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Archive for May 2010

Gold and the Euro: Angela Merkel triggers a gold rush

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by Tim Price
Originally posted Wednesday, May 26 2010

“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense… that gold and economic freedom are inseparable.” –Alan Greenspan, unbelievably.

PHILIPP BAGUS, ON THE CONSISTENTLY EXCELLENT MISES WEBSITE, asks whether we have now crossed the point of no return. As Austrian economic theory essentially warned, a credit expansion led by a largely unchecked banking system triggered an unsustainable boom with all the attendant malinvestments. The problem, however, is not that the free market has been allowed to run out of control. Quite the contrary. Under a free market system, unsustainable financial organisations would have been liquidated. Instead, as Bagus explains, governments across the world chose to inject capital into the banks whilst guaranteeing their liabilities: “malinvestments induced by the inflationary banking system found an ultimate sponsor – the government – in the form of ballooning public debts”.

If the level of public debts before the crisis had been modest, the cost of the banking system bailouts might have been manageable. But since the level of public debts was itself at crisis levels pre-crisis, it may now be beyond the point of salvageable return. The example of Greece is hardly reassuring. Bagus suggests that the ultimate outcome of our present dilemma is the inevitable collapse of the welfare state. But whatever the outcome, the tone of the public debate requires that electorates recognise that politicians are not and cannot be the solution, because they are unequivocally the source of the problem.

The also excellent Zero Hedge blog recently carried a damning polemic entitled “The Selling Out of Germany” which makes largely the same points, albeit in some more richly spiced language. Since most of the mainstream media remain unaware of or unable to satisfactorily report the issues, we make no apology for quoting liberally from it here:

“I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation.”

A former client asks what the writer thinks of the Euro zone bailout. His response:
“Basically, it’s a total joke as is everything else the politicians have done. No one and nothing is allowed to fail and this relates to the fact that the global monetary and financial system is a complete house of cards. It’s insanely bullish for gold. If Germans rioted they would be in the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot so rather I think they will dump their Euros and buy gold. That’s how Germans riot. With every passing day and every new bailout of the global banks (which is all this is, all TARP [the notorious US Troubled Asset Relief Program] was, and all everything has been) more and more people awaken to the fact it’s all a total scam. This will just accelerate the process of dumping the paper currencies we use today in favour of hard assets as this system is obviously coming down. A lot of people keep asking, is this the same as post-Bear Stearns ? I mean here is the biggest difference in my mind. Back then people believed in the system, the market and what we have going generally. Not now. Not any more. Thousands more people every day figure out it’s rigged and it’s a Ponzi scheme.”

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Money Supply Plunging Toward Depression?

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from The Daily Bell
Originally posted Thursday, May 27, 2010

US MONEY SUPPLY PLUNGES AT 1930s pace as Obama eyes fresh stimulus … The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The stock of money in the US fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6 percent. The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The assets of institutional money market funds fell at a 37 percent rate, the sharpest drop ever. … “It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said. – UK Telegraph

Free-Market Analysis:
The talk in the United States, especially, and Britain, too, is one of recovery. Even in Europe, we noted recently, there are digital maps available that show much of the Eurozone is coming out of “recession” and various indicators are turning positive. We have never, however, believed in the “green shoots” theory. In fact, we would note that green shoots have been perceived by the powers-that-be – and their pet econometric economists – for at least two years now, making this the longest springtime ever. Maybe it has something to do with global warming – er … wait, that’s not exactly proving out either.

Even articles like the above in the Telegraph are not reporting the full nature of the problem – which is not merely banks being over-regulated and “over-capitalized.” The numbers in this case may in fact tell part of the story. The only way debt-based money begins to circulate is if banks (the sacred repositories of central bank fiat money) lend it, but banks simply aren’t lending – they are not putting central bank, debt-based money into circulation. But the culprit is not just over-regulation (or even the failure of Keynesian deficit spending), in our humble, opinion – no, not at all.

