Addison,

I am not given to hyperbole. This is the most important message I have ever sent. I urge you to read it and to share it with others.

Earlier this week, I attended the Utah Monetary Summit in Salt Lake City, Utah. As you may know, the state of Utah passed a Legal Tender Act earlier this year authorizing the use of federally minted gold and silver coins as money in the state of Utah. Now legislators in other states, many of whom attended the Monetary Summit, are evaluating similar legislation.

Among other things, this means the United States is approaching a constitutional crisis because states are beginning to financially break away from the federal government. This is no less serious than the American War of Independence or the War Between the States. The Utah Monetary Declaration (below) is a financial declaration of independence whereby states are beginning to opt out of the Federal Reserve System. A major confrontation seems inevitable.

The issues underlying this historic development include:

1. The unsound condition of large U.S. banks, which have inaccurate and crumbling balance sheets along with $250 trillion in high-risk OTC derivatives contracts.

2. The unstable nature of the U.S. and world financial systems, characterized by unworkable levels of sovereign debt and private debt and by over $600 trillion in OTC derivatives liabilities.

3. The excessive levels of federal government debt and unfunded liabilities combined with falling federal tax revenues prior to the start of the double-dip recession that began in the second half of 2011.

4. The radically inflationary monetary policies of the federal government and of the Federal Reserve, which promise high inflation or hyperinflation in the future.

5. The worsening condition of the real U.S. economy outside of large banks, multinational corporations and Wall Street firms, where federal government bailouts and Federal Reserve monetary easing (money printing) transfer wealth from proverbial Main Street to literal Wall Street.

6. The rapidly escalating polarization of the distribution of wealth, which threatens not only the economic stability of the United States, but also its social and political stability.

7. That the current highly inflationary monetary system is plainly unfair and fundamentally immoral.

As a consequence of these grave, ongoing and growing problems, which are being largely ignored by the mainstream news media, state governments must take immediate action to ensure the functioning of local economies and of state governments, should the federal government/Federal Reserve System break down. Specifically, there is an urgent requirement for an alternative currency to the privately issued Federal Reserve Note, which is erroneously referred to as the “U.S. dollar.”

Replacing a stable form of money with ever expanding debt and inflation undermines capitalism and destroys jobs. The monopolistic monetary system of the United States today is inherently inflationary because it must continually expand in order to prevent a deflationary collapse. The underlying structure and root cause of the monetary system’s inherent and inescapable inflationary bias is the legal construction of money as debt with no direct link to real economic activity. Debt levels in the economy and bank profits are simply out of line with reality.

In addition to the unsustainable and unstable nature of such a system, an inherently inflationary monetary system destroys savings by devaluing the currency. Savings, which are the result of excess production, precisely define the term “capital.” Replacing capital with debt, while highly beneficial for banks that create money out of thin air (through lending), is a deeply flawed concept responsible for the systematic and ongoing breakdown of capitalism in America. This deep structural problem is the absolute root cause of chronic, irremediable unemployment. As a consequence, there will be no genuine economic recovery in the U.S. and jobs will not return unless and until the monetary system is fundamentally reformed.

An ultimately more important issue is also garnering attention among state legislators, prominent (non-Keynesian) economists, religious leaders, political activists and voters. Inflation, particularly if it is systematically understated by the federal government or Federal Reserve, robs savers of the proceeds of past labor and robs workers of the spending power of their wages, living standards and financial futures. Inflation robs the elderly of their retirement and robs investors of their capital by facilitating taxes on alleged gains created solely by currency debasement. Legal tender, created as debt, results in ever larger debt burdens thrust upon innocent future generations that will experience progressively lower living standards and reduced economic opportunity. Generations to come will be born into debt bondage. Thus, the monetary system is at the center of a profound moral crisis.

The morally and literally bankrupt nature of the current U.S. financial system is transforming America into a dog-eat-dog society where every person seeks to live at the expense of someone else, rather than by producing wealth, because production is systematically stolen by the federal government and by banks through the clever device of an inflationary monetary system. The monetary system operates by exchanging fictitious “wealth” (debt-based money created out of thin air by private banks) for the real wealth of borrowers, i.e., the proceeds of their labor. In effect, the monetary system is a massive scam purported to be legal but lacking any demonstrable legal authority. Specifically, there is no constitutional or other legal basis upon which the federal government can force a private monetary monopoly on the states. In fact, the Constitution of the United States explicitly establishes the exact opposite.

The oversized banking system and federal government have grown in an unholy alliance in lock step and now consume so much of the U.S. economy that, together, they not only pillage the real economy, but threaten to kill, once and for all, what is left of the free country founded by the Declaration of Independence. The moral precedent and example set at the highest levels of the federal government and of the banking cartel is that profit, fame, success and wealth are (either directly or indirectly) rewards for immoral acts, rather than for honesty in business. Moral corruption at the top — embedded in the very structure of the monetary system — has slowly spread its gangrenous effect, undermining totally the founding principles of the United States of America, enshrined in the Constitution of the United States and in the Bill of Rights. Rather than liberty, America’s legacy is fast becoming one of moral turpitude enshrined in financial injustice and oppression.

The challenge before our nation today — our moment in history — is not merely a financial or economic or political or legal/constitutional crisis. It is also, and primarily, a moral crisis that could literally destroy theUnited States of America and all that it has stood for in more than two centuries. A stable society requires sound principles. A moral society requires sound money. Today, the United States of America has neither.

This message is a call to action. In the words of poet Dylan Thomas, let us say for America, “Do not go gentle into that good night / Rage, rage against the dying of the light.”

I am personally asking you to read the Utah Monetary Declaration (below), which I, among many others, signed on Monday evening, Sept. 26, 2011, in the Post Chapel on the University of Utah campus at Salt Lake City, and to forward it to all, especially to your state officials. Time is of the essence. Although its duration and pace are as yet unclear, the crisis is already upon us. Please act now and do not delay.

Ron

Utah Monetary Declaration

WHEREAS, money, as a medium of exchange, a store of value and a unit of measure promotes economic activity, growth and productivity by facilitating specialization and trade, the accumulation of wealth and its long-term investment, as well as accountability in setting prices, tracking progress, and settling accounts;

WHEREAS, natural money — precious metal coin — by virtue of its inherent qualities of recognizability, measurability, uniformity, divisibility, durability, portability and scarcity has reliably retained its purchasing power, notwithstanding periodic fluctuations, over the centuries and millennia of human history, serving as an effective medium of exchange and store of value often without any governmental declaration to require, legitimize or perpetuate its adoption and operation as such;

WHEREAS, sound money, by retaining stable purchasing power over time, best serves societal needs by substantially reducing the uncertainty of inflation risk for creditors and deflation risk for debtors as well as encouraging saving and investment among the general populace and benefiting the economic zone in which it circulates by stimulating the economy and by attracting foreign capital and commerce to the region;

WHEREAS, history attests that monopolistic monetary systems frequently engender currency debasement, resulting in serious consequences such as lost purchasing power, inequitable wealth redistributions, misallocation of productive resources and chronic unemployment, and that, as the cornerstone of a free market and society, the right to choose, whether between suppliers of goods and services, political parties and candidates, or between alternative media of exchange, effectively promotes the general welfare;

WHEREAS, for the equal protection of all people, rich and poor, the open circulation of complementary and competing currencies should be fostered and promoted by every sovereign state, including those of the United States of America pursuant to their monetary powers (expressly reserved in article 1, § 10 and in the 10th Amendment of the United States Constitution) to monetize gold and silver coin as an alternative, voluntary medium of exchange, and as an effective check and balance against debasement of the national currency by the national government which is constitutionally precluded from demonetizing state legal tender, through disparate tax treatment, discriminatory regulation, the threat of suppression and seizure or otherwise;

NOW THEREFORE, we the undersigned hereby declare and affirm that:

1. As an essential element of true liberty and of the pursuit of happiness in a free society, all people enjoy the inherent and unalienable right to lawfully acquire, hold and use as a medium of exchange whatever form or forms of money they may prefer, including especially gold and silver coin.

