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The Loan: An exchange of wealth for income

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by Keith Warner
Posted Jan 25, 2012

AS THE TITLE OF THIS ESSAY SUGGESTS, A LOAN IS AN EXCHANGE OF WEALTH FOR INCOME. Like everything else in a free market (imagine happier days of yore), it is a voluntary trade.  Contrary to the endemic language of victimization, both parties regard themselves as gaining thereby, or else they would not enter into the transaction.

In a loan, one party is the borrower and the other is the lender. Mechanically, it is very simple. The lender gives the borrower money and the borrower agrees to pay interest on the outstanding balance and to repay the principle. As with many principles in economics, one can shed light on a trade by looking back in history to a time before the trade existed and considering how the trade developed.

It is part of the nature of being a human that one is born unable to work, living on the surplus produced by one’s parents. One grows up and then one can work for a time. And then one becomes old and infirm, living but not able to work. If one wishes not to starve to death in old age, one can have lots of children and hope that they will care for their parents in their old age. Or, one can produce more than one consumes and hoard the difference.

One discovers that certain goods are better for hoarding than others.  Beyond a little food for the next winter season, one cannot hoard very much.  One of the uses of the monetary commodity is to carry value over time.  So one uses a part of one’s weekly income to buy, for example, silver.  And over the years, one accumulates a pile of silver.  Then, when one is no longer able to work, one can sell the silver a little at a time to buy food, clothing, fuel, etc.

Like direct barter trade, this is inefficient. And there is the risk of outliving one’s hoard.  So at some point, a long time ago, they discovered lending.  Lending makes possible the concept of saving, as distinct from hoarding.  It is as significant a change as when people discovered money and solved the problem of “coincidence of wants”.  This is for the same reason: direct exchange is replaced by indirect exchange and thereby made much more efficient.

With this new innovation, one can lend one’s silver hoard in old age and get an income from the interest payments.  One can budget to live on the interest, with no risk of running out of money.  That is, one can exchange one’s wealth for income.

If there is a lender, there must also be a borrower or there is no trade. Who is the borrower? He is typically someone young, who has an income and an opportunity to grow his income. But the opportunity—for example, to build his own shop—requires capital that he does not have and does not want to spend half his working years accumulating. The trade is therefore mutually beneficial.  Neither is “exploiting” the other, and neither is a victim. Both gain from the deal, or else they would not agree to it. The lender needs the income and the borrower needs the wealth.  They agree on an interest rate, a term, and an amortization schedule and the deal is consummated.

I want to emphasize that we are still contemplating the world long before the advent of the bank. There is still the problem of “coincidence of wants” with regard to lending; the old man with the hoard must somehow come across the young man with the income and the opportunity.  The young man must have a need for an amount equal to what the old man wants to lend (or an amount much smaller so that the old man can lend the remainder to another young man). The old man cannot diversify easily, and therefore his credit risk is unduly concentrated in the one young man’s business. And bid-ask spreads on interest rates are very wide, and thus whichever party needs the other more urgently (typically the borrower) is at a large disadvantage.

Of course the very next innovation that they discovered is that one need not hoard silver one’s whole career and offer to lend it only when one retires. One can lend even while one is working to earn interest and let it compound. This innovation lead to the creation of banks.

But before we get to the bank, I want to drill a little more deeply into the structure of money and credit that develops.

Before the loan, we had only money (i.e. specie). After the loan, we have a more complex structure. The lender has a paper asset; he is the creditor of the young man and his business who must pay him specie in the future. But the lender does not have the money any more. The borrower has the money, but only temporarily. He will typically spend the money. In our example, he will hire the various laborers to clear a plot of land, build a building and he will buy tools and inventory.

What will those laborers and vendors do with the money? Likely they will keep some of it, spend some of it… and lend some of it. That’s right. The proceeds that come from what began as a loan from someone’s hoard have been disbursed into the economy and eventually land in the hands of someone who lends them again! The “same” money is being lent again!

And what will the next borrower do with it? Spend it. And what will those who earn it do? Spend some, keep some, and lend some. Again.

There is an expansion of credit! There is no particular limit to how far it can expand. In fact, it will develop iteratively into the same topology (mathematical structure) as one observes with fractional reserve banking under a proper, unadulterated gold standard!

