We spent the weekend attacking sections of our yard that had, until now, remained a wilderness reserve due to our inner laziness. Trees, shrubs, ivy that had been allowed to grow unchecked all fell victim to our saw and lopper (which must be the best tool ever invented). The yard now appears more barren, if not civilized, than before.
Like everything, it came at a price. Our back may never be the same and working in such close company with the pines seems to have triggered a latent allergy which nearly floored us for the balance of the weekend.
Fighting nature is not a long term strategy, but it has provided a strange sort of satisfaction in the near term.
This is the same sort of satisfaction that the Swiss National Bank must be feeling after they arbitrarily decided to cap the Franc:Euro exchange rate at 1.2:1, effectively throwing their lot in with the doomed Euro. From the Wall Street Journal:
“The SNB said Tuesday that it would “no longer tolerate” the euro falling below the minimum rate. In a statement, it said it will enforce the limit with “the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
While this type of action should come as no surprise to our readers, it is significant because the Swiss have traditionally been a sort of neutral safe haven on a number of fronts, not the least of which being money and banking.
Their abstention from joining the Euro in the first place was a testament to this. Their capitulation today simply gives more credence to the extraordinary pressures that the competitive devaluation of all fiat currencies is placing on those Central Banks which for one reason or another have chosen not to compete.
The Swiss currency has been under siege ever since its neighbors embarked on the Euro currency experiment. Being the ingenious people that they are, the Swiss, with their mountain bunker airbases and underground buildings, were able to hold out for a long time.
What finally sent them over the edge? We are not certain but we can only imagine that, as the Franc soared unwittingly towards parity with the Euro, the intelligent Swiss flocked across the border to purchase whatever they could from their unwitting neighbors who are all unequally yoked to the Euro’s fate.
In other words, why shop in Geneva when your Francs go further in France?
Having seen enough, the SNB is has now crossed the ropes and is entering the Battle Royal of fiat currency devaluation. Who will be standing at the end?
Fiat Currencies Battle for Devaluation
This is a trick question, as our equally intelligent fellow tax-payers will quickly point out. There are no winners when something with no value is widely recognized as such. Only mayhem, yelling, pile drivers, body slams, blood, and drama.
Most investors are now waking up and realizing that it is time to hold currency reserves (household savings) in Gold, Silver, Pork loins, anything but fiat currencies.
Get out of the arena and avoid the ensuing traffic jam. This sort of mayhem is better enjoyed from the comfort of one’s home and the quicker one gets there the better!
Just when you thought it couldn’t get any worse, Friday delivered a doozy of a one-two punch to the financial markets. The jobs report everyone watches showed that no new jobs were added in August. While this should come as no surprise to the sober and observant, most traders and economists took it square on the jaw with their gloves down at their sides.
The Chart of the Day, courtesy of the Money Game, shows what intelligent people like yourself, fellow taxpayer, already know. This recession is not like anything the current authorities have ever dealt with before. It is a balance sheet problem that has only one solution, widespread default.
The second punch came in the form of a lawsuit filed by the US Government against some of the heavyweights in the banking industry. A list of the defendants can be seen here and lo and behold, Bank of America is one of them.
There is much to think about over the coming weekend, but we think Michael Pento of EuroPacific Capital summed it up best in and interview yesterday:
“…do not keep money in the bank. You have to buy something that the government cannot duplicate by fiat.”
By fiat, he means currency or, by extension, bonds that are denominated in them. Starting in January, the FED’s cheapest money ever begins to hit main street. Then inflation will be on everybody’s mind.
With the markets relatively calm until the sparks fly later next week, we conclude our tale. Our tale is, among other things, a recount of the recent history of Bank of America wrapped up in a vehicle metaphor: “Ode to the Auto Feo,” originally inspired by the recent passing of a vehicle that taught us many valuable lessons.
You can catch up with the “Ode to the Auto Feo”, Parts I,II, III, and IV by clicking on the following links.
After careful reflection, we could see that our reasons for adopting the fateful “gasoline only” policy in the Auto Feo were two-fold and that they reflected two of our character traits which, taken individually are admirable, yet when combined, can lead to terrible decision making.
The first and most obvious of these traits is frugality. While we do not think of ourselves as especially frugal, we do tend to choose certain items or activities upon which to focus our frugality. This focused frugality in and of itself can prove extremely useful where investments in proven strategies are concerned.
The second, perhaps less obvious, trait which was expressing itself in this decision was our sense of adventure. This trait can prove extremely useful when there is something to be gained from the undertaking and adequate margin for error for the undertaking’s failure.
The terrible decision, then, comes when we combine this sense of adventure, which, we repeat, requires ample margin for error, with our frugality which, by definition, does not provide for any margin of error.
Hence, in retrospect it was obvious that adopting the gasoline only policy in the case of the Auto Feo was a terrible decision. The only thing to be gained was sheer entertainment value reaped by those unaffected by the decision, a group that you, fellow taxpayer, are happily a part of.
Now that we understand the motivation for such a decision, we offer you the inspiration.
We were inspired by the desire to avoid buying a quart of oil each week (frugality) and, by extension, to avoid further staining our driveway with oil spilled out of the engine block. To accomplish this, we discovered (or perhaps imagined) an experiment that the military had conducted in which they had never put oil in new vehicles and had been able to rely on the resulting engine shavings caused by the friction to serve as a sort of permanent lubricant for the pistons as they slammed up and down in the engine block.