2. All free and sovereign states bear the moral, political and legal obligation not only to refrain from debasing their own currencies (except under the most exigent circumstances) and from erecting barriers to the unfettered circulation of monies issued under the authority of their sovereign trading partners, but also to affirmatively defend and protect against fraud, counterfeiting, uttering, passing off, embezzlement, theft or neglect by requiring full transparency and accountability of all state-chartered financial institutions.

3. No tax liability nor any regulatory scheme promoting one form of money over another should apply to: (a) the holding of any form of money, in a financial institution or otherwise; (b) the exchange of one form of money for any other; or (c) the actual or imputed increase in the purchasing power of one form of money as compared to another.

4. Except in the case of governmentally assessed taxes, fees, duties, imposts, excises, dues, fines or penalties, the authority of government should never be used to compel payment of any obligation, contract or private debt in any specific form of money inconsistent with the parties’ written, verbal or implied agreement, or to frustrate the intent of contracting parties or impair contractual obligations by invalidating the application of a discount or surcharge agreed to be dependent upon the particular medium of exchange or method of payment employed.

5. The extent and composition of a person’s monetary holdings, including those on deposit with any financial institution, should not be subject to disclosure, search or seizure except upon adherence to due process safeguards such as requiring an adequate showing of probable cause to support the issuance by a court of competent jurisdiction of a lawful warrant or writ executed by legally authorized law enforcement officers.

We hereby urge business leaders, educators, members of the media, legislators, government officials as well as judicial and law enforcement officers to use their best combined efforts to reinstate and promote the legal and commercial framework necessary to establishing and maintaining well-functioning, sound monetary systems based on choice in currency.

The signatories hereto concur in the general principles expressed in the foregoing declaration notwithstanding specific reservations some may have as to how such principles should be interpreted and applied in practice.

Next week, the folks over at the Heritage Foundation are putting on their own request for a stable currency… They want a good old debate, to see if there’s anything one can do to stabilize the U.S. dollar.

We’re sending three of our best from the Baltimore office down to Pentagon City next week for Heritage’s two-day event. Expect commentary and coverage from Addison Wiggin, Doug Hill and Samantha Buker.

They’ll let us know what prescriptions are on the table. After all, the dollar is one sick puppy, as Detlev and Ron Hera know. Heritage advertises plenty of hope by calling it the Conference on a Stable Dollar: Why We Need It and How to Achieve It.

All good Whiskey patrons know why a sound currency is great, but do we think it’s gonna happen before all hell breaks loose? That’s the question that the likes of an ex-Fed Reserve president, a Wall Street Journal reporter, a whole slew of university economists and longtime investor and “interest rate observer” Jim Grant will address.

Case for Gold co-author Louis Lerhman and billionaire publisher Steve Forbes will take center stage. We think we know what they’ll argue for, but stay tuned next week, Shooters!

Regards,

Gary Gibson

Notes From the Utah Monetary Summit was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

You might reasonably wonder why the market is so large. A Pew Research Center poll reports that almost 85 percent of Americans say they are happy or very happy.

Yet millions want to be happier still. And they feel they could be, if only they pursued it a little more ardently.

Except… that won’t work. Happiness is a by-product. It is achieved indirectly, by producing something beautiful or useful or by making someone else happy. The search for happiness is one of the chief sources of unhappiness.

Take a look around. Much of the economic misery we see today is due to the unbridled pursuit of bigger houses, fancier cars, and more exorbitant trips. The lure of consumer culture and an obsession with more is precisely what keeps so many from contentment.

The Stoics argued that happiness results not from pursuing affluence and status but rather virtue and wisdom. Pythagoras, the sixth-century B.C. philosopher and mathematician, asked that his followers take time, before going to sleep each night, to pose three questions: What have I done? Where have I failed myself? What responsibility have I not fulfilled?

If we fixate instead on gratifying all our desires, we may become superficial, acquisitive, deluded, or foolish. The headlong rush for happiness can also blind us to serious problems or numb us to the pain of others. After all, every life is lived between the poles of joy and sadness. Laughter and love are part of it. But so are pain and suffering. To deny the tragic aspects of the world is to suppress a large part of what it means to be human.

Playwright Tennessee Williams understood this. Asked in an interview to define happiness, he replied, “Insensitivity, I guess.”

Great artists often try to awaken us — or stir our conscience — by reminding us of the more doleful aspects of life. In response to the 16th Street Church bombing in 1963, an attack by the Ku Klux Klan in Birmingham that killed four girls, saxophonist John Coltrane wrote “Alabama,” an instrumental work that expresses anguish and sorrow more eloquently than words.

Poetry, too, can inspire us with its sorrowful realizations. Seventeenth-century British poet Robert Herrick famously wrote, “Gather ye rosebuds while ye may / Old Time is still a-flying; / And this same flower that smiles today / Tomorrow will be dying.”

Shakespeare captured the same sentiment in Cymbeline: “Golden lads and girls all must / As chimney-sweepers, come to dust.”

History shows that men and women of genius are often melancholic. Consider writers like Ernest Hemingway and Virginia Woolf. Composers like Rossini and Mahler. Statesmen like Lincoln and Churchill. Artists like Michelangelo and Gauguin. Philosophers like Schopenhauer and Kierkegaard.

In 1890, Vincent Van Gogh, overcome by feelings of worthlessness, walked out into the southern French countryside and shot himself in the gut with a pistol. Just 37, he died from the wound two days later. Yet in the previous two years — and despite his bleakness — he completed more than 200 paintings, many of them masterpieces.

Handel, after years spent at the top of the musical world, fell into terrible poverty, ill health, and deep depression. Yet from the depths of profound despair, he completed his greatest work, “Messiah.”

Beethoven raged against advancing deafness and his own finitude, yet created immortal works during this period, including his Fifth Symphony; his only opera, Fidelio; his late string quartets; and the Ninth Symphony, with its triumphant “Ode to Joy.”

Not all innovators are melancholy, of course, and not all melancholy souls are innovative. And I don’t mean to romanticize clinical depression, an often-debilitating illness. But there can be no joy without sorrow, no daybreak without the night. Periods of unhappiness are natural and even valuable. How are we to measure our best moments except against those that are not?

