Already large unions in the U.S are encouraging borrowers to challenge banks to prove they won your mortgage. They’ve set up a website asking the question, “Where’s your note?”

You can see where this is headed. No one in America wants to own a failure. The banks want to foreclose on homes and sell them and avoid taking losses. Borrowers (some of them, and some of them rightly) want to avoid paying a debt for an asset that’s worth less. No one wants to be responsible anymore because the most lucrative and least painful route is to abandon responsibility and your word.

This is a serious breakdown in one of the most basic elements of a functioning market: contract (doing what you said you’d do). People at every level appear to have cheated and lied during the housing boom. The borrowers who lied on their loan applications…the mortgage originators who made the loan without any documentation of work or income…the securitiser who packaged it up and sold it to investors…the ratings agency that rated the debt investment-grade…the insurance companies who sold default insurance against the bonds multiple times…and the government that encouraged home-ownership and subsidised the fraud with an implied guarantee on the bonds of Fannie Mae and Freddie Mac, the government-sponsored enterprises that bought a lot of the garbage bonds.

What is really at stake though?

Well, if borrowers challenge foreclosure proceedings, and if banks (as they have already begun to do) halt foreclosure proceedings nationwide, the process of establishing a market-clearing price in the U.S. house market is frozen. Buyers can’t buy and sellers can’t sell if the ownership of the underlying collateral — the house itself — is in doubt. What sane person would enter a market like this with prices effectively having completely broken down?

As if that’s not bad enough — and it’s nearly as bad as it gets — don’t forget that that there is a whole universe of financial instruments whose value derives from the underlying collateral. Mortgage backed securities…collateralised debt obligations…the value of any instrument whose value is derived from the underlying asset is now suddenly in doubt.

It’s hard to understate what this could mean for financial markets. It could mean another capital crisis in the financial world. It would make 2008 look quaint.

This is why this problem is rapidly escalating into another contest between the banks and the borrowers. The U.S. Congress chose to side with the banks by passing a law (H.R. 3808) which would have made it easier for the banks to foreclose on properties without having to go through the usual process of documentation. But U.S. President Obama — less than a month away from an election that’s become a referendum on his policies — simply ignored the resolution (a pocket veto). Who wants to be seen siding with bankers right now?

Now you have a situation where U.S. banks again face massive losses on their exposure to residential real estate. You have a growing popular movement to challenge the banks through the legal system — raising bank costs and eating into bank earnings (which are already pretty flimsy when you take away the boost to the net interest margin from low short-term rates).

But the biggest problem by far is that you have a growing ethos in the American mortgage market that everything is so upside down and backwards that the best thing to do is just stop playing by the rules and stop paying your mortgage. The whole market is on the verge of breaking down. Trust has evaporated. The rule of law itself now seems irrelevant.

Who is the government going to side with in this dispute? The banks, who will claim (perhaps correctly) that the crisis threatens their ability to loan, and perhaps their very existence? Or will it choose an increasingly angry populace who doesn’t want to again get sacrificed on the altar of saving the financial system?

Our guess is the government won’t choose either. It will choose both!

The easiest way to deal with debt — if you have no intention of paying and don’t want to inflate it away right away — is to simply repudiate it. A great debt amnesty is required!

Bankers must be allowed to sell everything they don’t want to the government, and probably at a price that suits the bank, even if it wouldn’t be borne by the market. And distressed homeowners must be allowed to refinance at a fixed-rate for 50 years through a government lender that will never foreclose on them, and is probably statutorily prohibited from doing so. No one takes a loss. No one loses a house. Voila!

Of course it can’t work that way. Huge amounts of capital have been misallocated in a credit boom. The recovery begins when the losses are taken and household and corporate balance sheets are returned to sanity. But no one wants to deal with that pain. So insanity ensues and a completely zombified mortgage market looms.

Regards,
Dan Denning
The Daily Reckoning Australia
Whiskey & Gunpowder

October 13, 2010

The American Housing Market Is Headed for Total Destruction was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

You can imagine my surprise when I looked up and saw a squad of French infantry troops on patrol through the park, brandishing assault rifles at the ‘ready’ (essentially holding the weapon in a fire position with index finger over the trigger).

The only thing missing to complete the picture would have been Taliban forces and the Afghan countryside.

I was shocked at the display, wondering what possible threat could necessitate sending infantry troops through one of the world’s most peaceful city parks. Even more, though, I was shocked that no one else seemed to be shocked.

This sort of security charade has become commonplace. Ridiculous and unnecessary shows of force are simply accepted in today’s world; our governments blame faceless, conceptual enemies like ‘terrorism’ and have convinced everyone that such measures are for the common good.

Think about it — when taking public transportation or patronizing public buildings, how many times do you see signs or hear announcements that start with, “Ladies and gentlemen, for the safety and security of all passengers…”

This wasn’t the case 10-years ago. If French troops went marching through Paris in 2000, the whole city would have gone nuts. In fact, consider many of the other ways that the world has changed so drastically over the past 10-years:

1. The endless War on Terror and the rise of police states around the world
2. Elimination of any semblance of financial privacy
3. The bursting of four major bubbles — stocks, credit, derivatives, property
4. Developing nations’ increasing economic dominance
5. The end of America’s economic and diplomatic primacy
6. The greatest global economic decline since the Industrial Revolution
7. Rising world population coupled with food and water shortages
8. Loss of confidence in major institutions: government, banks, corporations
9. The growing, addict-like social dependency on technology
10. Central planning in the world’s most “free” economies

Lying there on the grass in Paris hoping to not get clipped by a negligent discharge, I started thinking about the boiling frog.

The allegory illustrates that when you throw a frog in a pot of boiling water, he immediately senses danger and jumps out. When you put him in cool water and slowly bring it to boil, the frog won’t sense danger until it’s too late.

The changes over any decade are remarkable, but what’s happening now is vastly different. In the next ten years through this period of dramatic change, your country, your business, your neighborhood will look nothing like they do today.

In the past, the world ran on a system of endless debt and consumption; everyone played a part. Students would rack up huge debt at university and in turn enslave themselves immediately to corporate jobs in order to service the debt.

Social reinforcement was a powerful mechanism, encouraging people to indebt themselves further through mortgages, car loans, and credit cards. Conspicuous consumption became a social tradition, and corporate profits surged as people filled their McMansion garages with useless imported trinkets.

For those who got in early and played by the rules, the system was very generous. In exchange for unwavering trust in the system and continued indebtedness, people were rewarded with large salaries, excellent standards of living, soaring investment returns, home price appreciation, health benefits, and generous retirement plans.

In fact, the baby boomer generation, which rode the bulk of this tide, is the most prosperous generation to have ever existed in the history of the world.

Little by little, though, this system has been changing. We have spent decades living in a period of unsustainable fiscal irresponsibility. The crisis is accelerating and the consequences are now being realized.

These economic consequences will drive future political decisions, geopolitical tensions, social stability, demographics, crime rates, resource availability, immigration policy, police activity.

They will even affect the reliability of our infrastructure, utility grids, and food transportation networks, leading to a significant reduction in standard of living for hundreds of millions of people.

Undoubtedly, we have entered what I consider to be the Age of Turmoil — a time that is marked by exceptionally rapid change and fluctuating crises.

Many people will resist the change and instead cling desperately to the old system — the cycle of debt and consumption that provided jobs, stability, and prosperity. These people will have their lives turned upside down because that system is gone forever.

The game as we know it is being reset, and the new rules have not yet been written. For those who are well prepared, this is a time not of fear, but of once in a century opportunity. During this rough period, the die shall be cast for generations. Fortunately, we can see what’s coming and there is still a bit of time to act.

