The Bill for Club Med comes due (the concept of Central Bankruptcy eloquently explained), a Parable

5/31/2011 Portland, Oregon – Pop in your mints…

Today the focus of the financial world is on events around the Mediterranean where the Greek and increasingly the Spanish people again find themselves at odds with their respective governments and their IMF / ECB / German debt collectors. 

How did they get there?  The Greeks and arguably the Spanish have been living in the social equivalent of a Club Med ever since they joined the Euro.  The initial sting of higher prices was offset for most by lower borrowing costs.  Life was good.  The advent of the Euro along with a boom in tourism began to feed a property boom in Spain and a government spending boom in Greece.

Alas, as an economy slows, the government is usually the last to know. 

Like the father whose family takes a vacation to Club Med, he is content to let the family splurge with little worry as to how he will cover the bill.  “Just throw it on the credit card, we’ll take care of it later” becomes the mantra.

Unfortunately for the father (who represents the Greek, Spanish, and arguably the US governments in our parable), his bank decides to cut his credit line just before the vacation is over.  The bill comes due and the man frantically negotiates with his bank (the ECB, IMF, and arguably the US FED) to extend his credit line enough to cover the bill. 

Club Med – Paradise Lost!

To make matters worse, upon his return the man finds that the income from his job (the government’s tax receipts in our parable) has been cut due to “the economy*.”  He now has no realistic prospect of repaying his extended credit line and instead must now consider a painful reduction in the family’s standard of living.

Naturally the family, who has developed some expensive habits while away at Club Med, rebels.  The father is now in a no win situation.  On the surface, he appears to have a choice between satisfying his family at the expense of his creditors or vice versa.

In reality, with his reduced income, he cannot satisfy either of them.  This is where the Greek and Spanish governments currently find themselves, and this is where the US Government will soon find itself.

There is, of course, an easy way out.  The man who is in this hopeless situation can declare bankruptcy.  Problem solved, right?  Not so fast.  You see, because of “the economy*,” the bank cannot release the man from his debts and have enough money to make good on its own obligations.

At this point, the Central Banks of the world (which are represented by the bank in our parable) lack not only the credibility but also the practical tools to perform their make believe function as protectors of the value of their respective currencies.

Today we read a piece by Michael Pento of Euro Pacific Capital (run by Peter Schiff) which seems to give logical credence to what we have long suspected to be the case:

“In the end, any meaningful attempt to withdraw liquidity will not only bankrupt the institution (The FED) but also zero out their remaining credibility. That’s why they’ll never even make an honest attempt.”

 The FED is helpless to remove the liquidity it has injected and will soon have to decide which of its member banks to sacrifice if the dollar is to continue as a functioning currency.  Our money is on the dollar and all who rely on it as a store of value to be the sacrificial lambs.

Back to our parable.  Both the man and the bank will continue to pretend to negotiate with each other, giving the illusion that what is now their mutual problem will supernaturally disappear.  The family will continue to pretend to debate which expenditures to cut back on as if it will make a difference.

Unfortunately, the likelihood of the problem disappearing is equivalent to the likelihood of the family being able to go back in time to cancel their trip to Club Med prior to departure.  Such is the nature of debt.

So the bank, the father, and the family find themselves clinging to a myth as they helplessly hurtle towards the unknown.

Where will they end up?

Stay Fresh!

David Mint


*Definition of “the economy”, circa 2011 – A term used to describe the large scale collapse of Central Banking and the Socialist / Communist economic model that it has created over the past 100 years.  Generally used by politicians and others in authority to “explain” why they cannot pay their obligations.  This explanation is presented to the masses as a failure of capitalism when quite the opposite is true.  Thus, this simple two word phrase is used as an excuse to further the Socialist / Communist agenda and that of the police state that is forming all around the world.

Key Indicators for Friday, May 31st, 2011

Copper Price per Lb: $4.17
Oil Price per Barrel:  $102.83

10 Yr US Treasury Bond:  3.05%
FED Target Rate:  0.09% FED IN DESPERATION MODE!!!!

Gold Price Per Ounce:  $1,534

MINT Perceived Target Rate*:  2.25% INFLATION HERE WE COME!!!!
Unemployment Rate:  9.0%
Inflation Rate (CPI):  0.4%
Dow Jones Industrial Average:  12,579
M1 Monetary Base:  $1,892,800,000,000 THE CRACK-UP BOOM BEGINS!!!!
M2 Monetary Base:  $9,036,600,000,000 MORE FUEL FOR THE CRACK-UP BOOM!!!!

 *See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.