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Saturday, October 29, 2011

OWS and real money

Whatever criticism anyone may have of the Occupied Wall Street movement it has now spread to 60 cities inside the US and internationally to London, Rome, Lisbon, Madrid, Greece, Australia, Japan, South Korea and New Zealand. Their rallying cry is that they are the 99 percent. That is true.

They differ from their Tea Party brethren in many superficial respects. The largest is that the OWS crowd is for transfer payments to everyone, the Tea Party against transfer payments to the poor. This difference is trumpeted to the heavens on Fox News (though they put it differently) - but it amounts to nothing - in economic terms.

They agree in that they're both against bank subsidies in the form of bailouts. This is good start. A cause for common solutions. If only there were some philosophical overlap that gave cover to collusion.

Unfortunately neither group understands the reason that the bailouts will never end until the entire economic system collapses. That reason is that the banks - not the governments - are firmly in control of the issue and distribution of MONEY. To understand this process - to follow it from inception through to final distribution is to understand that the problems of excessive debt will never be dealt with until the Banks - who control the world governments - are forced to become entities engaged SOLEY in loans made with CASH ON RESERVE.

To achieve this, the money itself must have intrinsic value i.e. - it must be silver and gold.

Anyone who understands this, will realize immediately that this means a massive contraction of the world economy. That is their objection. But that will happen anyway. The only question if from what point?

Anyone who doesn't understand this must make the effort to understand it. Because it is only from an informed perspective that the 99 percent can force the 1 percent to reform.

The one politician who understands this and who has proposed meaningful solutions is Ron Paul.  He is the one candidate who realizes that without hard money the banks will always be able to rape the economy.

OWS and the Tea Party have not yet realized that he is the candidate who can unite them to resolve their real concern and their real discontent: The Banks are cheating everybody by continuously devaluing everyone's currency.  It is the reason nobody but the 1 percent - the banks and those closest to the banks - can afford anything.

In time, OWS will learn that fixing the banking problem outweighs their concerns for more transfer payments.  In time the TEA PARTY will learn that fixing the banking problem far outweighs their desire for More Wars (social, political, military).  And when it does Ron Paul will be swept into office and real reform will follow.

Friday, October 28, 2011


John William's Shadowstats is a service not for bunker dwelling nuts, but rather for fortune 500 companies who subscribe in order to assess the facts behind the absurd government numbers. His major point (below) is that 70 percent of the GDP number (+2.5%) was supposedly from real growth in consumer spending, while consumer balance sheets, income, and sentiment (see chart above) are clearly deteriorating.

So what gives? Is our government simply lying to us - or are the numbers that they use hopelessly skewed to produce unrealistic results? Is there a difference?

Here are some excerpts from Shadowstats:

"Opening Comments and Executive Summary. The U.S. economy is sinking anew, not rebounding. Such is contrary to the media hype around this morning’s (October 27th) headline 2.5% second-quarter GDP growth, which was up from the 1.3% growth estimate of the first-quarter. Officially the broadest measure of U.S. economic activity published by the U.S. government, the widely-followed gross domestic product (GDP) nonetheless remains the most-heavily-biased, the most-heavily-guessed-at, the most-heavily politicized and the most-worthless major indicator of domestic business activity. Today’s numbers out of the Bureau of Economic Analysis are outright nonsense.

Consider that latest numbers showed that the level of inflation-adjusted third-quarter 2011 GDP broke above the pre-recession high of fourth-quarter 2007: a full recovery. That is absurd. No other major economic indicator, including payrolls, real (inflation-adjusted) retail sales, industrial production, trade deficit or housing starts is showing that. The GDP previously had been reported as breaking above its pre-recession high in fourth-quarter 2010, but that happy news revised away with July 2011’s benchmark revisions to the GDP series. Downside revisions also should erase today’s nonsensical news, eventually.

Consider that personal consumption contributed 1.72%, or 70%, of the annualized real 2.46% quarterly growth rate attributed to third-quarter GDP. Yet, consumer liquidity problems intensified in the third-quarter, with real disposable income (effectively inflation-adjusted take-home pay) falling at an annualized pace of 1.73%. Year-to-date, since fourth-quarter 2010, real disposable income has been flat (up 0.02%), while real personal consumption has gained 1.3%, which accounted for more than the total 1.0% growth in real GDP in the same period."