Contentment often saps our motivation. Dissatisfaction is the great spur to progress. Imagine the innovations we would lack today if we were satisfied with quill pens, horse-drawn carriages, or the “evil spirits” theory of disease.

Today, millions equate happiness with money. But studies show that once people are lifted out of poverty, their happiness is not dependent on income but rather love and meaningful work. Reported levels of well-being are also dependent, in part, on genetics, health, circumstances, and coping skills.

Happiness results when our aspirations are being fulfilled and we are optimistic about the future, when we are developing our capabilities or helping others develop theirs. In short, we are happiest when happiness itself is not the goal.

Contemporary philosopher Robert Nozick writes: We want experiences, fitting ones, of profound connection with others, of deep understanding of natural phenomena, of love, of being profoundly moved by music or tragedy, or doing something new and innovative, experiences very different from the bounce and rosiness of the happy moments.

Of all the prescriptions for happiness, perhaps the least helpful one is the now-fashionable idea that you can defeat the blues by “paying attention to yourself.” Hardly. The happiest individuals are invariably those whose ordinary, everyday mode of living is being busy and unconcerned with self.

That doesn’t mean sacrificing your interests for someone else’s. Rather, it means asking not just “what would it take to make me happy?” but also “What limits should I set on this pursuit?” “How should I weigh my own happiness against that of others?” And “What else matters aside from happiness?”

We all want to be happy. But life is also about education, work, courage, honor, empathy, and resilience in the face of hardship. Real contentment comes from a feeling that your life is worthwhile, that it is dissolved into something meaningful and great. That leads to gratitude.

And gratitude, it turns out, is an indispensable part of happiness.

Regards,
Alexander Green
Whiskey & Gunpowder

May 16, 2011

Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.

Mr. Green has been featured on The O’Reilly Factor and has been profiled by The Wall Street Journal, BusinessWeek, Forbes, Kiplinger’s Personal Finance, C-SPAN and CNBC, among others.

He currently writes and directs the twice-weekly Oxford Insight e-letter and three short-term trading services: The Momentum Alert, The Insider Alert and The New Frontier Trader. Mr. Green is also the author of two bestsellers: “The Gone Fishin’ Portfolio: Get Wise, Get Wealthy… And Get On With Your Life” and “The Secret of Shelter Island: Money and What Matters.”

The Trouble with Happiness 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.

The reason there are so many “reasons” is because gold is unlike any other asset. It…

• responds to its own supply and demand
• protects against short-sighted government actions and interventions
• is a bellwether of market sentiment and economic outlook
• protects against currency devaluation and inflation
• is global
• is one of the most beautiful metals ever found in the earth’s crust
• is a store of value
• is timeless
• is money

How many assets can you say have all those characteristics?

In spite of gold’s recent correction, the reasons haven’t decreased. In fact, the case for holding gold is stronger than ever. And over the past two weeks, a few “reasons” have surfaced that have fallen mostly under the radar. These, I believe, portend a higher gold price. In fact, it is catalysts like these that could end up in our children’s history books that, in retrospect, were obvious to see…

1. For the first time ever, China has invested in GLD, the gold exchange-traded fund. Their sovereign wealth fund, China Investment Corporation, recently invested $155 million in the ETF. The amount represents only 0.05% of the sovereign funds’ $300 billion, meaning there’s a lot more where that came from.

Those mainstream lemmings who predicted China was done buying gold now have to deal with the reality that this move more likely signals they are closer to the beginning — and not the end — of a long-term strategy to diversify into gold.

2. The Prime Minister’s Office in India is creating a stream-lined process so that the country’s state-owned corporations can “aggressively pursue the acquisition of strategic mineral resources.” The Indian government, normally known for thick-layered bureaucracy, has created a centralized body that will have “rapid strategic and decision making powers.” This is telling, both from the perspective that they see some urgency to the matter, and that the acquisition targets are minerals.

Given the country’s historic propensity to own gold, it’s not a stretch to think the yellow metal will be high on the list of “strategic investments.” Recall their government purchased almost half the IMF gold for sale last year in one fell swoop.

The upshot? Don’t be surprised to soon hear of India following China’s lead of buying precious metal companies and resources.

3. “Iran is now a nuclear state,” declared President Ahmadinejad last week. The Islamic republic has produced its first batch of high-level enriched uranium, which they claim is solely for electricity purposes but can also be used to create material for atomic weapons if enriched to 90%. In response, the U.S. imposed new sanctions, and the U.N. is considering adding more of its own sanctions, too.

The West recently proposed that Iran export its uranium for enrichment and then have it returned as fuel rods for a reactor. Iran demanded changes to that plan, which were rejected, so claimed they had “no choice” but to start enriching to higher levels on their own. “God willing,” declared Ahmadinejad, “daily production will be tripled.”

I’m sure this will all just blow over, right?

4. The U.S. government must inflate. Here’s another reason we think that sooner or later inflation trumps deflation… by 2020, government economists project that entitlement benefits (Social Security, Medicare, etc.), along with interest payments on the national debt, will devour 80% of all federal revenues.

This assumes entitlement benefits don’t grow, which, of course, they are. The overall national debt, meanwhile, will rise to 100% of GDP within a few years, an alarming level by any measure. Even Moody’s warned that our credit status could lose its triple-A rating if the nation’s finances don’t improve, an unheard-of prospect just a few years ago.

So, we’re abruptly fleeing our debt-adding habits, right? As you probably heard last month, Obama signed legislation that raised the cap on government debt from $12.4 trillion — already close to being breached — to $14.3 trillion to permit more borrowing. As Doug Casey has pointed out numerous times, this is the exact opposite of what the government should be doing and will have serious inflationary ramifications.

There’s only one way out: devalue the dollar to reduce the debt burden. And the direct result of that is a rising gold price. We may very well see another round of deflation, but the endgame is inflation.

What I would point out is that any one of these reasons would be sufficient for wanting to put some gold in your portfolio. It’s the cumulative effect that’s potentially scary, one that argues we should be overweight precious metals at this point in history. The reasons are numerous and, in my opinion, overwhelming.

Regards,
Jeff Clark
Senior Editor, Casey’s Gold & Resource Report

February 23, 2010

1,001 Reasons to Own Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In order for there to be a restaurant at all some entrepreneur has to put his money and vision on the line and open it. He has a thing called “overhead,” which is irreducible on-going expenses whether he has any customers at all or not. The rent, utilities, taxes, staff, laundry, raw ingredients, and so forth are constants. He is harried by assorted inspectors, frequently with conflicting demands.

In order for a meal to be put on the table once Joe Entrepreneur reaches that point the cooks have to prepare it and somebody has to serve it.

The diner has to have both the inclination to eat there and the wherewithal to pay for the meal and tip the waiter.

When government becomes the restaurant the system flies apart in many ways. Governments do not worry about overheads; indeed, it is an essential function of government to grow. The gang in DC has no concept of being able to “afford” the expenses they occasion. Money isn’t real to them. Other people’s money rarely is. They print some more any time they want to knowing that it reduces the value of the dollars we hold. They hire staff which always turns out to be permanent with reckless abandon.