Now most sane persons and certainly those who are mechanically inclined will quickly realize that there is a big difference between our situation with a 17 year old vehicle which held two quarts of oil and the military who had new vehicles which had never been filled. There was also a big difference in our respective circumstances. The military could afford to lose a few vehicles to this sort of experiment. We, on the other hand, would be walking if it did not pan out.
The experiment began with promising results. The vehicle’s performance, which was not that great to begin with, deteriorated only slightly. This did not concern us as. After all, we only had 1.5 miles to drive each day. We continued through rain and shine, confident that we were actually on the verge of improving the Auto Feo’s performance and significantly extending its useful life.
Like so many of today’s fiscal and monetary policies, the delusion of sustainability was to be, uh, sustained until the day it came to a catastrophic end.
Six more months passed and two things happened in quick succession. One turned out to be an omen, while the other an illusory victory.
The omen appeared one late Spring evening when we came upon the Auto Feo in the parking garage on our return commute to find that the driver side window had been shattered and the vehicle’s contents, which consisted of a Bible and a pair of jumper cables, had been clumsily rifled through. The thief took the jumper cables.
With the bi-annual emissions test that is required in Oregon just one week away, our frugality again kicked in and we resolved to use clear plastic and duct tape to temporarily replace our driver-side window until we could be sure that the vehicle would be cleared by the authorities to operate another two years.
Note to self: If you need to cover a broken out window in a vehicle, make every attempt not to use opaque or transparent plastic.
We hobbled along for a week of near misses at intersections with limited visibility out of our driver’s side. On a Saturday, we made the trek to Hillsboro to submit the Auto Feo to the automotive equivalent of a colonoscopy.
Arriving at the emissions testing center, we found ourselves apologizing unnecessarily for the condition of the vehicle and explaining that we wanted assurance that Oregon’s green gods would allow the vehicle to continue to operate on the roads of their realm.
“We wanted to see if it would pass before fixing the window,” we offered.
“Looks like its seen better days, let’s take a look,” said the attendant.
She was apparently unfazed by the appearance of the vehicle and we later thought that apart from these people, only body shops and junkyards see more pathetic looking vehicles on a regular basis.
We winced as we watched the attendant place the probe into the Auto Feo’s tailpipe and had to remind ourselves that it was not human.
“Looks like it failed,” said the attendant. “But it did improve at 2,000 RPMs,”
“Can we give it another try?” we offered in a desperate last ditch effort to forestall the diagnosis.
“Why not?” said the attendant.
And then a miracle occurred. The Auto Feo passed the emissions test.
We joyfully drove home and quickly arranged to have the driver’s side window replaced. Our experiment was going swimmingly and the emissions test somehow validated our hypothesis. The military was right, we are better off not adding oil to your vehicle!
The Bitter End - Rest in Peace Auto Feo
Our delusion, which was now government sanctioned, was allowed to carry on.
Astute readers will quickly draw a parallel between our Auto Feo tale and Bank of America and the current banking system in general: Our emissions test is a metaphor for the so-called stress tests that have been run on the banks in America and Europe in an attempt to shore up confidence.
When will these delusions end?
In the case of the Auto Feo, two short months after the government sanctioned emissions test gave it the green light, we were forced to make a journey farther than our normal 1.5 mile daily jaunt.
Through knocks, heaves, and roars, the Auto Feo dutifully carried us on our route until, a mere .5 miles from home, the Auto Feo froze up.
We feared the worst but in our optimism we had the vehicle towed to our house. We waited for the morning.
The next morning, it started! This truly was a miracle.
Alas, the miracle was that the Auto Feo was simply saying goodbye. For in the evening, when we jumped in to drive it home, the Auto Feo did not immediately respond. A brief heave was all it could muster as we cranked the starter. And then, all was silent.
Our experiment was a failure, the Auto Feo had passed on.
Bank of America has been in the news a lot lately, and for all the wrong reasons. The behemoth is too big to succeed and for every client that is making money, there seem to be two or three who are going bankrupt, leaving B of A to foot the bill.
Although management will never admit it, the Bank is now throwing Hail Marys late in the fourth quarter in a desperate attempt to raise capital. While this is exciting to watch, you probably don’t want to put your money on the team who has resorted to such a desperation tactic.
Returning for one last, painful look at our automobile metaphor, It appears that the FED has decided not to change the oil (i.e. replace member banks’ worthless assets for fresh cash) and the banks will be left to lubricate their engines with the metal shavings as its worthless assets disintegrate on the balance sheet.
What a brilliant move, and one that should give equity holders just enough time to get out while they still have some pocket change left. Brilliant for Buffett, we mean. For B of A shareholders, it is simply the latest bungle by management who are naturally overwhelmed by the sheer magnitude of the bank’s compost pile that it calls a balance sheet.
Like a compost pile, B of A’s assets should be allowed to disintegrate and be spread around organically to provide fertilizer for enterprises that actually contribute wealth to society.
In its current state, B of A as an entity is not only cannibalizing itself and its shareholders, but also nearly anyone that it comes into contact with. As such, the term’s of Buffett’s deal have allowed him to go into the toxic mix with a biohazard suit on. Berkshire should be shielded from the eventual collapse, albeit as a secured creditor.
But enough of B of A’s present woes, we have been relating a personal anecdote which may help readers understand the origins of what will be a spectacular slow motion collapse of B of A.
At a minimum, we hope you get a laugh at our expense.
