Gold Is Money (Must Read - Everyone Needs This Knowledge)
Gold Is Money, and SILVER Too
Money - medium of exchange, measure or store of value/wealth - means of payment/can redeem debts.
Required Qualities of money
Widely desired and therefore valuable, also rare, durable, portable and easily stored. Easily divisible and difficult to counterfeit.
When it is remembered that in its origin money is only an instrument to facilitate exchange - we might even say to render it possible - it follows that from its earliest to its latest form the ruling influence is the need of society for the best mechanism of exchange.
Bad money drives out Good money from circulation (ie: precious metals no longer circulate as currency due to fiat currencies)
Currency - something used as a medium of exchange
Fiat currency - debt based official currency (coins/notes in circulation imitating money)
US DOLLARS AND US DEBT
The enslavement of Americans into perpetual debt could not have been accomplished had US dollars remained based on gold and silver as put forth in the US Constitution. But the substitution of credit-based paper money brought with it the levels of debt that have now indebted Americans into perpetuity.
The debasement of the US dollar is accelerating as trillions more are being printed, i.e. “borrowed” (from whom?) and spent hoping to reverse the greatest deflation since the Great Depression. It is this process of accelerated debasement that will eventually destroy the remaining value of the US dollar.
In our derivative reality, value is a function of scarcity and when so many dollars have been printed, the value of all printed money begins to rapidly decline; and, eventually crosses the line from inflation into hyperinflation, an invisible line which is never seen until it is too late.
Today, the US, the UK and Japan are all debasing of their currencies through monetization, a process akin to monetary self-immolation. By “self-borrowing” and the resultant issuance of even more credit, it is hoped that monetizing their debt will allow them to borrow and spend their way out of the deflationary sinkhole into which they are now being drawn. It won’t.
THE ROLE OF GOLD IN THESE TUMULTUOUS TIMES
It is this accelerating debasement of currencies that will eventually force a powerful upward move in the price of gold and silver. When the value of paper money plummets, the value of real money—silver and gold—will explode upwards as a consequence.
We are now approaching the end game that will resolve the monetary sins of the past.
As the end game nears, I suggest a greater concentration of assets be allocated to investments in physical gold and physical silver.
Many Many now are not yet feeling the pain ! but but future our children will be feeling it greatly!
Clinton Speech Encourages Remittance Use for Micro-Lending
Americans continue to struggle with high unemployment rates and fears of a turbulent economic future. Across the nation, worried citizens have gathered at town hall meetings, rallies and even Washington DC en masse. Desperately trying to voice their objections, to the crushing debt and weakened dollar, citizens fear our children will be enslaved to Communist China, a shameful fate. We have become....... http://www.newswithviews.com/Graham/cj125.htm
by CJ Graham
At certain times, focusing on the big picture is important not just for investment success, but for personal welfare, and even survival.
We believe such times are here. It is estimated that 98% of Americans have never held a gold coin in their hands. Yet 100% of Americans regularly handle Federal Reserve Notes. From a contrarian standpoint, the financial message from those two statistics is clear.
Even so, gold is much more than money or an investment medium; it stands for liberty and throughout history has facilitated escape and ensured freedom.
Never having touched a gold coin is the monetary equivalent to never having breathed fresh air, felt the warmth of sunshine, looked up at the stars or risen from the gutter. Fiat Federal Reserve Notes are becoming nothing more than sewage decomposing in the vast, toxic septic tank of predatory Washington politics, epic Federal Reserve arrogance and error, blatant Wall Street fraud and outright Master Class plunder. Below, we outline America's troubling and compounding predicament, and urge you to think about how to protect yourself from its consequences, both financially and personally.
Thanks to the endless barrage of feel-good propaganda that daily assaults the American mind, best epitomized a few months ago by the "green shoots", everything's-coming-up-roses propaganda touted by Federal Reserve Chairman Bernanke, the citizens have no idea how disastrous the country's fiscal, monetary and economic problems truly are.Nor do they perceive the rapidly increasing risk of a totalitarian nightmare descending upon the American Republic.
One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America's citizens since the nation's founding 235 years ago, the government would remain totally bankrupt.
According to the Federal Reserve's most recent report on wealth, America's private net worth was $53.4 trillion as of September, 2009. But at the same time, America's debt and unfunded liabilities totaled at least $120,000,000,000,000.00 ($120 trillion), or 225% of the citizens' net worth. Even if the government expropriated every dollar of private wealth in the nation, it would still have a deficit of $66,600,000,000,000.00 ($66.6 trillion), equal to $214,286.00 for every man, woman and child in America and roughly 500% of GDP. If the government does not directly seize the nation's private wealth, then it will require $389,610 from each and every citizen to balance the country's books. State, county and municipal debts and deficits are additional, already elephantine in many states (e.g., California, Illinois, New Jersey and New York) and growing at an alarming rate nationwide. In addition to the federal government, dozens of states are already bankrupt and sinking deeper into the morass every day.
The government continues to dig a deeper and deeper fiscal grave in which to bury its citizens. This year, the federal deficit will total at least $1,600,000,000,000.00 ($1.6 trillion), which represents overspending of $4,383,561,600.00 ($4.38 billion) per day. (The deficit during October and November, 2009, the first two months of Fiscal Year 2010, totaled $296,700,000,000.00 ($297 billion), or $4,863,934,000.00 ($4.9 billion) per day, a record.) Using the GAAP accounting method (which is what corporations are required to use because it presents a far more accurate and honest picture of a company's finances than the cash accounting method primarily and misleadingly used by the U.S. government), the nation's fiscal year 2009 deficit was roughly $9,000,000,000,000.00 ($9 trillion), or $24,700,000,000.00 ($24.7 billion) per day, as calculated by brilliant and well-respected economist John Williams. (www.shadowstats.com)
Fiscal Year 2010's cash - and GAAP - accounting deficits will likely be worse than 2009's, given government bailout and new program spending that is on steroids and psychotic.
Putting Fiscal Year 2009's $9,000,000,000,000.00 ($9 trillion) deficit another way, 17% of America's private wealth, accumulated over a period of 235 years, was wiped out by just one year's worth of government deficit spending insanity.
Given this, is it any surprise that Treasury Secretary Geithner has announced that the release of the nation's FY 2009 supplemental GAAP financial statements has been delayed? Remember, this is the same Secretary Geithner who bullied people to cover up the sordid details of the AIG, or more accurately, the taxpayer-funded, multi-billion dollar, Santa Claus bailout and bonus bonanza for Goldman Sachs. Do you really think this government, characterized as it is by fiscal and monetary secrecy, lies, chicanery, cronyism and stonewalling, wants the people to know what is actually happening? Obviously, it does not, so it hides from the public the inexcusable facts.
It is estimated that the top 1% of Americans control roughly 40% of the nation's wealth. In other words, 3 million people own $21,400,000,000,000.00 ($21.4 trillion) in net private assets, while the other 305 million own the remaining $32,000,000,000,000.00 ($32 trillion). 77,000,000 (77 million) Americans (the lowest 25%) have mean net assets of minus $2,300 ($-2,300.00) per person; they live from paycheck to paycheck, or on public assistance. The lower 50% of Americans own mean net assets of $27,800 each, about enough to purchase a modest car. Obviously, it would be impossible to retire on such an amount without significant government or other assistance. Meanwhile, the richest 10% of Americans possess mean net assets of $3,976,000.00 each, or 143 times those of the bottom 50%; the top 2% control assets worth more than 1,500 times those in the bottom 50%. When you combine these facts with Wall Street's typical multi-million dollar annual bonuses, you get an idea of wealth inequality in America.
Historically, such extreme inequality has been a well-documented breeding ground for totalitarianism.
If the government decides to expropriate (steal) or commandeer (e.g., force into Treasuries) America's private wealth in order to buy survival time, such a measure will be designed to destroy the common citizens, not the elite. Insiders will be given advance warning about any such plan, and will be able to transfer their money offshore or into financial vehicles immune from harm. Assuming that the elite moves its money to safety, there would then be $120,000,000,000,000.00 ($120 trillion) in American debt and liabilities supported by only $32,000,000,000,000.00 ($32 trillion) in private net worth, for a deficit of $88,000,000,000,000.00 ($88 trillion). In that case, each American would owe $285,714.29 to balance the country's books. (Remember to multiply this amount by every person in your household, including any infant children.)
If the common people suspected that something diabolical was in the works, a portion of the $32 trillion in non-elite wealth could be evacuated as well prior to a government expropriation and/or currency devaluation, resulting in less money for the government to steal. What these statistics mean is that it is absolutely impossible for the government to fund its debt and deficits, even if it steals all of the nation's private wealth. Therefore, the government's only solutions are either formal bankruptcy (outright debt repudiation and the dismantling of bankrupt government programs) or unprecedented American monetary inflation and debt monetization.
If the government chooses to inflate its way out of this fiscal catastrophe, the United States dollar will essentially become worthless. You can be absolutely certain that a PhD. in economics, such as Dr. Bernanke, is well aware of these realities, despite what he might say in speeches. For that matter, so are Chinese schoolchildren, who, when patronized by Treasury Secretary Geithner about America's 'strong dollar', laughed in his face. One day, perhaps America's school children will receive a real education so that they, too, will know when to laugh at absurd propaganda.
The government has announced that during the fiscal years from 2010 through 2019, it will create an additional $9,000,000,000,000.00 ($9 trillion) in deficits, an amount that is almost certain to be understated by trillions given the country's current economic trajectory. The government assumes that this vast additional deficit will be funded by others, such as the Chinese, as it is a statistical fact that the United States will be incapable of funding it.
Furthermore, with the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.
These deficits and debts are now so gargantuan that they have become surreal abstractions impossible even for sophisticated financiers to begin to comprehend. The common citizen has absolutely no idea what these numbers mean, or imply for his or her future. The people have been deluded into thinking that America's arrogant, egomaniacal, always-wrong-but-never-in-doubt fiscal witch doctors and charlatans, including Greenspan, Rubin, Summers, Geithner and Ponce de Bernanke, have discovered a Monetary Fountain of Youth that endlessly spits up free money from the center of earth, in a geyser of good will toward the United States.
Unfortunately, this delusion is false: there is no Monetary Fountain of Youth, and contrary to the apparent beliefs of the self-deified man-gods in Washington, D.C., the debt and deficits are real, completely out of control, and 100% guaranteed to create catastrophic consequences for the nation and its people.
When government 'representatives' deliberately sell into slavery the citizens of a so-called free Republic, they have committed treason against those people. This is exactly what has happened in the United States: the citizens have been sold into debt slavery that they and their descendants can never escape, because the debts piled onto their backs can never, ever be paid. Despite expensive and sophisticated brainwashing campaigns emanating from Washington, claiming that America can 'grow' out of its deficits and debt, it is arithmetically impossible for the country to do so. The government's statements that it can dig the nation out of its fiscal hole by digging an even deeper chasm have become parodies and perversions of even totally discredited and morally disgusting Keynesianism.
The people no longer have elected representatives; they have elected traitors
The enslavement of the American people has been orchestrated by a pernicious Master Class that has taken the United States by the throat. This Master Class is now choking the nation to death as it accelerates its master plan to plunder the people's dwindling remaining assets. The Master Class comprises politicians, the Wall Street money elite, the Federal Reserve, high-end government (including military) officials, government lobbyists and their paymasters, military suppliers and media oligarchs. The interests and mindset of the Master Class are so totally divorced from those of the average American citizen that it is utterly tone deaf and blind to the justifiable rage sweeping the nation. Its guiding ethics of greed, plunder, power, control and violence are so alien to mainstream American culture and thought that the Master Class might as well be an enemy invader from Mars. But the Master Class here, it is real and it is laying waste to America. To the members of the Master Class, the people are not fellow-citizens; they are instruments of labor, servitude and profit. At first, the Master Class viewed the citizens as serfs; now that they have raped and destroyed the national economy, while in the process amassing unprecedented wealth and power for themselves, they see the people as nothing more than slaves.
America's public finances are now so completely dysfunctional and chaotic that something far worse than debt enslavement and monetary implosion, terrible curses unto themselves, looms on the horizon: namely, a Master Class-sponsored American dictatorship.
Throughout history, the type of situation in which America now finds itself has been a fertility factory for tyranny. The odds of an outright overthrow of the people by the Washington and Wall Street Axis, or more broadly, the Master Class are increasing dramatically. The fact that so few people believe an American dictatorship is possible is exactly why it is becoming likely.
Dictatorships have blighted history and ruined lives since the beginning of civilization. In recent times alone, tyrants such as Hitler, Stalin, Lenin, Ceausescu, Amin, Hussein, Mussolini, Tojo, Kim, Pinochet, Milosevic, Tito, Batista, Peron, Pol Pot, Mugabe, Marcos, Somoza, Mengistu, Bokassa, Sese Seko, Franco, Ho Chi Minh, Mao, and Castro have power-sprayed blood onto the screen of time and ravaged mankind with murder, torture and human oppression. A full catalog of history's tyrants would require a book of hundreds of pages. In the past 100 years alone, over 200 million human beings have been annihilated by wars, ethnic cleansings and government assassinations. Just when we think that civilization has been able to rise above tyranny's inhumanity and disgrace, a new dictator appears on the scene to start the process all over again. Every time this happens, fear and submission paralyze the vast majority of the affected masses, leading them to 'follow orders' and lick autocracy's blood-stained boots.
