|
THE ENEMY WITHIN
"If tyranny and oppression come to this land, it will be under the guise
of fighting a foreign enemy. But, in reality it will be an Enemy
from within”
James Madison (1785)
"No people will tamely surrender their Liberties, nor can they be easily
subdued, when knowledge is wide spread and Virtue is preserved. On the
Contrary, when People are universally ignorant, and debauched in their
Manners, they will sink under their own weight without the Aid of foreign
Invaders”
Samuel Adams (1775)
"Using history as our guide, the new wealthy will be those who had the
wisdom to get out of paper money before the BREAKDOWN of the current
financial system."
Aubie Baltin
The most massive and most intelligent pools of capital on the planet are now
looking to crowd into gold and silver. So far, they have been accumulating
it on the QT so as not to drive their prices up before they have had a
chance to buy back all the gold that they foolishly dumped from 1980 until
2001. This is great news for a sector that has been in a state of
consolidation for over a year and strongly supports the thesis that 2013
will be a banner year for gold and silver - just as the Stock Markets will
also be a banner year but on the downside for stock markets around the
world.
Don’t listen to all those Johnny Come Lately Precious Metal Bulls that have
now turned bearish. Silver is actually in the process of forming a very
strong base to set the stage for the beginning of a strong new up leg. Its
technical’s and fundamentals are very bullish, contradicting the prevailing
pessimism gripping traders. This glaring disconnect between price action and
sentiment won’t last much longer; start accumulating your PM stocks that you
have been watching now. My two favorites are FNV and SLW as the
first rounds of accumulation will start with the biggest, most profitable
and most solid companies.
HISTORY TEACHES US ALL LESSONS: But it is the responsibility of each
individual to learn these lessons by himself.
ERA OF MONETARY STABILITY (1950-1963)
On average, the Fed grew its financial assets by only 3.4% every five
years. The result being inflation and interest rates were very
subdued. Any speculative bubbles and busts were limited to niche sectors.
Recessions were relatively mild and the U.S. Dollar was king throughout the
global economy.
ERA OF MONETARY EXPANSION (1964 - 2007)
The Fed began expanding its balance sheet at an extraordinary rapid pace, by
an average of 37.2% every five years, or ELEVEN times faster than in the
prior era of monetary stability. This resulted in inflation surging
and interest rates going through the roof. Moreover, toward the end of the
period, two boom-bust cycles and the worst Recession since the Great
Depression nearly destroyed America's middle class. The U.S. Dollar fell
precipitously and America's global leadership became a shadow of its former
self.
ERA OF MONETARY EXPLOSION (2008 - PRESENT)
Chairman Ben Bernanke, true to his nickname "Helicopter Ben," has expanded
the Fed's financial assets at an average five-year clip of 194.9%!
This is FIFTY-SEVEN times faster than the pace of monetary growth recorded
during the era of monetary stability! The end result thus far is
unknown, but we can look to history for a description of the unimaginable.
And as if this weren't enough to rekindle some of the worst inflation of our
lifetime, this time around the world's other powerful central banks are
following our lead, compounding the world’s problems.
EUROPEAN CENTRAL BANK'S QE2 IS FAR LARGER THAN ITS QE1!
While the Fed launched QE1 with a big bang in September 2008, the European
Central Bank (ECB) grew its assets from 1.9 trillion Euros (nearly $2.8
trillion) on August 31, 2008 to 2.6 trillion Euros ($3.4 trillion) less than
two months later — the greatest increase in Europe since Weimar Germany
(1922 – 1923). Then, beginning on April 29, 2011, the ECB accelerated their
money printing, and today their balance sheet is up to 4 trillion Euros
($5.1trillion)!
What used to be the world's most "conservative" major central bank is now
printing money at an even more rapid pace than Bernanke himself! And yet the
Euro is appreciating against the US Dollar. Explain that, I can’t.
The Bank of England, the Bank of Japan and especially the Bank of China as
well as other central banks all around the world are following a similar
pattern. The total Balance Sheets of the four major Central Banks (USA,
England, ECB, and Japan) have increased by more than $10 trillion.
That's $10 trillion in paper money that's been pumped into the global
economy with zero positive results. So what will they be doing from here on
in? Even in the early 1930s, when the nation's entire banking system shut
down and in the early 1980s, when hundreds of U.S. banks were failing each
year, the Fed and the other central banks never came close to today’s
monetary expansion.
