As we alluded to yesterday, the Federal Reserve’s latest attempt to goose the economy, “Operation Twist,” is not only failing to achieve its stated goals, it is also triggering an unmitigated disaster in the fixed income markets. These markets, once the bedrock of global finance, have now been conditioned to do nothing more than attempt to front run the FED and other Central Banks up and down the yield curve.
To continue our waterbed analogy, it is akin to a 300 pound Ben Bernanke (Central Banks) chasing an 800 pound gorilla (the market) around on a queen sized waterbed. The action is becoming completely unpredictable and downright dangerous.
Today, as the chaos continues to unfold, we want to take a moment to examine how humanity has arrived at this critical juncture in history, where a fat man chasing a gorilla on a waterbed can threaten to damage the wealth of nearly everyone on the planet.
In order to understand this, we must travel back to the year 1492. Venice is the center of the western world and Christopher Columbus has set sail to find a new trade route to India. A Franciscan monk by the name of Luca Pacioli sits in his room and creates the outline for: Summa de Arithmetica, Geometrica, Proportioni et Proportionale.
Summa de Arithmetica, Geometrica, Proportioni et Proportionale - Pacioli's great gift to Western Civilization
As part of what would have otherwise been simply another boring textbook on Mathematics, Pacioli sees fit to include a section on “Details of Accounting and Recording” in which he described the accounting practices used in Venice at the time. When Summa was published in 1494, it contained what is recognized as the first complete description of dual entry accounting.
To be clear, accounting in some way, shape, or form has always been practiced. What Pacioli accomplished, perhaps unwittingly, was to disseminate throughout Europe the accounting method which had made the merchants in Genoa, Florence, and Venice the most successful in the Western World.
What makes dual entry accounting so special? Dual entry accounting, in a nutshell, is the formal recognition that every trade has a net affect on the income statement and balance sheet of an individual or enterprise.
More to the point, it enabled merchants and producers to understand which activities created wealth and therefore make informed decisions regarding which activities to undertake with their limited time and resources.
While this now seems intuitive, it is hard to overstate the benefits that the dissemination and use of dual entry accounting has bestowed on Western Civilization by enabling a greater number of persons to engage in activities which increase the capital stock and allowing them to more quickly abandon activities which deplete the capital stock (accumulated wealth) of society.
This facilitation of wealth generating activities is why dual entry accounting may be considered man’s greatest innovation.
Yet, in perhaps the greatest irony since God sending His Son, Jesus, to die in our place, dual entry accounting enabled the existence of what we are calling man’s greatest catastrophe, Modern Central Banking.
We’ll explain this great irony tomorrow in Part II.
At this point, most FED watchers have heard of the FED’s latest move to appear to stimulate the economy while at the same time appear to control inflation, Operation Twist. In theory, the FED is simply reshuffling its bloated portfolio of worthless paper, exchanging the pieces of paper that have dates that are in the near future for pieces of the paper with dates farther off in the future.
Sounds simple enough, the FED is not directly increasing the money supply; rather, it is stepping from one end of the bond market waterbed to the other in an attempt to shake things up.
Now anyone who has ever jumped on or skipped along a waterbed knows it is a dangerous exercise.
The FED prepares to Leap to the Long end. Where will the water go?
Why is it dangerous? Because the FED, whose balance sheet is leveraged 55:1 as of October 5th, is telegraphing its trades in bold letters everywhere it can and is bound to be front run and take some losses. Any mortal bank, bound by the restriction of marking its assets to market, would need to raise capital in the open market, beg the Government for a bailout, or increase its clients’ fees to cover these predictable losses.
Not the FED, they have the luxury of keeping their assets on the books at face value, running a negative capital balance, and printing the money necessary to absorb the losses. All of these strategies have the ultimate effect of robbing their depositors (anyone holding US Dollars) of purchasing power.
In the end, the Federal Reserve will become technically and later functionally insolvent.
They true tragedy in this gross, final expression of monetary madness by the FED is that they have no hope of achieving their stated goals. Ostensibly they are selling on the short end of the yield curve in an attempt to raise rates and somehow spur lending, yet at last check, rates on the short end are as low as they have ever been.
Meanwhile, long yields, the ones the FED is theoretically partnering with the “free” market in order to lower rates so that everyone can refinance their underwater variable rate mortgages, are rising.
Inconceivable! Yet true.
If today’s US Treasury auction was any indication of things to come (and there is no reason to think that it will not be), then the weakened demand for Treasuries that expressed itself today could overwhelm any attempt for the FED to lower rates and the logical end game is that the FED will be the ONLY entity bidding on long dated Treasuries.
Picture the waterbed. A 300 pound Ben Bernanke jumps from one end to the other, where does the water go? Follow the water, then race to get off the bed. As long is Ben Is jumping on the bed, the bed (i.e. the Government controlled bond market that it represents) won’t hold water much longer.
The big news over the weekend was the partial nationalization of the Belian Bank, Dexia. What? You’ve never heard of Dexia? Most people this side of the pond hadn’t up until a few weeks ago. This tiny $707 Billion hedge fund disguised as a bank, which just months ago passed the European bank stress tests with flying colors, has become the first official victim of the dearth of interbank funding in the Eurozone.