You can catch up with the Ode to the Auto Feo, Parts I and II by clicking on the following links.
We climbed into what our delusional mind had now identified as a BMW X5 smiling from ear to ear. No, it was not perfect but the vehicle was powerful. It felt like it was reliable and had been well cared for. Heck, the A/C even worked and had recently been charged! We were feeling extremely good about our purchase.
That feeling was soon to pass.
No matter that the Iranian had us call his brother to let him know we were purchasing the car. Presumably it was to arrange a ride home but in retrospect it appears that there was a “family” debt that needed to be settled and the proceeds from the sale were of great interest to the brother.
For our part, we had to call our brother in law to arrange a ride home. We drove our find back to Portland from Gladstone to pick him up, still in awe of our good fortune.
Then, it began to fall apart.
The Illusion is Shattered
Not literally, of course, but the mental construction of the BMW X5 and more importantly the vehicle’s reliability were quickly demolished as we watched the oil pressure drop, the check engine light go on, and the temperature gauge quickly approaching the red line.
“What is going on? This car was working flawlessly until now…” We thought to ourselves.
“Are we seeing things?”
Our mind attempted to pass it off as an optical illusion. After rubbing our eyes and focusing our mind, we turned off the A/C and reluctantly turned on the heater on that warm summer evening in a vain effort to regulate the temperature.
Then the car stalled. In vain, our mind made another attempt, an appeal to the supernatural.
“Perhaps the car is possessed,”
We dutifully exercised our authority in Christ to cast out demons from the lifeless mass of the Isuzu.
The Isuzu, for we would never again see the vehicle through our rose colored glasses, started up and again we were off, albeit at a slower pace and with the heater running.
When we arrived at his house, we were concerned. Maybe this car wasn’t worth $1,300. Maybe it is just scrap. Even so, we held to the hope that, if we could just get the vehicle home, it would serve its purpose to take us the 1.5 miles necessary for our daily commute. We let the car cool off.
Upon exiting the vehicle, we noticed a small but very important defect that had escaped our eagle eye during the inspection: The driver side door’s keyhole was a hole, as in, there was space where one would normally expect to insert the key.
Now we were flabbergasted. All of the other defects were somehow excusable because for the most part they had been invisible and had for whatever reason not manifested themselves during our inspection. This one, under the circumstances, was humiliating.
Oh, how we wish we had heeded the spousal veto!
We went to the front door of our brother in law’s house a mere shadow of the conquering hero we had been just 30 minutes before.
We felt we had just thrown $1,300 down the drain. It was not so much the sum that bothered us as the fact that we had allowed ourselves to become enamored with the vehicle and in the process had allowed ourselves to be blinded to its obvious faults.
After twenty minutes chatting with our sister, enough to let the vehicle cool down, we were off to Gladstone. The sun had long since set and the blackness matched our darkening mood.
Our brother in law attempted to cheer us up.
“This is a great car! You don’t really need the lock on the door and once you get it home, it should serve its purpose.”
His words of encouragement sustained us for the next painful part of our all night journey, bringing home our error in judgment to show to our loving, supportive, and rightfully skeptical wife.
We doubt such fear struck the board of Bank of America as they reported Countrywide Financials mortally wounded loan portfolio to their shareholders for the first time.
Today we will continue the saga of the auto feo. If you missed part I, please click here to get up to speed. It shouldn’t be difficult as the auto feo is currently at a dead stop.
But first, a quick look at the markets. At this point in the day, everything appears to be literally on hold until the FED chairman Ben Bernanke speaks at Jackson Hole. What will he say? Our guess is not much. Perhaps some dribble about standing prepared with all necessary tools to fight deflation. If He were truly to use his post for something useful, He would encourage Congress to recapitalize US households, not banks.
Speaking of banks, Bank of America seems intent on claiming that they are in no need of capital even as they sit on $2 Triilion in assets of an imploding economy.B of A made perhaps the worst choices of all time when they paid a premium for Countrywide and Merrill Lynch. They may not have had much choice in the matter given the carte blanche that regulators had during the panic of 2007-2008. Whatever the case, they are now choking on the sewage of the above mentioned entities.
Citigroup, on the other hand, may need another reverse split sooner than they think. With that said, we return to our personal story of a bad acquisition.
We left our story yesterday arriving at our rendezvous with the then owner of what would soon become our next “Auto Feo.” As we pulled into the parking lot of a large supermarket, nature called. Not seeing the vehicle which we were to inspect, we entered the supermarket to tend to our personal needs. As we were exiting the supermarket, we received a call from the owner, announcing his arrival.
Our pulse quickened.
We exited and there it was! A black beauty of an SUV. At that moment, as the sun began to set over the horizon, the 1993 Isuzu looked like a late model BMW X5. We were about to make the bargain of the century.
Astute readers will note that what we saw that evening was a mirage, born out of the dangerous mix of optimism and desperation that was moving in our body to inhibit our ability to make an informed decision. We can only assume the same was true when B of A was looking over Countrywide Financial in late 2007.
We met the man, an Iranian, who promptly handed us the keys as we hopped in for a test drive. As the engine roared to life, we were able to overlook the cracks in the windshield and somewhat soiled interior. After all, it is a ’93, we thought.
As we proceeded around the block, never exceeding 40mph, we were impressed. “This is a solid vehicle,” we complimented the owner.
A Solid Vehicle Indeed!
