Will the Fed's Overkill Succeed?

Forget about the $50 billion Madoff Ponzi scheme. Forget about the $8 billion Stanford Ponzi schemes, forget about the $3.6 billion of bonuses paid to Merrill Lynch (MER) executives after the firm’s failure, and forget about the $200+ millions paid out to AIG executives. The biggest stock market scam of the century is now underway, hatched, given the stamp of approval, and about to be executed by Central Banks worldwide. Though this scam will undoubtedly be bigger than the all revelations of previous scams combined, it will engender less public anger, less disbelief, and less protest than any one of the recent individual scams, because very few people will understand it.

The Failure Of Special U.S. Federal Reserve Programs

To understand the biggest stock market scam of the century, we must first pause for a moment to understand recent history. U.S. Federal Reserve, in an attempt to turn the U.S. economy around, first extended hundreds of billions of dollars of credit to U.S. financial institutions through facilities like TALF (Term Asset-Backed Loan Facility), TAF (Term Auction Facility), AMLF (Asset Backed Commercial Paper Money Market Fund Liquidity Facility), MMIFF (Money Market Investor Funding Facility), and the CPFF (Commercial Paper Funding Facility).

The Failure of the $850 Bailout Plan

When these above programs collectively failed to stimulate the economy, then U.S. Treasury Secretary and former Goldman Sachs (GS) CEO Hank Paulson offered up an $850 bailout plan to U.S. Congress in September 2008. In criticism of this bailout plan, I scripted an article on September 21, 2008 called “The Largest Robbery of the 21st Century”. In this article, I stated that U.S. Treasury Secretary Treasury Hank Paulson’s claim that there was “no intent to nationalize US mortgage institutions [Freddie Mac and Fannie Mae]” because they were still very much viable institutions was disingenuous, ludicrous, and a purposefully misleading statement intended to defraud millions of investors. In response to Paulson’s ludicrous claim, I stated,

“the official cost of the $200 billion for the bailout of Fannie Mae and Freddie Mac is highly delusional and grossly underestimated. The final cost is much more likely to be north of $1 trillion.” [author’s comment: $200 billion was the figure that then U.S. Treasury Secretary Hank Paulson was selling to the American people as the total cost to bailout Fannie Mae and Freddie Mac].

As I’ll explain later in this article, the costs to bailout now nationalized Freddie Mac and Fannie Mae, has already ballooned to a figure well north of $1 trillion and we’re still counting. Unfortunately, it appears if the largest robbery of the 21st century will now be surpassed by an even greater robbery.

The Failure of U.S. Federal Reserve Interest Rate Cuts

As I predicted above, because the intent of the $850 billion bailout plan was always to transfer wealth from American taxpayers to Wall Street and big banking executives, the bill thus far has been an utter failure other than its successful redistribution of U.S. taxpayer money to Wall Street and U.S. financial executives. Whether the intent of this bill changes at all under the Obama administration remains to be seen.

When this bailout plan failed to reinstate consumer confidence and U.S. and global stock markets continued to plummet, the U.S. Federal Reserve opted to emulate Japan by cutting the key interest rate in the U.S., the Fed Funds rate, to virtually zero, even though the Bank of Japan’s decision to do so created more than two decades of recession in their own country. The Feds then entered stand-by mode for a couple of months to observe if slashing the Fed Funds rate to 0.00% to 0.25% would be enough to turn around the U.S. stock markets.

The Failure of Recent U.S. Treasury Auctions

However, after it became clear that this series of desperate rate cuts would accomplish very little, the U.S. Treasury embarked upon an ambitious plan to raise money for U.S. government bailout programs by holding record size auctions in U.S. Treasury bonds and notes in March of 2009 despite dwindling global confidence in the U.S. dollar. (To read about my predicted failure of these interest rate cuts, refer to my September 19, 2007 article “Why the Fed’s 0.50% Rate Cut Won’t Save the Markets” and my January 24, 2008 article “The 0.75% Federal Reserve Interest Rate Cut: A Recipe for Future Disaster”)

As a means to raise cash for the U.S. government, the most recent U.S. Treasury auctions were largely a failure, as purchases of longer term notes and long-term bonds were revealed to be weak among Primary Dealers. Of $17.9 billion of 30-year Treasury bonds tendered in this month’s most recent U.S. Treasury securities auction, Primary Dealers only accepted $4.8 billion; of $31.7 billion of 10-year Treasury notes that were tendered, Primary Dealers only accepted $13.0 billion. (Source: U.S. Department of Treasury).

