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  • The End Of The Fiat Money Era: The Real Ponzi Scheme
     Fiat - Latin for "let it be done" is coming unglued before our very eyes, though most have chosen not to acknowledge it. At it's core, it is nothing but a Ponzi Scheme on a immeasurable scale. 

    Post Bretton Woods - When the U.S. decided to abolish the gold standard, and adopt the USD as the reserve currency, we ensured the eventual collapse of the then modern fiat money system (see: From Bretton Woods To World Inflation, Henry Hazzlitt, 1974) It was a ponzi scheme in the sense that is has allowed us, over the decades to amass enormous debt without the slightest chance of ever re-paying it. We spent this dead, squandered it on useless government work programs, stimulus packages and to fund the numerous bankrupt industries run by the government ( see Amtrak , The Post Office , Roads , Banks , Housing and everything else under the sun). Everyone knows government officials can't even find their way out of a paper bag, let alone operate the largest industry in the nation. Many of them, mainly Bernanke likely work for the government due to a of a real skill set an inability to be sucessful in private industry.

    Of course no one has called this a ponzi scheme, probably because we are engaging in fraud at the cost of our creditors. We try to lie to them by saying we promote "A Strong Dollar Policy". Instead of flowing funds from one investor to another in case one wanted to cash out, we merely call upon our trusted printing press to avoid the problem that such people as Charles Ponzi and Bernie Madoff had. This, however, is even more devious because we act as if we are making good on our promises, but instead making the money worthless via inflation in order to avoid and refute that argument. 

    A simple comparison between a democracy and a monarchy can help expand upon this further. In a democracy government officials have a limited time in office and are soon forgotten thereafter. This enables them to engage in destructive policies just so that they can accomplish their individual goals as the reprecussions will be felt by those who replace them in the near future. Though I'm not promoting monarchy, imagina a king who someday wants to give his kingdom to his son. He will seek to keep the people happy and avoid exploitation, for if only one man were responsible for the happeninigs in an econnomy, he would not only have to worry about maintaining his role but worry about revolution or attempts on his life. 

    What I am trying to get at in these brief paragraphs is that any fiat system is bound to collapse due to the inherent nature of government's desire to gain a stranghold over the economy and maximize thier influence. In our case, it has been done via war, government programs, inflation, etc. A 100% gold standard would prevent these from occuring due to the basic mechanics underlying this system. It goes as follows: Inflation would only be possible as fast as gold could be mined ( which the 19th century showed us results in deflation because increases in productivity i.e standard of living negate the 1-2% maximum). Inflating would cause gold to flow out of the country putting a natural check on government control of the mint. This would prevent programs and wars ( though not 100%) because there would be a severe lack of funding. Though this is only a rough explanation of the superiority of a REAL banking system, this is the basic premise.

    Sep 22 2:44 AM | Link | Comment!
  • The Demise Of The Dollar: 2009 The Nail In the Coffin?
    At face value Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV) are merely scratching the surface of the consensus market value. But lets dissect that which is artificially suppressing the current price in addition to rock solid fundamentals. Let's start with the most widely talked about precious metal gold first. Now on its third attempt at convincingly breaking through the $1,000 level, many exogenous factors must be taken into account most notably the Gold Cartel.

    1) For those unfamiliar with the Gold Cartel, it is nothing more than the worlds largest banks initiating massive short interest every time gold heads to $1,000. But it doesn't take a rocket scientist to realize this is by request of the FED. Though I have no factual evidence, should the banks fail to suppress the price (which is inevitable), the FED will merely inject more reserves into the system. The current short interest by these "financial giants" or more accurately "puppets of the fed" is at record high's yet gold has maintained its longest time above $1,000. This smells like consolidation, or in other words, the continued strength of gold in continually making higher lows. Is $1,000 the floor now? Maybe not, but it will sure in the high 900's.

    2) Gold is being attacked not only by the gold cartel but by the IMF who recently announced a planned sale of a rather significant magnitude. Somewhere in the neighborhood of 40 million tons (though I may be mistaken). But Gold and Silver (which I am personally more bullish on) continues to trend higher, seemingly unaffected by any happenings in the market. Why is this happening?