Without banks, there are two concepts that are not applicable yet. First is “reserve ratio”. Each person is free to lend up to 100% of his money if he wishes, though most people would not do that in most circumstances.

And second is duration mismatch. Since each lender is lending his own money, by definition and by nature he is lending it for precisely as long as he means to. And if he makes a mistake, only he will bear the consequences. If one lends for 10 years duration, and a year later one realizes that one needs the money, one must go to the market to try to find someone who will buy the loan. And then discover the other side of that large bid-ask spread, as one may take a loss doing this.

Now, let’s fast forward to the advent of the investment bank. Like everyone else in the free market, the bank must do something to add value or else it will not find willing trading partners. What does the bank do?

As I hinted above, the bank is the market maker. The market maker narrows the bid-ask spread, which benefits everyone. The bank does this by standardizing loans into bonds, and the bank stands ready to buy or sell such bonds. The bank also aggregates bonds across multiple lenders and across multiple borrowers. This solves the problem of excessive credit risk concentration, coincidence of wants (i.e. size matching), and saves both lenders and borrowers enormous amounts of time. And of course if either needs to get out of a deal when circumstances change, the bank makes a liquid market.

The bank must be careful to protect its own solvency in case of credit risk greater than it assumed. This is the reason for keeping some of its capital in reserve! If the bank lent 100% of its funds, then it would be bankrupt if any loan ever defaulted.

What the bank must not do, what it has no right to do, is lend its depositors’ funds for longer than they expressly intended. If a depositor wants to lend for 5 years, it is not the right of the bank to lend that depositor’s money for ten! The bank has no right to declare, “well, we have a reserve ratio greater than our estimated credit risk and therefore we are safe to borrow short from our depositors to lend long”

Not only has the bank no way to know what reserve ratio will be proof against a run on the bank, but it is inevitable that a run will occur. This is because the depositors think they will be getting their money back, but the bank is concealing the fact that they won’t behind an opaque balance sheet and a large operation. So, sooner or later, depositors need their money for something and the bank cannot honor its obligations. So the bank must sell bonds in quantity. If other banks are in the same situation, the bond market suddenly goes “no bid”.

The bank has no legal right and no moral right to lend a demand deposit or to lend a time deposit for one day longer than its duration. And even then, the bank has no mathematical expectation that it can get away with it forever.

Like every other actor in the market (and more broadly, in civilization) the bank adds enormous value to everyone it transacts with, provided it acts honestly. If a bank chooses to act dishonestly (or there is a central bank that centrally plans money, credit, interest, and discount and forces all banks to play dirty) then it can destroy value rather than creating it.

Unfortunately, in 2012 the world is in this sorry state. It is not the nature of banks or banking per se, it is not the nature of borrowing and lending per se, it is not the nature of fractional reserves per se. It is duration mismatch, central planning, counterfeit credit, buyers of last/only resort, falling interest rates, and a lack of any extinguisher of debt that are the causes of our monetary ills.

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Written by aurick

25/01/2012 at 5:12 pm

Banking’s Titans finally get their comeuppance

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by Rick Ackerman
Posted September 14, 2011

WITH BANK OF AMERICA’S RECENT ANNOUNCEMENT THAT IT PLANS to lay off 30,000 workers, the Great Recession has finally spread its shadow over a sector of the economy that had seemed inured to hard times.

Investment consulting, mortgages, mergers and acquisitions and the rest of banking’s most lucrative concessions have fallen into a more or less permanent funk, and so the banks are faced with the prospect of earning their money the hard way – i.e., through ruthless cost-cutting, and via fees on checking accounts, credit cards and other transaction-based services.

How dull! Embarrassing, even, since financial bigwigs who were pulling down seven-figure bonuses just a year ago thanks to the Federal Reserve’s extravagant bailout terms, will now be fighting to earn their base pay by nickel-and-diming their customers to death. Imagine a loan officer having to concern himself with something so mundane as a local businessman’s request for money to finance inventory.