The Nuclear Option is Now in Play

Although the above review of the failures of recent U.S. monetary policy decisions is brief, a discussion of the extent and breadth of attempts to revive the U.S. and global economy without sustainable success is important to understand the critical nature of the next phase of monetary policy decisions. I have opted not to discuss the reasons for the failures of these attempts in detail in this article as the linked articles above discuss in greater detail the reasons why these programs were and are destined for failure, With monetary policy options nearly exhausted without any sustainable results, the U.S. Federal Reserve signaled to the world its willingness now to place the nuclear option, the risk of severe monetary supply expansion, in play now.

On March 18, 2009, the U.S. Federal Reserve announced that it would step in and support the fledgling market for U.S. Treasury bonds with a $300 billion purchase. In addition, they announced that they would also purchase $1.45 trillion worth of Fannie Mae (FNM) and Freddie Mac (FRE) securities as well. And believe it or not, there’s more. Over the weekend, in an effort to shore up the quickly-heading-to-bankruptcy fate of the big banking sector in the U.S., the U.S. Treasury and the U.S. Federal Reserve have allegedly been seriously discussing the commitment of an additional $1 trillion to buy toxic U.S. banking assets that are essentially worthless.

Before I proceed with the explanations of why this scam will overshadow all previous scams to date, let me be clear that understanding and predicting the progression of this crisis has not been difficult as long as one steers well clear of the squawk boxes on CNBC and the mainstream financial media. As a prime example, consider that in response to the $300 billion Federal Reserve commitment to buy U.S. Treasury securities, Sung Won Sohn, an economist at California State University, declared, “this is going to help everybody”. By my analysis, this decision will help virtually no one.

In any event, the real problem lies in the answer to the question, “Where exactly is the Federal Reserve getting all this money that may end up expanding their balance sheet by more than $3.5 trillion in a relatively short period of time?” Certainly the $300 billion commitment to buy 2-10 year Treasury notes to shore up the Treasury securities markets will almost certainly be printed out of thin air, not only expanding the monetary base but also the monetary supply.

Furthermore, there is also a very strong probability that much of the trillions of additional dollars that the U.S. Federal Reserve is committing to Fannie Mae, Freddie Mac, and major US banks will also end up being printed out of thin air, thus significantly expanding the current global monetary supply. If we take a look at the explanation for where the $1 trillion to buy toxic bank assets is coming from, here is the breakdown we are given thus far: $150 billion from TARP, $850 billion from the FDIC in the form of debt, and $30 billion from hedge fund and pension fund managers.

To realize how foolish the funding for this plan is, consider that the FDIC’s capitalization plunged by 64% in 2008 to a lowly $19 billion, due to the failure of IndyMac (IDMC.PK) and other U.S. banks. At the end of 2008, $19 billion represented a tiny 0.4% coverage of U.S. banking assets. Frankly, the FDIC’s extremely leveraged position is every bit as precarious and dangerous as the leveraged positions that caused AMBAC, MBIA, AIG and other US financial institutions to collapse.

Throw in the fact that the FDIC’s leveraged position has grown even greater because of the 18 U.S. banks have already failed in 2009, and it doesn’t take a genius to figure out that there is no sane methodology to the FDIC assuming an additional $850 billion in debt. Even if the Depositor Protection Act of 2009, appropriately also known as the Dodd-Crapo bill, eventually passes and grants the FDIC $500 billion in additional funds to shore up its risky capital situation, this will likely be another $500 billion created out of thin air. Frankly, it doesn’t matter if you want to call this quantitative easing or debt monetization, the end result will very likely be the same – massive increases in monetary supply.

So it is with great confidence that I state that the end result of all these above actions will not bode well for the average investor, even if the end result is a global stock market rally. Why? Global stock markets can NOT experience significant recoveries in the near future without accompanying significant devaluations of global fiat currencies, because the fundamental problems of the economy are not being addressed in any of these proposed solutions.

As I’ve stated many times before, no government in the world has yet implemented a single, sane policy directive that addresses the root cause of this global economic meltdown – an unsound monetary system. Thus, major global banking institutions worldwide are still as fundamentally unsound as ever despite recent bounces in stock prices. I am quite confident in saying that throwing a freight ship cargo of money at these institutions will not fix any of the problems that have made them unsound, will not improve in any capacity, their risk management procedures, and will not contribute to solving the massive global problem that is the largely unregulated $600 trillion derivatives market.

