Will The Dollar’s Value Ever Reach Zero?

Mark, who frequently reads and comments, recently wrote:

On Christmas day I would have agreed with your assessment and conclusions for the most part. But, by the very next day I had been exposed to an opposing view, which leads to a very different scenario.
Somehow in my Internet quest to learn more and more about the crisis we face I discovered Andrew Gause (www.andygause.com) who is described as a monetary historian and contemporary expert on American and international banking systems. I began listening to archives of his weekly radio shows at http://www.oneradionetwork.com starting with the most recent 12/24 broadcast:http://www.oneradionetwork.com/content/view/689/136/ (you’ll have to sign up for his free newletter to listen) and continued backward week by week.
It is clear to me that this guy understands money, the Federal Reserve, US monetary history, and the current crisis far better than anybody I’ve followed to date. Like Peter Schiff and a few select others he was able to predict the mess we’re in which he documented in his interviews and in the two books he published, The Secret World of Money and Uncle Sam Cooks the Books. His predictions for the future, however, are far different than Schiff’s (and yours.)
I can’t recommend too highly that you take the time to listen to his archived broadcasts.
You’ll recall that I recently suggested that a “one world currency” was coming our way. Gause chuckles at that by saying “you’re predicting the past”. He says we already have it, the US dollar. He feels the Fed and the International banking cartel that owns them (including Citigroup, JPMorgan Chase, and Goldman Sachs being the top 3) are already in control of the world’s banking systems and can keep the dollar going forever by simply adding zero’s (i.e. inflation).
He explains that the current deflation (or disinflation) caused by the 1 trillion dollars recently sucked up by the treasury and deposited into the (NY) Fed will end with the big banks and their corporate buddies buying up recently devalued assets (like GM) for pennies on the dollar as the tsunami of liquidity is suddenly pumped into the market leading to a 70’s style inflation (but short of collapse) over the next several years.
Fascinating stuff!! 3 thumbs up…

I haven’t yet had time to digest the digital media. My girlfriend Auby, my mother, and family friend Pam, were watching the entire Californication – Season One tonight. I liked it. It’s good to see David Duchovny in a high-profile series again. I enjoyed him in The X-Files, and even in that movie he did, Playing God. I remember this one piece of dialogue from that movie where he’s confronted with a thug:

DUCHOVNY: Are you going to hit me?

THUG: Why are you afraid?

DUCHOVNY: I’m just trying to plan my day.

The stoic sarcasm that Duchovny brings to his characters reminds me a lot of myself. Which is to say, I enjoy his work.

At any rate, the gist of Mark’s point is the idea that the central bankers of the world have realized their ultimate goal of one world currency in the US Dollar, and are not going to let that default. While I’m sure that the person Mark is citing, Andrew Gause, has done his homework and knows what he’s talking about, I’m going to have to stick to my guns on this one: The dollar is going to default in the not-too-distant future. But, before I really tackle this question, I think it’s important to review a bit of history.

Bankers have always jealously guarded the power to create money; such power is as much a part of banking as the force is to George Lucas’s Jedi Knights: it is the source of all their power, and thus zealously defended by them. Remove from a banker his ability to create money, and all you’re left with is someone in formal clothes. Of course, money-creation creates problems of its own as well-documented by economists like Murray Rothbard in his book, The Case Against the Fed, as the blog readers who’ve been with me for a while are no doubt aware. It creates a devaluation of the currency as new money enters the system and, as the process continues, will prompt investors to put their money in another currency.

Hence, alternative investment options always create problems for the bankers. If they get too carried away and create too much money, they run the risk of people feeling the currency and eventually having it lose relevance altogether in a hyper-inflationary scenario. That’s why John Maynard Keynes proposed a currency that would circulate universally world over, which he named the “Bancor.” Now, in such a scenario, there is no alternative currency to run to, because this one would have legal tender power all over the world. Think of it as Keynes’s interpretation of Tolkien’s “One ring to rule them all.”

The argument has been put forward that the US Dollar is the de facto universal currency, and therefore, we are living in Keynes’ dreams today. The problems with this argument, is that it’s missing the whole point. The US Dollar does not have legal tender power everywhere, it simply has legal tender power for the world’s most dominant power. Now, yes, that may be good enough for most purposes — but there are competing factions that will not accept US Dollars; some powers, like Iran — who are politically motivated to see the US fall from grace, consequentially pricing their dollars in Euros or Yen instead of dollars. Others simply see the US Dollar as having lost much of its buying power, and therefore prefer to deal in local currencies — as we saw in the news this year where they stopped taking US Dollars at the Taj Mahal.

You see, this is all just a replay of the classic story: The Federal Reserve has created so much money to fund so much debt that the entire edifice of debt now towers over our entire economy and threatens to bring it down, which has lead people to start quietly moving towards the exits. The whole idea of a currency such as the Keynesian Bancor is that there is no exit: the world banking system would oversee the currency, inflating it a bit in each country — which is a far cry from one part of the world inflating the living hell out of its currency and expecting the rest of the globe to play along.