“Yes,” he replied, “we purchased it from a family friend and it has been our family car for five years. We have maintained it and most recently replaced the clutch. It was very expensive. In Iran, a clutch costs you $200, here, $800. We have a better car now.”
A new clutch! We thought. What a steal. We bonded with the man as we spoke of our children and family life. This was no longer a negotiation, it became a matter of honor. As we parked the vehicle, there was only one hope for us.
The spousal veto.
For those of you who have never been married, this is commonly known as “running the idea by our wife,” which in most cases can save one from making a bad decision or fending off persistent salesmen.
Excusing ourselves, for it seemed an unnecessary step when we were obviously getting a BMW X5 for a mere $1,350, we made the call.
Our wife was predictably skeptical.
“Don’t you want to see other options?”
We assured her that this was the best deal out there.
“It’s not that urgent, come home and sleep on it and see how you feel about it in the morning.”
Out of the question, I did not want to waste another trip to Vancouver or Gladstone just to pass on a car.
Again, astute readers will recognize this last objection as the sunk cost fallacy. We, of course, did not.
“Well, if you are sure…”
And with that, our loving, ever supportive wife relenting gave her approval of the purchase and the deal was done.
We went back to the Iranian and, with an unintentional pause before speaking, extracted a $50 reduction in the vehicle’s price.
At $1,300, the deal was done. And almost immediately, our problems began…
It is 66 degrees on a mid-August afternoon in Portland. As a banker friend of ours put it, “we hope you are enjoying the mild winter.” The truth is, were it not August, we would be quite enjoying the weather. Unfortunately people have certain expectations about the weather, hence the widespread belief that man can control and reverse trends like global warming or cooling. August in the Northern Hemisphere should be hot.
But its not.
If people are upset at the weather, then they must be seething at what is occurring in the financial markets. The relative calm in the financial markets has vanished like free beer at a NASCAR event. A 400+ drop in the Dow today and an even more significant drop in the price of oil and financial stocks, coupled with a rise in gold, silver, and Treasury Bills? (yes, you read it right) on the surface are evidence of a classic “flight to safety.”
But what is going on? Why such a massive flight to safety on what would otherwise be a calm August day, so fit for reflection and the pondering of life as one knows it? We don’t know exactly why all of this occurred today but suffice it to say, none of it should come as a surprise.
For instance, it should come as no surprise that banks are completely broke and at this point, worse than worthless, as they are destroying real wealth. The modern bank is built on the assumption that the currency regime and the demand for debt denominated in that currency will increase infinitely. Demand for debt in US Dollars began to wane about four years ago and as far as we can tell is not coming back anytime soon, at least not in the quantities (nor at the margins) necessary for the modern megabanks to exist on their current scale.
Hence, the banks are toast. Short them if you can after the next round of short covering passes.
The FED unwittingly made matters worse for the banks a couple of weeks ago when they announced that short rates would be near 0% for at least two years. The FED has given up, and they have done it in the worst possible way. Rather than standing ready to bail water out of the waterlogged currency ship, they have turned the spigot on full blast and walked away.
In yet another twisted irony that is a by-product of the current insane “debt is money” currency system, these low short rates, which in theory should be a boon to banks, will drown the banks with large deposits that they cannot lend except at razor thin margins to sub-prime borrowers such as the US Government.
Yes, society’s aversion to debt has fundamentally changed the banking business from one which primarily benefits from usury to one that must redefine itself as a trusted custodian of assets. This change seems to be happening overnight, and the banks are completely unprepared.
Case in point, it appears that Hugo Chavez, Venezuela’s democratically elected dictator has been moved to repatriate his country’s roughly 211 tons of gold held by foreign banks. He has already issued a demand to the Bank of England and rumor has it He will soon issue a demand to JP Morgan, which reportedly holds 10.6 tons of Venezuela’s gold.
JP Morgan’s short position in physical Silver is even more frightening. If JP Morgan’s skills as a custodian is any indication, it appears that the modern banks are unable to provide this service. Protect your assets accordingly.
And speaking of frightening, almost as if on cue, violence in Palestine began to escalate again after attacks on Israeli civilians, the deadliest in two years, led Israel to retaliate by launching an airstrike against Gaza earlier today.
Our instinct tells us that a major event is unfolding in Palestine ahead of the UN’s statehood vote and it just may coincide with the collapse of the Western Currencies.
Coincidence? Most certainly. And a very sad coincidence indeed.
Almost nothing of consequence happened today in the markets. Just what one would expect on a quiet August day. Silver and other commodities are poised to go higher, but our guess is that it will wait a month to really hit its stride. At that point, inflation could really be a problem.
August is a time for reflection and relaxation. Casting off the cares of the past 11 months and charging the batteries for another run. At The Mint, we are pondering a great many things. Our dear German friend who has been with us here in Portland the past nine months left for Frankfurt today. She will be missed dearly by all. It seems that Oregon had a special impact upon her as well and she commented that this season has been one of the most pleasant of her life.
Yes, Oregon is a special place.
“There is so much nature here!” she commented upon returning from a trip to Montana. Apparently in Germany every square mile is spoken for, leaving wild animals little room to roam. One of her chief concerns on these excursions was the bears. Who can blame her, with the news coming out of Yellowstone at the time?
She is heading to Barcelona to start a ministry and we wish her well, for she is now one of the family. Hospitality blesses one in ways they cannot imagine.