You can survive and thrive in the Age of Turmoil and over the next several days I intend to lay out a set of core principles which, when adopted, can shelter you from most of the pain, and position you and your loved ones to reap great rewards.

I sincerely believe this series of dispatches are the most important I’ve ever written so please stay tuned and, even if you’ve never commented before, I’d love to have your feedback on each of these important letters. Starting with this question:

Do you agree that we’re in the initial phases of the Age of Turmoil?

Regards,
Simon Black
Whiskey & Gunpowder

October 11, 2010

How to Survive and Thrive in the Age of Turmoil was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

When will the world finally begin to understand that we have reached the point of no return and that “the voyage of their life is bound in shallows and in miseries” (Shakespeare, Julius Caesar)? Sadly, we are probably not very far from that point. It is already starting to happen in many countries.

The latest EU and IMF package of $1 TRILLION (Euro 750 billion) is yet another futile attempt by governments to abolish poverty by printing paper. Let’s be absolutely clear, this money does not exist and the EU governments are hoping by declaring such a large amount that they can con the Wolfpack speculators. At this point the EU has just picked a large round figure out of the air. But when their bluff is called by the Wolfpack and the next attack happens, EU governments will after initial huffing and puffing start printing unlimited amounts of paper.

So the world is now on its road to ruin and there is no action, no leader and no new amount of printed money that can save the world or prevent a hyperinflationary depression.

Never in history has the world been in a situation when virtually all industrialised countries are bankrupt. Therefore there is no precedent for what will happen in the next few years. What we can be quite certain about is that events will happen in a seemingly random pattern and that it will be impossible to forecast where the next crises will start.

But although we will not be able to predict in what order events will take place, we can expect much of what is outlined below to happen.

Wolfpack Attacks

Already back in 2007 we warned about the very high risk of the CDS (credit default swap) market. This is now one of the primary instruments used by the Wolfpack (expression coined by the Swedish Finance Minister Borg). The Wolfpack, speculators with enormous fire power such as hedge funds and investment banks, use the CDS market to attack any weak financial sector, be it a country, a bank or a company. The combination of the leverage of the CDSs and the massive capital available to the Wolfpack makes it possible for them to bring down or badly maul whatever they attack. It was not the Wolfpack that caused the problem in for example Greece but they can bring down a weak victim quickly and profit immensely and immorally from it.

There are so many weak potential victims that the Wolfpack can attack and they will start with the most vulnerable ones like, Portugal, Spain and Ireland etc. But when the time is right they will also attack the US and the UK.

So in the coming year we will see country after country coming under attack from the Wolfback which will lead to acceleration in money printing and higher interest rates.

Iceland – Ireland – Greece – Who Is Next?

The EU support package of $ 1 trillion is supposed to be sufficient to protect the rest of Europe from another Greek tragedy. The dilemma with such a massive EU commitment is that no government expects to have to pay the money out. If they did the voters in the respective EU countries would throw out their government. Why should the German people, who are also having hard times, pay for the Greeks, Portuguese or the Spaniards, especially since these loans will never be paid back?

Greece is bankrupt but is still taking on additional EU loans of € 140 billion. In addition, their austerity measures are supposed to bring the deficit down from 12% of GDP today to 3% in a few years time. But who can be so stupid as to lend to a bankrupt nation which will sink into the Ionian and Aegean Seas in the next few years. With massive cuts in government expenditure, with major falls in output, with unemployment rising fast, with tax revenues collapsing how can Greece possibly be expected to improve the economy and pay a high interest rate on their exploding debt? In addition, as long as they have the Euro they will be totally uncompetitive. So if they couldn’t manage their economy in the so called good times, it is absolutely guaranteed that they have no chance of surviving in bad times. So Greece will default and so will Portugal, Spain, Italy, France, the UK, the US and many more. But before that there will be the most colossal worldwide money printing exercise which would have used up most of the trees in the world but for electronic fiat money.

So, if virtually bankrupt nations don’t cut their deficits, they will definitively go under and if they try to cut, they will also go under due to collapsing output and tax revenues and colossal debts. Thus whatever actions governments take or don’t take, they are damned.

The table below shows debt as a percentage of GDP for various OECD countries. The official debts (in red) are massive and unlikely to ever be repaid in real money. Total debts (grey bars) include unfunded liabilities such as pensions and health care. Spain has the lowest total debt to GDP of 250%. Germany and the UK have around 400%, the US over 500% and Greece over 800% debt to GDP. These figures are absolutely astronomical and prove that most governments in the world will be totally incapable of repaying their debts or funding the pensions or medical care which they have committed to. It doesn’t matter however much governments cut expenditure or raise taxes, all these countries are insolvent and nothing can save them.

The World Must Permanently Readjust

Most governments still believe that deficit spending and money printing is the solution to all their problems. Because the world economy’s expansion in the last 100 years and particularly in the last 40 years has been primarily based on credit and not real growth, governments live under the false impression that money printing will work this time too. But we have reached the point when investors will no longer buy worthless government debt that will never be repaid with real money. We will first go through a period when governments issue and buy their own debt thus monetising the debt or print money. This will be the hyperinflationary phase. Thereafter the world will realise that none of the government debt and very little of the bank debt will ever be repaid. Credit will then implode and so will also the assets financed by credit. Eventually there will be a new monetary and financial system and the world will start afresh. The adjustment period will be very long and will involve economic and human misery, leading to social unrest and major political change. It will be a horrible experience for the world during this extended period of adjustment. But it will be like a forest fire that clears out the deadwood and creates the conditions for strong new growth. Once the new era starts it will therefore be from a very much lower level and individuals will be rewarded for hard work with little or no social security safety net. Credit will only be granted for sound capital investment projects, not for consumption or speculation. Ethical and moral values will return and the golden calf will not be worshipped. But before that, the period of readjustment will be very long and extremely difficult for the whole world.

Regards,
Egon von Greyerz
Gold Switzerland
Whiskey & Gunpowder

May 24, 2010

Hyperinflation Guaranteed was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Something snapped in the world last week and a lot of people around the world sensed it — especially in the organs of news and opinion — but this ominous twang was not very clearly identified. It was, in fact, the sound of the financial becoming political. The macro-swindle of a worldwide Ponzi orgy now stands revealed and the vacuum left in its place is about to suck everything familiar into it — standards-of-living, hopes, dreams, not to mention lives. The political action will be a desperate scramble to determine who and what is able to escape getting sucked into this black hole of annihilation. It’s very suddenly shaping up to become an epic in human history.

Meanwhile, a giant oil blob lies quivering in deep waters off the Gulf coast, like some awful amorphous Moby Dick full of malice waiting to sink Pequod America — or at least the economies of five states. A few months from now, the BP corporation will wonder why it didn’t go into something safe and predictable like the pants business instead of oil exploration. They will surely question the viability of conducting future business anywhere near the USA, and the USA will enter a wilderness of soul-searching about the drill-baby-drill strategy that only a few scant weeks ago seemed to be a settled matter. Tough to have your future hoped-for energy supplies evaporate at the same time that your hopes for future prosperity get sucked into a black hole.

I’ve maintained for a long time that the folks down Dixie way are the the most dangerously crazy people in America and the Deepwater Horizon oil blob is not going to improve their outlook when it slops over their beaches and bayous. They’ll blame Obama for it by syllogism. Anyway, they are only marginally more crazy than the rest of the folks in the USA. Those folks are warming up for an election season that is going to send a horde of exterminating angels into the halls of congress and the governor’s mansions, and before too long those merchants of retribution are going to appoint their inquisitors. It’s going to be a heckuva spectacle. In retrospect, Mary Shapiro’s SEC will look like the Council of Trent. You can be sure that if ten gallons of gasoline remain to be found in America a few years from now, they will power the last GMC Sierra to drag the captains of Wall Street through the sawgrass prairies of Collier County, Florida.

