What is the maximum possible price for gold?

OK, so you missed the run up so far in gold.  Yes, I know you did because most of my family and friends are in the same boat despite the fact that I have been bullish (and vocal) on gold for years.  Perhaps 5% of all the people I know own any form of investment gold and of those 99% of them bought it only after they heard me explain the big con.  It's pretty hard to have a real bubble when so few are actually participating.

And so there you sit wondering what to do.   You know damned well that something is wrong - very wrong.  Gas and food prices are skyrocketing and you are doing the math on your 401k and IRA.  You know the purchasing power of these savings accounts are plummeting in a relative way even if their dollar value has been climbing since the first wave of the crash ended in March 2009.  Since then you have also developed an inner sense, an inner voice which is telling you that this strange, centrally managed thing that we laughably call a free market capitalistic economy is beyond anyone's experience.  You smell the risk and you know that many others do as well.  You know that buying gold a long time ago would have been a good move.  Your hindsight is working perfectly but the forward looking vision is still just as cloudy if not more so than it was when gold was sub $1000.

So maybe I can help you if you can just suspend disbelief long enough to listen to a complete stranger and recognize that you are operating in herd-think mode.  Instead of thinking independently (which would give you that forward looking vision you so badly desire), you keep reacting to what others are doing.  Don't get me wrong, I'm not knocking herd-think. This is how fish schools move in unison and how flocks of birds turn on a dime.  Looking left and right and compensating based on what others are doing is how the Blue Angels precision flying team stay in synch with each other during complex aerobatics.  Unfortunately, it is also, at times, why they tend to plummet straight into the ground in a fiery ball.  It's also how a pack of perfectly healthy lemmings occasionally runs right off the edge of a cliff.  Instead of thinking independently they just react to the clues they perceive around them.  They stay in formation.  Sometimes herd think is a good, workable strategy but if you are near a danger point - flying close to the ground at supersonic speed or running in unison near the edge of an abyss - independent thinking can be a life saver.

When you operate in independent mode, your main focus is getting ahead.  Conversely, when you operate in herd mode, your only concern is to not be left behind.  Surrounded by others in the herd that are doing and thinking the same way as you do makes you feel more secure.  It causes the serotonin to flow.   Of course the other side of being focused on not getting left behind is not worrying about getting ahead.  The Eagles rock band said it pretty clearly in their song, "After The Thrill Is Gone": "...you don't care about winning but you don't want to lose...".

Getting ahead puts you out there, alone.  The rest of the herd glares at you for it and they resent you.  You are a threat to their well being and their all important serotonin drip.  To them, if you are not part of the herd then you are a threat to it.  In reality, the only threat that an independent thinker presents to the herd is that he/she will get ahead, thus triggering the fear in everyone else that they are getting left behind.  Herding 101 says don't get left behind.  In order to avoid that you can leave the herd and compete with the leaders (thus separating yourself from the collective) or you can stay in the herd and attack the leaders from the safety of the masses.  Sound familiar?

So here you are in herd mode watching the gold holders step ahead.  Your stock portfolio is flat to down over the past decade while food and energy prices have risen.  You are clearly going backwards.  During that period, gold holders have moved forward big time and there is a growing chance they will never have to pay any taxes on their fake, inflation driven capital gains.  Think that's impossible?  Think again.  The rules have always been kiltered in favor of the smart money and several states are already working to make this law.  Once the states make it law then the federal government is going to be hard pressed to collect capital gains on a metal that has not appreciated in real value but rather only in terms of a plummeting dollar.  Count on it.  Stocks held by the masses will probably go in the other direction - taxes will be higher than expected down the road.

So despite all this background you are saying, "But gold is more than $1500/oz, how can I buy it here?".  "If I buy gold now then it could pull back and I don't want to lose."  Again, herd think 101.  The final part of the calculus is "If I buy gold here then how high could it go.  Aren't we near a ceiling right now?"

And so I finally get to the point of this blog entry which is what is the maximum possible price for gold.  In order to address that, let's discuss what the maximum possible price is for food and energy.  With respect to these things we always have to remember that buyers set the market price of things, not sellers.  This is because no seller can demand that anyone buy something from them (unless you are big government and you have some health care program you want to ram down everyone's throat using threats of fines on those who do not want to participate).  The bottom line is that people only have so much money.  As food and energy prices go up people of limited means (i.e. most of us) have to cut back.  They don't want to eat less and they don't want to set the thermostat to 82 degrees in the Texas summer but they just can't afford to pay more and so they cut back.  As the old saying goes, the best remedy for high prices is high prices.  When people have to cut back then prices have to come down.  High prices relative to stagnant salaries destroy demand.