Tuesday, October 25, 2011


Above is a nice chart showing total debt to GDP - not including unfunded liabilities (social security, medical, pension etc.) Even without these liabilities the numbers are impossible. Add in the unfunded liabilities and you get total debt moving from 300-500 percent of GDP to around 1000-2000 percent of GDP.

Yet all we hear from the Politicians, corporate economists and commentators is absurd blather about "Getting the government out of the way so that the Free Market can grow itself out of this mess."

It's as if the global economy was a Good Fairy, and the Government an Evil Goblin, and if we could only release the Good Fairy from the clutches of the Evil Goblin she would wave her Magic Wand, and Love would wash over our Fair Land.

First off, there is no such thing as a Free Market. It is a nonsense phrase that people with tiny little brains use to talk about a Fantasy World that exists only in their memorized talking points.

In the real world we have a group of Central Banks that create money out of thin air and distribute it to Member Banks who gamble it in the world markets. Of course, any individual is Free to try to gamble against the Banks, as long as they use only the money that the banks print and lend to them. Of course, if the banks lose on their bets the Central Bank will create more money and give it back to them. Thus any money you win from the Banks will be hopelessly diluted by the new money they print to cover their losses.

Welcome to the Free Market.

There is only one politician who even gets this reality, and that's Ron Paul, who is a pariah even in his own party. Nobody wants to hear it.

And that's really too bad. Because until we stop the blather and start talking about the real problem, nothing's going to change.

Monday, October 24, 2011

Gold Price Supresion Plot goes Mainstream

Gillian Tett, managing editor of the Financial Times, the world's most influential economics paper, rocked the investing world today by endorsing the idea that the world's Western governments have been colluding to suppress the price of gold in order to prop up the appearance of value of their paper currencies.

This idea has been floated for years by GATA and other US pro-gold organisations, yet until recently it has been regarded as the stuff of crazy fringe conspiracy buffs. No more.

With the world exploding in protests against the grotesque manipulation of the world economies by Wall Street in collusion with the US government, it doesn't seem so crazy anymore to suggest that any particular market is being manipulated for economic and political ends - especially the gold market.

The general idea is that as paper currencies are printed and doled out to the banks to backstop their reckless gambling addictions, the price of gold must be capped in order to give the appearance that these paper currencies are retaining some semblance of value.

Crazy right? Well now not according to the Financial Times. And this has caused a host of commentators who have ridiculed the idea for years to suddenly turn on their heals and admit there could be some validity to it:

"Out there in the world today, a cabal of western central bankers is secretly determined to manipulate the world’s markets. They are doing this not via interest rates, but by rigging gold prices. More specifically, they have kept bullion prices artificially low in recent decades to ensure that our so-called fiat currency system – that is, money created by central banks – continues to work. For if the public ever knew the “real” price of gold, we would finally understand that our currencies, such as the dollar, are a sham … hence the need for that central bank plot.

"Does this sound like the ranting of a Tea Party activist? A Hollywood screenplay? Or could there be a grain of truth in it? The question has been provoking hot debate among a small tribe of investors in America for many years, particularly those owning gold mining stocks. Right now it is also leaching into the more mainstream American political world...

Coincidentally Ben Davies of Hinde Capital just released a report chronicling the history of gold price suppression during the 20th Century, and reached this conclusion:

The failure of the 1968 London Gold Pool to suppress gold saw an appreciation of the

gold price from $35 to $850 per ounce. A similar percentage today would carry gold to

almost $30,000 per ounce. This is not a price forecast but an indication that when free

market forces have been frustrated by market manipulation for a very long time, the

equilibrium price can be many multiples of the suppressed price, and the rise is typically

rapid when the suppression is overcome.”10 & 11

Does this mean we'll see gold at 30,000 dollars an ounce soon?


But gold is going higher.