The real reason that banks STILL aren’t lending much may also have to do with the depth and breadth of the downturn. We’ve written in the past this is no ordinary downturn but a fiat-money blowoff. Western paper currencies, in fact, have all failed at once, including king dollar. They have failed because incessant credit stimulation has so distorted Western economies that even after two years, these economies have not yet returned to a point where banks and other investors can tell the difference between a legitimate opportunity and one that has been kept alive by various forms of governmental chicanery. This is why “stimulus” and “bailouts” are ultimately so counter-productive. They actually retard economic recovery.

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Written by aurick

29/05/2010 at 9:56 am

Roger Wiegand: EU Bailout Just Delays Inevitable

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Source: Barbara Templeton and Karen Roche of The Gold Report
Originally posted May 2, 2010

REPLACING MOST OF EUROPE’S COLORFUL NOTES AND VARIOUS COINS LESS THAN A DECADE AGO, the euro is on the brink of extinction, according to Trader Tracks’ Roger Wiegand, sharing news and views of Euroland’s critical condition with Gold Report readers in this exclusive interview. Roger says the euro at $1.20 is the “line in the sand where big trouble will start. . .and that’s dangerously close.” On the other side of the world, he sees China doing well now, but doesn’t pin his hopes on China as the engine for global economic growth as so many others do. In fact, he says things there are “fraying a bit on the edges.” So, is there a white horse waiting in the wings to lead the world back to economic good health? Read on…

The Gold Report: You put a rather provocative quotation in a recent Trader Tracks. It says: “The destruction of a currency does not follow a straight, predictable course… like a cancer, the disease breaks out anew because inflation cannot be cured through monetary and fiscal measures alone; it requires a fundamental change in social and political attitudes and this change usually does not occur until complete monetary chaos forces a change.” The quotation credit reads, “G. Carl Wiegand, ‘The Great Inflation: Germany,’ 1923.” Two questions: First, is Carl Wiegand among your ancestors?

Roger Wiegand: He’s not. I found that particular quote in a book, Golden Insights. It was written by James U. Blanchard III out of his Gold Newsletter of many years ago. He’d put together a collection of his favorite quotes, and that particular quote was among them. I thought it intriguing that the quotation came from someone with my surname, and it was a very interesting quote.

TGR: Very interesting indeed, and it leads right into the second question: What do you think of Carl Wiegand’s observation in light of the euro’s troubles and what’s happening in the European Union now?

RW: I think the statement was very appropriate for what’s going on in Europe today. We’ve been doing a lot of writing on this lately, and based on latest information Germany has become the engine of Europe. Its share of the huge Euroland rescue package will come to between $154 billion and $185 billion in loan guarantees. It’s going to be mostly German money and savings that was going to have to do it — their credit.
Chopper Ben (Federal Reserve Chairman Ben Bernanke), Timmy the G (Treasury Secretary Timothy F. Geithner) and the New York banksters turned up the heat and the German Parliament approved that ridiculous package in mid-May, contrary to Chancellor Angela Merkel’s urging lawmakers to reject the whole deal. They think they can blunder through to help the euro. They cannot. Germany goes down with the rest. I think the German people are very angry about this. They don’t want to be Europe’s paymaster.
I said back in 2003 that Euroland (i.e., the European Union); the European Central Bank and the euro would fail. Now it’s coming true. It’s in writing, seven years ago. I said that because I thought it was ridiculous idea for a group of countries with major cultural differences and languages, disparate economies that don’t match up at all, with their abilities to buy and sell and obtain credit being so different. There was no way to achieve parity to reach a point where they could participate as equal members. Germany is expected to save all its neighbors and it cannot.

TGR: Do you expect to see the return of guilders and schillings, pesetas, francs and marks as one outcome from all of this?

