In my last article "An Anti-Ron Paul Deflationary Economic Theory" I referred to the possibility of a deflationary environment. However, while I was writing that article, and if my favorite Federal Reserve websites are correct, this theory is most likely wrong. The United States dollar has technically embarked on a massive inflationary period by dramatically increasing the money supply. Eventually this inflation or Weimar hyperinflation will hit us, We the People.
One of the many critical pieces of news it seems that the mainstream media is not reporting on is that in the Fiscal Year ending September 30, the US national debt increased by $1,000 billion (otherwise known as a trillion). However through October 21, the national debt increased by $443 billion, or almost half of all of FY 2007 in just 3 weeks. Holy Bailout Batman!
So now it's time for the banks to take the money they got from the government/We-the-People and relieve the American consumers' (and corporations') credit addiction once more right? No, not per John Thain, CEO of Merrill Lynch-Me whose investment banking firm recently merged with US's second largest bank, the so-called Bank of America. On a personal note - never EVER trust an investment banker at his word, but that does not mean they always lie.
"We will have the opportunity to redeploy that," Mr. Thain said of the new [federally/taxpayer funded, I interject!] capital on a telephone call with analysts. "But at least for the next quarter, it's just going to be a cushion."
Although I have never met Mr. Thain, I am sure in his mind he also added "unless it's for some of my friends." The last few months have shown us Crony Capitalism at its best! In the same article, what did this New York Times article quote as our government saying?
"There is no express statutory requirement that says you must make this amount of loans," said John C. Dugan, the comptroller of the currency. "But the economics work so that it is in their interest to do so." Mr. Dugan added that he would not examine how the banks used the money, but he said their actions would "be open to the court of public opinion."
Translation: Congress gave the money to the banks to release credit, but the banks do not have to. Let's see what our next investment banker had to say here:
"I don't think that the market wants to see that capital being put to work to leverage the business up again," said Roger Freeman, an analyst at Barclay Capital, which acquired parts of the now-bankrupt Lehman Brothers last month. "My expectation is it's quarters off, not months off, before you see that capital being put to work."
And here's my favorite, from an "influential senior official at a big bank that received money from the government" who decided to retain his job (and possibly his life, I know some small American business owners where upset is far too weak of a description) by staying anonymous:
"It doesn't matter how much Hank Paulson gives us; no one is going to lend a nickel until the economy turns." The official added: "Who are we going to lend money to?" before repeating an old saw about banking: "Only people who don't need it."
Here is my reply from "the court of public opinion" to this banker and Mr. Dugan - I don't want your crappy Monopoly toilet-paper money anyways.
So what to do if you yourself are also a little miffed by the apparent callousness of the bankers? After all, wasn't Congress/"We the People"/Federal Reserve being "nice" and giving them all that money so they could get out of this mess they themselves started, why shouldn't they be "nice" back?
My opinion is to withdraw all of your deposits from these major banks immediately, save perhaps a piddly amount to pay remaining immediate bills. If you understand a balance sheet and still want cash your cash stashed in the dubious safety of a bank, store in a few banks to spread the default risk. Some credit unions should be comparatively well off and its unlikely they will all fail on the same day. Most importantly, keep (at least!) enough to get by for three months outside of the banking system. If I am wrong you will just lose the piddly little 1-2% interest rate the Federal Reserve grant you and your peon family for a few months.
In case you miss the innuendo from Mr. Thain and many other bankers and analysts, they use your capital, your money, as their principal to cover bets and investments, many of which are derivatives or poorly verified home/auto or commercial loans. As a reminder, due to the wonders of fractional reserve banking they can keep only cover 10% of their total deposits, so in effect they are also betting that 10% of their deposited money will not suddenly flee. (Umm, that's right these so-called banks actually DO NOT have all of our money. Try my Money Matrix series below.) When these bets succeeded in the past, these bankers get six-, seven-, or eight-figure bonuses, all from electronically moving your money around the globe with a bunch of mouse clicks. Apparently, when these bets do not succeed, these bankers got bailed out by the government with your future tax payments and get five-, six-, or seven-figure bonuses, where the only work they will do for the last six months of 2008 is quake in fear from their umpteenth floor office with a window view. Good news is that fractional reserve banking is a double-edged sword - for every $1 you remove, you cut down on the bank's reserves by $10 dollars, so even a $10,000 deposit will effectively remove $100,000 from the maws of these bankers.