What has gone on in Europe the past few weeks is nothing more complicated than a waking-up to how broke they are. We’re not quite there yet on this side of the Atlantic. They fired one last bazooka of wishfulness at the enveloping monster of debt and the monster laughed at them, and now they are standing in the windows of palatial edifice of the Euro Union waiting to see who will jump first. Here in the USA, we’re still dazed and confused. What for a long time had looked like a game of musical chairs is morphing into something more like a national Chinese fire drill, a pointless running around in circles in the hope that sheer motion will be an adequate substitute for conscious action. In any case, both Europe and the USA are out of bazooka ammo now. Nobody can bail out so much as another lemonade stand. From here on governments really start to crumble.

As in any time of severe turmoil, all political bets are off. There are insinuations in the press, for instance, that the communists will rise up in Greece and overthrow the elected government. That’s rich, since communism was flushed down the human race’s credibility toilet twenty years ago. The Greek opposition may even call themselves communists, but what on earth could they mean by that? There are no “means of production” left in a country whose economy consists solely of cab-drivers, bellboys, and waiters. There’s no “wealth” to redistribute, only the pain of collective economic loss when the tourists stop landing.

Elsewhere in Europe, each national house is being outfitted with a procrustean bed of austerity. The various publics are not going to like lying in them. They ain’t no Tempurpedics. History being the shape-shifting demon that it is, I imagine that this time around the Brits will be the ones who elect Nazis —or something like them — while the still-chastened Germans find themselves in the odd position of becoming Europe’s moral guardian — its sole-surviving “good parent” figure, striving to maintain some residue of collective goodwill in Europe’s once-ritzy gated community. Great historical figures always arise from unexpected places — Corsica, Kentucky. Maybe some great unifying leader even now warms a seat in a Norwegian law school.

God knows what the Europeans will make of the helter-skelter scene playing out here in the States. Perhaps some species of schadenfreude tinged with regret for the missing stream of tourists. My own guess is that there may not even be a president of the US after Mr. Obama. Rather, events will get so gnarly and disordered so fast that somebody like General Patraeus will have to step in for a while and keep the reincarnation of the Ku Klux Klan from trying to murder every non-Cracker from sea to shining sea. Of course, once that happens, we probably don’t go back. It’s not Imperial Rome (release 2.0) after that, either, because even the mighty US military will be too strapped for a means of support to continue operating. Instead, it’s the devolution of the US into functionally autonomous regions and states — and even that scale of governance may be too great for the stringent economic realities of the years ahead.

There remains, of course, the very great question of what the rest of people of the world — the non-Western world — do as the West spins into insolvency and tribulation. The Islamists will do everything possible to make things worse, and there’s a lot they can do, from restricting their oil exports (maybe cutting them off altogether) to provoking the immigrant populations of Europe into political violence to possibly setting a few nukes off in their enemy’s front yard.

The Chinese will affect to referee the collapse of the West, but soon they’ll be sucked into their own implosion of population overshoot and resource scarcity. India you can forget about out — zero oil. Russia gets to kick back in glorious isolation and enjoy the methane fumes of the melting tundra. South America will heed the wise words of a forgotten 18th Century Viceroy of Mexico who explained his method of administration thusly: “Do little, and do it slowly!”

Regards,
James Howard Kunstler
Whiskey & Gunpowder

May 18, 2010

The Ponzi Scheme Unwinds in America and Europe was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In order to make their huge payment due in early May, the Greeks didn’t know what to do other than beg and borrow. They cut programs and bailouts, but that’s resulting in civil unrest. Germany has a strong economy, and its government thought seriously about bailing out Greece. The Germans howled in anger over that proposal, but it happened anyway. Forget the opinion of the populace! The IMF loaned, as did other foolish national treasuries, so Greece has been saved…for a short time. How can Greece ever pay back the loans? Any euros it borrows will command huge interest rates, because its credit rating has been reduced to “Junk.” I wouldn’t loan Greece an ounce of gold, and I am sure you wouldn’t either. Too big a risk. Quite a quandary for Greece, repaying the loans, and believe me, the exact same thing will happen to Spain, Portugal, Japan, the UK, and of course right here in America. Spain is in virtually the same predicament as Greece, and it has an economy five times as large as Greece. All thanks to stupid, greedy politicians…and in this case…Goldman Sachs. How?

From a February article in of all places, the New York Times, comes the crookedness of both Goldman Sachs as well as Greek politicians. From the Journal piece:

“In order to use the euro as currency, a nation can not have more than a certain portion of its economy in debts. Greece was way over the limit. Goldman Sachs came up with an answer which would merely push off the day of reckoning till a future date. The first thing they did was to fabricate an instrument which would push Greece’s health care debt far into the future, similar to a homeowner taking out a second mortgage. It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow millions, people familiar with the transaction said. That deal, hidden from the public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules, while continuing to spend beyond its means. As in the American sub-prime crisis, financial derivatives played a role in the run up of Greek debt. Instruments developed by Goldman Sachs, J.P. Morgan Chase, and a wide range of other banks, enabled politicians to mask additional borrowing in Greece, Italy, and possibly elsewhere. In dozens of deals across the continent, banks provided cash upfront, in return for government payments in the future, with those liabilities left off the books. Greece, for example, traded away the rights to airport fees, and lottery proceeds for years to come. Wall Street did not create the Greek debt problem, but bankers enabled Greece to borrow beyond their means, in deals that were perfectly legal.”

The Senate grilled Goldman Sachs big shots, and never did get a good answer to their questions. They did a perfectly ‘legal;’ thing, and that was to sell junk to the unwary, shallow, vote hungry politicians, and then short on the deal, and make a lot of money. Did Goldman make a lot of commissions helping Greece get into trouble? Did they profit hugely from the shorts after selling the instruments? Of course, and it was perfectly “legal.” Did any citizen or group of citizens vote for it? Of course not! Who will pay? The only political answer is, MORE TAXES! Politicians are so god-awful stupid, and economically illiterate, that the bunch of them should be voted out today, not in November.

Now, the Obama clique is speaking of a VAT (value added tax) which taxes an item at every single stage of its manufacture or production. I have an idea: CUT SPENDING! The Tea Party Movement has nothing to with race, but about both Republican and Democrat wild spending, just like in Greece. All the spending over the decades since FDR, has given us and other nations, an underclass, which depends on the handouts, public housing, food stamps, and all sorts of government freebies, paid by us in the form of declining dollar value and outrageous taxes, to simply live, copulate, and produce endless more numbers of the underclass. When the s–t hits the fan, and politicians finally decide to cut spending to pay at least some of the debt, the underclass will riot, burn, and ransack. Get out of the big cities, and protect yourself with gold and silver, against a surefire, oncoming, hyper-inflation.

Regards,
Don Stott
ColoradoGold
for Whiskey & Gunpowder

May 7, 2010

Greece and Goldman Sachs was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The Daily Mail account put the blame for these disturbances on Germany’s finance minister, who warned the Greeks that “the German government does not intend to give a cent.” At least Bild, a popular German newspaper, was trying to be helpful. It suggested that Greece sell Corfu…and that Greeks get up earlier and work harder.

Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bailout plan. The Icelanders were slated to make good $5.3 billion in bank losses. But why shackle common voters to the banks’ losses? The plan was so outrageous and so unpopular that Iceland’s normally compliant Prime Minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong.

