Sunday, September 27, 2009

Say Goodbye to Wall Street

So many faces in and out of my life
Some will last
Some will just be now and then
Life is a series of hellos and goodbyes
I'm afraid it's time for goodbye again
Say goodbye to Wall Street
Say goodbye, my baby
Say goodbye to Wall Street
Say goodbye, my baby

Equity versus Credit

This is the difference between gold and dollars. One is limited and the other is unlimited. Gold and equity are limited. Dollars and credit are unlimited. The two cannot be mixed without a negative outcome for society.

Imagine two neighbors. Both are unemployed, yet neither are worried about it at the moment. One neighbor has a stash of gold coins. The other has a FICO score of 800. One has equity, the other has credit. For the time being they can each live on what they have. Eventually both will have to get a job, but hopefully you can see the difference.

Gold Credit?

In my post, The End of a Currency, I wrote about a perfect gold standard in which there was no monetary inflation and no monetary interest on loans. Someone asked, "why would anyone make a loan in this perfect system?" The simple answer is that they would not.

The more complicated answer is that savers would not loan their gold in the way we think of loans today, with only a piece of paper obliging the borrower to return the gold plus some interest. And certainly not with a mere piece of paper requiring the return of only the principle. Even if it would be worth more when it was returned, the same positive result could be had by burying one's gold, eliminating risk.

No, the way that gold would "go to work" in this perfect gold standard is only through equity investment. One man might provide the gold while another would provide the labor and knowledge and together they would share in the profit or loss of the joint venture.

(On a side note, all major religions originally promoted only this kind of economic activity. Loans for a specific nominal return that included interest were forbidden. Christianity called it usury. Judaism called it neshekh, meaning "a bite". And Islam called it riba, meaning "excess or addition".[1][2])

Which Came First, the Chicken or the Egg?

Which came first? The greed of the banksters to make usurious loans to the people? Or the demand of the people to borrow frivolous capital for whatever economic activity they chose without sharing profits?

Adam Smith (1723-1790) taught us that economies emerge as bottom-up spontaneous self-organized order that naturally arises from social interactions, not from top-down bureaucratic design. This is also true of banks.

Banks emerge in economies because man has the innate desire for a credit-based system in which he can engage his own economic folly at someone else's risk. Given pure equity, the individual man will not lend, but still demands to borrow. And as a society, we (rightly or wrongly) end up demanding that the risk of loss is spread far and wide. We say, "don't mind borrowing it, but damned if I'm gonna lose it!" (See: FDIC)

And with the recent bailout of the banks, it is repelling to think that we are responsible. It is true. We are all, as a society, responsible for the actions taken. It was a foregone conclusion a long time ago. That if losses ever loomed large enough to bring down the system, society at large would end up covering the losses. This is the very nature of the system we have built as a society. A system that sprung up from man's desire to borrow, not from man's desire to lend or steal. That came later.

I do not make these statements in support of the bankers or the bailouts. I find them just as revolting as the next guy. But as a pragmatist, I am looking for a realistic explanation of what is happening.


As a credit-based system emerges along side an equity-based monetary system, all kinds of problems arise for society, not the least of which is inflation. The interest portion of all loans requires growth in the money supply over time. And on a large economic scale, this growth can be quite substantial.

As the lenders' credit-paper notes are "seasoned" over time they begin to circulate as near-money at a discount to the original equity they represented. And as the "money supply" grows, so does the disparity of value between credit and equity. At first, governments always keep the two tied at par through legal tender laws, but this only drives real equity into hiding and credit must expand even faster to cover the loss of equity from the monetary system. But sooner or later the credit portion must be devalued against the equity portion and ultimately, the link between the two is severed.

Society as a whole decides what society's official money is. And once the link between credit and equity is stretched to the breaking point, credit alone is declared to be official money. Thus begins the ultimate unrestrained inflation.

Political Risk

Money, whatever it is declared to be, is constantly at risk from the body politic. The infantile will of the collective is the risk faced by all monetary systems. If gold is a part of that system, then it is the people's gold, their savings, that is at risk from the collective's grabbing hands. The collective is most often described as the government, but governments cannot take bold actions without at least the implicit support of the majority.

In our current crisis, it is the dollar that is at risk. The collective has given implicit support to unlimited government printing in hopes that it will slow the fall from the collapse of credit derivatives. We now also have the central bank of central banks suggesting printing support to guarantee the sum total of bank credit derivatives numbering five to ten times larger than the entire value of all equity on the planet earth.
Central Banks Must Agree Global Clearing Supervision, BIS Says
Sept. 14 (Bloomberg) -- Central banks must coordinate global supervision of derivatives clearinghouses and consider offering them access to emergency funds to limit systemic risk, according to the Bank for International Settlements.

It is the political will of the collective, now facing momentous losses, that is the biggest threat to the dollar. This will is already set in stone. And we have yet to see the full impact of this will as pension funds fail and state and local governments face inevitable insolvency.

The dollar's collapse through the loss of its reserve status has already begun. But it is the political risk, this political will inside the US that ensures that this collapse will be a hyperinflation the likes of which the world has never seen. Never before has a global reserve currency imploded. The stage is now set, the audience seated, the lights dimmed, and a low, rumbling, tympanic drum roll can be heard rising from under the stage.

Evolution of the Dollar

Over the past 65 years, the US dollar has been parlayed into a cost advantage for the United States greater than any other currency scheme throughout all of history. The reason this advantage has been so great was that the true inflation cost of the currency was concealed from the pricing markets.

In the fiat-gold systems of the past, steep price inflations always signaled that the official money was about to be destroyed and redenominated. This fear carried forward into our present purely symbolic currency system, but we soon evolved to accept price inflation as the cost of doing business. As long as it was low enough that we could out-gain it through other investments, the benefits that our fiat trading economy provided were readily accepted.

Over time we have grown numb to the slow, hidden increases of the inflation tax. In moderation, this tax would have been somewhat acceptable, in an immoral sort of way, as society stole the productivity and efficiency gains (from those that could provide such) to pay for itself. But alas, hidden theft is just too good of a process for our collectivist political system not to expand on.

And in the US it is our political system's MO that government does exactly what the majority demands, and then expands the inflation tax to cover it. It has been this way since before we were born!

The Catch

But here's the catch. Since 1971 at least, and probably since 1944, the US dollar has been EXPORTING most of its inflation. And in doing so, it has built up an enormous inflation tax deficit on all dollar based assets. The full amount of this deficit is unknown because it has been masked, hidden, rejigged, absorbed and papered over time and time again. But one thing is for sure. The full price of this tax is way, way above anything we imagine. Most of it hidden over many years in the "dollar reserve function".

As a credit-based currency expands, the market acts as the lever that balances equity values against the expanding currency within its legal tender zone. But in the case of the dollar, a constant outflow lasting decades has been absorbed and held in reserve (think reservoir) outside of the dollar zone.

In addition to this main monumental price deception, the little bit of price inflation that actually did seep into the dollar zone was either suppressed through the gold and oil price manipulation scheme, masked by CPI rigging, or simply papered over with low interest rates and intentional asset bubbles. In other words they handed out free money to pay for what little price inflation actually showed up, in the form of HELOCs on overpriced homes.

