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To those who study the numbers, it is now obvious
that America’s fiscal situation is hopeless. Given the country’s
current debt and unfunded liabilities of $75,000,000,000,000, an amount
growing by at least $5,000,000,000,000 per year, it will be statistically
impossible for the United States to pay its obligations unless it repudiates
them in large measure, or the dollar is sacrificed on the altar of searing,
society-altering inflation.
Congress and much of the nation are in utter denial
about the country’s unfolding fiscal catastrophe, as evidenced by
federal spending that is actually accelerating, producing all-time debt and
deficit records that exceed anything ever experienced by any nation on earth,
at any time in history.
Denial is a psychotropic, mind-altering drug that by
comparison makes crack cocaine look like health food, and addiction to it
shuts down the brain. America’s denial about its out-of-control
spending, non-repayable debt, financial sector fraud and deceit, decadent
political institutions, epic dereliction of leadership duty, fiscal and
monetary immorality, and disastrously dishonest system of cronyism is leading
the nation into an economic nuclear winter of desolation and chaos. Aside
from Ron Paul, there is not one politician telling the people the truth about
their oncoming debt enslavement and impoverishment; nor is there even one
sign of constructive fiscal change on the horizon. Our visionless, gutless
and greed-stricken leaders have transformed the United States into a cowardly
new world.
But these facts are already well-known to the
markets. In investing, the unexpected events change the game, causing
significant price adjustments, either up or down. Wars, terrorist events,
deaths of influential figures, natural disasters, provocations by foreign
foes, paradigm shifts, innovations and the opening of commercial, geographic
or intellectual frontiers have all, at their appointed times, had meaningful
effects on markets. Successful investors need to keep their eyes focused
toward the sun, because it is from its bright light that the jet fighters of
change appear. Change wants to take us by surprise, and down to the ground.
It is a contact sport.
Many are now making the assumption that because the
country has been able to sustain surrealistically deplorable fiscal numbers
for the past twenty years or more, it will be able to sustain them in coming
years, too. Elected officials delude themselves into thinking that they have
time to tidy up their affairs before announcing that they will not seek
re-election so they can “spend quality time with the family,” and
assume they can get out of Washington before the machine flies apart. They
expect to collect rich, self-legislated, taxpayer-funded,
cost-of-living-adjusted government pensions plus free health care for life,
while basking in the glory of such salutations as, “The
Honorable,” or “His Excellency.” The odds are growing that
things won’t work out this way, as America burns through its borrowed
time with a blowtorch. The question is, what is coming that will change the
game and accelerate the arrival of the inevitable?
Inferential analysis is now saying that a
game-changing trend having the potential to significantly affect
America’s institutions, economy and society might be well underway.
Inferential analysis is the practice of identifying trends from seemingly
unrelated events, and projecting their likely effects on the future. It can
be highly predictive, and serves as an early warning system.
In this article, we will examine three
contradictions that we think tell a much larger story in combination than
each tells by itself. We will then examine the implications of these
contradictions on the markets, and in particular upon the market for gold.
CONTRADICTION #1: On February 6, 2009, as it was becoming clear that
the $700 billion TARP bailout had failed to achieve any of its promised
objectives and as the mood of the citizens was darkening ominously as a
result, Pennsylvania Congressman Paul Kanjorski (D), Chairman of the House
Financial Services Subcommittee on Capital Markets, was interviewed on C-SPAN.
During that interview, Kanjorski attempted to make
the case that the frantic, due diligence-free passage of TARP was necessary
because Treasury Secretary Paulson and Federal Reserve Chairman Bernanke had
told him and other, select members of Congress that the country was facing an
historic banking crisis. Here is what he said, transcribed verbatim:
“On Thursday [September 11, 2008], at about
eleven in the morning, the Federal Reserve noticed a tremendous drawdown of,
ah, ah, ah, money market accounts in the United States, to the tune of five
hundred fifty billion dollars was being drawn out in a matter of an hour or
two. The Treasury opened its, ah, ah, ah, window, to help. It pumped one
hundred five billion dollars into the system, and quickly realized they could
not stem the tide. We were having an electronic run on the banks! They
decided to close that operation, close down the money accounts, and announce
a guarantee of two hundred fifty thousand per account so there wouldn’t
be further panic out there. [He was referring to the FDIC insurance coverage
limit increase.] That’s what actually happened. If they had not done
that, their estimation was that by two o’clock that afternoon, five and
one half trillion dollars would have been drawn out of the money market
system of the United States. It would have collapsed the entire economy of
the United States and, within twenty-four hours, the world economy would have
collapsed. Now we talked at that time about what would happen if that
happened. It would have been the end of our economic system and our political
system as we know it. And that’s why when they [the Treasury and Fed]
made the point that we’ve got to act and do things quickly, we
did.”
