Saturday, May 30, 2009

Mona Lisa or Ben Franklin?

When Paradigms Shift

When paradigms shift, the change occurs in the minds of men. The changes are subtle at first, but then, almost over night, the whole world sees a monumental shift. The subtle changes are happening right now, in plain view, even in the mainstream media. You need only to know what to look for.

Storing Wealth or Making Money?

In the olden days, there was a difference between what you collected as a store of wealth and what you traded or deployed into the marketplace to make money. Man has a basic need to collect and store wealth. This need derives from the awareness of his own mortality. Every man knows that someday he will grow old and die. And in those later years, he will need to draw from the wealth he has stored throughout his productive years.

Today's international financial and monetary system has evolved to where the demarcation line between the two, wealth-storage and trading-to-make-money, is hopelessly blurred. To see an example of this, look at the traders who play in the gold markets. Why are these traders drawn to the gold markets when there are many other markets with much higher leverage and profits? Perhaps it is because they have an innate understanding of the way things once were, yet they are hopelessly confused by today's international financial and monetary system.

The evolution of this system has bestowed upon the governments and bankers of the world a way to skim value from the wealth you store during your productive years. It is as if they are not only clipping the coins that pass through their possession, but they are also coming into your home and clipping the coins you have hidden for later use.

In order to achieve this magical feat, the system has grown excessively complex. And under the weight of its own complexity, it is now collapsing. Soon we will find ourselves back in the olden days, where there once was a difference between wealth preservation and "making money".

The evolution that brought us here took 100 years. The return trip will seem almost instantaneous when it is later recorded in the history books. And for a person to gain an understanding of what is changing, now, in the midst of the transition, will later be recorded as one of the most valuable "epiphanies" ever.

The Productivity of Debt

What is debt? In the olden days, if I saved an ounce of gold I had two choices. I could simply hang on to that ounce of gold forever, or until I needed it in my old age, or I could loan it to you. But if I loaned it to you there were a couple of vital requirements. First, I would only loan it to you for a productive purpose. You would need to prove to me that you had a way to grow the investment through productive means. This would ensure not only that I got my gold back, but that something good, some profit would come out of the exchange.

The second requirement would be collateral. Just in case your attempt at productivity failed, I would want to receive something of equal value to my loan. This collateral could be something you already possessed like a family heirloom, or it could be my ownership rights to whatever you used the gold to purchase, like farm land or farming equipment. In either case, if I didn't get my gold back (and some profit), I would at least get something of equal value back. Without collateral and a productive purpose, I might as well just hang on to my wealth in the form of gold.

Today we are encouraged by bankers and by our government to deploy our savings into the marketplace without either of these guarantees, neither productivity nor collateral. Even entire nations (like China) "invest" their savings in the non-productive, non-collateralized debt of the United States government, supposedly the safest investment on Earth. China is slowly realizing the flaw in this paradigm. Accordingly it is asking for guarantees (collateral?) and also diversifying into physical gold.

Today we have been conditioned to believe that debt does not need to be productive as long as the economy is growing. We loan our money to (invest in) companies that do not pay dividends simply because we believe new people (suckers?) will later pay us a higher price for these companies. We loan money (through fancy securities) to people for the unproductive purpose of home ownership. And in many cases, because of the excessive complexity of securities, we don't even retain the collateral rights to the underlying house.

The whole system has evolved to where there are no guarantees. Securities are no longer secure. We loan money to someone in the hopes that they will loan it to someone else, and they will loan it to another person, and that somewhere at the end of the line, someone will be productive. But instead, it has become an infinite loop of non-productivity... with no collateral. Today, debt is completely unproductive, without guarantees. So why do we even bother to part with our money?

Fiat Versus Physical

What is money? This question explains why we are willing to part with our money for such risky and unproductive promises. It is because for 100 years now, money has been steadily declining in purchasing power. It has failed in its third and final function, to be a store of value. So the system that evolved has taught us that we cannot just hide our money in the mattress and hope to later pay for our "golden years". Today, we must send our little (dollar) soldiers out into the world and hope that they multiply.

This brings us back to those traders that play in the gold market. They choose gold because they understand the problems with fiat money. Yet they use gold in the same way that fiat money works, they trade it back and forth hoping to profit from price changes. The same way we loan to (invest in) non-productive companies with the hope that someone later will pay us more. And in doing so, they never even touch the physical gold metal.

This is the ultimate confusion of fiat and physical. We instinctively know one thing, yet we are completely immersed in something else. The gold that these traders trade is no different than fiat money. It is a piece of paper that holds its value based on faith in the system, and it can be created from thin air (in great quantities). It is someone else's non-productive, non-collateralized debt. We lend them our money with the hope that someone else will later pay us more for that debt.

The paradigm shift that is now in progress will change the gold market from this fiat paper gold market (price betting) to a purely physical gold market (wealth reserve). When this happens, it will be instantaneous. When this happens, your fiat paper gold will disappear like a magic trick, and your physical gold will suddenly feel like the Mona Lisa herself.

Current Beliefs

The current paradigm we live in contains many firmly held beliefs. These beliefs have developed over many decades and have been passed down for several generations. Most of these beliefs are flat wrong. And as one by one they are shattered in plain view, we will see the paradigm shift.

Here are a few of the current beliefs. A house is more than just a home, it is the most important investment you will ever make. The right balance of stocks and bonds offers predictable long-term risks and returns. The modern economy requires an ever increasing supply of money. Deflation is bad. Inflation targeting (by central banks) is good. US Treasuries are a risk-free investment. Gold is only a hedge. I could go on and on. Can you think of a few?

There is an old saying, "You can't teach an old dog new tricks." This is true. Unfortunately this mean that the most vulnerable to a paradigm shift will be the last to recognize it. But as I said, the signs of change are already on TV for all to see.

Subtle Changes

I have the TV on today in the background. I am not actively watching. But just in passing I have seen two examples of the change in the minds of men that leads to a paradigm shift.

The first was a lady reporter talking about General Motors. She was talking about how the government is investing $70 billion of taxpayer money in a company that the market currently values at only $457 million! She made the statement, "Nothing is risk-free these days." Would you call that an understatement?

The second was a housing expert talking about how houses should only be purchased as a domicile, and not for any other purpose. He talked about property taxes and maintenance and all the reasons houses are expensive to own. He talked about the fallacy that a house can be a retirement nest egg. And he stated that houses should never have been considered speculative investments, as if he was sharing an age-old wisdom. Well, actually he was, but I wonder if he was saying the same thing five years ago.


Think about an object that means "great wealth" to you. It can be an old family heirloom or a fine painting in a museum. Now imagine that you are holding that object in your hands. Imagine it is yours, to do with as you please. Imagine you are a wealthy person and this object in your hands proves it.

Now ask yourself a few questions. Would you actively trade this object with other people, handing it back and forth, in order to make dollar profits from the fluctuations in its dollar value? Would you leverage this item (take a loan against it) in order to make dollar profits investing in non-productive, non-collateralized companies, knowing that if your investments go down you will lose this object of wealth?

And most importantly, ask yourself this. Under what special or extreme circumstance would you sell this item?

This is the paradigm shift that is underway. In the minds of men, physical gold is becoming this object of "wealth". Over the last year I have seen the change in the minds of some very unlikely people (in my own family). So I know first-hand that this is under way.

This change is not only happening in the minds of individual men, but it is also happening in the board rooms of national treasuries, sovereign funds and central banks.

The economy of man is an unimaginably complex biological organism. It is an ecology. And as with any ecological system, when stress is applied the system adapts and evolves. This is happening right now in the human ecology, the planetary organism made up of 6.75 billion individuals, each dealing with stress in his or her own way.

Some have had the foresight to take positions that will be massively beneficial as the paradigm shifts. This was the message of Another ten years ago. This is also the message of the Euro. Even with its many flaws, the Euro is positioned to benefit greatly from a paradigm shift to FreeGold.

The US dollar maintains its link to gold even without the gold standard. It must. This is because the US dollar competes against gold for global wealth reserves. This creates an inverse relationship between gold and the dollar, a relationship which must be managed. But very soon the dollar will either release its control over gold in an effort to save the unproductive debtors, or it will be forced to relinquish control over gold as productive creditors hoard all remaining physical gold in defense against the collapse of the unproductive debtors.

The Euro, on the other hand, has severed its link to gold. It now holds gold as they did in the olden days. The Euro holds gold as a wealth reserve giving it the credibility that comes with wealth, as well as a universal reserve to be deployed only in the most "special" of circumstances. The Euro holds its gold "marked to market". This means that as the price of gold rises, so does the value of the Euro's reserves. In turn, this lends rising credibility to the Euro. This is the opposite of what happens to the dollar as the price of gold rises.

