Tag Archives: Default

Economics, The Mint

European Semi-Solution Extends the False Calm and indirect moratorium on Eurozone Investment

10/24/2011 Portland, Oregon – Pop in your mints…
Today after the western stock markets closed, the German lawmakers announced yet another plan in an attempt to stem the Eurozone’s tandem sovereign debt and banking crisis, which is rapidly accelerating.  The plan, according to AP, would boost the European Financial Stabilization Fund from its current 440 billion Euros approximately one trillion Euros.
The one trillion Euro figure is an estimate due to the nature of the plan which involves enticing capital to invest in the Sovereign debt issues from Euro member states by creating an insurance fund to partially back sovereign debt issues that would otherwise attract little investor interest.
Think of it as a partial Fannie Mae guaranty for European Governments.
There is a reason that foreign capital is hesitant to invest in Euro sovereign debt, and it is not for lack of enticement.  Greek, Spanish, Portuguese, and Italian bonds all offer fixed income investors a decent premium over other sovereigns for their perceived risk.  The problem from the point of view of the investors is that the premiums are not high enough if considered against the likely event that they will not get their principal returned.  The problem from the perspective of the Euro sovereign issuers is that they cannot realistically pay even these reduced premiums.
Once it is generally perceived that a nation state will default on its obligations, it is very difficult to attract capital, whether it be the purchase of sovereign bonds or investments in businesses located in the troubled country.
Default, while the most practical solution for any normal debtor, is apparently unacceptable for modern western nations.  For this reason, the Eurozone leadership is moving in slow, measured steps to appear to do just enough to preserve the credibility of the debt issued by the weaker, peripheral states such as Greece, Spain, and Portugal.
Will this latest Eurocrat concoction be enough?
For the moment, it may be.  The German Parliament must vote on their new obligations on Wednesday, just hours before the broader Eurozone working group is set to formally announce the plan, leaving no room for dissent, ala Slovenia earlier this month.  Once the political drama in Germany passes, it will be smooth sailing for the Euro and its sovereign debt markets…for about a week.
The illusion of viability and solvency

At that point, it will again become clear that the banks and sovereigns will require additional funds (currently the estimate is north of 2 trillion Euros) in order to continue the illusion solvency.

The problem of Euro solvency is no secret.  This is why both banks and sovereign governments are having a great deal of difficulty getting credit from anyone other than other broke European governments, banks, the ECB, and the Federal Reserve.  This latter list of entities have two things in common.  First and foremost, they all have a vested interest in perpetuating the charade that the Euro is a viable currency.  Second, these entities, by virtue of their activities, can only destroy wealth and therefore must coerce the productive class into lending its resources.
To make matters worse, no one in their right mind can invest real capital in the Eurozone under these conditions.  With sovereign governments pushing austerity measures and increasing the confiscation of private assets via increased taxation, any further investment in the Eurozone must be properly seen as an act of charity.
Such is the paradox of solving debt problems by incurring more debt.  Once one believes that the debt cannot be repaid, this belief becomes a self fulfilling prophecy.  The Eurozone is becoming the world’s latest example of this inescapable truth.
Meanwhile, commodity prices, which reflect the fruits of productive activities, are on the verge of exploding to the upside, signaling a growing distaste for fiat currencies.   Will this be the final, violent blow off in commodities?
Stay tuned and Trust Jesus.
Stay Fresh!
 
 
Key Indicators for October 24, 2011
 
Copper Price per Lb: $3.46
Oil Price per Barrel:  $91.60
Gold Price Per Ounce:  $1,653 PERMANENT UNCERTAINTY

M1 Monetary Base:  $2,056,000,000,000 RED ALERT!!!
M2 Monetary Base:  $9,570,500,000,000 YIKES UP $1 Trillion in one year!!!!!!!

Economics, Gold, Silver, The Mint

Dual Entry Accounting – Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe – Part III – Money or Credit?

10/19/2011 Portland, Oregon – Pop in your mints…

For those of you who have missed Part I and/or Part II, you may read them by clicking on the following links:

Dual Entry Accounting – Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe – Part I

Dual Entry Accounting – Man’s Greatest Innovation, Modern Central Banking – Man’s Greatest Catastrophe – Part II – Irony

For those of you who are too lazy to click the links, we do not blame you.  Below we offer a brief summary to get you up to speed:

Central Banking is the physical expression of Man’s need to safeguard his wealth and to increase trade.  A Central Bank’s usefulness and scope were greatly increased when dual entry accounting could be employed to manage a Central Bank’s accounts.