Insurrection is in the air. In England, government employees are preparing the biggest strike since the ‘80s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say, “Nothing can be accomplished in Washington.”

Herewith, an attempt to deconstruct the rebel yell. By way of preview, it’s not the principle of the thing, we conclude; it’s the money.

There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years — particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work — not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said.

Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.

Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn’t belong to them. Consumers could enjoy a standard of living they couldn’t afford. And the financial industry could earn huge fees by selling debt to people who couldn’t pay it back.

Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the ‘30s, the government took it upon itself to guarantee the essentials in life – retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save.

As time wore on, more and more people lived at someone else’s expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged.

If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt…and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector — it helped them to go broke.

As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks’ losses…and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday. So, the patsies are in revolt.

Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports.

The rioters can go home, in other words. The system will collapse on its own.

Regards,
Bill Bonner, The Daily Reckoning
for Whiskey & Gunpowder

March 15, 2010

Collapse Is Inevitable was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Doug: Sure. This is a story that’s going to end very badly for a lot of people. I’ve said this before, in many different ways, but I think it’s worth saying again, because most people just don’t grok it…

L: Grok. From the Martian word for “drink” and “understand.” In Heinlein’s novels, water was a critical element of Martian culture — makes sense, for a desert planet. When you grok knowledge, as when you drink water, you don’t just hold it in your mouth and spit it out. You take it into yourself, it goes into your blood, and eventually into every cell in your body; it becomes part of you. This is heavy-duty understanding… Sorry for jumping in with the spontaneous lecture. I just suspect many readers will not know the term.

Doug: Or put another way, in the negative case, most people just don’t get what money really is — and what it isn’t. They take it as a given, as part of the cosmic firmament. But it’s not. A prime example of this is the mistaking of debt for money, a phenomenon David Galland pointed out in a Casey’s Daily Dispatch a few weeks ago. This is why the entire world’s monetary system today is headed for a disastrous failure. And this is absolutely inevitable. There’s no way around it.

L: Why?

Doug: Because you can’t use debt as money. As I’ve pointed out before, Aristotle, in the fourth century BC, was the first person to define what money is. And what is it? It’s a store of value and a medium of exchange.

The paper we use today is a medium of exchange — it got that way because governments made it illegal not to accept it — but it’s not a good store of value. And it’s rapidly and radically becoming less of a store of value. What we use as money today is actually not money; it’s currency. Technically, that’s simply a word that indicates a government substitute for money.

What does make for good money? Again, Aristotle gives us the answer. It’s something that has five characteristics: it’s durable and divisible, consistent and convenient, and has value in itself.

L: Some of our readers who’ve studied Austrian economics challenged us on that last bit, last time we talked about gold, because, as the Austrians pointed out, value is subjective. But you don’t mean some sort of value that’s independent of people making value judgments. You mean that people value something that makes for good money, because of its innate qualities — not something “valued” because of government threats of force.

Doug: Right. And for these reasons, gold is almost certainly the best thing to use for money. Not because I say so, nor because Aristotle said so, but because, over time, people have found it to be the most durable, divisible, consistent, convenient, and inherently valuable thing to use. Silver is also good, but it’s less durable because it corrodes. And less convenient, in that it takes about 60 times more of it — at the moment — to offer the same value as gold. Copper is the next traditional step down the ladder.

L: That, plus one reason that’s pertinent today but was not a problem in Aristotle’s world: gold can’t just be printed up on the arbitrary whims of those in power.

Doug: That’s the big one. Using metals as money takes the whole matter out of the hands of the government and its bureaucrats.

L: But we don’t use gold today…

Doug: No, as per David’s example, it’s as though a bunch of friends without any real money started exchanging IOUs for money, and then after a while forgot that the IOUs were supposed to represent, and be redeemed in, real money.

The problem with this is that, in the case of the IOUs between friends, paper is based solely on hope and trust. One can move away, or die, or turn dishonest, or become insolvent — many other things could happen. A guy stuck with a dead man’s IOU has nothing.

With government IOUs, or currencies, it’s worse, because they can increase the number of IOUs in circulation without telling anyone — that’s what inflation is. Since the government creates the IOUs, it gets the benefit of spending them before the inflation they create raises prices, which is basically stealing from the people. And, of course, sometimes governments do “die,” leaving the holders stuck with nothing, just as with the IOUs between friends. In fact, it’s arguably far more likely that such problems will arise from trusting a government to print IOUs than from trusting a friend.

L: Most people feel that they should do right by their friends — government’s don’t have friends, and most see their citizens as being property, like cattle, that require the state’s permission to do anything. Inflating the currency isn’t a crime in their view, just a tool for controlling the dumb masses. But it’s really taxation without representation.

Doug: Sadly so. And since the institution of government is based on force, on compulsion, they feel they have every right to do what they want. They sanitize all types of criminality by saying it’s in “the national interest” or some such poppycock.

L: Okay… but these currencies have worked for a very long time. Why are you right about this and the rest of the world wrong? Why is it inevitable that government currencies will fail?

Doug: [Chuckles] Because governments are not living persons who care and can be motivated to do the right thing. They are collections of individuals — politicians and bureaucrats, not exactly the most desirable types — who pursue their own interests. Regardless of the rhetoric, their interests coincide with the public good only on occasion, like a broken clock being right twice a day. Even in the most enlightened times — even in the best of times — governments have huge incentives to spend more than they take in. These are not the best of times; the population has been trained for generations to expect subsidies and freebies as their due, without regard to who pays or how they will be paid.

I’ll give you an example. When I was on the Phil Donahue Show, the day before the national elections in 1980, I was making the same philosophical points I am now. I explained how they, the taxpayers, would pay for all the goodies — like Social Security and unemployment compensation — that they wanted. A middle-aged guy in the audience asked: “Well, why can’t the government pay for these things?” And the rest of the audience roared approval.

It was then that I first realized that resistance was futile and the situation was basically hopeless. And that someone who can seem perfectly sensible when he’s discussing sports, or the weather, or the state of the roads, was likely to be a moron when it came to economics. And that when he became part of a crowd, it was even worse: he might transform into an imbecile or even an idiot.

Anyway, the dollar has existed for many years, even though it’s degraded over time — first with the creation of the Federal Reserve in 1913, then with the repudiation of domestic gold redeemability in 1933, then with the repudiation of international redeemability in 1971. Even though the government has created trillions of new ones, the dollar is still thought of as some kind of a cosmic standard. In point of fact, it’s no better than the Argentine peso and will have the same fate.

These IOUs have a quite ephemeral reality and are far too easy to create — there’s literally no limit at this point. We don’t even have to actually print them anymore, they’re created by computer strokes — so it’s unrealistic to expect fiscal restraint on the part of any government over time. It’s just too tempting to spend money to make people feel richer than they really are, buying votes.

L: Looking at the deficits and national debt, it certainly seems so.

Doug: The national debt — when was the last time you heard any average person worry about the national debt? Americans have become so used to carrying huge loads of debt around — right out of college with student loans — that it doesn’t even occur to them that there could be any reason for concern over the national debt. It’s an abstraction, like the number of light years to the Andromeda Galaxy.

People used to at least pay attention, though most would say, “It’s not a problem, we owe it to ourselves.” But that was always a delusion. Some people, organized in a club called the government, borrowed it from some other people. But now it’s even more dangerous, because the U.S. government owes it mostly to foreigners: the Chinese, the Japanese, the Taiwanese, and so forth. Americans, who at least theoretically have some interest in keeping the U.S. government straight, are tapped out. So it’s gone to borrow from other societies. And they won’t like it if they are left holding a bunch of worthless IOUs at the end of this experiment.