Think of it this way: governments all over the world are envious of the US Government’s ability to simply turn to the Fed in order to run perpetual deficits. These governments would like to do this themselves, but, to do that, they would need to displace the US Dollar as the world’s reserve currency. Thus, we are not in a situation where we could really have one-world currency. Furthermore, this argument supposes that: all the bankers of the world value this idea of one universally accepted inflationary currency, and that they would gladly watch their own people suffer the effects of perpetual inflation brought by a foreign power, rather than take moves to stop it.

I feel that that thinking is too conspiratorial for my taste. Central bankers have always fawned over the governments that oversee them since it could take away their money-creation abilities at any time. Governments allow the mischief of money creation on behalf of their banks because it has always made it easier for said government to run a large debt.

I just don’t think that that nation state-centered thinking is going to change anytime soon.

Honestly, can we really expect the central banks of countries such as China to just keep on honoring devaluing their own currency so they can keep honoring the dollar on, and on, and on, with no expectation that the Chinese themselves might want to become the ones issuing the world’s reserve currency?

It’s human nature.

Someday, someone somewhere is going to decide that they want their power to become the next global empire, and you’d better believe that on that day, they’ll tell the US Federal Reserve just where they can deposit all of the dollars it’s flooded the world with.

When that day comes, do you really think the dollar will be left with any value at all?

Answering Cathy’s Questions

Cathy, good friend and frequent blog commentator, recently left the following comment:

A nice series, even if it doesn’t have a happy ending. For those of us who already live austere debt-free lives yet have no money to invest, how would you suggest we prepare for what is coming?

I am also curious as to how guys like Madoff figure into all of this. If the SEC wouldn’t investigate when told the fund was likely a Ponzi scheme, then the SEC is useless. We should get rid of it. What would be a Libertarian answer to fraudsters like this?

So far, most “Libertarian” answers I have heard (from those who claim to be party members) involve non-answers like, “don’t get fooled, protect yourself”. I call it a non-answer because it means that everyone would have to be superhumanly smart and educated in order to know everything. It means that those unable to care fully for themselves would still be at the mercy of shysters. You’d still need somebody whose opinions you trusted… and Madoff was a very trusted name!

What would be your solution? Cheers!

For your first question, that fact that you are out of debt is very important. You also seem well-prepared for whatever calamities might next befall our society. But, if you’re looking to do more than just survive — and actually prosper — then I’d recommend you pick up a copy of my book. I give some very practical advice in there about how to save money including a section on how to get credit card fees refunded — yes, even if customer service denies you the first time around. In addition, I go over the specifics of how to start and grow a portfolio that’s going to do well over the next few years.

Going forward, America will still have an economy and building wealth will require that you participate in it. So you’re going to need to find that niche in that economy that best pays you for the talents and training you already possess. (If you’re lacking, then this is a good time to acquire it.) That the dollar will eventually default is almost a given in the future, so any student loans you take out to go back to school may end up being a free roll.

In terms of picking out skills for the economy, keep in mind you need to look to the economy of the future — not the present. Language skills will be at a premium. I can think of no language that wouldn’t be useful in some way. Asian languages such as Chinese would suggest themselves, but Europe will remain a training partner of ours as well which means that any of the traditional languages commonly accessed through your local college will be in demand.

Now as far as the SEC goes, I’m afraid I have the same non-answer as the other Libertarians: “Caveat Emptor”, (‘let the buyer beware’). Yes there will be frauds in the areas of finance just as there are frauds and cheats in all walks of life. The individual needs to be very aware of where his money is and how it is being put to work — which, incidentally, is called “transparency” in the field of accounting. Bernard Madoff did not have any transparency to his operation. His operations were a black box into which people out money. In return for it, Madoff would send them statements telling them they had made a profit when they really hadn’t. He didn’t provide any explanations for how their money had grown, just that it had.

Meanwhile, private industry will respond to the investors’ needs for information on where they can safely put their money. Accounting firms will audit records, and those with audited seal of approval from a prestigious accounting firm (which Madoff also did not have) can also go a long way towards keeping the cheats out of the system.

Now, I know this isn’t a perfect answer — in fact, you seem to feel it’s a “non-answer” — but keep in mind that the traditional answer failed, too: the Government’s oversight group, the Securities and Exchange Commission, investigated Madoff twice in the past 4 years and both times came up with nothing. All that did was give people the illusion that Madoff was running a clean ship when, in fact, he was not. Regulatory agencies such as the SEC and the FDA tend to have a horrible record in terms of fulfilling their charter. There have been a number of drugs that made it to market only to kill people under the watch of the FDA just as the largest financial scandals in history have been under the SEC. These agencies do little but chew up taxpayer money and give the organizations they preside over an aura of legitimacy.