The Central Bank’s role as a storehouse of wealth has generally attracted the attention of the Government, which is the physical expression of Man’s need to protect his life.  The Government, in this capacity, does not generate wealth and must maintain itself either by taxing its subjects or borrowing funds.

The Central Bank, as the repository of wealth and facilitator of trade, by default creates a majority of the banknotes which circulate in a society.  As such, the Central Bank becomes the natural creditor of the Government.  Whether it lends funds directly to the Government or indirectly, the result is the same.  That result is that the use of its subject’s wealth by the Government is greatly facilitated by the existence of a Central Bank.

Having established the fact that some form of both a Government and a Central Bank will come into existence and become increasingly interdependent, the only question is one of the size and scope of such entities.

Central Banking, like alcohol and socialism, may be a good idea when used in moderation.  However, each one of these also represents a catastrophe waiting to happen.  For if the circumstances under which they are created or used take an unfavorable turn, the wealth and lives of many may be lost in a very short period of time.

How, when, and most importantly why will this catastrophe take place?  As mere mortals, we can only answer the why and speculate as to the how and when.

Why, then, will the current system of Central Banking come to an end which will cause wealth destruction on a scale which will make the weapons of war seem like child’s play in comparison?

The answer, fellow taxpayer, is that money as it is widely understood today does not really exist.

You read correctly.  What a majority of the developed and semi-developed world uses as a store of wealth, unit of account, and medium of exchange, is a figment of the collective imagination.

Allow us to explain.  It is generally understood today that the value of money is not necessarily in money proper, rather the value of money is found in the ability of the bearer to exchange said money for goods and services.  What is often overlooked in this observation is that, for money to be exchanged for something of value between willing participants of a transaction, what is used as money in the transaction must be universally perceived to have value that is easily transferable between parties.

Following this logic, what society uses as money is, by definition, simply another good which is widely recognizable as useful in exchange and therefore carries a price premium (we will call it the monetary  premium) of a certain amount usually far above what some economists would incorrectly* call the good’s “intrinsic” value.

* We say incorrectly because value judgments, while often influenced by what are known as “market” or “intrinsic” values, are by definition made by the individuals who willingly enter into a transaction, not disinterested observers.  It is for this reason that it is more accurate to appraise value by observing price points of transactions on “the margin” (i.e. transactions that are actually taking place) as opposed to appraising value based on past transactions or transactions imagined to take place in the future.  Many are the hypothetical gains and losses of those who refuse to enter into transactions because they are waiting for and offer at “market prices” or the “intrinsic value” of an item.

Regardless of the monetary premium that a good may carry, whatever is used as money, by definition, must be a tangible good.  Otherwise, we are dealing with credit, which is a promise to pay in money at a future date. Credit may be given in exchange in the place of money and is often traded at a discount to money delivered immediately. 

The distinction between money and credit is common knowledge to but it is important to make a clear distinction in order to properly understand what happens next.

 

Examples of Money Proper - Courtesy of Mark Herpel - www.dgcmagazine.com

 

In roughly 9.000 years of human history, it has been tacitly agreed upon that silver and gold, usually in coin or bar form, are the highest and most widely recognized goods used as money and that the accumulation of silver and gold represent wealth. 

As you recall, the concept of a Central Banking arose in response to the need for man to protect his wealth.  You will further recall that in order to both protect wealth and facilitate trade, a Central Bank creates banknotes which represent a claim on the wealth being protected by the Central Bank. 

These banknotes which the Central Bank creates are, by definition, credit and not money.  They are generally the highest, least discounted, form of credit which is traded, but this does not change the fact that the banknotes are credit and thus carry an implied risk of default.  This risk of default places the ultimate limit on the circulation and acceptance of the banknotes in trade.

From time to time, when a Central Bank’s ability to protect the wealth entrusted to it came into question, banknotes would be presented to the Central Bank to be redeemed for the amount of silver and gold which they represented.  If the Central Bank could not produce the amount of silver and gold that was being redeemed, the Central Bank was considered to be in default and, as word of the default spread, the banknotes in circulation would trade at an ever increasing discount to real goods.