August thoughts in the US are being rudely interrupted by the presidential campaigns that are warming up in Iowa and are heading to New Hampshire to continue the race in which the winner will declare themselves King of the Americans.
As Bloom County fans may recall, when the Meadow party nominated Bill the Cat and Opus for the job, they concluded that only a complete idiot would apply after careful consideration of the job description which in there estimation included “being blamed for every problem on the planet.”
The complete idiot label came to mind after we heard a comment in a video shared with us by a friend in which Bill Hybels, the Pastor of Willow Creek, a large church in Illinois, noted that the tendency in American dialogue today is to “throw stones first” and ask questions later. He explained that people grab onto comments and statements made by others and publicly villianize them without bothering to consider the context or verify the validity of said statements.
His remarks were made at the Willow Global Leadership Summit while addressing the interesting situation in which Howard Schultz, the CEO of Starbucks, backed out of his contract to appear at the summit after receiving threats of a boycott from a group who claimed that Willow Creek was anti-gay.
He went on to say that this phenomenon is making America “ungovernable.”
Mr. Hybels did not go into detail as to how this phenomenon would make the country ungovernable, but the idea got us thinking. What makes a country governable in the first place? Do people naturally need government in order to survive?
In the sense that people need to feel protected and able to care for themselves and their loved ones, people may need the concept of government. People, knowing their weak state on this planet, need to believe that someone is looking out for them. This need leads them to subject themselves to the idea of government.
Inevitably, those who are entrusted with embodying the idea of government find that they are given quite a bit of power over the lives of others and quickly learn to abuse it.
This leads the subjects to seek freedom from the government while at the same time looking for someone of something else to fulfill the basic needs of protection and material well-being. Seen this way, when a people become “ungovernable” they are rejecting the government under which they are because of a perceived or actual abuse.
It is important to note that, for people to reach this state, they must feel that they are out of options under the current government. Economic hardship has a lot to do with how people perceive their options. It should come as no surprise then that economic hardship is a result of policies which restrictive freedom.
Free men are infinitely more productive than slaves. A policy change in either direction will express itself in economic results. The results in America prove that we are a people becoming enslaved.
When things go well, no one cares who is governing. When things go badly, they become unnaturally preoccupied with the political process. America circa 2011 is moving towards this unnatural preoccupation.
Ironically, the more one concentrates on the government and its political processes, the more it becomes evident that the very existence of a government organized by men may be more a threat to than a protector of the basic needs of protection and material well-being.
We have stated before that in practice the governments of the world today operate like competing defense agencies. It may be, then, that Americans are tired of the current contractor and are searching for another one; one that is less intrusive and has fewer overhead costs to cover.
Will they find it before they are completely enslaved by the current one?
The markets seem to be enjoying a relative calm after the record setting volatility they experienced last week. It turns out that one would have hit a home run by buying the VIX as the debt ceiling debate was dragging on. We’ll keep that recommendation tucked away for a later date as the conditions which created last week’s tremors still exist and continue to intensify.
This caught our eye because it is further confirmation of what we have long suspected here at The Mint. Specifically that giving up the right to coin currency (seigniorage) essentially means giving up a nation’s sovereignty. Any sort of puppet government may be set up to give the appearance of sovereignty. They may even give the people the right to vote for their own government. No matter how the government is chosen, the puppet will move in accordance with the way its strings are pulled.
In practice, the monetary authority becomes the sovereign.
We have further speculated that the current sovereign debt crisis in Europe would serve to erode the sovereignty of the governments being bailed out. It now appears that even wise users of the Euro, such as Germany and the Netherlands, will have to give up the illusion of budgetary authority to save the currency. Think of it as guilt by association.
What happens next in Europe will be the true test of the Euro’s ability to exist. Can Greeks and Spaniards manage finances to German standards? Can they alter their production and consumption patterns to the German standard? If the answer is yes, then we will have confirmation that a shared fiat currency (and by default fiscal policy) is all that it takes to break down borders and achieve world peace.
If the answer is no, then the Euro, the latest entrant in a long line of doomed experiments in fiat currencies is…doomed.
The leaders in the Eurozone are dealing with a problem that has no solution. What is unfortunate is that they are taking a considerable amount of time and other people’s money in a vain attempt to solve it.
The problem is simple enough. A fiat currency, such as the Euro, is a faith based currency. One needs faith that the currency will maintain its value and continue to be accepted in trade. The bedrock of this currency faith is that credits must be created which are repayable in the currency. This gives people, who naturally want to improve their circumstances by attending to the most urgently felt need, the incentive to productively trade in the currency.
If the currency is something tangible and can be produced in sufficient quantities, this is all that is required for something to be accepted as currency in society. Production and circulation of the currency would occur organically as the needs of the economy dictated.
The Euro’s faith based currency is doomed
On the other hand, if the currency is a fiat, faith based currency, such as the Euro, much heinous effort is required for it to be accepted as currency. The first requirement is a decree that all taxes must be remitted in the fiat currency. This is what Jesus referred to when he told the spies of the Chief Priests to “give to Caesar what is Caesar’s and give to the Lord what is the Lord.”
Once it is decreed that taxes will be remitted in the fiat currency, the fiat currency must be produced in sufficient quantities without the guidance of the free market signals (known today as monetary policy). Finally, the system of taxation and redistribution of the tax revenue (known today as fiscal policy) must be perceived as either inconsequential or fair in order for those subjected to the fiat currency regime to continue to assent to using the currency.