So even though prices have risen over the last 40 years, don't assume the inflation tax has been paid. Don't even assume we have made a down payment on it. Just think about the gains we have seen in the US ever since our purely symbolic currency became the global reserve. (Actually, ever since our gold-backed paper fiat currency became the global reserve and then somehow managed to retain that privilege after switching to pure fiat!) Think of the standard of living improvements. Think of the growth. Think of the military expansion. Think of the social program expansion. Think of all the spending we've done over the last 40 years, compared to the producing we've done.

Our spending has gone parabolic while our production has collapsed. And now we are mostly a service industry workforce and a consumer driven economy. The result of decades of decadence. The result of public and private profligacy. And now the tax is due.

Hugo Salinas Price's graph [3] gives us a good visual depiction of some of this unpaid inflation tax.

Payment of this enormous inflation tax deficit will present itself to us as a sudden hyperinflation. It will be perceived and reported by the media as something that was done to us by China. But now, at least you know the truth.


The taxman is at our door. The mother of all taxes is now due. But curiously, there is a refuge. There is a haven in which you can hide. Can you guess what it is?

Of course it is physical gold in your physical possession. But gold will not just protect you from this 65-year inflation tax. As the system collapses from its own weight, gold will first reveal its true value. And then, from there, it will hold its true value as paper burns all around it.

And once we make it through this firestorm to the other side, gold will continue to be THE world class refuge from the future inflation tax that is sure to come.

You see, the Siamese twins, credit and equity, have finally been separated. Gold has been demonetized! It is now a world class wealth asset. A tradable wealth asset. A portable wealth asset. A durable wealth asset. Money, which has been deemed by society to be fiat currency only, no longer needs to carry the heavy burden of ALSO being a store of value. No longer must we raise entire industries that suck in generations of our best and brightest talent for the sole purpose of designing paper wealth derivative products in a vain attempt to make money be a store of value. No longer. Say goodbye to Wall Street.


[1] History of Usury Prohibition
Wayne A.M. Visser and Alastair McIntosh
Centre for Human Ecology

[2] Islamic finance principles to restore policy effectiveness
Willem Buiter, Financial Times

[3] A New Magna Carta for Our Times
Hugo Salinas Price

Friday, September 25, 2009

Must-See, Must-Hear

This is the must-see...

And this is the must-hear...

Eric King interviews Jim Sinclair

The file is an MP3. Click to listen or right-click to download.

Source website

Thursday, September 24, 2009

Tuesday, September 22, 2009

A Question on China

In a recent comment on this blog, Belgian asked Ender, "Is there already enough goldmetal within Chinese borders to let freegold break free ?"

This got me thinking. Back in 2001 there was some discussion of "who is Big Trader?" I believe that Belgian took the position that it was probably Saudi Arabia. But then it was pointed out that Another had said "Big Trader" was "HK people", meaning Hong Kong.

Big Trader - circa 1997
MK: "As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices."

Another: "When everyone that has exchanged gold for paper finds out it's real price, in oil terms they will try to get it back. The great scramble that "Big Trader" understood may be very, very close."

"The problem is, "if the CBs don't expand their roll as "primary suppliers" LBMA will implode and in the process create the greatest bull market in oil and gold the world has ever seen. That is why some "Big Traders" are holding ONLY gold as events unfold. Interesting, don't you think?"

"That's why "Big Trader" and his bunch closed out all paper and pulled in bullion. Don't worry about the CBs selling everything, the market is huge compared TO WHAT THEY HAVE! And Comex is nothing, if "only a silly game". Worldwide trading in gold could be cut in half and still equal all the metal in existance!"

"Well a funny thing happened right after the Gulf war ended. What looked like big money before turned out to be little money as some HK people, I'll call them "Big Trader" for short, moved in and started buying all the notes and physical the market offered. The rub was that they only bought low, and lower and cheaper. They never ran the price and they never ran out of money. Seeing this, some people ( middle east ) started to exchange their existing paper gold for the real stuff. From that time, early 1997 LBMA was running full speed just to stay in one spot! In other words paper volume had to increase to the physical volume on a worldwide scale, and that was going to be one hell of a jump. It could not be hidden from the news any longer."

And one more from JTF (Oct. 12, 1997): "My assessment is the following: The Central banks began the gold market manipulation by offering private gold to brokers. Since they could use their own real gold as "insurance", they did not need to sell their own gold. As the paper gold (the derivative gold?) became popular, all the trading of US$/oil/US treasuries became based on the paper gold method. Eventually "Big Trader" or some other individual stepped in and started pushing down the "paper" price of gold. Other traders, possibly those selling oil decided that they wanted to go back on the gold standard, and wanted real gold. Now however, the paper trading volume was so high that the Central Banks could not possibly maintain control of the markets, let alone supply enough real gold to cover all demands. If we are now talking about the CB selling of 1/3 to 1/2 of their gold, the public will find out, with catastrophic consequences, regardless of how "worthless" that gold they were told is. Looks like the choice between the proverbial rock and the hard place! Is there really any gold in Fort Knox?"

One interpretation could be that the exposition of the daily trading volume of the LBMA on January 30, 1997 was driven by massive Hong Kong buys, in essence, busting open the gold for oil charade of the paper markets. What followed were posts by "Big Trader" (HK?) and Another (BIS?) explaining what had happened, in their cryptic way, the only way they safely could.

The logical question that follows is "did these HK purchases require the physical transfer of gold to HK in 1997, or just the 'paper cornering' of it?"

Another clearly said that the CB's would have to step in as primary suppliers or the whole thing would fall apart.

The Day Backwardation Came

Well, two years later on May 7, 1999 we had the BOE announcement and "Browns Bottom" where the Bank of England became a primary supplier of 400 tonnes.

This action was followed four months later on September 26, 1999 by the 'Washington Agreement on Gold' during the IMF meeting in Washington, DC. Under this agreement, 15 European CB's agreed that no more than 400 tonnes of gold (between the lot of them) would be sold in any given year. This agreement was in direct response to "Brown's Bottom" (and I'm guessing to prevent rogue politicians from doing what Gordon Brown had done with "the people's gold").

Three days later, on Sept. 29th, the paper gold market almost imploded. On this one day, gold went into "backwardation"!

Please CLICK HERE and look at the GOFO rates on Sept. 29, 1999 (and those just before and after).

And here is a graph showing the downward spike of "backwardation" on that day:

It is also interesting to follow the comments from that day in the USAGold forum archives. If you read the whole day you can see how sentiment changed within the period of one day. Something must have happened behind the curtain on that day. Click here and read from the bottom up. You will witness a shift from the early morning before the markets opened, through the trading day, and ending on a different note at the end of the day. Interesting in hindsight, knowing that was the day that backwardation came!


Now jump forward 10 years to 2009.
April 24 (Bloomberg) -- China boosted its gold reserves by 76 percent since 2003 and has the world’s fifth-biggest holding by country, said Hu Xiaolian, head of the State Administration of Foreign Exchange.