Back in the real world government makes everything more expensive and more difficult. In our example, the minimum wage concept makes labor more expensive for the business owner. He has his choice of taking less profit, reducing staff, not expanding, or cutting quality. All of those will damage his enterprise. For over two decades I have been listening to small business owners say that they had the business to expand, but that between ludicrous restrictions, regulations, and taxes it simply was not worth their while to do so.

Cap and Trade will make energy far more expensive, and do so by design. Does the restaurateur reduce the fourteen ounce Angus strip to ten ounces? Raise prices? Charge for parking? Use frozen french fries instead of hand cut ones from fresh potatoes? It does not matter which unpleasant choice he makes he will be obliged to offer less to customers who are under the same constraints with their work and family expenses. Every time one of them decides that dinner out is an expense he cannot justify the restaurant suffers.

The waiters are damaged by the harm done by government to the owner and the customers, and so is the cook, so is the busboy, and so is the bartender.

The diner, at least, still has the choice of whether or not to patronize the restaurant, although he has to eat somewhere, whether at home or out. This is where we get into taxation policies.

Statists and, indeed, politicians in general, rarely know anything about where money comes from. They seem to think that “made,” “earned,” “produced,” and “printed” all mean the same thing. They really cannot tell the difference between a US savings bond and gold. They think borrowed money is real and does not actually have to be paid back.

They appear to believe that incomes are immutable, that if you make $200,000 this year that you will continue to make at least that much every year until you retire no matter what else changes. They speak blithely of your electrical bill doubling, not seeing that as causing you to spend less elsewhere because you have a ludicrous fondness for heat and light in your home. They even think you should run automobiles on the stuff. Some of them probably even believe that you can charge the ten thousand dollar battery on a Volt with twenty-five cents’ worth of electricity, as advertised.

They think that burger-flippers will always flip burgers, and their lot will improve only if Congress mandates higher wages for them.

Governments understand only fear, force, and how to use the public treasury to buy votes. Congress fails to grasp the very simple fact that everything is interconnected. In one sense it does not matter who, other than those with Pelosi-like incomes, has his or her light bill doubled, the money that will be allocated for electricity can no longer be spent in another area. If Hal’s discretionary income is $500/month and he has to give $167 of that to Brazos Power and Light, one out of every three dollars that he had previously to spend in restaurants, or to have carpets cleaned, or to buy a new fishing rod is gone forever, vanished into the insatiable maw of government. If Susie, the single mom teacher loses a third of her discretionary income, she will have to do without a washing machine, painting her house, or as many school clothes for her child. There is no way, short of a second job, to replace the money which has been stolen by government action, or that stolen by inflation which was caused by printing of fiat money.

I suppose I sound as though I am speaking to a sixth grade civics class, although most kids have allowances or parents who utter the foulest three words in the English language, “We can’t afford…” One wonders if the constantly increasing out of control “budgets” at local, state, and national levels are caused in part by a system that requires great wealth to be elected to public office, and great dependence on funds gathered by those who demand political favors in return. I live near Bryan, a town of 55,000 people. Can someone explain to me why Bryan needs to spend nine million dollars a year? All of it extorted from local property owners?

You may wonder why I am covering anything this basic here on Whiskey & Gunpowder! Surely you Shooters, of all others, understand the basic principles of business, budgets, and von Mises. One would have thought so–right up to the point where the Editor was deluged with letters asserting that pie in the sky “health care” is a “right” and expressing their sentiments in language unbefitting ladies, gentlemen, and civilized debate. If you understand why we cannot have “single payer” health insurance, fine, pass this on to some child who needs to know.

The basic fact is that there is only so much “money” in the world, when we see “money” as a medium of exchange, which it is. I need a better way to induce the cobbler to make me a pair of shoes than offering him twenty dozen eggs he can’t eat before they spoil, although we might agree that I would deliver a dozen a week until the debt was paid. He, in turn, needs cow hide to make shoes, and I have cows, but I don’t want to skin one just to get shoes…at any rate, it worked better when we all exchanged little slugs of silver or gold for each others’ labor and production. The balance gets destroyed when the government creates “fiat” money and expects us to accept their fairy not-gold at the same value as shimmering silver ingots. We won’t do it. We also know that every time more money is cranked out of thin air every dollar we have is worth less because there is no way to differentiate between the dollar we had when there were only ten in the world and that same dollar when suddenly there are a hundred.

The Statists’ theory is that there is no limit to how much money they can “create,” just as there is no limit to how much milk the cow can give. There really are limits to how much moo-juice Bossy will produce, including her heritage, her age, how good her feed is, and whether or not she has had a calf recently. Even cows want a break after being milked for 300 days. It takes nine months to produce another calf and “freshen,” or begin producing more rich, creamy milk.

My darling Charles and I sent Asia, our Segundo, off to pick up a cow and her week old bull calf today. Mathilda, as we have named her, is three-quarters Jersey and a quarter Black Angus, both animals are black, and they will fit in beautifully with the Black Dexters. Mathilda will handle our milk and cream needs for the next three hundred days, more time than it takes for the goats to reproduce (210 days.) The funny part is that the owner didn’t want to milk her so he has been underfeeding her deliberately so that she won’t produce more milk than the calf can drink! How about that, Shooters, when a “simple farmer” in “flyover country” knows that to get less out of the cow you provide less sustenance than she needs. (We gave her a whole bale of first class hay and a big container of clear water for tonight.) Why can’t all those Ivy League economists and lawyers see that when they take too much of our money we produce far less taxes?

There really are practical limits to how many taxes can be extracted from most of us. Particularly in a land where nearly half of the people pay no taxes at all and a lot of them get “earned income credits” for doing one day’s work a year. There is a large class of people that is paid to do one simple chore: vote for the Statists. I suppose it is nice work if one can stomach it. I don’t know, since no government has ever bought my food, shelter, utilities, and medical care. Given my choice I would prefer to be a slum landlord, but the government beat me to it.

There are two points here that the DC gang had better grasp quickly. The first is that no matter how you jigger the figures, jobless people aren’t making money and they aren’t paying taxes on the money they didn’t earn. Just because they aren’t counted officially doesn’t mean that they aren’t out there, as increased robberies, claims for unemployment, and appeals to churches show. Those who are losing more of their income to higher taxes and utility bills are not purchasing as much, which means that the stores they once patronized are no longer making as much money, so they don’t pay as many taxes.

The Statist solution is automatic: “Oh, we’ll just tax the rich!” “Rich” is a relative term but our dear leader defines it at a quarter of a million dollars a year. Their problem is that if they confiscate all of the earnings of every person in America who makes $250,000 a year or more it won’t be more than a drop in the bucket they have to fill to cover their expenditures. It can’t be done. According to the most recent analysis available, 2006, the “richest” ten per cent. paid fifty-five per cent. of all taxes. Statists think that is “fair,” but what they had better start thinking is that pulling that much money out of those who produce jobs, start new businesses, invest in others, or even play the stock market slows everything down. Charity? When you filter money through the government over ninety per cent. of it is spent as salaries and overhead or disappears from graft or theft. Good private charities more than reverse that ratio.

