As our site name implies, we have more than a passing interest in monetary theory. As such, ideas for new types of coin and currency are of special interest. When the value of the coins proposed contains an insane amount of seigniorage, we are compelled to call it out.
The Fiscal Cliff melodrama playing out in the halls of US Federal Government’s Capital has given rise to the above mentioned monetary insanity.
As the so called, moronic “Fiscal Cliff” false alarm approaches, it becomes more common for those of a Socialist/Statist leaning philosophy to search for easy solutions to what amounts to enabling catastrophic policy failures, out of control spending, and unsustainable debt pacts.
This is not surprising, as Socialism and economics are incompatible philosophies. Anyone who claims otherwise either mistakenly applies small system theory to large scale systems or is a shill. From one of these insane theorists comes the idea of the US Treasury coining a trillion dollar platinum coin to deposit at the FED, who would then cancel the Treasury’s debts.
This will not happen, first and foremost, because the insane monetary system relies on debt as its lifeblood, as such, any debt cancellation by the underlying foundation of US Treasury debt is out of the question.
Second, it must be recognized that coining a trillion dollar coin, theoretically equal to 1/60 of global GDP, that anyone other than the FED would accept at face value, is impossible, it simply flies in the face of reason. The FED has been paying 100 cents on the dollar for the MBS toilet paper that banks have sold to them for years now, as such, any concept of value left the halls of the Federal Reserve years ago.
The third reason is that the US debt at the FED has already been largely canceled via the FED’s various QE operations over the past several years. For the reasoning as to why the official US Debt held by the FED hasn’t been lowered to better reflect its true drag on GDP, we refer fellow taxpayers back to reason one.
We will present more data to back this claim in the coming week. In the meantime, if someone offers you a trillion dollar coin, be sure to check the spot price of platinum before making a more reasonable counter-offer. In any event, you are better off holding the platinum, as someday it will be worth are least a trillion Federal Reserve notes, the shills at the FED and Treasury have assured it.
“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than output” – Milton Friedman
Today we came across evidence that the massive amounts of money created out of thin air may no longer be benignly parked at the Federal Reserve. From Lee Adler at the wallstreetexaminer.com:
“The Fed was hit with withdrawals of $83.3 billion last Wednesday, the largest withdrawals from its deposit accounts that were not associated with quarterly tax payments since February of 2009…The Fed was apparently forced to take extraordinary measures to fund these withdrawals. These included the outright sale of nearly $24 billion in its Treasury note and bond holdings from the System Open Market Account. As a result, the Fed’s System Open Market Account (SOMA) fell to $2.611 trillion, some $43 billion below the Fed’s stated target of $2.654 trillion.”
Mr. Adler goes on to state that in order to meet these withdrawls, the FED had to borrow $43 billion from foreign central banks through “Reverse Repurchase Agreements (RRPs)”. In a sense, the FED had to make the equivalent of a good old fashioned margin call that foreign central banks had to scramble to make good on.
Could this be the reason that Italian Bonds yields are surging and the ECB cut rates unexpectedly last week?
Could this be the reason that the BoJ had to expand its Yen debasement program to the tune of 5 trillion yen?
Ever since the FED opened swap lines with foreign central banks, it has generally been the FED lending money to the foreign banks to assure liquidity. In this unexpected turn, the FED had to call in some of those loans to meet its own liquidity needs.
Could this be the first of what history will call a “Central Bank Run”? Only time will tell, but we would expect the FED to announce another, large scale dose of QE (Quantitative Easing) of its own in the next few weeks in an attempt to meet a similar event with fresh cash instead of a disruptive firing of its RRP revolvers.
In a way, this is the moment that the FED and all of the taxing authorities on the planet have been waiting for. Inflation is a government’s best friend. It allows the wealth destruction that these defense and welfare agencies engage in to continue while socializing the costs in a manner that is imperceptible to the untrained eye.