This logic further supports the fact that banknotes are credit, subject to default risk, and not money proper.

Can you now smell the impending catastrophe?  Or, to put the question more directly:

What’s in your wallet?  More tomorrow,

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for October 19, 2011

Copper Price per Lb: $3.25
Oil Price per Barrel:  $86.11

Corn Price per Bushel:  $6.38  
10 Yr US Treasury Bond:  2.16%
FED Target Rate:  0.07%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,671 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.3%
Dow Jones Industrial Average:  11,505  

M1 Monetary Base:  $2,201,800,000,000 RED ALERT!!!
M2 Monetary Base:  $9,554,000,000,000 YIKES UP $1 Trillion in one year!!!!!!!

Economics, The Mint

A pending Eurozone implosion and How Inflation appears in disguise: The Euro/Peseta price of Spanish Coffee

9/14/2011 Portland, Oregon – Pop in your mints…

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.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S.  For more ideas and commentary please check out The Mint at www.davidmint.com

Key Indicators for September 14, 2011

Copper Price per Lb: $3.90
Oil Price per Barrel:  $88.94

Corn Price per Bushel:  $7.24  
10 Yr US Treasury Bond:  2.01%
FED Target Rate:  0.09%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,815 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.5%!!!   UP 0.7% IN ONE MONTH, 8.4% ANNUALLY AT THIS PACE!!!
Dow Jones Industrial Average:  10,992  TO THE MOON!!!

M1 Monetary Base:  $2,181,100,000,000 RED ALERT!!!
M2 Monetary Base:  $9,456,000,000,000 YIKES!!!!!!!

Daily Default, Economics, The Mint

Waiting on Armageddon in the Bond Markets, A Freaky Chart form the BIS

7/18/2011 Portland, Oregon – Pop in your mints…

We are taking the week off here at The Mint.  As the world observes the pitched battle between default and inflation, we will be roaming the cornfields of Northeastern Nebraska waiting to attend a cousin’s wedding.

To default or not to default, that is the question.  The financial world is on the edge of its seats waiting for the answer.  What will congress do?

Regular Mint readers know that once QE started, the US essentially defaulted.  Everything that is happening now is a mere attempt to avoid openly admitting it.

There has been a startling graph from Bank of International Settlements that has been circling the internet and is worth a look.  You may want to ask the children to leave the room, it is downright scary.

"AAA" Government dominates the market and it is beginning to smell funny!

Do you now understand why what happens in Greece, Ireland, Portugal, Spain, Italy and the US in the coming weeks is of the utmost importance for the bond markets?  In a very short period of time, sovereign debt issues have become predominant.  The scary part of the chart is that any sane person can tell you that there simply ain’t that much AAA rated paper out there, no matter who issues it or who rates is.

With what is sure to be an action packed week as the financial world braces for the next of its many brushes with Armageddon.  Not matter what happens, the only clear winner promises to be the volatility index (which you can conveniently trade as VIX).  If there truly is the threat of a default, try TBT, the Ultrashort US Treasuries EFT.

Better yet, head down to your local coin shop, load up on physical Gold and Silver, and come roam the cornfields with us, worry free!

Stay Fresh,

David Mint

Email: davidminteconomics@gmail.com

P.S. If you enjoy or at least tolerate The Mint, please share us using the buttons at the top of this post. If you feel that you can’t go another day and risk missing The Mint, please register by clicking here. Thank you!

Key Indicators for July 18, 2011

Copper Price per Lb: $4.39
Oil Price per Barrel: $97.12
Corn Price per Bushel: $7.01
10 Yr US Treasury Bond: 2.91%
FED Target Rate: 0.06% JAPAN HERE WE COME!
Gold Price Per Ounce: $1,594 PERMANENT UNCERTAINTY
MINT Perceived Target Rate*: 2.00%
Unemployment Rate: 9.2%
Inflation Rate (CPI): 0.2%
Dow Jones Industrial Average: 12,479 TO THE MOON!!!
M1 Monetary Base: $2,027,500,000,000 RED ALERT!!!
M2 Monetary Base: $9,265,600,000,000 YIKES!!!!!!!

*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.