    3) Well in my opinion there are several reasons for this type of reaction, all of which are deeply intertwined in the underlying cause. It may be easiest to begin starting in November of 2008. At this time enormous stimulus packages were agreed on (both in the U.S and internationally), exponential expansions of excess reserves in the U.S and to a lesser degree in Europe, Unprecedented increased in the monetary base both by the FED and ECB combined with artificially low interest rates around the world (making way for a future of global inflation of varying degrees), Bailouts that have now amassed over 10 trillion ( excluding the FED's purchase of almost worthless agency and commercial paper in addition to debt monetization and trillions of even more worthless mortgage backed securities. If that isn;t enough we have increased our public debt to nearly 13 trillion (making just the interest payments nearly impossible to service for a sustained period of time). This brings us up to approximately march or April 2009. 

    4) This was more or less the time where China and other creditor nations began to express their deep concern publicly ( What do you think was said behind closed doors?). This was soon followed by the Chinese announcement that they will begin using Yuan swaps with other international trading partners, further showing their increased concern over the USD. This was soon followed by even more announcements that became even more indicative of their state of mind. They publicly agreed to trade with Brazil in both their respective currencies (which is likely to spread to many other major trading partners). I can't fail to mention masses of Chinese students laughing Timothy "I am exempt from the income tax" Geithner being laughed off stage when promoting a "strong dollar policy". 

    5) Now we come to the Japanese, who are finally getting in touch with reality as the new regime takes the reigns. They made it clear buying more U.S debt isn't gonna happen in this lifetime and their focus is on the domestic economy, not propping up the phony U.S pipe dream. This followed the multiple U.S debt auctions (which have double mid/long term yields in just 6 months) (NYSEARCA:TBT) , (NYSEARCA:TLT) and their secret but brilliant approach to dealing with the U.S. On the surface they appeared to have been buying our debt but rather they were swapping long maturity treasuries for short term treasuries so that by the time it mature it is not completely debased.

    6) I previously mentioned in another post the ensuing bankruptcy (though it will be bailed out) of the FHA ( the largest holders of mortgages). They have a mere 35 billion in loan loss reserves for well over a billion of outstanding mortgages ( Yeh, that will cover the the hundreds of billion of defaults as unemployment surpasses double digits and the majority of ARMS reset!). Even worse is the furious pace they are originating new loans to the most unqualified individuals with less than 2% down when you include the tax credits. This is basically No money down! Aren't all these same policies the ones who dug us this ditch and making hyperinflation a possibility?

    USD index at 130+ in 2000....... 90 in 2008.......76 thus far in 2009 ( and you haven't seen anything yet)..You decide.. (NYSEARCA:UDN)

    Disclosure: Long TBT, TLT CALLS
    Tags: GLD, UDN, SLV, TLT, TBT, inflation, bonds, gold
    Sep 20 9:14 PM | Link | 1 Comment
  • More Trouble on the Horizon

    Although many people don't realize the true meanining of inflation, it is not important as long as we stay consistent. Okay let's assume inflation is an unneccessary increase in the price of goods and services. Well let's get this deflation non-sense out of the way as credit doesn;t dissappear should it be malinvested. The argument for deflation presupposes somehow there is a destruction of "monies" due to malinvestment and or credit defaults. 

    Well I'm not eintstein but things don't just dissappear into thin air as the masses are claiming. Don't you find it odd that one of the shining characterstics of the prosperous 19th century was a constant existence of deflation. This is because productivity increased faster than the money supply ( which can be attributed to a 20%+ reserve requirement which the banks were responsible to maintain as well as having outstanding credit backed partly by gold. This was also during the "free banking era when Andrew Jackson abolished what is similiar to a central bank but with a slighly different dicatomy). Deflation IS part of a free market as it actually increases the purchasing power of the currency and thus the overall standard of living. But doesn;t anyone find it odd that since the establishment of the FED in 1913, the USD has depreciated 96% (lost 96% of its purchasing power). If that wasn;t bad enough, we have slowly but surely ensured the collapse of the USD in the next decade. This didn't come about from Greenspan or Bernanke, although they put several nails in the coffin, but started 40 years ago.

    Post Bretton Woods (It was a terrible system by the way), the USD became the reserve currency. This like welfare or fractional reserve banking is nothing more than a moral hazard waiting to happen. Having paper money, unbacked by real assets or in other words , the government monopoly of the mint is a politicians wet dream. As opposed to a monarchy, who hands down his reign to his son or family, a politician has a short time to accomplish his personal goals as opposed to the peoples. A monarch has to be on his toes and treat the people right so A) he can pass down his kingdom with support from his people to future generations and B) not to abuse his powers as he is solely responsible for the failings of his policies i.e taxation thus upsetting society puts his life in danger. This is not a promotion for monarchy was meant to point out the nature of US politics. Perhaps it is better to think of it as such: "Would you treat a house you leased or a house you bought with more care assuming you would in no way be responsible for any damages?" Moving on..