In a world full of potential butterfly effects, Dexia’s staggering juggernaut could have a knock-off effect for the US Municipal bond market.
Unfortunately for France, Belgium, and Luxembourg, things will not settle down in time for their governments to remain solvent. Chalk another set of Eurozone governments up to the “effective loss of sovereignty club.” Surrendering sovereignty to international banking interests seems to be working out well for Greece, Ireland, Portugal, and Italy, so why not join the fun?
Slovakia appears to be the only nation willing to stand up against the wave of bailouts and subsequent loss of sovereignty as the bailouts costs crush already strained government balance sheets. It appears that they may hold out a couple more days, enough time to find a compliant government (the current one was voted out in a confidence vote tied to the EFSF earlier today).
The situation in Europe is giving the world a frightening message: When push comes to shove, the governments can be counted on to work in the interests of the banks. How long this untenable situation can last is anybody’s guess, but if the Occupy Wall Street movement continues to gain traction, it is clear that the situation, if properly understood, could change very quickly.
The Euro Prepares to Claim More Sovereignty
Observant fellow taxpayers will note that we have qualified our previous statement with the words “if properly understood” because, at the moment, the Occupy Wall Street movement appears to misunderstand the roots of their many and varied forms of discontent.
Protesters apparently see nothing wrong with the government selectively fleecing the productive class as long as they receive their “fair share.” If we have correctly identified the Socialist tendencies of these protests (as last check they had not adopted a manifesto), then the logical outcome is simply the ouster of one form of parasite, the banking interests, for another.
The problem, of course, lies in what we use as money. Placing the power to create money in the hands of a Central Bank and then turning a blind eye as they shamelessly debauch the currency, giving an inordinate amount of purchasing power to those closest to the money printing operation (banks and government) and placing an inordinate amount of regulatory and tax burden to those farther away from the money printing operation (that would be you and I, fellow taxpayer), is perhaps the surest way to destroy man’s faith in the capitalistic system, and in the process lay the blame for every evil unleashed by the debauching of the currency on the capitalistic system.
Rothchild, Marx, and Keynes understood this. They also understood that only one man in a million would be able to understand how debauching the currency serves to concentrate power in the hands of few at the expense of many.
In Europe, the sumo wrestlers have resumed their battle royal on the edge of the cliff. In this metaphor, the wrestlers conveniently represent the various banks, semi-sovereign governments, central banks, and other unproductive, parasitic organizations with the words “Monetary Fund” in their name.
Up until now, with the exception of some jeering from the spectators, the battle royal has been good natured fun. Each time one of the wrestlers has tumbled towards the cliff, several of his benevolent fellow competitors have come to his rescue.
First Greece, then Ireland, Northern Rock, Anglo-Irish, and The Bank of Ireland. Now Alpha, Spain, Caja del Sol, Portugal, Italy, and Dexia.
Each time, they get up, dust each other off, and go back at it.
But the competitors are getting weary, as are the spectators. With each new stumble towards the cliff, more competitors and even some spectators are required to jump in to avert certain disaster. If this continues, when one of the weary wrestlers finally tumbles over the cliff, it is increasingly likely that he will take the rest of his competitors and a decent number of well meaning spectators over the edge with him.
Now things are starting to get interesting as BNP Paribas, SocGen, and France herself began to stumble towards the edge. Who will save them?Certainly not the Swiss National Bank, which last month stumbled to the edge of the ring and ironically may be the first to fall off.
Any sober observer will quickly point out that this is an insane pastime. Why would a group of sweaty fat men repeatedly try to push each other from a ring along the edge of a cliff?
We can only venture a guess, and our guess is along the lines of “they somehow believe that they must.”
Why ask Why? Just stay away from the edge!
It doesn’t make sense, neither do a great number of things that occur in the current, insane, “debt is money” currency system in which we live.
People and institutions are trained to make decisions regarding money based on the assumption that money in and of itself has value. This assumption, under which the world currently toils, was debased along with the US Dollar back in 1971. Money today has very little in common with the money our fathers grew up with. Peter Schiff, the outspoken CEO of Euro Pacific Capital, has gone as far as to call modern currencies the “hidden portfolio risk.”
Our father’s money was based on the assumption that men were dishonest, and what they used as money (gold and silver) served to keep them honest. Today, money is widely assumed to be honest, a fact which has served to make a great number of men dishonest.
Debt is not money, the proof
The only way that the illusion that debt is money can be perpetuated is when debt, and therefore the perceived money supply, is increasing. First of all, who has ever been known to turn down free money? When the exponential increase in the perceived money supply is occurring, it creates the welcome illusion of wealth.
Second, people quickly learn that the easiest way to make money is to position oneself as close as possible to the creation of new debt. This is essentially the business model of Goldman Sachs and every other consumer and investment bank on the planet.
The money is so easy that no one stops to consider what would happen if aggregate debt were to begin to decrease, in turn decreasing the money supply by the same multiples with which it was created.