In essence, what your question boils down to is, “What can be done about evil in the world?” There is no one answer to that. Evil will always exist and it will never be eliminated entirely. In terms of limiting our exposure to it, there is no substitute for learning the art of skepticism and critical reasoning. Those mental tools will keep most people out of an awful lot of trouble. And, of course, there will always be organizations that will come along and say that they can vouch for various clients of theirs. Then you have to decide whether you want to trust the vouching organization. Sometimes it’s private, and sometimes it’s a government agency.

I haven’t seen any studies to support the notion, but I’m putting my money on the free market to provide better watchdog agencies than the Government.

An American Christmas Carol; Part III; A Ghost of America’s Future

So where will all of this lead? Should we believe the Chairman of the Federal Reserve when he says that his policy of lowering interest rates should ease us through this crisis? Or, perhaps we should believe our new President who’s promising to make the economy his top priority and, through a combination of stimulus and bailouts, guide America back to the path of prosperity? And even if they are right in the short-term, and we do make it out of this recession — what is the ultimate path that our nation is on? Where is it heading?

The thing is, no one really needs to ask. You already know. It’s uncommon that I meet someone who doesn’t seem to know that:

  • Our country is broke and only the kindness of strangers keeps it from being bankrupt
  • We are losing our competitive edge to overseas competition
  • That we are an empire in decline

And so you don’t have to ask me where our country is going to end up. It’s obvious to any who dare ask the question and ponder the answer with any amount of objectivity. We are going to witness a collapse of our currency and, possibly with it, the corrupt body that serves as our government. We may not revolt and overthrow the government; perhaps we will only revolt against the taxes it levies as it tries to keep itself afloat for just a little while longer. But right now, the whole apparatus of the US Government is made to spend other people’s money in large quantities: the lobbyists are there to ask for it; the politicians usually got there to begin with on the backs of campaign promises to spend money; the Federal Reserve is there to create it; and the Congress is there to spend it.

Once the magic fountain of being able to print unlimited quantities of the world’s reserve currency has ended, we are left with a very different picture. If the government is to spend money, it must borrow, raise or print it. Given that we will have all but exhausted the printing and borrowing option, we will be left with a situation where money spent must come from current revenue. In other words, every dollar spent by the government must first come from someone else.

In that scenario, I doubt that politicians will get elected on platforms of how much money they’re going to spent to try and improve the economy. People will inherently understand the absurdity of that statement; money spent by the government to benefit the economy must first be removed from the economy. Thus, I think it highly possible that the government will be forced to suddenly discover frugality not soon after the voters pay more attention to their representatives actions and start holding them accountable. The entire scenario would reflect a far different kind of government functioning than we see today, and a better one.

Henry Hazlitt wrote a novel entitled Time Will Run Back that featured characters in a fully Socialist society “rediscovering the wheel” of capitalism and implementing it to improve their society, and I would love to think that this would happen. Perhaps after completing The Road to Serfdom as outlined by Hayek, we will once again heed the words of Jefferson who wrote:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

It would indeed be a shame that Jefferson had the answers to all of these questions back when our nation was founded, but that we chose not to listen.

At any rate, our near term future is very dark for those of us who are not prepared for it. For the majority of America’s citizens this will serve as a rude awakening. They will discover that borrowing for the purposes of consuming is second only to war in terms of its economic destruction. I am sure that by that time we will have had our fill of both war and borrowing to consume, but this newfound austerity will be a forced one. Like many empires before us, we will stop attempting to conquer because we can no longer afford to support an army capable of the attempt. Like many peoples before, we will discover that we were not really entitled to the wealth of the world as we had deluded ourselves into believing.

The specifics of the future are impossible to predict, but I am sure that It will prove a very harsh awakening.

An American Christmas Carol: Part II; A Ghost of America’s Present

Today, we are a people that would best be characterized as sheep. Having taken control of our money as well as the most important functions of our Government, the banking sector is fulfilling its traditional role in support of it by creating all the money it wants to spend. The two major political parties of our nation have lost any meaningful distinction, and both favor a strong central government that oversees most areas of American life underneath layers of bureaucracy. They only differ in terms of how that power should be used: Republicans favoring the traditional fascist agenda of allowing government to work closely with large corporations to enhance their profits, while leveraging the military to open up and further expand the influence of both. Democrats favor using the power of government to reallocate wealth and correct for the errors of a free market. Both seek to expand government powers that were never granted by the US Constitution to begin with.

Instead of being outraged at the continual depredation of the American Government and way of life by moneyed powers and power-hungry politicians, Americans look to television to tell them what they should care about and how they should feel. Television serves to do little but distract them from what’s going on around them; even the news channels do little outside of featuring infotainment designed to titillate our infuriate its viewers regarding some contrived controversy epitomized by Fox News’ “War on Christmas.” And so Americans have come to look at politics much as they do sporting events: they have the team they’re rooting for and sympathize with, and the opposition they love to hate. They don’t seem to care whether the party sticks to its principles or not. Sometimes they don’t even know what those principles are.