    The USD being the reserve currency has allowed up to squander nearly 12 trillion from selling interest bearing debt to the public and foreigners. Instead of investing that money prodcutively we sqandered it and now have nothing left. As interest rates (ON LONG BOND) have nearly doubled in 2009, so has a susbstancial portion of the interest of the aforementioned debt. Current conditions are reminiscent of the late 1970's but about 100x worse. That being, lets assume mid and long term rates average 10% going forward. That means we will have to pay out 1.2 trillion out annually to service our debt. We also are spending somewhere in the neighborhood of 800 billion a year on defense (which is now in Afghanistan), 950 Billion (unfunded of course) on medicare and medicaid. This doesn;t seem to outrageous but lets go out 5 years... Interest to service the public debt 1.5 Trillion + 800 Billion on defense + 1.4 Trillion ( unfunded liabailities increase nearly every year) = 3.7 Trillion just on these three things. Add in government programs i.e postal service, Amtrak, HUD, etc and the number start to become very outrageous. Tax revenues will never be able to come close to paying for this and the government will have to print the difference. Deficit spending in FY 2009 using accrual accounting tops 5 trillion dollars excluding nearly another 4 trillion for bailouts. In other words if GAAP accounting were used 2009 would show a deficit of 8 to 9 TRILLION DOLLARS. If that isn't enough....

    The practice of fractional reserve banking is such.. A customer comes in to take out a loan and pay a specified rate of interest plus principal. But the banks do not draw from retained earnings, instead they make a fractional deposit with the central bank which creates the rest out of thin air. For example if John Doe wanted to borrow 1m dollars, the transaction would go as follows... After the terms of the loans are agree upon and John has made the down payment (which has been 0 in some cases), the bank then makes a 100k deposit with the FED in return for an additional 900k creation of fiduciary media out of thin air by the FED. People tend to pay off most loans but when the fed manipulates interest rates causing an intemporal missallocation of resources , investments that originally seemed to be profitable turn out to be malinvestments. This is all well and good of course and long as John can repay the bank through his savings or something of that nature. But what happens when an economies savings rate is negative while there is a housing bubble augmented by no money down loans given to anyone who has a face? DEFAULTS! Defaults have enormous consequnces when done on a large scale- Remember the money the FED created out of thin air? Well now 90% is pure inflation (assuming nothing has been paid back for simplifications reasons). 

     Now when you combine that with easy money policies i,e the nearly immediate availability of credit (a 150%+ increase in the monetary base - the narrowest measure of the money supply), you have a problem similiar to that of Zimbabwe, Argentina, Mexico, Weimar, etc on your hands.) This isn't the great depression when we had a strong economic foundation i.e high savings and being the largest creditor nation instead of the largest debotor nation in history. We didn't have trillions of unfunded liabilities and a trillion dollar a year military empire. We had a good manufacturing base which we have exported and become completely reliant on the service economy.

    Lets add this up- Fiscal Irresponsiility to the highest degree(deficit spending that is unprecendeted in terms of dollar amount), trillions of unfunded liabilities, a 12 trillion dollar debt burden to the public and our trade partners, reckless lending (which is almost forced upon a bank who wished to remain competitive when central banking as opposed to private banking is in play), Trillions worth of bailouts which will be followed by trillions more worth of bailouts as thie fiat money system like every one before it comes crashing down. Well I guess cash for clunkers may just get us out of this mess!

    There are ways to have and continue to benefit from all the excess taking place. Shorting the medium and long bond via (NYSEARCA:TBT) and (NYSEARCA:TLT) would and will continue to reward investors handsomely. Other strategies include buying the (NYSEARCA:GLD) or (NYSEARCA:SLV) which are gold and silver etfs and inflation hedges. But the best way to hedge and even profit from the ensuing wave of inflation is to own such equities like those in the oil patch, gold and silver miners and those who specialize is select agricultural goods. An easy wasy to play oil is (NYSEARCA:DBO) which tracks double oil, (NYSEARCA:GDX) is the gold miners index and (NYSEARCA:DBA) is double wheat, corn, cotton and soybean futures ETF. I have written my previous articles on my favorite industry, the gold and silver miners in which I highlighted such tickers as (NYSE:SLW) , (NYSE:CDE) , (JAG) , (NYSE:AEM) , (NYSE:AUY)


    Disclosure: long slw,jag,auy
    Sep 05 4:50 AM | Link | 1 Comment
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