone's savings which are in dollars. And it will also wipe out paper investments denominated in dollars, like mutual funds, pension funds, stocks, bonds, annuities, insurance policies, Social Security promises, etc...

The dollar system is no longer mathematically viable. Dollar numbers can no longer be reconciled (like you reconcile your own checkbook). "Trillion is the new Billion". They (Washington) are completely out of control. Pension promises are lurking like a nuclear time bomb that will ignite widespread civil unrest. It is only a matter of time. All the numbers coming out of Washington these days are so unbelievable because they are complete fiction. You cannot create new value by printing paper dollars. You destroy value by doing that. Only production from private enterprise creates and adds value to a country. Washington is right now destroying the capitalist engine that made this a great country.

This is why it is important for anyone with savings to buy gold. And more specifically, physical gold in your possession. When the world finally dumps the dollar (most likely within less than a year), it will probably be replaced by something that is backed by gold. So by buying gold, you at least preserve the purchasing power of your savings. And more likely, you may find your savings multiplied many times over because of this transition. Other parts of the world, like the Middle East, Russia, China, Germany, and many others, are already planning a new system of trade without the US dollar.

Jim Willie has been tracking this developing situation for a while now. Here's his latest.

A New Currency

In this video, Glenn Beck speaks with Ron Paul about the G7 working on a new currency system since the US dollar-based reserve system has apparently failed.

This is pretty important stuff for anyone holding dollars. Do you think they will do anything to protect the value of the dollar or the value of people's savings if and when they switch? No. That's the whole point of switching. It's like a Biblical Jubilee for dollar denominated debt, and the collateral victims are retiree's with savings.

What they don't talk about openly in the media is that there is actually a battle raging behind the scenes about what the new system will be based on. The UK, France, Italy, and most of Europe want a new global fiat system (New World Order) where they get the privilege of printing the new paper reserve currency. The PRODUCING countries, on the other hand, want a currency that is backed by a basket of commodities like oil and gold. Rumor is that the "BRIC" (Brazil, Russia, India, China plus the Middle east) countries already have this new global currency ready to roll out in January 2010. If they do this, and they price their oil, gold, and everything else they produce in this new currency, it doesn't matter what Europe does. All that matters is what currency oil is priced in. That becomes the world reserve currency through usage demand.

What it all boils down to is the final settlement of trade imbalances. Right now, the producing countries export more goods than they receive. And the imbalance is settled with printed paper representing future debt. They don't want that anymore. That's where gold comes into play. Gold is a final settlement that represents no one's debt. Gold cannot be defaulted on. Once you hold it, you have been "paid in full".

Funny Muney

Whenever government spends money "to move a mountain", it is sucking in real value from the real economy in one way or another. When we borrow the money from China, we are sucking in the real value that China created and stored from their trade surplus. And when we print new money, we are drawing in the real value in the form of the inflation tax. Any activity that prompts men to work and materials to be used up is drawing that capital from somewhere else in the real economy through the trickery of our monetary system.

Think about a home poker game, where the guests buy in with real money and receive plastic poker chips with which to play. Now imagine that half way through the game the host, who is also playing, reloads his own chip stack from the box of plastic chips. He owns the chips, so he doesn't add any more real money to the till. What he has done is to dilute the value of everyone else's poker chips at the table. Sooner or later the other players will figure this out and leave the game.

For those of you who don't gamble, imagine a game of Monopoly where the host feels it is his right to add more Monopoly money to his tray as he buys up the boardwalk and everything else. How long can this last? How long will he have friends to play with?

As I watch the stock market and the gold market make moves that go against all logic (especially once New York wakes up), it is becoming more and more clear that our government feels it is their job and their right to spend hundreds of millions of dollars on any given day in order to delay the inevitable for just one more day. This is the absolute height of arrogance. The hubris is breathtaking. Where does this money go? It goes to the large funds that sell those same holdings the very next day at a higher price than they should have been able to.

As I watch the Congress spend like there's no tomorrow, promising to stimulate the economy and dig us out of this hole, it occurs to me that they have no real value to spend. That they are using this money game to suck value from the environment and to redistribute it as these morons see fit.

Our Federal government has turned itself into the largest global parasite ever known to man. As it sucks in the life blood of this planet and destroys it as Mugabe has destroyed Zimbabwe, so many of us feel completely helpless to act. We are only along for the ride.

My friends, we already are Zimbabwe. We just don't know it yet. Zimbabwe is simply a scale fractal model of where we are heading. It is a sample, a warning. Study it, and study those that suffer under Mugabe's rule for answers to what would be the best preparations you can make on an individual level.

As always, I hope for the best and prepare for the worst. To me, the best would be a quick collapse that would cause the public faith to turn away from our failed government and toward real solutions and real reform. The worst is a slow descent into the depths we are heading.



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Anonymous said...


What do you think about the Amero and the North American Union that have been discussed on the internet?

FOFOA said...

Hi Anon,

I am an Amero skeptic. I am not certain, but my gut tells me that it is not the Amero that we need to worry about. And even if the Amero was and is a real plan, I'm not sure "they" will go through with it now. And even it they do, I don't think it will have the desired effect.