Friday, October 21, 2011

Greek Tragedy: History repeats - every few months now

It was just last June that Greece was about to default on 150 billions euros of debt. Not a lot of money by today's standard, but that 150 billions euros was linked to about 2 trillion dollars in counter-party exposure throughout the European and US Banking system.

And the markets watched, with baited breath: Will they or won't they? What is going to happen? Can the European Union avert this disaster?

Yesterday the Greek parliament passed an "austerity measure" (that they will never adhere to), but is designed to assuage the European Union when they meet for another Bailout Session this weekend. The markets wait, yet again, with baited breath: WHAT WILL HAPPEN? Will they keep their austerity pledge? Will the ECB bail them out again?

This is the modern way of looking at the unfolding Greek Tragedy. It is built on the modern predilection for "Suspense." Suspense leads us to believe that a series of twists and turns will unfold, built on choices made by the central character. Flawed characters will make flawed choices, strong character make strong choices. This gives power to the illusion that Humans are in control. So again and again we watch the exact same show, with baited breath.

It betrays a fundamental misunderstanding of Tragedy.

According to the principles of Tragedy: Greece is currently in Default. The whole audience knows Greece is in default. Greece can not adopt sufficient austerity without going into terrifying depression. The whole audience knows this. The banking system can not bail themselves out of the Greek/Italian/Spanish/Portuguese problem without creating trillions in new debt which will functionally bankrupt even the healthier economies of Germany and France. And yes, the United States. Which is also already bankrupt.

By the tenets of Tragedy: The whole audience knows this

The unfolding drama that ensues is a matter of watching the actors (The Greeks debtors and the world banking system that lent them the money) struggle mightily against the inevitable conclusion: Disaster, Ruin, Death.

Why do we watch together? Catharsis. Emotional release from the horrible pressures inherent in Life on Earth. And the emotional release of understanding we're all in this together. All men are pathetic pawns in the Drama of God's Will. (Something that once upon a time Christians believed too.)

This is the principle of Dramatic Irony. The audience understands the situation in the way the actors can not. It reflects the idea that Humans are not in control. There is a Divine Order. All we can do is hope not to upset it. Our hopes will be in vain. Because man is Vain.

Man's vanity, Hubris leads him into constant struggle to assert his will over the human condition. He does not realize that the human condition is struggle: Polemos.

But at least we - the Demos - can weep together, can struggle together.

But modern man rejects this. Because we are not a Demos. We are not The People. We are now a collections of Individuals each as powerful as God, struggling not together but against each other, in a giant Zero Sum game, to Game each other, to destroy each other.

Modern man has turned even the word Polemos into a virtue. We call it Passion: a quality to be admired and emulated. The word means struggle: a condition to be suffered - at best, with dignity. We embue Super Men with Super Passion that allows them to defeat all fellow men. And we admire these Super Men. We worship them. (See goldman sachs.)

Now, if the few destroy the many, it's because they deserve to. They are superior. They are Supermen.

So what does this have to do with gold?

Well, gold is for those who see the world in terms of Greek Tragedy, rather than Hollywood drivel. Gold is for those who see Greek Drama, the European Drama, and the unfolding US drama in terms of Dramatic Irony rather than Suspense.

These are Dramas in which the conclusions are known. They can not be averted. They have been written into the script in accord with the laws of human nature. All we can do is prepare for the inevitable. And hope to derive a measure of catharsis.

Now, I know gold has been driven down a few hundred bucks lately. And if you believe is Suspense you're probably wondering what will happen. Is the bull market over?

But if you believe in Tragedy, you know the answer.

I will say - from a purely modern perspective - that Catharsis is a whole lot easier with a little gold in vault.

Wednesday, October 19, 2011

A Letter from Goldman Sachs

A Letter from Goldman Sachs

Concerning Occupy Wall Street

NEW YORK– The following is a letter released today by Lloyd Blankfein, the chairman of banking giant Goldman Sachs:

Dear Investor:

Up until now, Goldman Sachs has been silent on the subject of the protest movement known as Occupy Wall Street. That does not mean, however, that it has not been very much on our minds. As thousands have gathered in Lower Manhattan, passionately expressing their deep discontent with the status quo, we have taken note of these protests. And we have asked ourselves this question:

How can we make money off them?