How many families do you suppose there are with incomes of two hundred thousand dollars a year or more? I’ll tell you, since Newsweek kindly told me: 3.4%. That is 34 out of 1000 families, or 340 out of 10,000 families, or 3400 out of 100,000 families, or 34,000 out of a million families. Those are the ones who pay more than half of the taxes. I’m not among them, but I understand the frustration and annoyance such a state of affairs must cause.

The really fun statistic is this one: those 3.4% do 14% of the consumer spending and they are the ones who create and sustain businesses, which is where jobs come from. When the top five per cent. bears the greatest burden of onerous taxes, sooner or later not only does commerce decline but at least some of them ask why they are bothering. That is one of the difficulties with the proposed health “care” legislation, the bizarre proposition that doctors will submit to a 15% pay cut at the government’s whim. No, they won’t. Those who are old enough will retire. Young people who were planning on enrolling in medical school will think of something else to do.

The best solution I can see is to do the John Galt thing. Quit. If you cannot afford to quit your job literally, stop your consumer spending to the greatest extent that you can.

Put the money into commodities for your family’s use or into chunks of silver. Some of you may shake your heads in bewilderment and ask, “Isn’t that consumer spending?” Well…yes, and no. If you spend a hundred dollars taking your family out for pizza and a movie, that money (minus taxes) goes back into the economy to be taxed again and again in every hand that holds it, and you have nothing to show for it beyond a few memories. If you buy a case of MREs (ugh), your money has gone to an individual who will do whatever with it, but you have taken it out of circulation. You are storing value in the form of food that you can eat during the coming Greater Depression. If you wear the clothing you have now and do not visit Macy’s or Dillards, the shock of what you do not spend ripples through the economy. A nice blouse costs a couple of hundred dollars and you may wear it two years. That money goes to pay those who manufactured, shipped, and sold the blouse. If you turn that money into a dozen ounces of silver you have pulled that value out of circulation. You are richer for having “savings” that cannot be lost through devaluation. You have turned the value of your fiat dollars at present into a metal which will preserve it. You have also hit the tax-and-spenders where they live…

A great many stores and firms are going out of business and this trend will gain momentum. You’re smart. You can figure out for yourself which businesses will not make it through a deepening depression and what you should stock now. Only the big, the smart, and the connected will survive, and the myriad choices you have now will be a distant dream perhaps five years from now. Perhaps in less.

Big government turns you into lunch. Most of us cannot afford to be the owner. Our choice is whether to be the waiter, who may lose his job and will surely see his customers and his tips diminish, or to be the diner. It isn’t too late to do the Joseph thing and stock up for the future, and emulating John Galt and Midas Mulligan will shorten the time until the whole rotten system collapses. Too many carpenter ants have been nibbling at the foundations of our financial structure.

John Galt said to withdraw our minds. The current system doesn’t want those and doesn’t want us to use them. Take away what they do want, an endless stream of tax revenues.

Cordially,
Linda Brady Traynham

September 4, 2009

Free Lunches, Money from Nothing and Limits to Government Theft was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A recent example from the British press: One of the first lottery millionaires punched a plumber and ended up in court, says The Telegraph. Michael Antonucci won 2.8 million pounds in 1995. But he “blew his entire fortune,” reported the paper last month. Now he’s reduced to stiffing tradesmen. The amount in dispute was just 400 pounds, what he was billed for a “gigantic ceiling mirror fitted above a whirlpool Jacuzzi.” He had the mirror installed when he was still flush. Now that he’s broke, he can’t pay…hence the altercation.

The phenomenon is little different when it happens on a national or even imperial scale. Any money that you don’t earn is stimulus. Without the sweat of honest toil on it, money seems to play a pernicious role in history. There are no examples – none – where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford…and getting into trouble.

The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more booty…gold, silver, land and slaves. And each led to more conquests, which brought forth more booty. But the stimulus of this booty stimulated only the need for more stimulus. It did not stimulate real prosperity. Instead, it undermined it. First, slaves bought by rich landowners destroyed the free labor market and ruined small farmers. And then, imported wheat from the provinces – paid as tribute – put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food.

In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, made up of displaced small landowners and out-of-work laborers, needed bread and circuses which drained the Treasury.

The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it…with more stimulus. Neither paper money nor the printing press had yet been invented. So, Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock! This extra money did not bring prosperity; it caused price inflation. In a period of about three decades, Rome’s consumer price index almost doubled. Then, when output from the mines could be increased no further, Augustus’s great nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Of course, Rome itself was played out too.

Another early and dramatic example of stimulus-in-action came in Spain in the 16th century. The conquistadors increased their supply of money in the time-honored fashion – by stealing it. Galleons brought treasure from the Americas; increasing the Spanish money supply substantially and fatally. The Spaniards had so much stimulus that they laid down their tools. Why should they work? They could buy things.

The discovery of a whole mountain of silver – Potosi – in the middle of the 16th century insured a supply of stimulus that would last for nearly a century. Results? Predictable. Inflation. In the “price revolution” from 1540 to 1640 the cost of living went up throughout Europe. In England, for which we have the most reliable data, prices went up 700%. And Spain, though it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next 10 decades. Spain, like Rome, welcomed stimulus; it never recovered from it.

Now we turn to the biggest misadventure in stimulus ever – the period after the United States ‘closed the gold window’ in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. After 1971, on the other hand, the sky was the limit – especially in the United States of America. The US could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. The Fed’s adjusted monetary base grew 900% since 1985, and more than doubled this year alone. Total US debt tripled – as percent of GDP.

As it did with Rome and Spain, more and more stimulus stimulated spending and speculation, but not real output. During the 2001-2007 period, for example, credit in the United States increased by $22 trillion. The nation’s GDP increased only by $4 trillion. For every extra dollar of output, Americans took on $5.50 of debt.

But now the bubble has blown up; the feds are on the case. What do they offer? More stimulus! Cometh a report this week that $23 trillion has already been put at risk in the various bailouts and credit guarantees. As for the US public debt, it is expected to increase until the country goes broke.

Future economic historians will look at these staggering efforts with awe and wonder; they will wonder what the Hell we were thinking.

Regards,
Bill Bonner

July 27, 2009

Romulus, Remus, Stimulus: A Brief History of Monetary Madness was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The U.S. Labor Department reported that around 467,000 Americans lost their jobs in June. This was unwelcome news. The data had been getting less bad every month since January. Then the June numbers rocked up, fell out, and took stocks down with them. This is causing everyone with a pulse (and most with a brain) to have second thoughts about just how good things are-or how much worse they might get.

The S&P and the Dow both fell nearly three percent. Oil and gold were down too. About the only things up were Treasury bonds and notes. Speaking of which, the U.S. will auction another $73 billion of those this week. Wednesday’s auction is for $19 billion in ten-year notes while $11 billion in 30-year bonds go on sale Thursday.