The Currency Race to the Bottom has Officially Begun

And lest we make the mistake of believing that it is just a foolish agenda that the U.S. Federal Reserve is currently pursuing, the Bank of England, and the European Central Bank along with select EU Central Banks such as the Bank of Switzerland, as well as may Central Banks in Asia have also engaged in equally destructive monetary policies as of late. And as if this was not enough to put the fear of God in everyone regarding the fate of fiat currencies around the world, according to the U.K. Telegraph, U.K. Chancellor of the Exchequer Alistair Darling has been meeting with senior U.S. Treasury members to finalize a plan for the International Monetary Fund [IMF] to issue hundreds of billions of dollars of a digital form of money called Special Drawing Rights (SDRs) to world governments.

Basically, this IMF directive is a duplication of the Federal Reserve’s plan of flooding U.S. financial institutions with the creation of new dollars, with digital SDRs assuming the role of the U.S. dollar, and the IMF assuming the Federal Reserve’s role of money supply expansion. Under the direction of U.S. Treasury Secretary and ex-New York Federal Reserve Branch President Timothy Geithner, the global financial monetary system has quickly sucked all major players into a destructive currency devaluation race to the bottom.

To explain why the counterintuitive notion of a recovery of global stock markets encouraged through foolish monetary policy instead of a concerted effort to fix the broken global monetary system is bad for every single person invested in traditional stock markets anywhere in the world, I am going to use a chart to illustrate my point.

In this chart, I've reconstructed the performance of the S&P 500 on a
non-inflation adjusted basis versus an inflation-adjusted basis for the period beginning January, 2003 until March, 2009.

In constructing this chart, I did not use the U.S. government’s officially reported inflation numbers for the time period represented because the government’s reported numbers are not at all representative of true inflation. Over the past two decades, under the direction of Alan Greenspan and the Clinton administration, the formula used to calculate inflation in the U.S. has been changed so many times that it no longer remotely resembles the inflation formula that was once used.

Due to these changes, official U.S. government inflation figures have become grossly distorted and erroneous and have not remotely resembled the true rates of inflation for at least the past two decades. Consequently, I have used the official U.S. government Bureau of Labor formula from 1980 to determine inflation rates in the construction of the above chart, for the 1980 formula more closely represents true rates of inflation.

Using the 1980 formula, inflation rates from 2003 to 2009 varied from 8% to about 13%. In 2004, when the S&P 500 gained about 9%, the true inflation rate was also approximately 9% for the year; thus, the inflation-adjusted S&P 500 index shows zero gain, and so on. Please note that there are other factors, for the sake of time, that I did not take into account, like capital gain taxes in the inflation-adjusted index that would further deflate its gains (so in reality, the inflation-adjusted gains as indicated in the above chart are actually too generous).

As well, for the sake of time, I did not seek exact monthly CPI numbers for each year using the 1980 U.S. Bureau of Labor formula to determine each year’s true rate of inflation but merely used an annual approximation of the inflation rate. Still, even though I constructed this chart with a slight margin of error, this is irrelevant to the point I am trying to make, as the point of the chart is still very much valid.

The chart above illustrates the importance of always taking into consideration the effects of monetary supply expansion into real returns. Without taking into consideration the effects of monetary supply and inflation, for the past 6+ years, if one was invested in U.S. markets, despite the enormous recent decline in these markets, one may falsely believe that one has only lost about 23%.

However, if you now take into effect the serious devaluation of the U.S. dollar during this same time period and the effects of this devaluation upon your purchasing power, your 23% loss suddenly becomes a much harder to swallow 65% decrease in real wealth. Now consider that all major Central Banks around the world are actively engaging each other in a game of financial chicken that almost certainly will make the currency devaluation of the last 6 years appear mild in comparison to the effects all of us will feel through this “invisible tax” in the near future.

Thus, should major global markets rise significantly, this event will almost certainly be accompanied by major devaluation of all major global fiat currencies. One must realize that a 20% bump higher in U.S. stock markets is of absolutely no benefit to an investor, if this bump higher is solely caused by a 20% devaluation of the U.S. dollar, or heaven forbid, a 30% devaluation of the dollar. Likewise, a 20% bump higher in the ASX index in Australia is of zero benefit to any investor if the Australian dollar has devalued by 25%, and so on. And once you figure in capital gain taxes that will be paid on illusory returns in global stock markets if they materialize, the real wealth of investors will have been eroded even further.

You can be assured that if you live in the UK, Germany, Spain, Canada, Brazil, or any other major global capital market, that this situation also applies to you as an investor. It matters not if the valuations of these indexes increase the amount of U.S. dollars, Canadian dollars, Brazilian reals, or Euros in your pocket. What is the ultimate measure of real wealth is the purchasing power of your money. If this has declined significantly, then you may be left with a greater amount of money but in a financial nightmare that has actually left you poorer.