We feel sorry for the many bank employees who are about to lose their jobs, especially since they face such bleak prospects for re-employment. With respect to the fate of banking’s top brass, however, it’s going to be hard to hide our schadenfreude if a few of these prodigious paper-shufflers wind up living out of shopping carts. Ditto for securities traders at the big banks, for they have turned the markets into a giant casino, exploiting mathematically arcane opportunities that have absolutely nothng to do with the business of making, buying and selling real things.

In recent years, stock and bond markets have almost completely decoupled from the real economy – so much so that they will probably have to collapse into ruin before honest markets can re-emerge – markets that serve the real commerce of the real world.  The epic fraud of financial markets reached its apotheosis with high-frequency trading, a tactic that uses computer-driven algorithms to exploit bid/offer spreads that exist for mere nanoseconds. Because these trades can move no more quickly than the speed of light, it is necessary to execute them on servers that sit on the trading floor rather than on microprocessors associated with distant satellite feeds.  How long could that game go on?

Five things you need to know about the economy

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by David Galland of Casey Research
Posted  August 3, 2011

AT ANY POINT DURING THE RECENT NEGOTIATIONS IN WASHINGTON over the debt, did you seriously think for even a second that the U.S. was about to default?

Of course, in time the U.S. government (along with many others) will default. However, they are highly unlikely to do so by decree or even through the sort of legislative inaction recently on display. Rather, it will come about through the time-honored tradition of screwing debtors via the slow-roasting method of monetary inflation.

Yet most people still bought into the latest drama put on by the Congressional Players – a troupe of actors whose skills at pretense and artifice might very well qualify them for gilded trophies at awards banquets. Instead, rather than glittering statuettes, these masters of the thespian arts settle for undeserved honorifics and the pole position at the public trough. Followed by lifelong pensions.

But to the heart of the current matter, do I think that the latest antics out of Washington will have any more lasting effect on the trajectory of the economy than what I had for breakfast this morning (raw oats with a dab of maple syrup, milk, a sprinkling of strawberries, and half of a banana, sliced)?

Absolutely not. Sorry to say, but the trajectory of the economy at this point is well established, and closely resembles that of a meteor streaking through the night sky. What’s left of the solid matter of the nation’s accumulated private wealth is fast being burned off by an unstoppable inferno of government spending, inevitably leading to an earth-shaking crash.

I make this dire prediction not out of an aberrant psychology (I hope), or in an outburst of self-promotion for Casey Research because the big-picture scenario we have so long warned of is unfolding according to script, but rather due to certain fundamental truths about our current situation. And that brings me to the five things you need to know about the U.S. economy (much of which also applies to the other large developed nations)…

1. The U.S. remains in the grip of a debt-induced depression.

While personal levels of debt have eased somewhat since the crash, most of the improvements have come at the expense of debt repudiation, and are offset by the steep decline in housing prices that have left something like 50% of mortgages underwater. Meanwhile the debt on the balance sheets of the U.S. government and the country’s largest financial institutions remain at record highs – and much of that debt is toxic. So, what’s the one thing that the heavily indebted – individual or institution – most fears? Answer: Rising interest rates.

2. Interest rates can’t stay low.

Despite the debt, interest rates remain near historic lows – which is to say, well below the norm. At some point they have to at least revert to the mean, which would push the 10-year treasury rate north of 5% from current rates below 3%. But in reality, the levels of monetary inflation, the nature of the debt, and mind-numbing scale of the government’s other financial obligations – in total upwards of $70 trillion – all but guarantee that interest rates must go much higher than 5%. That in turn torpedoes the half-sunk real estate market and risks kicking off a debt death spiral as higher interest payments suck the financial juice out of the economy and causes debtors to demand even higher rates. Say hello to Doug Casey’s Great Depression.

The last time the U.S. economy found itself in such dire straits was back in the 1970s, when the problem was raging price inflation. Back then, though, the debt levels were considerably lower than they are now. Then, Fed Chairman Paul Volcker had the latitude to raise rates and by so doing helped to choke out inflation. By contrast, today the Fed is virtually helpless. Rates certainly can’t be pushed lower by any appreciable amount, and the Fed sure as hell doesn’t want them to go up. While the Fed has been a primary factor in controlling interest rates up to this point in the crisis, in the near future the direction of interest rates – particularly long-term rates – will increasingly be determined by skittish market participants. Specifically, the sovereign and institutional buyers whom the U.S. Treasury so desperately needs to keep showing up at their auctions.