“You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that’s breaking,” Black Swan author Nassim Taleb told CNBC’s Squawk Box. “Anything that’s fragile like the financial system will eventually crash, he said…We’re in the middle of a crash…So if I’m going to forecast something, it is that it’s going to get worse, not better.”

Taleb’s point is not a popular one. But it is a realistic one. The fiat money, leveraged finance Western financial system went global in the last twenty years, providing an epic rise in asset prices (and the debt used to purchase them). There’s no doubt that real goods and services have traded hands with world growth. But now we wonder how much of that is sustainable when you take the credit away.

Did we use phony money to build a world with completely unrealistic levels of growth? Were trillions of dollars of capital allocated based on final demand that was artificially pumped up by credit, currency manipulation (low U.S. interest rates and global dollar pegging), and government stimulation?

Yes we did!

Mind you, the crash of the financial system is not the end of the world. It is a massive calamity to be sure, wiping out the value of retirement assets many people were counting on to make it through their golden years. But as many readers have reminded us in the last few months, there is more to life than money.

Fair enough. But there is more to wealth than money too! Peace of mind, having your assets in forms that can’t be inflated away or won’t suffer from debt deflation…we would count these as “wealth” at a time like this.

That brings us back to the problem growing at the back of our mind yesterday. Can a massive deflating credit bubble nullify the liquidity measures by central bankers, which are puny in comparison to the nominal value of the assets at risk? “Yes you can!” comes the answer from some of the friends we put the question to.

“I’m tempted to disagree that expansion in government credit won’t reach the economy and therefore won’t be inflationary,” replied Money Morning editor Kris Sayce. “I’m not mistaken, the Fed is buying up these ‘assets’ in order to take them off the banks and also to help price them. If the Fed didn’t do this then the banks wouldn’t be able to lend extra money to customers as they would breach their lending limits.”

“It’s not so much that the Fed is directly feeding the banks money which flows through to the economy, it’s more that the Fed is feeding the banks money which allows them to expand lending which they otherwise wouldn’t be able to do. Thus at the very least is preventing prices from falling, or from falling as much as they ordinarily would without the intervention. In effect there is more money flowing in than there otherwise would be. There already IS inflation.”

Another colleague in the States replied that, “I am leaning more and more to the idea that the credit-based stuff will deflate (real estate, stock prices) but the cash-based stuff could rise (like foodstuffs, energy). In a way, it’s not a debate about inflation or deflation, but which assets inflate and which deflate. There might be a strong dichotomy within the economy between the two.”

To the extent that you cannot eat a mortgage-backed security, we see the wisdom in this view. The world has a lot of people. They have a lot of real needs. Regardless of the value of derivatives and opaque financial assets, a certain level of economic activity for a certain kind of tangible good will still be there. The challenge for investors is to determine if you can profit from this in traditional ways (stocks and bonds) or if you have to venture into less traditional asset classes and forms of ownership (land, real commodities, precious metals).

And of course, the thesis could be incorrect. If credit is not money-or if the large lending and government guarantee programs don’t reignite a lending boom in the real economy-then you may simply see a lot of wealth disappear down the memory hole.

Finally, a mystery Aussie commentator who wishes to remain anonymous but whom you may hear from in the future in this space sent a philosophical yet practical reply.

“What is money? Currently, that’s what the Federal Reserve (and other central banks) put in the reserve accounts of their member banks. The banks then use this as a base to create their own money, or ‘like money’. I guess this is also known as credit. So yes, credit is not money.

“And this bank credit is now contracting as the natural force of the market tries to drive prices lower and correct the boom. The Fed is offsetting this process by swapping ‘money’ (fed funds) for the impaired assets. But the banks are sitting on the cash, and obviously do not have the risk appetite (or the demand) to lend it out.”

“So at this point additional base money is not being lent out as inflationary ‘like money’. I’m not sure the Fed has the mechanism to make out and out purchases of assets other than through lending facilities, unless they are Treasury or Agency purchases. As far as I’m aware, the Fed can only distribute its newly created money through the banking system, and no other way. The banks have always been the source of inflation, and they need to lend to create this. They will probably use their excess reserves to buy Treasury’s in the coming years, and then the Fed can but the Treasury’s back off them in time. This will be inflationary.”

“Where does gold come into it? Well, gold is real money….chosen independently by the people. As trust in the US dollar continues to evaporate, demand for gold will increase. At some point gold will again be referred to as money. Because the amount of credit (debt) in the world dwarfs the amount of gold, and because gold will be a legitimate extinguisher of the debt, gold will likely rise massively to have the capacity to extinguish the debt. This is a process unfolding over years though.

“A rising gold price is actually deflationary in that it represents a rise in the purchasing power of money. So I think deflation is the ultimate force that cures this massive credit bubble…outright deflation if long-term faith in the US dollar remains, or gold price induced deflation should the bottom fall out of US dollar trust. The quantity of US dollars may be rising at the moment but the real turning point will be when the perceived quality of the dollar declines.”

Hmm. Gold rising indicates the rising value of cash…because gold is money. But if money is not wealth…and gold is money…does this mean gold is not wealth? Now there is something to think about.

Regards,
Dan Denning
Daily Reckoning Australia

July 7, 2009

Money Isn’t Wealth was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Well, we told you so about a lot of things, including the plans that the Obama Nation has for your 401K.

To be brutal, the rape artists are moving on their plans to hijack your 401K and replace it with a handsome certificate suitable for framing which says you got a Guaranteed Retirement Account in return for one of your old, unsafe means of preparing for the grim future.  Actually, I made that part up.  You probably won’t get a certificate large enough to frame and hang over your computer as a constant reminder never to trust government with your money, or not to change the rules on you.  What you’ll get is a dud IOU.

Given the speed with which the Left Wing Congress and the “I just sign what they send me” President move, you have at most days to contemplate what is left of years of thrift and deferred gratification.  Those people don’t mess around when they have prey in their sights.

I’m no expert on how a 401K can be restructured, but if I were you I’d be on the ‘phone to my CPA or financial advisor immediately to see if there is any exemption anticipated, any way to get your meager security th’ hell outta Dodge.  What I would really do–and did two years ago–is pay the penalty and close the position out.  You’re going to have to pay taxes on those funds eventually anyway, and far better to snatch two-thirds or so of the prize away before it gets dumped into the general fund and is spent on housing for Hamas, the snail darter, uniforms for the Obama Youth, excruciatingly bad modern “art,” or more perquisites for Congress.  Even half a loaf will be better than none…if you turn it quickly into objects of intrinsic value, such as gold, silver, diesel oil, and emergency rations.

This freight train is building up speed, folks, and actions which were objects of scorn two years ago can be discerned now quite clearly.  Here are some serious warnings:

1.  Empty out your safety deposit box.  Your bank manager will confirm that if there is a Friday surprise he can not guarantee that you will ever have access to it again.

