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Nathaniel Crawford
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Professional Trader.
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Black Swan Insights
  • Time To Dump Your Federal Reserve Notes 0 comments
    Nov 4, 2010 7:33 PM | about stocks: SPY, DIA, QQQ

    We truly live in incredible times when government propaganda is considered truth, and reason has been abandoned. With the recent announcement of QE 2 (code name for money printing), the Fed along with the media has declared to the public that its only desire is to "boost" the economy. Despite the fact that QE 1 did nothing for the real economy, the media elite will continue to claim that money printing helps increase employment and shows the Fed cares about the economy. The Federal Reserve will continue to deceive investors (and our trading partners) by claiming QE 2--and 3,4,5,etc.-- will be temporary and should not be considered debt monetization. Economists will further support the Fed by devising bogus computer models which predict 2-3% inflation for the next decade, confirming the fact that money printing is not inflationary. The deflationists (MISH and others) will continue to lead their flocks astray by saying there can never be inflation without velocity. What they fail to understand is that once velocity picks up, it can accelerate at an alarming rate (sometimes it can go parabolic), and once it does, it is too late. The inflation genie will be out of the bottle. No reverse repo from the Fed to drain liquidity is going to stop it. The great inflation which awaits the US and world economies will take most people by surprise and leave billions of people impoverished. However, the elite will do incredibly well as they own real assets like real estate, operating businesses, and gold.

    The most disturbing fact is that after inflation occurs, the government will continue its deception regarding the true cause of inflation. The President and Fed Chairman will tell the public inflation is the result of nefarious speculators who have driven up prices. Or perhaps the government will follow what President Gerald Ford did in 1974-1975 by announcing an Orwellian police state style "WIN" program, which stood for Whip Inflation Now. This campaign to stop inflation was a fantastic farce, considering that the government itself was responsible for the inflation, courtesy of the Fed printing money and excessive credit growth. In a determined speech, Gerald Ford told the gullible public that inflation was some kind of external phenomenon which could only be stopped by actions of the public working together. To combat rising food prices the President instructed farmers to produce more food, completely overlooking the real source of inflation--monetary policy. He also announced that the government would monitor and try to influence the production and pricing of energy (oil, and gas) to prevent bid-rigging and price gouging. Of course, all of these specious ideas failed as inflation continued to stay in the double digits. However, it helped to distract the public from ever really understanding why prices were surging, despite high unemployment and a weak economy.

    Today, we face a situation that is in many ways similar to the 1970ss and yet worse in other ways. The US has sky high real unemployment of around 17%, surging commodity prices and weak growth. Further compounding the problem is that  the US economy is in secular decline as globalization outsources good jobs to foreign countries while creating more McJobs in the US. To be sure, this works great for the multi-nationals which no longer need the US as they once did. Instead, they benefit from the growth in emerging markets whose success has been underwritten by the US. These developing countries, particularly in Asia, have only done well because they can export an unlimited amount of goods to the US, while manipulating their currencies to maintain a competitive advantage. This process has left the US with nothing but debt and a low-paying service economy. To counter this reality, the Federal Reserve has provided asset bubbles to keep the public feeling wealthy and serving to fuel a historic credit bubble. But alas, the final credit bubble in housing has backfired and almost destroyed the economy To counter this collapse, the Federal Reserve has resorted to the policies of banana republics such as printing money. Sure, the money printing is disguised under the veil of quantitative easing, but this charade only fools the ignorant.

    The purpose of money printing has and always will be debt monetization. The US economy is for all practical purposes bankrupt. The only thing keeping the ponzi scheme alive is money printing. The Federal Reserve is so supercilious in its power over the people that it openly announces its plan to print trillions of dollars to inflate stock prices. Truly, a first in modern economic history, when a central bank is so brazen as to publicly boast of its intentions because it fears no push back by the populace. In fact, the Fed is correct: There is nothing you or I can do to stop this criminal confiscation of our wealth from occurring.

    The only action left to holders of money wealth (no matter how small or large) is to abandon the US dollar as our unit of wealth. This is our form of revolt as the great author Jens O. Parsson postulated in his seminal work on inflation called "Dying of Money: Lessons of the Great German and American Inflations." In it, he notes "They[holders of money] do not fly flags or demonstrate in the streets to express their revolt; they simply get rid of their money." It may not be as spectacular as thousands of Americans storming the walls of the New York Fed, but in many ways, it is equally as powerful. When enough holders of wealth dump the dollar, the velocity of money goes vertical, which unleashes the inflationary potential of government money printing; in that moment, the government will cease to have its monopoly over money. Parsson notes that once this occurs, "government has little or nothing to say or do about it" because they cannot stop it. Whether the US simply experiences high inflation (10-20% per year) or enters hyperinflation (more than 50%) is immaterial. After watching in bewilderment the actions taken by the government, I choose not to hold Federal Reserve Notes as a store of value. I do not want my wealth hostage to government whims.

    I will not simply stand by and let the government steal my hard earned money through inflation. I do not want to end up like the poor Germans of the Weimar Republic who were taken by surprise as their life savings vanished within months at the hand of their own government. The elderly were particularly hit by the hyperinflation because they lived on fixed incomes and had the majority of their wealth in bonds. Some elderly couples gassed themselves in their own homes in despair of losing everything, showing the destructive power of inflation in the real world. I wish Bernanke understood this fact, but tragically he sees inflation as a means to a healthy economy.  I do not want to be left dependent on government handouts when the US dollar has lost all of its value. Protect yourself!

    Full Disclosure: At the time of this writing I have 50% of my wealth in gold and will be promptly converting the rest into gold as soon as possible. Goodbye, FRNs, except for day to day purposes



    Disclosure: Long Gold
    Stocks: SPY, DIA, QQQ
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