Then, September 3, 2009, Hong Kong announces its wish to recall its physical gold:
Hong Kong recalls gold reserves, touts high-security vault
In a challenge to London, Asian states invited to store bullion closer to home

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

Also in 2009, we have the IMF announcement that it will sell 403 tonnes of gold. (There's that 400 tonne number again!) We also hear that China might like to buy that gold from the IMF. And it is also interesting to note that IMF gold is actually the "membership fee" of its member nations. It is even possible that the IMF gold vault only contains the paper promises of its member nations. But that is a subject for another day.


So let's recap our scenario. Prior to 1997 we have an "oil for gold deal" that is run through the paper gold market. It is a means of price suppression so that private gold will be sold to "buyers in the know" at ridiculously low prices. Then right at the beginning of 1997 we have Hong Kong entering this market - as a buyer - "to get in on the deal".

Then, on January 30, 1997, the monstrous paper volume is exposed under mysterious circumstances. We then have the appearance of "Big Trader" and "Another" on the only internet gold message board of the time, explaining what is happening and how individual gold investors should react.

The events that followed over the next 12 years, including the price rise from $265 per ounce to $1015 per ounce (383% rise so far), seem to confirm that something happened in 1997 to change the gold market.

My Question

Back to Belgian's question to Ender: "Is there already enough goldmetal within Chinese borders to let freegold break free ?"

Something else happened in 1997 that may be relevant in the context of all of the above.
From Wikipedia: "Beginning as a trading port, Hong Kong became a crown colony of the United Kingdom in 1842. It was reclassified as a British dependent territory in 1983 until the transfer of sovereignty to the People's Republic of China in 1997. <--

"Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People's Republic of China on the Question of Hong Kong, "The Government of the People's Republic of China declares that to recover the Hong Kong area (including Hong Kong Island, Kowloon and the New Territories, hereinafter referred to as Hong Kong) is the common aspiration of the entire Chinese people, and that it has decided to "resume" the exercise of sovereignty over Hong Kong with effect from 1 July 1997."

BBC: On this day in 1997
July 1, 1997: Hong Kong handed over to Chinese control

Hong Kong has been handed back to the Chinese authorities - ending more than 150 years of British control.

So my question to all of you is this: Do you think the 1997 Chinese recovery of Hong Kong from the British was related to a substantial 1997 shift in Hong Kong's accumulation of gold metal from the West?


Sunday, September 20, 2009

Shake the Disease

Here is a plea
From my heart to you
Nobody knows me
As well as you do
You know how hard it is for me
To shake the disease
That takes a hold of my wealth
In situations like these

On this blog I write mostly about two things: the dollar and gold. The disease and the cure. On the dollar side, I usually focus on the inflation-deflation debate and my view that hyperinflation is both imminent and inevitable. On the gold side I focus mostly on freegold, the impending emergence of a physical-only gold market, and also on the tremendous benefit of holding physical gold through this transition.

These two subjects relate fractally to everyone. What is best for the individual producer/saver. What is best for the various collective producer/saver groups. And what is best for the entire planet. This is not a patriotic issue. It is common sense!

Today we have a disease that has crippled our global economy. All existing real-world capital is still out there, but for some reason it won't circulate. Forcing paper capital through our planetary veins is not a solution any more than transfusing water to replace the blood stream would keep a dying man alive. We need real blood to survive. This is a natural law.

Our disease is a parasite which has spread throughout the entire circulatory system, collecting and clotting blood in only non-vital, non-productive organs like the appendix and Goldman Sachs. To cure this disease we will have to remove the parasite, the diseased organs, and transfuse new, healthy blood. This disease is in violation of natural laws, and its cure will be a natural solution.
"Early in life there is one thing that people learn about natural laws: laws of nature do their own enforcing, and when not obeyed, they do their own punishing. The mere attempt to disobey a natural law, intended or not, exposes a person to whatever punishment that law imposes."
-Richard W. Wetherill (1906-1989) Quote found in an advertisement in Scientific American, Sept. 2009, p. 103

Let us imagine this long, stringy parasite as a Matrix that is covering the entire planet. Yes, like the movie.

Today, all of our perceptions exist inside this Matrix, the "transactional currency matrix". A transactional currency is any medium of exchange. It is any currency used to transact the exchange of real goods needed for life, liberty and the pursuit of happiness. The exchange, or flow, of these real goods is the life blood of our global economy. The flow of purely symbolic digital currency units used as an arbitrary unit of account at that fleeting moment of exchange, is not life blood. But according to Ben Bernanke, it is.

Ben Bernanke has announced that he conquered the recession by creating enough new symbolic digital currency units to raise the nominal GDP. Wow! With his mouse and keyboard, Ben has raised the sea level of this arbitrary unit of account by which we measure the GDP. So now the recession is over, huh?

Well, a recession is two or more quarters of contracting GDP. So, I guess if Ben printed the GOV and PPT enough dough to stop that GDP mess, then it must be over. Hooray!

While we're on the subject, let's take a quick look at a couple more definitions. A "depression" is a contraction of real GDP growth of 10%. And a "Great Depression" is a contraction of real GDP growth of 25%. But what happens if they just keep on printing money, so that in the accountants' fancy books, nothing contracts ever again? All is well. Right?

In his ongoing series of interviews focused on the inflation-deflation debate, Jim Puplava's latest offering is a "face to face debate" between Daniel Amerman (who's writings heavily influenced my popular post, All Paper is STILL a short position on gold) and Mike Shedlock (Mish). This program is good and worth your time:
The Great Deflation/Inflation Debate with Daniel R. Amerman & Michael 'Mish' Shedlock
WindowsMedia MP3 RealPlayer WinAmp

One thing that Mish has difficulty understanding is the sheer frivolity of a completely unbacked, purely symbolic currency. Sure, it has lasted for 38 years now. And sure, it supports a matrix of great weight that has its tentacles in every corner of the world. But neither of these weighty arguments changes the core nature of the dollar to anything more than a purely symbolic idea or thought. Mish just doesn't get this point. To him, the weight of the world scrambling for dollars as global credit and debt collapses makes the dollar as good as gold.

And here is something I think they both missed in this debate. See my diagram above. They both seem to agree that the Fed is the fulcrum between the global dollar matrix and the value of the dollar. Daniel Amerman argues that the Fed can crush the dollar's value at will. And Mish argues that the sheer weight of the global matrix prevents the Fed from having any control over the value of a dollar.

The way I see it, the Fed is not the fulcrum. As I have said many times, first in The Judgement of Value, the Fed makes your money, but it cannot tell you what it is worth. That judgement of value is reserved for the recipient of those dollars. The Fed has no control over the value. In fact, I believe the weight of the Fed itself belongs on the side that puts constant downward pressure on the dollar, 24/7. And everything the Fed does adds weight to that side. Here is how I see the fulcrum...

The dollar is "out on a limb" in the truest sense. And its fate lies mostly in external factors. Sure, the US could decide to devalue the dollar. But all it can really do is create more of them. The rest of the world must decide if that is enough to devalue. In this sense, Mish is right. The Fed has less control than it thinks. But Dan Amerman is also right. The dollar is nothing but a concept, a thought, an idea, a purely symbolic unit of account, and if the world decides it is not worth its weight, it will quickly hit the floor.

