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Title: Hedging Chaos with Gold [Debt Default or Hyperinflation- One or the Other]
Source:
321gold.com
URL Source: http://www.321gold.com/editorials/schoon/schoon080510.html
Published: Aug 5, 2010
Author: Darryl Robert Schoon
Post Date: 2010-08-09 16:32:46 by Capitalist Eric
Keywords: None
Views: 8245
Comments: 21
Darryl Robert Schoon …what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night… dramas lie ahead as the nasty fiscal arithmetic of imperial decline drives yet another great power over the edge of chaos.- Niall Ferguson, July 28, 2010 The nasty fiscal arithmetic of imperial decline that Harvard professor Niall Ferguson refers to is America’s unsustainable debt. Growing levels of debt according to Ferguson are now about to drive the US, like other great powers before it, over the edge of chaos; an event Ferguson believes will come sooner rather than later. …most imperial falls are associated with fiscal crises…empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse. In 2010 the U.S. government is expected to issue almost as much new debt as all other governments, around the world, combined The resemblance between the above chart and the following is obvious - except, of course, to those in denial. [see them side by side here] The US borrows 45 % of all moneys borrowed by all governments and spends virtually that same percentage of global military spending. Beginning in 1980, President Reagan started the US on the road to financial collapse, borrowing heavily in order to fund the US military buildup, an act of fiscal irresponsibility that would later prove fatal. In his two terms, Reagan increased the US national debt by 258 %, the cost of which would be the loss of America’s economic power-base. After WWII, both the USSR and the US spent vast amounts of their respective GDPs on military expenditures. Bankrupted, the USSR collapsed in 1992. Three decades later, the US now faces the same fate. America’s pending bankruptcy reflects America’s shift from the world’s creditor to its largest debtor. Prior to Reagan’s military buildup, the US did not need to borrow to support the global deployment of its military; instead, in order to do so the US spent its entire hoard of gold - 21,775 tons. The only gold the US now possesses is there because in 1971 the US refused to convert its remaining gold for dollars as required under Bretton-Woods; and by the time Reagan was elected, the US could pay for its global military force only by indebting itself to others When Reagan took office, total US debt was $980 billion. Today, the budget deficit for this fiscal year alone is projected to be $1.4 trillion. After the Reagan presidency, the US accelerated its spending until sovereign default or currency debasement are its only options. SOVEREIGN DEBT SOVEREIGN DEFAULT SOVEREIGN DENIAL The Emperor has no clothes, i.e. the empire has no money The publication of Rogoff and Reinhart’s seminal work on sovereign debt in 2008 predated the sovereign debt crisis by two years; and if Rogoff and Reinhart were not surprised, they would be surprised that it would be industrialized nations that would find themselves under the scrutiny of global debt collectors. In 2010, sovereign default concerns unexpectedly shifted from developing nations, i.e. Rogoff and Reinhart’s sovereign rite of passage, to industrialized nations - Greece, Spain, Italy, the UK, the US, and Japan etc. The shift in sovereign debt concerns was accompanied by another extraordinary shift. Between 2000 and 2010, China became America’s creditor as well as its sweatshop; and China knows that the US owes so much money that only by borrowing more can it pay what it owes, a condition economist Hyman Minsky called ponzi-financing, the last stage prior to debtor default. In truth, the US is not the default virgin described in Rogoff and Reinhart’s study. The US default on its gold obligations was perhaps the most important monetary default in history, plunging the entire world into a regimen of fiat money against its will Sovereign default, however, is not the only strategy available to the US regarding its unpayable debt. The US could alternatively pay down its massive obligations by debasing its currency, a strategy wherein the US would pay its creditors with increasingly worthless US dollars - to the US, a far more convenient solution. This is why China is worried - and the rest of the world (including Americans) should be worried too. BORROW BORROW BORROW SPEND SPEND SPEND No one will be surprised when the US again tries to borrow its way back to economic growth. This has been the default strategy of the US ever since Ronald Reagan’s Treasury Secretary, Donald Regan said, “Deficits don’t matter”, a financial heresy that would eventually undermine the American economy. Capitalism is an uneasy balance between credit and debt. However, in the 1980s, far more credit was created and far more debt resulted. Combined with the removal of gold as a constraint on monetary growth, it would be only a matter of time until capitalism’s accrued debt would overwhelm the capacity of credit to contain and service it. That