It will never happen, right? People will never turn down free or almost free money.
Yet they are. It turns out that people have a propensity for austerity when they have no choice. If money were based on something real, austerity would be extremely healthy for the economy which would be accumulating a capital base from which to make the next series of technological advances.
In the current, insane, debt is money currency regime austerity (the reduction of aggregate debt) removes the life blood from the monetary system and causes the underlying economy to die a slow, then sudden and altogether painful, death.
The mirage of the debt fueled economy quickly vaporizes and the debtors and creditors in the system find themselves in the middle of an economic desert with a long road ahead of them.
There will be much struggle along the way, and their only hope is to walk together.
The dust is beginning to settle after what must have been a tense weekend for bank execs on both sides of the Atlantic. We can only imagine that banks pulled out all the stops to somehow make their numbers for the third quarter end. In a practical sense this meant putting the stranglehold on equity and commodity positions and hanging on to dollars with all their might.
The vacuum action in the dollar funding markets was so extreme that at one point it was rumored that US dollar funding for banks in Europe was apparently non-existent. We speculated that banks were holding on to cash in the absence of clear direction from the Eurozone as to how they intend to bail out their large institutions and governments.
The action looks like a sumo wrestling battle royal on the edge of a cliff.
The FED came to the rescue and re- opened its swap lines with European banks to provide dollars and avoid widespread panic. According to a report that we saw from Bloomberg, the FED had gone from its role as the lender of last resort to a role as the lender of ONLY resort.
We left off with a question which we will consider today:
Does the fact that the FED is the only institution willing to lend dollars indicate that the US Dollar system has technically collapsed?
On the surface, it would appear that the evidence points to just the opposite. The US Dollar index has gone through the roof which would indicate a preference for dollars, making them more valuable. Doesn’t this prove that the US Dollar is alive and well?
Bernanke Readies his Helicopters
Were the Dollar backed by something real, the above would be true. However, in the current, insane, “Debt is Money” currency regime, it tells us quite the opposite. The fact that the Federal Reserve, the creator of the current version of the US Dollar, is the only institution willing to lend said Dollars is in fact evidence that the system has failed.
It has failed because it is no longer self sustaining. The willingness to take on new debt, which is the life blood of a debt based currency regime, is non-existent. The usurers need fresh blood in order to sustain themselves and finding no new victims, are beginning to feed on each other.
Financial Institutions are attempting to hoard dollars on a net basis. Instead of lending them to productive enterprises, they are paying down their dollar denominated liabilities. In other words, the productive classes have begun to shun the dollar on a net basis and the ultra leveraged financial sector is beginning to vaporize as the productive debts are cancelled.
Financial institutions see this vaporization taking place at their counterparties and are unwilling to extend them credit on any terms. The financial institutions which cannot meet their day to day funding requirements then turn to the Federal Reserve to lend them the Dollars necessary to meet their commitments.
The inter day funding action has, in effect, become a high stakes game of musical chairs.
While musical chairs is fun to watch, it is not evidence in and of itself of the collapse. The evidence of the collapse emerges as we fix our gaze on the logical end of this vicious feedback loop. The logical end is this: The Federal Reserve ends up holding every worthless paper asset on the planet on its balance sheet which theoretically backs the dollars which it is emitting in exchange. The banks, which are left with the dollars as their own “paper asset” and the Federal Reserve are left with staggering liabilities which they pass back and forth as investors, businesses, and consumers increasingly shun their paper.
For the moment, the world may have reached a peak in monetization, and the FED’s money machine is now backing up as the sewage of every bad loan on the planet begins to flood their balance sheet.
It is getting ugly. How ugly? So ugly that Bank of America’s website has been down for three straight days, presumably for technical reasons but avoiding an online bank run and forcing customers to pay $8 to bank at the branches come to mind as compelling technical reasons for a website failure.
Yes, the end of the insane system is approaching. It won’t be long now until the authorities pull out their ultimate trump card, a wholesale change of the currency. With nearly every government and bank on the planet heading to the poorhouse, it is the only trick that the currency regime has left.
Don’t fall for it, fellow taxpayer, for it too shall fail.
We have taken a small breather here at The Mint. What has occurred in the past week simply boggles the mind. Precious metals have taken a beating and it is our guess that they will continue through tomorrow.The most interesting reasoning for the drop in Gold and Silver that we have heard is that there will be an announcement on October 4th limiting short positions on the COMEX.
Guess who has a huge short position in silver that needs to be covered this week? JP Morgan, to the tune of 121 million ounces. We can only guess at the machinations but needless to say, it would be very convenient for them to be able to cover their positions at a discount. Hence the increase in margin requirements at the COMEX last Friday which has shaken out the weak long positions this week.
Across the board in commodities, current prices reflect a rush to cash, not changing fundamentals.
Some interesting reading on the current, sorry state of employment in the US from US News:
Other than that, chaos is reigning as the dollar funding markets for banks in Europe are apparently non-existent. As September 30, 2011 approaches, banks are holding on to cash in the absence of clear direction from the Eurozone as to how they intend to bail out their large institutions.