Kanjorski’s interview was broadcast worldwide
and viewed by millions. It was also printed in newspapers in virtually every
country on earth. It was regarded as a stunning, uncharacteristically honest
admission for a politician, and was accepted at face value.
At the time, Congress was desperate to convince the
citizens that the passage of TARP had not been a bailout, orchestrated by a
Wall Street centimillionaire to the express and
enormous benefit of a cabal of Wall Street millionaires and billionaires, but
rather an heroic act that prevented the collapse of
the United States and the world. Washington had to somehow explain why
average citizens were being forced to pay for Wall Street’s losses,
when during the previous decade, Wall Street had
kept every dollar of its trillion dollar profits for itself. Now, as
Washington and Wall Street were shoving those losses down America’s
throat without a popular vote, or even a serious debate, they were grasping
for straws.
But there is a problem: Kanjorski’s story
makes absolutely no sense whatsoever. He said that $5.5 trillion would have
been withdrawn from money market accounts on September 11, 2008, but
according to the FDIC, the total amount held in bank money market accounts at
that time was only $2.9 trillion. (The grand total of all FDIC bank deposits
then, including everything from checking accounts to CDs was $9 trillion.)
In addition to bank money market accounts (to which
Kanjorski apparently referred, and as Chairman of the House Subcommittee on
Capital Markets, he should certainly have been familiar with basic banking
terms), there also exist “money market mutual funds,” operated by
mutual fund companies. Total deposits in those accounts were only $2.3
trillion at the time, for a grand total of $5.2 trillion in both money market
categories.
Kanjorski’s claim was that 106% of all bank
and mutual fund money market deposits were going to be withdrawn between the
hours of 11 AM and 2 PM on September 11, 2008. In other words, every single
money market depositor was going to sell every dollar of their holdings
during those three hours that day, plus another 6% out of nowhere. Of course,
that would have been impossible.
While the numbers themselves prove the invalidity of
the story, there are other aspects to it that make no sense, either.
Kanjorski said it was “an electronic run on the banks.” But to
where? If the transfers were electronic, then by definition, they were
staying within the United States banking system. The notion that every single
money market account holder also had a foreign bank account to which they
planned to transfer the money is factually incorrect, and absurd.
Every true bank run in history has involved people
going to their banks and demanding cash, not electronically transferring
their funds from one bank account to another. In a true bank run, depositors
want cash because they fear their bank will fail, taking their money with it.
As we know, there was not one REAL bank run on September 11, 2008, involving
depositors lining up at banks and demanding cash that could not be provided
because banks had run out of it.
The story was a hoax, either concocted by Paulson
and Bernanke to frighten Congress into passing TARP without due deliberation
and then repeated by Kanjorski, or concocted by Kanjorski to make him and
Congress look like heroes for spending $700 billion of taxpayer money on a
desperately flawed bailout that was, at best, an egregiously negligent
misallocation of public money, and at worst, the biggest outright taxpayer
theft in history. His interview presents a classic case of propaganda and
brainwashing, of which even Orwell would be proud.
CONTRADICTION #2: For more than twenty years, representatives of the
United States government did nothing as millions of manufacturing,
information technology, software development, customer service and other jobs
were exported to foreign countries. In fact, government actions, such as:
NAFTA; direct and indirect currency manipulations that artificially supported
the U.S. dollar, negatively affecting exports and opening the floodgates to a
cascade of imports; lobbyist-promoted, knee-jerk political support for a
fuzzy, untested concept called “globalization;” and a government
culture oblivious to or strangely supportive of America’s employment
crisis, all expressly intensified the country’s job losses. The export
of American jobs resulted in chronic, multi-hundred billion dollar annual
trade deficits, compounding the country’s financial distress. It was as
if a secret deal had been entered into between the United States government
and select foreign trading partners: You buy our bonds, and we will send you
our jobs.