time has now arrived. Bankers have unleashed a beast they cannot contain. The beast is of their own making although they are careful to deny their patrimony. The bankers’ deflationary black hole of defaulting debt is now destroying capital faster than bankers can create it. This is why Fed Chairman Ben Bernanke is contemplating flooding the US economy with even more printed dollars, the so-called helicopter drop of money (Milton Friedman’s term), the proscribed solution of Milton Friedman to the Great Depression. Because Friedman observed that the money supply had contracted during the Great Depression, Friedman erroneously believed sufficient monetary expansion would prevent another depression in the future. This is why Bernanke flooded the US with money and credit in 2009 hoping Friedman was right. But Friedman was wrong. Bernanke’s palliative was temporary, producing only a short boost instead of a sustained recovery. Despite trillions of dollars spent and interest rates lowered to zero, the US money supply is still contracting - and the US economy is again slowing. Despite Friedman’s failed theory, Bernanke still believes more injections of credit and debt can do what previous injections didn’t. This is akin to an alcoholic believing more alcohol will dispel the hangover that previous drinks did not. Friedman and Bernanke’s helicopters are coming. Get ready. Can you hear the helicopters coming Printing money is easy Bernanke’s dream is our nightmare THE GOLDEN HEDGE AGAINST CHAOS In The Critical Path (St Martin’s Press 1981) Buckminster Fuller predicted the world’s power structures would fall, plunging the world into an unprecedented crisis. Communism collapsed in 1992. Now, capitalism is about to do the same. Bucky’s predicted crisis comes next. In The Great Wave (Oxford University Press 1996), Professor David Hackett Fisher observed we are at the end of a great wave - a phenomena that separates historical epochs, a phenomena which always end in the complete economic collapse of the existing order. Great Waves last 80 to 120 years. The current wave is 114 years old. At the 2010 Aspen Ideas Festival last month, Harvard Professor Niall Ferguson warned the collapse of the American empire could be imminent. I think this is a problem that is going to go live really soon,” Ferguson said. “In that sense, I mean within the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos.. When America’s empire does collapse and, like all empires, it will, chaos will reign. Today, the US is the world’s super power, its dollar is the world’s reserve currency. The collapse of the US will change all this and more. This is why the price of gold has quintupled in only ten years. America’s failing grasp on power has been mirrored by gold’s rise during that same time. In 2000, America’s credit-driven prosperity began to falter with the collapse of the dot.com bubble. Ten years later, America has still not recovered. Indeed, as Niall Ferguson predicts, its demise is imminent. Since the 1980s, the US has conspired with others to suppress the price of gold as it is an indicator of the failings of the fiat financial system upon which its power is based. This is akin to doctors icing the thermometer to convince others that the patient is not in danger; and while they have been successful in so doing, the patient is now about to expire. When the US empire implodes, the global geopolitical matrix will collapse as will much of the world’s financial underpinnings. It will be a time of chaos; and gold - history’s hedge against chaos - will again perform its time-honored role. RESPONSIBILITY AND RENEWAL In an extraordinary mea culpa published July 31st in the New York Times, President Reagan's Director of the Office of Management and Budget, David Stockman, a Republican, blamed his own party for four critical errors that contributed to America's decline: The errors are as follows: The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. It is.. an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct. [But] relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors… The second unhappy change in the American economy has been the extraordinary growth of our public debt…This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts… The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector…the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadn’t been able to obtain virtually free money from the Fed’s discount window to cover their bad bets. The fourth destructive change has been the hollowing out of the larger American economy…It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans - paid mainly from the Wall Street casino - received two-thirds of the gain in national income, while the bottom 90 percent - mainly dependent on Main Street’s shrinking economy - got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy. Read here. Stockman’s mea culpa is an unexpected admission of political responsibility especially at a time when Americans are searching for someone to blame. But there’s no one to blame except America itself. The Russians aren’t responsible, the Muslims aren’t responsible and guess what, illegal immigrants aren’t responsible either - America, and America alone, is responsible for its own demise. America was born out of the desire for freedom and a better life for all (apologies, however, are due to the Native Americans and the African slaves who suffered in the process). But, along the way, America chose to instead pursue power, not freedom; and, today, the considerable bill for America’s fatal choice is coming due - and more paper money won’t pay it. God save America from itself. Buy gold, buy silver, have faith.Hedging Chaos with Gold