In the meantime, the FED has apparently opened up swap lines (read printing presses) to provide dollars to these banks. According to a report that we saw from Bloomberg, the FED has gone from its role as the lender of last resort to a role as the lender of ONLY resort.
We take this to mean that nobody is willing to lend US Dollars at any price to the largest banking institutions in the world.
Does this indicate that, at long last, the US Dollar system has technically collapsed?
While it was a rough day for equity markets everywhere, in light of what is occurring, they (the markets) were amazingly resilient. A testimony to how fast the monetary spigots at the Central Banks are running.
There are two events that appear to be on a collision course with destiny today (No, neither of them is the NASA space junk hurtling towards the earth). It feels as if the world is reaching a sort of inflection point in modern history. Perhaps a great awakening is about to occur. Will people’s faith in Central Banking finally be broken?
The colliding events are the Palestinian bid for official recognition by the United Nations, scheduled for tomorrow, and the emerging institutional bank run on BNP Paribas.
The Palestinian situation needs no further discussion. It is clear to most that it is an explosive topic to which the bid for recognition threatens to detonate, much in the way the Israeli Declaration of Independence ignited war in Palestine in 1948.
The Institutional run on BNP Paribas is an event that is occurring as we write and it is unclear how it will play out. Reggie Middleton at the BoomBustBlog, is chronicling this event in real time. If you are interested, we highly recommend following the event there.
Then there was the report of the ECB making an emergency loan of $500 million US Dollars to an unidentified bank (read BNP) with similar loans to other institutions in the cue. It is clear that the banking crisis in France is dwarfing the ability for the French government to deal with it.
There is no use pointing out the many lessons that society will learn from this, for only one is expedient at the moment. That lesson is that digital bits on a computer screen or numbers on a bank statement are worthless if the counterparty cannot make good on their commitments.
The run on BNP will intensify the focus on Western Central Banks, which have balance sheets that make BNP, BAC, and all of the other large sinking banks look good by comparison. This is important because a good part of the world is to some extent a counterparty to the Central Banks.
Need proof? Open your wallet. If you have US Dollars or Euros, you are a counterparty to (owed money by) the Federal Reserve or the ECB, whose management is currently buying every worthless paper asset on the planet with leverage that is unimaginable for mere mortals.
Dollar and Euros are about to become extremely hot potatoes, which makes trading them for potatoes, spuds, or anything real, a real good idea.
Let us pray for the peace of Jerusalem, and that tomorrow passes uneventfully on all fronts.
The Stock market is absolutely resilient in the face of news ranging from bad to UGLY. Presumably, the slow motion debt market collapse occurring in Europe is priced in, and it may be this very collapse that is driving money into US equities. In the insane “debt is money” system, the money can only go so many places, and there is currently so much money sloshing around that it is a wonder everything isn’t going up in price.
Oh, wait, it is! The CPI came in at 0.4% for August. Nothing to write home about but at this pace the annual CPI could hit 5%, well above the FED’s 2% target.
And we haven’t seen anything yet. Tomorrow, the Federal Reserve will meet and be expected to “do something.” Lately, “do something” has meant that the FED offers to throw perfectly good Federal Reserve notes at various forms of bad paper issued by companies and governments who never intend to make good on them.
At this stage in the game, it is now a given that if perfectly willing market participants won’t buy the paper, surely the FED must do it. “So what?” say you, “Let the FED waste its own money!” If only it were that simple, fellow taxpayer.
Unfortunately, the FED’s money, by decree, is everybody’s money. Every bad decision by the FED reduces the purchasing power of every dollar holder on the planet, making nearly all of us involuntary shareholders of this worthless enterprise, and management at the FED has been making some very bad decisions with very large sums for about four years now.
As a concerned involuntary shareholder of the FED we are compelled to offer the following unsolicited advice: Why not just wait until January, when the 0% FED funds “trickle” their way down to Main Street? Then things will really be interesting. That is when the US Dollar in its present form will go the way of every other paper currency in the history of mankind.
Fellow taxpayer, prudence demands that one make immediate plans to replace anything that depends upon the value of the US Dollar with something real. By the time the FED gets around to doing it for you, by introducing a New Dollar, current inaction will have caused anyone with faith in the dollar to suffer horrendously tremendous losses in relative purchasing power.
Back in the rotting old world, to quote Nabokov, the Euro debacle just became more complicated as the Slovenian government failed a confidence vote. The President is now left trying to cobble together a government and the rest of the Eurozone will presumably have to wait at least 30 days to get Slovenia’s approval for the next round of good money to be thrown at Greece.
It is useless to point out that the Eurozone governments, like their American counterparts, are simply throwing good money after bad. As we have observed here before, throwing money at failing enterprises is their only solution. Besides, they have banking interests to protect. Soon they will be spreading propaganda that ATMs won’t spit out Euros and the world will end if the Greeks are not supported.
That may be true, but these unpleasant outcomes will eventually come to pass no matter what the Euro FEDs do.
This is how the State, which by definition can do nothing but destroy wealth, operates. Western societies, and dare we say, the entire world are now beginning to suffocate under the weight of the current form of welfare/warfare state which exists to make promises on behalf of its productive citizens to its unproductive citizens.