2.  Start pulling your cash out of banks.  Again, turn as much of it as possible into real property–which does not mean “real estate”but tangible assets.  It doesn’t matter if the banks crash before the bond market does or whether the dollar crashes or is devalued first.  The interests rates are so low it is very inexpensive insurance to remove your personal wealth from sinking Bernankes and store it in metal, C-rations (sorry, MRE, “meals, ready to eat”), or cowrie shells.  I’m famous for saying, “The worst that can happen is…” and the worst that can happen is you will lose the premium you paid for gold coins (there are better ways to buy metal), forfeit the 1.13% your funds are accruing in the bank, and have to pay the premium to sell silver ingots back much later.  Don’t stand there like a deer caught in a jack light, and don’t expect any sympathy if you go to the bank one day and see signs that say “Bank holiday.  Closed until further notice.” or “Daily withdrawal limit $300.” There are proposals for those very restrictions floating around, and that limit is going to include transferring funds between banks.  Mr. Paulson asked for permission a while back to post SWAT teams to prevent bank runs.

3.  You’ve been warned repeatedly to accumulate a bare minimum of three months’ supplies of food, water, and Sudoku puzzles, those representing whatever you, personally, would not wish to be without in times of stress and crisis.  Don’t forget the Tullamore Dew.

4.  If the dollar is devalued again history shows that the usual amount is on the order of two-thirds.  If you want to risk getting roughly thirty-three Amero coins for a Bernanke, you keep your innocent faith that this is “just another bump in the road” and that Mr. Obama couldn’t possibly do what Roosevelt and Nixon did.  When the dust settles from what at best will be a controlled demolition you have watched go whoomp-whoomp-whoomp-whoomp-whoomp in a series of rapid shocks you will take what you are given on any assets you haven’t squirreled away in hard money of various kinds including tobacco, soap, fifty pound bags of rice and pinto beans, and canned corned beef.

Our world is a-swirl with forces building hurricane speed, each having an impact on the others.  The concatenation of instability in the bond and stock markets, housing and commercial real estate, the mushroom cloud of increased “money” supply, job losses developing in the auto and tobacco industries due to recent legislation, the Chinese and Japanese at least eying manipulating our currency or replacing the dollar as the standard against which other currencies float, and the possibility that the government is going to appropriate the health industry are just some of the warning signs that indicate it is time to head for the storm cellars with the kiddies, the livestock, a kerosene lantern, a good book, and an enormous picnic lunch.

Those are only the more obvious evils building to gale force.  Ignore the urgency of the klaxons if you will, but this occasionally fey half-Irish lady thinks she knows “Dive! Dive! Dive!” and “Tora, tora, tora” when she hears them.

Call me Chicken Little if you must, but I’m off to stuff some more silver coins under the mattress.  Literally they make lumps which prevent fairy tale princesses from sleeping well, but figuratively you’ll sleep far better if you have prepared for the hurricane before it makes landfall.  It may yet turn and blow away at sea, but a big one is right off your coast, and others are lined up clearly visible on radar.

Take care,
Linda Brady Traynham

June 26, 2009

401(k) as Dangerous as the Dollar was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

– James Warburg of the banking dynasty, resigning as President Roosevelt’s monetary advisor, 1933

Want to know where the price of gold, oil, the S&P, Euro or overseas stock markets are heading?

Pick a number, any number. Go on, choose whatever number you like! Because that’s how policy-makers and their advisors would like to set the common denominator of asset prices: the value of money.

“When I calibrate my favorite version of the Taylor rule using the most recent data,” says Greg Mankiw, professor of economics at Harvard and chairman of Dubya Bush’s “I get a target for the nominal federal funds rate of about negative 1%.”

Actually, “as long as expected inflation is still positive…that means an even more negative target for the real interest rate. And given the forecasts of inflation and unemployment, we are likely to get further into the negative region in the months to come.”

Yes, you read right. As Dr.Marc Faber of the Gloom, Boom & Doom Report has been howling since Mankiw published his “Economic View: Time to Go Negative” in the NY Times back in April, the professor “seems to have great sympathy for the outright expropriation of savers.”  Negative real rates of interest – returns paid to cash depositors that lag the rate of consumer-price inflation, thereby devaluing bank savings in terms of purchasing power – are currently best maintained in Zimbabwe, notes Faber. And Mankiw is such a man of the future, sent back in time to guide us with the wisdom of ages yet to pass, that pension savers in the United States might hope their retirement runs out before the Fed acts on his hindsight and drags us all into Robert Mugabe’s brave new world.

Ignoring the fact that the real Fed Funds rate was negative for 34 of the 38 months between Aug. 2002 and Oct. ’05 – a feat topped only by the 40 months of negative real rates between Sept. 1974 and Jan. ’78 – “The idea of negative interest rates may strike some people as absurd,” writes Mankiw.

“But remember this: Early mathematicians thought that the idea of negative numbers was absurd. Today, these numbers are commonplace…”

Early mathematicians also gave the world geometry, algebra, Pi, elevation surveying and pneumatics. But those old, dead people with their fear of surds…They know nothing! NOTHING! as class monitor Jim Cramer would no doubt scream if invited to comment. And closer still, even within living memory, “When you look at the [Fed's] mistakes of the 1920s and 1930s, they were clearly amateurish,” as Mankiw told the WSJ in Feb. 2000.

“It’s hard to imagine that happening again – we understand the business cycle better.”

“[In May 2001] I wrote a paper on monetary policy in the 1990s,” the über-enlightened Mankiw blogs on. “I estimated the following simple formula for setting the federal funds rate:

“Federal funds rate = 8.5 + (1.4 x (Core inflation – Unemployment))

“The parameters in this formula were chosen to offer the best fit for data from the 1990s,” explained Mankiw after solving his equation 8 years ago. Yes again, you read that right. His “favorite” monetary-policy rate for any given pair of inflation and jobless data is spat out by taking the one from the other, multiplying the result by 1.4 and then adding that result to eight-point-five.

Not because those figures of 1.4 and 8.5 represent some immutable law of the universe. They’re now stuck in the mold of, say, the ratio of a circle’s circumference to its diameter always equaling 22/7…or the weight of fine gold (its specific gravity) being 19.3 that of an equal volume of water. No, Mankiw instead built his theorem upon the achievements of “miracle worker” Alan Greenspan (to quote the professor), head of the Fed when inflation – as well as unemployment – trended down towards 40-year lows.

Inflation is always and everywhere a monetary phenomenon; so any change in the rate of inflation must come due to changes in monetary policy. Unemployment is also influenced “over a period of at least two or three years by central-bank actions,” Mankiw asserts. Hence the numbers – not quite any numbers – squeezed out of Mankiw’s solution to the Maestro’s 40-year records in US macros-stability and growth.

One-point-four, eight-point-five. Keep them in mind. They might mean something important. Not least a whole new surge in commodity and especially gold prices as savers flee the warm, welcoming  arms of US commercial banks – now being recapitalized by lending cash at pre-crisis prices but giving depositors next-to-nothing in return.

“I’m advocating 6% inflation for at least a couple of years,” says Mankiw’s Harvard colleague – and former IMF chief economist – Kenneth Rogoff. At current interest rates, “It would ameliorate the debt bomb” by taking real rates to their very lowest in history and leaving them there. Or rather, it would make the debt bomb sound like a fire-cracker against the exploding oil refinery of re-shrunken savings rates, impossible investment decisions, and collapsing Treasury bonds.