RW: Yep. Absolutely. It won’t happen overnight. It would be too much of a big changeover at once. There may be a “mini-euro,” a higher-quality currency probably established by Germany, running alongside the current euro. I contend that Germany will be the first to bail out of the European Union and abandon the euro. I have said numerous times that the German mark probably would come back, run in parallel with the euro, and eventually the euro would just be cancelled out as a currency in Germany and they would use the old marks.

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The Greek bailout’s two secret exit clauses: Why Europe is now cheering for its own demise

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by Tyler Durden
Posted originally on May 25, 2010

WHEN ALL OF EUROPE RUSHED INTO ITS RESCUE PACKAGE TWO WEEKS AGO (first half a trillion, market red, then a full trillion, market green), the one thing that struck us as odd was the conflicting data on the conditionality of the package, with various sources both confirming and denying that the “package” was revocable. It did seem somewhat shortsighted of the Germans, whose political leadership would soon be on the verge of a series of electoral routs, to tie its fate without even one exit hatch, to a country that is a financial toxic spiral.

Sure enough, the Telegraph’s Evans-Pritchard has uncovered what may be the two loopholes in the European bailout agreement. While the first one is not surprising, the second one explains why the biggest sellers of European government debt (and/or buyers of Euro sovereign CDS), are likely the governments of the distressed, and core, countries themselves.

Markets have been rattled by reports in the German media that the Greek rescue deal contains two secret clauses. The package will be “immediately and irrevocably cancelled” if it is found to breach the EU Treaty’s “no bail-out” clause, either in a ruling by the European court or the constitutional courts of any eurozone state. While such an event is unlikely, it is not impossible. There are two cases already pending at Germany’s top court in Karlsruhe, perhaps Europe’s most “eurosceptic” tribunal.

The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test.

The second clause is particularly troubling: since most European countries will soon see massive hits to their GDP, resulting in inevitable spikes in borrowing costs, this becomes yet another example of a game theory arrangement where the benefit to the first defector is far greater than any downside, with the last to defect left holding the bag on what would basically become a bail out of all of Europe. Many have wondered how arguably intelligent people could come up with a rescue package of Greece in which Greece itself is supposed to contribute to its own bailout.

Now we know that this was the ploy all along. The second Portugal, Spain and Italy are dragged under by the vigilantes, their participation in the $1 trillion bailout ends. And when that happens, the full cost of the bailout will be borne by none other than the “richest” member of the IMF, the United States. Obviously, the incentive to blow up one’s borrowing costs in this arrangement are huge, now that both Germany and the US have no choice but to bail out each and every dropping domino.

Which is why we are confident that in the very short term we will see credit spreads of the PIIGS blowing out yet again, and in the medium-term, some diligent reporter will get an anonymous tip that the biggest buyers of Spanish CDS are Santander and BBVA, the biggest buyers of Italy CDS are UniCredit and Intesa SanPaolo, the biggest buyers of UK CDS is Barclays (RBS still has to figure out how to sell its Greek bonds, let alone how to trade CDS), etc.

The bottom line is that all of Europe is now incentivized to blow itself up, and it doesn’t even have to put too much effort into it. All the borderline European countries have to do is raise their funding costs to above 5%: this is mere basis points away from where most are trading already. After all the US has no option but to bail them out: Bernanke has made it clear that his Wall Street bosses will not allow their European colleagues to be dragged down by something as trivial as total insolvency, which in turn would uncover just how bankrupt our own financial system is. These are the perverse incentives in what is now officially known as farcist capitalism.