History has proven to tyrants that oppression works. In fact, it is easy to control a populace, once you control the money, markets, military (including police), media and minions (the recipients of welfare, social security, free health care, government jobs and the like, who are dependent upon the state and likely to be compliant).
This is exactly where the United States is today.
Recent American events paint an ominous picture of a Master Class that is now in total control.
When 90% of the American people vehemently rejected the $700,000,000,000.00 ($700 billion) TARP bailout plan, the Master Class put it on a fast track and approved it anyway.
When a clear majority of the American people said no to a government takeover of Chrysler and GM, the Master Class poured billions of taxpayer dollars into those corporate sinkholes and took them over anyway.
When the people said no to multi-trillion dollar crony bailouts for the bankers and insurers whose corruption had caused global financial mayhem, the government pledged to those elite insiders more than $13,000,000,000,000.00 ($13 trillion) of the people's money anyway.
When the people expressed astonishment and anger that Wall Street planned to pay itself record 2009 bonuses, in the midst of America's worst-ever fiscal and financial crisis caused by them, Wall Street stuffed its pockets with taxpayer-supported bonus money anyway.
When the people said no to a proposed $40,000,000,000.00 ($40 billion) bailout of AIG and its elite trading partners such as Goldman Sachs (an amount that subsequently exploded to $180,000,000,000.00+ ($180+ billion)), the Master Class went underground, covertly misappropriated taxpayer money and made the payoffs anyway.
When Fannie Mae and Freddie Mac were nationalized at enormous taxpayer expense, the government approved $6,000,000.00 individual pay packages in 2009 (150 times the average American wage) for the CEOs of both failed companies anyway.
When a clear majority of the people said no to nationalized health care, even after being bombarded by a multi-million dollar, lie-drenched propaganda campaign designed to bamboozle them, the House and Senate passed nationalized health care bills anyway.
When more than seven million American workers lost their jobs and were subsisting on unemployment benefits and food stamps, federal government employees, who now earn DOUBLE what private sector workers earn, were given another round of pay and benefits increases anyway.
When private sector workers' 401Ks and IRA retirement plans plummeted in value due to economic collapse and endemic Wall Street-orchestrated market corruption (including systemic front running, flash trading, naked short selling and other manipulations), government 'defined benefit', lifetime-cost-of-living-adjusted pension plans, despite already being underfunded by $2,000,000,000,000.00 ($2 trillion), were made richer than ever anyway.
The long, shameful litany of events signaling the total divorce between the Master Class and the people of the United States doesn't stop there. It goes on and on.
The message from the American Master Class to the American people is simple and clear: We Defy You.
Governments that openly defy the people are either already totalitarian or in the process of becoming so. Monetarily, the United States clearly functions as a totalitarian dictatorship already, with a Federal Reserve that operates in secrecy, creates limitless amounts of debt and currency at will, and showers trillions of dollars upon favored Master Class insiders with zero transparency or accountability whatsoever. The Federal Reserve is so shameless about its dictatorial powers that it flatly refuses to provide details about multi-trillion dollar bailouts and rescues of privileged elites, in open defiance of Congress and the people. The fact that they get away with these blatant acts of defiance demonstrates the true extent of the Master Class chokehold on America.
If the Master Class were a benign despot and if its policies and programs actually worked, that would be one thing. But that is not the case. Rather, its programs are in a complete shambles.
Every single government entitlement program in the United States is bankrupt. This includes Social Security ($17,500,000,000,000.00 underfunded; $17.5 trillion); Medicare Part A ($36,700,000,000,000.00 underfunded; $36.7 trillion); Medicare Part B ($37,000,000,000,000.00 underfunded; $37 trillion); Medicare Part D ($15,600,000,000,000 underfunded; $15.6 trillion), Government and military pensions ($2,000,000,000,000 underfunded; $2 trillion), Food Stamps (current underfunding difficult to measure because the number of recipients is exploding; hundreds of billions underfunded versus original projections, minimum); and the list goes on. The above underfunding amounts are NET of projected tax receipts over the next 50 years. But the current recession has invalidated virtually all long-term budget and tax receipt assumptions, meaning that the true underfunded amounts are now greater than current, already mind-boggling estimates.
While the above statistics are terrifying enough to any citizen with a functioning brain, what is Twilight Zone-eerie and a far more serious cause for alarm is the casual indifference with which the Master Class is now making the country's dire and irreparable fiscal circumstances even worse.
The nationalized health care program will cost at least $1 trillion over the next ten years, and most likely multiples of that. It is being crammed down America's throat by a bankrupt government that does not have the money today and will not have the money tomorrow to pay for it. Worse is the fact that the same government that has bankrupted each and every existing social program now intends to directly or indirectly control the health care of all citizens. Based on the government's existing track record and the health care program's enormous complexity, invasiveness and cost, the probability that it will become a national fiscal and humanitarian catastrophe is roughly 100%.
'Cap and Trade' is a multi-trillion dollar tax scam being foisted onto the American public without a legitimate debate or popular referendum. You might be surprised to learn that 'Climate Revenues' are already included in the federal budget, starting with $79,000,000,000.00 ($79 billion) in fiscal year 2012, which begins only 20 months from now. During fiscal years 2012 through 2019, the government expects to collect $646,000,000,000.00 ($646 billion) in 'Climate Revenues', a completely new tax category. Have any of your elected traitors told you that they have enacted $646,000,000,000.00 ($646 billion) in 'Climate' taxes beginning twenty months from now and continuing forever? These 'Climate Revenues' are based on junk science, lies and hysteria, and have been pimped by greed-diseased parasites who seek to make billions from operating and manipulating the Cap and Trade 'marketplace'. Favored elitists such as Hank Paulson, Al Gore, General Electric and Goldman Sachs, among others, have positioned themselves to profit from the nation's upcoming Cap and Trade tax misery and economic debilitation.
The reality is that the giant Ponzi scheme called the United States of America is running out of money. In any Ponzi scheme, money must constantly be poured into the top of the funnel in order to pay the redeemers at the bottom. As the number of redeemers has grown, tax receipts have fallen far short of covering their withdrawals, a problem that has now become an outright government funding emergency further aggravated by the fiscal, financial and economic crises.
If the Washington and Wall Street Axis were not legally able to create and distribute counterfeit American money, the Ponzi scheme would have collapsed already. Trillions of new, out-of-thin-air, printing-press and electronic 'dollars' have bought the Axis additional time, but new sources of revenue must immediately be found to keep the scam alive. Congress is fully aware of this reality. Outright tax increases would be bad politics during a recession that is morphing into a depression, and also bad for 2010 re-election campaigns, so they cannot be implemented. Therefore, Congress continues to advance the health care and Cap and Trade agendas, which are nothing but taxation Trojan Horses festooned in righteousness and sanctimony, despite overwhelming popular opposition.
If the nationalized health care program is passed, revenues and fees will kick in immediately in 2010, whereas costs will not begin to accrue until 2012 and later. The government plans to spend the revenues immediately to forestall a total fiscal collapse. Nationalized health care has absolutely nothing to do with health care; it has to do with creating an immediate revenue stream to help fix the current government funding crisis. Similarly, Cap and Trade has nothing to do with fixing the environment. It, too, is nothing more than a massive tax increase similarly designed to address the government's epic funding shortfall, with thick slices of pork thrown in for privileged insiders and deceitful propagandists like bloated 'Father of the Internet' and now 'Savior of the World' Al Gore.
The last thing the Master Class wants is for the people to understand the disastrous state of the nation's finances.
Master Class brainwashing tells the people that it is 'negative' and 'pessimistic' to look at the facts, despite the fact that psychological health is characterized by the ability to identify and deal with reality. The Master Class wants the people to put on Bozo the Clown happy faces and let sugar plums and green shoots dance in their brains as they write one check after another to pay for Cap and Trade, nationalized health care, and a mind-numbing assortment of other taxes and fees.
On Sunday night, November 30, 2009, North Korea's dictator Kim Jong Il (a name that says it all, even better than Made-off's), an international poster child of Master Class psychological illness, devalued his country's currency by 99%. This vicious tyrant, who has given birth to a national hell on earth, is chauffeured in Mercedes Benz limousines, drinks the finest imported whiskies and dines in imperial dignity on foods prepared by personal chefs while his citizens starve to death on the streets or, at best, eke out a subsistence living. Kim became paranoid that the people were actually figuring out how to improve their pitiful, impoverished lives in tiny ways, so he decided to wipe them out. The people were given one week to exchange their money at a rate of 100 old Won for 1 new Won. Any lifetime family savings in excess of roughly $700.00 were simply confiscated by the North Korean government. To keep the people in line, the military and police were put on high alert, fully prepared to kill or arrest any protesters.
On January 9, 2010, Venezuela's strong man Hugo Chavez devalued his country's currency by 50%, overnight and without warning, causing immediate inflation, shortages of food and supplies, and general financial chaos throughout the nation.
While you might be shaking your head in pity over the plight of the citizens of North Korea and Venezuela, ask yourself this: could this not happen in the United States?
On April 5, 1933, President Franklin D. Roosevelt, an Obama hero, outlawed gold ownership overnight by signing Executive Order 6102, which gave the people three and one-half weeks to surrender all privately-owned bullion to the government for a price of $20.67 per ounce. On January 30, 1934, nine months after collecting the people's gold, Roosevelt devalued the dollar 69% overnight, by raising the gold price from $20.67 to $35.00 per ounce.
Since its founding in 1913, the Federal Reserve has devalued the dollar by 98+% thanks to endless money printing and debt creation, a corrosive and impoverishing process that is now accelerating. In the past year, the Fed has engineered $20+ trillion in bailouts, subsidies and guarantees for well-connected and lucky scavengers and opportunists, an amount equal to roughly 40% of the total private wealth created in this country since its inception. All because a few elitist government man-gods with an almost perfect record of error and failure have deemed in their imperial wisdom that it shall be so. The citizens, whose hard-earned wealth is being systematically destroyed by this continual, government-decreed monetary debasement were never invited to the debate or given a say, which is par for the course for dictatorships. This massive de facto devaluation now hangs over the people’s wealth like a great monetary sword of Damocles.
Conceptually, whether it is a 50% overnight devaluation in Venezuela, a 69% overnight devaluation in the United States, a 98% devaluation in America over time, or a 99% overnight devaluation in North Korea, what is the difference? The fact is: there is no difference; monetary debasements are all the same. In each and every case, the people's wealth is stolen via government edict, while the people stand by helplessly and in shock.
So one must ask: For whom does the bell toll? A foreign 'them', or a domestic us? Who is to say that you will not be told tomorrow morning that, effective immediately, in accordance with some perversely named mandate such as the "American Monetary Security, Wealth Preservation and Terrorism Prevention Act", enacted by emergency for "the safety of the nation and the financial well being of the citizens", all existing currency and bank balances will be redenominated in "New Dollars", at a conversion rate of 1 new for every 100 old currency units? Would this not simply be another, almost predictable act of defiance toward the American people by the Master Class? And if that happened, do you honestly believe that the Master Class would not have been alerted in advance and allowed to make special preparations for itself ahead of the devaluation? Do you think they intend to go down in the same ship as the people they defy? If such a currency devaluation were announced, what could you do about it? March on Washington? But how would you get there if your money had been wiped out?
Despite what you may hear from State Media, which includes virtually all establishment news organizations, particularly financial ones (e.g., CNBC), America is on the precipice. No bankrupt nation in history has ever defended or preserved the freedoms of its citizens. In fact, it has been the exact opposite: in desperation, bankrupt governments have routinely plundered their citizens' wealth and imposed totalitarian controls. What will make things different for the United States, the largest debtor nation in all of recorded civilization?
The United States government cannot ever possibly pay its debts, is pathologically incapable of controlling its spending or curbing its hunger for both domestic and international empire, and persistently refuses to tell the American people the truth. If America's citizens were told the truth and given the benefit of true leadership, as opposed to the guile and dishonesty of an endless array of political liars and hacks, perhaps they could rally and defeat the problems that afflict them. But instead, they are fed by the Master Class a steady diet of narcotic propaganda that deludes, confuses and enervates them. The truth cannot set people free if it is never told, and that is the essence of America's gathering tragedy.
In a future article, we will detail specific developments you should watch for to chart the course of America's ominous and potentially deadly national storm.
The current, grave situation is already a clear call to action. When the signals become even more urgent, it will be late in the game to take protective action, and possibly too late. Citizens should begin to prepare now not just for financial survival, but for the personal security of themselves and their loved ones should a Category 5 economic and political hurricane rip into the nation, something that becomes more likely every day. With respect to personal finances, in virtually every national currency devaluation and major political upheaval in the past, gold has represented sanctuary for the affected people. Gold has not just preserved wealth, but personal freedom as well. While governments can devalue fiat currencies, they cannot, by edict, devalue gold. Yes, they can try to manipulate its price, but unless all governments join in the collusion, ultimately the price will return to market. The market for gold is global, and demand exists in all nations and among all peoples. Should the government attempt to confiscate gold, it will be an outright admission that the financial system is collapsing, and the people will know better than to hand over to a corrupt government their only means of survival.