“Just as 55 million Social Security recipients are about to get their first benefit increase in three years, Congress is looking at reducing future raises by adopting a new measure of inflation that also would increase taxes for most families –(with) the biggest impact falling on those with low incomes.
If adopted across the government, the inflation measure would have widespread ramifications. Future increases in veterans’ benefits and pensions for federal workers and military personnel would be smaller. And over time, fewer people would qualify for Medicaid, Head Start, food stamps, school lunch programs and home heating assistance than under the current measure.
Taxes would go up by $60 billion over the next decade because annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets because their wages rose faster than the new inflation measure. Annual increases in the standard deduction and personal exemptions would become smaller.”
Do you see how it works, fellow taxpayer? Inflation, combined with statistical shenanigans intended to mask it, is the magic pill for broken government finances. It is no secret that the Government’s finances are a disaster, which is why we expect to inflation in generous doses.
How exactly does “Chained CPI” differ from the current CPI calculation? The article goes on to explain:
“Many economists argue that the chained CPI is more accurate because it assumes that as prices increase, consumers switch to lower cost alternatives, reducing the amount of inflation they experience.
For example, if the price of beef increases while the price of pork does not, people will buy more pork. Or, as opponents mockingly argue, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters.”
Are you laughing yet? Perhaps crying? Now listen to how the Government justifies it:
“A report by the Moment of Truth Project, a group formed to promote the deficit reduction package produced by President Barack Obama’s deficit commission late last year, supports a new inflation measure. “Rather than serving to raise taxes and cut benefits, switching to the chained CPI would simply be fulfilling the mission of properly adjusting for cost of living,” it argues.”
If you are not yet laughing, crying, or laughing to avoid crying, allow us to assist you. What they are trying to say is that in the parallel universe in which the Government operates, the need to substitute more expensive goods for cheaper ones does not constitute a real loss of the purchasing power of the currency with which those goods are purchased.
After all, you can always put on a sweater, right?
Where the Government’s logic, and ultimately society, begins to break down is at the point when all prices, beef, pork, heating oil, and sweaters begin to rise astronomically in tandem with each other. At that point, it becomes painfully obvious that the problem lies in the currency, not with the producers.
Unfortunately, at that point, the Government will have long since vilified and persecuted speculators and producers for alleged price gouging to the point that the productive part of society, those who grow food and produce raw materials, will have completely ceased to produce and/or fled the country. The subsequent lack of production will result in an increasingly scarce stock of real goods being quickly priced and re-priced in a currency which is produced at an incredible surplus.
In layman’s terms, these events will be summed up in the phrase “hyperinflation.”
If the FED has to draw once again on its RRP revolvers, it will be clear that the benign growth in the M2 money supply will have become malignant, and that hyperinflation will soon be in full bloom.
The fairy tale of the world’s current financial system continued today. Stocks crept higher in the face of what seems to be a deluge of bad news:
“Frustration mounts for MF Global clients” – Jon Corzine’s firm cannot account for $600 million in client funds. Beyond the inability to deliver client funds on demand, MF Global clients began receiving margin calls as their collateral with the firm vanished. The ripple effect was so severe that commodities exchanges relaxed their margin rules in order to to avoid wider damage. The fall of MF Global was like an earthquake, now it is time to brace for the financial Tsunami.
“New Census data raise number of poor to 49 million” – The official poverty rate is 15.1%. However, it hits 16% when you slide the income bar just a bit higher to $24,343 for a family of four. In other words, one in six Americans is currently living below this slightly adjusted poverty measure.
“Italy bond yields soar; euro zone troubles deepen” – Lest we forget that the euro financial system is a complete disaster, Italian yields are climbing and the Italian bond market is beginning to resemble the leaning tower of Pisa. Then came reports that Spain only had 20 billion Euros in reserves at the end of August (they must have spent their savings on vacation!) and as their banking system crumbles, they are largely helpless to intervene to save it. Meanwhile France is now pushing austerity leaving Germany and the ECB as the only backstops in Europe.