As the world political situation continues to deteriorate towards something I think will vaguely resemble World War III, the chances are excellent that a U.S. government at the end of its financial rope will default, likely by radically devaluing its dollar. They’re way past thinking in millions. They don’t even think in billions anymore; they’re up to trillions. Soon Obama will have to ask the buffoon he appointed as a science advisor what comes after trillions. Those nice foreigners who gave Americans physical wealth in exchange for pieces of paper are going to find that, indeed, all they got was a bunch of paper. Maybe not even that, but just ledger entries representing pieces of paper.

It’s not just the Chinese and Japanese governments that are going to be unhappy. But hundreds of millions of individuals around the world — in places from Russia to the Congo, to Mexico, to Thailand — that have a trillion of the things under their mattresses, because they justifiably don’t trust their own government’s paper, are going to be even more unhappy with the U.S.

This is big trouble. It’s not just another economic downturn when scores of millions find their life savings go “poof.” What we’re looking at is a cataclysm at some point soon. I hate to sound inflammatory, but I think the situation is much, much more explosive than it appears on the surface, much worse than you see on the TV news.

L: That’s a frightening assessment. But World War III is a topic for another day. As dire as the scenario you paint may be, is it enough to cause currencies to stop functioning as means of exchange? So few people can even conceive of an alternative…

Doug: They probably won’t stop functioning as means of exchange. At least not right away.

Even during Germany’s infamous hyperinflation of the 1920s, or Zimbabwe’s more recent one, in which there were so many zeros after the ones on the bills you couldn’t even count them — people still used the governments’ paper currencies. They still used them! When I was last in Zim, three years ago, we already had to pay for gas with backpacks full of notes; most inconvenient. In the case of Germany, there were still ten- and twenty-mark gold coins available, if not exactly in circulation. People forget that the mark, the franc, the lire, the dollar all used to be names for a certain amount of gold. [Like the pound, all were measures of weight.—ed.]

When World War I started, Germany went off the gold standard — it used to be about five marks equaled a dollar. By 1923 there were trillions to the dollar. Only the Germans who either kept those gold coins under a mattress or had foreign bank accounts still had liquid capital by 1923; everybody else was wiped out. So people didn’t spend their gold if they could avoid it.

That’s what Gresham’s Law is all about. If there is a “legal tender” money — a paper money — floating around, you try to pay your obligations in it. You try to get rid of the hot potato. But you try to get paid in the good stuff and hold on to it. The Weimar inflation of Germany was an utter disaster for that country; it led to all kinds of nastiness.

L: So many people think of Weimar Germany and Zimbabwe as aberrations from far lands, if they think about them at all. Interesting that Germany is at the heart of the euro now, facing Gresham’s Law again.

Doug: It’s been true since at least the days of Rome. But I wonder if it won’t be much more serious this time. All the world’s major currencies are issued by governments of countries that are much more urbanized, with economies that rely mostly on services. In the U.S., the UK, the eurozone, and Japan — all of their currencies are in big trouble for various reasons, and there’s relatively little production of what you might call the basics.

Back in the 1920s, or even a few years ago in Zimbabwe, half of the people still lived on farms, and a lot of people didn’t even have bank accounts, let alone credit cards and pension funds. The demise of the dollar and other paper currencies has got to be much, much more serious than these episodes in the past.

L: Currency regime change hits the global reserve currency — it won’t be easy. Let me come at this a different way. As an advocate of hard money, you understand that inflation of the money supply leads to inflation in prices. If you have 1,000 gold coins in a small village, in the unlikely event that someone digs up enough gold top make 1,000 more gold coins, you now have twice as many coins chasing roughly the same goods, and so prices will go up. But we don’t live in a hard-money economy. We’re off the gold standard. We have fractional reserve banking, we have easy debt financing for individuals, businesses, and governments. So one new dollar gets multiplied and impacts the economy like multiple new dollars. But on the downside, if you have loss of confidence in what amounts to a bunch of currency derivatives, those get wiped out in large swaths, greatly reducing the multiplier effect.

So, is it not possible that we could see the government’s unprecedented creation of trillions of new dollars in debt and currency compensated for by the obliteration of trillions in derivatives, and hence no price inflation?

Doug: That’s a good point. It’s one of the many problems with a paper money system based on credit. All those dollars are created out of nothing — inflation. But when banks fail and bonds are defaulted on, you can get deflation. With a metal money, the money supply grows only about as fast as miners can mine more — which is usually about as fast as the real economy grows. So the value of the money tends to stay constant. Or even go up, in a gentle deflation. That’s a good thing, because it discourages debt and encourages saving. And saving is how either an individual or a society gets wealthy.

But these government officials are now totally out of their depth. I remember in 2007, for once in his life since he became one of the nomenklatura, when Alan Greenspan actually said something clear and understandable. He was no longer chairman of the Fed and was, believe it or not, on the Daily Show, a comedy show. I thought John Stewart did an excellent job when he interviewed him. He asked Greenspan if he knew what the money supply really was — if he knew how big it was. Greenspan, quite candidly, said, “Well, we don’t really know.”

L: I think I found a video of this while you were talking.

Doug: There’s a titanic battle right now between the forces of inflation and deflation. When a big corporation like General Motors, or Fannie or Freddie, defaults on its debt, hundreds of billions of dollars disappear. Assets people thought they had and could have been converted into cash disappear. That’s deflationary. In a sound banking system, in which money is a commodity like gold, money can’t disappear. It can change ownership, but it can’t disappear. But in our current system, it can dry up and blow away as easily as it can be created.

One major problem that stems from this is that some people benefit from government money creation and some don’t. Who gets to spend it first, when it’s most valued, and who gets stuck holding the Old Maid card when it vanishes? It’s usually the little guy — the middle-class guy — who gets hurt when this happens. And in the U.S., the middle class is contracting. The financial gyrations we’re going through are destroying the middle class, which naïvely believes that traditional American values still hold sway and that their government is honest. The lower class has long since lost any values, and the upper class is way too cynical and self-interested to really care. Most middle-class people will end up joining one or the other of these two classes, and that’ll be a moral disaster for the country.

America used to be a place where class wasn’t really important, and you could move between classes easily — not at all like Europe or the Orient. But as the middle class gets squeezed, we’re likely to get class warfare between those on top and those on the bottom.

L: One way to look at the inflation/deflation debate is that even if we do in fact have financial asset destruction — a kind of deflation — on a scale necessary to outdo the truly phenomenal amounts of money creation the U.S. and other governments are engaged in, the implied destruction is just as bad as hyperinflation. The number of banks and other financial institutions that would fail — and with so many people having 401Ks and online brokerage accounts, the number of people whose savings and pension plans would be wiped out — would be truly cataclysmic. That’s what it would take to balance the wanton inflation of the money supply we now see in progress. If that’s the cure, it, too, is deadly.

Doug: I think that’s fair to say. Either way, it’s going to be really serious. As I pointed out a few minutes ago, when you have runaway inflation in a place like Zimbabwe, where most people are living on a subsistence level, people with gardens and chickens will get hurt, but they’ll still get by. It’s not the same when the world’s wealthiest and most advanced economies are falling apart. Americans are going to see a serious drop in their standard of living, which they are completely unprepared for, and it’s going to be a disaster. They don’t have gardens and chickens to tide them over. There’s no way around it.

L: Which brings us back to why. I mean, I’m sure many people can see the picture you’ve painted, but why is it inevitable?