The most important point is this: devalued currencies never rise again.
Once they are destroyed, they are gone forever, and those whose wealth had once been denominated in them are wiped out. As you have no doubt heard before, not one fiat currency has survived over time, and that is an indisputable fact.
More significantly, no fiat currency has ever suffered the abuse that has been inflicted upon the United States dollar, meaning that it is at extreme risk.
Given this, the most important financial question a person can ask him - or herself today is: How is my wealth denominated at this time? And given its denomination, is my wealth likely to be safe in current and evolving circumstances?
Gold has been money for 5,000 years. It has not merely survived, it has prevailed over each and every fiat currency collapse throughout history.
One thing is certain: as the epic David and Goliath monetary battle unfolds, between the people fighting to defend their hard-earned wealth on one side, and a Master Class that greedily and pathologically wants to plunder them on the other, the price of gold will become extremely volatile for a period of time. Volatility will, in fact, tell you that the War on Wealth has officially been declared, and will be your signal to do whatever you must to protect what is yours.
As the government Goliath and its Master Class allies short tonnes of bullion into rigged futures markets in a desperate attempt to make gold look dangerous and risky, the Davids will be coming forth not just in the United States but from all corners of the globe, buying 10 grams here and one ounce there. There are 6.8 billion Davids, versus one diseased Master Class that numbers in the small millions.
There is no way the Master Class can defeat the people, if the people finally rise up and say "No More of Your Plunder. No More of Your Cold and Soulless Financial Oppression. No More of Your Cynical and Godless Exploitation."
If you find the above argument compelling, you should consider how to protect yourself from Executive Orders that could be issued at any time, under any pretext, and that could be extremely hostile to your financial and/or personal health and well being. One simple way to start is to purchase one ounce of gold for yourself and each member of your household, and much more if you can afford it.
That is not financial advice; it is merely the common sense generously communicated to you by history.
Great article. Don, could you please put the source of the article(s) you're posting on the end of the post? I often re-post some of these to other forums/message boards and I think it's good if folks can tap into alternate new sites and resources. Thanks a lot.
Understanding these times is its own reward. If, however, you understand the role of gold in these times, a reward of another magnitude awaits you.
Economic cycles of expansion and contraction are the inevitable result of central bank credit flows. So, too, are deflationary depressions and hyperinflations. Though far less frequent, the destruction caused by deflationary depressions and hyperinflations more than make up for their infrequency; and, today, after perhaps the longest absence of each in recent history, we are now about to experience both—perhaps this time in tandem.
This will not be just a deflationary depression, it will be deflationary depression accompanied by a monetary crisis of epic proportions.
The sudden on-set and virulence of the current economic crisis caught economists and central bankers by surprise. Having successfully dismissed those who disagreed with the spread of central banking and its illegitimate off-spring, fiat money, central bankers and economists were stunned when their world of paper money suddenly collapsed in 2007.
Were it not for the unprecedented flood of government aid in 2008, private bankers would have been swept away just as they were in the 1930s. But, instead, private bankers were rescued with public funds, funds which allowed them to quickly return to their avocation of profiting from the indebting of others.
DON’T FEED THE PIGEONS
words of advice from The Banker’s Handbook
Modern banking is essentially a Ponzi-scheme on a global scale. Bernard Madoff’s Ponzi-scheme was but a smaller, private version of the public model used in the world today.
What people do not understand is that bankers loan money which doesn’t exist and then receive compounding interest and repayment of previously non-existent funds in return.
While this might be considered an abomination and nightmare, it is a wet-dream for bankers and those who profit from such a system. Charging interest on the loaning of gold and silver was believed to be a sin during the Middle Ages, but today, the charging of interest on the loaning of money that didn’t previously exist and the receiving of the previously non-existent principal back plus interest is considered nothing less than a miracle—at least by the bankers who profit thereby.
The very birth of paper money was conceived in sin. In its genesis, central banking’s paper money was always a fraud. Believed to be backed by equal amounts of gold or silver, in actuality it was never so, no more than were the demand deposits of savers available upon demand in banks.
WHERE’S THE MONEY?
THE SHELF LIFE OF A SHELL GAME
Modern banking is akin to a shell game. As long as the public doesn’t catch on or the unexpected never happens (as in a banking crisis) the fraud can and does continue. The banking crisis during Great Depression, however, almost brought the banker’s shell game to an end by exposing it for what it was—a shell game.
When US depositors rushed to the banks between 1930 and 1933 to withdraw their savings, they found the banks didn’t actually have their money and thousands of banks were forced to close.
This is what happened to Bernie Madoff’s clients when they requested their money en masse in 2008. This was Bernie Madoff’s nightmare. It is also the nightmare of all bankers because—just as with Bernie Madoff—the depositors’ money isn’t really there.
When the Great Depression alerted savers to the fact that the banks didn’t actually have their money, bankers and government decided something had to be done to prevent bank runs from occurring in the future.
So, they created the FDIC, the Federal Deposit Insurance Corporation, which would maintain a fund composed of bank insurance premiums that would protect depositors against any losses up to a certain proscribed amount.
But while Americans now believe their savings are backed by premiums paid into the FDIC fund, no such fund exists; and, although the FDIC regularly reports how much money is in the FDIC fund, the fund itself, like modern economics, is a fraud.
The following is an excerpt from an article, The Mythical FDIC Fund, by William M. Isaac, former Chairman of the FDIC. It should be titled:
WHAT BILL FOUND OUT WHEN HE WENT TO WASHINGTON DC
8/27/08 THE MYTHICAL FDIC FUND
By William M. Isaac William Isaac, former Chairman of the Federal Deposit Insurance Corporation, (FDIC)
…When I became Chairman of the FDIC in 1981, the FDIC's financial statement showed a balance at the U.S. Treasury of some $11 billion. I decided it would be a real treat to see all of that money, so I placed a call to Treasury Secretary Don Regan:
Isaac: Don, I'd like to come over to look at the money.
Regan: What money?
Isaac: You know . . . the $11 billion the FDIC has in the vault at Treasury.
Regan: Uh, well you see Bill, ah, that's a bit of a problem.
Isaac: I know you're busy. I don't need to do it right away.
Regan: Well . . . it's not a question of timing . . . I don't know quite how to put this, but we don't have the money.
Isaac: Right . . . ha ha.
Regan: No, really. The banks have been paying money to the FDIC, the FDIC has been turning the money over to the Treasury, and the Treasury has been spending it on missiles, school lunches, water projects, and the like. The money's gone. Isaac: But it says right here on this financial statement that we have over $11 billion at the Treasury.
Regan: In a sense, you do. You see, we owe that money to the FDIC, and we pay interest on it.
Isaac: I know this might sound pretty far-fetched, but what would happen if we should need a few billion to handle a bank failure?
Regan: That's easy - we'd go right out and borrow it. You'd have the money in no time . . . same day service most days.
Isaac: Let me see if I've got this straight. The money the banks thought they were storing up for the past half century - sort of saving it for a rainy day - is gone. If a storm begins brewing and we need the money, Treasury will have to borrow it. Is that about it?
Isaac: Just one more thing, while I've got you. Why do we bother pretending there's a fund?
Regan: I'm sorry, Bill, but the President's on the other line. I'll have to get back to you on that.
I don’t know whether Treasury Secretary Don Regan ever answered Isaac’s question, Why do we bother pretending there's a fund? But the answer is obvious. Modern economics, i.e. central banking, is a shell game, a shell game where bankers with the aid of governments have foisted a highly lucrative fraud on society; and, while the fraud of the FDIC fund is egregious, it is no more egregious than the fraud of the Fed or of the economy itself.
In economies based on the fraudulent issuance of money as debt, there are only predators and victims. Bankers are the predators, society is the victim (businessmen are victims who often believe they’re predators) and governments are the well-paid-off referees in the rigged game being played out in today’s capital markets.
ALL GOOD THINGS COME TO AN END
AND BAD THINGS DO TOO
This is our salvation. The debasement of our money and our enslavement by bankers into perpetual debt is finally coming to and end; but not because those oppressed realize their plight and are finally revolting. Their slavery is ending because those so enslaved are now so indebted they are unable to pay what they owe and the prison of debt itself is now bankrupt.
Banker’s credit creates constantly compounding debt and; today, so much debt has been created the economy can no longer expand fast enough to service it or pay it back. Homeowners, workers, farmers, business people, corporations and governments are all indebted beyond their means to repay and, when debtors can’t pay what they owe, the shell game of debt-based capitalism collapses — game over.
The Federal Reserve System which substituted debt-based paper money for the gold and silver based money issued previously from the US Treasury is now 96 years old; and, if the US economy continues to decline because of the compounding levels of debt created by the Federal Reserve, the Federal Reserve System itself may be called into question before it reaches its 100 year anniversary.
The end of the Federal Reserve System should be the collective goal of all Americans; for all Americans—black, white and brown, men and women, rich and poor, tea-baggers and tree-huggers, the already born and yet-to-be born — have all been enslaved by the Fed’s substitution of its debt-based money for the gold and silver currency previously issued by the US Treasury.
Today, all Americans collectively owe more than can ever be repaid. America has been delivered into perpetual bondage by the Federal Reserve. It’s about time that changed. The descent into perpetual debt happened on our watch. It is our responsibility to now do something about it. If we owe anything to anyone, we owe this to ourselves and to our children.
US DOLLARS AND US DEBT
The enslavement of Americans into perpetual debt could not have been accomplished had US dollars remained based on gold and silver as put forth in the US Constitution. But the substitution of credit-based paper money brought with it the levels of debt that have now indebted Americans into perpetuity.
The debasement of the US dollar is accelerating as trillions more are being printed, i.e. “borrowed” (from whom?) and spent hoping to reverse the greatest deflation since the Great Depression. It is this process of accelerated debasement that will eventually destroy the remaining value of the US dollar.
In our derivative reality, value is a function of scarcity, and when so many dollars have been printed, the value of all printed money begins to rapidly decline; and eventually crosses the line from inflation into hyperinflation, an invisible line which is never seen until it is too late.
Today, the US, the UK and Japan are all debasing of their currencies through monetization, a process akin to monetary self-immolation.
By “self-borrowing” and the resultant issuance of even more credit, it is hoped that monetizing their debt will allow them to borrow and spend their way out of the deflationary sinkhole into which they are now being drawn. It won’t.
THE ROLE OF GOLD IN THESE TUMULTUOUS TIMES
It is this accelerating debasement of currencies that will eventually force a powerful upward move in the price of gold and silver. When the value of paper money plummets, the value of real money — silver and gold — will explode upwards as a consequence.
We are now approaching the end game that will resolve the monetary sins of the past. As the end game nears, I suggest a greater concentration of assets be allocated to investments in physical gold and physical silver.
History is a process in which we are both participant and observer. According to Professor David Hackett Fisher, author of The Great Wave, we are nearing the end of a “great wave” that will bring to an end the shift from the era of Victorian stability to what comes next.
Great waves last between 80 and 120 years and mark both the end and beginning of epochs. The current wave began in 1896 which means we have but seven years at most before it culminates in the beginning of yet another era.
Great waves are marked by strife and disaster. Wars, plagues, and famines have all occurred during previous waves, waves that each ended with the complete economic destruction of the preceding era.
Since this wave began in 1896, there have been two World Wars, several lesser wars, the dropping of nuclear bombs, a Great Depression, a flu pandemic, the over-heating of the atmosphere, and for the first time in history a global economy based entirely on fiat money. The collapse of the paper-based global economy may well be the trigger-event for the finale—a complete economic destruction which marks the end of all Great Waves.
Just over a year ago, the United States underwent a seemingly radical change, seemingly overnight. Its financial system had been revealed as insolvent under the weight of huge liabilities and worthless assets. The government refused to allow all the bankrupt institutions to fail, and thus permit the market to do its job of purging the rot from the system.
Instead, the authorities saved their favorites, effectively merging bank with state. They did so under cover of a witches' brew of subsidies, guarantees and quasi-nationalizations bearing bizarre acronyms like TARP; PDCF; TAF; TSLF; and my personal favorite, the ABCPMMFLF, otherwise known as the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility.
And those were just the visible programs. The Fed, our central bank, dropped interest rates to zero and monetized additional trillions of dollars worth of problem assets, away from prying eyes. The nature and source of these assets remain matters of speculation, because the Fed to this day refuses to tell us what it bought and from whom.
When the smoke cleared, we Americans found ourselves the subjects of a gangster state, in thrall to a clutch of greedy, corrupt and incompetent banks which only days before had failed. We were now the guarantors of trillions of dollars in worthless assets that had generated billions in profits for those same banks in recent years. Their gains remained their gains; but their losses were now our losses. Our money, the reserve currency of the world, was now backed by toxic waste.
The events of last fall were, to all appearances, a bloodless coup, taking us from freedom to fascism virtually overnight. And all without a shot fired, or even, with few exceptions, an authoritative voice raised in protest.