To use a metaphor, the situation today is akin to a bunch of gunfighters facing off in a dusty street, hands poised over their six-shooters, eyes nervously shifting this way and that – to the eurozone, to the housing markets, to the situation in Japan, to the U.S. government spending, to the crumbling balance sheets of the banks, to the Fed. Everyone is anxiously watching, waiting for someone else to start making the first move. The standoff can’t last – and when the lead starts flying, there will be few places to hide.

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A thousand pictures is worth one word

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by Jeff Clark, Big Gold
Posted July 15, 2011

IN SPITE OF CONSTANT HEADLINES ABOUT DEBTS AND DEFICITS, most Americans don’t really believe the U.S. dollar will collapse. From knowledgeable investors who study the markets to those seemingly too busy to worry about such things, most dismiss the idea of the dollar actually going to zero.

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.

BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!

As you scroll through the 23 banknotes (fiat currencies) below, you’ll see some long-ago casualties. What’s shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you’ve been born. You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price.

So what’s the one word for the “thousand pictures” below? Worthless.

Yugoslavia – 10 billion dinar, 1993

Zaire – 5 million zaires, 1992

Venezuela – 10,000 bolívares, 2002

Ukraine – 10,000 karbovantsiv, 1995

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500 Million debt-serfs: the European Union is a neo-feudal Kleptocracy

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by Charles Hugh Smith
Posted July 22, 2011 on Of Two Minds

The banks of Europe are the new Feudal Manors and Masters. All Europeans now serve them as debt-serfs in one way or another.

IF WE KNOCK DOWN ALL THE FLIMSY SCREENS OF ARTIFICE AND OBSCURING COMPLEXITY, what we see in Europe is a continent of debt-serfs, indentured to the banks under the whip of the European Union and its secular religion, the euro. I know this isn’t the pretty picture presented by the EU Overlords, of a prosperity built not just on debt, but on resolving the problem of debt with more debt, but it is the reality behind the eurozone’s phony facade of economic “freedom.”

What else can we call the stark domination of the big banks other than Neo-Feudalism? In one way or another, every one of the 27-member nations’ citizens are indentured to the big international banks at risk in Europe, most of which are based in Europe.

Amidst the confusing overlay of voices and agendas, there is really only one agenda item: save the big European banks. Everything else is just mechanics. The banks are the new feudal manor houses, the bankers are the new feudal lords, and the politicians of the EU and its influential member nations are the servile vassals who enforce the “rule of law” on the serfs.

Here is the fundamental fact: there are trillions of euros of debt which can never be paid back. In a non-feudal system, one in which the banks were not the Masters, then this fact would be recognized and acted upon: something like 50% of the debt would be written off in one fell swoop, all the banks whose assets had just been wiped out would be declared insolvent and liquidated, the remaining debt would be sized to the economic surplus of each debtor nation, and a new, decentralized banking sector of dozens of strictly limited, smaller banks would be established.

To the degree that is “impossible,” Europe is nothing but a Neo-Feudal Kleptocracy serving its Banker Lords.

The Greek worker whose pay has been slashed in the “austerity” demanded by the banks serves the Banker Lords, as does the German worker who will be paying higher taxes to bail out Germany and France’s Banker Lords. Though the German is constantly told he is bailing out Greece, the truth is Greece is just the conduit: he’s actually bailing out the EU’s Banker Lords.

We can clear up much of the purposeful obfuscation by asking: exactly what tragedy befalls Europe if all the sovereign debt in the EU was wiped off the books? The one and only “tragedy” would be the destruction of the “too big to fail” banks, not just in Europe but around the world. As the big European banks imploded, then their inability to service their counterparty obligations on various derivatives to other big banks would topple those lenders.

While the political vassals call that possibility a catastrophe, it would actually spell freedom for Europe’s 500 million debt serfs. From the lofty heights of the Manor House, then the loss of enormously concentrated power and wealth is indeed a catastrophe for the Lords and their political lackeys. But for the debt-serfs facing generations of servitude for nothing, then the destruction of the banks would be the glorious lifting of tyranny.