In the midst of these sheep, the banking industry is content to make itself the power behind the curtain. Let Americans look to their government for guidance; they’re happy to just keep creating the money and lending it at interest for all of our ridiculous wants.

And why shouldn’t they? It’s not their money, after all. It’s ours.

The US Dollar is our obligation, and the bonds we take out to finance the whole circus are our childrens’. Why should the banking industry care if we spend it frivolously? It didn’t cost them anything — and they’re happy to make the interest.

At every turn in American political life, the banking industry is there to guide us. And, when it turns out that they’ve loaned Americans money they can’t afford to pay, they’re ever quick to exert their influence with Washington politicians to receive a bailout — courtesy of the tax payers, of course.

The game bankers play reminds me a bit of how parents pacify children; they know that children have short attention spans and a primitive understanding of the world, and so are happy to play on both in order to mold their behavior towards the parent’s own ends. And so it is with bankers and the American people: bankers know that Americans’ eyes roll into the back of their heads when they mention interest rates or the mathematical models of Keynes and his almighty multiplier effect, so they make what they’re doing artificially complicated as to purposefully misdirect everyone away from the obvious scam being perpetrated against us. And when they need to translate it out of economistspeak and into ordinary terms, they always do so with the most dire of warnings: Ben Bernanke himself told Congress that if they did not act to save the economy this week, that there might not be one to save come Monday. Of course, there was, but people were still scared enough to grant the Treasury and the Federal Reserve additional powers.

This can only go on for so long before we lose our prosperity and complete, in the words of FA Hayek’s book, The Road to Serfdom. And here we are, at the end of the road. Looking to our shepherds for guidance as we face a crisis that they previously promised us would never happen. Today our shepherd is Barack Obama and the Democratic party, and they are convinced that they can spend enough money to stimulate us out of the hole that naturally resulted from all the previous efforts at stimulus. As if to somehow show solidarity with Socialism, Dick Cheney recently scolded Congress for not bailing out the auto industry.

And so, we again are ready to rally around the leader and follow whatever plan he outlines to get us out of these dark times. We march forth, not really understanding the problem we are facing, but determined to do our best to fix it anyhow. Ben Bernanke has said that we have to lower the value of our money in order for us to beat this recession, and he has offered to do that for us by creating money out of nothing and loaning it out until interest rates fall to absolutely nothing. I’m sure that the average American feels somewhat suspicious of that course of action, just as they were somewhat suspicious of the Wall Street bailout, but they figure that the middle of a crisis is no time to question the orders being handed down. If the plan is to devalue the dollar, then here we go:

Printing presses: maximum warp!

This can only lead to one inevitable destination. We’ll look at that in the final installment of this series, when visited by the Ghost of America’s Future. Until next time.

An American Christmas Carol: Ghosts of Our Past, Present, and Future; Part I: The Past

Christmas; a time of friends, family, and ritual. Many religious, many secular. Among the latter, are TV showings of It’s a Wonderful Life and various versions of Charles Dickens’ A Christmas Carol.

Well, in the spirit of the season, I thought I’d write a blog series in the spirit of the Dickens’ work. This is the first of a three-parter regarding our current American crisis. In this, the first, we are going to take a look at some of America’s past ghosts that are still haunting us.

The figure of Scrooge is an unhappy one; he has used greed to fill the void left from the emptiness of his existence. In this way, Scrooge is personifying what Scott Peck would later write in The Road Less Traveled that most neuroses are caused by a person’s attempt to avoid legitimate suffering. If Scrooge had but properly grieved the pain and loss that the Ghost of Christmas Past came to show him, then he would not have become the twisted and hated figure upon which the story opens.

It’s ironic that that hated figure actually had a lot of virtues that we as Americans lack; Scrooge was tight with his money and always in search of prudent ways to invest it. Americans seem to work more hours than Europeans, and in that way we should be able to identify with Scrooge’s desire to lose himself in his own work. But it seems we are not using the work as a means to gather financial security (which was his obsession.) Instead, it seems we work to pay off the debts that nevertheless seem to grow year-after-year. In that way, we’re a bit like Jacob Marley; having lived lives absent of the proper virtues, and are now so chained to a hated existence we cannot escape.

While Marley was forced to walk the afterlife in chains of his own making, our nation has gone into debt to foreign creditors. We have lost our willingness to save, and with it, our competitive edge. And now, even our industries. Our only strength now lays in our military superiority — and, unfortunately, history is rather mute of any empires that were able to pay for themselves off of foreign tribute alone. Bereft of owning our own capital, we cannot compete on the world stage, and so we will increasingly be forced to work for our foreign masters in an attempt to pay off our debts.

How did we get here?