How was such a thing possible in the United States, the supposed bastion of free market capitalism? The nation that had led the free world in the defeat of fascism some sixty years earlier, and in the defeat of Marxism-Leninism less than 20 years earlier?
And more importantly, how do we get out of this mess?
To understand how we got here, we must first understand that what seemed like major change, was actually just the illumination of existing reality. Bank and state had been a unitary phenomenon for many years. And what seemed abrupt, was actually the outcome of a gradual, accretive process.
Ideas have consequences, and bad ideas have bad consequences.
What happened last fall can be seen as the aftermath of a war of ideas fought long ago, in which the wrong side won, decisively.
The vanquished were the heirs of a noble intellectual tradition, the English empiricist philosophers who developed in the modern era the concepts of private property and voluntary exchange. This tradition, which informed, among other things, the United States Constitution, was reinvigorated in the late nineteenth century by a remarkable succession of economists originally based in Vienna, hence the term 'Austrian School' of economics. The Austrians, whose greatest exponent was Ludwig von Mises, and whose American voice was Murray Rothbard, developed a theory of economics based entirely on individual choice.
The victors were the heirs of a far less noble tradition, a long line of intellectual quacks and panderers to power. The line began with a Scotsman, John Law, reached a vigorous maturity in an Englishman, John Maynard Keynes, and entered a final, flamboyant decrepitude in the policies, if not the public posturing, of former Fed Chairman Alan Greenspan. In this tradition, the relevant analytic units are aggregates, broad abstractions. The individual scarcely warrants mention. Public power, not private property, is the heart of this tradition.
Keynesian economics is just a modern mutation of inflationism, a stealth tax levied by powerful insiders on ordinary people who can't see it happening until it is too late. It is music to the ears of interventionist governments, because it ratifies what, if unchecked, they will do anyway, and it preys on the greed and gullibility of its victims, who are more than willing to believe you can get something for nothing.
Now I must concede, as a matter of historical fact, I've overdrawn the point. It wasn't much of a fight, much less a war. The quacks had the field to themselves. They told powerful people what they wanted to hear, validating the intervention and deficit spending that was already occurring.
They also had a head start of some 20 years, since it was not until relatively late in the day when the Austrians' theories were even translated into English.
Nevertheless, I believe the events of last fall, and the road ahead, can best be understood in terms of the interplay between these two schools of economic thought.
Now, a detailed comparison of the two schools is just a bit beyond us this evening. But there are two contrasting theories that I'd like to mention briefly.
The first such contrast is the theory of depressions. In Austrian teaching, so-called business cycles are caused by official interference with money and credit creation. This interference – for example, setting interest rates below market – fools individual actors into overproducing, creating supply that exceeds actual demand. A depression is merely the process of clearing the resulting imbalance. It is inevitable, and it is necessary. Left to itself, the market will clear the excess of supply over demand through price adjustments. Government at this point has no role to play; it has done quite enough already.
In Keynesian teaching, by contrast, government is blameless in the business cycle, which just occurs naturally. In a depression, markets can't be trusted to clear themselves through price adjustment. The government must step in and stimulate additional demand by means of deficit spending, more money creation, and more credit expansion.
The policy responses of last fall illustrate perfectly Keynesian doctrine in action. Our authorities refused to let the markets clear. Instead, they panicked, and attempted to prop up prices, reignite the credit expansion, and stimulate demand. All this is obvious to anyone who follows the news.
What is less obvious is how the crisis came about. Keynesians treat it like an act of God. Virtually no one in authority saw it coming. Applying Austrian theory, we see that the crisis was caused by Government intervention, decades of relentless credit expansion. It was entirely predictable. And, indeed, it was predicted. The nature and timing of the inevitable crash were endlessly debated for years all over the Internet by ordinary people unburdened by false doctrine.
A more important question, however, is why we tolerate unaccountable power in government. Why do we find it acceptable that government has the power to intervene so massively in the market that it can cause such a crisis in the first place? And why do we now tolerate more of the same, a putative cure that is doing even more damage?
This brings us to the other contrasting theory, the concept of money itself.
In Austrian teaching, money originates in the market: ...all money has originated, and must originate, in a useful commodity chosen by the free market as a medium of exchange. The unit of money is basically just a unit of weight of the monetary commodity – usually a metal, such as gold or silver. Government has no role in the definition or selection of money, let alone its creation, price or quantity. That is the market's function.
In Keynesian theory, by contrast, money originates in the state. Government has a total monopoly on money, starting with its very definition. It is not chosen in free exchange, it is imposed by force.
Keynes got his idea for state control of the means of exchange in the writings of a Prussian academic named Friedrich Knapp. Herr Knapp was the author of a book entitled the State Theory of Money, published in 1905. According to Knapp's theory, money is a creature of law, of state power. Money is whatever the state is willing to accept as payment for its taxes. It derives its value exclusively from the state.
Keynes was so delighted with the State Theory of Money that in 1924 he sponsored its first translation into English. In 1930, he adopted it explicitly in his Treatise on Money.
Now, it is a measure of the success of the Keynesian indoctrination to which we have all been subjected that this insidious theory strikes most people, even some who fancy themselves free market in orientation, as unobjectionable. They prefer to concentrate on other fallacies of Keynesian doctrine. Many of us are so used to hearing that the state properly has a monopoly on money that we have come to think it natural.
In fact, the State Theory was already defunct long before Keynes appropriated it. It had been demolished in theory as early as 1912 by Mises in his classic Theory of Money and Credit. It had been discredited in practice by its association with the German hyperinflation of the 1920's. But inconvenient truth did not deter Lord Keynes. The State Theory was quietly incorporated into Keynesian dogma without further ado.
And there it sits, to this day, malignant and unexamined, a false theoretical postulate at the foundation of the entire corrupt edifice of inflationist theory and practice.
So why is this bit of intellectual history relevant? Because bad ideas have bad consequences.
The State Theory of money, the obscure foundation of modern inflationism, left us intellectually defenseless against our government's incremental shift to fiat money and away from any practical limitations on its power.
It left us defenseless against the depredations of our central bank, whose grotesque mispricing of money and credit over the years led in a straight line to the catastrophic serial bubbles in assets and credit whose threatened collapse triggered the open interventions of last fall.
And, unless we drag it out into the open and drive a stake through its heart, the State Theory will leave us defenseless still as we grope for a way out. If our assumptions are so flawed that we cannot properly articulate the conceptual problem, we will never understand, let alone fix, the institutional and behavioral problems.
Or, more to the point, defend ourselves against the next wave of monetary swindles by powerful insiders.
And so we come to the second question: how do we get out of this mess? The short answer is, we don't. There is no saving the dollar or the monetary system now based upon it.
Not that we should want to. Absolute power, Lord Acton famously observed, corrupts absolutely. The power to print a reserve currency out of thin air is the greatest power on Earth. Its very existence attracts and empowers people who wish to control other people. It corrupts all who enjoy it.
You have had direct exposure to the truth of this observation. Consider the relentless attacks on your gold by our authorities, and the relentless attacks on your bank secrecy laws by nearly everybody. The very same laws, ironically, that were developed in the 1930's for the express purpose of protecting clients who were nationals of fascist states.
I believe it fair to say that as a society, we Americans have reached a dead end. We are bankrupt, and not just financially. Our leading institutions are corrupt and discredited. Our leadership class has betrayed its trust, openly and repeatedly.
Our financial and economic crisis will in due course lead to an intellectual and cultural crisis. We may yet avoid the fury and violence that have attended other paradigm shifts, other imperial collapses. But we will need to be very lucky indeed. That's because on the one hand, this is about power which will not be voluntarily relinquished, and on the other, there is no reasoning with an angry mob.
So I believe it is a waste of time to talk about reform of the existing monetary system. There is no historical precedent for a fiat money surviving more than a brief span of years; and, in any event, the experience of the Soviet Union teaches that an economic system built upon a false dogma cannot survive.
We should instead focus on regeneration, the task of rebuilding out of the wreckage on the other side of that final monetary collapse. At that time, and not before, we will have the opportunity, however brief, to drive out these disastrous ideas along with those who used them to control and impoverish us. Only then will we have an opportunity, however long the odds, to restore our Constitutional republic.
In the meantime, what keeps the current system going? You do. You, meaning foreign investors, still lend us your savings. This just enables us to prolong the process, defer the resolution, and increase its ultimate cost.
When will it end? Whenever you cut us off. At some point, foreign holders will sell our debt in earnest, and buy gold with a conviction resembling panic.
And so, finally, I come to gold. This is, after all, a gold conference. Why then do I talk so much about politics? Because I think it's impossible to understand gold without understanding its political dimension. Gold is permanent, natural money, the antithesis of money made from nothing, money backed by force alone. It is a potent symbol of private property; of voluntary exchange taking place outside the control of the state; of limits on state power; and of resistance to the runaway state.
Left to its own devices, gold is the ultimate barometer of public confidence in government.
It is also the ultimate means for ordinary citizens to opt-outof an oppressive, fraudulent system.
That is why gangsters who wield power in the name of the 'people' always make ownership of gold a crime. So it was in France during the Revolution, in Germany during the Nazi era, in Russia during the Soviet era, in China during Mao's rule, and in the United States from 1933 through 1974. It is why, even during periods when the ownership of gold is not outlawed, its price is 'governed', as one commentator puts it, or officially manipulated, as others of us put it.
It's often hard for practical men of affairs to understand the vehemence of those of us who assert, seemingly ad nauseam, that gold is money.
The truth is, our passion has more to do with the concept of liberty than with that of money. We know from history and experience that once the free market has lost control over the definition and creation of money, individuals have lost their liberty.
That's why neither a central bank nor fiat money find support in the Constitution of the United States, and why our monetary system, which has these two elements as its very foundation, is unconstitutional on its face.
It's also why, as we rebuild our institutions from the wreckage of the final monetary collapse, control over money must at all costs be kept away from government. It is not enough that gold return as money; government must keep its hands off.
Money must be real, tangible, circulating. As Mises wrote when considering the subject of monetary reform back in the 1950's; "Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store." And I'm sure he would have added an approving reference to digital gold had the technology then existed.
Now, just to be clear, people must be free to choose whatever they want to use as money. We believe they will choose gold, given a chance, simply because people have already done so over thousands of years, and for very good reasons.
But creating the conditions within which an informed choice can be made, even – or perhaps especially - after the collapse of the system and the discrediting of its false ideology, will be extremely difficult.
We are beset by propaganda, falsehood and spin from all sides. Truth is of no consequence; the Fed has bought and paid for virtually the entire economics profession in the United States.
Our universities are riddled with apparatchiks who at the very least must toe the party line to advance in their careers, and in many cases are directly dependent on Fed largesse.
The financial press, now concentrated in ever fewer hands, is captive to the same false dogma, and is little more than an apologist for the current monetary regime.
We desperately need credible new sources of information on money if we are going to have any shot at a sustainable regeneration. In this connection, I have reason to hope that from the talent assembled here this evening, we will see a new initiative in the very near future. Stay tuned.
How Can We Possibly Calculate the Future Value of Gold?
Today we have a financial crisis, an economic crisis, and a monetary crisis. Three different crises, all happening at the same time! Financial is all the paper junk that is floating around at fantasy valuations. Economic is the collapsing architecture of the real world (unemployment, imbalance), and monetary is the accounting of it all. Together they form a SYSTEMIC crisis.
A crisis of the WHOLE DAMN SYSTEM.
An accounting adjustment is needed, and WILL happen one way or another. THIS is inevitable!
The Fed believes it can manage public perception of this crisis by simply stuffing the Dow and the S&P full of pure base money inflation. There is no economic inflation to back this up. It is a recipe for hyperinflation (a run on the >currency<), not inflation. And as I have said, hyperinflation is actually DEFLATION when viewed in real terms, gold!
In deflation, the purchasing power (PP) of money RISES! This will happen to gold. In inflation, the PP of money FALLS. This will happen to the dollar. Only it will not fall in the orderly manner that is associated with normal inflation (which is in the presence of an inflating economy). Instead it will fall dramatically as a currency event in the presence of a collapsing economy.
Gold's function in society is evolving into something new. It is being spread out among millions and millions of savers, to perform this new function. Only the SAVERS need gold!
The cornering of gold means only that small amount at the margins that is offered for sale at today's low prices. That marginal physical volume is being depleted rapidly at the same time as giant buyers stand ready to buy giant amounts. This is the "cornering", and it puts a lot of pressure on those who sell paper gold without the physical to back it up.
Money has always had two functions, trade and wealth reserve (actually three: means of exchange, unit of account and store of value; the unit of account function acts as a bridge between the other two). Fiat currency is an extremely inefficient wealth reserve because it can be created from thin air (see: Ben Bernanke and Gideon Gono).
But with our modern computerized banking system, it works great for overnight trade. Gold, on the other hand, is a little bulky for trade, but works great as a wealth reserve, especially once the dollar loses its global reserve currency status which allows >only it< the ability to suppress the price of gold. When that is gone, gold will float freely against all currencies as a wealth reserve!
It is the separation of these two functions that is happening today!