Europe Braces for Chaos

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from The Daily Bell
Originally posted Tuesday, May 25, 2010

EUROPE’S DEFLATION TORTURE IS A GIFT TO THE FAR LEFT … If Europe’s ultra-Left has so far reaped little dividend from the great “Crisis of Capitalism”, this will surely change as the eurozone’s 1930s policies of wage deflation sap the credibility of the governing centre and the EU itself. … As historian Simon Schama wrote over the weekend in the Financial Times, “The world teeters on the brink of a new age of rage: we face a tinderbox moment” … There is typically a lag-time between economic shocks and social fury. Luckily there is no Fascist threat this time. It is the (more benign) Marxist Left that stands to gain. – UK Telegraph

Dominant Social Theme: Europe will struggle through austerity by pulling together, even if it drifts left …

Free-Market Analysis:
For several years now, we’ve been covering the power elite’s dominant social theme as regards the European Union. And what is that? It seems to be … “Only regional and even global governance can prevent another world war (or at least pan-European war) from happening.” Of course not only do we not believe it, we’ve indicated many times that the crazed bureaucrats of the EU are actually setting up a system guaranteed to heighten the very tensions they purport to downplay.

Europe is an old continent in terms of human habitation. The very first fully human incursions, according to the Bradshaw Foundation were supplemented some 20,000 years ago by Cro-Magnon migrations, from which modern Europe was eventually born. It is true that first Roman power and then (Carolus Magnus) Charlemagne on behalf of the Holy Roman Empire pulled together Europe’s fractious tribes, but neither of these interregnums proved the norm. Europe has always been fractured, by language, by race, by culture, even by climate.

Enter the ludicrous EU experiment and its false message of cheery unity. “The European Union is peace,” says French President Nicolas Sarkozy. This is the initial fear-based promotion that launched a thousand votes and re-votes and inevitably has enabled the endless corruption of the EU and the creation of a smug, pan-European political order that at its top level is not answerable to European citizens. This too-clever body of Euro-crats welcomed Greece, Portugal, Spain and Italy (and numerous other countries) knowing full well that it was creating a great regional divide that could only be fixed, eventually, by desperate and risky actions to create a political union that currently does not exist.

What right did this tiny elite group have to play with hundreds of millions of lives in order to realize their misguided and impractical goal of melding Europe together into one regional lump – apparently to serve as a stepping-stone for world government? Those who did the deed were quite aware of the unworkability of the EU. And they were quite prepared, nonetheless, to risk all for … what? For personal aggrandizement and to generate the increased wealth and control that sociopolitical and physical consolidation can yield. And yet what need is there for EU-style regionalism with all its fascistic faux-cheer that masks a vision of the future, as George Orwell wrote, “of a boot stamping on a human face – forever.”

And now … “austerity.” The masses of Europe, having been promised a brighter and more prosperous future under the benevolent regime of the EU are faced with years, perhaps decades, of what amounts to institutionalized poverty in which all the bright promises of security, early retirements and lazy living will be stripped away. Only the wretched, mercantilist banks of Europe and America will win, if it come to this. And it was all so unnecessary – as are so many of the results of the crazed power elite agenda.

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Too big to fail means too big to exist

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by Greg Hunter USAWatchdog.com
Originally posted May 24 2010

Dear CIGAs,
BOTH THE HOUSE OF REPRESENTATIVES AND THE SENATE have passed their versions of financial reform legislation. Now, the process of reconciliation takes place between both bodies of Congress to iron out a final bill the President can sign into law. There is plenty in the bill such as new consumer protection, increased power given to regulators to prevent systemic risk, and new powers to oversee the $600 trillion derivatives market. These are just a few of the highlights, and there is no telling what will actually end up in the final bill. (The derivatives problem alone can kill the U.S. economy. I wrote about this in a post called “Can The Financial System Really Be Fixed? Some Say No.”)

“Too big to fail”
The most important issues that could cause another financial crisis are not covered in the pending legislation. The biggest problem is the enormous size of the institutions being regulated. “Too big to fail” means they are simply too big, and shrinking them is not on the table. Last month, Senator Sherrod Brown (D-Ohio) explained the size problem this way: “Fifteen years ago, the assets of the six largest banks in this country totaled 17 percent of GDP. The assets of the six largest banks in the United States today total 63 percent of GDP, and that’s too (big)–we’ve got to deal with risk to be sure, but we’ve got to deal with the size of these banks, because if one of these banks is in serious trouble, it will have such a ripple effect on the whole economy.”