“There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt,” Rogoff notes sagely. Yet somehow, he thinks, soaking the lenders will mean avoiding “a long period of slow growth.”

Remember: This tomfoolery might sound absurd right now, but in Harvard’s bright smiley future, it could indeed become commonplace – and US cash savers lived with precisely this outcome between 2002 and 2005.

Now this “thinking” represents the blue-sky academic and professional chin-stroking amidst which the Federal Reserve claims it will start raising rates and withdrawing “excess liquidity” just as soon as Consumer Price inflation ticks higher.

Like Jim Cramer says, they really do know nothing.

Regards,
Adrian Ash

June 18, 2009

Inflation and Random Numbers, Part I was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

At the moment, there is tremendous hoopla and jubilation over the start-up of so many “shovel-ready” highway projects around America — as if what we need most are additional circumferential freeways to enhance the Happy Motoring lifestyle. How insane are we? Is this the only thing we know how to do?

I remain confident that the months ahead will introduce the American public and our leaders to a range of horrors that will begin to penetrate our addled collective imagination. We’re far from done with the crisis of banking and money and the related fiasco in mortgages — which translates into the very real situation of many people becoming homeless. It remains to be seen what may happen on the food production scene, but the current severe shortage of capital and the intense droughts shaping up around the world will resolve into a much clearer picture by mid-summer. The price of oil has resumed marching up and has now re-entered a range ($50-plus) that spun the airline industry into bankruptcy last time around. Enough carnage has already occurred on the jobs scene that the next act among many chronically jobless may tilt toward desperation, anger, and violence. The sporting goods shops around the nation are already rationing ammunition.

It’s not just the stock markets that have decoupled from reality as we enjoy the fragrant vapors of spring — it’s the entire conscious consensus of everybody holding the levers of power and opinion. To put it as simply as possible, we’re still sleepwalking into the future.

Bad Collateral

The wishes of the “green shoots and mustard seed” crowd really hinge on whether the various organs of the suburban economy can be jump-started back to life — the production home-builders, the granite countertop outfitters, the mall and strip-mall gang, the national chain discount retailers, all the people who make Happy Motoring possible from the factory to the showroom, and, of course, the banks who shovel money into these enterprises.

All these organs of our now-former economy are gravely impaired, and a realistic appraisal of them would have to conclude that they’ve entered the zone of congestive failure. The choice we face really comes down to this: do we put our dwindling resources and “hopes” into resuscitating those dying systems, or do we move forward to the next chapter of American life, cut our losses, and make new arrangements more consistent with the realities on offer from the universe? To take it a step further, can we remain one nation, a common culture, without such a conscious re-purposing of our collective spirit?

The bizarre spectacle being played out right now by President Obama and his team only adds layers of mystery and mystification to this big question. It is so dispiriting to see Mr. Obama’s White House mount a campaign to sustain the unsustainable in the economic realm. Everything they’ve done for four months involving money management and enterprise policy — from backstopping hopeless banks, to gaming the bankruptcies of the big car companies, to the bungled efforts to prop up artificially-high house prices — amounts to a gigantic exercise in futility. Worse, it gives off odors of dishonesty or stupidity, since the ominous tendings of our system are so starkly self-evident.

Not least of the problems entailed in all this are the scary political consequences. It’s one thing for a business such as a bank to fail; its another thing for the public to lose confidence in banking, or their own currency, or the credibility of all the people who work in banking, or the authority of those charged to regulate these activities, or the courts and their officers who are supposed to adjudicate misconduct in them. When faith in all these things starts to go, all bets are off for even larger social constructs like democracy, justice, and the destiny of a federal republic.

The Obama White House has very quickly painted itself into a corner on these things. The so-called bank “stress test” couldn’t have backfired more completely. Rather than bolster confidence in our money system and the people who run it, it only made the system appear more obviously corrupt. It made the Treasury Department (and the White House by extension) look idiotic for concocting it. Worse, the game of allowing the banks to audit themselves, and cook their books under newly jiggered accounting rules, only made them look less sound and trustworthy, and their executives more venal and mendacious. The stress test scam also virtually guaranteed that the banks will not get another dime out of congress — even while it is common knowledge that they will desperately need quadrillions more dimes in the months ahead.

Who knows what the point of this ludicrous exercise was? Observers in all corners of the media saw through it, and the public has only been made more cynical, and is now so furious over related stunts like AIG using taxpayer money to pay back swaps bets to Goldman Sachs that there is a whiff of revolution in the American air for the first time, really, since 1861. A lot of reasonable people see a good chance that our society will sink into disorder if these trends continue, and these fears could beat a path into radical politics, even the frightful prospect of coup d’etat — not something that I advocate, by the way.

The president is playing with fire on all this. The old economy is not going to recover, and so far he has not used his rhetorical talents to articulate what the next economy is likely to be about. It is reasonable to wonder whether he even really has a clear sense of it — and, based on the fatuous utterances of his economic mandarins like Larry Summers and Austan Goolsby, this team is really behind the curve.

There are plenty of things you can state about the economy past and future with some confidence right now:

• Cheap energy is over and our wishes for alt.energy are currently inconsistent with reality, meaning we have to live differently.

• We have to downscale and re-localize our major economic activities: food production, commerce and manufacturing, banking, schooling, etc.

• We can’t hope to have a stable money system unless we allow a workout of unpayable debt to proceed.

• Even if we can do this, universal easy credit is a thing of the past. From now on, we have to save for the things we want and run our businesses and households on accounts receivable.

• Major demographic shifts are inevitable as it becomes necessary to let go of suburbia and reactivate our derelict towns and smaller cities (and allow our giant metroplexes to contract).

• We have to face the truth that our major social contracts cannot be met, namely the continuation of social security as we know it and probably all pension arrangements. We’ll probably have to change household arrangements to make up for these losses.

• Health care will have to go through a revolution more comprehensive than just changing how we pay for it. Like everything else, it will have to downscale, re-localize, and become more rigorous.

We’re not going to rescue the banks. The collateral for their loans is no good and it will only lose more value. All those tract houses on the cul-de-sacs of America and scattered on the out-parcels of our tragically subdivided farming landscape will only lose value, one way or another, in the years ahead. Right now they’re simply losing inflated cash value — and that has been bad enough to sink the banks. In the months and years ahead, they’ll lose their sheer usefulness as the distances once mitigated by cheap gasoline loom larger again, and the jobs vanish and incomes with them, and the supermarket shelves cease to groan with eighty-seven different varieties of flavored coffee creamers, and one-by-one the national chain stores shutter, and the theme parks, and the NASCAR ovals, and the malls, and the colossal superfluous cretin-cargo of consumer nonsense that we’ve been daydreaming in gets blown away in a hurricane of change that we were not ready to believe in.

Regards,
James Howard Kunstler

May 19, 2009

Shoveling Money into the Deceased Economy was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.