Let’s talk a walk with the Ghost of Christmas Past and see if we can figure it out.

When our nation achieved independence, it featured a manufacturing and financial North complemented by an agrarian South. The North and South were natural complements to each other, but over time, their differences got the better of them. A war was fought to determine whether the South would be allowed to become independent from the North, or whether the North would be able to use its expanding influence to dictate terms to the Southerners.

The war proved expensive; far more expensive than either side anticipated. The Northern Government turned to the financial centers to loan it money, but that proved insufficient as the war drew on. So, they returned to the bankers, who then asked them for a favor. The first national banks were chartered during the Civil War, and the act that chartered them gave huge advantages over state-chartered banks. So much so in fact, that several banks switched their charter to become national banks. Next, the Government floated the idea of issuing unbacked fiat money, and which point the bankers asked for another favor: Greenbacks, the first ever fiat money issued, were declared to be legal tender for all debts public and private … save two. According to the laws then, interest or import duties had to be paid in gold coin.

The bankers knew fake money when they saw it, and they were content to let its inflationary power slowly deprive the people of their wealth — as long as the bankers themselves were able to increasingly acquire gold. By allowing this law, the US Government was giving the bankers a mortgage on the future earnings of Americans — and, to top it off, demanding that it be paid in gold.

After the war was won — thanks in no small part to the financial maneuvering of these newly-created national banks — the balance of power continued to shift in their direction. The Republican Party was dominant both during and after the war, and it had a very cozy relationship with banking interests. More legislation was passed under President Grant by which the US Government abdicated controlling its money supply to the national banking interests who were now allowed to expand or contract the amount of bank note currency in circulation according to whatever reasons they say fit. The power to create monetary-based booms and busts had been handed over to the bankers who quickly recognized it as yet another tool for influencing public policy. More than once, the national banks would greatly contract the money supply to incite a panic if they were not pleased with what the politicians in Washington were talking about.

The industrial revolution started booming, and with it came increasing worry regarding the power of large corporations. People grew especially fearful that large corporations would begin conspiring amongst themselves to confiscate wealth from the people. Consideration of antitrust legislation started being brought to the table; the most threatening trust of them all was the national banking system — dubbed by its opponents as “the Money Trust”; which was too smart, too powerful, and too subtle to be undone by a simple act of Congress. Instead, the Money Trust conspired to arrange for the formation of a government-sanctioned banking cartel — its crown jewel being a US Central Bank; privately owned, yet solely responsible for control of the US debt obligation: the US Dollar.

The Trust went to work; in no time at all, they had their allied Republicans in the House and Senate considering a plan to create the Federal Reserve. Surprisingly enough, President Taft took a rather un-Republican stance on the banking bill, refusing to support it, so, the bankers waited until the next administration. Do-gooder Woodrow Wilson defeated Taft to become one of the first Democrats since the Civil War to win the Presidency, and the bankers soon brewed a tempest in a teapot by having Congress call hearings meant to expose the abuses of the banking industry. What would happen next was a foregone conclusion; Congress found that the banking industry was abusive, in need of being cleaned-up — by the creation of a central bank and entrusting the bankers with its ownership.

From there we start to get to the history we all know. Under the Federal Reserve, the boom and bust cycle got much more exaggerated, and soon we had our first “Great Depression.” This prompted the bankers to again ask the Government for more power, and FDR was happy to comply in whatever ways they deemed necessary. And soon, it was insuring banking deposits, declaring bank holidays, even outlawing gold ownership by American citizens — but not American banks.

The bankers found a friend in Macroeconomists such as John Maynard Keynes who legitimized their control by theorizing that the operation of the free market was too unstable to be allowed to function on its own. But really, they were so powerful at this point that all that they had to do was pick the right person for their spokesperson. If Keynes hadn’t been around, they’d have found another patsy.

Keynes told a lot of lies in his theory. Chief among them was that savings was a vice, not a virtue, and that and investment funded by newly-printed money was just as good as an investment funded through odious savings. The bankers now became the national heroes of our society, ever-ready to stand firm in the face of market downturns and do what they have always done naturally anyway — create money in massive quantities.

(Most of the information I used for this blog post came from the excellent book, The Coming Battle: A Complete History of the National Banking Money Power in the United States which details the activities of national bankers in perverting our republic to further their own ends.)

Next time we’ll take a trip with the Ghost of Christmas Present and really assess how far this system has taken us. Until then.

Mr. Poulter Presently Indisposed

Ah, the holidays.

‘Man down! Man down!’ It isn’t the most popular battle-cry amidst Christmas cheer. In entertaining younglings, however, Preston has been reminded of how truly fierce the little ones can be. Journalists may not be into hurling their footwear at our soon-departing President, but nieces and nephews rather delight in the practise. Not quite down for the count, some ice, and a rather charming photo complete the picture.