The Eurozone’s incurable ailment is that its single monetary policy cannot respond to the multitude of fiscal policies that are operating in the currency zone. If the currency were tangible, production in the economy would properly adjust and fiscal policy would be less pervasive and dictated by reality. But because the Euro is simply a faith based currency, fiscal and monetary policy have no chance of harmonizing themselves.
The Euro is doomed and its handlers must at least suspect it by now. Their only hope is to quickly form a unified fiscal government in the Eurozone which is what in theory they are doing. In practice this may be nearly impossible.
The US Dollar faces a similar problem which has been slower to manifest itself because its problem is on a global scale.
As Jesus said, the fiat authority only owns the coins, scraps of paper, or electronic bits that consist of money. True ownership of real things, and especially people, ultimately is the Lord’s.
How important this simple teaching will be in the years to come.
Fresh injections of electronically printed cash from the US and Euro FEDs appear to have tranquilized a market in free fall. That, along with a ban on short selling in Europe seems to be sufficient to continue the illusion that the financial system is operating normally.
The ban of short selling in Europe is eerily similar to the ban placed on short selling large bank stocks in the US not so long ago. The increase in the Gold margin requirement is eerily similar to the increase in Silver margin requirements by the CME last spring.
What is going on? Nothing good, fellow taxpayers. A tip, if you see the Government actively trying to stop something, it is good idea to be on the other side of the government’s trade. In this case, sell European bank shares and buy gold. Think of it as an indirect governmental subsidy to little old you.
The markets are desperately trying to correct nearly 40 years of errors that have been created since the US Dollar was officially de-pegged from gold. The FED’s, who see currency that can be created on a whim without the inconvenience of having to either mine it from the earth or earn it in honest, fair trade as extremely convenient , are desperately trying to fight the correction.
If the numbers just look normal, they think, people will continue to pacifically labor under the illusion that the Government has everything under control.
Nothing could be farther from the truth.
It occurred to us that we may need to clarify what the money problem is and why it, and not fossil fuels, are the cause of economic imbalance and may lead to what is popularly referred to as climate change.
Many deride the use of gold and silver as money because it must be mined from the ground, refined, minted, carried around, kept secure, etc. It is inconvenient. They see money created out of thin air as a simple net gain to society.
Presto, you have, with a stroke of the pen, saved the miners from years of hard labor underground. You have saved who knows how many trees, fossil fuels, and other elements required for the refining process. And you have saved Jack and Jill consumer and shopkeeper from the inconvenience of carting around loads of heavy coins.
So what is the matter with instant money? The problem, if you have not identified it, is precisely in the fact that it is easy to create. When you remove the effort required to create money for trade, you free that effort to be spent in a lot of other ways. That is great, except for the fact that no one considers that instant money would give people the time to scorch the earth in a thousand other ways which are much more harmful than mining.
By making money “free”, you throw the economy completely out of balance and perpetuate bad decisions for a much longer time than if the wrong speculations were limited by the need to back them with real money, acquired by difficult toil both under and above the earth.
The problem with “free” money is that it has no value, and it serves to devalue the production and lives of all who are forced to circulate it. The longer it circulates, the more damage it does.
Worst of all, it concentrates power in the hands of those who create it out of thin air and enjoy it first.
The world has gone 40 years down this insane path. How much more can it take?
Gold hit $1,800 today. That should tell you all you need to know about what is happening.
We are trying not to look at the markets today. It gives us the morbid feeling that one gets as they are about to witness a train wreck or other catastrophe. Our curiosity begs us to look but our morality forbids it.
What we are hesitant to watch as it gets underway is some form of global banking collapse. From CNBC:
“Rochdale banking analyst Richard Bove said there is little chance of a French bank default.
“If a bank in Europe went under, it would cause huge counterparty risk. It wouldn’t be that bad for 99 percent of the banks in the country. It would be bad for the biggest banks…Why are all the banks falling in price? The deeper issue is what the Federal Reserve did yesterday,” said Bove.
“The Federal Reserve told me, number one, that the economy is weakening and my loan losses just went up,” Bove said. “The ability to make new loans is hampered by the weaker economy, and on top of that, the Federal Reserve said they were going to keep margins on my product down,” he said, explaining banks need higher rates to make profits on lending and deposits.”
As we alluded to yesterday, the Federal Reserve essentially ended its storied career yesterday. In an all out attempt to goose the markets it spent its last bit of credibility. It is currently being carted off the field to cheer its losing team from the sidelines. It may come back, but, like Brett Farve, it may find its former glory elusive.
With the FED injured and out of the game, the world’s largest banks are readying to show the world that there really is no entity on the planet which is “too big to fail,” starting with themselves. There is no doubt that the ECB will pull out all the stops to save the large French banks, as Mr. Bove suggests above.
They will be carted off behind the FED. But enough of the markets, it is just too ugly to gaze upon.
Let’s talk about the weather!
It is an unusually cold “summer” day here in Portland. We loosely use the term summer because it now seems that summer has taken its own vacation and left the inhabitants of the Northwest with a straight shot from Spring to Fall. Not so bad, provided we get the best of both seasons.
Still, the lack of sunshine at this time of year seems to be taking its toll on people. When the sun comes out here, you suddenly become aware that the city has about triple the number of inhabitants than you once thought. People literally hibernate here and when the sun brings them out it can be startling if you are not expecting it.