However, I am still unconvinced that we have yet seen the bottom of major stock markets around the world. If we do receive a global stock market rally for several weeks or months, surely this event will be accompanied by joyous headlines in all major financial media outlets declaring the crisis as over. But after reading this article, you should know better. This is the conundrum we face today - rise or fall, and it still remains a possibility that a significant rebound of 20% or higher may not even materialize despite the nuclear option being unleashed - being invested in traditional stock markets is likely to be terrible to the bottom line of your real wealth.

Large profits will still be made in this environment, but the best ways to invest in gold and silver and other select commodities, and not traditional markets, are likely to produce them. As the race to the bottom for fiat currencies progresses, gold and silver should finally have their day in the spotlight, and the likelihood that price suppression schemes against gold and silver in the COMEX futures markets will remain as effective as they have in years past will diminish as the present monetary crisis grows in seriousness.

In conclusion, if a U.S. Federal Reserve inspired bounce occurs in the U.S. stock markets, if a Bank of England bounce occurs in the U.K. stock markets, if a ECB inspired bounce occurs in any European stock market and so on, this is a doomsday scenario for investors as it can only happen if the Central Banks’ plan of money supply expansion and monetary valuation implosion succeeds.

And if it does, they will have pulled off in essence the biggest stock market scam of the century under the guise of a massive global monetary devaluation scheme that very few people will fully understand. Realizing the implication of the above charts as well as the likely effects of these Central Banks policies on the world’s money supply should scare the hell out of everyone to a far greater degree than $50 billion Ponzi schemes and $200 million bonuses to failed financial companies.

In writing this article, I am not asking anyone to blindly agree with me, but I do hope that this article inspires enough of you to forward this article to everyone you know so that we can foster a truly intelligent debate about this matter. In the process of starting an intelligent debate, we will educate instead of misinform, gain more clarity about the origins of this crisis instead of shrouding it in secrecy, and ultimately, illuminate the true culprits of this deepening global economic crisis – the Central Banks.

Comments

[yellowhoard:]

Great article! Again!

I'll pass this on to my freinds.

Mar 24 09:26 AM

[phdinsuntan...:]

sure, but guess who needs to be sacrified more deeply for "gold and silver finally have their day in the spotlight " the UK, Japan, China, the EU, will have the worst part in a "return to Bretton Woods". Take care what you wish, maybe you can get it...

Leverage of M1 in Relation to Central Bank Gold Holdings, Selected Countries (*)

US$ bn M 0zs U S$/Ozs Leverage
M1 Gold Reserve (1) US$ Currency/Ozs

USA 1388 262 5,298 1.0
Switzerland 257 36 7,139 1.3
Rest of the World 2596 208 12,481 2.4
EU 13 6072 290 20,938 4.0
China+ Hong Kong 2236 20 111,800 21.1
Japan 3641 25 145,640 27.5
United Kingdom 1990 10 199,000 37.6

Total Sample
90% world 18180 851 21,363 4.0

Selected Countries 15584 643 24,236 4.6
(1) ECB+Germany France+Italy, (*) First half 2008

Mar 24 10:01 AM

[sdavid0419:]

good summary of everything I've been spousing for some time now. What I'm unclear about is the bottom line. Once we've printed all the money we can and bailed out all the people that should be going to jail and bankrupting innocent citizens begging our representatives to stop this insanity. What happens next? Do we become indentured servants to the creditors of the elected caval that chose to do this to us? In the great debate of the lie that "we have to do this because the alternative is not acceptable" I am quick to point out what we are really talking about since I have forced this debate to full conclusion with people that I consider intellegent enough to represent the opposing point of view. That is, should we allow big business to go bankrupt and start completely anew from the ashes with hopefully more honest and caring merchants or should we once again do wealth reassignment and bankrupt every US citizen of all their life savings along with untold generations to come (as if when they arrive they are going to be crazy enough to accept the fact that they are burdened with debt that had nothing to do to create) and save the crooks that put us in this position? You people that thought Obama's "CHANGE" meant from big business to private citizen could not have been more incorrect.

Mar 24 10:09 AM

[Conan the B...:]

YH: You're kidding right?
This isn't an Article, its a Booklet.
A month ago, it was sell gold, now its buy gold.

His quote: "One must realize that a 20% bump in US stock markets is absolutely of no benefit to an investor, if this bump higher is soley caused by a 20% devaluation of the US dollar or, heaven forbid, a 30% devaluation of the dollar."

I beg to differ, I would have 20% more USD's to combat the Devaluation than I would have had I not been invested. If US stock markets climb in parity to the USD devaluation, I would have to be a fool to sit on the sidelines watching the USD go down and the Stock Markets rise.