After the Senate passed its version of financial reform, Representative Alan Grayson said, “Too big to fail means too big to exist. We have to systematically dismantle the institution that caused the systemic risk to the economy and that, for sure, the Senate bill does not do.” I don’t see any way we are going to see a breakup of the banks. There are some amendments that will force banks to spin off risky trading operations. The banks are against any trading restrictions or spin-offs. So, getting that into a final bill is going to be tough. I don’t think the big banks will get appreciably smaller until after the next meltdown, and one is coming sooner than later.

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Greek unrest may spread

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from The Daily Bell
Originally posted Tuesday, May 11, 2010

ANGRY GREEKS ‘CARRYING THE CAN’ FOR POLITICIANS… Like the sting of police tear gas, popular anger hangs heavy in the air as protesters take to the streets of Athens, for the third time in less than a week. Some Europeans have been surprised by the extent of Greeks’ anger over government cuts in wages, pensions and increases in VAT – all measures needed to get the Greek economy back from the brink of default. The measures are a condition for the huge bailout agreed by the IMF and EU, amounting to loans to Greece worth 110bn euros (£95bn; $146bn). Why are Greek people so angry? From the outside, it looks like a spendthrift country getting what it deserves in painful cuts to public spending. At street level, however, the anger stems from a sense of injustice. Many feel that the average citizen is now paying the price for corruption and government spending that they did not benefit from. – BBC

Free-Market Analysis:
We can’t help but be a little pleased when the mainstream media occasionally validates our point of view (truly cheap thrills), and in this case, the BBC has posted a report that aligns well with something we wrote in late April. Our intrepid feedbackers provided some pushback to our conclusions (expressing the point of view that the lazy Greeks were getting what was coming to them) but we were fairly confident that we had some points to make.

And now the BBC seems to agree – not that we necessarily care for their point of view mind you. What we wrote then, and the BBC has reported on now, is that the average Greek was snookered by his or her leaders (see above). The financial and political elite of Greece took the deal provided by the EU long ago, pocketed the money and stole away, leaving the average Greek (today) to pick up the pieces.

How did the scam work? Well, the EU itself was in on it, and you can bet that doesn’t make the Greek-on-the-street any happier. What happened was that EU leaders, in order to bring in as many countries as possible into the EU, offered loans and gifts to the Greek government (especially) to help the Greeks overcome their chronic deficit spending. Once the Greeks cleaned up their books, they were “good to go” – and joined the EU.

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The unbelievably rampant corruption on Wall Street

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from The Economic Collapse
Originally posted May 20, 2010

IN ORDER FOR A FINANCIAL SYSTEM TO BE ABLE TO FUNCTION PROPERLY, it is absolutely essential that the general population has faith in it. After all, who is going to want to invest in the stock market or entrust their money to big financial institutions if there is not at least the perception of honesty and fairness in the financial marketplace?  For decades, the American people did have faith in Wall Street. But now that faith is being shattered by a string of recent revelations. It seems as though the rampant corruption on Wall Street is seeping up almost everywhere now. In fact, some of the things that have come out recently have been absolutely jaw-dropping.

The truth is that the corruption on Wall Street is much deeper and much more systemic than most of us ever dared to imagine. As the general public digests these recent scandals, it is going to result in a tremendous loss of faith in the U.S. financial system. Once faith in a financial system is lost, it can take years or even decades to get back.  So how is the U.S. financial system supposed to work properly when large numbers of people simply do not believe in it anymore?