We can all position ourselves like the Euro. Or we can stay positioned with the dollar. The choice is ours. The paradigm shift is happening whether we like it or not. The subtle changes are already there to be seen. We only need to know what to look for. And when this thing happens, when the dollar and gold part ways and head off in opposite directions, gold will be closer in value to the Mona Lisa than to a Ben Franklin.


Friday, May 29, 2009

Monday, May 25, 2009

What Obama Does Not Know

Transcript of the speech

By Richard J. Maybury

Keynote Speaker

And editor of Early Warning Report

At the

Wealth Protection Conference

Phoenix, May 2, 2009

Copyright © 2009 by Richard Maybury, but permission to make and
distribute copies is hereby granted.

In 1992, I coined the term Chaostan — meaning the land of the Great Chaos — for the area from the Arctic Ocean to the Indian Ocean, and Poland to the Pacific, plus North Africa.

Thereafter, for nine years, I warned incessantly that federal officials did not understand Chaostan, and if they did not stop meddling in those countries, we would end up in a war. And, the war would wreck the economy, because the government would pay for it by borrowing and printing dollars; the debt and inflation of the money supply would lead to economic chaos.

Obviously, that prediction has come true, so today I'm going to explain three more things that the government and mainstream press seem not to understand.

The title of this speech is, "What Obama Doesn't Know." The first draft was 14 hours long, but I have cut that quite a bit.

You might ask, how can the president of the United States — the most powerful, most well-connected person in history, with all sorts of intelligence agencies — not know something important?

The answer is that a successful politician is not an expert at economics, foreign policy, military affairs or any of the other areas in which he makes decisions.

A successful politician is a person who is an expert at winning elections. That's how he gets the job — by winning elections. That is his skill, his career, his area of expertise. Winning elections.

In other words, to be president, he needs to be highly skilled at illusion. He must be a better actor than his competition.

I sometimes think we need a change to the Constitution. Every six months, a president's job performance should be evaluated, and if he isn't doing well, we should call up Hollywood Central Casting and tell them to send over another president.

Since the president isn't really an expert at anything presidential, except how to get the job, he doesn't know what he should look for when he hires an advisor or cabinet member. Generally presidents just hire their drinking buddies, or whoever their drinking buddies recommend.

You can see that with Obama's group of economic advisors. Before he was sworn in, he formed one group of advisors, then on February 6th, only three weeks after he took office, he hired a second group. Now he has two groups of economic advisors.

Why? Well, if you know a bit about economics, you can make a good guess.

During his election campaign Obama admitted he knows very little about economics.

The first group he hired were people who were prestigious, but they have different economic models. Some are Keynesian, some monetarist, some socialist — I'll say more about the different models shortly — and I'm sure every time he got a dozen of them in a room and asked for an explanation of what's happening, he got a dozen different answers.

He hired a second group, and he's probably getting a dozen different answers from that group, too.

So, I'm going to explain three crucially important topics the president — and mainstream press — seem not to know anything about.

When I'm finished, you will know more than Obama does.

The first I'll cover is the fact that ...

...the economy is not a machine

When we listen to politicians and the mainstream press talk about the economy, we usually hear comments such as, the economy is sluggish, or, the economy is slowing down. We need to speed it up, to jump start it, or repair it, or tune it up.

But the economy is not a machine. It's an ecology, made of biological organisms — people — you and me and our loved ones, and millions of others.

Economics is not a math course. It's not the study of charts, graphs and equations. It's the study of living, breathing, thinking, feeling humans.

Especially feeling. And I'll say more about that shortly.

Economics is not a branch of mechanical engineering, it's a branch of biology — because we are biological organisms.

The economy is an ecology, the human ecology, and it is by far the most complex ecology on earth. I think, for instance, the typical big city hospital probably contains more complexity than all the other so-called natural ecologies in the world put together.

Think about it. Not only are the physical bodies and brains of the patients unimaginably complex, but so are the thoughts and feelings of the medical staff and patients, the personal interactions, the decisions, the knowledge base, the experience and training, the chemicals in the color of the paint on the walls, the production of the raw materials used in the bathroom tiles.

The contents of that one building are so complex no human will ever understand them.

Yet, for more than a century, politicians and bureaucrats have been meddling in the human ecology, which means they've been playing God.

The economic trouble we see around us today is the chickens coming home to roost.

Right now, there is a big political movement to increase the number of regulations on the financial industry. The industry already labors under tens of thousands of regulations, that no one understands, and it broke down. So how is more regulation going to help?

I submit that the financial industry only needs one regulation, of four words: thou shalt not steal.

Let me be very clear about this: the politicians and bureaucrats have been taught to see us and our loved ones as machines that have broken down, and they plan to do whatever they think is necessary to jump start us and rev us up.

If someone elected you God, and gave you the power to meddle in a rain forest, or a tropical reef, with all its coral, fish and underwater vegetation, where would you start?

How would you tune up your tropical reef so that it ran more smoothly?

How would you jump start your rain forest?

If you've read my Uncle Eric book called WHATEVER HAPPENED TO JUSTICE?, you know that the human ecology is vastly more complex than a rain forest or tropical reef, and yet for more than a century politicians and bureaucrats have operated on the assumption that they are God and they know how to improve it.

So, they wrecked it.

I'm sure that if we gave federal economists control of the Amazon rain forest, it would never occur to them to just leave it alone!

The first thing they'd do is set up the official Amazon Federal Reserve, and start arguing about the formulas they'd use every six weeks to loosen or tighten the supply of water.

A hundred years later, the Amazon rain forest would be a lifeless desert, two million square miles of sand.

The most complex thing ever discovered is the human brain, and the economy — the human ecology — is comprised of 6.8 billion of those brains.

So, does Obama understand that the economy is an ecology?

Well, just listen to the terminology he uses. He has said — and these are his actual words — the economy has "structural problems." It's "locked up." It's "out of balance." It's "sluggish." It's "frozen." It's "slow." It's "clogged up."

The man thinks he's a plumber.

The next topic Obama — and the mainstream press — seem not to understand is...

...economic models

All mechanical engineers and architects use Newtonian physics. Cars, ships, trains, skyscrapers, they're all built on Newtonian physics, because Newtonian physics has been proven right billions of times.

So, for most of what we do every day, Newtonian physics is the model. No engineer or architect would for one minute consider using anything else.

Economics students in college are led to think there is just one model in economics, too. But there isn't. There are five main models: Keynesian, monetarist, socialist, fascist and Austrian, and there is no consensus about which one is correct.

Yet, every financial analysis, every investment recommendation, begins with a choice of economic models. It cannot be avoided. Whether he knows it or not, the analyst is using some kind of economics to do the analysis, because all financial work builds upward from economics — meaning, from the study of the human ecology.

Economics is the foundation. I would like to see the whole financial industry, including every article or book you read, disclose under the name of the writer, the economic model the writer is using, so that the audience can tell what the bias is!

In my own case, the article would show the title, then "by Richard Maybury, Austrian." An article by John Doe would say "by John Doe, Keynesian," or monetarist, or whatever.

When I was in college, we were never told what model we were being taught. In one course, the professor would be a monetarist, in another a socialist, another a Keynesian, and they never disclosed it.

So, most of us didn't even know there were different models.

Ever since, I've talked with college students, and found this has not changed. I almost never run across a student who even knows there are different models.

So they come out of college thoroughly confused. To them, the human ecology is a huge mystery. They've been taught a mass of contradictions, and they think there must be something wrong with them personally — their brains are defective — because they can't make sense of it.

Several times I've had people with college degrees in economics read my little book WHATEVER HAPPENED TO PENNY CANDY, which is written to be easily understood by a 12-year old, and these people have told me that for the first time in their lives, they understand economics.

I use the Austrian model, which is the one that most closely dovetails with the beliefs of Thomas Jefferson and the other American founders. It's the only one that sees the economy as an ecology not a machine.

As far I know, I'm one of the very few people in the whole country who ever disclose their model — because I'm proud of my model.

As for Obama, I'm sure his confusion comes from the fact that he doesn't know or is only vaguely aware that there are various models, and he doesn't know how they differ. If someone asked him, which economic model do you think makes the most sense, and why, I'm sure he'd have no answer.

So the result in the White House is confusion.

It cannot be any other way when the advisors have different models of how the world works.

The third topic Obama and the mainstream press apparently know nothing about is...

...velocity & money demand.

Jim Powell has pointed out that the tens of millions of people who are still working — and that's 91.5% of the workforce — have received a huge pay raise, because prices of houses, cars, refrigerators and a lot of other things, have been cut drastically. The buying power of their wages has soared!

And, it's the best kind of pay raise, because they didn't need to work any harder to get it, and it's not taxed.

This is a huge windfall. It's probably the biggest, most widely shared windfall in all of world history.