The answer is the newly launched Goldman Sachs Global Rage Fund, whose investment objective is to monetize the Occupy Wall Street protests as they spread around the world. At Goldman, we recognize that the capitalist system as we know it is circling the drain – but there’s plenty of money to be made on the way down.

The Rage Fund will seek out opportunities to invest in products that are poised to benefit from the spreading protests, from police batons and barricades to stun guns and forehead bandages. Furthermore, as clashes between police and protesters turn ever more violent, we are making significant bets on companies that manufacture replacements for broken windows and overturned cars, as well as the raw materials necessary for the construction and incineration of effigies.

It would be tempting, at a time like this, to say “Let them eat cake.” But at Goldman, we are actively seeking to corner the market in cake futures. We project that through our aggressive market manipulation, the price of a piece of cake will quadruple by the end of 2011.

Please contact your Goldman representative for a full prospectus. As the world descends into a Darwinian free-for-all, the Goldman Sachs Rage Fund is a great way to tell the protesters, “Occupy this.” We haven’t felt so good about something we’ve sold since our souls.


Lloyd Blankfein

Chairman, Goldman Sachs

Monday, October 17, 2011

Gold and Use Value

Those who can't see the value of gold as a currency, though it has been used as such for 6000 years, inevitably resort to the argument that gold has no intrinsic use value. In this argument they owe a tremendous debt to Karl Marx who actually invented the concept.

To Marx everything had a use value and/or a fetish value. To those who just can't accept gold as an "investment" it is because they see no use value. To them it has only fetish value, or what they will call fiat value.

What these same critics fail to understand is that the same argument can be made for anything and everything other than prayer.

Housing? Well, people existed for thousands of years in caves and forests, huts and tents. Sure a hut or a tent could be considered a "house." But is there any real use value in a modern house? Is the house dweller any happier than a desert nomad? Of course there is no answer to that question. But consider this: 99 percent of drug abusers live in houses.

Food? Does any amount of food above subsistence level have a use value? Of course not. Unless you think that being fat makes you happy. Okay, some people who eat above subsistence level aren't fat. But not many. And besides there are saints in India who never eat. You don't believe it? That only proves you're a slave to food fetish.

Art? Does art really have a use value? Does it make life worth living? Does it fill you with wonder and awe at the ineffable brilliance of creation? Or does that simply mean you're entirely incapable of appreciating that value of this moment. Is there any use in art to those who can not appreciate this moment? Is there any use to those who can?

Again, there's no answer to these questions. Just as there is no answer to those who can see no use in gold.

But there has been art for 6000 years. People have been eating for 6000 years (at least). And gold has been currency for 6000 years.

How about

Friday, October 14, 2011

How hyper inflation ignites out of seeming stability

Art Cashin, in his daily market commentary for UBS makes a stunning analogy between Germany in the 20's and the US now:

"Originally, on this day in 1922, the German Central Bank and the German Treasury
took an inevitable step in a process which had begun with their previous
effort to "jump start" a stagnant economy. Many months earlier they had decided
that what was needed was easier money. Their initial efforts brought little
response. So, using the governmental "more is better" theory they simply created more
and more money.

"But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).

"To understand the incomprehensible scope of the German inflation maybe it’s best to start with something basic….like a loaf of bread.

"In the middle of 1914, just before the war, a one pound loaf of bread cost 13 cents. Two years later it was 19 cents. Two years more and it sold for 22 cents. By 1919 it was 26 cents. Now the fun begins:

"In 1920, a loaf of bread soared to $1.20, and then in 1921 it hit $1.35. By the middle of 1922 it was $3.50. At the start of 1923 it rocketed to $700 a loaf. Five months later a loaf went for $1200. By September it was $2 million. A month later it was $670 million (wide spread rioting broke out). The next month it hit $3 billion. By mid month it was $100 billion. Then it all collapsed.

In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000
times more than the entire money supply of the nations just 10 years earlier).