Logic would follow that, with the recent weather data taking a turn for the cooler, the global warming crowd would declare victory and let the planet move on to bigger and better things. Now that the myth of global warming is apparently being disproved by nature herself, scientists are clinging onto the term “climate change” to justify the right to determine who needs how much energy. The right to energy in recent times was determined by wars so perhaps this is an improvement.
Many will quickly note that we have certain facts wrong about global warming/climate change and will want to correct us in our error. To them we say, please do not waste your time. We do not pretend to be an expert at anything here at The Mint, we are merely opinionated. The most normal thing is for us to be wrong, it helps keep us humble.
Flooding on the Missouri River at Omaha, Nebraska - July 2011
That said, we base our “the globe is now cooling” opinion on two anecdotes that we heard while in Nebraska recently. First, Lake McConaughy, which just five years ago was nearly bone dry is now full to overflowing. The “experts” said that it would take 50 years to reach normal levels.
Second, we spoke with a guy from northern Wyoming who said they are seeing new GLACIATION taking place right before their eyes. In a valley where last season there was merely a stream coming down from the mountains now stands a new glacier over 50 feet high. Not just snowpack, a glacier. He could not recall this ever happening there before. Let alone so quickly.
Then there are the bears. Rumor has it that they are moving to lower altitudes in the Northwestern US because snowpack in the mountains is not receding as it normally did and this is driving the bears closer to populated areas in search of a feast to fill their bellies for the winter.
More Flooding near airport on the Missouri River at Omaha, Nebraska - July 2011
And finally, everyone is aware of the flooding taking place along the Missouri and Mississippi rivers this season.
To us, here in the Northern Hemisphere, it appears that the globe is now cooling at an alarming rate. Is the solution now to burn more fossil fuels?
Our point is that the weather is something that no man, no matter how many terms he has spent in Congress, can control. Those who believe that mankind can somehow master the weather (the logical implication and end of most policies invoked in the name of stopping “climate change”) are innocently deluded at best and in the worst case may be power hungry control freaks.
As for allowing Wall Street first dibs at selling us the air we breathe (cleverly disguised as “carbon credits”), any thinking person should quickly identify this notion as just plain insanity.
On the other hand, we have great respect for people who are deeply committed to taking care of the environment. We wish them well and whole heartedly support their dream of bringing peace to the earth and balance to what occurs on it.
Our disagreement with most mainstream climate policy is a question of methods. While most see a problem with what mankind currently uses to create energy, we see as a problem with what mankind has chosen to use as money.
Once the monetary system is fixed (which may be occurring shortly), we suspect that the earth will be cleaner and greener than even the most ambitious environmentalist has ever imagined.
Best of all, the change will be a product of mankind’s collective free will, not of the hollow decrees of a governmental edict.
This is the ultimate stimulus measure, money will continue to be free, let the final stage of the mad scramble for resources begin. With this statement, the FED has confirmed that the currency will be destroyed. Plan accordingly!
We saw a chart at the Wall Street Journal site today which was entitled “Downward Dow.” The name hearkens to the canine/yoga position better seen that described:
A Canine demostrates the new Dow pattern that is forming for the next two years
The FED sees what is going on and is taking a long, running, Charlie Brown style kick at the Downward Dow before it. Unfortunately for us all, like Charlie Brown, Ben and the gang are going to whiff on the Dow, which is more likely to lie down than resume its forward gait, and pull a hamstring in the process.
In other words, the FED, with today’s statement, has severely injured itself and will do nothing more now than sit on the sidelines and hand out free money. With Congress paralyzed, the helicopters (the FED member banks) will be in charge of dropping the money on the populace.
Oh my. Two words, four meager characters, made famous by Jesse “The Body” Ventura during his ringside blow by blow commentary in the glory days of the WWF (circa 1986). These words, which so eloquently summed up the effects of a pile driver, seem strangely appropriate to describe what is occurring in equity markets around the globe during their first chance to “react” to the S&P downgrade of the US Government’s sovereign debt rating.
As we write, the Dow is down 5%, ditto for Oil. Gold is up over 4% and the downgraded bonds of the US Government of the 10 year variety are up (in other words, yields have fallen) approximately 4%.
What is going on? We will give you a clue, Bank of America (BAC) is down almost 20% on massive volume.
Still guessing? We won’t keep you in suspense. This downgrade, whether deserved or not, early or late, is wreaking havoc with mutual fund investment policies which call for excess funds to be held in AAA rated debt. There are not enough German bunds or UK gilts in circulation to pick up the excess funds gushing out of Treasuries.
The obvious implication is that USD bank deposits should rise.
More deposits that it can’t lend at a profit would tank behemoths like B of A, and Uncle Sam may have trouble saving it. That, and B of A is being sued for fraud, again.
Enough of B of A, back to the money flying out of US Government obligations by investment policy edict. Where will this money go? That is what is currently being sorted out in the markets. And at the moment it is UGLY for equities on a global scale. Don’t worry, by late next week, so much money will be pumped into the system that equities will have no choice but to rise.
We can’t help but think back to this chart (BELOW) showing the proliferation of AAA debt in the world. It seemed as if it was everywhere, like pine trees in a forest. Now, with one simple action, those who trust S&P’s judgment (which history has show is at one’s own peril) find themselves with at least $14 Trillion less AAA issues to choose from. More, if you count the implied downgrades of government agency and other government guaranteed debt.
"AAA" Government dominates the market and it is beginning to smell funny!