I think it is possible that the risks that dollar holders are facing right now is worse than under the Amero threat.

The Amero might have been a controlled demolition of the dollar, while now we face an uncontrolled disintegration of not only the dollar, but everything else as well.


alchemymike said...

lets jump off the dollar now. We should fall back to pre 1964 silver and 1986 issued silver and gold bullion.

have a plan I'd like to share with you to defeat obama's massive tax plan on the rich and the feds fiat money theft policy that has been ongoing since 1913.

President Reagan has given us a great gift to the Americans to battle this corrupt government.

The Gold Bullion Coin Act of 1985, Pub. L. No. 99-185, 99 Stat. 1177 (Dec. 17, 1985), codified at 31 U.S.C. § 5112(a)(7) through (a)(10), 31 U.S.C. § 5112(i), 31 U.S.C. § 5116(a)(3), and amending 31 U.S.C. § 5118(d) and 31 U.S.C. § 5132(a)(1), has helped the American Gold Eagle to quickly become one of the world's leaders in gold bullion coin. Produced from gold mined in the United States, American Eagles are imprinted with their gold content and legal tender face value.

The act was signed by Ronald Reagan in 1985. One requirement is that all gold used in minting the coins would be from "newly mined domestic sources".

Gold coins as legal tender

The case of Ling Su Fan v. United States[1] establishes the legal distinction of a coin bearing the "impress" of the sovereign:

These limitations are due to the fact that public law gives to such coinage a value which does not attach as a mere consequence of intrinsic value. Their quality as a legal tender is an attribute of law aside from their bullion value. They bear, therefore, the impress of sovereign power which fixes value and authorizes their use in exchange.

The case of Thompson v. Butler[2] establishes that the law makes no legal distinction between the values of coin and paper money used as legal tender:

A coin dollar is worth no more for the purposes of tender in payment of an ordinary debt than a note dollar. The law has not made the note a standard of value any more than coin. It is true that in the market, as an article of merchandise, one is of greater value than the other; but as money, that is to say, as a medium of exchange, the law knows no difference between them.

Here is what we can do:

I build homes and I would like to build one for you. I need $250,000
to build your home. You and I enter in contract for Construction and I accept $12,500 dollars to build your house. My fixed contract has my overhead and profit $3750.00 which would be my tax liability for the work I've done.

You paid me in US issued legal TENDER $50.00 gold Eagle coins.
Think of the consequences- Your home cost $12,500 dollars- what would that do to your property taxes?
you lost 237,000 on your gold investment and write it off on your tax return
I only made $3750 on your job I'd have to build over 100 homes to come close to obamas rich man tax rate.

same would work with junk silver I have a used car I'd like to sell for $10,000.00 you and I go into contract for car for $550.00 (Your paying me in silver eagles. or junk silver) or $500.00 in $50 gold eagles.

We take control of our currency. no more money created by debt. our goods and services are protected against government theft though inflation as we control our money. and we beat them at their own game inflation runs backward and hurts the government and empowers the people.

Lets give them The Reagan Tea Party

FOFOA said...

Hello Mike,

I like your idea! At least until gold finds true freedom from its dollar masters. Can you come replace my gaskets for $5? I will pay you in gold. I promise.


FOFOA said...

Seriously though, Mike, I do like it a lot. Very nice.

Anonymous said...

"What is $10 trillion divided by zero? It is zero."

Did you try dividing any number by zero in a calculator?
If your analysis is as good as your maths, then the dollar is here to stay...


FOFOA said...


Hehe. Thank you. You are absolutely correct. By my math, debt would completely explode upward as the dollar approached zero.

I changed it to "times" in the post. It seems that definitions 1 and 2 are not entirely compatible. "A common trait" is not the same as "divided by". In fact, they are practically opposite.


Anonymous said...

Hi there,

Again a wonderful analysis of present situation. However, i am more of a skeptic in terms of new currency being backed by gold. I am sure new currency is in the making but it will be geared towards a cash less economy so to speak. All digital numbers. It will be worse than Fiat and i am sure western world will accept it as technological solution to fiat problems. Sadly, it will be far more destructive in nature than any other fiat currency can ever be. To me that is the new world order we are headed towards. Sadly a nightmarish world as well.


Anonymous said...


FOFOA said...

Hi Neo,

Thank you for your comment. I agree that your version of the future is an absolute nightmare. And it certainly seems like that's where we're heading, with RFID and welfare debit cards and all.

I do not know what system will emerge from this crisis. But I have a feeling that the producing countries of the world will have a bigger influence in it than most Westerners expect. Just because a currency is planned, does not mean it will succeed.

Personally, I hope that a system I call FreeGold will emerge. It is kind of a default system that will emerge naturally. Currencies won't be directly backed by gold, but instead, gold will float freely in price against all currencies. And the credibility of any fiat currency shall be measured against gold, not against competing fiat currencies. Gold will be the de facto reserve currency and will be held in reserve by all. No single fiat currency will have the power that is concentrated in the dollar right now.

This was predicted by Another back in 1997 on the Kitco forum and later on the USAGold forum. The old posts can be found here and here. It is an excellent read and full of insight into the international gold, currency and oil markets.


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