"How Could This All Happen? "

Cashin points out that miscalculations over the cost of the first world war had much to do with Germany's ultimate collapse. This might seem different from the US situation today where we are engaged in 2 wars yet we are in no danger of having a generation of men wiped out. However, the similarity lies in the fact that the cost of our Global Military operations today as a percentage of GDP is substantially similar tot he cost of the War for Germany back then.

Cashin continues:
"In 1913 Germany had a solid, prosperous, advanced culture and population.
Like much of Europe it was a monarchy (under the Kaiser).
Then, following the assassination of the Archduke Franz Ferdinand in Sarajevo in 1914,
the world moved toward war. Each side was convinced the other would not dare go to war.
So, in a global game of chicken they stumbled into the Great War.

"The German General Staff thought the war would be short and sweet and that they
could finance the costs with the post war reparations (*think oil) that they, as victors,
would exact. But the war was long. The flower of their manhood was killed or injured.
They lost and, thus, it was they who had to pay reparations rather than
receive them. (*We don't have to pay reparations, but neither are we being compensated by oil as promised by our leaders.)

"Things did not go badly instantly. Yes, the deficit soared but much of it was borne by foreign and domestic bond buyers. As had been noted by scholars…..“The foreign and domestic public willingly purchased new debt issues when it believed that the government could run future surpluses to offset contemporaneous deficits.” In layman’s English that means foreign bond buyers said – “Hey this is a great nation and this is probably just a speed bump in the economy.”

"(Can you imagine such a thing happening today?)

"When things began to disintegrate, no one dared to take away the punchbowl. They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive...."

Whatever differences you can find between Germany then and the US today, bear in mind the fact that the entire Western economy ruled by the Fed and the ECB are attempting to offset a debt induced stagnation by creating ever more debt: which means ever more printed money.

The flip of the switch that ignites the hyper inflation arrives when there is a total loss of CONFIDENCE that the government is in control of the situation. People suddenly lose confidence in the currency. They want to trade it in for real goods - and real money - GOLD.

Will the result be different this time? Why?

Thursday, October 13, 2011

Who's in charge?

Who's in charge?

The Republicans claim there's some shadowy force behind Obama, controlling events, pulling the strings. They suspect it must be that dastardly Jew George Soros. And certainly there must be some other dastardly One-Worlder types (whatever the hell that means) pulling the strings behind the Wall Street Protests.

The Democrats are sure that those greedy Koch brothers and Rupert Murcdoch are out there organizing the Tea Party and funneling all sorts of money to whomever the hell is in charge of the Republican Party these days. Could it be that fat spluttering high school dropout Rush Limbaugh?

And over in Europe everyone's speculating who will eventually take control of the sovereign debt fiasco that's sure to snowball from Greece to Italy to Spain to Portugal.... Will it be Angela Merkel? Sarkozy? Will it be the ECB?

And of course, out here in Gold Land we all think Bernanke and a smoky cabal of international Bankers are pulling all the strings. They're in the back room somewhere plotting ways to keep the game going long enough to suck all the remaining productive capital out of the world economic system right into their own pockets.

But what if we're all wrong? What if nobody's really in charge anymore? What if the debt and debt derivative problem has grown so enormous - that all these shadowy figures pulling all these strings are just as bewildered as everybody else? What if the numbers are not a mirage and all these governments are actually broke? What if the mobs that are starting to assemble all over the country and all over the Western world are just the first drops in a tidal wave of resentment and anger that's about to engulf a leaderless, rudderless economic and social void?

What if Peter didn't kill wolf, asked Grandpa? What then?

I have this terrible feeling we're about to find out.

Wednesday, October 12, 2011

Bloomberg: Republicans routinely lie during Bloomberg Debate

Republicans Stretch Truth in Debate Salvos

Sunday, October 9, 2011

TARP REPAID = More Silly games

The latest Wall Street fad is to insist that TARP has been repaid with interest by the largest Wall Street Banks.

Is this possible?

As with everything that comes out of Wall Street, it depends entirely on what one wants to believe. Sure, why not? The fact is the Fed's balance sheet is entirely opaque. Nobody's allowed to see it. So maybe it could be true if you want to believe it. Do you?

Maybe the banks technically have given some funds back to the Fed. Maybe technically you can count those funds towards "repayment of Tarp."