But here's the greatest irony of all: It's not working. So
what are their solutions? Why more of the same naturally (The definition of
insanity). To make matters even worse, they are running into the law
of diminishing returns — more and more money, less and less positive
benefits.
WHAT TO DO
First, remember that you can't expect inflation to suddenly appear
immediately because the Governments are fudging the inflation numbers. More
importantly, no one will be ringing any bells to let the world know
precisely when the Dollar and Euro (in fact the Euro is strengthening
against the US Dollar) will collapse in value. So you have to be well
prepared in advance.
Second, make sure gold and Silver are a part of your preparedness strategy.
Among all the asset classes, it has been and should continue to be the most
reliable hedge — not only against inflation, but also against crises of
nearly any kind, especially depreciating currencies and out of control
government spending.
Third, be sure that it’s gold bullion that is at the core of your strategy
and not gold’s paper derivatives, remembering that MF Global’s can and will
probably infect the gold and silver exchanges. Buy Either CEF and/or PSLV
or the bullion itself.
ALL THAT GLITTERS IS GOLD
Veteran gold investor, Jim Sinclair, posted no less than three of his own
comments on the recent gold take-down on his own website, jsmineset.com,
describing the latest gold price moves brought on by heavy opening selling
on the COMEX as a ‘move of desperation by the Fed’, which has seen the gold
price fall over $100 in three weeks. It is in fact a concerted effort by the
Fed and its bullion bank allies, to artificially depress the gold price and
by so doing, hide the true state of the U.S. and global economies in a last
ditch effort to protect the dollar.
You cannot fix the problems of the Western World’s economic system by
breaking the telltale thermometer, which is the price of gold. Sinclair and
I have long held the view that gold is going substantially higher, despite
what he and I and a number of others see as a gold price suppression scheme
with gold seen as the bellwether of True Economic Value. There is not one
professional who does not know that high volume sell orders at a time when
London, Switzerland and Wall St. are closed, have but one purpose, and that
is to reduce the price of gold. Why would the Fed be prepared to do
this? Well, the view is that in modern day politics, perception is
everything. Rising gold prices are seen effectively as dollar devaluations,
so if you can control the gold price – or at least mitigate its ongoing rise
– the perception amongst the general public is that the value of the dollar
in your pocket remains reasonably stable. If the gold price is allowed to
rise precipitously, then the perception is that all is not well in both the
World and the U.S. economies.
Now whether there is indeed a concerted ploy by the political and financial
elite to control the global economic thermometer (gold) remains to be proven
– and probably never will be – but the machinations on the COMEX give
increasing credibility to the view that someone, with unlimited pockets, is
trying to control gold and silver prices. Logic suggests that this can only
be accomplished by government – or rather by major financial institutions
with tacit government approval and support. That this solution is now
beginning to gain coverage in some of the mainstream financial press says
much for the distrust of the government’s motives in economic manipulation
(as seen by 4 consecutive QE’s, which are not producing the expected
positive results).
The idea that the patient will recover because Dr. Ben is manipulating the
fever thermometer (the gold price) is the height of blatant foolishness and
ignorance. They did this in the 1970s and it failed then as miserably as
this act of desperation will also.
The only thing that this is achieving is to drive gold into Asian hands at
bargain prices, thereby ultimately transferring global economic leadership
from West to East. This is a process which can only be accelerated by this
kind of intervention in the markets (particularly if one observes that China
is taking this opportunity to build its gold reserves on the way towards
making the Yuan at least a part of the coming next global reserve
currency).
Japanese pension funds are investing in gold for the first time in an effort
to hedge against economic upheaval. They hope that it will shelter
them from the problems of the global economy, with low interest rates as
well as newly elected Prime Minister Shinzo Abe’s demand for “unlimited
easing measures” from the central bank further justifying the inclusion of
non-yielding gold in their portfolios.
The Central Bank of Iraq’s quadrupling of gold reserves is important as
there are many oil rich nations in the world with sizeable dollar and euro
currency reserve and only a small allocation to gold by these central banks
alone could lead to higher gold prices.
The world order is changing – a process which is being facilitated by the
US’s own economic mismanagement leading to an enormous debt burden which has
now reached proportions from which there can be no return. Gold is going to
$6,250 over the next 4 or 5 years (as I predicted as far back as 2002). I
have often been said “that the only difference between the government and
the mafia is the cost of their suits.