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The top five places NOT to be when the dollar collapses

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by Silver Shield
Posted June 23rd,2011

http://dont-tread-on.me/top-5-places-not-to-be-when-the-dollar-collapses/

THE DOLLAR COLLAPSE WILL BE THE SINGLE LARGEST EVENT IN HUMAN HISTORY. This will be the first event that will touch every single living person in the world. All human activity is controlled by money. Our wealth, our work, our food, our government, even our relationships are affected by money. No money in human history has had as much reach in both breadth and depth as the dollar. It is the de facto world currency. All other currency collapses will pale in comparison to this big one. All other currency crises have been regional and there were other currencies for people to grasp on to. This collapse will be global and it will bring down not only the dollar but all other fiat currencies,as they are fundamentally no different. The collapse of currencies will lead to the collapse of ALL paper assets. The repercussions to this will have incredible results worldwide. (Read the Silver Bullet and the Silver Shield to protect yourself from this collapse.)

Thanks to the globalization and the giant vampire squids of the Anglo-American Empire, the dollar is the world’s reserve currency. It supports the global economy in settling foreign trade, most importantly the Petro Dollar trade. This money is recycled through the City of London (not to be confused with London) and New York. This fuels our corporate vampires that acquires and harvests the wealth of the world. The corporate powers suppress REAL assets like natural resources and labor to provide themselves massive profits. This Fascist, Statist, Collectivist model provides the money into the economy to fund an ever increasing federal government. That government then grows larger and larger enriching its minions with jobs to control their fellow citizens. Finally, to come full circle, the government then controls other nations through the Military Industrial Complex.

This cycle will be cut when the mathematically and inevitable collapse of the dollar occurs. In order for our debt based money to function we MUST increase the debt every year in excess of the debt AND interest accrued the year before or we will enter a deflationary death spiral. When debt is created, money is created. When debt is paid off, money is destroyed. There is never enough to pay off the debt, because there would be not one dollar in existence.

We are at a point where we either default on the debt, willingly or unwillingly, or create more money/debt to keep the cycle moving. The problem is if you understand anything about compounding interest, we are reaching the hockey stick moment where the more debt that is incurred, the less effective it is and this leads us to hyperinflation. There are only two actors needed for this hyper inflation, the Lender of Last Resort, the Fed,and the Spender of Last Resort, the government. These two can, and will, blow up the system. I believe they will wait until the next crisis and the whiff of deflationary depression before they fire up the printing presses. That crisis is coming very soon at the end of this summer or fall. The money and emergency measures are worn out. The fact is that NONE of the underlying problems that caused the 2008 crisis have been resolved. The only thing that has happened is that instead of corporate problems, we now have nation problems. In this movie Greece will play the role of Lehman Brothers and the United States will play the role of AIG. The problem is there is nowhere to kick the can down the road and there is no world government to absorb the debt, yet…(Problem,Reaction,Solution.)

So this leads me to the top five places not to be when the dollar collapses:

1. Israel- This Anglo-American beach head into the Middle East was first conceived by the most powerful family in the world,the Rothschilds, in 1917. The Balfour Declaration said that there will be a Zionist Israel years before World War Two and the eventual establishment of Israel. Israel has not been a good neighbor to its Muslim nations and has always had the two biggest bullies on the block at its back. When the dollar collapses, the United States will have much too much on its plate both domestically and internationally to worry about such a non-strategic piece of land. This will leave Israel very weak at a time when tensions will be high. This very thin strip of desert land will not be able to withstand the economic reality of importing its food and fuel or the political reality of being surrounded by Muslims.

2. Southern California- The land of Fruits and Nuts turns into Battlefield Los Angeles. Twenty million people packed into an area that has no water and thus food is not good to say the least. Throw on top of the huge wealth disparities and the proximity to a narco state and this does not bode well. We have seen riots for Rodney King, what will happen when the dollar is destroyed and food and fuel stop coming into this area? People will get desperate and do crazy things, especially when a huge proportion of its citizens are on anti-depressants. If food and fuel cannot get in, what about Zolfot? At a time when the world is falling apart, they lack the ability to deal with this new paradigm. If people come off of these drugs too fast they suffer psychotic breaks and you will have thousands of shootings or suicides.