But here's the question: Where did the Banks get those funds?

From a myriad of other Fed sponsored programs perhaps? From TALF? From the Primary Dealer Credit Facility? From the Commercial Paper Funding Facility? From the Term Auction Facility? From the Small Business Lending Facility?

Did they get if from selling hundreds of billions of dollars of crap agency paper (Think Fannie and Freddie) at fantasy mark to model values to the Fed?

Did they get it from selling hundreds of billions of dollars of other crap paper at fantasy mark to model values to the Fed?

Or maybe they got it from borrowing money at Zero percent from the Fed and then using it to cheat everyone else in the markets with High Frequency front-running trading programs?

What do you think? Do you think the banks earned the money the good old fashioned way: by making smart loans? Or do you think the paid back the TARP money by essentially borrowing - or just plain getting - the money from the FED? Or cheating you in the markets?

The funny thing is that nobody will ever know. Because the Fed isn't obliged to tell anybody. And also, because the balance sheets of the banks are technically available but all but indecipherable even to industry analysts.

The other really funny thing is that even if not one person in a million understands any of this, nine out of ten people just assume the Fed and the banks are lying. That's the really funny part. Because when you lie long enough people catch on, and after a while it doesn't matter anymore what you're saying. As long as your lips are moving people assume you're lying.

That's not good for your run of the mill con man. Or your run of the mill politician. But when it becomes true within and throughout the Banking System the economy is past the point of no return. Are we there? What do you think?

Friday, October 7, 2011

Debt to GDP

The number one thing to consider when deciding for yourself how the global economy will play out, and how you should protect yourself is a simple ratio: Debt to GDP.

There are many who will scream about "debt reduction," and others who will scream about "Growing the economy." Unfortunately there seem to be very few with enough high school math to see the contingent link between these two ideas.

In modern capitalism Debt and GDP are inextricably linked. In fact, they exist as a ratio. You can not create GDP without Debt. You can not reduce debt without reducing GDP - for some period of time.

The easiest way to think about it is this: How many dollars of debt does it take to create a dollar of GDP? In the simplest of terms: If I lend you a dollar and you invest it and make ten: Well, then a dollar of debt created 10 dollars of GDP (or more.) If I lend you a dollar and you turn it into 1.10 dollars. Well, then it would take 10 dollars of debt to create a dollar of GDP.

The problem right now in the Global Economy is that there is so much debt in the system that it takes six, eight, ten dollars of debt to create a dollar of GDP. That's where we are. In fact, it's no longer clear that any amount of additional debt will add even a penny to world GDP.

Austerity will bring down debt, but it will also bring down GDP so the Debt to GDP RATIO WILL NOT MOVE.

And if growing the economy takes debt, but debt no longer grows the economy - what then do you do, grasshopper?

You figure that one out.

I'll buy gold.

Wednesday, October 5, 2011

How to preserve capital

Day to day, this is not a real market. It's a rigged casino. If you're one of those rigging it - trade away. If not, realize we're in a period of massive de-leveraging and almost everything will deflate as debt chokes the world economy. Over time the stock market will drop, commodities will drop.

Certain currencies will rise. The dollar while the dollar remains viable. Then gold.

That's it.

How do you navigate this? There are two rules:

Rule 1: You have what you have now. Don't think about what you had six months ago. Or two years ago. Don't think how you'll get it back. You won't. Ever. You have what you have now. Decide how to preserve it.

Rule 2: Have your own idea about what is happening. Your stock broker is just a salesman. Your fund manager is just a manager. They might be selling shoes or managing a shoe store - if they just didn't look quite so good in an expensive suit. Have your own idea. If you're lucky enough to have a good job so you don't have time - excellent. Go to cash and study on the side. If you have the time: figure it out. Because only those with their own idea will survive the temptation of pursue every bone-headed promotional investment scheme that will hurtle your way over the next five to ten years.

It's not that complicated. The world is drowning it debt. Debt must be settled. Figure out what that means.

Monday, October 3, 2011

Vested Interest and the gambling illness.