Posted Aug 5, 2010
Sounds of choppers fill the sky
Whirling birds of destruction
This is how currencies die
The problem is the debt
Money’s source is credit
You ain’t seen nuthin’ yet
His solution is our demise
Helicopters filled with money
Dropping from the skies 
###
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#1. To: Capitalist Eric (#0)
Okay Mr. Boaster, give us your stock purchases, the prices you made them at and how many shares.
Being a Democratic shill means you check your humanity at the door.
Whether the USA defaults on the existing national debt, is beyond dispute. The real question is whether the government will actively and publicly repudiate the national debt, or quietly utilize the printing-presses, to maintain the facade as long as possible. The government will never publicly repudiate the debt. The simple reason is that, while the government would declare itself bankrupt, and lose the system of patronage that currently exists (if there are no government funds to funnel to their croneys, the power structure would collapse. Government lackeys become so for the pursuit of power, and will actively avoid anything which threatens that. The government, therefore, will institute massive flooding of the market, with paper money. It is an insidious tax upon the populace, in a massive transfer of wealth the politically-connected. While the inflation will destroy the majority of the public, the system of patronage will actually grow stronger, as long as the politicians are able to dole-out money to their croneys at a higher rate than inflation, in general. Either way, the system will ultimately collapse. The only question is whether the politicians and parasites in D.C. will throw us to the wolves in order to save themselves, or simply shut down the system, to soften the burden that will befall ALL of America. Recent American events paint an ominous picture of a Master Class that is now in total control. When 90% of the American people vehemently rejected the $700,000,000,000.00 ($700 billion) TARP bailout plan, the Master Class put it on a fast track and approved it anyway. When a clear majority of the American people said no to a government takeover of Chrysler and GM, the Master Class poured billions of taxpayer dollars into those corporate sinkholes and took them over anyway. When the people said no to multi-trillion dollar crony bailouts for the bankers and insurers whose corruption had caused global financial mayhem, the government pledged to those elite insiders more than $13,000,000,000,000.00 ($13 trillion) of the people’s money anyway. When the people expressed astonishment and anger that Wall Street planned to pay itself record 2009 bonuses, in the midst of America’s worst-ever fiscal and financial crisis caused by them, Wall Street stuffed its pockets with taxpayer-supported bonus money anyway. When the people said no to a proposed $40,000,000,000.00 ($40 billion) bailout of AIG and its elite trading partners such as Goldman Sachs (an amount that subsequently exploded to $180,000,000,000.00+ ($180+ billion)), the Master Class went underground, covertly misappropriated taxpayer money and made the payoffs anyway. When Fannie Mae and Freddie Mac were nationalized at enormous taxpayer expense, the government approved $6,000,000.00 individual pay packages in 2009 (150 times the average American wage) for the CEOs of both failed companies anyway. When a clear majority of the people said no to nationalized health care, even after being bombarded by a multi-million dollar, lie-drenched propaganda campaign designed to bamboozle them, the House and Senate passed nationalized health care bills anyway. When more than seven million American workers lost their jobs and were subsisting on unemployment benefits and food stamps, federal government employees, who now earn DOUBLE what private sector workers earn, were given another round of pay and benefits increases anyway. When private sector workers’ 401Ks and IRA retirement plans plummeted in value due to economic collapse and endemic Wall Street- orchestrated market corruption (including systemic front running, flash trading, naked short selling and other manipulations), government “defined benefit,” lifetime-cost-of-living-adjusted pension plans, despite already being underfunded by $2,000,000,000,000.00 ($2 trillion), were made richer than ever anyway. The long, shameful litany of events signaling the total divorce between the Master Class and the people of the United States doesn’t stop there. It goes on and on. The message from the American Master Class to the American people is simple and clear: We Defy You.