If I stay within the confines of the USA, I can either maintain my lifestyle or lower my quality standards slightly to allow for Additional Stock Purchases.

No Benefit? How about a Psychological one in the Form of watching your 401Ks go up for a change?

If the current move can retain most of its gains through the end of the month, the Impact on 401Ks will help mitigate the prevailing Doom and Gloom amongst the people, they might actually buy something.

Mar 24 10:14 AM

[J. S. Kim:]

paultaut,
A month ago, I said a gold correction would happen and it did. So that people would not misinterpret that particular article of mine, I stated: "But don’t misinterpret my message. Physical gold is one of the most conservative investments you could own right now." I couldn't have been more explicit in that statement that I was not advocating selling gold.

As well, advocating a new investor to wait for a better entry point to buy gold, which indeed materialized as I predicted, is a vastly different thing than advocating selling physical gold, which I have not never advocated a single time since I started publicly writing about the virtues of gold in 2006 on my blog.

During a monetary crisis, there are always much better means of not only maintaining the purchasing power of your dollars but far exceeding in gains, the equivalent decline that occurs as a result of rapid and significant monetary expansion.

Thus, I would still never invest in traditional stocks in the hopes of maintaining the purchasing power of my dollars, especially when there is no fundamental backing to this brief rise we have experienced so far. Investing in assets that will benefit from this monetary crisis, assets that have produced significant profits for the past several years, is a much better approach.

Mar 24 10:34 AM

[Moon Kil Woong:]

Thanks for your insight. Personally, what you are seeing is the sheep being shorn as all assets migrate towards the banks and financial institutions. Despite their loosing massive sums of money their global take of the market is increasing while the rest of the market and public assets shrink.

Today the Treasury and Fed which has prevented bad financial institutions from going bankrupt just announced that they want to be able to seize any company they think is a threat to financial security. Why? Because bankruptcy doesn't work for companies like AIG because the Fed and Tresury prevented them from going into bankruptcy? The medicine they propose is exactlyt the cure for the disease they are creating.

Constitutionally taking any company into conservatorship without regards to solvency puts the whole notion of capitalism, private ownership, and rule of law into question. The fact no one even mentions this insult on the free market is appaling.

While you worry about your pocketbook they are stealing away your rights.

Mar 24 10:35 AM

[pacman1947:]

Mr. Kim,
It has been 40 years that I have invested in global markets, and I have seen much that would be material for booklets and "Investing For Dummies" that I wish I had chronicled as it happened. Nearly all of the worst and unpredictable impacts on global financial and monetary markets have occurred because of government interference, acts of insanity, and acts of violence. I have seen them all. This last few years, and the last few months, have combined all of the worst ideas and fantasies of so-called leaders. Their actions may literally destroy the entire wealth system for everyone. Well, nearly everyone.

So, what to do? If you sit on your assets, they devalue with inflation. If you invest in gold, you have gold, but what do you do with it? If you buy land, and move there, how do you support it? If you buy bonds, you can live off a diminishing value cash stream, and lower your standard of living. Of all these, you say gold. I sat on gold Krugerrands for nearly thirty years to see them recover only a third of the present value cost to me in the late '70s. They sit in a safe deposit box, gathering dust.

So, what's left? If you buy stocks, you play the game in the casino. The dies fall as luck would have them. They go up, and down. I play the game, and win sometimes, and lose the rest.

I am no pundit, and no great purveyor of wisdom. I can only tell you this:
You may be right today, and wrong tomorrow. Investing is a gamble. The psychology of the markets drives the price fluctuations. The only way to win is to have the right measure of psychological forces, and flow with the direction. If that sounds profound, it isn't. It's merely an observation.

Good luck with the predictions.

Mar 24 10:48 AM

[SmBlkBob:]

Simple really.

You can't print endless money without it being worth less at some point. Worth less means items cost you more to buy.

Gold might be the play but will still not match the amount of inflation coming. Will just make it easier to bear. Stocks won't come close to breaking even long term.

Bob

Mar 24 12:20 PM

[yellowhoard:]

I think we're all looking at the same problem with different time frames in mind. Over a long period of time, the author makes a very good point. Over the short run, we'd all be fools not to double down on inflation sensitive securities.