Doug: Because the U.S. government and others like it are between a rock and a hard place. It is simply not a politically acceptable option to step back and let the market correct the gross misallocations and distortions the government has imposed on the economy. They must “do something” — even if they know full well it’s the wrong thing. And “doing something” means spending without raising taxes too much, because they know too much of that will slam the coffin on the economy they are trying to resuscitate. Spending on “stimuli” to “fix” the economy — direct spending on bribes to voters, like extending unemployment “benefits” to years and offering them “free” health care, etc… the way things are structured, the government must spend. Not spending is unthinkable.

There are only two ways to pay for that. They can borrow, which they can only do if they raise interest rates enough to make their bonds attractive, and that, too, would pull the plug on what you so colorfully called the “iron lung economy.” And they can print money, which they can do with some impunity, hoping the bill won’t come due until some other poor fool is in office — but that destroys the dollar sooner or later.

Everything we’ve seen shows that they are doing what is predictable for politicians, since they can appear to be “doing something” with the consequences left to the future: they are destroying the dollar.

The U.S. government is going to be running trillion-dollar deficits as far as the eye can see. Again, they can’t borrow it while keeping interest rates low, so they are going to sell their bonds to themselves, which is to say the Federal Reserve, and inflation is going to explode. There simply is no painless choice, and it’s very close to being totally out of control.

L: What about the apparent recovery of the economy? You dissed “green shoots” in one of our conversations last year, but they seem to be growing more numerous.

Doug: That’s because the government bribed people with that ridiculous “cash for clunkers” program. They gave people $8,000 to buy houses. They are hiring three times as many people to do the census as last time, and the population is not three times as large. And many more bribes. But that’s going to come to an end, and it’s going to get much more grim than it was in the fall of 2008.

L: And this financial apocalypse now, as we termed it last week, is the natural endgame of using fiat currencies instead of real money — this is why you can’t use debt as money.

Doug: That’s why you don’t use debt — IOUs — for money. And those people who are complacent about this, those who read these words and know we’re right but take no action because they can’t believe things will get that bad in America, are going to be very unhappy in the near future.

Readers should do something now, while we’re still in the eye of the storm, while there’s a small cyclical improvement happening, and when most of boobus americanus thinks happy days are here again.

Not only do we have to go through the other side of this storm, but then there’s an even bigger hurricane after that. This is just the beginning of the troubles ahead. Take action now.

L: Financial self-defense 101 — that’s what we teach Casey Research subscribers. But let’s walk through some of the generalities here. Reasonable actions to take would include: buying gold, diversifying assets offshore, and… would you still recommend going to cash with inflation on the way?

Doug: Here’s an easy way to remember it: I would liquidate, consolidate, speculate, and create.

Liquidate: Get rid of any assets you have that might have been favored by the old economy but are likely to be blown away by the new one. That would include speculative real estate holdings in formerly hot markets. Maybe even sell your house, if you can, and rent instead. Or, for sure if you keep your house, get a big mortgage at a fixed low rate that will probably be inflated out of existence. And get rid of your houseful of stuff — the junk filling your basement, your attic, that storage unit you’re renting — anything you don’t really need. Turn it into cash.

Consolidate: Cut your expenses to the bone and consolidate your assets. The best way to do that is to buy gold and silver in cash form (coins) and put them away as savings. The other critical element is getting a major portion of your assets offshore.

Speculate: With the government creating bubbles through its mammoth spending programs, and other bubbles popping, like the collapse of more major corporations, take chances on winning big on bets placed on these trends. It’s possible in such volatile times to make a lot of money, just as you do for subscribers to the International Speculator, and Marin does for the Energy Report.

Create: In the coming years, the world is likely to change as radically as it did entering the industrial revolution. This is going to be a really major change, economically, politically, technologically, demographically, socially, militarily — the whole ball of wax. This is a good time to look around and ask yourself, not, “Who will give me a job?” but, “What goods and services can I provide that people will need in the future and pay me for?” What worked during the late Long Boom won’t work — in order to create, you’re going to have to think creatively.

L: I guess I won’t be working on a business plan to become a personal trainer.

Doug: [Laughs] Nor is becoming a barista a good plan for personal survival at this point.

L: Seriously, I’ve listened to you, Doug. As you know, I’ve decided to buy a lot in your Estancia de Cafayate project in Argentina, I’m consolidating, liquidating, and creating — and speculating, that’s what I breathe, drink, and eat. Thus far, it’s made a huge, positive difference in my life. I sincerely hope our readers are doing or will do the same.

Doug: I know you are. I just wish everyone was as quick a study.

L: Thanks boss. Until next time.

Doug: Talk to you soon.

Doug Casey and Louis James
Whiskey & Gunpowder

March 12, 2010

How to Survive Financial Collapse Right Now was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Like it or not, the Aussie share market still takes its marching orders from the U.S. action. It hasn’t decoupled yet – even though what drives the respective economies of Australia and America is somewhat different. Australia has resource demand for its raw materials from emerging markets. America does not. But both countries have debt (especially household debt), and plenty of it.

Here in Australia, what will investors think of the new powers being sought by the Federal government on behalf the corporate regulator, ASIC? ASIC would have the power to tap phone lines, impose fines of $500,000 on insider traders, and double jail terms for insider traders from five to ten years. Hmmn.

Better yet, what will corporate insiders think? We’ve seen some strange share price activity since moving to Australia four years ago. Shares move on no news and volume spikes. Then a few days or weeks later some important announcement comes out. And frankly, the disclosure rules for insider buying (or selling), or at least the enforcement of those rules, seem fairly voluntary.

Not that it’s any better in America or anywhere else. But perhaps because of the smaller financial community and the underpowered regulator, the insiders have a better time of it here than they might other places. Ahem.

But the power to tap telephones? Yikes. That sounds draconian. But it’s fully in line with the encroachment of government power into private life, so it’s no big surprise.

Outside Australia, more trouble is piling up for the world’s most debt-addled nations. “We no longer classify the United Kingdom (AAA/Negative/A-1+) among the most stable and low-risk banking systems globally,” said ratings agency Standard and Poor’s. The FTSE finished lower on that cheery note.

This is the big back story to today’s financial markets. The debt problem has not gone away. Banks have recapitalised, making up for some of their losses from 2008 and 2009. But you still have a financial system addicted to debt and leverage. Investors have bought into the recovery story, though, and taken a punt on shares at just the time they ought to be reducing their allocation to shares (in our estimate). Why?

The deleveraging that kicked off in 2008 still had a long way to run. The banks know this, which is why they’ve decreased risk by being stingier with lending. Shareholders, on the other hand, have done the opposite. And that could cost them.

“Any discussion about the response to the crisis,” reports Peter Larsen at Reuters “must acknowledge the need to reduce the levels of debt that have been built up. A study by McKinsey, the consultancy, found that previous deleveraging episodes have generally taken four forms: a period of belt-tightening, in which credit growth lags behind economic growth for many years; massive defaults; high inflation; or a period of rapid GDP growth as a result of a war effort or an oil boom.”

So which will it be? The RBA releases its report today on financial aggregates. We’ll see if credit growth is lagging the economy. Not likely, we reckon. Massive defaults? High inflation (higher than the RBA is comfortable with)? Or war and an oil boom?

None of them are particularly attractive. But none have really happened yet either. That’s why we think 2010 will have more fireworks. Perhaps a debt default by a sovereign government or two. And then you have fewer and fewer surviving financial firms all deemed too-big-to-fail by the government. Not good.