Yet in spite of this disasterous news, the Dow is holding just above 12,000. What does it mean?
Far from signaling economic recovery, the action appears to be further evidence that what Nadeem Walayat at the Market Oracle calls the Inflation Mega-Trend (and consequent Stealth Bull Market in stocks) is firmly in place.
The Mega-Trend, as Mr. Walayat calls it, is the simultaneous debasement of the currency and spreading of deflationary propaganda intended to delay the public’s reaction to the inflation caused by said debasement.
Think about it, while the FED, ECB, BoJ, and nearly every other Central Bank in the world pump money into their financial systems in order to “fight deflation” or “stimulate the export market,” the average person has watched gas, food, and the price of nearly everything else (besides their paycheck) steadily rise over the past decade.
The the public is told that these steady increases are “healthy inflation” which is currently “understood” to be roughly 2% a year. This 2% in reality represents the indirect tax rate imposed on anyone who chooses to hold a currency as an asset or accept the currency as wages. There is not time here to properly refute the fallacy that inflation is somehow necessary for GDP growth. However, inflation is useful and absolutely necessary to keep an insane, “debt is money”, ponziesque, wealth destroying monetary system functioning.
As the Central Bank creates trillions of dollars out of thin air in a vain attempt to stabilize the global financial system, the public is told that it this new currency is “benign” because most of the money is being held on deposit at the Federal Reserve simply to buffer the banks against falling asset prices and keep the ATM machines spitting out cash.
Yet, with the stock market maintaining its optimism in the face of seeming insurmountable odds, can you be sure that the FED’s funny money is safely locked up in its electronic vaults, simply waiting to have foreclosed properties written off against it?
Will all of this freshly printed money really be content to simply die a quiet death, never having run through an ATM or point of sale transaction in the real world?
Oh, fellow taxpayer, we have our doubts. You should too. More tomorrow.
As the western world braces for a full scale currency collapse, we have endeavored here at The Mint to offer an explanation as to why these events are taking place and, along the way, offering the obvious solution to the chief problem, mistaking credit for money.
For those of you who have missed Part I, Part II, Part II, and/or Part IV, you may read them by clicking on the following links:
If you require only a brief summary, Part IV above offers a relatively brief and comprehensive summary of the previous three. Now where were we…
Ah yes, in the United States, circa 1968, a time not so unlike our own. The Vietnam war was becoming increasingly unpopular and the social climate was ripe for protest. The US had run up a large and increasing trade deficit with the rest of the world. It was becoming clear that if foreign dollar holders were to redeem a significant amount of their Federal Reserve Notes, which we now understand to be banknotes and not money proper, for gold, which we now understand to be money proper, the Federal Reserve would not be able to deliver enough gold.
The solution, if it can be called that, was to gradually increase the amount of Federal Reserve Notes required to obtain an ounce of gold from $35 to $41 between 1968 and 1971. Then, in 1971, with the US dollar collapsing in value and the Bretton Woods system falling apart at the seams, then President of the United States Richard Nixon announced that US dollars were no longer convertible into gold. The event is now referred to as the Nixon Shock.
And a shock it was. The US dollar, the benchmark of Central Bank currencies throughout the world, was now officially backed only by the faith that it would continue to be accepted in trade. The Federal Reserve had defaulted.
Most of the world still lives by this faith today, and if anything, the delusion that a banknote issued by a Central Bank which has defaulted on its obligation to deliver real money on demand has only grown.
The reason that the large scale catastrophe of modern Central Banking lies before us is that over the last 40 years, the lack of gold and silver to back the banknotes in circulation has been replaced by the expectation that governments, and by extension their subjects (citizens), will produce enough goods and perform enough services to repay the obligations represented by the banknotes. As the unrestricted quantity of banknotes and obligations to deliver banknotes in existence will always tend to exceed the stock of available goods and services, these obligations are impossible to satisfy.