On Mar 24 10:14 AM paultaut wrote:

> YH: You're kidding right?
> This isn't an Article, its a Booklet.
> A month ago, it was sell gold, now its buy gold.
>
> His quote: "One must realize that a 20% bump in US stock markets
> is absolutely of no benefit to an investor, if this bump higher is
> soley caused by a 20% devaluation of the US dollar or, heaven forbid,
> a 30% devaluation of the dollar."
>
> I beg to differ, I would have 20% more USD's to combat the Devaluation
> than I would have had I not been invested. If US stock markets climb
> in parity to the USD devaluation, I would have to be a fool to sit
> on the sidelines watching the USD go down and the Stock Markets rise.
>
>
> If I stay within the confines of the USA, I can either maintain my
> lifestyle or lower my quality standards slightly to allow for Additional
> Stock Purchases.
>
> No Benefit? How about a Psychological one in the Form of watching
> your 401Ks go up for a change?
>
> If the current move can retain most of its gains through the end
> of the month, the Impact on 401Ks will help mitigate the prevailing
> Doom and Gloom amongst the people, they might actually buy something.

Mar 24 12:28 PM

[Conan the B...:]

JS Kim: Your Article on the correction for gold was published about a week after both YH and I had discussed Gold's drop in March. It happened, we were right. So what, hey, YH, you were right.

You haven't answered the real question?

How is it possible for an Investor not to Benefit from a rise in the Value of his/her holdings by 20% even if the USD drops by as much or more?

The Dollar can collapse but if the Markets continue to Rise, The Investor Will Always benefit from an Increase in their holdings...Always.

The people who will not benefit...will be those that are not Invested in anything, who hold a depreciating asset...USDs.

Mar 24 02:24 PM

[RJ Coupe:]

Dear Mr. Kim,

Congrats on an outstanding article that once again provides solid rationale as to why the monetization by the government...any government, does not work. Every nation in history that created fiat money has went down...for many different reasons but the result is the same. As investors, I agree that we need to selectively invest in solid commodities that maintain value, in spite of what any government is doing. You have done the investment community a real service by providing the detailed explanations and insight in your paper concerning what is going on in the USA ...keep up the good work!

Mar 24 03:23 PM

[coldcut:]

Words of wisdom. I just had to give you a thumb up.


On Mar 24 10:48 AM pacman1947 wrote:

> Mr. Kim,
> It has been 40 years that I have invested in global markets, and
> I have seen much that would be material for booklets and "Investing
> For Dummies" that I wish I had chronicled as it happened. Nearly
> all of the worst and unpredictable impacts on global financial and
> monetary markets have occurred because of government interference,
> acts of insanity, and acts of violence. I have seen them all. This
> last few years, and the last few months, have combined all of the
> worst ideas and fantasies of so-called leaders. Their actions may
> literally destroy the entire wealth system for everyone. Well, nearly
> everyone.
>
> So, what to do? If you sit on your assets, they devalue with inflation.
> If you invest in gold, you have gold, but what do you do with it?
> If you buy land, and move there, how do you support it? If you buy
> bonds, you can live off a diminishing value cash stream, and lower
> your standard of living. Of all these, you say gold. I sat on gold
> Krugerrands for nearly thirty years to see them recover only a third
> of the present value cost to me in the late '70s. They sit in a safe
> deposit box, gathering dust.
>
> So, what's left? If you buy stocks, you play the game in the casino.
> The dies fall as luck would have them. They go up, and down. I play
> the game, and win sometimes, and lose the rest.
>
> I am no pundit, and no great purveyor of wisdom. I can only tell
> you this:
> You may be right today, and wrong tomorrow. Investing is a gamble.
> The psychology of the markets drives the price fluctuations. The
> only way to win is to have the right measure of psychological forces,
> and flow with the direction. If that sounds profound, it isn't. It's
> merely an observation.
>
> Good luck with the predictions.

Mar 24 05:12 PM

[User 154029:]

Hi,

I completely agree that its not right solution. But should we assume that whole banking system is just fraud? Our economies are not bunch of cards that would fall because more money was printed.

May be Feb will take out the money at right time to restore the value of dollar once upturn of economy starts. And may be these boosting tactics would work? Is there better way to manage than just letting everyone fail?

Sachin

Mar 24 05:27 PM

[Mad Hedge F...:]

Pimco things so. “I said a few months ago that Washington was all in. We are now all in squared. The FDIC, Fed, and the Treasury are making a concerted effort to turn deflationary swamp water in inflationary wine.” Ah, Paul McCulley, man of Virginia, you have such a way with words. PIMCO must love you. I agree.

Mar 24 08:06 PM

[Vuke:]

It seems there is no safe alternative today except a store of gold and silver as an insurance policy. It may not show a huge return, on the other hand it may.

The alternative, betting all on a recovery or individual stocks or currencies leaves one open to potential disaster. I prefer to sleep knowing it can't all go away. The violent currency swings and market oscillations we are now seeing indicate underlying stress that, like a volcano, will soon explode.