So why aren't these tens of millions of people out celebrating? They should be delirious with joy. Why aren't we seeing dancing in the streets?

Because people are scared and afraid to spend the money. And that brings us to what economists call velocity.

As this war was developing during the 1990s, I repeatedly warned that it was likely to bring a dollar crisis, and advised my readers to always have part of their savings diversified into non-dollar assets such as Swiss francs, New Zealand dollars, gold, silver, platinum, oil, and other raw materials.

Incidentally, in March on our web site, I ran a special bulletin telling my readers that I think there is an 85% probability the bottom in non-dollar assets has occurred, or is occurring, and I think those investment suggestions are now as solid as they were ten years ago.

A major reason is velocity. As far as I know, my Early Warning Report is the only publication that says much about it.

I think velocity has become the key driver in the entire world-wide economic crisis, so here is a quick explanation of it.

Money responds to the law of supply and demand just as everything else does.

If people do not want a particular currency — let's say the British pound — then the value of a pound will fall.

Sellers will demand more pounds in trade for their goods or services, and prices in Britain will rise, even if there has been no change in the supply of pounds.

On the other hand, if the demand for pounds rises, the value will rise and prices will fall even if there has been no change in the supply of the currency.

Velocity is the speed at which money changes hands. When demand for the money is high, money changes hands more slowly, and velocity is low.

When demand for the money is low, velocity is high.

A key point is that velocity and money supply can act as substitutes for each other. A 10% rise in velocity has the same effect as a 10% rise in money supply.

The biggest problem with velocity and money demand is they can turn 180 degrees overnight. If people trust the currency, and suddenly perceive some kind of big threat to their futures, money demand can shoot up.

That's exactly what happened last year. The supply of dollars certainly did not go down, but when the real estate crash happened, people became so frightened they were afraid to let go of their dollars.

Within a few days, money demand shot up, people stopped spending and held onto their dollars, and this had the same effect as an instantaneous deflation of the money supply.

If you don't spend your money, that's the same thing as taking it out of circulation.

This can instantly cause the equivalent of a sharp deflation of the money supply by 10 or 20 percent, or more.

That's what happened in the Great Depression. The Fed was inflating. In 1932, the money supply[1] was $20 billion, and by 1940 it was $38 billion. But fear was so great that velocity was falling faster than money supply was rising.

This is why Franklin Roosevelt said in his first inaugural speech, "The only thing we have to fear is fear itself." People were afraid to spend their money, as they are now, and velocity was falling, which has the same effect as deflation, because if you don't spend your money, it's not in circulation.

So, speaking economically, I think that is where we are now. Changes in money demand and velocity are running everything.

And, my key point is, it's all controlled by emotions. By fear.

What are you more afraid of? The dollar becoming worthless? Or losing your job and running out of dollars?

The whole world is constantly shifting back and forth between those two fears, so money demand bounces up and down like a yo-yo, and velocity — the speed at which the money changes hands — does, too.

These wild shifts in money demand and velocity have the same effect as massive, instantaneous shifts up and down in money supply. It's like we're having a huge inflation, then a deflation, every few hours — because our fears change every few hours — because the politicians have all this arbitrary power and we don't know what they're going to do to us!

Now, do you see why it is so important to see the economy not as a machine but as an ecology. Machines don't feel, they don't have fear, or joy, or optimism.

But people, biological organisms, do have feelings. They do fear, and their fears can change instantaneously.

The human ecology, especially these days, is driven very largely by emotions.

How are the politicians and bureaucrats who are playing God ever going to control, or fine tune, or repair, or speed up or slow down, our emotions?

Okay, so I've given you three of the things politicians and the mainstream press say little or nothing about, probably because very few of them understand these things. The three are:

#1, The economy is not a machine, it's an ecology made of unimaginably complex biological organisms, meaning people.

#2, Models. There is no single economic model, like there is in Newtonian physics. Obama probably does not realize his advisors are giving him conflicting advice because they have different models.

#3. Velocity. The speed at which money changes hands is dependent on emotions.

Now you know some of the things Obama doesn't.

Perhaps a good summary of what I've said so far is, when people play God, they always do it badly. And, the politicians and bureaucrats have been playing God with the human ecology for more than a century, and now the chickens have come home to roost.

On March 29th on our web site, we posted a special bulletin telling my readers that I think there is an 85% probability the recent deflationary stage of the crisis is ending and the next inflationary stage is beginning.

I can't prove it, but I think the bottom in non-dollar assets has occurred, or is occurring, and now is the time to get into non-dollar assets: Swiss francs, New Zealand dollars, Canadian dollars, Australian dollars, oil and other raw materials, real estate, and especially, gold, silver and platinum.

Pat Gorman at Resource Consultants can help you with the gold, silver and platinum. I've been recommending Resource Consultants for precious metals for twenty years or so, and never had even one complaint from any of my readers.[2]

If I'm right about this new inflationary cycle, then within two or three years, we will see oil at $300, gold $3,000, platinum $3,000, and silver at $50.

I think we have three to five years of chaos ahead of us, but a lot of new fortunes will be made by those who are knowledgeable and prepared.

We're going through a giant, and very painful, object lesson. But when it's over, America will be back on track to a new golden age, and the people who were knowledgeable and prepared will enjoy a prosperity far greater than anything ever seen before.

That's the objective of my newsletter, Early Warning Report, to get you through the hard times as comfortably as possible, so that you can enjoy the golden age that will come after.

This speech is copyrighted, but permission to make and distribute copies is hereby granted.
[1] As measured by M1. Source: Historical Statistics of the U.S., Colonial Times to 1957.
[2] Neither Richard Maybury nor his company Henry Madison Research, Inc. receive any kickbacks, commissions or fees of any kind for recommending any broker, dealer or publication. Mr. Maybury works for his subscribers, and no one else.

Sunday, May 24, 2009

Weimar Reloaded

“It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery stores were empty.You could buy nothing with your paper money.

– Harvard University law professor Friedrich Kessler on the Weimar Republic hyperinflation (1993 interview)

Some worried commentators are predicting a massive hyperinflation of the sort suffered by Weimar Germany in 1923, when a wheelbarrow full of paper money could barely buy a loaf of bread. An April 29 editorial in the San Francisco Examiner warned:
“With an unprecedented deficit that’s approaching $2 trillion, [the President’s 2010] budget proposal is a surefire prescription for hyperinflation. So every senator and representative who votes for this monster $3.6 trillion budget will be endorsing a spending spree that could very well turn America into the next Weimar Republic.”

In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary policy and Weimar Germany’s, when 50% of government spending was being funded by seigniorage – merely printing money. However, there is something puzzling in his data. He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark. Something else must have been responsible for the mark’s collapse besides mere money-printing to meet the government’s budget, but what? And are we threatened by the same risk today? Let’s take a closer look at the data.

So begins an article by Ellen Hodgson Brown, author of "Web of Debt", titled TIME TO GET OUT THE WHEELBARROWS? ANOTHER LOOK AT THE WEIMAR HYPERINFLATION. In it she very nicely lays out the case that the Weimar hyperinflation is misunderstood.

She explains that in the Weimar Republic of 1923 the mark collapsed to one-trillionth of its value just 9 years earlier. She then points out that no one claims the hyperinflation was CAUSED by a trillion times dilution of the mark, so the cause can not be as simple as supply and demand. Something else must have happened.
Light is thrown on this mystery by the later writings of Hjalmar Schacht, the currency commissioner for the Weimar Republic...

What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark’s decreasing value by selling it short.

Short selling is a technique used by investors to try to profit from an asset’s falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.

So the cause of the hyperinflation, according to Brown, was the foreign currency speculators and the banks that paid off their bets with newly created marks. But she doesn't stop there. Not only did the government NOT cause the hyperinflation, but it was Hitler's national protectionism and make-work programs that brought it under control...
If Schacht is to be believed, not only did the government not cause the hyperinflation but it was the government that got the situation under control. The Reichsbank was put under strict regulation, and prompt corrective measures were taken to eliminate foreign speculation by eliminating easy access to loans of bank-created money...

While Hitler clearly deserves the opprobrium heaped on him for his later atrocities, he was enormously popular with his own people, at least for a time. This was evidently because he rescued Germany from the throes of a worldwide depression – and he did it through a plan of public works paid for with currency generated by the government itself. Projects were first earmarked for funding, including flood control, repair of public buildings and private residences, and construction of new buildings, roads, bridges, canals, and port facilities. The projected cost of the various programs was fixed at one billion units of the national currency. One billion non-inflationary bills of exchange called Labor Treasury Certificates were then issued against this cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on goods and services, creating more jobs for more people. These certificates were not actually debt-free but were issued as bonds, and the government paid interest on them to the bearers. But the certificates circulated as money and were renewable indefinitely, making them a de facto currency; and they avoided the need to borrow from international lenders or to pay off international debts. The Treasury Certificates did not trade on foreign currency markets, so they were beyond the reach of the currency speculators. They could not be sold short because there was no one to sell them to, so they retained their value.