Gold is not immune from the rule of supply and price based demand but there is a significant difference between gold and food or energy.  Food and energy are consumption items.  You acquire them because you require them.  Conversely, gold is not a consumption item.  You acquire it because you have excess wealth that you want to store somehow.  If gasoline goes to $10 or $20 a gallon in America due to Bernanke's mismanagement of the money supply coupled with profligate spending by government con men then many people simply will not be able to afford that.  Unfortunately, they need the fuel to get to work, run their tractors on their farms, heat their homes in winter, etc.  High priced food would have a similar effect.  If the people sense that they are being starved to death and that they have nothing to lose by rioting then we will have riots and government hacks will be at great risk of being hanged in the streets.

But what if gold went to 5, 10, even 15 thousand dollars per ounce?  Would this, in and of itself, be the cause of riots or unrest?  Of course not!  Why?  Because people do not need gold to live day to day.  It is a savings tool.  If you don't have excess wealth to save then you might not like it but you probably won't don the "V for Vendetta" mask and start building firebombs in your basement either.  The price of gold is therefore limited only by the amount of money that people have to buy it.  Importantly, it is not limited by the threat of social disorder if prices get too high as would happen if food or energy went up 10x from here. 

As you consider this, keep in mind that there is a bunch of credit based money floating around out there - the so called "hot money" that is constantly moving from market to market looking for a place to be stored.  We are talking about sums that reach into the many tens of trillions of dollars at a time when the monetary base is "only" $2.5 trillion (roughly the amount that Rumsfeld said went missing from Pentagon budgets 1 day before the 911 attacks).  All of this credit based money was conjured from thin air by bankers and other "special" financial institutions.  This credit based money is always very afraid of the very real threat of evaporating back into the Ether from whence it came.  Thus, it is always on the hunt for not only safe shelter but also on a fair rate of return. 

As one market gets over valued the hot money flees to the next market.  In other words, there is too much credit based money out there relative to the places where it can be reasonably invested with low risk.  Hot money overheats any market that it touches.  At some point the rate of return part won't matter so much (US treasuries, anyone?) to hot money holders.  Safety of not being defaulted upon and thus evaporating will become of paramount importance.  As the safety of US treasuries is increasingly called into question, the demand for something solid and physical and non-vaporous like gold is likely to increase. 

So to answer the original question, there is no social limit on how high the price of gold can run (a statement which cannot be made about food and energy).  The only limit on the price of gold is how much excess money (of the monetary base or of the credit variety) the world has in hand that need to be stored someplace.  Given that less than 0.6 percent of the global assets are currently stored in gold it would seem that there is still quite a lot of room for gold to run before the global economic scam collapses and is forced to reach a new equilibrium.  Gold used to trade at $35/ounce back in 1971.  Now it is $1500+ per oz.  People back in 1971 would have claimed you were insane had you predicted that gold would be $1500 in 2011.  They would have attacked you for existing outside of the herd.  They would have been angry at you for pinching off their serotonin flow.

Going forward, there is no reason that gold cannot trade at $5k, $10k or $15k per oz. 5, 10, or 15 years in the future respectively.  So to close this post out, I continue to see physical gold as the best long term store of wealth for your retirement.  Buy it on a regular basis no matter the price.  Sometimes you will buy at a short term peak and sometimes at a short term trough.  Know this in advance - EXPECT TURBULENCE - and get over it quickly when it happens.  The only way you can get hurt is if you go "all in" at once during a peak and then panic sell when the inevitable dip comes OR if you buy gold on leverage OR if you buy fake gold (paper gold) via market ETFs which could turn out to be fraudulent OR if you let someone else have physical posession of your gold.  In other words, if you are a conservative, buy-over-time (AKA dollar cost averaging) person who demands physical posession of the gold then you will be immune to 99% of all the actual risk out there (nothing is 100% risk free).  If you are a leveraged or paper gold gambler then you are at significant risk.

Physical gold is the perfect long term retirement wealth storage medium.  With gold you might never get rich but you will always have what you worked for despite the best attempts to steal it from you by Bernanke and the con men.

Inflation vs. deflation: a chaotic relationship

Economists, financial speculators and bloggers across the web are engaged in a grand debate about whether the future of the US holds massive inflation or deflation. There are good arguments for both sides. Deflationists like Robert Prechter remind us that the money supply is more than just the monetary base which Bernanke controls directly. Much more. That’s because we have a funny money supply that allows (nay, encourages) fractional reserve banking. Fractional reserve banking is a scam whereby banks and other special people (i.e. not you and me) can loan out more money than they actually have in their possession. Much more. As in at least 10x more. In fact, they loan out as much as they possibly can because they get to collect interest on that vaporous money they lent. In other words, they get something for nothing. Where does the extra money come from that they loan out? From thin air. In other words, banks and special financial institutions have virtual, temporary printing presses that work exactly like Ben Bernanke’s printing press with one major difference: When Bernanke prints more money it’s (generally) forever money. Conversely, when financial institutions conjure up credit from thin air, it’s supposed to be temporary money which is automatically destroyed when the loans are repaid or defaulted on.