The distress and action of the Fed is signal enough. We have not been told their greatest fears.

Mar 25 12:05 AM

[Conan the B...:]

Pacman1947: Investing is a gamble and you go with the flow. That's my entire premise.

But I also like to include a bit of Insurance now that I have vehicles which were not available the last time around. ETFs of all sorts, long and short.

The last time around? 1969-1982.

Vuke: read a few more past Articles and comments. Believe me when I say, whatever their greatest fears are, we have posited worse including States separating from the Union and another Civil War.

Mar 25 01:15 AM

[Vuke:]

I believe you. Historically wars, invasions, dictatorships and internal strife begin and end on underlying economic shifts.

Let us hope the worst we face is inflation.


Believe me when
> I say, whatever their greatest fears are, we have posited worse including
> States separating from the Union and another Civil War.

Mar 25 01:42 AM

[Al-USA:]

Excellent article Mr. Kim. I will indeed forward it with my own summary. Thanks for taking the time to put this down on "paper".

Mar 25 03:04 AM

[odessa88:]

great article , thank you for taking the time to write it.

Mar 25 10:37 AM

[fireball:]

mr kim
thank you again. i have been adding to my silver systematically over the last year. i am waiting to add to gold for a bigger correction. i am starting to wonder if the wiser approach would be similar to the silver approach. buy on the dips. i know i want to increase my "insurance policy".
maybe it is foolish but i have been picking up some oil and gas explorers lately thinking they may make a good trade reasonably soon. i had great luck with gold explorers.
it is starting to feel like the planned destruction of the middle class. if you were successful and frugal we want your ass ets.

Mar 25 01:33 PM

[Davinci:]

Pacman1947: Your comments sums up the delusion of the masses and "The psychology of the markets". Like most you can not see what is going on as it's happening to slowly for you to perceive it. Much like a slowly boiled frog.

1. The paper money system can not work long term any more than paying someone a penny and doubling it every day they work. The same exponential curve occurs with paper money at a low interest rate. Start with 1 ounce of gold at 2% annually and in 6000 years you would own every atom in the universe and it would be gold. Now start off with $15 Trillion (current M3) and see what I am getting at.

2. If you had purchased gold with you your retirement savings over the past 40 years you would have cost averaged out better than the market. Also if a gold coin is sold to a person privately, did it happen thus requiring a 1099 form?

3. Every religion on this planet tells you not to collect interest on money the reasons are explained above. Gold or silver is the only money in the world that men can not counterfeit and only God can provide.

I understand where your are coming from and only after reading many book on money did I obtain my clarity of though and purpose. So after reading my comment I expect most people to dismiss what I have said and continue doing what they do today. It is my hope that some will read this and take action to gain the same clarity that Mr. Kim and I have, and prosper.


On Mar 24 10:48 AM pacman1947 wrote:

> Mr. Kim,
> It has been 40 years that I have invested in global markets, and
> I have seen much that would be material for booklets and "Investing
> For Dummies" that I wish I had chronicled as it happened. Nearly
> all of the worst and unpredictable impacts on global financial and
> monetary markets have occurred because of government interference,
> acts of insanity, and acts of violence. I have seen them all. This
> last few years, and the last few months, have combined all of the
> worst ideas and fantasies of so-called leaders. Their actions may
> literally destroy the entire wealth system for everyone. Well, nearly
> everyone.
>
> So, what to do? If you sit on your assets, they devalue with inflation.
> If you invest in gold, you have gold, but what do you do with it?
> If you buy land, and move there, how do you support it? If you buy
> bonds, you can live off a diminishing value cash stream, and lower
> your standard of living. Of all these, you say gold. I sat on gold
> Krugerrands for nearly thirty years to see them recover only a third
> of the present value cost to me in the late '70s. They sit in a safe
> deposit box, gathering dust.
>
> So, what's left? If you buy stocks, you play the game in the casino.
> The dies fall as luck would have them. They go up, and down. I play
> the game, and win sometimes, and lose the rest.
>
> I am no pundit, and no great purveyor of wisdom. I can only tell
> you this:
> You may be right today, and wrong tomorrow. Investing is a gamble.
> The psychology of the markets drives the price fluctuations. The
> only way to win is to have the right measure of psychological forces,
> and flow with the direction. If that sounds profound, it isn't. It's
> merely an observation.
>
> Good luck with the predictions.

Mar 25 05:48 PM

[Skeptical Ben:]

I remember the 70s. People bought land, gold and silver. Inflation was eating up buying powers, as were high taxes. If you don't have 25% of your liquid assets in gold and inflation protected govt. bonds you risk being blindsided by volatility in a year or three.