Then, after enslaving the productive citizens, the State then makes promises to support the banking and military interests in order to ensure that the productive citizens remain enslaved.
Is Anarchy the Answer?
At some point, each citizen decides that they are either better off becoming an unproductive citizen, working for the State taskmaster as a banker or provider of “security”, or fleeing beyond the State’s ability to enslave them. Western society is quickly approaching the tipping point where a majority of its productive citizens will be forced to make this choice.
Faced with such facts, an intelligent fellow taxpayer such as yourself is surely asking (or should be asking, if we may prompt you), “Isn’t there a better way?”
In other words, is the State really necessary? Today we read a brilliant essay on this very subject by Stefan Molyneux. We encourage you to peruse it at your leisure. You can see it by clicking on the link below:
If you are limited on time, it is enough to say that Molyneux lays out compelling, logical arguments about how the free market would more effectively take care of the tasks which are currently relegated to the State. Specifically, he examines three activities which pro-State apologists claim that the free market will not solve on its own, making the State’s existence a necessity: Dispute Resolution, Collective Services, and Pollution.
After reading Molyneux’s arguments, it seems that now more than ever that embracing Anarchy is the answer to what ails society.
Much more than simply the answer, it is clear that the true chaos in not created by the Stateless Anarchist model, rather the present chaos is a product of entrusting the State with too much power.
How else can one explain how every present effort the Government uses to ”improve” its citizen’s lives serves to collectively impoverish them?
We’ve had our first taste of autumn here in the Pacific Northwest. We found ourselves strangely welcoming the overcast sky and constant humidity. It is the type of weather that is pleasant for a month or two. Unfortunately, we get about 8 months of it here which requires some sort of escape to the sun, either Hawaii or California, for it to remain tolerable.
But still, the first taste was sweet and provided a warm feeling that all was well with the world, despite constant reports to the contrary. Fortunately for us, the sun looks as though it will return this week.
On the whitewashed shores of Greece, where the sun seems to perpetually shine, there is now intense pressure from which there seems to be no escape. The Prime Minister was called back from a trip to the US after receiving an emergency call from the Finance Minister as he stopped over in London. The poor chap had to be on a conference call with creditors and the troika and didn’t want to take the lashing alone.
As if to give the world a taste of things to come, the Greek Government passed an emergency property tax which is to be collected via the citizens’ electricity bill to help ensure compliance. Apparently the folks at the electric company are not happy about adding tax collection to their duties and are pushing back on the order.
The Greeks never have been good at collecting taxes, either that or their citizens are especially adept at avoiding paying them. Either way, the combination makes for low tax revenues which makes servicing public debt, well, difficult.
We offer a suggestion to the Greeks, privatize the electric company and then enact an enormous tax on consumption. At least then the riots would be staged at the electric company and not at parliament.
Meanwhile, before departing for New York in perhaps the least understood yet most important peace-keeping mission the US will ever embark upon, President Obama gave yet another clinic on teleprompter reading during his speech on, what else, government finances. His proposal was to save $1.5 Trillion over the next 10 years by in large part by ending the wars in Iraq and Afghanistan.
Will Palestine Become a UN Member?
We do not have any statistics, but we are willing to bet that this is not the first time that ending these wars has been proposed as a deficit reduction measure. What is truly astonishing to almost every thinking person is that these two military adventures have continued for so long and have become such a drain on the public treasury that ending them now would save $1 Trillion.
Less war, more money, what a novel idea! It is as straightforward as it is unlikely to happen.
We sense that both this speech and bath time for Greek creditors will be interrupted by the Palestinian bid for statehood at the UN this week. The Middle East has not seen a moment like this since Israel vied for statehood in 1949. Let us pray that this moment passes in a peaceful manner.
What a week it has been, and we are only halfway through it! Societe Generale, BNP Paribas, and many other European banks are bracing for the impact of a pending Greek default which would likely be followed in short order by an Irish, Spanish, Portuguese, and possibly Italian default as club med prepares to give the collective finger to their German, ECB, and IMF taskmasters.
There were rumors that BNP could not borrow dollars yesterday and today we saw why. The large French banks, of which BNP at $2 Trillion in assets is the largest, collectively hold assets of $8 Billion, which is four times France’s annual GDP. This, in theory, makes nationalization of these banks impossible and the meager, strings attached handouts offered by China are of little comfort.
Zerohedge.com posted an excerpt of a report by Jeffries which spelled out a probable endgame scenario in Europe which involves sloppy nationalizations of the financial sector and a repudiation of the Euro by the defaulting countries in order to print the drachmas, pesetas, liras, etc. necessary to make good on the newly nationalized banks’ liabilities.
The PIGS have nothing to lose at this point and it will be EUROUGLY for those who cling to the Euro.
We are all preparing to learn a great lesson about faith in paper currencies and it looks like for the Europeans, class is in session.
Yesterday, we were attempting to explain the concept of inflation coming in disguise. We speculated that the disguise would come in the form of a “10:1 reverse split” being declared for the current USD. In other words, a new US Dollar would be introduced which would be worth 10 old US dollars. We left off with a question, “What’s the big deal? Why does this matter?”