ENDING THE ERA OF PONZI FINANCE
“Over a protracted period of good times, capitalist economies tend to
move from a financial structure dominated by hedge finance units to a
structure in which there is a large and larger weight given over to the
units engaged in speculative and Ponzi scheme finance. . . . The greater
the weight of speculative and Ponzi finance, the smaller the overall
margins of safety in the economy and the greater the fragility of the
financial structure.”
—Hyman Minsky, 1992
The greater the amounts of speculative and Ponzi finance, the smaller the
overall margins of safety in the economy and the greater the fragility of
the financial structure.”
— Hyman Minsky, 1992
WILL WE EVER LEARN? NO COUNTRY CAN BUY ITS WAY OUT OF TROUBLE
BY PRINTING COUNTERFIT MONEY.
By far, the second-biggest Ponzi scheme was organized by the New York
hedge-fund manager Bernard Madoff, which led to losses of approximately $20
billion in 2008. However, the biggest Ponzi scheme is still ongoing: The one
organized by the US FED and Treasury involving US Treasury Notes and T
Bonds. It is not simply that the developed world has borrowed significantly
from future wealth to fund today’s consumption, leading to huge burdens for
the next generation. It has also reduced the potential for future economic
growth, making it more difficult for the next generation to deal with this
legacy.
It may seem harsh or exaggerated to liken the current troubles of the
developed economies to a Ponzi scheme. I do so deliberately to emphasize the
scope and seriousness of the problem. After nearly six years after the
financial crisis, the leaders of the developed world are far too complacent.
Politicians and central bankers have continued to “kick the can down the
road,” pursuing policies designed to postpone the day of reckoning and avoid
telling the public the truth: that a sizable part of the debt will never be
paid back in an orderly way.
Fortunately, there is still time to act. But leaders from all social
sectors—government, business, organized labor, environmental and other
stakeholder groups—need to act decisively and quickly in order to secure
future economic prosperity, social cohesion, and political stability. It is
in the nature of Ponzi schemes to collapse suddenly, without warning. No one
knows what event may send the developed world and the global economy as a
whole back into crisis.
THE ORIGINS OF THE GOVERNMENT PONZI SCHEME
The developed world’s Ponzi scheme is caused by record-high levels of public
and private debt. And it is exacerbated by huge unfunded liabilities that
will be impossible to pay off owing to long-term changes in developed-world
demographics. According to a study by the Bank for International Settlements
(BIS), the combined debt of governments, private households, and
nonfinancial companies in the 18 core countries of the OECD rose from 160%
of GDP in 1980 to 321% in 2010. In real terms, after inflation is taken into
account, governments debts have increased more than four times, private
households more than six times, and nonfinancial companies more than three
times the debt they had in 1980.
There is, of course, nothing wrong with taking on debt, as long as that debt
is invested to create additional economic growth. In recent decades,
however, the vast majority of debt has not been used to increase future
income but to consume, to speculate in stocks and real estate, and to pay
the interest on previous debt. One indication of this trend: During the
1960s, each additional dollar of new credit in the US led to 59 cents in new
GDP; by the first decade of the new century, that same dollar of credit was
producing just 18 cents in new GDP.
These rapidly rising debt-to-GDP levels are a sign of the growing share of
what the late economist Hyman Minsky termed “Ponzi financing” in the global
economy. Minsky distinguished three types of credit-based financing,
determined by the financial strength of the debtor:
• Hedge financing, in which the debtor
has sufficient cash flow to pay interest and to pay back the principal.
• Speculative financing, in which the debtor can
service the loan—that is, he or she can pay the loan interest that is due
but not repay the principal out of income cash flows. Therefore, the
debtor needs to continuously roll over liabilities by contracting new debt
in order to meet the obligations on maturing debt.
• Ponzi financing, in which the debtor doesn’t
have enough cash flow to cover either the principal or the interest. While
hoping that the asset will rise faster in value than the total financing
cost, he or she must borrow even more to meet the interest payments. The
ultimate goal is to be “bailed out” by selling the asset to the next
buyer.
Today the developed world looks for a “next buyer” to take over its
excessive debt load. Unfortunately, there is no such buyer in sight. The
Ponzi scheme will have to be unwound.
| |