Why not invest in the one asset that is a true monetary wealth reserve? An asset with a very limited downside and a virtually infinite upside! An asset that is a future claim on ANYTHING in the world, not just one specific local company. It is even a monetary wealth reserve FOR THE CENTRAL BANKS!!!
This function [wealth reserve] of money has been STOLEN from us by the central bankers and their fiat currencies, in which ALL other investments are denominated! This function, the wealth reserve, was second only to the trade function of money for thousands of years. We lost this function of money when actual physical gold stopped being used as currency. But the idea of this function persisted, driven by the greed of the bankers to not only skim profits from trade, but to take the much larger skim that comes from savings!
This reset of value is going to be a one-time-event when it finally happens. After that, things will be in equilibrium again. And this event will have little empathy for your cricket-like jump-skills as the shoe drops. Many skillful traders will be completely squashed.
The big debate right now seems to hinge on a slow collapse versus a fast collapse, and internal versus external. My gut tells me it is likely to be fast and external. What better time to take down Wall Street than while they are still long the dollar, short the Euro, and short gold? Wall Street is far too confident in its own manipulative power, and I imagine a strong movement sooner rather than later to take it down. The rest of the world has to be worried about an organized dollar devaluation from the inside, so why wait? The spineless parasites in Washington don't have the backbone to make a big move until they are SURE they can blame someone else. But whoever STARTS the panic, profits most!! "The early bird gets the worm", as they say.
I believe that the collapse of the dollar is directly linked to the paper gold market. Much is written about how gold will profit from the falling dollar. I think it is the other way around. It may just be a semantic difference, but I really think that gold is the key! And I feel privileged to have found the one explanation that makes so much sense.
Let's try not lying to ourselves and admitting that gold alone in a currency will not remove our will to borrow and lend and therefore eventually defraud each other! Would it not be better to at least not shackle the money to gold. Indeed, a real physical freegold market will constantly be devaluating any fiat currency over a long term. While removing the need for CBs to maintain fixed exchange structure through a dirty float against gold.
But, the most important aspect is in the escape valve gold would provide to developing countries with positive trade flows. Those that wish to settle their debts outside the currency arena using gold as a settlement. Or, if they wish, to buy gold in the open market with their trade reserves.
The secret to all of this is in the "Legal Tender laws". Allowing gold to be used as a Legal Tender,,,, "for the settlement of all debts public and private",, but changing international law such that no form of debt can force it's payment in gold! This opens a one way street for gold and a two way street in fiat currencies. No one will lend gold because they cannot force it's return in the courts, thereby making gold a physical only international currency. Yet, on the other hand, we all must borrow in this modern world and currencies will be the only avenue for this. Creating a demand (and added value) for them in addition to general use demand.
The first thought many will have is that everyone will just buy gold to make debt payments, driving out fiat currencies. But remember, if you have debts they will be in currency settlement only. One will weigh the cheapest form for repayment! Gold in this atmosphere will be completely free to trade, become extremely expensive and stay that way. Not to mention that it's sale as a commodity (outside it's money use) on the private level will be well taxed.
Taking Freegold to its logical conclusions one can deduce a few things about future gold taxes:
1. Capital Gains tax will almost certainly NOT be applied to physical gold carried through the fire. Government today makes no distinction between ETF shares and physical, and does not track small cash transactions. There will be no possible cost basis on which to widely attempt to collect such a tax. And in "gold" (most Western "gold investments") it will be capital loss write-offs that will be "taxing" the tax man.
2. The filp side to the "cost basis" conundrum for CGT is the change in "liquidation mentality" that Freegold will usher in. Michael Kosares put it well in his recent newsletter: "I have been asked on many occasions if there might be a set of circumstances when selling one’s gold holdings in toto might make sense. Since I view gold more as a form of savings than as an investment for gain, selling it simply to make a gain doesn't make a great deal of sense to me. If your intent was to purchase gold as a hedge starting out, why would you sell it simply because the price reached some arbitrary plateau? Like dollar-based savings, you should tap your gold reserves based on need."
3. The only tax that will be logistically plausible will be a sales tax (6% to 10%).
4. The burden of this sales tax will be carried by the unstoppable stream of gold BUYERS, not those who carried it through the fires of change. What I mean is that, like any sales tax, it will simply "raise the price of the product" in that particular tax zone, relative to everywhere else.
5. But because physical gold is fungible, divisible and private real capital on all sides of all borders, any nation with a high sales tax on gold will see ZERO capital inflow, and will likely see black market capital OUTFLOW of the most CRUCIAL capital in the new world. This is the primary rationale for saying there will likely be NO tax on physical gold in Freegold, period, only on the mining operations that will be viewed as "digging up the public's reserves."
6. Governments already know this. They don't need to learn it. For example; see the 0% tax on gold in Europe while silver and everything else still carries a VAT. And see the recent news that Russia will drop capital gains tax to attract new investment. Governments already know winning is all about taxing economic activity.
7. Gold will not deliver capital gains, it will denominate them through the fires of change. And you don't tax the denominator!
8. Zones with NO tax on gold will experience massive capital inflow and new, taxable economic activity. This will be the goal of governments after transition. Encourage self-sufficiency and then tax it. The ROI on taxing real, private, physical capital (physical gold) will be quite negative, gold bug paranoia notwithstanding.
The case for gold seems almost too good to be true to some gold bugs. Well, surprise! It is about 10 times better than most of you even imagine.
Instead of looking at wealth, or even debt, let's look at "purchasing power". Better yet, let's look at the concept of "Stored Purchasing Power". Now I realize that most people's "stored purchasing power" will be deployed at some point over the next ten or twenty years... those that have any. But for the sake of understanding the theoretical concept, imagine that I have immense stored purchasing power. Imagine that I am a "super-producer" giant. Imagine that I make something that everyone in the world wants and needs.
Let's suppose that I am similar to Bill Gates, only much more necessary to the human race. Yes, I have moral charity obligations that come with my significant wealth, but do I not also have the right to store some of it for future use? Should it be illegal for me to store my productive effort so that my descendants could benefit from it for generations to come? If you make such a thing illegal or impossible I will likely not produce as much of what everyone wants and needs! Is this a good economic strategy? Or is it an economically limiting (perhaps even deflationary) strategy spawned only by envy?
You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people. This is perfectly understandable. But does this mean that I should forfeit the fruits of my labor after some point in time or at some maximum? Of course not! That would be socialist nonsense. As long as my storage of wealth medium does not infringe on anyone else's industrial growth, then my accumulation actually contributes to economic expansion.
The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless. The only thing that limits its potential is a faulty storage medium, which limits the collective confidence in its ability to preserve wealth over time.
With a faulty storage medium I will not be as eager to store the fruits of my labor for deployment so far into the future. For I will recognize that at some point in time the medium will fail and my efforts will have been for naught. So I will be more likely to "spend" my considerable wealth in the here and now. Not right now, but you know what I mean. I'll probably build a 70,000 sq. ft. high tech castle on a lake for me and my wife and things like that.
And an interesting side effect of spending my considerable wealth in the here and now is that it not only reduces the purchasing power of the rest of my wealth, but also everyone else's who holds a similar medium as me. In aggregate, a faulty storage medium is self-limiting.
So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:
1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and
2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.
I say this is the rough limit because it represents the emergency exit from said flawed medium.
So the next step is to ask ourselves the obvious question. How much "stored purchasing power" exists in the world today? This is a good question, yes? But how could we possibly know? Today it is all denominated in worthless paper!
For at least 66 years now the whole world has been operating under the $IMFS. But when we really look at "who is the dollar faction" and "who is the non-$ faction" we see that roughly 25% of the world profits greatly from this system and 75% of the world is essentially "taxed" by it. In other words, roughly 25% of the world has been running a trade deficit for 66 years while 75% has been running the necessary surplus to support the other 25%. I know this is a bold, generalized statement to make without full explanation, but these are conservative numbers that I have used and explained in many posts.
For simplicity, let's call these two zones "The West" and "everyone else". Now what are a few broad, sweeping generalizations we can make about these two zones? For one thing, those in the West, unlike most everyone else, operate, as ANOTHER put it, "without 'loss of currency' Experience." And because of this they exhibit a level of confidence in paper storage of purchasing power that is quite surprising to everyone else.
The West loves its paper wealth. It loves to record it, to publish it, to know where it is, to know where it stands, to throw its weight around with it, to tax it, to track its movements, and occasionally to take it away. It is this $IMFS fascination with paper wealth that made it possible for you to even find a number for "Global Household Wealth", Stefan. And when I think about this number for a while, it is hard not to laugh at the absurdity of it.
Let me ask you this. Does that UN survey take into account the "stored purchasing power" of the Indian wives? How about the sovereign wealth hidden in Saudi Arabia? What about "old money" and "royal wealth" hidden in Europe? Large swaths of the "everyone else" 75% never stopped storing their purchasing power privately in gold, knowing that one day it would be restored.
And what about the 66 years worth of surpluses centrally accumulated in national central banks and sovereign wealth funds? Were they counted as part of the "Global Household Wealth"?
This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.
And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequaled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.
So when the plug is pulled on the matrix and the pitcher of water disappears, how much water will be revealed in the physical plane beneath? I guess this is the $50,000 question, yes?
If you are just dying to be able to visualize the actual mechanics of this transfer of wealth that could explode aggregate value to a much higher level than your linear model allows, Stefan, I'll give you a brief glimpse. Gold holds its unique position because it is pretty much used for nothing else. It has an extremely high stock to flow ratio. "Stock" means those who are sitting tight on their physical gold, letting it lie still for the future, and "flow" means those who are presently trading their gold.
One of the false assumptions of your linear model is that real physical gold must hold the same time-value-durability confidence level throughout 100% of the world that paper wealth holds in 25% of the world. So as people sell their paper wealth and buy physical gold, the price rise will bring down the stock to flow ratio to a much lower equilibrium point somewhere around $10,000 per ounce.
Gold is not like other commodities where supply is economically driven to ramp up and meet demand as prices rise. Nor is it like paper investments that have objective metrics like price-to-earnings ratios and interest rates. With gold, a rising price sends the exact opposite signal to the place where supply comes from. It confirms the belief in those that already hold the "stock" that it is a good investment and it is best to sit tight and not re designate it to "flow".
Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand. And this dynamic obviously has nothing to do with today's paper gold market where physical stock lies very still and paper stock meets most of the demand.
Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.
This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have objective metrics for valuation or economically limiting forces. All except gold.
The true Giants of this world that hold large amounts of gold have a good idea what their gold is worth. And yet, when it finally gets there they will still not liquidate their "stocks". This is because gold as a store of purchasing power has an infinite time horizon. These Giants are not interested in "catching the top" like Western traders. They are interested in storing purchasing power well into the future.
I guarantee to you that the Noble families of Europe still possess some of the same exact pieces of gold that were in their families in the 16th, 17th and 18th centuries. And this is purchasing power stored (and increased) through several currency collapses!
So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.
Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude. Here is what my supercomputer spat out:
Take it for whatever it's worth, which, of course, only you can decide for yourself. The IMFS is failing. Please don't let the fears, envy or baseless doubts of others obscure this reality. You can choose to participate in the recapitalization of world finance or you can be a victim of it when the lights go out. The choice is right in front of you.
So decide what you'd rather be: a participant in the rebuild, or a victim of the collapse. Amazingly you still have this choice available as I type these words.
Karl Marx predicted the breakdown of capitalism as a result of class struggle, followed by the establishment of a grand commune in which all the means of production would become publicly owned and used only for the public good. Sounds pretty nice, huh? "Imagine no possessions, I wonder if you can. No need for greed or hunger, A brotherhood of man. Imagine all the people, Sharing all the world..." ... and all that peace and harmony stuff.
Today we have many fine, intelligent and exacting analysts all looking at the same economic data and coming up with vastly different analyses of the present global financial crisis. What sets them all apart from each other is not intelligence, or math skills, or even popularity. What sets them apart is the foundational premises on which they operate.
And a false premise can skew a brilliant analysis 180 degrees in the wrong direction. Few analysts fully disclose their premises. But Karl Marx did, and in this we can find the one, key flaw that sent his analysis off in a disastrous direction.
Marx writes, "The history of all hitherto existing society is the history of class struggle." He got this part right! What he got wrong was his delineation of the classes.
Marx's classes were:
1. Labour (the proletariat or workers) - anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.
2. Capital (the bourgeoisie or capitalists) - anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.
Simply put, Marx says it's the rich versus the poor. According to Marx the rich exploit the poor to get themselves a "labor-free income", which spawns a class struggle.
This is an attractive perspective because it requires only a cursory, superficial judgement to place someone into one of the two camps, the rich or the poor. If someone is driving a Bentley we immediately know which group they are in, right?
But within this simple, foundational premise lies an error so serious that within 130 years of Marx's death it caused somewhere between 85 million and 150 million deaths, depending on how you count them. That's an oddly large number of dead people for a commun-ity in which class struggle had been eliminated, isn't it? Peace and harmony my ar$e.
As I said, Marx got one thing right. History does bear out the dramatic story of centuries of class struggle. But if we eliminate his one small flawed premise, we can see it all much more clearly.
The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The soft money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.
