Ponzi scheme - a fraudulent investment operation that returns assets to the defrauded from assets they previously loaned to the scheme's operators or assets paid by subsequent newer "investors" rather than from any actual profit earned by Jake Towne, the Champion of the Constitution
(libertarian)
Thursday, December 31, 2009
While it is (comparatively) well-known that the US dollar, while a currency, is a solely an instrument of credit issued bythe Federal Reserve. All holders of dollars - including myself and most readers of this article - are in debt to the Federal Reserve. Now, this debt is really phantom debt, but the key really is printed on each dollar, more properly known as a Federal Reserve Note: "This note is legal tender for all debts, public and private." (1)
The total federal debt issued was $11.933 trillion dollars at the end of fiscal year 2009 in September per the Treasury Department, an increase of $1.9 trillion from 2008. (page 37/123) This debt will continue to increase every year until the monetary system collapses due (just in part) to the compounding "miracle" of interest rates. Federal debt is bought at auction by primary dealers (Goldman Sachs, JP Morgan Chase, etc.) and "resold" to the FED, which then inflates the money supply by creating new dollars, or "injecting liquidity." The FED can also "inject liquidity" by purchasing assets, such as toxic mortgage debt or even company stock like AIG or GM. Individual community banks, whether Citibank, Bank of America, or small local banks and credit unions, can also create new dollars with the fractional reserve system, which iscan be viewed graphically here. However,a proof I wrotedemonstrates that fractional reserve banking broke down years ago, and can be more aptly named as the "no-reserve lending" system.
Investors Eric Sprott and David Franklin have gone one step further than I in examining the Treasury situation. They note that since the largest foreign buyers of Treasuries (China)has stopped buying-- which I warned of in May 2009 in "The Gold War - China and the US Treasury Market." Sprott and Franklin wonder who purchased over $500 billion in federal debt needed to sustain the system - the FED's widely-publicized "quantitative easing" or injections of new dollars are not large enough. They suggest that the "Household Sector" in the FED'sZ1 reports- widely-assumed to be American households - really is just an extension of the FED or Treasury and this is how the scheme is being maintained both in a monetary and psychological sense. I have been unable to find errors in Sprott and Franklin's work and sources, but I encourage you to try and leave any comments below. The document is viewable below or downloadable fromhereandhere.
Also of concern isZerohedge's claimthat ~40% of the newly issued $1.9 trillion FY2009 Treasury debt must all be repurchased next year - along with the to-be-issued 2010 Treasury debt necessary to maintain the scheme, mostly to pay for the reckless deficit spending of the delusional Congress. Furthermore, they estimate the USD denominated fixed income market will need to find 11X more demand in 2010.
Will 2010 be the year the Ponzi scheme collapses? I do not know. But keep in mind the truth -the value of the dollar is completely subjective. Same with an egg or barrel of oil. Even the value of an ounce of gold is completely subjective. If you understand this truth, and study the world's most critical market (yes, it's gold) 2010 will be prosperous. As always, feel free to ask questions below and I will do my very best to answer them.
I apologize if the above seems complicated - even two years ago I would have had a lot of trouble myself. Recommended reading materials on basic economics can be foundhere. And....
Happy New Year!
Jake Towne
(1) Legal tender laws, protected by the force (or fiat) of government, are important in sustaining the modern fiat monetary and taxation systems, as I noted inthis speech. I recommend the short Hulsmann article referenced.
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
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with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Jahfre Fire Eater
Date: 2010-01-01 09:08:30
Hi Jake,
I also enjoyed the Sprott and Franklin article. This ties in with something else I read this week but couldn't find a source to share with you. I believe it was something from Agora Financial but not sure which publication. Anyway what I recall (may be off on the ratios) is that the $1.9T that the US needs to sell is only about 1/4 of the debt that needs to be sold world wide.
The question is, "where will all that cash come from"? The answer is, "The printing press". The cash doesn't exist yet. The FED will practice the JIT method of golden egg production.
The recent Dubai World financial crisis ensures loans will be tight and investors leary. That leaves the printing press as the only answer. The game is called, "Chicken." China hopes to build local markets before the US market collapses. The US hopes to reanimate the corpse of the consumer economy that the coming depression has arrived to bury before the Chinese build those local markets.
Both sides, in full view of each other and the world play a game of economic Chicken. The USA has a noose around its neck and is sitting on a pracing horse that China is helping to calm. The USA holds a gun to China's head with the unspoken threat that if the horse bolts China's head gets blown off before the USA is hung to death. Quenten Tarantino couldn't have written this scene any tighter.
Adding to the tension is the history of US Democrat Presidents going to war to change the general perception of the dispute. Violence and overwhelming force is the tactic of first resort for Democrat Presidents. China knows this better than the average American does.
I expect China to adopt a T'ai Chi posture and encourage the USA to fall on its face quickly, with maximum momentum...while smiling wisely.
Posted By: Jake Towne, the Champion of the Constitution
Date: 2010-01-01 13:24:17
Dear Jahfre -
Yep, it's getting interesting. One theory it will be interesting to follow is Jim Willie's here
http://www.gold-eagle.com/editorials_08/willie121509.html
Very intersting article, thanks for sharing that info. I think that the dollar is in a lot of trouble in the long run because the Fed is now caught in a position where it cannot withdraw the stimulus or stop the money printing because it would devastate the economy. So for investors I think it is best to continue to add to gold positions on pullbacks. And I recently read a recent article titled "Canadian Gold Stocks Rally as Gold Price Opens 2010 Higher" at http://www.goldalert.com/ which discusses the outlook for a bunch of gold-related sectors, including several gold mining companies based in Canada.
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Also of concern is