A true Libertarian; takes a lickin, keeps on tickin.
A true Libertarian; takes a lickin', keeps on tickin'.

So, Happy Holidays, Season’s Greetings, and all that rot, to you, yours, theirs, the guy down the street, the kittens in the box, the woman up the block, and, well, did I already mention you? There’ll be much more to come from everyone’s favourite doomsaying economic pundit — or at least, your favourite. And that’s all that matters, right?

He’ll be back in action soon. The economy, however, erm … yeah.

Be warm, be safe! And hell, be merry!

Is Blogging Illegal in Italy?

There’s an interesting story recently that is worth mentioning. A Sicilian judge found Italian blogger Carlo Ruta guilty of the 1948 law of publishing a “clandestine newspaper.” Despite the fact that the Italian constitution gives its citizens the right to freedom of expression, Mr. Ruta was ordered to pay a fine and shut down his website.

How was it decided that Mr. Ruta’s blog constituted a newspaper? It has a headline. By that criteria, it must be a newspaper. And since it wasn’t registered, it is therefore a clandestine newspaper.

This is a ridiculous finding as many Italians have pointed out because, by the headline criteria, practically the entire internet is illegal in Italy. Digging a little deeper it seems that the content of Mr. Ruta’s blog (the connection between local government and the mafia) is a bit of an inflammatory subject in Sicily, so this ruling was simply an expedient way of shutting him up. I’d like to think that this case gets appealed and saner heads prevail, but this also goes to show a few things.

First, that laws have far reaching consequences beyond what their authors envision. The 1948 law was written in the aftermath of Facism and was meant to stop radical political newspapers from polarizing the population. Despite however well intentioned the authors of the law may have been, it remains a clear case of government overstepping its bounds. If people are guaranteed freedom of expression by the supreme law of the land, then government has no business saying otherwise.

Second, it goes to show how well politicians passing laws in an effort to seem like they are doing something productive often have far reaching, unforeseen, pernicious effects. The politicians of 1948 were trying to seem popular by assuring the populace that they were on watch of a resurgence of Facism. It’s understandable for politicians to busy themselves passing silly laws, but everyone else seemed to forget that no laws on the books stopped Hitler and Mussolini from taking power. Those two dictators broke several laws, including some constitutional basics, in their assumption of power, but no one was able to stop them at the time. As obvious as it may seem to you and I, the government needs to understand that it does not improve the situation by passing a law that says, in essence, it’s illegal to break the law.

Every time politicians act to better their public standing by passing silly laws, the liberty of its people ebbs a little more. The more laws accumulate, the more almost everything under the sun becomes illegal. Of course, the justice system would bankrupt itself if it tried to prosecute everyone, so instead the state selectively targets its dissidents by selectively invoking laws that don’t seem to apply to anyone else- as we see here.

I’m not too concerned about my blog running afoul of Italian laws, but maybe I should be. After all, Ernest Zuendel was a Canadian citizen who, while extolling the virtues of Hitler, ran afoul of German laws banning Holocaust denial. He was declared a threat to national security, tried in a German court, and sentenced to jail time. Does anyone else find it ironic that, in the name of combating Facism, the states of Germany and Italy have taken on government powers that are vaguely reminiscent of… Facism?

Still, it’s not the German and Italian government that worried me as much as the good old government of the USA. Giving aid and comfort to the enemy was declared by the Military Commissions Act to be the equivalent of being an enemy combatant. According to that act, should you be suspected of being such an a person, you get tried by a military tribunal.

Considering what we’re seeing happen with these Italian and German laws, I don’t even want to consider the kind of abuses that can occur with a law as draconian as this. It’s high time we as Americans get serious about liberty, and there’s no better place to start than to call for the repeal of laws such as the Military Commissions Act.

Yet another gift to us from the Bush Administration.

The Logic of the Auto Bailout

Today it was announced that George Bush was extending $13.4 billion of the $750 billion in bailout money to the auto industry: $9.4 to GM and $4 to Chrysler.

Let’s take a closer look at that. According to GM’s balance sheet, it’s currently worth, oh, -$60 billion dollars. That’s not good credentials to secure a loan, but maybe their income can make up for it. Hmm, GM’s income statement shows that GM lost -$38 billion in 2007, -$1.9 billion in 2006, and -$10.5 in 2005.

Hmm. Well, that’s none too encouraging, either.

I suppose there is some good news in all of this, though. The -$60 billion that GM’s currently worth has largely all come about in the last three years or so. Although, if you go back to when they were earning money, the company made $3.6 billion in 2004 (2.9 of which came from GMAC), $3.8 billion in 2003, and $1.7 billion in 2002.

Hmm. Well, that’s not looking so good, either.

2003 seems to be the only year where GM actually made much money manufacturing (as opposed to loans for) cars, and the profit they made in that year was roughly $4 billion. Even if the company were to restructure to produce $4 billion in profits every year from here on out, it would take 15 years for them to have a net worth of zero, and an additional 3 if we now factor in paying back the government loan.