Stepping away from the technicalities of investment policies and looking at the downgrade in a philosophical sense, it is like a minor earthquake that triggers a tsunami that the financial world is now helplessly watching roll ashore, or like a giant snowball has been pushed downhill and threatens to start an avalanche.
The financial world is looking at these twin disasters and now realizes that the only thing standing between them and the demise of the current financial and currency systems is, are you ready for this?
The Central Banks of the World!!! Not exactly knights in shining armor, if you ask us. We might be more comfortable if Pee-wee Herman were on the case. At least he could provide entertainment as the demise unfolds!
The downgrade is another chink in the armor of the world’s largest knight in shining armor, the United States of America. Every day, more people are coming to grips with the fact that the US of A cannot provide security and social benefits at such low rates. Bill Bonner of the Daily Reckoning regularly explores this decline of the American Empire.
As we touched on the other day, what man calls nations today are, for purposes of analysis, simply competing security agencies which have a man-made geographical monopoly. The problem, as any businessman will tell you, is that nowadays the agency’s customers can’t take the price hikes. Neither can they easily choose to move their business to a competitor. Expatriating is not cheap and involves a host of logistical problems.
The book of Isaiah, chapter 40, God refers to the nations as a “drop in the bucket” and “dust on the scales.” The obvious implication is that nations do not last, and in extreme cases, dealing with a government may feel like one is dealing with the Mafia. The need to preserve a geographical monopoly can make an analysis of the actions of a government or a mafia eerily similar.
Seen through this lens, S&P is like the snitch who broke Omerta and tells everyone that the Mafia boss can’t pay on his contracts. Now the boss will likely face an increase in the vig on what he owes the loanshark.
How long before the rat gets whacked?
Don’t forget to keep your eye on events in the Middle East, especially Palestine. Something bigger than we image is brewing there and our guess is that the eyes of the world will soon be focused there.
This will cause havoc with any investment policy, rule, code, law, etc. that relies on the US Government to maintain an untarnished reputation as the safest investment in the world. Ironically, an S&P downgrade will probably trigger a rally in US Treasuries. However, this phenomenon is more a testament to the ineptitude of the debt raters at S&P rather than any firming up of the nation’s finances.
But what if tax revenues began to increase? They almost have to, even if by accident, given all of the cash that is flying out of stock, bond, and money market funds and on to the streets. Word has it that over $66 BILLION left money market funds for parts unknown last week, mostly due to the debt ceiling debacle, which last week threatened to wreak the same havoc that a downgrade will likely cause on corporate short term cash investment policies across the globe.
For perspective, $144 BILLION ran out of money market funds the week that Lehman Bros declared bankruptcy. But that, by most counts, was a surprise.
As food for thought, we submit this scary chart for your perusal, courtesy of the Money Game:
Today the Dow fell some 500 points. Looking further, everything seemed to fall today. We hope you have a good umbrella, fellow taxpayer, it could be quite a storm.
Three noteworthy things seemed to have taken place in no particular order and for no apparent reason other than to unite to tank financial asset prices all over the globe, which is no small feat. We will take them one by one.
First, overnight, the Japanese Central Bank intervened to prop up the dollar (or weaken the Yen, however you prefer to look at it).
Second, the world gave a collective thumbs down to the Eurozone’s “effort” to stabilize its bond markets. The Euro Feds appear over matched in their currency union’s first true fidelity test.
This uncoordinated action led to the third event which we will call the “mother of all calls” on the US Dollar. With short and long interest rates skipping around a zero as far as the eye can see, speculators have taken swings at the dollar like Dave Kingman at the 2-0 fastball. The dollar is already sold short on an almost unimaginable scale.
Today, those speculators, ala Dave Kingman, whiffed and nearly fell over. The only way this “mother of all calls” could be satisfied was for those short the dollar to quickly and injudiciously exit other positions.
This exiting injudiciously of other positions is colloquially called a crash.
This crash, along with the foul smelling economic datacoming out of the US will give the Fed and Congress all the ammunition they need to launch both QE3 and any and every fiscal stimulus program they can dream up.
QE3 and fiscal stimulus on steroids will soon prove those speculators short the dollar right and the final, sordid chapter of the US Dollar’s history is about to begin!
Dave Kingman may have whiffed at the 2-0 fastball, but he has two more swings…
*See the MINT Perceived target Rate Chart. 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.
After a long absence, we offer a brief Mint. As the entire financial world knows, the US Government decided to go deeper into debt to the tune of $2.4 Trillion. Something was mentioned about spending cuts but they are inconsequential and probably will never materialize.
“The US is now conducting war-like operations in at least six different countries. The problem, of course, is that it is ruinously expensive. In all of history no empire has been able to resist the urge to overdo it…to commit suicide – either by military or financial “overstretch.” In America’s case, it does both.
The cost of maintaining the empire…fully loaded…is about $1.2 trillion a year. That’s the Pentagon, the Department of Homeland Security, fortified embassies – everything. Take it away, and the US budget is almost in balance.
But Washington won’t seriously cut military spending. Why not? It’s the way destiny works. First, she disarms you of your critical intelligence. And they she shoots you in the back of the head.
An empire continues until it drops. It does not back up. It does not reconsider its mission – not until it is forced to. How is it forced to? In the usual way…it runs out of money…”
Yes, it appears that America is intent upon losing its place as the leading private security agency on the planet, for as a practical matter, that is all that what we frequently refer to as nations are. More on that to come.
*See the MINT Perceived target Rate Chart. 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.
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