1. Debtors - "The soft money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like soft money because it is always and everywhere constantly inflating, easing the repayment of their debts.
2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.
1789, the French Revolution, "the hard money camp" had been in power since 1720 when John Law's soft money collapsed, and starting in 1789 "the soft money camp" killed "the hard money camp" and took back the power. This is the way "the soft money camp", the Debtors, usually take power... by revolting against the hard repayment of their spending habits.
Only nine years later, 1797, soft money collapsed once again (as it had just done in 1720) and a new French monetary system based upon gold was again reinstated. This is the way "the hard money camp", the Savers, almost always regain control: when the soft money collapses. On very rare occasions and only under highly favorable circumstances (like moving to a new continent!), "the hard money crowd" takes control by physically separating from "soft money" and declaring independence from the Debtors.
The American Revolution. Yes, the Constitution mandates hard money.
So just to repeat for clarity: Hard money regimes almost always end in bloodshed, when the soft money camp slaughters the hard money camp to avoid hard repayment terms. And soft money regimes almost always end in financial suffering when the soft money collapses. Here are a few more examples of "soft money collapses"...
Argentina (1975-1991, 2001)
Free City of Danzig (1923)
Germany (1923-1924, 1945-1948)
Hungary (1922-1927, 1944-1946)
Mongolian Empire (13th and 14th Century AD)
Persian Empire (1294)
Poland (1922-1924, 1990-1993)
Ancient Rome (~270AD)
Russia (1921-1922, 1992-1994)
United States (1812-1814, 1861-1865)
Yap (late 1800's)
Zimbabwe (1999 - present)
You see, Marx had it almost completely backwards when he said the rich exploit the poor for free income. Once we shuffle and re deal the two camps correctly we see that it is actually "the soft money camp" (the Debtors) that always exploit "the hard money camp" (the Savers), taxing them, destroying their savings, destroying capital, borrowing money only to repay it on easier terms, and sometimes even killing them. So are "the Debtors" the rich and "the Savers" the poor? Of course not! Is this clear enough?
What does all this have to do with Freegold today? Well, with history, ANOTHER and FOA as our guides, we can see clearly what is coming. And with a correct view and a wide enough perspective, we can also see how some fine analysts operating under false premises are inducing the wrong conclusions.
Today we are living the end of the longest stretch of time in which "the soft money camp" has been in power both politically and monetarily. For a century now they have been softening our money more and more. And for those of you obsessed with the "emerging" NWO and One-World Currency... surprise! You've been living with it for 66 years now.
This latest push for central control and massive deficit spending by the "soft money camp" is simply the blow-off phase right before the long awaited collapse. And when soft money collapses, the transition is always financially painful but not necessarily bloody like the French Revolution, which was the end of the "hard money camp".
Now, what happens during ALL periods in history, whether "the hard money camp" is in charge or "the soft money camp" are running things... is a transfer of wealth. This is important! Because when the soft money guys are in power the transfer of wealth happens slowly and gradually, and wealth flows from the Savers to the Debtors. But when "soft money" collapses - and it ALWAYS collapses - there is a very RAPID transfer of wealth in the other direction, from the Debtors back to the Savers.
And this is where you need to take some action today. Because we have been living in a "soft money regime" for so long now, the delineation of the two camps is somewhat obscured. There are many many people who consider themselves Savers who are still sitting in the wrong camp, and will be on the WRONG side of the coming
- extremely rapid - transfer of wealth.
Today you need to be proactive if you want to get on the receiving end of this "blow back" transfer of wealth. You need to actively choose which camp you are in. And to do that, you need to recognize the two camps, or classes. Remember, this is a "class struggle".
So let's put a few modern groups and people into these two camps. I think it is fairly obvious that almost all modern "socialistic" governments and their politicians addicted to sovereign debt and deficit spending are in the debtor class. These are the soft money guys. And the bankers as a class are generally there too. As I said in a recent post:
The banker makes his largest profits during times in history when the liberal soft money crowd is in power both politically and monetarily. And he makes his most absurd profits when the debtor class allows its debt to go too far... to the very mathematical limit. But don't worry. This unstoppable avalanche will reduce banking and central banking to what it should be; a utility for the public good.
And this is because soft money debt must flow THROUGH the banking class as it is passed between the savers and the debtors.
But as individuals, not "banks", but individual bankers, we could say that some of them are Debtors while others are Savers. For example, would you agree that the Rothschild family, as a family unit, is in the "saver class" while their industry or profession (banking) as a whole falls in the "debtor class"? Or perhaps we could say that the banking institutions, as the hollow corporate shells that they are, are closely aligned with the debtor class.
But on the other side of the coin, we can broadly say that most of the young "hot shot bankers" and investment bankers probably fall firmly in the "debtor class". When you look at the lavish lifestyle of a lot of these young guys, you don't see the debt it is built upon. Just like our character, Liam O'Leary, in The Tiger's Tail. You could watch a Rothschild and a Goldman VP pull up to an event in identical Bentleys, not seeing that one is leased while the other is owned outright. Are you catching my drift?
You can tell who the "soft money guys" are because they will always argue that a currency devaluation is preferable to forced austerity. They will say, "the euro got it wrong because it doesn't allow for Greece to devalue." And in saying this, they put themselves firmly in the Debtor camp. They are saying that the "Argentine/Brazilian/Soviet/Zimbabwe workout" is preferable to what is happening in Greece today.
So here's the important thing in today's dangerous world. We must each understand the difference between choices and inevitabilities. What is coming at us is inevitable. It is unavoidable. How we personally prepare for it is a choice we each must actively make.
The coming "blow back" hyper-rapid transfer of wealth is not something that necessarily requires moral judgements of good and evil. It is simply a fact of life today. Pick which side you want to be on in THIS particular transfer of wealth. By selling your debt-financed paper savings and buying physical gold today you are making the conscious CHOICE to join the camp of the true Savers.
Many people that consider themselves "savers" are precariously positioned right now. These people need to take active measures to get on the receiving end of this transfer of wealth to survive. Many, many, many average citizens amazingly still have this option, yet they don't even realize it. They need to get up and move over into the same camp as the Rothschilds and the Russian Oligarchs, and prepare to own the future. It's not a matter of good versus evil at this point, it is a matter of survival!
The soft money crowd has had a really, really long run in the sun this time. There's no need to feel bad for them. And all the last-ditch central control efforts we see today are simply the culmination of that run. But their influential position is completely dependent on the power afforded by the soft money debt machine that is now crumbling. Their "power generator" is out of gas. And it's not the kind of gas you can legislate or print.
But don't take my word for it. And certainly don't take financial advice from me! For that matter, don't take financial advice from ANYONE. Think it through yourself, quietly. Use your own head. This is the only path to peace of mind. You and only you will lose your wealth if you take the wrong advice. And this time, it doesn't take an MBA and a JD to understand the choices.
It is easy to watch the dollar losing its reserve privilege today. And it is also easy to see who will come out ahead when it happens. All else is noise. Choose your camp wisely.
Imagine there's no Heaven
It's easy if you try
No hell below us
Above us only sky
Imagine all the people
Living for today
Imagine there's no countries
It isn't hard to do
Nothing to kill or die for
And no religion too
Imagine all the people
Living life in peace
You may say that I'm a dreamer
But I'm not the only one
I hope someday you'll join us
And the world will be as one
Imagine no possessions
I wonder if you can
No need for greed or hunger
A brotherhood of man
Imagine all the people
Sharing all the world
You may say that I'm a dreamer
But I'm not the only one
I hope someday you'll join us
And the world will live as one
The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system.
Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience. The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someone’s pocket.
Watching a performer is just harmless entertainment, and everyone knows that it’s just a series of clever tricks. In contrast, the monetary illusions created by central banks, and the evil acts they conceal, can cause serious pain and suffering. This is a topic that needs more exposure.
The commonly accepted definition of inflation is “an increase in consumer prices”, and deflation is “a decrease in consumer prices.”A corollary is a myth that stubbornly persists: “today, a fine suit costs the same in gold terms as it did in 1911, about one ounce.” Why should that be? Surely it takes less land today to raise enough sheep to produce the wool for a suit, due to improvements in agricultural efficiency. I assume that sheep farmers have been breeding sheep to maximize wool production too. And doesn’t it take less labor to shear a sheep, not to mention card the wool, clean it, bleach it, spin it into yarn, weave the yarn into fabric, and cut and stitch the fabric into a suit?
Consumer prices are affected by a myriad of factors. Increasing efficiency in production is a force for lower prices. Changing consumer demand is another force. In 1911, any man who had any money wore a suit. Today, fewer and fewer professions require one to be dressed in a suit, and so the suit has transitioned from being a mainstream product to more of a specialty market. This would tend to be a force for higher prices.
I don’t know if a decent suit cost $20 (i.e. one ounce of gold) in 1911. Today, one can certainly get a decent suit for far less than $1600 (i.e. one ounce), and one could pay 3 or 4 ounces too for a high-end suit.
My point is that consumer prices are a red herring. Increased production efficiency tends to push prices down, and monetary debasement tends to push prices up. If those forces balance in any given year, the monetary authorities claim that there is no inflation.
This is a lie.
Inflation is not rising consumer prices. One can’t understand much about the monetary system from inside this box. I offer a different definition.
Inflation is an expansion of counterfeit credit.
Most Austrian School economists realize that inflation is a monetary phenomenon. But simply plotting the money supply is not sufficient. In a gold standard, does gold mining create inflation? How about private lending? Bank lending? What about Real Bills of Exchange?
As I will show, these processes do not create inflation under a gold standard. Thus I contend the focus should be on counterfeit credit. By definition and by nature, gold production is never counterfeit. Gold is gold, it is divisible and every piece is equivalent to any other piece of the same weight.
Gold mining is arbitrage: when the cost of mining an ounce of gold is less than one ounce of gold, miners will act to profit from this opportunity. This is how the market signals that it needs more money. Gold, of course, has non-declining marginal utility, which is what makes it money in the first place, so incremental changes in its supply cause no harm to anyone.
Similarly, if Joe works hard, saves his money, and gives a loan of 100 ounces to John, this is an expansion of credit. But it is not counterfeit or illegitimate or inflation by any useable definition of the term.
By extension, it does not matter whether there are market makers or other intermediaries in between the saver and the borrower. This is because such middlemen have no power to expand credit beyond what the source—the saver—willingly provides. And thus bank lending is not inflation.
Below, I will discuss various kinds of credit in light of my definition of inflation.
In all legitimate credit, at least two factors distinguish it from counterfeit credit. First, someone has produced more than he has consumed. Second, this producer knowingly and willingly extends credit. He understands exactly when, and on what terms, with what risks he will be paid in full. He realizes that in the meantime he does not have the use of his money.
Let’s look at the case of fractional reserve banking. I have written on this topic before. To summarize: if a bank takes in a deposit and lends for a longer duration than the deposit, that is duration mismatch. This is fraud and the source of banking system instability and crashes. If a bank lends deposits only for the same or shorter duration, then the bank is perfectly stable and perfectly honest with its depositors. Such banks can expand credit by lending, (though they cannot expand money, i.e. gold), but it is real credit. It is not counterfeit.
Legitimate lending begins with someone who has worked to save money. That person goes to a bank, and based on the bank’s offer of different interest rates for different durations, chooses how long he is willing to lock up his money. He lends to the bank under a contract of that duration. The bank then lends it out for that same duration (or less).
The saver knows he must do without his money for the duration. And the borrower has the use of the money. The borrower typically spends it on a capital purchase of some sort. The seller of that good receives the money free and clear. The seller is not aware of, nor concerned with, the duration of the original saver’s deposit. He may deposit the money on demand, or on a time deposit of whatever duration.
There is no counterfeiting here; this process is perfectly honest and fair to all parties. This is not inflation!
Now let’s look at Real Bills of Exchange, a controversial topic among members of the Austrian School. In brief, here is how Real Bills worked under the gold standard of the 19th century. A business buys merchandise from its supplier and agrees to pay on Net 90 terms. If this merchandise is in urgent consumer demand, then the signed invoice, or Bill of Exchange, can circulate as a kind of money. It is accepted by most people, at a discount from the face value based on the time to maturity and the prevailing discount rate.
This is a kind of credit that is not debt. The Real Bill and its market act as a clearing mechanism. The end consumer will buy the final goods with his gold coin. In the meantime, every business in the entire supply chain does not necessarily have the cash gold to pay at time of delivery.
This problem of having gold to pay at time of delivery would become worse as business and technology improved to allow additional specialization and thus extend the supply chain with additional value-added businesses. And it would become worse as certain goods went into high demand seasonally (e.g. at Christmas).
The Real Bill does not come about via saving and lending. It is commercial credit that is extended based on expectations of the consumer’s purchases. It is credit that arises from consumption, and it is self-liquidating. It is another kind of legitimate credit.
Now let’s look at counterfeit credit. By the criteria I offered above, it is counterfeit because there is no one who has produced more than he has consumed, or he does not knowingly or willing forego the use of his savings to extend credit.
First, is the example where no one has produced a surplus. A good example of this is when the Federal Reserve creates currency to buy a Treasury bond. On their books, they create a liability for the currency issued and an asset for the corresponding bond purchase. Fed monetization of bonds is counterfeit credit, by its very nature. Every time the Fed expands its balance sheet, it is inflation.