Apparently, no one in government could have cared
less that the lives of millions of American families were shattered as their
jobs vanished and their finances crashed, or that the country had become
crippled as it lost its manufacturing base and morphed into a so-called
“service economy,” an economic fantasy that is now failing
catastrophically. Perhaps there would have been greater concern in Washington
if government jobs were being exported to foreign countries, too.
Contrast that to the following: within mere weeks of
the Wall Street financial crisis going Code Blue in late 2008 (thanks to Wall
Street’s own Biblically-epic avarice and recklessness), Congress had
passed the largest financial industry bailout package in the country’s
history, based on nothing more than a few “back of the envelope”
proposals made by a seriously-conflicted Goldman Sachs executive turned
Treasury Secretary and a cooperative head of the Federal Reserve. This was
despite the fact that 90% of the American people were instantly and adamantly
opposed to TARP, proving that they are not nearly as stupid as Washington and
Wall Street like to think they are. After Wall Street learned how easy it was
to obtain $700 billion from the citizens, the floodgates were opened wide and
trillions more flooded into their money caverns. Year after year, despite
their well-known unemployment misery and its enormous cost to the country,
American workers got nothing; Wall Street was given trillions in a matter of
weeks just for squealing like stuck pigs, and using their political juice.
To the people’s credit, we are now learning
that the TARP funds were badly misspent, with the government having
significantly overpaid for the toxic assets it purchased from crony banks.
Nobel Prize winning economist Joseph Stiglitz
recently observed that the overpayments were 50% at a minimum, and in many
cases much more. This resulted in tens of billions of dollars of additional
illicit profits flowing to Wall Street at the expense of the citizens. The
people were correct: TARP was a fraud that never should have happened.
CONTRADICTION #3: After becoming the nation’s top
auditor in 1998 as Comptroller General of the United States and head of
the Government Accountability Office, David Walker repeatedly warned Congress
over a period of several years that government spending was unsustainable,
and that unless fiscal policies were reformed, a monetary and economic
disaster would ensue. Walker presented irrefutable evidence to Congress to
support his warning, evidence so powerful it was never contested because it
could not have been. Walker focused Congress’s attention on spiraling, deca-trillion dollar Medicare, Social Security,
prescription drug, military and government pension, welfare, trade and
general obligation deficits and liabilities, in addition to the crippling
impact of ever-increasing interest payments on the rapidly increasing debt.
Instead of heeding Walker’s
flawlessly-reasoned warnings, Congress did the exact opposite and went on a
spending binge never before seen in American or world history. Just one
program, the Medicare Prescription Drug Plan was bankrupt on Day 1, with an
unfunded liability of $7,100,000,000,000.00 that was heaped on top of
taxpayers’ existing, crushing debt burden. That turned out to be just
the warm-up act. It was followed by an unprecedented fiscal year 2009 federal
deficit of $1,600,000,000,000.00+, which will then segue into 70 years’
worth of multi-hundred billion to trillion dollar plus deficits. Furthermore,
the government approved $13,000,000,000,000.00+ in bailouts for favored
insiders. Every penny spent on these programs represents newly created debt,
on which interest will accrue in perpetuity since the principal can never be
paid.
There are additional, related contradictions, such
as presidential candidate Obama promising “change you can believe
in,” and then, once elected, installing into positions of economic
power and influence people such as Lawrence Summers and Timothy Geithner, who had been directly involved with the
policies and programs responsible for the crisis in the first place. Obama
subsequently proposed that the Federal Reserve be given vast new powers over
the financial system. This was astonishing, given that the Fed, under
Chairman Greenspan and successor Bernanke was clearly implicated in the
meltdown, though not alone in culpability.