Although we are in a time period when no one can definitely forecast the future - even the most sound economic theories could all get washed out if the US government decides to give us a dose of their 1970s-style Pinochet economics, which FYI involved empty sports stadiums, no clothes, electric cattle prods, and hot pincers on your genitals - my opinion from everything I have learned about economics combined with current events, and a logical eye, is that, strangely enough, many of the preconditions for deflation I listed in the last article are coming true.
Prices of commodities are being crushed. Gold, the barometer of inflation, is being crushed in the USD even as I write (to my glee, it's getting closer to my next buy target as with my savings I think in terms of ounces, not dollars), even though I reported last week that it set all-time highs in the Canadian dollar, Indian rupee, South African rand, British pound, and Australian dollar. The USDX is a nice number to look at (although technically it's for the birds) but it has climbed sharply where some factors I did not register such as foreign dollar-denominated bank accounts redemptions, especially in places like Europe, are forcing banks to buy dollars and sell Euros, and most likely some derivative movements hidden from view. As I already noted, my humble opinion is that from an American consumer's point of view this price deflation is a completely separate phenomenon from the massive inflation of the money supply that's going on as you read. Therefore my personal forecast for the medium-term is inflation. Unlike anything Americans have seen in the past 20 years. Perhaps followed in the long-term by hyperinflation. Laughing at silly Icelandic banking practices? Zimbabwe economics? I'm not. Here's my view on gold.
Gold is a currency. Gold is your survival insurance for the coming years. If you don't own at least some physical gold (or at least silver), in my humble opinion, you are risking your financial well-being and that of your family. Otherwise, go buy some US Treasuries, some Government Sachs and JP Morgan shares and good luck to you! Your call, and if this is all news to you, please read some of my other articles and their sources before running to your local coin store plus they probably will not have any gold or silver coin anyways!
As for me, with my piddly resources, I have started my own little personal feud with the central banks and investment bankers, and I want to help bleed them to death before they can do any more harm to our world. On my side are thousands of physical gold and silver investors here in the States, Canada, Germany and many other places, legions of gold-adorned Indian women, and the millions of other Asians who trust in gold as their "eternal wealth." Not all share my ideology of course, nor my purpose (survive and protect my family, not make astronomical profits), but this is the alliance that may change the world for the better. Join our team if you like, check out the below post from one of the leaders, Jim Sinclair of www.jsmineset.com.
For Honest Money and the Constitution.
CIGA Jake, the Champion of the Constitution
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.
Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
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Save Ron Paul's Voice - A Money Matrix Addendum
Fight the Gestapo Tactics of our Congress, McBama, and Bush with Ron Paul and I
A Money Matrix Addendum: Citigroup and GATA Call for an End to the Suppression of the Gold Market
The Money Matrix - Prelude (PART 1/15)
Calling All Wheelbarrows: Hyperinflation in America? (Part 2/2)
An Anti-Ron Paul Deflationary Economic Theory
Summary of Articles for Jake, the Champion of the Constitution (10/19/2008)
Nolan Chart Facebook Group Page Created
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Excerpt between a reader and Jim Sinclair from October 22, 2008
Dear Jim,
The question is who in the world is selling off all of this stuff? Is it the hedge funds/mutual funds? It seems that everyone is hitting the exit at the same time on a weekly basis and no matter what we all think/know to be the right place to be, it doesn't get through to all of those who strive for US Dollars. I agree with you that the dollar is doomed with what is happening, but how long will it take for everyone to wake up, if they even do Then the turn comes and we see the dollar collapse as fast as Gold has here and Gold moves up inversely. The idea being to ride it out for a period and then go back in at some level potentially much lower.
I take from your comments here that this thinking is nuts and to just stay with the plane even though it has crashed in the high mountains with a huge snow storm upon us. At least it is shelter as they have always taught us in survival training. Don't try to work your way out, let them come to you.
Bruce
Dear Bruce,
Your first lesson in staying alive in the wilderness in an emergency is not to panic, not to wander, but rather build or find shelter from the elements before anything else.
Gold is insurance and is shelter in this wilderness caused by demonic OTC derivative manufacturers. A storm is coming that is so serious Weimar now cannot be avoided and might just be duplicated. What do you think the reaction to a market losing 700 points on the Dow is going to be in DC? The Fed and Treasury will manufacture dollars in amounts never contemplated by anyone. The discount rate will drop to negative percentages. The Fed begging bowl window will be open to all and every of the old boys clubs in the US or any other country without limits on the amount of electronically created dollars. Bailouts will from this minute forward cover all and every. That dooms the US dollar and calls for gold over $1650 no matter what the black boxes and their algorithms do tomorrow.