It is no exaggeration to say that the very purpose of the Fed is to create inflation. When real capital becomes more scarce, and thus its owners become more reluctant to lend it (especially at low interest rates), the Fed’s official role is to be the “lender of last resort”. Their goal is to continue to expand credit against the ever-increasing market forces that demand credit contraction.
And of course, all counterfeit credit would go to default, unless the creditor has strong collateral or another lever to force the debtor to repay. Thus the Fed must act to continue to extend and pretend. Counterfeit credit must never end up where it’s “pay or else”. It must be “rolled”. Debtors must be able to borrow anew to repay the old debts—forever. The job of the Fed is to make this possible (for as long as possible).
Next, let’s look at duration mismatch in the financial system. It begins in the same way as the previous example of non-counterfeit credit—with a saver who has produced more than he has consumed. So far, so good. He deposits money in a bank, and this is where the counterfeiting occurs. Perhaps he deposits money on demand and the bank lends it out. Or perhaps he deposits money in a 1-year time account and the bank lends it for 5 years. Both cases are the same. The saver is not knowingly foregoing the use of his money, nor lending it out on such terms and length.
This, in a nutshell, is the common complaint that is erroneously levied against all fractionally reserved banks. The saver thinks he has his money, but yet there is another party who actually has it. The saver holds a paper credit instrument, which is redeemable on demand. The bank relies on the fact that on most days, they will not face too many withdrawal demands. However, it is a mathematical certainty that eventually the bank will default in the face a large crowd all trying to withdraw their money at once. And other banks will be in a similar position. And the collapsing banking system causes a plunge into a depression.
There are also instances where the saver is not willingly extending credit. The worker who foregoes 16% of his wage to Social Security definitely knows that he is not getting the use of his money. He is extending credit, by force—i.e. unwillingly. The government promises him that in exchange, they will pay him a monthly stipend after he reaches the age of retirement, plus most of his medical expenses. Anyone who does the math will see that this is a bad deal. The amount the government promises to pay is less than one would expect for lending money for so long, especially considering that the money is forfeit when you die.
But it’s worse than it first seems, because the amount of the monthly stipend, the age of retirement, and the amount they pay towards medical expenses are unknown and unknowable in advance, when the person is working. They are subject to a political process. Politics can shift suddenly with each new election.
Social Security is counterfeit credit.
With legitimate credit, there is a risk of not being repaid. However, one has a rational expectation of being repaid, and typically one is repaid. On the contrary, counterfeit credit is mathematically certain not to be repaid in the ordinary course. This is because the borrower is without the intent or means of ever repaying the loan. Then it is a matter of time before it defaults, or in some circumstances forces the borrower to repay under duress.
Above, I offered two factors distinguishing legitimate credit:
1. The creditor has produced more than he has consumed
2. He knowingly and willingly extends credit
Now, let’s complete this definition with the third factor:
3. The borrower has the means and the intent to repay
Every instance of counterfeit credit also fails on the third factor. If the borrower had both the means and the intent to repay, he could obtain legitimate credit in the market.
A corollary to this is that the dealers in counterfeit credit, by nature and design, must work constantly to extend it, postpone it, “roll” it, and generally maintain the confidence game. Counterfeit credit cannot be liquidated the way legitimate credit can be: by paying it back normally. Sooner, or later, it inevitably becomes a crisis that either hurts the creditor by default or the debtor by threatening or seizing his collateral.
I repeat my definition of inflation and add my definition of deflation:
Inflation is an expansion of counterfeit credit. Deflation is a forcible contraction of counterfeit credit.
Inflation is only possible by the initiation of the use of physical force or fraud by the government, the central bank, and the privileged banks they enfranchise. Deflation is only possible from, and is indeed the inevitable outcome of, inflation. Whenever credit is extended with no means or ability to repay, that credit is certain to eventually become a crisis that threatens to harm the creditor. That the creditor may have collateral or other means to force the debtor to take the pain and hold the creditor harmless does not change the nature of deflation.
Here’s to hoping that in 2012, the discussion of a more sound monetary and banking system begins in earnest.
Addendum, by Pater Tenebrarum
Our readers may remember Keith from last year's debate over fractional reserve banking in these pages. Keith writes for the Daily Capitalist and is associated with Dr. Antal Fekete's school. He has graciously allowed us to publish the above article.
We wanted to add a few comments: we agree with Keith that one could term the activity of the current banking system as creating counterfeit credit, as fractional reserve banking allows the creation of money substitutes (fiduciary media) from thin air. Given that demand deposits represent claims on money proper payable on demand, a system that creates fiduciary media is in practice no different from a medieval gold banker who issued an amount of bank notes exceeding the gold he had on deposit.
It is important to keep in mind though that this credit creation process – while generating loan assets on the asset side of a bank's balance sheet, also creates liabilities that are in fact money in the broader sense (i.e., they are not standard money, but an immediately available and transferrable claim to standard money and can be used for final payment). In short, inflationary credit adds to the money supply.
Keith makes a very good point about the maturity mismatch issue plaguing the system: fractional reserves are a special case of this general problem.
We briefly wanted to mention on which points we disagree with Dr. Fekete. One is the viability of real bills doctrine and the other his assertion that gold's marginal utility is not diminishing. The law of marginal utility is a time and place invariant economic law that always holds. We would be prepared to allow that gold's marginal utility probably declines only very slowly, due to its (currently suspended) function as a medium of exchange and the functions that flow from this, such as its usefulness as a store of value. However, every additional gold ounce one holds can only be used for the satisfaction of a less urgent want than the preceding gold ounce. It is in other words the grading of want-satisfactions that is the decisive factor.
For a decade I have been urging my subscribers to move into gold — either physical bullion or other wise. Now I am at it again: PLEASE MOVE INTO GOLD. Those who think gold has lapsed into a bear market simply do not know what they are talking about. Gold has simply been correcting in an on-going bull market.
This is a time when almost every central bank in the world is grinding out paper currency, grinding it out by the car-load. This is a time when people are searching for safety. People are frightened and confused. Where is the land of safety?
There is only one safe asset on the planet: that safe asset is gold. Uninformed people believe gold is just a commodity. Wrong, gold is absolute money. Gold alone is the world's only completely safe currency. Gold has no counter-party against it, and no central bank has ever found a way to create gold.
The fact is that gold can only be produced by the sweat, ingenuity, and capitalization of men.
The key to the entire situation today is something you don't hear anyone talking about. I am referring to PAIN. I am referring to the fear and avoidance of pain. When a man loses his job it's painful. When a man does not know how he's going to feed his family it's painful. These are basics that every politician knows about.
The first job of every politician is to get reelected. If the pol's constituents are feeling pain they will not vote for the politician who represents them. Every politician knows this, and thus politicians always vote for spending plans that they hope will keep their constituents happy. All during the years following the World War II politicians have OK'd an endless parade of spending bills. As a result the US national debt has grown to over $13 trillion dollars — an amount that would have been considered inconceivable just a few years ago. Almost every nation on earth has indulged in the same kind of fiscal madness.
To cover the insane spending, nations have had to create an almost endless amount of fiat currency. This avalanche of "money" has steadily reduced the buying power of almost every currency. The result is that it takes increasingly more paper currency to buy one ounce of real money – gold.
Gold may now be ending its latest correction (see chart on yesterday's site). If I am correct in this, gold is in a buying zone.
One of my resolutions for 2012 is to spend some time finding new ways to introduce gold-resistant paperbugs to the powerful arguments for buying and holding physical gold right now. But I never want anyone to invest in anything based merely on a recommendation. I want them to understand the reasons for the purchase themselves. Peace of mind can only come from within, and that's what understanding can provide.
This is tricky ground for me because I'm not a gold activist. The purpose of this blog is stated at the top. It is a tribute to Another and FOA. I'm not here to convert the unwilling. I'm not here to project my thoughts and draw in the masses. But at the same time, I do want to share what I've learned with loved ones. And from the email I receive, so do a lot of other people. That said, you can't just approach the unwilling with stories of decade-old anonymous internet personalities.
So this is my first foray into the frustrating world of the gold-resistant paperbug. With your help, I hope to build a primer on the gold thesis explaining "why gold, and why now," to those who know nothing about The Gold Trail that brought us here. This post is my first baby step.
As most of you already know, you don't get any of the usual hard money, gold standard or gold bug arguments from me. I do not predict a return to the gold standard, I'm not opposed to fiat currency or central banking and I don't think the world is going to end. What you do get is my explanation of the changes that are unfolding right now in the international monetary and financial system, and how they could affect your savings.
That last part is important. How changes in the monetary and financial system could affect your savings. What are your savings? And why do we save the way we do today? Has it always been this way? Are there universal do's and don'ts when it comes to saving for the future or for a rainy day? Do systems ever change or implode, erasing people's savings? Is it ever fair to say "this time it's different"? These are interesting questions to think about.
And now that I'm thinking about it, does anyone even save anymore? If you've got a hundred grand sitting in a bank CD or savings account someone will likely tell you that you should invest it or else you're wasting money. So you invest it in what, mutual funds and bonds? In that case there will be people that will say you should be actively trading, because you're still leaving potentially rich profits on the table.
Have you noticed how many people think they are traders and investors these days? And with all the options to invest in and trade out there, who can blame them? But in reality they are not traders or investors. They are doctors, lawyers, businessmen… and savers. What we call investing today is more like speculating. So why do we "save" the way we do today, by speculating on things we know so little about?
I had an email exchange over the holidays with a reader who was home visiting his parents. He's frustrated because he's been trying to talk to them about gold for at least a year now. Here's what he writes:
"I had to bite my tongue last night because my parents told me of the results of their trip to a financial adviser. My dad has over a million in his retirement account. Thanks to this adviser they went to, 1/2 of that is going into low-yielding Muni-bonds, the other half is going into some mixed fund that my parents really have no idea what it is. I asked about gold and apparently the adviser said it was "too volatile", so zero goes into that. Great!"
I'm guessing this is pretty common, because I received an email from another reader, also during the holidays, that said almost the same thing about his mother's savings: mostly government bonds and no gold thanks to a financial advisor's advice. Is your life's savings so trivial that you will put it somewhere based on a mere recommendation? Do you feel no need to understand, no responsibility to personally protect the fruits of your own life? I'll tell you one thing, it wasn't always done this way.
A saver is different from an investor or a trader/speculator. A saver is one who earns his capital doing whatever it is he does, and then aims to preserve that purchasing power until he needs it later. Investors and traders aim to earn more capital by putting their already-earned capital at risk in one way or another. This takes a certain amount of specialization and focus. But this difference is a big topic for another post. And anyway, it doesn't matter so much in terms of the gold thesis for today.
Today the system is in transition, so you can throw your ideas about these differences out the window. There is no safe medium for simple preservation of purchasing power when the entire system shifts from the old normal to the new normal. When systems implode, the safest place to be pays off big time!
In hindsight, the stock market (represented by the DJIA) would have been a great investment or speculation from the 1970s until 2000. Since 2000 it has gone nowhere:
Likewise, bonds would have been a great trade from about 1981 until now. As I've noted before, you make capital gains in bonds while interest rates are falling. The real pros know all about this. And from 1981 to present, interest rates fell from 20% to 0%. Flipping the interest rate chart upside down shows how the bond king Bill Gross of PIMCO traded his way into a personal $2.2 billion fortune over the last 30 years:
But markets do change. With the stock market now flat and bond yields at zero, the market is about to change again. Those of you with financial advisors putting your money into bonds should pay attention. If you don't believe me, how about the bond king himself, Bill Gross? Here's what he wrote just last week (my emphasis):
How many ways can you say “it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.”…
Interest rates were lowered and assets securitized to the point where they could go no further and in the aftermath of Lehman 2008 markets substituted sovereign for private credit until it appears that that trend can go no further either. Now we are left with zero-bound yields and creditors that trust no one and very few countries. The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust. Goodbye “Old Normal,” standby to redefine “New Normal,” and welcome to 2012’s “paranormal.”
Bill is a billionaire himself. And he also manages more than a trillion dollars of other people's money, including millions of retirement savers, public and private pension plans, educational institutions, central banks, foundations and endowments, among others. So you can be pretty sure he doesn't use words like "imploding" lightly.
Remember, I'm talking about "how changes in the monetary and financial system could affect your savings." I don't want you to buy anything on my (or anyone else's) recommendation. I want you "to understand the reasons for the investment yourself." And I asked, "do systems ever change or implode," and "is it ever fair to say this time is different?" Well, you just heard a mainstream billionaire bond fund manager answer "yes" and "yes."
In fact, history is chock full of stories about financial and monetary crises and change, and there is a part of these stories that often gets only a one-line mention, buried in between the descriptions of the chaos and the subsequent resolution. That line usually reads something like this: "Many elderly investors lost their life savings." That line is from an actual American story. Here's another one: "[Group 2] got lump sum payments that roughly equated to 15% of the actuarial value of their [savings]. Group 3… got nothing."