Within two years, Germany’s unemployment problem had been solved and the country was back on its feet.

Brown goes on to draw comparisons of Germany's money printing to money printing schemes of early American colonists as well as Zimbabwe. She points to the law of supply and demand with supply being real economic goods and demand being paper currency as the culprit that leads to hyperinflation...
The dramatic difference in the results of Germany’s two money-printing experiments was a direct result of the uses to which the money was put. Price inflation results when “demand” (money) increases more than “supply” (goods and services), driving prices up; and in the experiment of the 1930s, new money was created for the purpose of funding productivity, so supply and demand increased together and prices remained stable. Hitler said, “For every mark issued, we required the equivalent of a mark’s worth of work done, or goods produced.” In the hyperinflationary disaster of 1923, on the other hand, money was printed merely to pay off speculators, causing demand to shoot up while supply remained fixed. The result was not just inflation but hyperinflation, since the speculation went wild, triggering rampant tulip-bubble-style mania and panic.

This was also true in Zimbabwe, a dramatic contemporary example of runaway inflation. The crisis dated back to 2001, when Zimbabwe defaulted on its loans and the IMF refused to make the usual accommodations, including refinancing and loan forgiveness. Apparently, the IMF’s intention was to punish the country for political policies of which it disapproved, including land reform measures that involved reclaiming the lands of wealthy landowners. Zimbabwe’s credit was ruined and it could not get loans elsewhere, so the government resorted to issuing its own national currency and using the money to buy U.S. dollars on the foreign-exchange market. These dollars were then used to pay the IMF and regain the country’s credit rating. According to a statement by the Zimbabwe central bank, the hyperinflation was caused by speculators who manipulated the foreign-exchange market, charging exorbitant rates for U.S. dollars, causing a drastic devaluation of the Zimbabwe currency.

The government’s real mistake, however, may have been in playing the IMF’s game at all. Rather than using its national currency to buy foreign fiat money to pay foreign lenders, it could have followed the lead of Abraham Lincoln and the American colonists and issued its own currency to pay for the production of goods and services for its own people. Inflation would then have been avoided, because supply would have kept up with demand; and the currency would have served the local economy rather than being siphoned off by speculators.

Finally, she brings us to our current crisis and the current threat of hyperinflation. Describing the risk, she compares the mountain of OTC credit derivatives to the foreign currency speculators of 1923, and she compares the Fed's "quantitative easing" to the German banks that paid off the bets...
The $12.9 billion in bailout funds funneled through AIG to pay Goldman Sachs for its highly speculative credit default swaps is just one egregious example. To the extent that the money generated by “quantitative easing” is being sucked into the black hole of paying off these speculative derivative bets, we could indeed be on the Weimar road and there is real cause for alarm.

And on a positive note, she compares Obama's stimulus package to the successes of Hitler and Benjamin Franklin...
Using quantitative easing to fund infrastructure and other productive projects, as in President Obama’s stimulus package, could invigorate the economy as promised, producing the sort of abundance reported by Benjamin Franklin in America’s flourishing early years.

Concluding the piece, she offers a solution...
We have been led to believe that we must prop up a zombie Wall Street banking behemoth because without it we would have no credit system, but that is not true. There is another viable alternative, and it may prove to be our only viable alternative. We can beat Wall Street at its own game, by forming publicly-owned banks that issue the full faith and credit of the United States not for private speculative profit but as a public service, for the benefit of the United States and its people.

So, to summarize, it is not the government's reckless deficit spending that causes hyperinflation, but the evil speculators that drive down the value of paper currency through short selling, and the evil private banks that pay off the CORRECT bets on paper being worth... well... what paper is worth. NOTHING.

Here is where Ellen Brown gets it wrong. By relying on the fundamentals of supply and demand, she equates the value of a paper currency to the value of the real goods it buys. And she believes this equation is real. Therefore, all that is needed is for economic goods to increase at the same rate as worthless paper. That, and of course the hog-tying of the evil speculators.

The reality is that the monetary base of dollars does not need to be increased a trillion times for the dollar's value to drop to one-trillionth. The reality is that the paper (or digital) dollar is really only worth that already. The fact that we can still buy real goods with our dollars is the result of the façade or "matrix" that has been built. But this façade is now crumbling.

The speculative bets are not the disease. They are simply the visible symptom of the disease. The disease is the purely symbolic currency we trade for real goods from all over the world. Think of this from a medical perspective. To only attack the symptom of a deadly disease, or worse, to believe the symptom IS the disease, is a sure way to a quick death. This is where the dollar is going. And the many misconceptions about hyperinflation that are circulating on the internet ensure that death will at least be quick, even if it is not painless.


Wednesday, May 20, 2009

Friday, May 15, 2009

Taking Delivery of Physical

Image: Several thousand 28lb bars of 24-carat gold stored in the Bank of England's massive underground vault.

It is said that if everyone would just take delivery on the gold contracts they buy, then the price of gold would shoot the moon. This is because there is not enough gold in the warehouse to cover all the outstanding contracts.

And the reason there are more contracts than gold is because the banks like to sell contracts "short", meaning they will sell you a contract for some gold they do not have because they know you will not take delivery.

They do have some gold for the small percentage of people that take delivery. And they will gladly tell you all about this gold to prove to you that your contract is backed by the real thing. But this is still very much like "fractional reserve banking".

In fact, fractional reserve banking began with gold. The banks realized that they could issue receipts for the gold they stored and those receipts would circulate just like money... just like gold!

One of the things that Another first brought to our attention was that in today's gold market, there are perhaps 100 times as many receipts trading as there is real gold available for delivery. This was an incredible revelation. This is from the introduction to Another's (Thoughts!)...
When the once highly secretive London Bullion Market Association (LBMA) -- its venerable membership comprising the world's largest gold dealers -- published its daily clearing volume for the first time in January 1997, it rocked the tight-knit world of international gold traders and analysts...

Now this first LBMA report forced analysts, investors, and brokers to reassess their understandings of the gold market. While some reveled in the glow of the large LBMA numbers, others began to raise some very important and rather unsettling questions. First, Why was this much gold on the move? Second, Where was all this gold going? And third, Where was all this gold coming from?

Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text.

What Another revealed was a "deal". A deal between the dollar faction (Washington and London) and a few MidEast oil producers. This deal was meant to keep the dollar strong in the absence of a gold standard by "backing it with oil". In other words, all oil in the world would be priced in dollars, and the dollar would remain strong through usage demand.

In exchange, the dollar faction would keep the price of gold low so that these oil producers could exchange their dollars for gold, kind of like before Nixon closed the gold window. Here is more from the intro...
If ANOTHER's claims are true -- that a consortium of oil states has cornered the gold market (and given the impressive circumstantial evidence, this could very well be the case) -- these "footsteps of giants" become the most salient and persuasive case for gold ownership I have seen in the past decade, if not the full twenty-eight years I have been in the gold business.

Now the way you would "corner the gold market" in a deal like this is to take delivery of your gold while the rest of the world is caught up in a game of paper gold. A game that is meant to give YOU a good price on physical gold in exchange for cheap oil.

There are a couple ways to "take delivery". One way is to bring your gold home. The other is to insist on delivery of physical, but to allow the bank to hold it for you. So the gold never actually moves, physically.

One other thing to consider is that not all the MidEast oil producers were in on the deal. This is to say that they were not privy to the valuable knowledge of the intentional suppression of the price of physical gold through the issuing of abundant paper gold.

What happened in the mid-to-late-90's that caused this "deal" to start to fall apart was that a "Big Trader" in Hong Kong found out about the deal, and began to partake to the same extent as the original parties to the deal. This put a certain stress on the system which first forced the LBMA to admit (albeit not quite a full admission) to evidence of the shenanigans. Secondly, it eventually caused the price of gold and oil to start to rise, putting downward pressure on the dollar.

According to Another, we were very close to a full collapse of the system right around the turn of the century. This collapse may have been delayed by several years because of the massive support the US received following 9/11, and then by the subsequent blowing up of bubbles until the pin prick of 2007.

Today the whole dollar system is more fragile and unstable than it has ever been. Even more than in the late 90's. Today there is no room for a rescue of the dollar by another disaster or through quantitative easing or anything else they may try. Today we come full circle back to 1999. Only this time Y2K is real!

Gulf Nations to take back their Gold from London

A few days ago this story hit the wires out of Dubai:
Gulf ETFs, nations may take their gold back from London

Much of the region's gold that has so far been held in London may soon return...