Human beings are fallible. It is normal and should be expected that they will not be able to deliver on certain obligations. The natural beauty of banknotes redeemable in gold and silver was that, if it was suspected or observed that a person or entity would be unable to pay their obligations, the creditor would move to seize the gold, silver, or other assets that the debtor had pledged as collateral.
The seizure of collateral or the threat of seizure was often enough to correct the failed human action or decisions that were leading to the net loss of wealth incurred by the activity which was undertaken. In economic parlance, we would call this the correction of the malinvestment of resources.
Without gold and silver to act as a natural limitation on the supply of banknotes and other forms of credit, the bad decisions that lead to the malinvestment and the activities that lead to the destruction of wealth and resources can continue for a very long time.
The use of gold and silver as money had another, more important function that is often overlooked. Gold and silver are inert, non-consumable objects. Their hoarding and use as money will not generally cause starvation or want. In fact, the hoarding of gold and silver as money would have the effect of lowering general prices as productivity increased, naturally creating an incentive to decrease production which in turn would raise prices, making the expenditure of more silver and gold necessary and in turn raise prices, creating a natural incentive to produce.
Gold and silver allow the economy to naturally regulate itself and, by virtue of the difficulty in extracting them, cause the rest of the earth’s resources to be used in harmony with each other.
Finally, gold and silver are inanimate objects. Their recognition and possible seizure as collateral does not threaten the liberty or life of a person. However, because modern central banking has replaced money proper and placed credit in its place, it will become increasingly common to entire societies held as security for a debt that many of them had no direct hand in creating. This is the logical end of using credit as money.
It is the truth that will bring tragedy to the earth.
Without the natural counterbalance to trade and growth which gold and silver money had provided for over 9,000 years, man’s activities, whether productive or destructive, have continued nearly unchecked for the past 40 years. It is staggering to think of the catastrophe that awaits if man is truly on the path to destruction.
Man, by nature, is always on the path of destruction, but the use of gold and silver as money served to correct him before he strayed too far down it.
Most people alive today have been trained to believe that using Gold and Silver as money is an unnecessary and environmentally harmful process. Even Adam Smith believed that if the effort expended to mine metals to create money could be directed to other, more useful activities, that humanity would be better off.
What Smith did not realize was that man would not always direct its energies to useful activities. Like modern Socialists, he underestimated the power of self interest inherent in all human action. Today we are preparing to reap the consequences of 40 years of unrestricted and more often misguided human actions.
While it may be too late to avoid the catastrophe that Modern Central Banking may bring upon us, it is comforting to know that a return to the understanding and use of gold and silver as money offers hope for a future of truly infinite possibilities.
Again, for those of you who are too lazy to click the links, here 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 naturally, in some form, come into existence and become increasingly interdependent, the only question is one of the size and scope of such entities.
Today, that the scale of modern Central Banking is excessive and that the potential for catastrophe is unprecedented.
The reason for the unprecedented scope of Central Banking is that money, as it is widely understood today, does not really exist. Rather, banknotes issued by Central Banks, which are by definition credit instruments, are misunderstood to be money proper by a majority of the people in the developed and semi-developed world.
This misunderstanding flies in the face of 9,000 years of human history, in which Gold and Silver in bar and coin form have been tacitly used as money proper. It is this misunderstanding which has set the stage for the greatest catastrophe in history to occur.
The misunderstanding of money and credit began, like many experiments, in Northern Europe with the establishment of the Bank of Amsterdam. Established in 1609, the Bank of Amsterdam is widely recognized as at least a precursor to modern central banks. For over 400 years since it was established, the use of banknotes issued by a Central Bank which are not directly convertible to coin has slowly but steadily increased.
Modern Central banks issuing banknotes were subsequently formed in Europe, England, and Japan. As these Central banks and their successors began to slowly absorb the true money supply and issue banknotes in their place, man began to slowly transfer the concept of money proper from Gold and Silver and attribute the qualities of money to the banknotes issued by the Central Bank.