So why buy gold? Why buy only discrete coins and unambiguous bars of physical gold? And why right now? A historical perspective is necessary for understanding the answers to these questions. Crisis resolutions always involve the sacrifice of someone. And that someone is usually the savers. But there are always winners and losers. Devaluations play out like a seesaw. There is a force (the crisis devaluation), a fulcrum (what is being devalued against), and a load (the beneficiary or the winner).
I think if we are going to try and talk about gold with gold-resistant savers, we first need to think about why they save in the way that they do today, pretending to be investors and traders, and how it wasn't always this way.
The Studebaker Effect
Most of you reading this in the U.S. probably have some sort of an individual retirement account. Maybe you have a Traditional IRA, or a Roth IRA, a SEP IRA, Simple IRA, a 401(k) plan, or even a Self-Directed IRA. Or maybe you don't have your savings tied up in a tax advantaged account but you still invest in the same way, relying on the advice of an RIA, a registered investment advisor.
If this is you, then you probably also have a diversified mix of stocks, bonds and cash or cash equivalents. Perhaps you even have some non-dollar investments, foreign stocks, commodity positions or fancy REITs. Maybe you've got a little in the tech sector, a little in the banking sector, some in the energy sector and the rest in mutual funds. But have you ever stopped to wonder why this is the way we save today? Was it always this way? No, it wasn't.
The 1970s were a pivotal decade of change in so many ways. The 70s were not only a decade of high inflation, it was also the first time the U.S. blew the lid off the idea of a "permanent" debt ceiling by introducing the concept of "temporary" increases (later made permanent) and driving U.S. debt into the $Trillions by the end of the decade. In 1979, the House of Representatives passed a rule to automatically raise the debt ceiling when passing a budget, without the need for a separate vote on the debt ceiling itself. This was just one of many big changes that came out of the 70s.
The 70s decade was also the pivot point at which the U.S. switched from a trade surplus to running a perpetual trade deficit. And it was when we changed from being the world's greatest goods producer into a service-driven economy. And in 1974 Congress passed a bill which President Ford signed into law that forever changed the way we save. A law that eventually exploded into the constellation of investment options I just enumerated.
That bill was the Employee Retirement Income Security Act of 1974, or ERISA. But like all of the systemic changes that occurred in the 1970s, the roots of ERISA can be found in the 1960s, 1963 to be exact.
Before 1974, most people's retirement savings were in the form of a "defined benefit" from their employer. If you worked for a company until a specified age, you were "guaranteed" a defined, nominal benefit for the rest of your life. This system was similar to the pension funds used mostly for union workers today, only back then pensions weren't just for unions. The bottom line was that the burden of saving for retirement was on your employer, not on you.
As a pensioner, the comfort of your future retirement was in the hands of a single counterparty, your employer. Post-ERISA, most people put their hopes for retirement in the hands of a more diversified group of counterparties. With a single counterparty, default, mismanagement or fraud was and is a big risk. Secondary risks were the systemic ones, like a currency collapse, because it was your benefit that was nominally defined. Post-ERISA most companies (and individuals) switched to plans based on employee contributions rather than defined benefits.
This was a dramatic shift of burden. By the simple addition of choice, the burden of retirement savings was shifted from your employer to you. You now had not only the choice of how much to contribute, but also where to put your savings. With the old system, the payoff was a fixed, nominal promise. Through ERISA, your retirement is no longer fixed at a certain number of dollars. It now varies based on the amount you save, how you choose to invest it, and how the market values those investments when it comes time for you to retire. This can be a good thing or a bad thing, depending on what happens between now and your retirement.
In many countries other than the U.S., countries that experienced a currency collapse during the last century, it was mostly the pensioners that were wiped out. Owing only a fixed, defined number of currency units to retirees turned out to be a blessing to pension funds in these countries. Pensioners could easily continue receiving their promised $2,500 per month forever, even well after the price of toilet paper had risen above $10,000 per roll.
But getting back to the roots of ERISA in 1963, it was mismanagement and default that destroyed the retirement hopes of many people. The collapse and ultimate liquidation of the Studebaker Automobile Company was pretty orderly on the surface. Production lines were consolidated, then closed, then sold off and renamed. But it was the loss of Studebaker's employee retirement fund that started a movement toward system-wide pension reform.
By the time Studebaker closed its South Bend plant in 1963, its pension fund was so poorly funded that the effect of its default would reverberate for the next five decades. Of 6,900 Studebaker employees that had not yet retired or at least reached retirement age, 4,000 received only 15% of what was the actuarial present value of their savings, and the other 2900 got nothing. MF Global anyone?
So the Studebaker effect became a systemic transition shifting both the burden of saving and the responsibility of decision-making onto the people themselves. And out of this transition grew the whole financial services industry as well as the full menu of investment choices listed above. Incidentally, and speaking of MF Global, another child of the transitional 70s and the Studebaker effect was the Securities Investor Protection Corporation, or SIPC.
The SIPC promises up to $500,000 insurance for individual investors against broker-dealers that go bankrupt. That is, unless a loophole can be found. Unfortunately for MF Global's customers, the vibrant commodity futures market came later than the SIPC which was only written to cover financial securities, not futures. So while the 400 securities accounts at MF Global were covered by insurance, the other 50,000 or so commodities accounts were left hoping they'll get back more than 72˘ on the dollar. Oops. Oh, and the CME also decided not to back the accounts. It seems nothing is for sure when it comes to counterparties.
The Gold Thesis
The above is a brief description of how the 70s were a decade of many changes. And also how changes in the 70s led to the way we save today. This is important to understand because I think we are in the midst of another historic transition period right now. I think this present period will be viewed by history as far more dynamic than the 70s. And I think the lessons learned from the experience of the 1970s will ultimately prove to be a poor guide for financially navigating this transition.
The evidence is already in — physical gold is " the load," set and levered for revaluation, as in the illustration above. The fulcrum is all other hard assets. And financial securities of all types, the nominal promises of counterparties, bonds, cash and cash equivalents are all vulnerable to the devaluation force. It's a three-part dynamic with hard assets—the middle part—acting as the denominator for both a devaluation of paper promises from counterparties and a revaluation of physical gold (it should be telling that we need to qualify such an elemental word as gold) and physical gold only. And from my Euro Gold post, here's the lever in early action:
The way people save today is traceable back to the collapse of the Studebaker pension fund and the reform movement that followed. In its 50 years of making automobiles, Studebaker exploded into a large and diversified company that, by 1960, included a missile and space technology division, a home and office appliance division, a tractor division, a generator division, a refrigeration division, a chemical division, and even an airline division. But within a few years it was collapsed, condensed, consolidated, liquidated and closed. And in the process, the employee savings were erased. The savers were sacrificed.
Similarly, the investment landscape that followed has exploded in supernova fashion yielding nominal credits that number like the stars in the heavens. Today's savers have given their saving to every manner of counterparty who went on a spending spree, leaving only the illusion of a debt that is too big to even be serviced in real terms. We have spent the last 35 years exploring the Milky Way galaxy of investment options, pretending to be investors and traders, when all we really are is savers waiting, once again, to be sacrificed.
It seems to me that we are now in the consolidation phase of change, heading back down to Earth. And where you choose to land, to consolidate your savings, has never been more important than it is today. I believe we are in a new transition period that is necessary, natural and inevitable (unstoppable). And that is why I don't take the quixotic stance of an activist, fighting to change the world. The only action I advocate is personal action, like purchasing power preservation and the personal action of expanding your understanding beyond the standard dogma you hear everywhere else.
And for those of you who are also struggling through the frustrating world of the gold-resistant paperbug, I'm looking for feedback so I can continue this project. What anti-gold arguments are you running into these days? And also, what worked for you? Has anyone had success introducing a Western paperbug to gold? I thought Victor's comment here, on the permanent portfolio, was very good. Those are the kinds of solid arguments I'm looking for. Perhaps, together, we can come up with a few more!
It isn't enough for you to love money - it's also necessary that money should love you." ~ Baron Rothschild
This report will focus on one thing and one thing only, gold. It is the one and only market where I don't question if there's any value. Of course you wouldn't know that by listening to the mainstream media as they parade out one "expert" after another in an effort to convince the world the bull market in gold is over and done with. It happens every time we experience a correction. This is the same crowd that says every decline in the Dow is an opportunity to load up on cheap stocks, and yet they can't wait to through dirt on the gold bull's grave. Since most people know little or nothing about the yellow metal, it's easy for these analysts to gain a following. After all they are the experts!
When gold put in a lower low a couple of weeks ago, I came out and told clients right then and there that I thought the bottom was in. After watching gold's behavior following the big sell-off two weeks ago, I am now convinced that we've seen the bottom and the end of the correction.
With that thought in mind I want you to take a look at this chart showing the sharp move up to the August all-time closing high of 1,900.20, and the reaction that immediately followed:
You can see that the reaction can be divided up into three sections: an initial move down, a recovery to a much lower high at 1,804.40, and a final leg down with a low coming on the 90th day down. The fact that a low came at 90 days is important because the 90-cycle has dominated the markets for years.
Furthermore both moves down are almost identical in percentage terms with the first move registering a 14.5% decline and the second move a 14.7% decline. This symmetry between the first and second leg down is often typical of what's found at a bottom. Also, the overall decline (using closing prices) equaled $364.00 or 19.2% and was middle of the pack when compared to previous reactions that checkered the eleven-year history of this bull market.
So we have a low coming after two symmetrical legs down, you have a Fibonacci connection, and you have a strict adherence to the 90-day cycle. When I add it all up I would say that you have an 80% chance that the bottom is in and the only piece missing is a close above the trend line that connects the all-time closing high with the lower high and currently comes in around 1,715.00. I believe this final condition will be met within a couple of weeks.
As some of you know by know I sit through reactions in the gold market and try to add on when I think the reaction has run its course. That's why I purchased gold at 1525.50 and I've added on along the way up with my most recent purchase coming at 1,642.00. Friday's early morning bear raid scared a lot of investors, but the reality is that it failed to test even the first level of good support at 1,622.20. It then went on to recover most of that decline by the time the spot market closed later that day. That's bullish behavior. Also, I would like you to note that gold's Point & Figure chart is once more sporting a bullish price target as you can see below:
Finally, it is worth mentioning that gold has exhibited a change in character. For the 90 days that it declined it moved inversely to the US dollar and in lock step with commodities. Now gold is rallying even though the dollar has made new highs and in spite of the fact that commodities are being sold off. That's an important change in behavior and such changes almost always accompany a bottom. Also, gold is not the only thing that's moving higher. Silver is on the rise as well after bouncing off of strong support at 26.48 two weeks ago. Gold's poor cousin closed out the week at 29.75 after trading as high as 30.67 on Thursday. If you look at the following chart you'll see that silver is actually much closer to breaking out than gold:
The key will be silver's ability to close first above the 50-dma at 31.32 and then to close above strong Fibonacci resistance at 31.91. If I am right and gold bottomed, you will see silver take the lead in a month or so and both metals will surge.
I would like to conclude this article by not telling you how ominous things look or how inept our current leadership is. Most of you don't want to hear it and all of that is cooked into the new leg up anyway. Instead I'm going to tell you how things will play out in the gold market from here on out, and I'll leave you to extrapolate how it will reverberate through other markets on your own.
All bull markets move in phases and that's especially true with gold. The first phase was powered by the smart money and drove the price from $252.00 to $475.00 and ran from 2000 to late 2005. The catalyst for the second phase was institutional buying and ran from late 2005 until the December 2011 bottom. Assuming the bottom is in we are seeing the birth of the third phase and almost no one realizes it.
Surprisingly there are very few people who realize that this bull market in gold is an event of historical proportions. We are witnessing the demise of the one hundred year old fiat currency experiment designed to take wealth from the many and transfer it to the few. Gold is going to put a stop to it with the advent of the third phase. The general public finally becomes aware and rushes into the relatively tiny gold market in search of a true store of wealth, one that cannot be frittered away by prostitutes disguised as politicians. Can anything stop the third phase? Only a final volcano-like blow-off to the upside!
Perhaps a better question is can anything impede it and the answer is only to a small degree. We have experienced manipulation in the paper gold market for two decades and it had an effect, but the third phase will turn out to be a completely different animal.
This third phase will turn out to be a mostly uninterrupted move run up to, and more than likely beyond, US $4,000 an ounce. When I say almost uninterrupted I mean no more than two or three reactions of 12% to 14% and of a relatively short duration. Manipulation will not be able to do much as people finally come to the realization that all fiat currencies are just a government-sponsored fraud. You will see that gold will rally against anything and everything including real estate, commodities, bonds, stocks, fiat currencies and Indian beads.
It will be a real scorched earth policy. The third phase of the bull market will only run its course when you see extreme levels of greed and euphoria in the market place, and we're no where near that.
Now here's one last question, do you know what will make this all so interesting? The fact that 98% of the people in the world have absolutely no idea of what is about to occur. Imagine their reaction when the finally figure out that they've been completely defrauded by the very people they entrusted to manage the economy and their future. The final epiphany will come about when they recognize that judges, lawyers, bankers and politicians all colluded to steal the wealth of the many for the benefit of a very small group of individuals. That folks will be an interesting realization.