The fundamental common denominator in each of these
contradictions is immorality. Creating money out of thin air is
counterfeiting and theft, no matter who does it. Bonds that can never be paid
are promises that cannot be kept, and are dishonest. Lying to the people for
self-glorification, and to divert attention away from actions that were
negligent and destructive is immoral. A government that robs from the poor
and gives to the rich is corrupt. A government that casually throws its
workers to the wolves while toadying to the wealthy is morally lost. And a
Congress that decides, in direct rejection of the United States Constitution,
that there will be two classes of citizens in America, the commoners and the
elite, the serfs and the nobles, is derelict in its duty and a disgrace to
its high office.
Contemporary society is an amusement park of
addictions. Most emphasis is given to the substance addictions, such as to
nicotine, food, alcohol, or drugs. Less attention is given to the activity
addictions, such as to shopping, gambling, television and sports, habits less
physically dangerous and depleting, but life-affecting for those who become
consumed by them.
Two other addictions get far less attention than
they deserve, given the powerful forces they have exerted on humanity
throughout history. Those addictions are to money and power. Washington is
about the addiction to power; Wall Street is about the addiction to money.
Those two centers of addiction are now galvanizing each other. By finding
artificial means by which to temporarily keep the government’s sinking
financial ship afloat, Wall Street supports Washington’s power
addiction. By funneling trillions of public dollars to Wall Street,
Washington supports the bankers’ money addiction.
These twin addictions to money and power represent
another piece of the moral hazard puzzle. Addiction breeds immorality.
Addicts will stop at nothing to get their drug of choice.
The colossal miscalculation made by Washington and
Wall Street is that they could control the moral hazard genie once they
removed it from the bottle. They believed they could use the genie to enrich
themselves with trillions of dollars’ worth of taxpayer money, and then
replace it in the bottle before its magic spell of immorality metastasized
throughout society at large. They assumed that the people would be too stupid
to see what was going on. And that even if the people did figure things out,
they would willingly wear the thick, choking chains of debt being welded to
their necks by the financial elite and its Washington enablers.
Instead, thanks to the Internet and the democracy of
information and insight it affords, the people were instantly wise to what
was happening, and it stirred them. The concept of “an eye for an eye,
a tooth for a tooth,” harkens to the Bible. [1] And perhaps Shylock was
speaking for all of humanity when he said, “If you prick us, do we not
bleed? If you tickle us, do we not laugh? If you poison us, do we not die? If
you wrong us, shall we not revenge?” [2]
There is accumulating evidence that the Washington
– Wall Street moral hazard experiment has gone disastrously wrong, and
that just like any other accidental discharge of a deadly virus, the moral
hazard virus is now loose and swiftly propagating throughout society. By so
blatantly colluding with Wall Street, Washington has lost all moral
authority, and the people now have only one place to turn: themselves. An
ethic of, “If they can do it, so can I,” is spreading, as people
realize that fabric of American society has been shredded and replaced by a free-for-all
mentality whereby everyone must fend for oneself in order to survive.
If this is so, it is a serious game changer for
America.
Evidence of the spread of moral hazard is noticeable
everywhere. Despite government reports that the economy contracted only 1%
last quarter and is now stabilizing, 13% of all home mortgages were either
delinquent or in foreclosure in the second quarter, 2009, an all-time record.