At this point, our rational readers are thinking to themselves, ”Big deal, so we get rid of the penny and nickel production cost problem, learn to move the decimal place in our thinking, and happily move along with life, right?”
This, of course, is what most monetary and governmental representatives think as well. It makes the move almost a no-brainer.
We must beware of the money changers! They seem innocent, yet are wolves in sheep’s clothing.
Yes, fellow taxpayer, under the reverse split scenario, dollar holders will be robbed. Quietly, and, if not for the following humble explanation, completely unaware. It is as Keynes famously said:
“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”
(Editor’s note: today inflation is accepted as “sound” economic policy thanks to meddlers such as Mr. Keynes.)
How, then, will dollar holders have their wealth confiscated? A change like this initially robs those who can least afford to be robbed, the poor. And the thievery is made all the more sinister because the thieves employ unwitting merchants and tax collectors with which to fleece them.
The following is a practical example of how the theft will take place:
One would be hard pressed to find a more suitable and pleasant example if instant price inflation than that of the Spanish cup of coffee, pleasantly sipped at mid-morning with friends and colleagues.
Inflation explained in the new Euro price of Cafe con Leche
This cup of coffee, a constitutional right of Spaniards for generations, could be enjoyed for a mere 100 pesetas circa 1995, in the era before the peseta was to be pegged and converted into the then conceptual Euro currency.
This 100 peseta price held more or less firm until the Euro coins began to circulate in 2002. The Euro/Peseta conversion rate had been pegged at 166.386:1 in 1995. In 2002, the same cup of coffee was now 1 Euro, an overnight 66% increase.
The numbers may not be exact but you get the point. Currency changes offer a grand opportunity for price adjustments at the lower end. While on the surface, it appears that a cup of coffee that costs 1 monetary unit compared to one that costs 100 monetary units is an improvement. In fact, considering that many wages remained stagnant, it represented a considerable deterioration of overall purchasing power.
To this day, many Spaniards think of prices for larger items such as cars and houses in terms of pesetas. It is one thing to be duped on the value of a cup of coffee, quite another to be duped on the value of a car or house.
For a time, asset prices there did indeed rise as an indirect result of people fleeing the inflation caused by the change to the Euro. However, the devil of inflation is in the details. An overnight 66% increase in a cup of coffee can eat into a laborer’s stagnant wages quickly.
Once the transitory asset price increases have been burned through at the café, one is left with a nation that is collectively poorer and unable to make economic decisions because of these types of stealth price shifts.
Returning to the probable US Dollar reverse split, we can see that a 10:1 change from old to new dollars would likely result in a cup of coffee going for a nice round quarter (or 25 new cents). Which sounds like a trip back to the 70’s until you consider that we are talking about $2.50 of the old dollars for a plain cup of coffee which could be had for $1.50 before the switch.
One can rest assured, employers will be mindful to move the decimal point and nothing more on wage calculations. Voila! Overnight poverty, all with the stroke of a pen.
While one may hold out hope that any change in the monetary unit will be price neutral, the Spanish example shows us that lipstick on a pig does not make it any prettier, and coffee at 1 Euro is no tastier than it was at 100 pesetas, just more expensive.
We pray that you will prepare yourself by saving in gold and silver coins, which will retain and perhaps increase their relative value under such a scenario. Under current conditions (and probably more so after the G-7 begin to their coordinated action) anything that cannot be created by government decree, to paraphrase Michael Pento, will be preferable as a savings vehicle to the US Dollar.
The moment of truth is approaching for Greece. Today the headlines flashed that the markets were pricing in a 98% chance of the Greeks defaulting on their sovereign debt. A great lesson is about to be learned. Is anyone paying attention?
The great lesson is the following: Reliance on governmental and/or central bank action to stave off a default is not a sound strategy. You may get lucky once, twice, even three times. If one is particularly unfortunate, the strategy may even work many times in succession.
The government reliance strategy is like idly watching spins a roulette wheel with all your chips on red. With enough spins, the ball will eventually drop on a black. Think of it as the governmental version of a black swan.
Gambling on Government intervention
In the case of Greece, who abandoned its 2,000 year old currency to join the Euro club, there seems to be a lack of political will to ink the rubber stamp which approves the Greek’s next ration of Euros. The taskmasters of the Eurozone are starting to realize that each time the stamp is inked, the sewage of Greek finances leaks a little further into their well.
The populace is starting to get sick to their stomach, as are large banks on both sides of the Atlantic. The French banking giants are queasy because much of the Greek debt is on their books. In the New World, where about half of Greek debt is insured, the banking giants are getting nauseas. It is the nausea of a drunk man realizing he will be stuck with the bar tab after his buddies sneak out of the tavern.
Meanwhile, as the politicians and central banks continue to bungle their way through this information, the market has already priced it in.
“Priced in?” Astute, shocked, and astounded readers are surely thinking, “Then where is the crash in stocks and bonds?”