3. England- The Land of the Big Brother and former Empire of world wide slave and drug trade will suffer heavily. The stiff upper lip that their the British Elite ingrained into their sheeple will not work any more as the British population explodes. The human character will sacrifice and unite for a foreign enemy, but not if the enemy has always been the Elite. The Anglo-American Empire may pull off another false flag to distract its population on another Emmanuel Goldstein like in 1984, but I feel this collapse will happen before they pull it off. This will make all eyes point at the British Elite as solely responsible for this catastrophe. We have seen massive riots for soccer matches with hooligans. What will happen when this island with very little food and fuel gets cut off?

4. New York City- Another large urban area living too high on the dollar hog. NYC is the area I moved out of in 2008. There is little doubt that all of the wealth in New York, New Jersey and Connecticut is derived from Wall Street wealth. The savings and investments of the whole nation and much of the world flows through this financial capital. As the world wakes up to the massive financial fraud, this will lead to the destruction of capital like we have never seen before. This will have tremendous effects on the regional economy as people (perhaps owning very expensive cars) suddenly wonder where their next meal is coming from.

5. Washington D.C.- The political collapse of the Federal Government will wreak havoc on the hugely inflated local economy. As more and more states find it necessary to assert their natural control, the Federal Government will suddenly lose power and importance as the whole world suffers from a Global Hurricane Katrina. The money that they create and spend will become worthless and the government minions’ pensions will evaporate. Millions that once relied on the ability to force others to send their money to them will learn that the real power has always been at the most local level. Massive decentralization will be the answer to globalization gone mad. Local families and communities will forgo sending money and power out of their community as they will care about their next meal and keeping warm.

“You can ignore reality,but you can’t ignore the consequences of ignoring reality.” -Ayn Rand

To sum up,those areas that have lived highest on the hog in the dollar paradigm will most likely be the worst places to live when the dollar collapses. Many of you will find this article of passing interest, but rest assured this dollar collapse is coming. It is a mathematical inevitability. We will not be as fortunate to muddle through this collapse like we did in 2008 when it was a corporate problem. This time around, it is a national and global problem. The global Ponzi scheme has run out of gas as the demographics decline, as cheap abundant oil declines, as hegemonic power declines. This comes at a time when we reach the exponential or collapse phase of our money. The Irresistible Force Paradox says, ”What happens when an unstoppable force meets an immovable object?” We are about to find out,when infinite money hits a very finite world.

If you want to become aware and prepared for this collapse, please join the free Sons of Liberty Academy.

Gold and silver: We were right – they were wrong

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by Brandon Smith of Alt Market
Posted July 25, 2011

ONLY NOW, AFTER THREE YEARS OF ROLLER COASTER MARKETS, EPIC DEBATES, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway.

Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’).

Alternative analysts have pleaded with the public to take measures to secure their hard earned wealth by apportioning at least a small amount into physical gold and silver. Some economists, though, were silly enough to overlook this obvious strategy. Who can forget, for instance, Paul Krugman’s hilarious assertion back in 2009 that gold values reflect nothing of the overall market, and that rising gold prices were caused in large part by the devious plans of Glen Beck, and not legitimate demand resulting from oncoming economic collapse.

To this day, with gold at $1600 an ounce, Krugman refuses to apologize for his nonsense. To be fair to Krugman, though, his lack of insight on precious metals markets is most likely deliberate, and not due to stupidity, being that he has long been a lapdog of central banks and a rabid supporter of the great Keynesian con. [And he a Nobel Prize winner!] Some MSM economists are simply ignorant, while others are quite aware of the battle between fiat and gold, and have chosen to support the banking elites in their endeavors to dissuade the masses from ever seeking out an alternative to their fraudulent paper. The establishment controlled Washington Post made this clear with its vapid insinuation in 2010 that Ron Paul’s support of a new gold standard is purely motivated by his desire to increase the value of his personal gold holdings, and not because of his concern over the Federal Reserve’s destructive devaluing of the dollar!

So, if a public figure owns gold and supports the adaptation of precious metals to stave off dollar implosion, he is just trying to “artificially drive up his own profits”. If he supports precious metals but doesn’t own any, then he is “afraid to put his money where his mouth is”. The argument is an erroneous trap, not to mention, completely illogical.