LMAO. Keep dreaming, bubba... You ever take a hard look at portfolio management theory? In a fair game, the best you can do is have a Beta that matches the stock market... And that assumes the stock market isn't rigged... (of course, Goldman-Sachs has their man-in-the-middle software that eliminates the possibility of a "fair" game.) At the end of the day, you're better to take your money to Vegas or Atlantic City, put it on the craps table... And if you lose, YOU will have lost... not a paid stock broker, who gets paid even if he loses your money... Only fools put their money into the stock/bond market... Let me guess: You listen to Mad Money with Cramer, don't you? LOL.
Gold is not a good crisis metal. You can't buy a tank of gas with Krugerrand. It's worth too much. How would you get change? In grains of gold? Yes, they are painstakingly counting out grains of gold in Zimbabwe to buy things, so I suppose that could happen here. But America is too efficient to let that happen long term. Short term, old silver coins are the best crises metal you can buy. I bought a bunch in the early 80s and more over the last two years. Long term, a monetary collapse is likely to be replaced by entrepreneurs who figure out how to tie a commodity like gold to your cell phone. I welcome that development.
Long term, a monetary collapse is likely to be replaced by entrepreneurs who figure out how to tie a commodity like gold to your cell phone. From Ferfal's blog, written about the Argentina collapse: GOLD!! Someone hit me in the head please because I messed up about the gold issue. Everyone wants to buy gold! “I buy gold. Pay cash” signs are everywhere, even on TV! I can’t believe I’m that silly! I just didn’t relate it to what I read here because they deal with junk gold, like jewelry, either stolen or sold because they needed the money, not the gold coins that you guys talk about. No one pays for the true value of the stuff, so big WARNING! Sign on people that are buying gold coins. Since it is impossible to determine the true mineral percentage of gold, small shops and dealers will pay for it as regular jewelry gold. What I would do if I were you: Besides gold coins, buy a lot of small gold rings and other jewelry. They should be less expensive than gold coins, and if the SHTF bad, you’ll not be loosing money, selling premium quality gold coins for the price of junk gold. If I could travel back in time, I’d buy a small bag worth of gold rings. Small time thieves will snatch gold chains right out of your neck and sell them at these small dealers found everywhere. This is VERY common at train stations, subways and other crowded areas. So, my advice, if you are preparing for a small economical crisis, gold coins make sense. You will keep the value of the stuff and be able to sell it for its actual cost to gold dealers or maybe other survivalists that know the true value of the item. In my case, gold coins would have been an excellent investment, saving me from loosing money when the local economy crashed. Even though things are bad, I can go to a bank down town and get paid for what a gold coin is truly worth, same goes for pure silver. But where I live, in my local are small time dealers will only pay you the value of junk gold, no matter what kind of gold you have. So, I’d have to say that if TSHTF bad, gold jewelry is a better trade item than gold coins. Forgive me for not talking about this before, but I didn’t realize this until today, when I visited my local market warehouse and saw a “Buy Gold” sign.
I completely agree with that. 100% However, I am not planning for a small economic crisis. I am planning for the world's reserve currency to collapse in a hyper- inflationary spiral. Old silver coins will do a better job at buying food and gas in this situation than gold. Different planning is needed for each scenario -- asset protection versus survival.
Of course not. He's an entertainer. I have some stocks in oil/energy. Not much, only about 50K. The rest is cash. Cash is now king with assets declining in price.