Astute readers, of course, are right. There is a crash occurring right now in stocks and bonds. However, bond yields are down and the stock market is up because the crash is occurring against the backdrop of rapidly depreciating currencies and as such, the debauched currencies are disguising the crash.
The Disguise
Astute readers now have a collective light bulb in their head illuminating as they clearly see that inflation in consumer prices is set to accelerate in the near future. Naturally, this obvious inflation would not be tolerable and as such must be masked in order for the general public to peacefully accept it.
A new dollar will be introduced with a convertibility ratio from old dollars of 10:1. In other words, each current dollar will be the equivalent of a new dime.
Voila! No inflation here. The new and improved dollar now buys more than ever!
The Debauched Dollar in disguise
Why choose a 10:1 ratio? There are two compelling reasons for the US Currency to go through a reverse 10:1 split. First and foremost, it is simple. Since a majority of the world’s commerce is conducted in dollars, the disguise must be mathematically simple. What could be simpler than moving a decimal place?
The second reason is less obvious but perhaps more compelling from the point of view of the monetary authorities. The disguise would immediately eliminate the need for pennies and nickels and increase the demand for dollar coins.
At this stage in the game, it costs the US Mint more to create pennies and nickels than they are worth. While we are not certain of the exact numbers as of today, some estimates have the value of the metals needed to create a nickel valued at $0.07 while the metals needed to create a penny are valued at $0.012. This is before considering the energy and equipment necessary to strike the coins and distribute them.
At current metal prices, which are unlikely to drop in the near future, the US Mint is producing nickels and pennies at a loss.
This embarrassing detail makes the purchase of nickels and pennies a better risk free investment than US Treasury Bonds, the world’s current safe haven of choice. The metal premium for Platinum, Gold, and Silver coins is widely known. At some point, nickels and pennies will disappear from circulation and their metal premium will take precedence over their face value.
Still, one may ask, “What difference does it make? This 10:1 switch sounds like a great idea. I’m sick of pennies!”
Oh, if only the switch were price neutral, it would make no difference at all. How, then, do the stock, bond, and almost every other market continue to rally in the face of questionable macroeconomic fundamentals?
Much ink is being spilled today in anticipation of what may or may not happen as the 10th anniversary of the events that occurred on September 11, 2001. Here at The Mint, we take the somewhat radical view of the Amish in response to tragic loss. We must forgive. An important part of forgiveness is to avoid making or observing a memorial to the offense. Memorializing an event is to keep it present before us.
As the US Empire is now conducting at least three extremely expensive military adventures which have their origins in the events that occurred that fateful day, forgiveness is probably not on many people’s minds this weekend. Meanwhile, millions of dollars are being spent to memorialize it.
We must forgive. It is our opportunity to choose the tree of life over the tree of the knowledge of good and evil. To repair the fateful error made in Eden.
Under the cover of this memorial, we sense that an extraordinary event will occur which will impact the fortunes of many in the US, England, Japan, and Europe and others outside their borders with exposure to their respective currencies.
Debauchery
The Event which we refer to is the coordinated debauchery of their currencies.
For the past four years, the FED, BoE, BoJ, and ECB have been engaged in a desperate attempt to debauch (devalue) their currencies. They have had the predictably mediocre to poor results that one would expect from efforts made by this rare hybrid of an agency which combines the laziness of the banking class with the incompetence of the governing class.
The goal seems simple enough. Print money to pay existing debts and encourage people to spend and to take on new debt. So simple, that each of these Central Banks is currently running at their own pace down this calamitous path with little regard to how the outside world is reacting.
Guess what? The outside world is not reacting as expected.
What they did not take into account, at least until now, was that there is quite a bit of money to be made from the fact that they are all running at different paces down the same path. The nature of international finance is such that one Central Bank’s unbridled effort to debauch its currency leads to an opportunity to profit by borrowing in that nation’s currency and purchasing one of the other three currencies, which undermines the debauchery of the currency that is being purchased.
Stark, as most thinking persons, cannot stomach the debauchery in his midst
This is commonly known as the carry trade, and these large Central Banks have taken all of the guess work out of it for the past four years.
We suspect that these four Central Banks see the immediate need to eliminate interest rate spreads amongst their currencies which will force those who ply the carry trade to purchase currencies outside of this group.
In effect, this ultimate coordination of interest rate policies will cause these four currencies to “peg” to each other, which should assure that the debauchery of their respective currencies will continue unchecked and likely accelerate.
Will another stealth disaster befall the US this weekend? If these Central Banks somehow coordinate their collective debauchery of the currency, the economic devastation of millions will march on.
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.
It was another beautiful weekend here in the Northwest, safely away from Irene and all of the mayhem that it has left in its wake. Summer arrived a bit late this year and, like recent stock market rallies, has had trouble gaining traction.
One must be content with the days of sunshine that come our way, for our instinct tells us that they will not last. For us here in the Northwest, that means days of sunshine must be enjoyed to the fullest. In the stock market, it means that any near term rally should be seen as an opportunity to sell.
In the long run, as the wheels come off the US Dollar mobile, stocks should outperform most other paper assets. In the short run, with Bank of America imploding, the resulting black hole threatens to suck a few trillion dollars out of the stock market.