This process of wealth absorption greatly accelerated in 1913 when the United States of America granted a 100 year charter to its third Central Bank, the Federal Reserve. The FED, as it is commonly known, was to act primarily as a reserve and to create “money” (read banknotes) as necessary. At the advent of World War I, the FED stepped in and issued bonds to finance the war and after the war the FED was granted exclusive control of the money supply in the United States.
In 1933, in the midst of what was to be the great depression in the US, President Franklin D. Roosevelt signed Executive Order 6102 which required citizens to deliver all but a small amount of gold coin and bullion held by them to the FED in exchange for $20.67 worth of Federal Reserve notes (the banknotes issued by the FED) per ounce.
Naturally, most citizens with large quantities of gold at the time had it transferred to Switzerland.
Then, by decree, the Government raised the price of redeeming gold from the FED to $35 per ounce. Redemption could only be made by Foreign parties as, naturally, it was now illegal for US Citizens to own gold.
Federal Reserve notes were now the only form of “money” that an entire generation of Americans were likely to handle. However, foreigners could still redeem the Federal Reserve notes for gold, though they rarely did, at $35 per ounce.
After World War II, the US emerged as the most powerful nation on earth. It was only natural that the western governments would peg their currencies at a fixed exchange rate to the US dollar (Federal Reserve Note) which was redeemable in gold at $35 per ounce. This is commonly known as the Bretton Woods system.
The system held together for around 20 years, accepting that $35 US Dollars were as good as gold until 1968, when things began to get dangerous…
As the Fixed income markets continue to crumble, all eyes in Finance are now on a summit of European leaders that will take place next Sunday, when many persons will be watching sporting events, enjoying the outdoors, protesting, or toiling to eke out a meager existence on this earth.
What happens in Europe next Sunday may be simply another act in the game of extend and pretend that until now has been the only strategy employed by Western governments and their Central Banks in response to the bankruptcy of the world’s largest banks and governments.
Since we do not know what will befall mankind this coming Sunday, we must endeavor to understand how the Western world has arrived at this critical juncture in history. We began last week, by exploring the often underestimated contribution of Luca Pacioli to the commonwealth of society: The dissemination of Dual Entry Accounting methods used in Genoa, Florence, and Venice circa 1492.
Today, we will explore the great irony that Dual Entry Accounting – what we call man’s greatest innovation, has made possible what we are calling man’s greatest catastrophe, Modern Central Banking.
In order to do this, we begin with a brief history and explanation of the concept of Central Banking and its relationship to government.
The concept of Central Banking is rooted in man’s need for security as well as his recognition of his co-dependence on his fellow man to increase his well being through trade. It takes time and energy to obtain and protect wealth. It also takes time and energy to barter with counterparties while trading differing goods without a suitable means of exchange.
A bank, in its simplest form, provides a secure place to store wealth. A natural extension of this activity is for the banker to extend credit and act as a clearing house for commerce by assuming a de facto role as an issuer of currency in the form of banknotes which represent a claim on wealth held at their bank. The existence and circulation of these banknotes greatly facilitated trade.
As trade and consequently the wealth of mankind increased both in volume and geographical reach, there was increasingly a need for a larger banking interest to store the excess wealth of the individual banks and to honor the banknotes emitted by the individual banks. This larger banking interest, formed by and for the benefit of the individual banks, is what we today call a Central Bank.
The complexity of maintaining banking accounts was greatly facilitated and made possible on a large scale by the use of dual entry accounting. The ability for individual banks to maintain accounts on a larger scale made possible the existence of a Central Bank to act as a clearing house amongst banks. Hence, our premise that Dual entry accounting enabled Central banking.
Now, on to the role of Government in relation to Central Banking. If Central Banks arose because man needed someone to look after his wealth, governments arose because man needed someone to look after his life. Governments were formed in response to the natural human need for a common defense.
It is not hard, then, to imagine that Governments, in whatever form, relied heavily upon and supported the formation of both individual banks and Central Banks. Why would Governments need banks and Central banks?