Prominent gold dealers in Dubai say that it's "only natural" for the central banks in the region to store their gold in DMCC instead of London, where they have typically held their bullion reserves so far...

Almost immediately, Michael Kosares (MK, who wrote the above intro to Another) posted this on his website:
Over the coming weeks and months the Dubai story may turn out to be bigger than it appears on the surface.

Aleksandar also made several astute observations:
1. "What has been holding us back is the difference in gold specification between London and Dubai"
I wonder what gold specification means.

2. "While the gold allocated to DGS is kept at HSBC's vaults in London, the gold reserves held by the Gulf Cooperation Council's central banks are held by various other vaults in London, market sources said."
Reading between-the-lines, this story is REALLY about the GCC and the Arab Central Bank reserves! Not some silly ETF.

3. Have these banks [holding the Gulf's gold] been practicing the "gold carry trade"? [If so, they may owe gold to the western Central Banks as well as the Arabs] This call from the Arabs is effectively asking for delivery of the physical. Scary stuff.

[Alek had a couple more, but I paraphrased and edited his Thoughts for the purpose of this post]

So what does this mean? The MidEast oil producers have decided to form their own currency union, their own central bank, and their own reserve currency for pricing oil. And now they want their gold!

Every couple months the gold writers get all worked up over "taking delivery" from the Comex. But is it possible that "oil" is about to take delivery of 30 YEAR'S WORTH OF GOLD PURCHASES?

Do you think the shorts will have to cover? Will there even be enough physical gold to cover? And what if the CB's have to cover for the banks [like the ECB recently did for DB], will they? Another said they would not:
"The US$ has risen on a flight of fear. That will now end as the LBMA shorts are given to wolves. If this fire burns too hot, gold will turn and it's trading halted. The price of oil will explode as gold becomes the "world oil currency"! Even now oil has locked the IMFs gold, Asia will bid against them no more. We come to extreme times.

Risk not your wealth in paper, we enter a period of truth."

Either way, whether they take all the gold or if they are denied delivery, we are very close to what Another was trying to say!


Sunday, May 10, 2009

Stress Test Results Are In!

The Underwater Beach Ball Effect

Today, a technical analysis of the markets is misleading, mainly because the Fed is pumping the USTbond and Agency MBS markets and the President's Working Group including Goldman Sachs is propping up the equities markets. Also, the currency markets are distorted by the turbulent capital flows driven by fear, and the interventions by central banks into those currency markets. And the commodities markets, including the gold and oil markets, are the beaten down stepchild of all the powerful forces listed above.

So if technical analysis is misleading, perhaps a fundamental analysis gives us a clearer view of the future. It is well known, after all, that market interventions can create short term market movements, but they always succumb to the larger secular trend in the end.

When reading about interventions in the gold market we often hear of the big "bullion banks". The following article posted today on GATA is one of the best I have read at describing what has been going on with these "bullion banks" and why we may soon see what a beach ball does when it is released under water. And for those of you that have been following Martin Armstrong's writings, there are some interesting connections here!


Murray Pollitt: The gold monetization scheme is ending
By Murray Pollitt
Pollitt & Co., Toronto
Thursday, April 30, 2009

The G8 appears finished but their policymakers continue to try to bend the G20, and the world, to their will. The establishment, the Fed, the Bank of England, the Bank for International Settlements, the same gang that has been setting policy for decades, is still at it. They appear to remain in charge (with nary a whimper of criticism about the trillions of dollars' worth of damage their policies have caused) but, when it comes to gold, they are slowly losing their grip.

Besides setting the stage decades ago for sub-prime paper, CDSs, and so on, it appears policymakers embarked on a scheme, at more or less the same time, to monetize the hundreds of billions of dollars' worth of gold lying sterile in central bank vaults. The temptation was too much. One-percent income on gold for a central bank was better than nothing, so the argument ran, and for the Lehman types borrowing gold (and selling it) provided lots of money (capital) to play games with.

It was so easy. Besides, the gold carry trade involved selling lots of gold into the market and this helped keep the price down (and hopefully the dollar up), a subject near and dear to policymakers.

It also led to: a) huge mine hedging with the two biggest miners, each with a link to Morgan, together short over 30 million ounces ("making money on gold in the ground" was the argument) and b) significant outright central bank sales, which may have been interventionist or may have been for portfolio diversification, however ill-advised.

And if banks and markets didn't always follow the script, there was always high-level intervention. To illustrate the mindset, in 2004 one William White, advisor to the BIS, talked about the need for "international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful." The idea of rigging markets is as old as the hills, and if the government is on your side. ...

Anyway, the great gold monetization (mobilization?) scheme appears to have started in the 1980s and the following events that, in part, characterize it are not necessarily in sequence.

1) Goldman bought gold dealer J. Aron.

2) In an early gold carry trade, Drexel borrowed hundreds of tonnes of gold from Portugal.

3) All the big swinging banks sought to get into the gold game and they bought all the London gold dealers except Rothschild, which was definitely in on the game on its own.

4) Mine hedging was pushed very hard, to a peak of about 120 million ounces.

5) Greenspan and others dropped broad hints that central Banks stood "ready" to supply gold to the market.

6) Drexel went broke and it apparently took Portugal five years to recover its gold.

7) Two long-term gold players, Republic and Safra, each with a somewhat checkered past, had a shotgun wedding. Later Mr. Safra was fried to death in his Monte Carlo apartment, presumably for nonrepayment of gold.

8) Two of the largest American players, JP Morgan and Chase, also had a shotgun wedding and now carry more gold derivatives than can be imagined.

9) Much of the Drexel brain trust apparently went to work for AIG, which promptly started boasting about mine hedging.

10) HSBC (often advised by Paul Volcker) bought Midland Bank (which had earlier bought bullion dealer Samuel Montagu) and, in another shotgun wedding, bought Republic, transactions that made HSBC one of the major gold players. HSBC's U.S. subsidiary is now the custodian for the SPDR ETF.

11) When the gold price started to move up, Rothschild said enough and sold its "book" (at a loss?) to Barclays.

12) Finally there was recently a shotgun wedding between Dresdner bank and Commerzbank.

Crisp details are rare, but the past generation has seen hundreds of millions of ounces of gold bled into the market. Canadian and Australian gold reserves are gone; Britain, Switzerland, and many others are down by two-thirds.

But this doesn't count the gold that has been lent. In general it seems that the same sort of banks that got into trouble investing in high-yield, low-quality sub- prime paper have also taken short positions in low-yield, high-quality gold. Too many favorite-son banks are on the wrong side of the market for policymakers to be rational. Given the option between common sense and helping a bank, well, the record is clear. This is probably the main reason the establishment remains anti-gold today -- the old ideological reasons are not that relevant.

So once again they trot out the idea of International Monetary Fund gold sales. What rubbish. The IMF hasn't sold gold since the 1970s, but every year the idea is advanced to frighten the gold market. Why would the IMF sell $10 billion of gold when central banks are printing $10 billion of new money every day? Gold is the only IMF asset worth 100 cents on the dollar -- everything else is junk.

As well the establishment hammers on the idea that the gold price is high, and GFMS continues its weird forecasts.

Well, the gold price is not high. Oil and several other commodities have outperformed gold since World War II. A good underground gold mine may grade 5 parts per million (ppm) while a good open pit may grade 1 ppm.

Nobody who has said the gold price is high has ever spent a nine-hour shift drilling rock -- it's a tough business. God only knows the blood-to-gold ratio for old Roman mines in Spain or Spanish mines in Peru, and getting the gold from mine to home base was often not easy. Much Victorian gold went from Ashanti by caravan through Timbuktu, the Sahara, and on to Europe -- the Brits were hardly keen to auction it off then.

Gold mine production is down about 12 percent from the 2001 peak (and still falling) and Barrick shares have barely moved in a decade. Much of the industry's cash flow is attributable to accounting magic, and the long years, even decades, of gold price suppression have taken their toll. There are few major new mines on the horizon, and lots of old ones on the way out.

Notwithstanding, GFMS has consistently forecast rising production for the past eight years (even though it has consistently fallen), raising the question: Why?

Our guess is that GFMS' big clients are the very banks we refer to above, the ones on the wrong side of the market, and for them Ms. Rosy Scenario needs the healthy, and expanding, industry model that GFMS gives them.

What are companies like Commerzbank and Societe Generale doing sponsoring GFMS anyway? Neither Germany nor France has any gold mining industry at all.

One would have to be barking mad not to see the benefits a higher gold price would have on vast chunks of the global economy. Even long-suffering Zimbabwe would be a huge beneficiary, and more wealth in Africa and Latin America would mean more exports of Fords and Cats from the United States. The establishment may not care, but that won't stop G20 members (and others) from connecting the dots and following China's lead in increasing gold weighting in monetary reserves.