Being a Democratic shill means you check your humanity at the door.
Yes, they are painstakingly counting out grains of gold in Zimbabwe to buy things, so I suppose that could happen here. But America is too efficient to let that happen long term. Agreed. One cannot compare what has happened in Zimbabwe (third-world-shit-hole) to the US. Glad JW you see it. Now if we could only educate Eric on this point.
Being a Democratic shill means you check your humanity at the door.
I am planning for the world's reserve currency to collapse in a hyper- inflationary spiral. Old silver coins will do a better job at buying food and gas in this situation than gold. Point taken. How bad you think it gets, will determine the strategic plans you put into play. Some think it'll be the "Road Warrior" scenario... I'm not in that group, but if you're looking at that kind of scale, then NO plan will be perfect...
I'm ready. Kewl.
I don't think that, but I do think it will be at least as bad as Weirmar Republic hyperinflation. It will take months, if not years for the market to evolve a new monetary system. In the meantime, we have to eat.
Captain LunchPail couldn't answer this question...how can you have hyper inflation if asset values are depreciating because of supply?
Here's a great aricle: Hyperinflation Can Not Just Happen, But Can Be Sudden The origins of hyperinflation are with excess 'money' printing by a government... This becomes a potentially dangerous problem when severe deflation takes place because of a shock to the financial system (the Credit Crisis for instance). To make up for the loss in value of assets (deflation), the government prints a huge amount of money. The printing causes devaluation of the currency and requires more printing to try to make up for the additional loss of value. A self-feeding money printing cycle then develops. Even though huge money creation has occurred because of the Credit Crisis, we still haven't seen significant inflation yet. Indeed, the American government claims the U.S. inflation rate has fallen close to zero. How is this possible? The answer can be found in the banking system. The feds have pumped huge amounts of money into it (U.S. bank reserves have increased approximately 100 times or 10,000% since the Credit Crisis began) and banks have received this money at close to a zero percent interest rate. Yet, if you look at commercial and consumer bank lending, you will see that they have been declining. So where did all this money go? It was used to buy treasuries and this is what is allowing the federal government to fund its massive deficits. For all intensive purposes, this is a massive Ponzi scheme being run by the U.S. government. Ponzi schemes though don't follow the same rules as normal businesses or economic statistics. They build to a crescendo over time and then suddenly collapse to zero instantly. The analogy for inflation will be the opposite however. Inflation will go to zero and then suddenly jump up to some very high level.... If you think about it, the Credit Crisis seems to have come out of nowhere. It didn't of course; there was a slow, long-term build up behind the scenes that just exploded suddenly. Inflation is likely to follow that same path of development. Global governments eventually got control of the Credit Crisis collapse by throwing trillions of dollars at the problem. That solution however won't work for dealing with inflation.
Post Hoc Ergo Propter Hoc... Asset price deflation does not mean that you have to print more money...
But this is what's happening now. Huge amounts of money are being injected into the system to cover the deficit. It will get worse as foreign lenders refuse to continue to buy treasuries at the rate they've been buying them.
That has nothing to do with inflation either. We've had inflation - hyperinlfation at that - with a budget that was fairly in balance. You have unemployment that will not move lower...you have people dumping assets, paying off debt and keeping their spsnding at a very low level. There is no demand with supplies more than adequate..there is slack in the labor market...there is slack in capacity utilization... The seed of INFLATION appears nowhere.
Inflation is largely a monetary phenomenon. How does money get created? It gets created through borrowing. The amount of money getting borrowing is a largely (but not exclusively) a function of interest rates. The amount of new money that gets created for each dollar borrowed is a function of the bank reserve ratio, which is currently around 10 percent. Excess borrowing by the government can result in inflation. So can excess borrowing by the private sector, especially if the borrowing is for consumption and not used to increase the productive capacity of the country. Excess borrowing by the private sector can have a "localized" inflationary effect, for example the housing bubble where the price of homes increased far faster than prices in general, due to artificially low mortgage rates. However, excess borrowing by the government usually winds up in a general inflation. Paul Volker stamped out the inflation of the 1970s by RAISING INTEREST RATES to slow down borrowing. Over the past couple of years, the money supply has exploded and has largely been used to finance government deficits. This points to worse time ahead. As the article I posted points out, hyperinflations can start very quickly after many years of excess money creation.