That’s close to 20 years down the road before this company even achieves a net worth of zero.

I don’t know about you folks, but that seems highly unlikely, and even if it is in the realm of possibility, I still have to ask: “So what?”. Should we celebrate that GM might someday work and plan hard in the hopes that it someday might achieve the honor of being worthless?

And, if we step back from this rosy scenario of $4 billion in profits per year, the situation looks ever more bleak.

I’m here to tell you that next year will not feature a sudden bounce back in the demand for GM cars, and the year after that’s not looking too good, either. As I describe in my book, we are looking at the tail end of a multi-decade expansion in consumer spending. Consumers at this point are completely and totally buried in debt; they too hope that someday they may be able to work and save and someday be able to call themselves flat broke.

In fact, debt is everywhere we look today: car companies, consumers, governments — all are hopelessly indebted. And, really, all we’re talking about doing here is creating some money out of nowhere (which is where this whole “bailout” is going to come from to begin with, in case you didn’t realize) and loan it out at interest to someone who has no real hope of ever paying it back, in the hopes that the benefits of keeping GM around will outweigh the costs.

Not likely.

Let’s face it, folks. As Peter Schiff says, the US government can’t even afford to bailout a lemonade stand at this point. No one has any real money. Everyone’s broke, and the only money that can be used to remedy the situation has to be printed and assumed as someone’s debt. Which is really an exercise doomed to fail. The American automakers are in as bad a shape as the rest of us. I see no reason we should use fiat money to try to redistribute wealth away from one group of broke people and towards another.

All of us have to realize that true wealth can’t be created from thin air, and you can never borrow your way to prosperity.

Until we release those delusions, we’ve got a long hard road to the bottom to look forward to.

Gold reaches for the crown of Emperor

The saying goes that, in a recession, “Cash is king.” That saying has a lot of merit. If you look across all of the asset prices of everything over the past year or so, cash seems to have outperformed them all. All save one. A year ago gold closed at $792.50 an ounce. Today it was $838.70. Investors often figure that gold and oil will perform similarly, but oil is a roughly half of where it was a year ago while gold is still ahead. The dollar rose in value during the crush of the recession, but have a look at where it is today. 



USDX Dollar Index
USDX Dollar Index


The dollar has fallen on hard times recently as the chairman has stepped forward and offered to run the printing presses until banks could afford to loan money to each other at zero percent. Still, even with the fall in the USDX, the dollar is still above where it was a year ago. Investors often say that gold performs inversely to the dollar, but here we see that both have strengthened over the last year. What does that tell us?

To me it says that people want to stay liquid during this downturn, but where to store the liquid assets? Cash is the traditional safe haven to wait out he downturn, but with the central bankers of the world acting in concert to see who can make their currency the more worthless, it does seem a rather precarious place to park your assets. The market data seems pretty clear from all of this. In this downturn, people are demanding gold. As I’ve said in previous blog posts, the demand for physical gold has outstripped the dealers ability to supply it. And despite the fact that the price for gold seems to be set by the COMEX where paper claims to gold are bandied back and forth, you just can’t keep a good commodity down. Cash may be king in economic downturns, but when cash is as suspect as it is today, gold is emperor. 

As Bill Bonner said in today’s Daily Reckoning, gold may be the main, or even ONLY, beneficiary of the massive amounts of fiat money that is being forced into the system. And this just brings us back to fundamentals. It is said that Vince Lombardi would start every year’s training camp by presenting a football to his team and saying “Gentleman, this is a football.” He hoped to make his team brilliant on the basics. 

In this blog, I’ve talked about the gold standard a number of times. I’ve gotten numerous questions from people asking, “But why gold. It has little intrinsic worth.” To them I now have to say, “Oh really? Well then why is it one of the only asset classes (and the ONLY commodity) that is up over the last twelve months?” No other commodity has survived the past twelve months: not oil, not platinum, not silver. Even at a time when all of the major financial forces of the world continually seek to demonetize it, gold stands alone as the protector of value. The only other safe haven in these times has been US Treasury bonds, but given the meager yields offered on them and how the dollar has performed over the last couple of weeks (see above graph) I think it’s safe to say that government bonds are no longer a safe haven. Gold is where people need to invest, and they need to invest in it now. 

Gold may vacillate in its value on that goofy COMEX market from one day to the next. Sometimes it can vacillate wildly, but that’s just because two opposed forces are in conflict. There is the force of people seeking to maintain their liquidity in a safe asset which is driving the price up, and there are the central banks of the world trying to drive the price down. In the end, I feel confident that we will have a clear winner, and I’m prepared to bet on it.

Ben Bernanke Proves He’s Good for Nothing

Today the Fed made history by lowering the fed funds rate to a target of between .25% and zero. That’s right, zero. Nada. Nothing. Ben Bernanke proved that he was a man of his word. Before he was elected chairman, he said that he would lower interest rates to zero to combat the dreaded forces of deflation, and now he’s proven he’s good for it.