Gold is again becoming a preferred central bank asset and the great monetization scheme is coming to an end. Western policymakers and banks have pushed their game too far for too long and the combination of the shift of power from G8 to G20, plus the reduced availability of gold, will turn the tide. You can sell gold only once, although, in the new wondrous world of derivatives, maybe somebody has actually sold it twice.

Must-See Video

This is a must-see video if you have not seen it yet. I know it is making the rounds and has already been seen by more than 100,000 people! But please take a look at the ineptitude of this one small part of the Federal Reserve System. There are many reasons why central banking should be abolished, and this is another one...

At 1:50 into the video, Ms. Coleman is prompted by the puppeteer seated behind her and immediately clarifies that she is tasked with overseeing the Federal Reserve Board's delegated functions for the reserve banks as well as the Board's oversight and supervision of the reserve banks, not the reserve banks' specific activities.

With this in mind, that this woman is the INSPECTOR GENERAL, please read these two scathing criticisms of the actions of the Board over the past DECADE...

EconomicPolicyJournal: Eliot Spitzer Breaks Down the New York Fed

Jesse's Café Américain: Financially Farcical Friday

Maybe next time Congressman Grayson can ask Ms. Coleman about her jurisdiction over the CORRUPTION and CRONYISM inside the most powerful central bank on the planet Earth.

Saturday, May 9, 2009

Martin Armstrong Makes The Case for FreeGold

Or something pretty close to it.

In his latest article, Martin argues for a One World Currency. He shows how gold has for centuries been the de facto one world currency. And he points out the problems of a fixed gold price in a gold standard, as well as the benefits of a floating gold price. Everything he describes seems to dance nicely around the Freegold concept. Here are the first few pages followed by a link at the bottom...


The Coming One World Currency
How do we do it?
by: Martin A. Armstrong
former Chairman of Princeton Economics International, Ltd.
and Foundation for the Study of Cycles

May 1st, 2009

There is no doubt we will see a new One World Currency. This is the next step in the evolution process of Okinomikos (Economics) as Xenophon (431-352BC ca) first coined the word as the title to his book that today probably would have been given the illustrious title - How to manage your estate including your wife and slaves - for Dummies! (meaning = how to regulate the household).

Until 1971, the world for the most part, relied upon gold as money. It was the neutral store of wealth that was recognized around the world. There were times when the gold standard was suspended, such as during the American Civil War. And there were times when some countries adopted a silver standard because they had too little gold to create a viable money supply domestically such as in China and Mexico during the last quarter-century in the 1800s. There was a suspension of the gold standard during periods of war, but we must exclude these interregnum periods for now.

The Monetary Crisis Cycle of 37.33 years has come on target - 2008 as calculated from 1971 turning point when the gold standard died. Go back another 37 years and we come to 1934 when Franklin D. Roosevelt confiscated gold and created a Two-Tier Gold Standard whereas gold was illegal domestically, but served as the ultimate store of wealth to settle the balance of payments among nations. Go back yet another 37 years and we come to the crisis of 1986 where J.P. Morgan had to gather a consortium of banks to lend the US Treasury a $100 million in gold because it was bankrupt. If we go back yet another 37 years, we come to 1860 with the break of the Union and the abandonment of the gold standard thereafter for the Civil War. We can keep going back in time and find amazing correlations to the various currency crisis periods that seem to appear like clockwork. Perhaps it just takes 37 years before man routinely screws up everything one way or another. The answer to the regularity is a bit deep than that and is interlinked with a host of other regular events including weather. That is for another day.

There is a rising discontent politically behind closed doors where some of the noise is filtering out through the cracks. Both China and Russia are raising the question about the dollar and its global reserve currency status. China has even suggested that it wants a "guarantee" that its $1 trillion reserve will not be just devalued by spendthrift domestic stimulus packages. Those who seem to have great difficulty in believing there are even cycles, fail to understand that there are a limited number of options, and the one thing that remains unchanging, is human nature. Just as China has asked for a "guarantee" now, so did Britain in 1971 that fueled the closing of the gold window by Nixon. History does repeat!

The One World Currency Cometh

There will be no avoiding a One World Currency - after all is said and done, that is what the gold standard was. There will be the biblical soothsayers who will be carrying their signs that the end is here and repent. But for the most part, we always had a One World Currency meaning gold. The real issue that seems to get the juices flowing is the idea that the Anti-Christ will control all commerce and thus will prevent the buying or selling of anything with a One World Currency and accepting the number of his name 666 stamped on your forehead or right hand. Perhaps the Anti-Christ was really Karl Marx, and his posterity are organized governments who follow Adam Smith's Invisible Hand insofar as their self-interest dictates more and more power is needed to control the population. Look well at the shenanigans of government, for there lies the true threat to the liberty of the people.

For now, the real problem we have is that the floating exchange rate system is causing economic distress that may break the back of the average person. On the one hand the United States wants to be the world leader. On the other, it wants freedom to expand Marxism to create a social state. Either we abandon the world leader shit and worry about our own, or we abandon our own and tell the people you must suffer because the politicians want to play king of the mountain. We cannot have our cake and eat it too under such a current system.

At the same time, there is about $5 trillion outstanding in the world dollar reserves outside the United States. Those people holding the dollars believe that they have a right to be heard in economic policies that will affect the value of those reserves. We cannot say; "Here support the dollar, but shut up about our domestic policies." If we double our money supply squandering that on infrastructure payments that do nothing to stimulate either the domestic or international economy, then there is going to be concern about the lack of a voice in those policies. Remember what the slogan was that symbolized the American Revolution? "No taxation without representation."

The complaint of the founders of the United States was that England was raising taxes, but Americans had no seats in Parliament. There was no voice to even object to the spendthrift policies of King George III. We are doing the same thing right now to those who hold $5 trillion worth of dollar reserves. If you want to see a real economic crisis, what if they said here, take them back now! It will be time to turn out the lights.

How do we retain sovereignty?

The real question then is this. How do we retain sovereignty for domestic policy yet at the same time respect the views of those outside the United States? The idea of creating a new enhanced SDR (Special Drawing Right) at the IMF (International Monetary Fund), will not work. The IMF lacks integrity and is long known behind closed doors for being an economic prostitute that can be bought. Those put in charge would be subject to favorite appointments, and this would yield sovereignty to an agency that is just not trust-worthy.

So how do we create a new world monetary system that is still viable, retains individualism among nations, and reduces the threat of global war be it either physical or economic? The answer is to create a new Global Central Bank kind of like the EU where the head rotates among nations, rather than appointments from private Investment Banks groomed for the job. We need not a single currency used in each national locally, but a Two-Tier Currency system where international payments only are filtered.

A Two-Tier Currency System

A Two-Tier Currency System would allow us to retain the individual sovereignty that embraces the "culture" of each nation and simultaneously create accountability among nations. The whole problem with Bretton Woods back in 1944 setting up the U.S. dollar as the reserve currency, was that it was inflexible and polluted the global economy causing it to suffer by exportation of domestic economic policy from the United States.

Bretton Woods was not well planned. It "fixed" the dollar to $35 of gold, but it did not account for domestic policy interfering with international stability. If politicians stood up and ran for office promising new spending programs, they did not consider the impact upon the supply of dollars relative to gold. Had gold been allowed to float, then perhaps the domestic policies would not have been exported to the global economy that led to (1) the establishment of a two-tier gold standard in 1968 when gold began to trade on the London Metals Exchange establishing a "free market price" for gold that rose to $42 at one point, and the "official" standard between nations of $35; (2) the entire collapse of the gold standard by 1971.

Europeans began to see massive increases in dollars, but no corresponding increase in gold reserves. The Europeans began to "put" dollars to the US Treasury demanding gold at $35. This effort was led by the Swiss and French. Yet finally, in 1971 even Britain joined and asked for a "guarantee" that the United States would secure the value of the dollar with gold. That sparked the closing of the gold window where gold was exchanged for dollars, and thus the end of the gold standard officially took place.

Bretton Woods was a total failure. Why? Because it did not recognize that no matter what the nation, politicians always spend more than they have. There was no practical way for the world to force economic responsibility upon American politics. American politicians would never yield sovereignty to the world, for how else could they run for office if they could not promise gifts for the people?

It Must Be Practical

We cannot design a system that sounds nice, but has no possible hope of long-term survivability. It must be Practical or we will end up with another bandaid. Bretton Woods failed because it left the politicians in charge of the money supply with no sense of responsibility whatsoever for its relationship to the gold supply. If gold had floated freely, perhaps we could still have a monetary system that survived. But gold is so rare, there is less than 1 ounce (troy) per person in the entire world. Its real value would probably be in excess of $10,000 per ounce. But we have to be practical and also realize that the supply of gold does not increase automatically with economic growth nor with population growth. Fixing gold would amount to an official form of deflation by decree, for the value of goods and all services would decline against gold when its supply does not increase in proportion to economic growth or population growth. Instead of there being 1 ounce per person, the day would come when there was 1/2 ounce per person. That is institutionalized deflation.