Governments are generally given license by the members of society to use whatever means necessary to preserve their lives. As such, they assume the role as the apparatus of compulsion and coercion in that society.
As the apparatus of compulsion and coercion, the government, by definition, cannot generate wealth. At best, it can only create the conditions under which individuals may create wealth, but the activities of government as a provider of security never directly create wealth. Because they cannot create wealth, they must either borrow from or tax the populace in order to fund their activities of compulsion and coercion.
The Central Bank, as the ultimate repository of wealth, offers a convenient source of both credit and, in a later wave of Central Banks of which the Federal Reserve is a prime example, tax collection services.
As you can see, a Central Bank is an indispensible institution both for individuals in terms of storing wealth and facilitating trade, as well as for Governments who have an insatiable need for tax revenues and credit.
The existence of a Central Bank, for all of the benefits that it may bestow, unwittingly makes the wealth of those it serves a natural target for those who are anxious to obtain that wealth through unjust means.
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.
Needless to say, the scale of modern Central Banking is beyond what would be advisable, and the potential for catastrophe is unprecedented.
How, when, and most importantly why will this catastrophe take place? We can only answer the why, and we will tackle it tomorrow as we are spent.
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.
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.
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 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.
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.
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.
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?
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.
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.
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!
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.
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.
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.
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!
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.
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.
“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…
Apart from earthquakes on the US East coast and Colorado all appears calm relative to the past two weeks. Ben Bernanke is scheduled to speak in Jackson Hole today which may or may not change that. As we have stated recently, with the FED’s most recent announcement of its intention to hold its funds rate below 0.25% until at least 2013, they essentially told the world that they were stepping back to let the chips fall where they may.
With the fate of the US dollar apparently sealed, we have a personal anecdote to share. Like central banking, this is for entertainment purposes only.
A little over a year ago, our second car, which we affectionately call the “Auto Feo” (Spanish for “ugly car”) died. It was a vehicle which had been struck by another vehicle on the passenger side, denting the wheel well. The damage was cosmetic and only noticeable when one opened the passenger door, causing a horrendous sound of metal crushing metal. While driving, the car would “bark” (as in, it sounded like a dog was after us) if the front wheel on the passenger side hit a sizeable bump, causing the tire to rub against the crimped wheel well.
The car served its purpose until the automatic transmission went out. Even then, we were able to salvage a year of commuter service out of it before the transmission had a catastrophic failure, after which we finally took it to the junk yard.
Without much time to mourn, we set our sights on finding a replacement for the Auto Feo.
Based on a previous good experience, we wanted an Isuzu Trooper or Rodeo, any model year that could be had for $1,300 or less. After passing on what in retrospect was the best option at the time (a 1995 Trooper) we were eager, perhaps too eager, to not let the next opportunity pass us by.
We were ready to be taken for a ride, literally, figuratively, and with a pun intended in the worst possible way.
After doing our due diligence by surfing Craigslist, we found a 1993 Isuzu Rodeo with 143,000 miles on it which the owner was selling for the incredibly low price of $1,350. We were intrigued. In retrospect, we were sold before even driving the vehicle. A dangerous frame of mind when one considers Craigslist’s non-existent vetting of sellers. (Editor’s note: We are not criticizing Craigslist, which offers a tremendous service, but rather our own lack of diligence.)
We were foolish, impatient, and determined. It is a dangerous frame of mind to be in when making any purchase and a deadly combination of states of being when trolling the internet for a used vehicle.
As the warning lights in our mind began to go off, we pressed on. We called the number and arranged to “see” (read “purchase” as it should have obvious that our mind was made up) the vehicle that very evening.
It was a warm early summer evening, pleasant in every way. The wind was at our back, traffic was smooth as we wound our way across Portland to Gladstone. What could possibly go wrong?
As we approached the rendezvous with our mystery seller, we were relaxed, optimistic, and the epitome of P.T. Barnum’s sucker…