Ben’s Christmas gift to the world is an interest rate of nothing.

I read a lot of superhero comics as a kid, and as an adult I love the movies made from them. The figure of a guardian watching over people ready to swoop down and deal a couple of solid punches to evildoers was very reassuring to me as a child. The world painted on the pages of the comic books made the hero indispensable.  Without the protection of heroes like Spider-man, the world would be overrun by criminals. Not to mention supervillains.

I’d say that the world we live in today views itself through that comic book prism. Free societies will soon be overrun by fraudsters and criminals if we don’t have super powerful regulators to protect us. Similarly, free markets would soon fall prey to their own excesses were it not for super powerful bankers who can sweep in and defeat the business cycle with a couple of handy rate cuts.

Look, up in the sky. It’s a bird. It’s a plane.


Ben Bernanke to the Rescue
Ben Bernanke to the Rescue

His super powers include the ability to run the printing presses faster than a speeding bullet… and in so doing make your money lose value. That’s all inflation is, you know — money losing value. Ben hopes that the tonic of a little inflation will get the markets started again. Keynes himself theorized in The General Theory of Employment, Interest and Money that inflation was the great trickster which could get labor to work for lower rates of compensation then they had anticipated. He figured that laborers would be slow to catch on to the difference between nominal wage rates (the number of dollars they were being paid) and real wage rates (what those dollars could buy). Keynes figured that by using the trick of inflation, business would be getting a discount in their labor costs (because he figured labor is slow to catch on) and would therefore become profitable.

It’s never worked, mind you. It didn’t pull us out of the Great Depression despite being tried year after year. It didn’t do a lick of good in Japan, either. Inflation has not cured deep recessions then, and it’s not going to solve this one today. In fact, it was these efforts to use the power of inflation to resist economic downturns that caused the greater downturns down the road in the first place.

In William Feckstein’s short little book, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve he meticulously traces how Greenspan did little but cut rates through his tenure as chairman. First, he did so at the start of the ’90s to prevent the ’91 recession from deepening. These lower interest rates pushed a lot of savers out of traditional interest-bearing bank accounts and into the stock market in pursuit of higher returns. Greenspan then found that he was powerless to bring the rates back up without crushing these newly-made stock market investors. So he just kept them low despite the “irrational exuberance” he felt was getting priced into the market.

The end of the millennium came, and Greenspan worried that nervous individuals would pull too much liquidity from the system with their Y2K concerns. So in anticipation, he pushed liquidity into the system and helped spike the stock market of ’99 to be one of the best stock market years on record. He again found himself unable to raise interest rates, because of the downturn that ensued after the bursting of the stock market bubble. So, Greenspan just lowered rates AGAIN, inciting a housing bubble. Now his predecessor, Ben Bernanke, is finding that he also could not raise interest rates back to where they were without crushing the bubble and causing a depression. And now he’s having to lower interest rates even lower than Greenspan ever did. To drive this point home, I took the historical data for the fed funds rate from the Federal Reserve’s website and plotted it in Excel.  Have a look.

Graph of the Fed Funds Rate
Graph of the Fed Funds Rate

As you can see from the graph, every attempt to raise interest rates after they were lowered caused an economic downturn that necessitated still lower interest rates. As most anyone could guess, this can only go on for so long. Once the fed funds rate hits zero, there’s no more room to cut. And here we are at the bottom. I suppose it’s possible that there may be one more bubble cycle in the American economy, but that will only prolong the inevitable. In real terms, there’s nowhere for the American consumption-driven economy to go but down.

“Fear not,” our chairman, turned-superhero seems to say, “I have other ways to cause inflation.” And he does. As he detailed in his speech on making sure deflation “doesn’t happen here,” the Fed chairman can use all kinds of shenanigans to keep inflation rolling. The fed funds rate is a short-term rate, but Ben wants us to know that with the flip of a switch, the Fed can just start printing up money and using it to purchase bonds in order to drive down interest rates all across the spectrum. So we may be down to a short-term interest rate of zero, but we still have room to cut the mid- and long-terms ones next.

Of course, if one takes this to its logical conclusion, one would figure that once the Fed has manipulated interest rates all across the board down to zero, the inevitable fall that they’ve been prolonging must come to be. That’s assuming that no one catches onto the fact that the Fed is creating trillions of dollars out of nothing in the meantime and just flees the whole monetary system.

Speaking of, gold did very well today, and it’s going to do even better in the future. The more inflation Helicopter Ben forces on us, the more it’s going to reward those who flee the dollar.

If you know of anyone who needs to learn more about this, I’d encourage you to buy them a copy of my book What Do You Mean My Money’s Worthless for Christmas.

It makes an excellent stocking stuffer.