This part is important, because most people don't get it. The US dollar IS our debt to each other and to the world. The US dollar is backed by all the goods and services WITHIN the United States. Legal tender laws say it is so. The dollar currently buys many things outside of the United States, but there is no law that says it always will. The only law protecting dollar holders all over the world says that their dollars can be exchanged INSIDE the US. So when Ben Bernanke issued $500 billion in swaps to 14 different foreign central banks in 2008, each one of those dollars became a new claim against us, the US. It is here in the US that those dollars are legal tender. No where else. No where else in the world is anyone required by law to accept those dollars for real goods and services.

So when the world was in dire need of $500 billion, it should have come to our markets and bid up the value of our dollar at the window! Just like Ben said it would! But instead, Ben DOUBLED the number of outstanding, external claims on goods and services within the United States. Did our economy double to cover (back) these new claim checks with real goods and services? Nope, the opposite happened. Our economy shrunk. And that is the way things are going, have been going, and will keep going until the dollar hits the floor.

Of course Mish would argue that these trillions being created by Ben are offset by the credit contraction. But there is a qualitative difference between new dollars created through credit, and those claims created by Ben Bernanke. When new dollars are created through the credit system, they are backed by expanding asset values and by the debtor's promise to work them off. When Ben creates dollars to swap with Europe they are backed only by our countries' contracting economy. So in my view, what Mish sees as a mitigating or balancing factor, I see as an exacerbating one.

Mish is right. It boils down to definitions. And Dan Amerman is right too. The focus must be on what the individual investor can do to protect his wealth. What they avoided (seemingly at all costs) was specific questions and answers. Is it best to hold dollars? Or is there something better? Mish would tell you to hold dollars. Dan Amerman will tell you there is something better. I am here to tell you that even though they wouldn't say it, the answer is so very simple, physical gold.

Read my post All Paper is STILL a Short Position on Gold to learn why it is so simple. You don't need a fancy derivative specially positioned to make money in inflation. Not this time, anyway.

The world is now aligned for the emergence of Freegold. There is almost nothing left standing in the way anymore. The time has arrived that the world will shake the disease that drains real wealth from every corner of the globe in a futile, desperate effort to preserve a failing system of oligarchical centralized banking.

As we wait for the next shoe to drop, be it an unexpected collapse of the banking system, an organized bank holiday, an over-expected collapse of the stock market, an overdue collapse of the bond market, a collapse of the paper gold market, a collapse of the currency exchange markets, a planned devaluation, or something else entirely, we must use this time given us to prepare for the worst. What comes at us is the extreme end of the high impact, low frequency end of the Martenson spectrum. It is an event of the rarest possible nature, certainly once in a lifetime, probably once in a century, and perhaps even a one of a kind.

And as for impact, it will be complete. Entire fortunes accumulated over centuries will vanish overnight. And new fortunes will be created in a sweeping transfer of stored wealth from those holding paper to those holding physical gold. This will be a natural event, even though it does have a few "giant" advocates. A natural response to the decades-long violation of natural economic laws. As the global economic organism, the collective mind of the planet comes to the epiphany that paper debt pyramids aren't worth the paper they are written on, this will happen.

And because it is such a complete impact and absolutely the rarest of events, you cannot possibly prepare too early or too much. Mish says that you are a fool to play the inflation trade until it comes time for the government and the Fed to devalue the dollar. He says that you need not worry about the inflationary impact on your savings until all the consumer debt is cleared from the system. This is possibly the worst advice ever. Would you let your children play in a forest because the forest fire still looks like it is a couple miles away? Would you play football at the edge of the Grand Canyon? Would you take your kids swimming at the edge of a giant waterfall?

As Daniel Amerman says, the United States has no choice now but to keep its dollar-denominated promises and obligations with the printing press. Perform in form, default in substance! But if the external world does not devalue the dollar, the US will be able to perform in form AND substance, through only the printing press, while the rest of the world ships us the goods and services we require to maintain our high standard of living. This is the outcome Mish describes! Sure, he'll say it can't go on forever. But how long? I say no longer. It is done. D-U-N done! But the deflationists say it can continue at least 4 or 5 more years. Most of them believe it will be at least a decade before we see hyperinflation or a total collapse of the dollar.

"Perform in form, default in substance" has already begun. It is underway now. Bernanke is trying to hide it, but doing a poor job. It won't last long. Perhaps weeks. "Perform in form, default in substance". This is the final, terminal stage of the disease. Our creditors know they are already being screwed with every Fed purchase. But as long as they continue to judge the dollar valuable, the US default will remain focused outward on the world, spewing massive losses on everyone but the United States itself. But once the dollar is judged valueless, in that instant, the focus will reverse and nature will impose her justice.

It is now that the world is going to shake the disease. And once it does, we will finally have a tradable wealth asset, existing along side and providing balance to our transactional currency. No more will common working men and women be relegated to saving only a transactional currency while the truly rich save real wealth. "Finally, we will all have a wealth reserve that places our footing in life on equal ground with the giants around us. Gold! Understanding the events that got us here and how they will unfold before us is what the GoldTrail is all about."

"Hear me now, what the wealthy and powerful know: real value does not have to always be stated or converted throughout time. It need only be repriced once during the experience of life, that will be much more than enough!"

Finally, here are three concepts to keep in mind as you wade through the barrage of conflicting information day in and day out.

1. Paradigm shifts happen very fast with a distinct element of surprise. As Richard Maybury says, sentiment can turn on a dime. And when it does, that which seems solid can crumble in an instant. For a scale example please see Bear Stearns and Lehman Brothers.

2. Natural paradigm shifts are preceded by a "head fake". In the moments before a tsunami, the water recedes. In the moments before hyperinflation, you will be faked out by pseudo-deflation or rigged stability. For an example please see Argentina and Zimbabwe...

3. Natural paradigm shift transitions, by design, surprise and financially destroy the vast majority while only the smallest minority gains greatly from them. Even some of the staunchest honest money advocates may find that things won't play out as they had expected. Can you imagine the crushing disappointment? In one of Another's very last published messages sent to his American friend FOA, he said this...

"Truly, this failure of current gold will be reflected as anguish in these western goldbugs, both bankers and investors... Your work, good man, has been as trying to reconcile the religions of this world. Telling both they are just, while only one can be right in the end. So it is in this day of gold."

Another's message was to take physical gold into your physical possession. This, he said, will explode in real value as paper wealth burns in the great fire that is coming.


Tuesday, September 15, 2009

Gresham's Ghost

Gresham's Law states that bad money drives good money out of circulation. In other words, debased money drives non-debased money under mattresses and into shoe boxes.

Sir Thomas Gresham

Sir Thomas Gresham (1519-1579) lived during the reign of the Tudors in England. Those of you who have been watching the excellent TV series, "The Tudors", will appreciate this history. Gresham's father, Sir Richard Gresham, served as the Mayor of London, a member of parliament, and was knighted by Henry VIII.

Thomas served Henry VIII in his younger years and went on to serve King Edward VI (son of Henry and Jane Seymour), Queen Mary (daughter of Henry and Catherine of Aragon) and Queen Elizabeth (daughter of Henry and Anne Boleyn) in the role of royal financial wizard.