The creation of money is largely today in the hands of the private sector. This takes place through leverage in debt creating a spiral of velocity whereby the same $100 is multiplied in a cascade of loans. If you really look close at the books of some institutions, you will see net revenues of a few hundred million dollars but the "risk" factor from leverage may be hundreds of billions of dollars.

To be practical, government will not surrender their sovereignty to some one world government. Those notions of grand conspiracy theories are not remotely even possible unless there was a major world war and all government no longer existed. That extreme circumstance set aside along with visions of the Illuminati or whatever else we may call them, neither the people nor the politicians would surrender all their individuality and customs to some sort of central control.

Yet at the same time, we must respect that there has always been one reserve currency since ancient times. Even during the Dark Ages of Western Europe, still it was the currency of the Byzantine Empire that circulated and was the only minted gold coin that circulated among the various regions of the world. While the formal name was the gold "solidus" much as we formally have a "dollar," the slang name became known as the "Byzant" as we call the dollar a "greenback" or a "buck" and a wide variety of other names here and there...

Click here for the full 23 page PDF and you can pick up where I left off on Martin's page 4 (page 5 of the pdf).


Thursday, May 7, 2009

Worst Case Scenario (12" Remix)

A few days ago Seeking Alpha had a good piece by "Big Jake" called The Worst Case Scenario (Someone Has to Say It). In it he describes a pretty bad scenario with ten predictions. These predictions seem pretty reasonable to me, however they miss the slightly wider view that FOFOA likes to take. This wider view looks at the very foundation on which all the events listed stand, and more specifically, from a global monetary perspective.

One advantage of this wider view is that it provides an antidote to the pain and suffering, on any scale you want. The wider view will often get the actual details and short term developments wrong. But in return, it provides a high probability prediction for the end result, one in which said antidote works wonders. Think of this antidote as a kind of flu vaccine. It can be taken by individuals or by entire nations. It can even be taken by the entire world. And once you are immune, the stress created by this slow motion train wreck just seems to disappear.

So without further adieu, I will dig into Big Jake's predictions and add a little international monetary flavor. Please read his intro at the above link as I am jumping right into the predictions:
Prediction one. The twenty-five-year equities bubble pops in 2009. U.S. and foreign equities markets will stop treading water and realign with economic reality. Stock prices will cease to reflect the “greater fool” mentality and will return to being a function of dividend yields, which have long been miserable. The S&P 500 will sink below 500. In a bid to stem the panic, the government will enforce periodic “stock market holidays”, and will vastly expand the scope of its short-selling prohibitions—eventually banning short-selling altogether.

Globally (which includes the interior of the United States) equities will be recognized for what they really are; pieces of paper representing a promise from an untrustworthy individual or group of individuals. No one will want this toilet paper any more. As companies frantically issue billions of new shares to raise capital, diluting and extinguishing the value of existing shares, these pieces of paper will be shunned by the entire world. Short sellers won't even matter any more. Because there will be no buyers except for the insiders who are still trying to rig the charade. In the end, the entire stock market will either go to zero, or it will be owned in toto by Goldman Sachs and the US Treasury/Fed. Anyone still holding wealth in paper will lose it all as paper burns.
Prediction two. With public pension systems and tens of millions of 401k holders virtually wiped out—and with the Baby Boomers retiring en masse—there will be tremendous pressure on the government to get into the stock market in order to bid up prices.

Therefore, sometime in 2010, the Federal Reserve will create and loan out hundreds of billions of fresh dollars to the usual well-connected suspects, instructing them to buy up stocks on the public’s behalf. This scheme will have a fancy but meaningless name—something like the “Taxpayer Assurance Equities Facility”. It will have no effect other than to serve as buyer of last resort for capitulating smart-money types who want to get out of stocks entirely.

First off, I've got to say, "as if the government isn't already IN the stock market." But this issue is beside the point. The stock market will be so low in value relative to the things pensioners need to survive from day to day that the government will find it much more efficient to monetize the monthly pension payments than to try and boost the underlying securities. This will happen either before or after the rest of the world has given up on the US dollar. If it happens before, then it will CAUSE the demise of the dollar and bring about hyperinflation. If it happens after, then it simply won't help the pensioners. A pensioner will receive his $4,500 per month for the rest of his life directly from the Fed, but it won't even feed him for one day.
Prediction three. Millions of new retirees—including white-collar people with high expectations for a Golden Retirement—will be left virtually penniless. Thousands will starve or freeze to death in their own homes. Hundreds of thousands will find themselves evicted and homeless, or will have to move in with their less-than-enthusiastic children. Already strained by the rising tide of the working-age unemployed, state and local welfare services will be overwhelmed, and by 2012 will have largely collapsed and ceased to function in many parts of the country.

"Golden Retirement" Isn't that a nice hint to throw in there? I can't add much to this prediction other than to say that any retiree who has taken STANDARD MAINSTREAM ADVICE and held at least 1% of his retirement in (physical) gold will at least preserve his wealth, and will probably do fine. 10% would be much better.
Prediction four. “Quantitative easing” will fail to restart previous patterns of lending and consumption. As the government sends out additional “rebate” checks and takes ever-more drastic measures to force banks to lend, hyperinflation could take hold. However, comprehensive debt relief via a devaluation of the dollar is even more likely. This would entail the government issuing one “new” dollar for some greater number of “old” dollars—thus reducing both debts and savings simultaneously. This would make for a clean slate a la Fight Club.

Big Jake makes a good point here. Devaluation or revaluation can come from either internal or external actions. And the way it works is that the first entity to act profits the most from the action. Everyone knows this. By everyone, I mean China, Russia, Europe, the UK, and even the US Fed. At this point we are simply in a game of chicken. Who will veer away from the dollar first? They are all positioned for a quick maneuver, muscles tightened, hands on the wheel, leaning forward, speeding toward each other at a combined 250 miles an hour.
As there are many more debtors than savers in the U.S., the vast majority would support devaluation. The Chinese and other foreign holders of our bonds would be screaming mad, but unable to do anything. Every country that has not found a way out of dollar-denominated reserve assets by 2012 will see its reserves eliminated.

This is true. The vast majority within the 25% of the world that makes up "the dollar camp" would support an internal devaluation (thereby screwing "the rich" as well as the rest of the world). So the question is will the other 75% of the world just sit around and wait for it to happen? Or are they instead, secretly converting dollars into something more golden?
Prediction five. The government will stop pretending that it can finance continuous multi-trillion-dollar deficits on the private market. By late 2010, the sole buyers of new U.S. Treasury and agency bonds will be the Federal Reserve and a few derelict financial institutions under government control. This may or may not lead to hyperinflation. (See prediction four).

I think this prediction is perhaps a year too late. I would say that by late 2009 this will be the case. For all we know, it already IS the case, thanks to the transparency of the bond markets. Primary dealers have long been short selling bonds to the point that there are more Treasury bonds being auctioned in the markets than have even been issued by the Treasury. Foreign governments and sovereign wealth funds have all but stopped buying new issues at this point. And if they are buying a few, what they are really buying is TIME. They are buying time to trade in other paper assets for something more golden.
Prediction six. As the need for financial industry paper-pushers declines and people have less money to spend on lawyers and Starbucks (SBUX), unemployment will rise until the private sector has eliminated all of its excess capacity and superfluous or socially needless jobs. The government’s narrow unemployment figure (U3) will rise into the high teens by late 2010. The government’s broader unemployment figure (U6) will cease to be reported when it reaches 25 percent—it will simply be too embarrassing. Ultimately, one in three work-eligible Americans will be unemployed, underemployed, or never-employed (e.g. college grads permanently unable to find suitable work).

This prediction deals with the service sector or the FIRE economy versus the real producing sector. It is a very US-centered prediction. When we step back, we see that within "the dollar camp", about 80% of the people work in the service sector and only about 20% actually produce real wealth. In the "non-dollar camp", the statistics are reversed. The term "reality bites" has a lot of meaning here. Like a rubber band breaking when it is stretched to the limit, the entire world will snap back to reality. And reality is that the service sector is reliant on the productive sector, not the other way around.