Credit card write-offs hover near 10%, also a record. Automobile, home equity
and personal loan defaults are at or near record levels. Fiscal year 2009
federal personal tax receipts have declined 22% and corporate receipts have
plunged by 57%, even though the economy has supposedly declined by only a
fraction of that amount. Compared with January through April, 2008, state
personal income tax receipts have plummeted by 26% in 2009, with eight states
seeing declines ranging from 30% to 54.9%. Prime and Alt-A mortgage
delinquencies and foreclosures are climbing rapidly, and are the true
canaries in the banking industry mineshaft. Homeowners evicted by foreclosure
trash their homes in rage on the way out the door, with an estimated 50% of
such dwellings damaged. Looters and squatters destroy many of the rest,
stealing copper pipes, wiring, granite counter tops and anything else of
value. Dozens of Internet sites such as “youwalkaway.com” provide
calculators to help homeowners decide whether or not to
“strategically” default on their mortgages. Shoplifting costs
retail businesses $35+ million per day, as 27 million shoplifters go on the
hunt. Drug addicts who have become shoplifters say that the activity is
equally as addicting as drugs, leading to a continuing cycle of theft. [3]
Insurance fraud is a systemic financial risk, with 25% of fires caused by
arson or suspected arson, making this the greatest cause of property damage
in the United States. Even before this financial crisis, which has bankrupted
millions, 10% of respondents said it was acceptable to submit a false
insurance claims. [4] Medicare fraud exceeds $60 billion per year. Phony
automobile and other bodily injury claims cost billions annually, and are
difficult to control since it is impossible for a court to tell someone they
are not in pain. Despite a massive consumer education campaign designed to
thwart it, Identity Theft rose 22% in 2008, to 10 million cases, a record. It
takes the average victim 330 hours to repair the damage to their personal
reputation. [5] Identity Theft is estimated to cost individuals and businesses
$221 billion per year. [6] Each day, 175,000 phony checks are presented as
payment. The cost of check fraud is estimated to exceed $50 billion annually.
And on and on it goes. The stress tests never envisioned this.
The people, whose predictive instincts have been
uncannily accurate throughout this crisis, sense that trouble is coming: 80% of them say they expect crime to increase due
to the deteriorating economy. [7]
As average American citizens lose their jobs by the
millions, become mired in financial distress and are crushed by the largest
debt increase in the history of civilization to pay for government bailouts
and fiscal stimulus programs, several Wall Street firms, in actions so
arrogant they beggar and defy belief, have announced that they will pay
record bonuses in 2009. These bonuses commonly amount to 20 – 200+
times the median American wage, in other words, 20 – 200+ times the
earnings of the citizens whose taxes were spent only a few months ago to keep
the Wall Street firms from imploding.
Nurses, police officers, school teachers, store
clerks, truck drivers, gas station attendants, firemen, flight attendants,
ambulance drivers and everyday workers of every other description, many of
them struggling to provide only a humble, basic lifestyle for themselves and
their families, were asked to reach deep into their pockets to help Wall
Street survive. Now that Wall Street has taken their money, it will use it to
lavish huge bonuses upon itself, in a callous Roman orgy of excess.
The American psychological landscape has been
parched by the searing winds of financial desperation, surging inequality and
dying hopes. And the tinder of the desiccated American Dream, once the great
calling and aspiration of a nation, is now piled so high that a spark
igniting it would unleash raging flames reaching up to and scorching an
astonished Sun. Yet politicians and the press are so divorced from reality
that when the people express at town meetings and other venues their deep,
legitimate frustration over the loss of their hopes and nation, they are
viewed as whiners, or paid political activists. As noted earlier, denial is
very dangerous drug.
Civilized society requires a foundation of morality,
decency and justice to survive. The spread of moral hazard, should it happen,
will have a disastrous effect on America’s institutions. Few investment
classes will be safe in an environment of elevated moral hazard, because both
legal and illegal counterparty risk will surge. Legal counterparty risk
occurs when, for instance, a corporate executive at a public company is
awarded excessive, unwarranted pay at shareholder expense. (Abercrombie and
Fitch recently reported that its CEO was paid $70 million this year, as the
company’s performance deteriorated and the stock price plunged by 70%.
This is an example of legal counterparty risk. It is a disgrace.) Illegal
counterparty risk occurs when there is fraud. (Enron and Madoff
are just two of many possible examples.)