Henry VIII and Edward VI, during their reigns, drastically debased the silver coinage of the kingdom through both weight and purity. In 1544, young King Edward VI issued a coin containing just one third silver and two thirds copper — equating to .333 silver, or 33.3% pure. The result was a coin copper in appearance, but relatively pale in color. A shocking debasement considering England's first silver coins were .999 pure, followed by .925 which later came to be known as sterling silver.

The Tudors

Then, in 1552, a penny's weight was cut to only 8 grains (0.52 g). The penny began at 22.5 troy grains of fine silver and was reduced to 15 grains around 1420, then to 12 grains in 1464, and 8 grains in 1552.

In 1551 Thomas Gresham was called upon by King Edward VI to rescue the pound sterling which had embarrassed the king as it collapsed in value. Gresham's solution was to manipulate the value of the pound sterling on the bourse (exchange) in Antwerp (modern-day Belgium) through "ingenious, arbitrary and unfair means". His methods were so successful that King Edward later discharged almost all of Gresham's personal debts.

Sir Thomas Gresham went on to serve Edward's two half-sisters as they took succession of the throne. Another interesting story is the fictional excerpt from "The Virgin Lover" related by John Rubino in
A Tremendous Secret. Sir Gresham was Queen Elizabeth's closest monetary advisor at the time:
The year is 1560 and the young queen Elizabeth rules a country nearly bankrupted by a Spanish alliance that produced only war and debt. The English treasury has been systemically debasing its coins by clipping and shaving them, so that their face value vastly exceeds their gold content.

Elizabeth’s advisors have decided that the monetary system needs to be reset, and have been importing borrowed gold. On the appointed day they intend to call in the circulating coins and replace them -- by weight rather than face value -- with newly-minted coins. This devaluation will transfer citizens’ wealth to the government, impoverishing the former and enriching the latter. And if all goes as planned it will come as a surprise to most of the country.

But Elizabeth’s lover, Sir Robert Dudley, learns of the plan and is not happy:

Queen Elizabeth I

Elizabeth turned and smiled at him and took his hand and held it to her cheek. “My Robert.”

“Tell me, my pretty love,” Robert said quietly. “Why are you bringing in boatloads of Spanish gold from Antwerp, and how are you paying for it all?”

She gave a little gasp and the color went from her face, the smile from her eyes. “Oh,” she said. “That.”

“Yes,” he replied evenly. “That. Don't you think you had better tell me what is going on?”

“How did you find out? It is supposed to be a great secret.”

“Never mind,” he said. “But I am sorry to learn that you are still keep secrets from me, after your promises.”

“I was going to tell you,” she said at once. “It is just that Scotland has driven everything from my mind.”

“I am sure,” he sad coldly. “For if you had continued with your forgetfulness till the day that you called in the old coin and issued new, I would have been left with a small treasure room filled with dross, would I not? And left at a substantial loss, would I not? Was it your intention that I should suffer?”

Elizabeth flushed. “I didn't know you were storing small coin.”

Sir Robert Dudley

“I have lands; my tenants do not pay their rents in bullion, alas. I have trading debts which are paid in small coin. I have chests and chests of pennies and farthings. Do tell me what I may get for them?”

“A little more than their weight,” she said in a very small voice.

“Not their face value?”

She shook her head in silence. “We are calling in the coins and issuing new,” she said. “It is Gresham’s plan -- you know of it yourself. We have to make the coins anew.”

Robert let go of her hand and walked to the center of the room while she sat and watched him wondering what he would do. She realized that the sinking feeling in her belly was apprehension. For the first time in her life she was afraid what a man was thinking of her -- not for policy but for love.

“Robert, don't be angry with me. I didn't mean to disadvantage you,” she said and heard the weakness in her own voice.

“I know,” he said shortly. “It is partly that which amazes me. Did you not think that this would cost me money?”

She gasped. “I only thought it had to be a secret, a tremendous secret, or everyone will trade among themselves and the coins will be worse and worse regarded,” she said quickly. “It is an awful thing, Robert, to know that people think that your very coins are next to worthless.”

Here is an interesting fact: Sir Thomas Gresham did not formulate "Gresham's law"! It was actually a well known concept of the time, though it didn't carry any name. It wasn't until 300 years later, in 1857, when an economist named Henry Dunning MacLeod attributed Gresham's name to the concept.

I think it is clear from this story that Thomas Gresham was not exactly a hard money hero. In fact, he was an agent of monetary control and debasement. Which brings me to the main concept of this post, that Gresham's Ghost is still with us today, debasing our medium of exchange and unit of account and driving the evolution of money to Freegold.

Money. It is what confuses our soul and drives us to do that which makes absolutely no sense. It is only because we have been led by a chronological history, rife with warnings of debasement, into thinking that we must retain that which is only an ephemeral medium of exchange as our ultimate store of life-long value. Do the truly wealthy hold rooms-full and truckloads of paper cash? Hell no! They hold real stores of wealth, like artwork, antiques, property, collectibles and land. Why then have we, the subjects of the world, the masses, been led to only hold that one faulty medium of exchange as our main store of value? Why? Because it is the one thing in this world that is vulnerable to the collective, the government and banker debasement and the surreptitious theft of the inflation tax!

With each new advancing stage of civilization we climb one step higher on the ladder of economic sophistication. And once there, we perceive the need for a more sophisticated way to use money. We are told that this newfound monetary sophistication is responsible for our higher standard of living. What a lie!

It is here, at this step of sophistry, that men always attempt to combine receipts with real wealth. Each time we come to this point, each new idea throughout history promises to undo the prior problems. And each time the wealth of the common man, his life-long savings is risked, plundered and squandered once again as the world tries to make gold into something it isn't.

It is the mashing of the gold wealth concept with the circulating credit receipt concept that opens the door to some of the greatest problems man has ever seen. Take, for example, the period of the modern gold exchange standard. 1913: Creation of the Federal Reserve System. 1914: WWI. 1923: Weimar hyperinflation. 1930: The Great Depression. 1939: WWII. 1950: The Korean War. 1959: The Vietnam War. 1971: Off the gold exchange standard.

Inflation of the circulating money supply is simply a fact of life in our imperfect world. The collective or the King always finds a way to inflate or debase money to its own advantage. And if circulating money is gold, or based on gold, then inflation is historically done through the golden spoils of war or confiscation. The cry of the hungry collective is "if fiat is our money, we must borrow it. We must print it. If gold is our money we must take it. We must have money when it is needed!"

It is for this reason that electronic fiat money is here to stay. Yet evolution still takes us forward, not back. Gresham's Ghost is with us today, driving the finite physical gold supply of the world into private hands, into mattresses and shoe boxes as the collective's play money is inflated to the heavens. Moving forward with the flow of evolution means embracing this fiat money experiment that society will always tamper with, and at the same time owning the wealth of ages as the ancients did, in your possession. In this way, the average family can know their wealth is real while society at large pursues its greedy folly while issuing unlimited receipts of credit.

Embrace Gresham's Ghost, for it is leading us to Freegold!