Numerous MSM pundits have continued to call a top for gold and silver markets only to be jolted over and over by further rapid spikes. Frankly, it’s getting a little embarrassing for them. All analysts are wrong sometimes, but these analysts are wrong ALL the time. And, Americans are starting to notice. Who beyond a thin readership of mindless yuppies actually takes Krugman seriously anymore? It’s getting harder and harder to find fans of his brand of snake oil.

Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Debt ceiling debate a final warning sign

If average Americans weren’t feeling the heat at the beginning of this year in terms of the economy, they certainly are now. Not long ago, the very idea of a U.S. debt default or credit downgrade was considered by many to be absurd. Today, every financial radio and television show in the country is obsessed with the possibility. Not surprisingly, unprepared subsections of the public (even conservatives) are crying out for a debt ceiling increase, while simultaneously turning up their noses at tax increases, hoping that we can kick the can just a little further down the road of fiscal Armageddon. The delusion that we can coast through this crisis unscathed is still pervasive.

Some common phrases I’ve heard lately: “I just don’t get it! They’re crazy for not compromising! Their political games are going to ruin the country! Why not just raise the ceiling?!”

What these people are lacking is a basic understanding of the bigger picture. Ultimately, this debate is not about raising or freezing the debt ceiling. This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.

We have two paths left as far as the mainstream economy is concerned; default leading to dollar devaluation, or, dollar devaluation leading to default. That’s it folks! Smoke em’ if you got em’! This train went careening off a cliff a long time ago.

If the U.S. defaults after August 2, a couple of things will happen. First, our Treasury Bonds will immediately come into question. We may, like Greece, drag out the situation and fool some international investors into thinking the risk will lead to a considerable payout when “everything goes back to normal”. However, those who continued to hold Greek bonds up until that country’s official announcement of default know that holding the debt of a country with disintegrating credit standing is for suckers. Private creditors in Greek debt stand to lose at minimum 21% of their original holdings because of default. What some of us call a “21% haircut”.

With the pervasiveness of U.S. bonds around the globe, a similar default deal could lead to trillions of dollars in losses for holders. This threat will result in the immediate push towards an international treasury dump.

Next, austerity measures WILL be instituted, while taxes WILL be raised considerably, and quickly. The federal government is not going to shut down. They will instead bleed the American people dry of all remaining savings in order to continue functioning, whether through higher charges on licensing and other government controlled paperwork, or through confiscation of pension funds, or by cutting entitlement programs like social security completely.

Finally, the dollar’s world reserve status is most assuredly going to be placed in jeopardy. If a country is unable to sustain its own liabilities, then its currency is going to lose favor. Period. The loss of reserve status carries with it a plethora of very disturbing consequences, foremost being devaluation leading to extreme inflation.

If the debt ceiling is raised yet again, we may prolong the above mentioned problems for a short time, but, there are no guarantees. Ratings agency S&P in a recent statement warned of a U.S. credit downgrade REGARDLESS of whether the ceiling was raised or not, if America’s overall economic situation did not soon improve. The Obama Administration has resorted to harassing (or pretending to harass) S&P over its accurate assessment of the situation, rather than working to solve the dilemma. Ratings company Egan-Jones has already cut America’s credit rating from AAA to AA+.

Many countries are moving to distance themselves from the U.S. dollar. China’s bilateral trade agreement with Russia last year completely cuts out the use of the greenback, and China is also exploring a “barter deal” with Iran, completely removing the need for dollars in the purchase of Iranian oil (which also helps in bypassing U.S. sanctions).

So, even with increased spending room, we will still see effects similar to default, not to mention, even more fiat printing by the Fed, higher probability of another QE announcement, and higher inflation all around.

This period of debate over the debt ceiling is liable to be the last clear warning we will receive from government before the collapse moves towards endgame. All of the sordid conundrums listed above are triggers for skyrocketing gold and silver prices, and anyone not holding precious metals now should make changes over the course of the next month.

What has been the reaction of markets to the threat of default? Increased purchasing of precious metals! What has been the reaction of markets to greater spending and Fed inflation? Increased purchasing of precious metals! The advantages of gold and silver are clear…

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