Bank of America is too big to succeed and is in a hurry to raise capital that they do not need. Given the incredible incentive that most Bank Executives have to misrepresent their circumstances, it is a wonder that investor would take them seriously. Anyone who is not obligated to hold B of A stock and is still holding it is performing an act of charity, for that money will go quickly down the drain.
That story is the sordid tale of the Auto Feo. You can catch up with the “Ode to the Auto Feo”, Parts I,II, and III by clicking on the following links.
We arrived at home much later than we imagined. What should have been a brief run across town to kick the tires on a vehicle that we should have passed on had now become a frustrating and humiliating odyssey. We were stuck with a car that seemed doomed to be scrapped within the week. Our only consolation was that we had “only” dropped $1,300 on this bitter lesson.
We drove the overheating, smoking beast into our driveway. We were dripping with sweat as we were forced to turn the heat on in a desperate attempt to moderate the vehicle’s temperature as the thermostat was not performing its designated function.
Still, our ever supportive wife was optimistic:
“It only needs to make it the 1.5 miles each day,” she reassured us.
“And it has air-conditioning!”
She appeared as sold on the vehicle as we were until the smoke, which we were later to identify as oil leaking from the engine block onto the exhaust system, began to fill the thick summer evening air.
The smoking of the Auto Feo produced a dry ice effect coming out of the hood on the passenger side which we were never able to repair (the only attempt the mechanic made served to make it worse.)
Then, she saw the keyhole, or lack thereof. She shook her head.
“You say you didn’t notice this?”
All we could do was shrug. It was an oversight of classic proportions, like forgetting to make gravy for Thanksgiving dinner. There was no reasonable excuse that could be offered.
Her look confirmed what we had now known for about 90 minutes, we had been taken.
What could we do? Given the discovery of the oil leaking and the lack of the keyhole, we deemed the vehicle unacceptable. We had to attempt the unthinkable.
“We will humble ourselves and ask the Iranian to undo the deal,” we proclaimed, as if the matter were firmly under control. Swallowing one’s pride seemed preferable to seeing a testament to our own ignorance and impatience in our driveway.
We will spare you the details of our three telephone calls to the Iranian that ranged in tone from bold appeals to the man’s honor to tearful groveling. True to form, He out-groveled us and admitted that the cash had gone to his brother that fateful night.
We were stuck.
A Unique Vehicle - The Discovery of a James Bond Smokescreen
The next two weeks served to confirm that we had just made the worst purchase in recent memory. In addition to the inconvenience of entering the vehicle from the passenger side and the permanent smoke screen that the vehicle threw off as it drove:
-We experienced random starter issues (i.e. the vehicle started or failed to start completely at random)
-The cherished air conditioner broke in a plume of smoke on 3rd day,
-After 7 days, the odometer stopped turning, which explained how a 1993 could have a mere 143,000 miles.
Still, the vehicle ran and served its purpose of carting us to and from the train station, a mere 1.5 miles down the road, and even though the starter worked only when it chose to, it rarely failed to start the motor after teasing us for a time.
With the initial bad taste out of our mouth, a strange sort of respect began to grow between ourselves and the mistreated vehicle.
“Just give us 12 months,” we told the trusty steed, which was obviously on its last legs.
Somehow, it seemed to understand, and six months passed without incident.
At that point, we decided to embark upon a dangerous experiment, an experiment that in hindsight was so ridiculous that it made even B of A’s robo-signing of foreclosure documents seem reasonable by comparison.
We decided to put an end to the annoying smokescreen the vehicle threw off the cheapest way we could think of. From that point forward, the only fluid we would put into the Auto Feo was gasoline.
Like B of A’s robo-signing adventure, it was bound to backfire.
We will continue our Ode to the Auto Feo next week. The week appears to be ending anti-climactically. Ben Bernanke said nothing of consequence at the economic conference in Jackson Hole, Wyoming today. As we have stated here at The Mint previously, the FED has essentially shot its last round of lethal ammunition, announcing that rates will stay near 0% until at least 2013.
Anything further would make the FED look like more of a laughing stock than it already is. At this point, they are giving away money because no one will take it. Unwittingly, the FED’s taking this most recent stance will spur a spending spree that will certainly be labeled “economic recovery” by the politicians who have become accustomed to identifying capital consumption as “growth” and capital accumulation as something to be severely punished.
Fortunately, the currency regime will end long before it can further scorch the earth. Our only advice is to not hold dollars or bonds when it does end, for those assets are the ones that will burn.
It appears that the debt crisis in Europe is spreading to the football clubs of Spain and Italy. Allegedly some of the clubs can’t pay salaries and the players are striking in the off the field sense. This is probably why the great Samuel Eto’o went to Moscow to become the highest paid player, of any sport, mind you, in the world.
Samuel, opting for liquidity over fame, must figure that Russian billionaires are more likely than Europeans to pay their bills over the next three years. Not a bad bet.
We will leave you with some footage of Eto’o’s goals which should tide you over in case La Liga and La Nazionale don’t play for a time:
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