Friday, September 11, 2009


Let us take a trip back in time to visit the first users of gold. We'll travel back 6,000 years to the very end of the Stone Age, a period where the first metal tools start to appear along side the stone tools that were used for the previous 6,000 years. This was a time of human transition, sometimes called the "copper age" or the "bronze age", followed by the "iron age".

Stone Age tools

During this period of time we see the emergence of agriculture which allowed for the storage of food which created the first cities that could support the first division of labor. We also see the emergence of the first long-distance trade routes between cities and civilizations. 5,500 years ago we see the emergence of Mesopotamia, "the cradle of civilization", on the Tigris and Euphrates rivers in modern-day Iraq, followed a couple hundred years later by Egypt on the Nile.

The discovery of metal literally changed the world, bringing it out of the stone age and into civilization. This "cradle of civilization", called "The Fertile Crescent", was also the birthplace of writing, recorded history, and the wheel!


During these ancient times, the force which most drove the development of civilization was trade. Trade, or commerce, allowed the division of labor to flourish and spread. But money had yet to be conceived. To ancient man, trade meant the exchange of real goods. Spices, silk, oils, incense, ivory and live animals were popular long-range trading items because they were transportable and durable. But for one who was setting out on the trade road with his camel bearing the weight of his goods, one item stood out head and shoulders above the rest.

That item was gold. Its most precious quality was that it always traded for the most goods, especially on the road. In town, you could trade your perishable items directly for other needed items. But on the road, gold ruled.

I can imagine that the first man to trade gold would have offered it at a pretty low price. But as the shiny metal began to circulate throughout this young economy, its unique qualities quickly raised its value above all else. Gold was a beautiful, soft, malleable metal. It was easily divided, melted or bent into form. And it was rare, in an age when metals were just coming into wide use.

Bronze Age weapons

As copper, bronze and iron quickly found their place in agricultural tools, cooking wares, weaponry and armor, gold found its home in the luxury of kings! And once again, this gold was not money. It was simply one of many metals and trade goods. But it was by far the best. You might find it difficult to trade silk to a pig farmer for a pig, especially if that farmer had no wife. But you would have no trouble trading gold for whatever you needed as it found its ultimate backing in the lust of kings and giants.

Store of Value

As division of labor matured, a new need arose in this ancient economy. Through division of labor, some men were able to find a trade craft at which they especially excelled. No longer did everyone have to spend half the day tending to food. Some men were able to produce goods of a value in excess of their own daily needs. And for this, a good store of value was needed so that men could hoard their productive efforts for later use.

As the exchange good which brought the most value in trade for its weight, gold quickly became the store of value of choice. And it also had other important qualities which made it an excellent store of value for these ancient "super-producers".

Because gold was proving itself most valuable as a mere medium for trade and as a luxury for kings, it was not used in essential activities like fighting and cooking. So an ancient "mogul" could hoard as much gold as he could muster without depriving his countrymen of the necessities of life. It was a stand-alone store of value that did not invade the rights of others to their share of the limited resources necessary to the support of life.

It was completely durable. It did not rust, tarnish or rot. And it was soft and malleable making it easily divisible when called upon for trade. It was rare and difficult to remove from the earth, and most importantly, it was coveted by kings! Its value was assured and backed by the lust of Giants!

What needs to be understood from this story is that gold, as a simple good for trade, assimilates the qualities of our modern understanding of money. And not only that, but it is democratically elected through unanimous participation for this singular task. In the monetary and currency vacuum of antiquity, gold became both the medium of exchange par excellence, AND the store of value of choice for kings and commoners alike. This was natural selection. This was evolution!


The first known use of the word 'money' was in the 1200's at the height of the Dark Ages which ran from the fall of the Roman Empire in 476 AD until the Renaissance of the 1300's. [To be fair, I should note that modern academics (who also notably embrace Keynes and Marx) no longer refer to this period as "the Dark Ages". It is now called "the Middle Ages".]

The word 'currency' did not enter the lexicon until more than 400 years later, in 1699, 12 years before the founding of the South Seas Company and 21 years before the infamous "South Seas Bubble" which cause massive international financial ruin.

I bring this up because the very concept of money and currency is most certainly a modern construct that has been imposed on gold to the detriment of society at large. Historically, gold filled two purposes by popular demand. It quickly evolved into the medium of exchange of choice in the absence of any forceful government interference. And it has, for 6,000 years, filled the need for a durable store of value that does not infringe on the rights of any other living human being.

Gold Coins

The coinage of gold in ancient times marks the emergence of a third function. By coining gold, it also became a standardized unit of account. This not only made trade easier, but it also allowed for the emergence of taxation!

The first gold coins were made by the Egyptian Pharaohs around 2700 BC and were given as gifts from the king, not circulated in commerce. Not until more than 2,000 years later, around 560 BC, did gold coins start circulating. From that point in history, gold coins have had a very long run as 1) a medium of exchange, 2) a store of value and 3) a unit of account. This run lasted from 560 BC until 1933, a total of almost 2,500 years!

Through most of this 2,500 year history, gold coins functioned and circulated solely because of their intrinsic premium ability to fill an essential need. Only in modern times has man's collectivist association found selfish advantage in legislating a specific, faulty medium of exchange and a unit of account.

Survival of the Fittest

The next stage of this evolution is upon us today. Society's collective ambitions have betrayed the working producers of the world. And now no store of value endorsed by the collective is safe. Yet physical gold's store of value function is still backed by the desire of kings and giants all over the world (e.g., India, Arabia, China, Russia, Central Banks... all physical gold advocates - all net accumulators).

As a collective society engaged in the stealthy proliferation of contractual paper debt, we have evolved a paradox in which it is commonly understood that more wealth comes from less work. The individual has forgotten the age-old wisdom that he is responsible for his own well being, and exchanged it for the illusion of collective responsibility.

The individual still claims all the rights which have been hard won through centuries of blood, sweat and tears, yet now he shifts the obligation of providence onto the collective. Now in full, unstoppable, political swing, this movement has turned the world's producers and savers against the infantile collective. Their goals and desires are no longer aligned. Their future plans no longer coincide. Their support for each other, no longer exists. The warning bell has rung.

This debauchery has led to the rediscovery of gold by individuals the world over as a self-defense reflex against the lust of the collective. Gold will increasingly be held privately and physically as all other "on the record" stores of value are taxed and pillaged to oblivion by the hungry collective. This cycle will continue, growing exponentially, until the hunger is broken through either starvation or a return to responsible production.

3 Stage Rocket

Some say that biological evolution happens in fits and starts, a theory called "punctuated equilibrium". It states that evolutionary change is characterized by short periods of rapid evolution followed by longer periods of stasis in which no change occurs.

In economic terms, we have just entered one of the rare short periods of rapid change. And in so doing, an unparalleled opportunity is presented to all commoners who would hold physical gold through the duration of this "punctuation". It is a de facto transfer of wealth that will rival some of the greatest windfall gains in history.

Imagine with me a three stage rocket which has just launched to take us to our next level of stasis and equilibrium. In the first stage of this ride, the fractional reserve paper market for gold will break up and all the existing gold demand will rush from paper into physical. These are the "gold bugs" that were fooled into paper promises. This stage represents a newfound equilibrium between already existing supply (physical gold) and demand (all gold investors). You can do your own calculation of the ratio of paper gold to physical, but I will tell you it is not small.