Just consider some of the recent revelations of Wall Street corruption that have come out recently:

• Bloomberg is reporting that a massive network of big banks and financial institutions have been involved in blatant bid-rigging fraud that cost taxpayers across the U.S. billions of dollars. The U.S. Justice Department is charging that financial advisers to municipalities colluded with Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Wachovia and 11 other banks in a conspiracy to rig bids on municipal financial instruments. Read the rest of this entry »

Payment Option ARM resets to explode with devastating consequences

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by Lorimer Wilson
Originally posted January 19, 2010

THE U.S. FEDERAL GOVERNMENT AND STATES ARE BEGINNING TO prepare themselves for the next foreclosure crisis in our housing malaise – payment option ARM resets are about to explode with devastating consequences. In further edited excerpts from the original article* Ian Cooper (www.wealthdaily.com) goes on to say:

Option ARMs are considered one of the riskiest loans made during the housing boom and have left many borrowers owing much more than their homes are actually worth. These underwater mortgages have and will continue to be the driving force behind defaults and foreclosures in 2010 and 2011.

The truth of the matter is that the amount of debt wrapped up in these Option ARMs is much worse than that of subprime and if the government or the banks fail to understand this, the second round we’ve been warning about will begin and banking instability will wreak havoc yet again. Option ARM resets will be tougher for the economy to handle than subprime and, as a result, we will see greater numbers of bank failures, job losses, foreclosures, delinquencies, and economic hardships. Honest.

Just as 2007 and 2008 were the years of subprime woes, this one will go down as the year of Option ARM resets (or adjustable rate mortgage resets). With billions in Option ARM resets scheduled to take place in 2010, this crisis is about to unleash a fury no one’s prepared for. This crisis won’t be as bad as subprime, of course. It’ll be worse because:

a) lenders created these ARMs with “teaser” features for borrowers, which included making lower minimal payments for the first few years before the loan reset to a higher payment schedule and

b) if that weren’t bad enough, there was another feature called “negative amortization,” which meant you weren’t paying back any principal. In fact, with negative amortization loans, your loan balance increased over time. Incredulously, every time you made a payment, you owed the bank even more. These are the loans that allowed consumers to buy houses they couldn’t otherwise afford.

What should concern you is that about $750 billion worth of option adjustable mortgages (option ARMs) were issued between 2004 and 2007 and will begin resetting shortly. Banks like Bank of America, JP Morgan Chase, and Wells Fargo are in for a rough ride as a result, given their exposure to option ARMs.

The next phase of the real estate disaster is upon us. It’s just shifted from subprime to Option ARM and with many economists predicting unemployment will stay in the double digits, foreclosures will only accelerate, which will add to bank losses, which will add pressure to the financial system and broader economy.

Guess who’s even more broke than Greece?

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by Graham Summers
Originally posted May 18, 2010


SOME FIFTY YEARS AGO, THE NOTION OF OWING DEBT in the US carried with it some degree of shame and embarrassment. It was a point of pride to live within one’s means. And anyone who racked up large debts was seen as unsavory or unprincipled.

A lot’s changed since then. Today, debt is everywhere on a personal, state, and federal (country) level. Consumers are broke, state and municipal governments are collapsing, and even the Federal Government is running deficits and Debt to GDP ratios that are comparable to Greece.

In fact, owing money has gotten so ingrained in our collective psyche that we’ve begun dressing it up verbally to mask how broke we are. On a personal level we use the word “credit,” a word typically associated with a quality that is earned, to discuss how much money we owe. On Wall Street, garbage debt that would never be repaid was marketed as “securities,” a word associated with protection and stability.

US debt is even seen as a “safe haven”. Think about that for a moment… lending money to someone is now seen as a safe thing to do (as opposed to simply sitting on your cash).

This is how warped the world gets when you let currency-devaluing lunatics like Alan Greenspan and Ben Bernanke run the monetary policy. I don’t give a hoot for clever economic models or language.  When a world becomes so messed up that it is deemed more prudent to LEND money to someone (a broke country no less) than to simply have your cash in hand, then we have SERIOUS problem.

I implicate Greenspan and Bernanke for this because they both crafted monetary policies in which savers (those who sat on their cash) were punished for doing this. Humans are animals and can be conditioned to think anything, including the idea that it is unwise to actually keep one’s money in one’s own hands.

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