Gold is a currency, always has been a currency and will be the only currency as a result of the madness in creating dollars to infinite levels.
The good days of the Weimar Republic came to an end in the late 1920s, especially as the depression began to take a hold on the German economy. As a result the political situation became uncertain and dangerous. The genuine believers in the republic began to lose the battle against the enemies of the Weimar Republic from the left and the right.
The hyperinflation in the Weimar Republic was accompanied by an economic depression.
Your alternative plan sounds to me as if you would sell you gold shares for zip, and throw your insurance away, hoping to re-enter your insurance at $600.
In the meantime you would hold 100% with cash. I assume it would be in US dollars.
The sellers are all in the paper market for gold. They are comprised of black boxes, 29 year old hedge fund managers and gold holders that were never really convinced. Short sellers in gold can pound and pound just like naked short sellers in equities.
I have made my bet. I am neither looking at it nor **tching about it.
I know without any shadow of doubt that I am right so let the margin traders and constant whiners go to h*ll.
I have bought insurance. I am not staring at the insurance policy.
You are not nuts, just emotional. That is quite human and normal.
Think about all I have written today, and if you agree, man up, and stop looking at it.
If you do not, then bail out immediately.
Respectfully,
Jim
©2008 Jake Towne, the Champion of the Constitution, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Thursday, October 23, 2008
Last modified: Thursday, October 23, 2008
The views expressed in this article are those of Jake Towne, the Champion of the Constitution only and do not represent the views of Nolan Chart, LLC or its affiliates. Jake Towne, the Champion of the Constitution is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: David S
Date: 2008-10-23 12:18:43
Jake you might be giving up on the deflation theory too soon. Of course it's not likely that deflation will last forever, but it could go on for a few years. During the last depression the CPI dropped for about 4 years. It fell from 51 in 1929 to 38 in 1933. The Dow Jones Industrial Avg also dropped from a high of 381 in 1929 to a low of 41 in 1932. If that's indicative of what we have in store for us then the stock market has a long long way to fall.
It's hard to say what will happen to gold. In the depression era gold was money. The dollar was fixed at about $20. / oz. of gold. But today gold is strictly a commodity. So its price is dictated by market forces. But what will happen to it in hard times? If people are confronted with a choice of buying gold or food my guess is that they'll go for food every time. In such circumstances there would be little demand for gold and its price would fall. Same for non-essential consumer goods. That would spell deflation.
I don't have a crystal ball so I can't predict the future, but I'd guess hyper-inflation will hit eventually. But the question is when?
Posted By: Jake, the champion of the constitution
Date: 2008-10-23 15:28:22
David S -
You are completely correct on the choice between gold and food. I guess I should have also mentioned to store up on food.. :) Its just that the main problem I see with the whole financial crisis is that people have forgotten what money actually is.
We sure don't have crystal balls, but my wild guesses are deflation for 6 months, then the inflation starts. But who knows?
Posted By: Jake, the champion of the constitution
Date: 2008-10-23 16:13:34
On gold, my prediction is it will stay beaten down at least for the next 11 days. But of course it could be much longer, its more or less dependent on whether the central banks decide to sell their gold.
One must always wonder why, if gold is so unimportant, why the central banks hold so many bars of the stuff.
Here's an interesting article from Switzerland. He is wondering the same thing we are
http://www.mineweb.net/mineweb/view/mineweb/en/page33?oid=71248&sn=Detail
And from goldbug John Embry who write a pretty interesting column summarizing the situation here:
"This whole event confirms my long-held belief that when push comes to shove, the US authorities will not hesitate to debase their currency in an attempt to salvage the financial system." [David S, I think we both agree 100% here]
Then "In the fullness of time, this will be a wildly inflationary and should propel gold and silver to prices that would be viewed by many in today's context to be surreal."
http://www.sprott.com/pdf/investorsdigest/digest.pdf
Don't forget that a lot of rich individuals bought into US treasuries recently. When they see that currency debauched, the stock market crushed, where will they go? Hard assets, which include gold unless they want to lose their wealth. The gold and silver markets are pitifully small compared with the amounts of fiat currency in the world today, and its pretty amazing that one of the best ways to fight back against the central banks is a simple act of buying a piece of yellow or white metal.
The central banks have all the marbles except the gold one as Fekete writes here. It may be the only way to win.
http://news.goldseek.com/GoldSeek/1187190300.php