The second stage of this rocket ride begins as the first stage propellant (paper gold market) is jettisoned. During this second stage we will witness the massive force of trillions of dollars as dollar reserve holders all over the world bid on rising physical gold as there will be not much else for them to do with their dollars at that point.

As the first stage brought "the gold market" into equilibrium, this second stage will bring "the dollar" into equilibrium, as it finally reaches a depth of value to match its long term history of over-creation - 50 years worth!

The third and final stage of the rocket ride could be called "the momentum effect". Seeing the first two stages in full swing, everyone else will rush out of any paper asset still liquid enough to obtain even a tiny amount of gold. And with this stage will come the hyperinflation in the prices of all other real goods as the US Fed frantically prints more dollars to pay the government's nominal obligations in addition to its hyperinflating daily expenses.

This printing response will add fuel to "the momentum effect" stage rocketing it from what would normally be a bubble into a sustainable rise which will only plateau once the madness ends.

And may I remind you, the madness has only just begun.


When things finally settle down, we will enter a new era of equilibrium. Some things will remain the same while others will have changed forever. Here are just a few of the changes I imagine.

Gold will trade in physical form only. No longer will the owners of gold trust the custodianship of foreign nations.

Fiat currencies will still function in trade and as a unit of account, repositioned at their new values, wherever debt is required. But they will have to undergo a process of credibility re-establishment, much like a bankrupt individual, before they will ever again be used by people as a reliable store of value.

For producing individuals and nations alike, gold will become the wealth reserve of choice for the preservation of purchasing power earned through productive labor. Believe it or not, I think that our freshly neutered governments will support this development as they will ultimately view it as the only means to slowly rebuild what has been lost, in a sustainable way.

So am I an optimist or a pessimist? I guess that is for each individual to decide. But I'll give you a tip. Get some physical gold before you think too hard on it!


Tuesday, September 8, 2009

Sunday, September 6, 2009

The End of a Currency

Debt Based Money and Interest Rates

Isn't interest the real price of money? As more and more people demand money through credit, this drives up the cost of money, right? This drives up interest rates. Rising demand for easy money causes rising interest rates which cause falling bond valuations.

Does it follow that artificially lowering the price of money will raise demand for easy money? Does it follow that artificially propping up the value of bonds and bills will levitate a plunging real world economy that is built on credit and debt?

Don't bet on it!

As the stock market rises during "normal" times, rising interest rates follow. Likewise, as the stock market falls, so do interest rates. Economic expansion and contraction drive real interest rates in a "healthy" fiat system. This is the check and balance that keeps the system "healthy", keeps it in relative balance.

What we are witnessing today is NOT a healthy fiat system. What we see is NOT a healthy economy. In fact, practically everything we watch today on CNBC is the result of government acts. The government wants desperately to save the stock market, not the economy... because over the past 30 years the stock market has gradually become the US economy!

Wonderland Breaks from Reality

Remember this graphic?

All those fake numbers being put out by Wall Street, the government and CNBC showing magical growth on the Ponzi paper digit (Alice in Wonderland) side of the equation must be juxtaposed against the real world manufacturing economy that has been in decline for 30 years.

This is the 30 year digital/Ponzi-paper inflation crescendo that has finally crested and, like an ocean wave, will curl over and break. This is also the 30 year engineered interest rate decline that has finally reached its nadir, 0%!

So is the price of the dollar actually zero? Perhaps price and value are the same thing in this particular case!

What did I say at the top? "Rising demand for easy money causes rising interest rates..." So what does a zero Fed Funds rate say? Zero demand for worthless money? I don't know. You tell me.

Here is what I see: 30 years of digital/financial Ponzi-paper inflation has gradually decreased the efficiency of all capital investment, everywhere! Mal-investment is so ubiquitous now that it cannot even be distinguished! Confidence in the future is at an ALL TIME LOW! And mass-confusion about inflation, deflation, stagflation, etc... is at an ALL TIME HIGH! We have truly built our own Tower of Babel!

Sound Money
"...achieving 'sound money’ is the easiest thing in the world! Just stop creating more of it! That’s all you need!"
-Mogambo Guru

Imagine a hypothetical perfect gold standard. There is nothing but gold used as money, and its supply remains constant. As man labors and builds, the economy will grow, and gradually one piece of gold will equal more and more real goods and services. Over time, in this perfect gold standard, the value of that piece of gold will rise and the cost of goods and services will fall.

Now imagine a lender and borrower. The lender lends 10 ounces of gold to the borrower, who then trades it on the open market for the goods he needs to be productive, say, farm equipment.

Let's say the term is a 5 year loan and there is no interest in this perfect world. After 5 years, the borrower must return the 10 ounces of gold that he borrowed.

During those 5 years, the value of gold will rise and prices of goods will fall, what we currently think of as "deflation". So in 5 years when the farmer must reacquire gold on the open market, he will have to surrender more goods than he received for that same gold 5 years earlier. Likewise, the lender will receive his gold back with greater purchasing power than it had 5 years earlier.

In essence, the lender received "interest" and the borrower paid "interest", even though the money supply remained the same. All that changed was the economy against which the money is measured! The interest was the productivity that the borrower added to the economy. The lender profited from this economic growth and the borrower labored to meet his obligation.

So in this perfect world, the price of borrowing money means keeping up with the average productivity of everyone else in a growing economy.

In other words, money is priced in goods and labor. The price of money is goods or labor. You must either create them or surrender them for money.

Now, in our imperfect world, we can borrow without being productive with the money we borrow. We can borrow for pure consumption! But to do so we must pay the interest out of our own body. We must eat away at our own net capital to pay the vig if we choose not to be productive. Like a stranded starving hiker whose body begins to devour itself. Herein lies the fatal flaw in our system.

Fiat systems work the opposite of gold. While gold increases in value against the real goods that price it, fiat money supply grows commensurate with the goods and services it is priced in; the money supply tracks the economy!

This is supposed to create "price stability" during an economic expansion. You cannot have price stability in an expanding economy on a pure gold standard, you instead get "the evil deflation".

And in a perfect fiat system, where no government or central bank cheats by creating money at will for the "inflation tax" it provides, and all borrowing is for productive purposes, the system could be quite sustainable for a very long time.

Sure, it is still essentially a Ponzi scheme because if everyone paid back their debt all at once the money supply would vanish except for the monetary base. But in our perfect scenario, there is always new volume added to the economy to match the production of new money, and prices remain stable.

But this is not good enough for the bankers and governments who add little real value to the economy. They want something for nothing. So they cheat, which leads to a collapsing real economy set against a mountain of debt money that must grow like a cancer until it kills the host system.

The only conclusion to this systemic flaw is not deflation like we saw in our perfect gold standard. It is not price stability like we saw in our hypothetically perfect fiat system, nor is it even normal inflation like we get in the early stages of a real world fiat system. No, the only conclusion is repudiation which leads to currency collapse, hyperinflation and the end of the system.

So what is the price of money? It is the real economy that it is juxtaposed against. Too much easy money always comes at the cost of the destruction of the real economy!