On Mar 24 12:20 PM SmBlkBob wrote:

> Simple really.
>
> You can't print endless money without it being worth less at some
> point. Worth less means items cost you more to buy.
>
> Gold might be the play but will still not match the amount of inflation
> coming. Will just make it easier to bear. Stocks won't come close
> to breaking even long term.
>
> Bob

Mar 26 02:06 AM

[GeorgeSecond:]

You're kidding right? According to your chart there's been over 100% inflation between 2003 and 2005. This simply isn't true.

Mar 26 03:37 PM

[User 384490:]

I'm curious about the use of the 1980 inflation formula. As an Economist, I'm well aware that the current method of CPI adjustment is hardly accurate, but it's not totally inaccurate either. It's been altered to accomodate the adjusted spending patterns of individuals over time. The 1980 formula cannot come close to being accurate as a different % of incomes are being spent on items such as food/clothes/energy/ho... and other newer items are available for sale which are desirable and purchased in larger numbers (against a base of zero - the increase in purchasing of IPods in 2008 versus 1980 is pretty huge).

So the use of the 1980 formula is not accurate, either.


On Mar 24 10:34 AM J. S. Kim wrote:

> paultaut,
> A month ago, I said a gold correction would happen and it did. So
> that people would not misinterpret that particular article of mine,
> I stated: "But don’t misinterpret my message. Physical gold is
> one of the most conservative investments you could own right now."
> I couldn't have been more explicit in that statement that I was not
> advocating selling gold.
>
> As well, advocating a new investor to wait for a better entry point
> to buy gold, which indeed materialized as I predicted, is a vastly
> different thing than advocating selling physical gold, which I have
> not never advocated a single time since I started publicly writing
> about the virtues of gold in 2006 on my blog.
>
> During a monetary crisis, there are always much better means of not
> only maintaining the purchasing power of your dollars but far exceeding
> in gains, the equivalent decline that occurs as a result of rapid
> and significant monetary expansion.
>
> Thus, I would still never invest in traditional stocks in the hopes
> of maintaining the purchasing power of my dollars, especially when
> there is no fundamental backing to this brief rise we have experienced
> so far. Investing in assets that will benefit from this monetary
> crisis, assets that have produced significant profits for the past
> several years, is a much better approach.

Mar 27 05:41 PM

[User 384490:]

You are wrong. Investing is not gambling. If you manage risk with ANYTHING, you can come out ahead. But if you invest purely on HOPE, you will lose every time. This is why I could not vote for a man who sold his campaign on the concept of HOPE. HOPE is the refuge of those who the facts have abandoned.

If Mr. Kim's doomsday scenarios are true, even gold is a lousy investment and it matters little where you put your money. The issue RIGHT NOW is currency debasement. But the problem isn't the monetary system per se. Fiat currencies fail due to lack of political will, not because they are inherently wrong. Fiat currencies wouldn't exist if Gold was a perfect model for currency - if it were perfect, then it would still be the standard in every nation. Sadly, the limited amount of gold means that growth can only occur if monetary velocity increases constantly. Monetary velocity is a sticky thing. It needs help from time to time, which is why fiat currencies exist.
But the danger of fiat currencies is exactly what is happening now - the printing of money with ad hoc abandon. Switching to gold won't solve anything. In fact, in the short run it will create more problems than not.


On Mar 25 05:48 PM Davinci wrote:

> Pacman1947: Your comments sums up the delusion of the masses and
> "The psychology of the markets". Like most you can not see what
> is going on as it's happening to slowly for you to perceive it.
> Much like a slowly boiled frog.
>
> 1. The paper money system can not work long term any more than paying
> someone a penny and doubling it every day they work. The same exponential
> curve occurs with paper money at a low interest rate. Start with
> 1 ounce of gold at 2% annually and in 6000 years you would own every
> atom in the universe and it would be gold. Now start off with $15
> Trillion (current M3) and see what I am getting at.
>
> 2. If you had purchased gold with you your retirement savings over
> the past 40 years you would have cost averaged out better than the
> market. Also if a gold coin is sold to a person privately, did it
> happen thus requiring a 1099 form?
>
> 3. Every religion on this planet tells you not to collect interest
> on money the reasons are explained above. Gold or silver is the
> only money in the world that men can not counterfeit and only God
> can provide.
>
> I understand where your are coming from and only after reading many
> book on money did I obtain my clarity of though and purpose. So
> after reading my comment I expect most people to dismiss what I have
> said and continue doing what they do today. It is my hope that some
> will read this and take action to gain the same clarity that Mr.
> Kim and I have, and prosper.

Mar 27 05:48 PM