Wealth comes from producing real things. Only an excess of wealth from producing can support a vibrant service sector. And in the regions where 80% of the people are living off of the other 20%, most of that excess wealth is held as paper promises, which are now burning. So it will be a long time before we ever see the service sector in the US even approach 50% of the economy. First it must decrease to maybe 25%, and then slowly grow back. This could take a couple generations.
Prediction seven. With their pension dreams squashed, and their salaries frozen or cut, police and other local government workers will turn to wholesale corruption in order to survive. America’s ideal of honest, courteous, and impartial cops, teachers, and small-time local functionaries will have come to an end.

The key to this prediction is that the real power that comes with the badge and gun will remain. Only the loyalty that comes from payment will disappear. This will probably be one of the most difficult developments to work through. Look no further than Mexico to see what happens. The local police take money from the drug cartels who basically run the local economies. If we see this turn of events in the US, then it will be best to keep a very low profile. And if you happen to have some mysterious "income stream", it would be wise to befriend and financially help out your local cops. They will need it and they will appreciate it.
Prediction eight. Commercial overcapacity will strike with a vengeance. By 2012, thousands of enclosed malls, strip malls, unfinished residential developments, motels, truck stops, distribution centers, middle-of-nowhere resorts and casinos, and small-city airports across America will turn into dilapidated, unwanted, and dangerous ghost towns. With no economic incentive for their maintenance or repair, they will crumble into overgrown, plywood-and-sheet-rock ruins.

Again, notice that all of the facilities Big Jake lists are related to the service sector. They will be the first to go. In fact, they are already going. As the entire world turns away from the promise of financial paper and the rigged New York auctions we call "markets", it will focus with great intensity on real value. Real value comes from production. Real value comes from gathering the salt of the earth and making something meaningful and useful. And when it comes to trade, if direct trade (barter) is not sufficient, then the intermediary "money" must also carry real value. To store real value, you can either own a producing factory, real things that have already been produced, or the intermediary of choice which is held in high esteem by the entire world. This is gold.
Prediction nine. By the end of 2010, tens of millions of households will have fallen behind on their mortgages or stopped paying altogether. Many banks will be unable to process the massive volume of foreclosure paperwork, much less actually seize and resell the homes.

The problem here is that the medium of paper money is dying. Yet this medium has been so interwoven into all these deals that the deals themselves will crumble. The laws themselves that created this mess will have to change if there is to be any hope of working this out. Once again, the first people or countries to adopt real change will benefit the most. People have to have motivation to go to work in order to earn something with which to pay mortgages. Mortgage companies want something of real value in return for the underlying asset. This whole system is predicated on the flow of paper money, which is dying. It is hard to predict how it will all play out. But the final outcome is not very hard to see.
Devaluation (as mentioned in prediction four) could ease the situation for those mortgage holders still afloat, but it would also eliminate any incentive for most banks to stay in the mortgage business. In any case, the housing market in many parts of the country will lock up completely—nothing bought or sold.

With virtually no loans being made, even the government will finally acknowledge that most banks are fundamentally insolvent. A general bank run will only be averted through a roughly one trillion-dollar recapitalization of the FDIC, courtesy of new money from the Federal Reserve.

A bank run cannot be averted, even as he says. But this bank run will be much different than the 1930's. This will be a bank run from dollars themselves. Perhaps for a short time, maybe one month, we will see a run to physical cash like Professor Fekete has described. But ultimately the run will follow the global giants to gold.
Prediction ten. As an economy is never independent of the society within which it functions, the next few paragraphs will focus on social and political factors. These factors will have as much of an impact on market and consumer confidence as any developments in the financial sector.

Whether rightly or not, President Obama, having come to power at the dawn of this crisis, will be blamed for it by over 50 percent of the population. He will be a one-term president. In response to his perceived socialization of America, there will be a swarm of secessionist and extremist activity, much of it violent. Militias and armed sects will be more prominent than in the early 1990s. Stand-off dramas, violent score-settlings, and going-out-with-a-bang attacks by laid-off workers and bankrupted investors—already a national plague—will become an everyday occurrence.

On the global scene, leaders of all colors who stayed in "the dollar camp" will be blamed. Some leaders who have secretly straddled the fence, like the ECB and Saudi Arabia, will need to openly declare their "secret preparations" in order to stay in power. Leaders who had the foresight to move from dollars into gold will be held up as heroes. In many cases, these will not be the most noble and moral personalities. But economic reality will trump political ideology and humanistic morality, at least for a while. Because of this dynamic, we will see the next generation heavily influenced by personalities from the East.
For both economic and social reasons, millions of immigrants and guest workers will return to their home countries, taking their assets and skills with them. The flow of skilled immigrants will slow to a trickle. Birth rates will plummet as families struggle with uncertainty and reduced (or no) income.

What's more interesting here than the flow of immigrants is the flow of real capital. First, (at least for those in the dollar camp), "capital" will be almost instantaneously redefined. This redefinition of capital will resemble a massive instantaneous flow from west to east. Then, once redefined and revalued, real capital will continue to flow away from the West until the rule of law returns and capital can once again find safety here. The East is not a safe place for capital. But it is far more safe than the West is right now. Everything will be relative.
Property crime will explode as citizens bitter over their own shattered dreams attempt to comfort themselves by taking what is not theirs. Mutinies and desertions will proliferate in an increasingly demoralized, over-stretched military, especially when states can no longer provide the educational and other benefits promised to their National Guard troops.

Property crime will explode among nations in "the dollar camp" as desperate, insolvent governments lash out like zombies hungry for brains. One by one, nations will desert this camp until no one is left. This is already happening.
There will be widespread tax collection issues, and a huge backlash against Federal and state bureaucrats who demand three-percent annual pay raises while private sector wages remain frozen or worse. In short, the “Tea Parties” of tomorrow will likely not be so restrained.

In the global analogue, the "bureaucrats" are the Fed and the US Treasury, who can print the world's reserve currency to pay themselves. As the rest of the world's governments struggle to make ends meet, they are watching Obama smile as he simply "prints" his own prosperity. The international "Tea Parties" of tomorrow will be against the US dollar itself.
Finally, between now and 2012, we are likely to see another earth-shaking national embarrassment on the scale of the 9/11 attacks or Hurricane Katrina and its aftermath. This will demonstrate conclusively to all Americans that their government, even under a savior-figure like Obama, cannot, in fact, save them.

We will also see another major financial and monetary "earthquake". This will demonstrate conclusively to all the world that the dollar, even under a savior-figure like Ben Bernanke, cannot, in fact, save them. Only gold can.
By 2012, there will be a general feeling that the nation is in immediate danger of blowing up or coming apart at the seams. This fear will be justified, given that the U.S. has always been held together by the promise of a continuously rising material standard of living—the famous “pursuit of happiness”—rather than any ethnic or religious ties. If that goes, so could everything else. We were lucky in the 1930s—we may not be so lucky again.

We don't have to wait until 2012. In 2009 there is already a general feeling among 75% of the world that the global financial system is in immediate danger of blowing up or coming apart at the seams. This fear IS justified. For 65 years the world has been held together by the US dollar. Even through the betrayal of 1971, the rest of the world forgave the US and continued using this piece of paper as a substitute for real wealth. But this is over.

March 18th, 2009: Ben Bernanke announced that the Fed will purchase billions of dollars of mortgages and government bonds.

March 20th, 2009: At the Independent Community Bankers meeting a Bernanke squeeze doll was handed out, and Bernanke was the target of ridicule. The only thing backing the fiat paper dollar is the credibility of the US central bank. When foreigners see the Fed’s own banking community jeering the Fed honcho, the loss of confidence in the dollar is imminent.

March 23, 2009: China’s central bank governor said the US dollar should be replaced as the world reserve currency. That was the most powerful attack yet on the dollar’s credibility. (China is the largest holder of US dollar assets.)

April 24, 2009: China admitted that it has boosted its gold reserves by 76 percent since 2003.

May 5, 2009: The Gulf Cooperation Council (GCC) held its most recent meeting to discuss the Khaleeji, a new gulf-wide currency that, starting in 2010, will displace both the dollar's usage demand in pricing and purchasing oil, but also its reserve demand among oil producing and oil consuming countries the world over.

The writing is on the wall, dear friends. Sure, we will have some chaos and turmoil in the coming years. But more importantly, we will have an entire paradigm shift away from paper wealth toward real wealth. This shift is going to deflate the value of all paper until it reaches its intrinsic value of zero. And in that same action, the perception of value that flows out of paper will flow into gold. Gold is about to realize a return to its long history as a wealth reserve.

In the near future, we will all be familiar with the various forms of gold that one can hold to protect one's wealth. But right now, only about 1% of us (in the West) are aware. More than ever in the history of the world, gold IS the antidote that I mentioned at the top. It is the flu vaccine for the dollar flu. Get some and become immune to much of the stress that is heading our way. Turn a worst case scenario into a best case scenario. Not only on a personal level, but also on a global scale. Freegold will be for the good of all mankind.