Hyperinflation is a mass psychological event. It is the revelation that the juxtaposition of paper obligations and the real economy no longer match in any way that can be resolved. It is the epiphany on a mass scale that the proverbial music has stopped and not just one, but millions of musical chairs are missing.

One of the biggest misconceptions about hyperinflation is that it is initially caused by the massive printing we saw in Weimar, Germany and Zimbabwe. But the fact of the matter is that all the inglorious printing, the dropping of zeros, and the million-dollar-notes are simply a subsequent RESULT of the initial condition that caused the currency repudiation.

In dollar terms, the hyperinflation of fantasy digits has already happened! It has been accumulating and accelerating for at least 15 years now. The stage is now set for repudiation on a global scale. What ultimately follows will be up to our wise leaders in Washington, DC. But it is my guess that they will follow the time-tested political path of printing more currency and passing it out. At that point, we will see a familiar sight:

But just know that the wheelbarrow is only a symptom of the disease, not the disease itself. The disease is already present in the dollar, and unfortunately it is terminal.

Protect Your Savings

Currency digits that are not spent on consumption can either be held in their raw form (cash) or stored. Storage of excess digits is available in both paper form and real world elemental form. Over the past 30 years the paper storage of digits has grown many times faster than the real world storage options. And right now, because of "fractional reserve debt" (that it is mathematically impossible for all debts to perform), the paper option is burning in the public square like so many books in 1933 Berlin.

So you can view this as deflation if you would like. But as the entire world watches Ponzi-paper storage burn and runs to safety, you have to wonder, will they stop running once they reach the raw digits of paper created by Ben Bernanke? Or will they keep running to the golden safety of a physical element created in the stars billions of years ago?

This is what it is all about: Capital Flow! You may not have much capital yourself, but if you want to make the right decision for your own savings, you must put yourself in someone's shoes who does. You must follow in the footsteps of giants!

A Little Context from a Friend

It was when the British Empire started to lose its colonial wealth generating tools that the pound sterling lost its dominance and standard value. This is the only story that I intuitively compare with the actual status of the dollar. The sterling didn't go "hyper", but it lost its intrinsic value provided by the enormous amount of goods and services that it represented. The colonies produced these valuable products for practically nothing. So, behind each printed note, there was an enormous amount of tradable tangibles.

As soon as we start to increase the amount of paper to compensate for a contraction in goods and services, we are depreciating that piece of paper. In the case of the pound sterling it was easier to understand how the crumbling colonial wealth eroded the corresponding value of the same existing amount of paper. The same exercise is more difficult to proof for the dollar. But we have some criteria:

- What will happen with global dollar-debt against the increasing amount of dollar-paper?

- Up until now, declining interest rates, put some lid on the expanding debt. When do we reach the confidence-culmination-point? How will we react once we realize thoroughly that nothing is what it seems? My guess is pure HYPERINFLATION.

This extremely strong tendency of more paper for less goods and services is similar to what happened with the sterling and its colonies.

Gold and oil are, IMO, two beacons to signal the above looming dangers. Presently, they don't seem to do their job. The valuations of currencies, relative to each other, is very confusing. Gold and oil are the most universal standards one can come up with.

We are probably making a mistake by considering the dollar-paper against other paper. We are comparing how good we are as Americans or Europeans against the Turkish or South Africans. We lost an important universal standard... 38 years ago (smile).

My intuition tells me that ALL paper is depreciating. Or is it that services are more and more over-valued? Isn't it strange that most produced goods decline rapidly in price while services are constantly rising in price? Aren't we doing something similar to the British empire? Surfing the world in a quest for the lowest price for manufactured goods, undervaluing Chinese/Indian etc... services and overvaluing the services we provide to ourselves? This global imbalance cannot exist forever. The outcome is most probably an inflationary solution.

Words of Wisdom

And since I, myself, am a mere shrimp following giants, I will close with a few selected quotes from FOA on The Gold Trail:

The dollar is toast because most of the world doesn't like the management policy. They didn't like it in 71, but tolerated it because gold was suppose to keep flowing in repatriation payments. And if they didn't like it back then, they god awful hate it now!

We like to think that the dollar is what it is because we are so good. (smile) But, the truth is that for over a two decade period +, none of our economic policy, our trade financing policy, our defense policy or our internal lifestyle policy has pleased anyone outside these borders. We managed the dollar for us (U.S.) and the rest could just follow along.

Our fiat currency has survived all these years because others have supported our dollar flow in a way that kept it from crashing its exchange rate. We talk and think like we are winning the tug-of-war when, in fact, they just aren't pulling very hard.

My friends, a national fiat in our modern world only functions if the whole world uses and supports its flow and most importantly likes its management (political styling is the catch word). This support and use of our dollar can and will change faster than many think possible. Our dollar is not going to become a "banana" or "nada" in the future, as auspec notes. It already is and has carried this trait for some time now as does every fiat today. The only thing that keeps them from cascading away is world support and use.

That dollar value is there now, you just don't see it yet. The price inflation that many don't or can't see happening, will be the result of our currency management changing to confront the nature of all the above. As this happens the US will have to raise rates even as it massively prints more currency to support our internal economy [obligations!]. Our entire economy will slow and fail as this price inflating process moves on. Some will call it stag/flation, but will change that description as it becomes more of a crash/hyperinflation.

We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nations identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Make no mistake, the entire internal US sector can and will function as its currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly.

The prestige that we have the largest military force in the world does not help our money problem. We talk as if we will let any country die that does not use our money or support our currency. I point out that the British also made such comments and it didn't stop their downfall. Nor the Russians.

I point out that many, many other countries also have the same "enormous resources; physical, financial, and spiritual" that we have. But the degrading of our economic trading unit, the dollar, places the good use of these resources in peril. We buy far more than we sell; a trade deficit. Collectively, net / net, using our own resources and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbors energy supplies (smile). We cannot place our resources up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert.

No, this country will not turn over and simply give in. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not its currency system. Around the world and over decades other fine people-states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work.

And lastly, a Q&A w/ FOA:

Q: [Will we see] Brazilian or Weimar style hyperinflation of the USD? The Big Banana, or the 'little banana'?

FOA: Full on, wide open, in your seat, flat out! It's in the pipeline!

[Note: Zimbabwe's hyperinflation hadn't happened yet when this was written]

Q: Debt is designed for default as fiats are for debasement. [Right?]

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

Q: At $30,000 POG [115 times the current price at the time this was written] the US[$] as we know it will be no more, agreed?

FOA: Agreed, but still in use. Just like all those Pesos around the world! But remember, at the very least, the first $10,000 [38 times the POG at that time] of that figure would represent the current purchasing power of the dollar today. We will most likely get there long before price inflation jumps way up, once the current dollar gold market fails and gives way to a free physical price[...]

Q: What advantage would it be to the Power Elite to destroy the dollar?

FOA: Wrong context. What advantage does the Power Elite gain by expending assets to save an already failed currency. Better to do what major players have done for centuries and are doing now, buy gold and evolve your power base to use the next reserve.

Q: The end of a currency's lifetime always ends in gold debasement?

FOA: In almost every case. Sometimes in the open, sometimes hidden.


Friday, September 4, 2009