This just in…the U.S. Senate has voted to raise America’s statutory debt ceiling to $14.3 trillion. This will allow the Treasury to borrow more money to both service existing debt and pay for this year’s $1.3 trillion annual deficit. Ben Bernanke was also confirmed for another for another four-year term as destroyer in chief of the U.S. dollar by a 70-30 vote.

Prediction: at some point the American people are going to turn on the clowns ruining their money and their financial future, piling up debt that will take decades to pay off, if it’s ever paid off at all. The Congressional Budget Office reckons that interest on that debt will more than double as a percentage of GDP. In nominal terms, it will triple from $202 billion to $723 billion.

That’s just interest. That is the price of living above your means as a nation. That is the price (really just part of the price) for making promises you can’t keep. It’s a big price. And in the meantime, we’d take U.S. dollar rallies with a lick of salt. And though we read this morning that George Soros thinks everything is in a bubble – including gold – we’d keep an eye on old yeller and look to buy more on dollar strength.

Regards,
Dan Denning
The Daily Reckoning, Australia

February 1, 2010

The Debt Problem Has Not Gone Away was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It’s elastic. And, boy, oh boy, can it stretch. You see, if governments cannot operate under paper money, they can’t inflate the currency. If they can’t inflate the currency, then they can’t spend with reckless abandon. Perhaps you’re asking yourself what rising prices have to do with government spending. And if you haven’t been around this bar much… that’s a very good question. So let me sum it up quickly.

The basic theory of government operation as it is taught in school and propounded by the media is that the government spends money to provide us services that we would be unable to provide ourselves. To pay for those services, they extract from us, you guessed it, TAXES.

STOP! Wait! Don’t you believe it!

The amount of taxes collected here in the United States last year would not have been enough to fund Social Security and Medicare. It’s hard to believe, but true. So where does all the money come from to pay for the infinite number of other expenditures of the federal government?

How do they pay for schools? Not just the aging and dilapidating buildings, but the books, supplies, teachers and the massive bureaucracy? How do they pay for the military… guns, tanks, soldiers, computers, jets, ships, submarines and planes? How do they pay for the Senate, House, Supreme Court, president, Secret Service, CIA, FBI, NSA, NASA, DOJ, DHA, HUD, DHS, ATF, IRS? Not to mention welfare programs of multitudinous varieties, college grants and national parks. How do they pay for all this? By means of two devices about which the man on the street knows little.

The first is through bond and Treasury auctions. We — as in “we the people’ — sell these instruments to people who believe that we are a good risk. Then we pay them to let us borrow their money. Of course, borrowing money costs money… it’s never free. But when a country borrows more than it takes in by taxation, because it is spending more than it takes in by taxation, the result is a growing debt problem, which never gets paid down. So how can the United States, or any country, continue on this cycle of never-ending borrowing? Not to worry, my friend. Because here is where the second device comes into play.

Countries begin paying off their debt with money that they “print.” It is commonly called monetizing the debt. It’s not hard to understand, but they try to make it hard. When you’re stealing from your citizens, it is better if they don’t know it. If you make the example and the problem personal, it all falls into place.

If I had a nearly endless source from which to borrow, some deep-pocketed uncle for instance, I could borrow from him indefinitely, as long as I could pay him back in money that I printed myself. If he did not know the money I gave him was fake, or if he just didn’t care, I could continue that scam in perpetuity. I could borrow millions… billions… TRILLIONS! But let’s not get ahead of ourselves.

Technically, I could only borrow from him until he was out of money. Right? Well, no… not exactly. If he had creditors who would take my fake money as real money, he would never have to stop lending. Until someone held his “wallet to the fire.” That is essentially what is happening. Only it is our Uncle Sam who is doing the borrowing. Then he prints his own money and uses it to pay his bills to his creditors around the world. Up until recently, our creditors had to take it. Because we had the bully power to force it on them. Plus since all the countries in the world were doing the same thing, our funny money was considered the best. That gave it some sort of intrinsic value.

But now there are currencies more valuable than ours. And now we do not have the military firepower to force it on others. Some feel that means that the whole jig is up. If our paper money is refused, then everyone’s paper money will be refused. But just because our government has spent us into trouble and is trying to make it worse with bigger and bigger spending projects from stimulus to healthcare doesn’t mean that the other major economies of the world are ready to throw in the towel. Indeed, if they can hang on, they will, because perhaps they will move into the position of world’s reserve currency and can produce prosperity out of nothing, all while impoverishing their citizens and neighbors.

Thus this will be but another round in dumping the dollar. The other currencies will look out for themselves. And playing those currencies could mean more currency option opportunities for us.

Regards,
Bill Jenkins

December 11, 2009

Government’s Shell Game of Taxing, Borrowing and Monetizing Debt was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Tentative last safe date to get your Bernankes traded for something of intrinsic value is the end of the first quarter, 2010.

Well…you you could just take my word for it and save both of us some valuable time, but you probably want enough details to know how I made this dizzying leap a couple of weeks ago. My landing spot has been confirmed to my satisfaction by what Chris Dodd is up to.

It is the usual combination of what the dogs did not do in the night, how I would solve the problem if it were mine and I were a Statist, and wisdom accumulated from my gracious hosts at Agora Financial and a lot of time reading obscure articles and foreign newspapers. (English papers can be far more informative than ours.)

I am supposing that you are aware of the money-laundering scheme which funds the current regime? Congress raises the debt ceiling, Treasury Timmy burns out bearings on the printing presses and funnels the money over to Benny Big Bucks; the “money” swooshes through the system several times to US and foreign banks and corporations, including that which is smuggled over so that other governments can “buy” treasuries with the newly-created money substitute, sticking to assorted fingers in copious amounts. Fiat currency is rather like depreciation on your house, as interpreted by your insurance company which does not recognize that the value of a thing is what it costs to replace it. Every time fiat money changes hands it is worth less for the reason insurers give: it’s older.

In the meantime, the Fed has been very busy buying up sliced and diced materials to have sausage to hang in the window. (Okay, call them “toxic mortgages,” but while I’m telling you the roof is really going to fall in this time we may as well indulge in a little flippancy.) Ostensibly, the Fed is rescuing Fannie Mae, Freddie Mac, and assorted banks who have no idea who holds title to many properties any more, and being the savior of what Hillary refers to contemptuously as “the little people” and their underwater mortgages. Right.

If you insist drearily on having that in dignified macroeconomic terms, the Fed is buying up GSE’s by the trainload. The Fed has also announced that it will purchase another 1.2 trillion (yes, TRillion) in treasuries in the next quarter (and a mere two or three hundred billion more before the end of the year) and that it will buy no more after that–which was why I gave you the 31 March deadline. It is busy taking on all the debt it can…but has warned it will not continue to do so.

In the meantime we have learned from a censorious Congress that the Fed cannot account for umpty trillions and that it declines to say which banks it “bailed out” because that would jeopardize those banks’ standing and gravitas, as well as making us all as mad as fire.

Congress, outraged on our behalf, gathered 285 sponsors for a bill to Audit The Fed. Gasp, what an idea, particularly since it hasn’t been done honestly in nearly a century. So…how is it that that sort of power and support cannot pass the Bill and send a team of auditors trotting over? Once again, what the dogs did in the night was nothing. In speech they support the idea, but not with deeds.

Still got your eye on the wrong shell, huh? I doubt the pea has been under any of them for over a decade–to be generous. We can’t audit the Fed because it isn’t time. There are those who are connected who haven’t finished closing out their positions in greenbacks, long a derogatory term. Why can’t we audit? Oh, you modern generation. Because as soon as the Bill passes a lot of foofurraw will be kicked up, and the dead cat will drop half as far again, judging from the laws of physics, at least. When the team announces even a preliminary conclusion in Congress assembled, we’re going to see a mass version of Captain Renault in Casablanca: “We are shocked to learn that gambling has been going on in this establishment!”