Economics, The Mint

What is so Complex about a Default? The Greek Bailout Highlights The Shortcomings of Debt as Money

7/5/2011 Portland, Oregon – Pop in your mints…

Another day, another Euro.  It appears that it is still all systems go for the Greek bailout.  Athens will get another shot of hot money in mid July and the charade will keep going on.

In the old communist days, the joke went “we pretend to work and they pretend to pay us.”  In the current socialized monetary system, the joke goes “we pretend to cut back and they pretend we will pay them back.”

As our astute fellow taxpayers are already aware, the Greeks have no intention of changing their ways.  Parliamentary promises and austerity measures are of little value when 90% of the population is against them.  It is doubtful that the money lenders in Germany and France will step out of their high rises to come repossess the Parthenon.

No, they will leave that to foreign militaries as they march on Palestine.

But we are getting ahead of ourselves.  Our topic of the day is why the Euro/IMF and now, reluctantly, the private sector are “thrashing” (which must be somewhat harsher than mere hashing) out an aid plan for Greece tomorrow in France.  From Reuters:

International banks and insurers will meet on Wednesday to thrash out a plan for the private sector to contribute to Greece’s bailout effort as fears grow that the proposal will be derailed.

The Institute of International Finance (IIF) lobby group said it will chair the meeting of private-sector creditors.

It needs to resolve how a deal can get past credit rating agencies without it being termed a default, and how accountants will deal with it.

A lot of work remains to be done and Wednesday’s meeting will not be decisive, several sources said.

“It’s a process. The new French finance minister said today it will take weeks, over the summer. It’s complex. It can’t be settled overnight,” a French private sector source involved in the talks said.

He said there was unlikely to be a single “one-size-fits-all solution” but rather several options, given the number of different bondholders and stakeholders involved.

“The issue is so complex that we need more time,” a German banking industry source added.

Of course, the issue is not complex.  The Greeks have promised more than they can deliver.  Anyone can do this for a time but if too much time passes, actions (overspending) speak louder than words (austerity measures).

Besides, for a socialist tax collecting entity such as the Greek government, austerity measures starve its customer base of revenue, lowering its own tax revenues, which in turn demand’s more austerity, etc.

For a generally unproductive country that has made the mistake of outsourcing its money printing operations like Greece, austerity is collective suicide.  Even credit ratings agencies and accountants can no longer ignore this dubious state of affairs.

Greece, Where the Euro pays tourist prices

Yet paradoxically, the international bankers seem intent on forcing the Greeks, against their collective will, to starve themselves.  Why?  Even in the parallel universe of our current monetary system this course of action makes absolutely no sense.

And that is precisely why it must be done.  Somehow, the banking cartel must put on the charade of solvency.  Most people, accountants and ratings agencies amongst them, have a vague understanding that saving money is equal to solvency.

How right they would be, if silver and gold were still money.  In the current insane “debt is money” socialist monetary system, savings remove the lifeblood of the currency regime.

Don’t be deceived by the Euro and IMF’s words, Greece is a lost cause.  It has problems that not even Christine Lagarde and her $550K pay package cannot solve.

But that won’t stop them from trying!  As the explanations become more and more ludicrous across the Atlantic and Mediterranean, keep your eye on The Mint’s Key Indicators, which are still pointing at raging inflation with no end in sight in dollar land.

The only protection for savings is anything real that is not a dollar (or a promise to pay a dollar in the future, such as dollar denominated bonds).  How is that for investing made simple?  So many options!

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

P.S.  For more ideas and commentary please check out The Mint at www.davidmint.com

Key Indicators for July 5, 2011

Copper Price per Lb: $4.30
Oil Price per Barrel:  $96.83 A FAILURE TO INFLATE, WILL TREND LOWER

Corn Price per Bushel:  $6.80 MONETARY POLICY IS NOT WORKING
10 Yr US Treasury Bond:  3.14% WITH THE FED OUT, THE SKY’S THE LIMIT
FED Target Rate:  0.07% JAPAN HERE WE COME!

Gold Price Per Ounce:  $1,516 BENEFITING FROM PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.1%
Inflation Rate (CPI):  0.2%
Dow Jones Industrial Average:  12,570 WINDOW DRESSING FOR 401K PORTFOLIOS
M1 Monetary Base:  $1,954,300,000,000 RED ALERT!!!
M2 Monetary Base:  $9,098,400,000,000 YIKES!!!

*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.