It's exclusively a "monetary phenomenon"": Too many dollars chasing too few goods. Bubbles are not inflation. Bubbles are a the result of a dislocation between supply and demand the bursting of which is usually the direct result of the simple fact of a finite supply of both until just before the bubble bursts when supply will outstrip demand measurably. Even an equity bubble is the lack of a broad based distribution of capital. Thus you can have a general decline in cumulative value yet while having several sectors outperform the one sector that caused the bubble. In an inflationary economy, the vaulation of one sector is interdependent upon another. The price pull of rubber will afectthe valuation of tennis shoes. The price pull of cotton or synthetic fibers will affect the cost as well [show laces]. This results in hoarding and other consumer behaviors that result in a shortage of goods because there was no slack anywhere along the supply chain. In bubbles, you often find slack and over supply...
Yes, I generally agree with what you just wrote. Insofar as the housing bubble was in concerned, the same phenomenon was at work -- too much money chasing too few goods. Two things happened as a result: A.) Houses prices escalated (sometimes dramatically) B.) There was a huge mis-allocation of resources -- too many people building homes and not enough people building other things, which we started buy overseas. This was all caused by the same thing -- artificiality low interest rates, especially with regards to home mortgages.
While I would make the case thet interest rates were an inducement, SOMEONE HAD to make the loans. I can get a loan for a ridiculous price now. My daughter can't. Four years ago, she probably could have.
Perhaps I'm not making the point clear enough. Without the artificially low interest rates, there would have been fewer people buying houses because they wouldn't have been able to afford the mortgage payments. Prices wouldn't have escalated to the same degree. A lot of people that were building homes would have done something else for a living. There wouldn't have been a bubble, followed by the inevitable collapse.
Buy gold, buy silver, have faith.
#2. To: All (#0)
-- Stewart Dougherty --
#3. To: Nebuchadnezzar (#1)
Okay Mr. Boaster, give us your stock purchases, the prices you made them at and how many shares.
#4. To: Capitalist Eric (#0)
(Edited)
#5. To: jwpegler (#4)
Short term, old silver coins are the best crises metal you can buy. I bought a bunch in the early 80s and more over the last two years.
#6. To: Capitalist Eric (#5)
(Edited)
if you are preparing for a small economical crisis, gold coins make sense.
#7. To: Capitalist Eric (#3)
Let me guess: You listen to Mad Money with Cramer, don't you?
#8. To: jwpegler (#4)
Gold is not a good crisis metal. You can't buy a tank of gas with Krugerrand. It's worth too much. How would you get change? In grains of gold?
#9. To: jwpegler (#6)
However, I am not planning for a small economic crisis.
#10. To: Capitalist Eric (#9)
Some think it'll be the "Road Warrior" scenario...
#11. To: Capitalist Eric (#9)
Some think it'll be the "Road Warrior" scenario...
#12. To: jwpegler (#11)
(Edited)
#13. To: war (#12)
#14. To: jwpegler (#13)
To make up for the loss in value of assets (deflation), the government prints a huge amount of money.
#15. To: war (#14)
#16. To: jwpegler (#15)
(Edited)
Huge amounts of money are being injected into the system to cover the deficit.
#17. To: war (#16)
(Edited)
That has nothing to do with inflation either. We've had inflation - hyperinlfation at that - with a budget that was fairly in balance.
#18. To: jwpegler (#17)
(Edited)
Inflation is largely a monetary phenomenon.
#19. To: war (#18)
#20. To: jwpegler (#19)
#21. To: war (#20)
While I would make the case thet interest rates were an inducement, SOMEONE HAD to make the loans.
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