As the global economy drowns in debt the argument rages as to who's to blame for this mess. In one respect this is an important argument, because if you can't assign blame it's tough to find an appropriate remedy.

In approaching this problem one useful tool is to look to see who has a vested interest in debt and debt derivatives and who does not. Vested interest means that the debtor or the user of a debt derivative has a use for the debt other than pure gambling. For example an airline might use a gasoline derivative to offset the risk of the future gasoline purchase price.

In the same way some poor middle class slob who takes out a mortgage he can't afford to buy a McMansion at least has a vested interest in the McMansion - even if he can't afford it. It may be a stupid purchase -but still, there's just not enough venal grasping morons out there trying to live a little above their means to torpedo the entire global economy.

At the same time you can look at governments that spend way above their means. Sure, this is terrible for the global economy in the long run - but at least these greedy egomaniacal spendthrift politicians do have a vested interest in much of the debt they incur. In all they can certainly bankrupt their governments but they can not account for the extraordinarily deep hole of debt into which the global economy has sunk

No, to understand exactly how this debt got so out of hand you have to understand that the vast majority of debt is made possible by sophisticated gambling pools that bet on the debt without any vested interest. It matter not to these gamblers who owns issues the debt and who owns the underlying instruments - or if underlying instruments even exist.

There's a great moment in Michael Lewis' "The Big Short" when a hedge fund manager who's shorting mortgage debt meets an investment banker who's issuing it. "We love you guys," the banker says, "Without you we'd have no market." And he realizes: There's no underlying mortgages in these mortgage debt bundles. The banks are just issuing bundles of BETTING INSTRUMENTS that act like mortgages. They're filled with Virtual Mortgages that behave like mortgages for betting purposes but there are no underlying properties! And the more he shorts the more they can issue as the gambling market grows larger.

Get it? Vast amounts of debt in the system have NO VESTED INTEREST - they're simply created in order for banks and hedge funds to gamble.

It's tough to get your head around that. But the 500 trillion dollars of debt derivatives floating around out there are simply GAMBLING INSTRUMENTS.

This gambling illness is the underlying problem.

Until we face this fact there's little that can be done to solve it.

And until we solve this the only debt free currency: gold: will thrive.

Saturday, October 1, 2011

The Great Deleveraging

Leverage is Debt.

You're going to hear a lot about de-leveraging over the next several months and years. We've been building debt into our system over the last forty years to the point where the activity on Wall Street is now devoted primarily to the production and dissemination of debt. Four times as much as the production and dissemination of equity.

You know all the figures about personal, corporate and government debt. You know that total debt to equity in the United States is about 350 percent. (not counting unfunded liabilities).

You know that the figures in Europe and Japan are the same. Nobody knows the figures in China, but it's reasonable to assume they're not far off.

Everybody knows this is unsustainable. And the dirty little secret about this is that in reducing debt we reduce our ability to produce GDP. It takes now in the developed world between 4-6 dollars of debt to produce a dollar of GDP. So when you reduce debt you reduce GDP too, thus the debt to GDP ration doesn't budge.

Get it?

That alternative is to "Grow our way out." But if it takes 5 dollars of debt to produce a dollar of GDP then Grow Our Way Out means taking on a lot more debt.

Get it?

It's a problem with no solution, except this:

We must vastly restructure the economy of the developed world.

How? We must let debt ridden institutions DEFAULT and start over.

But we won't. Why? Because then markets of the world would drop to their intrinsic value - as opposed to their Fantasy Gambling Value based on wishful P/E's and Mark to Model values.

And hundreds of trillions of wealth would be wiped out.

What's the alternative? Kicking the Can Down the Road. Which means printing ever more debt to throw at the problem.

But De-leveraging is taking place without the consent of the world's governments and central banks. Because the global markets - as managed and manipulated as they are - are still so vast that the Primary Trend over time asserts itself - and they move ineluctably towards their intrinsic value.

Governments will fight this tooth and nail by creating ever more debt and forcing it down the throats of the markets.

And the markets will slowly (hopefully) continue to vomit this debt back up. (de-lever.)

In both scenarios gold does better than any other asset. In the only likely scenario gold does best.