In the emerging social climate, common stocks will
face powerful headwinds from a suffering economy made worse by the corrosive
costs of theft, fraud, false executive enrichment, phony insurance claims and
frivolous lawsuits. Bank deposits, yielding near-zero percent interest rates,
are basically no better than cash in mattresses. Corporate bonds carry
serious interest payment and default risks. State, county and municipal bonds
will become increasingly stressed as deficits grow and proposed tax increases
stoke voter anger, making it difficult to close funding gaps. The real estate
sector faces a spike in taxation risk, due to deteriorating local and county
government finances. It is also subject to interest rate risk, as surging
government debt becomes difficult to sell, resulting in higher coupons. The reputations
of hedge and private equity funds have been compromised by large losses, the
imposition of redemption restrictions, and high fee structures. Algorithmic,
black box trading has been largely discredited. Annuities carry heavy fees
and important counterparty exposure, as seen by the industry’s bailout
by government. Commodities prices are volatile, and price manipulations by
large traders are legion. CFTC oversight is lax to non-existent, so small
investors are without protection. While there are many good commodities
funds, they carry counterparty risk. Derivatives markets are opaque and out
of control, in addition to being nuclear waste sites of counterparty risk,
and are certainly no place for individual investors. Art, diamonds,
numismatics, collectibles and other highly specialized asset classes have
large transaction costs and are best suited to experts. As we can see,
investment safety is hard to find even in normal times, which these are not.
In the recent crisis, virtually every investment
“truism” has been discredited as a myth. Buy and hold; Stocks for
the long term; Efficient market theory; Housing prices only go up; Buy land,
they’re not making any more of it; Municipal bonds offer safe, tax
advantaged returns; Treasurys are guaranteed by the
full faith and credit of the United States; the dollar will remain strong
because it is the world’s reserve currency; A diversified portfolio
offers protection; Demand for serious art works is unquenchable; and on and
on. The current markets have laid waste to every one of those theories, and
many others.
Gold is the antithesis of the investment classes
described above. Physical gold represents pure wealth of a very finite
quantity with absolutely zero counterparty risk. Because of this
distinguishing fact, it is immune to the costly effects of moral hazard. Gold
does not have expensive skyscrapers named to stroke its ego, nor does it have
offices or branches dotting the land. Gold has no CEO who demands a
multi-million dollar compensation package just for showing up. It has no
employees desiring pay raises, health insurance or vacations. Gold does not
take three hour lunches, play golf, drink martinis, do drugs, get sick, or
demand a lavish expense account. Gold is not dependent upon protection from regulators
who discover frauds only after every innocent investor has been wiped out.
Gold is not represented by a Congress that spends it into bankruptcy. Gold is
unaffected by the Devil’s songs of greed and graft sung by lobbyists
and other self-serving parasites. Gold does not charge an endless procession
of monthly or annual fees. Gold cannot be manufactured out of thin air by
politicians or Central Bank monetary witch doctors.
As money, gold has not one legitimate competitor,
though it is surrounded by fiat fakes. In time, those frauds always die of
their chronic, congenital disease: immorality. Gold is the free and honest
money of the people, not the controlled, monopoly money of bankers
intent upon destroying it for private gain by debasement and inflation.
Having been born at the beginning of civilization, it possesses the wisdom of
time. It is liberty. When border crossings have been closed by soldiers with
machine guns and paper money has been a useless persuader, gold has opened
the gates for refugees fleeing tyranny and oppression, providing them safe
passage. With beauty commensurate to what it represents, gold makes tangible
the wondrous, invisible force of freedom. In Latin, the word for gold is
aurum, meaning “shining dawn.” Gold is more than honest money;
more, even, than liberty. It represents the endlessly renewing fountain of
the future, and the shining dawn of life.
As the existing system destroys itself, the question
becomes, “how will wealth and financial freedom be defined in the
future?” Today, we say that dollar millionaires and billionaires are
wealthy. They used to say that about those who possessed millions or billions
of Zimbabwean dollars. But that fiat currency is now dead and its possessors
are penniless. History is absolutely categorical: fiat currencies are
immoral, and because of that, they fail, without exception. Repeat: without
exception, as documented throughout all of time. The new wealth will be
measured in something different, most likely gold. There are only 5 billion
ounces of it on earth, or roughly 0.75 ounces per
capita. The supply grows at less than 2% per year, a fraction of world fiat
money growth. Much of it is not and will not be for sale; the amount
available to the market is less than 0.25 ounces per person. As gold takes
its rightful place of honor as the people’s reserve currency, demand
for its limited supply will continue to grow. Tomorrow’s billionaires
will be those who prepare today for the coming, inevitable monetary paradigm
shift. Those who acquire gold now, while it is still available and
inexpensive, will create for themselves a future that is secure, free and
rich with opportunity.
Stewart Dougherty
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