Hang on, Sweeties, because it gets much better from the perspective of the big boys. What happens to corporations that have no assets and shocking debts? Okay, so some of them are anointed solemnly as “too big to fail,” but in general they declare bankruptcy. Most of the proletariat is unaware that the Fed is and has always been a private corporation, but we Shooters are better informed. WE know that the Feds (note the “S”) can wash their hands of the Fed at any time! By definition the Fed cannot be “too big to fail.” “Look!” the government will cry. “It already has!”

Now, if the Fed is undergoing bankruptcy proceedings while Bernanke heads for some area that never heard of Federal Reserve Notes for his health, how will the government continue to fund junkets, pay off voting blocks, and send out pay checks? Obviously, there has to be some sort of money, and Congress and the Auditors will have established that the Fed’s version is suitable only for the board game, Monopoly, and putting in the Chic Sales. Whatever shall we do?! You there, in the back of the class?

Very good. The king is dead, long live the king. The Fed will be dead, but fortunately Chris Dodd, in his foresighted way, arranged recently for the three functions of the Fed to be transferred to new departments of the FedS. Besides, it says right there in the devalued Constitution that it is the responsibility of Congress to decree what money is. Son of Fed is born…and what happens?

Well, anyone who didn’t know about the scam in time to flee with his stored value is going to take a brutal kick to the codpiece. The stock market crash and housing bubble will be regarded fondly as “the good old days.”

China is obviously in on the plans (see Hillary’s latest negotiations), and probably everyone who “counts” knows. They may not have told the upper levels of Bangladeshi, Icelanders, or the Yemeni…BRIC, OPEC, and the EU will all pretend to be furious, but most countries have been very busy attempting to devalue their currencies without anyone else recognizing that they’re doing it. Trade balances, and that sort of stuff. It may be amusing to watch the scramble to refloat first.

Don’t break out the champagne too early celebrating, because there is just one other little point to this exercise.

I already pointed it out: we have to have something we call “money.” Obviously no one has anything as rash as gold in mind, and I can’t help wonder how many of the golden ingots in Fort Knox–if, indeed, there are still any there, that being another place that doesn’t get audited–may turn out to be genuine gold-plated tungsten. How convenient to have another metal with the same specific gravity as gold.

And this means? Yes, you there? Absolutely. It means that we must have a new currency to differentiate between new and improved genuine United States funny money and the disgraced notes of the Federal Reserve, which was neither holy, Roman, nor empire.

It doesn’t matter whether they call it “the Amero,” “the Globo,” or “the Obama” in honor of a man who deserves precisely that sort of adulation and appreciation for his accomplishments. Snicker; think of it as America’s version of the Nobel Peace Prize. Would that it were that harmless. Anyone who expects to get a 1:1 swap for his greenbacks leave quietly now, please.

My most sanguine guess–and it is only a guess–is that we’ll turn them over for 30% of face value. And that was “sanguine” meaning “hopeful.” It would not surprise me at all if you are offered ten per cent., or even one per cent., at which point I suggest they would make great wallpaper. Those still holding traditional dollars will be exsanguinated. My bet is on the Amero, since I don’t think the coins I have seen were stamped “D” to indicate that they were turned out by the Franklin Mint as collectors’ items. There were plausible reports that China received a shipment of eight billion of them already…and perhaps more, who can say? Oh, I know, I am such a conspiracy theorist. Other fringe benefits include claiming that the new currency will fight the drug war and smacking those whose assets are stored overseas as dollars still. Can’t bring ‘em home without exchanging them and explaining where you got them.

One of the pigeons devalued currency will kick into the fire is a large increase in the price of items with the lowest cost. Do you really suppose anyone is going to round down on a can of soup that costs $1.12 in debunked FRN? No, indeed, my friends; the rounding will be up and–just as tires soared immediately on news that future tariffs will be levied on the Chinese–those items will probably see hasty increases before the fact. That’s where the big money is going to be on the exchange!  Lower case “e.” And, uh…who are the most famous purveyors of low-priced “goods?” Do I have to do all the thinking around here? Aren’t these things pounding you thud, thud, thud? Wal-Mart and thousands of “dollar” stores full of geegaws from China, of course. The one I use has excellent merchandise and an honest policy. It changed from “Everything A Dollar” to “Everything $1.09″ a few months back. Given their choice of reducing quality or accepting that their costs had increased 9% (that being a fine example of “There is zero inflation.”) they chose to raise prices. Sensible folks. Excellent value for the money. Their version of Vick’s Salve is every bit as good as Kroger’s $4.39 generic and Mr. Vick’s original product which was up over seven the last time I looked. They sell a great many everyday objects which are sturdy and well-designed.

Okay, Sugars, you got all that? The debt is all being loaded onto the Fed, those in the know are scurrying to invest in kukui nuts, baht chains, ink cartridges, whatever they can find that is tangible, and in the fullness of time Mary Renault will be shown right again because The King Must Die.

You heard it here first, and if you don’t get your money out of the mutuals, your CD collection, the Market, banks, and treasuries on your bottom line be it. I stopped to muse gently on the fate of T-bills, but concluded they will “merely” be revalued. Which doesn’t mean there is not a way to repudiate them, only that I have not thought of it yet. Wahoo, would the FedS enjoy that even more than confiscating your 401(K) and replacing it with a genuine Government Retirement Account backed by the full faith and credit of the United States government, a project still in the works.

Killing the Fed like Caesar on the floor of the Senate is the perfect solution for everyone except those of us who are in line to become destitute. The government is off the hook for gazillions with a face-saving explanation for why they replaced the currency. “Devalued” it? Never!

Bernanke won’t even murmur, “Et tu, Obama?” If my analysis is correct, he knows what is coming and helped arrange the biggest coup since FDR confiscated private gold.

Regards,
Linda Brady Traynham

December 3, 2009

Q&A Time:

“Mrs. Traynham, what if you are wrong?” You had the fun of reading my prose and getting out of FRN’s is the most sensible course for many reasons.

“Are you never serious?” What’s more serious than telling you the bottom is about to fall out of the basket you put all your eggs in? It doesn’t matter how you have diversified your assets if they are all denominated in dollars. If they are revalued in a new currency you have no choice of rejecting you’ll discover that broken eggs on pavement aren’t good for much, although they may go well with splattered stock brokers of lesser rank.

“Did you come up with this all by yourself?” No, for once I did not. A very bright friend brought me the first few pieces and asked what I thought. I admire his grasp of things political and economic, the floor shifted under my feet, and I went looking for more straws in the wind and found a couple. He prefers to remain anonymous. Thanks again, fellow.

“How do I tell if the gold I have is real?” Pour aqua regia on it and wait until the acid has dissolved a hole a quarter of an inch deep? For centuries people bit gold coins. Don’t do it; dentists are very expensive. Besides, what are you going to do if you whack a bar briskly with a heavy carving knife and discover that beauty is only skin deep? My guess is that the longer you have had it the more likely a bar is to be genuine, and you will lessen the numismatic value (if any) if you cut into coins. Best answer? Assume yours is real because you can’t do anything about it. Don’t buy any new gold from less than impeccable sources and think carefully about further new coin purchases. I’m sure coins can be minted in tungsten and gold-plated.  Kick yourselves for not buying sterling silver table ware; that isn’t likely to turn out to be tungsten. Oh…go ask Byron King!

They’re Going to Kill the Fed was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.