Because of this, the money supply actually consists of a combination of what Bernanke has printed up (again, it’s called the Monetary Base) and the amount of debt outstanding. Over the past 30 years, the monetary base has increased, especially in the past 3 years, so that it now stands at about 2.5 trillion dollars. Since our national debt –all of it money that has been spent into the economy- is 14 trillion it’s pretty clear that the monetary base is not the entire money supply. In fact, it’s not even the big part of the money supply. So herein lies the argument for deflation. People in the US and abroad have created massive dollar denominated debt. This has increased the dollar based money supply which has resulted in its dilution relative to the stuff available for sale. Diluted money does not buy as much stuff as undiluted money and so the result is higher prices. The deflationists argue that we have had higher prices for 30 years not because of Bernanke printing money but mainly because of exponentially rising debt in all sectors (government, housing, business, etc.). Folks like Prechter argue that people are now realizing all this debt is a bad thing and they are either paying it off or walking away from it. These acts make that debt based money evaporate back into thin air from whence it came. The result is a reduced overall money supply even with Bernanke printing his a$$ off. Prechter claims that Bernanke and his printing press is fighting a losing battle against credit deflation because the debt portion of the money supply is far larger than the monetary base – $50 trillion of overall debt to $2.5 trillion of monetary base.  If Bernanke tried to print, for example, 10 trillion dollars from thin air in order to offset $10 trillion of debt reduction, interest rates would rise causing the housing market to crash.  This would cause more defaults on the single largest asset class - real estate - thus causing enough deflation to more than offset any money printing Bernanke can possibly do.  Thus, the argument that Bernanke can print unlimited amounts of money is flawed.

Inflationists tend to ignore the fact that our money supply is mainly made up of debt. They focus strictly on Bernanke and his printing presses. This includes people like Peter Schiff and Ron Paul. They tend to ignore the fact that Japan has been printing like crazy for the past 20 years and now has a debt to GDP ratio of more than 200% yet it still has a deflationary environment. Each side of the argument believes that they are dead right because, they claim, the math supports them. Conversely, I see plenty of room for shades of grey.

How can I ignore their math? Actually, I don’t. I simply add factors that they are ignoring. Given that we have a money supply consisting of monetary base + debt, the deflationists win the math argument hands down. As soon as people stop borrowing money and start saving more and start walking away from debt, the resulting deleveraging MUST show up as a deflationary force. That’s the math of it, period. And there can be no argument that the leverage in play right now is very high. When Bear Stearns went under the forensic accounting discovered that they were leveraged 32:1. In other words, all it had to do was to lose about 3% of the overall value of it's assets before it would be rendered insolvent. As another example, the Fannie and Freddie debt that the government took over is leveraged at least 50:1 and some say even 70:1. That leaves a lot of room for deflation when those houses are walked away from and then have to be marked way down to current market prices. If only that were the extent of it! Unfortunately, the entire economy is infested with leverage and thus the potential for deflation is everywhere. Look at all the states which have underfunded their public pensions. Those are basically debts that will be defaulted on. People who thought they were going to get a full pension spent more money yesterday because they thought their futures were assured by the pension. Now that they are waking up to the fact that these were “fairy tale promises”, they must stop spending so much today in order to make up for the new found shortfall that will hit in their retirements.

So all of the above would seem to make me a staunch deflationist and I would be except for one teeny weenie little problem: our money has an intrinsic worth of zero. It is backed by nothing at all. If people decide not to accept it in exchange for their goods and services then there is nothing you can do about it. You might as well wonder why people in China do not accept dollars for purchases in their markets. The dollar has no value over there. They do not recognize it as having any local purchasing power (zero) in exactly the same way as nobody here in the states will accept Chinese Yuan for groceries or a big screen TV from the big box electronics store. Now, if Chinese Yuan were backed by a fixed amount of gold and if there were a way for people to exchange the paper notes for metal bars upon demand then I assert that only a fool would not accept them in trade. But, by definition, nobody backs their fiat currency with gold or anything else and so the global money supply has an intrinsic value of zero. It is only worth what people think it is worth. The perception of the value of fiat currency is not generally a binary thing. In other words, people don’t view it either as having value or not. They assess some level of variable value to it in order to come up with the price for milk, eggs, cars, houses, gasoline, etc. So it is entirely possible that, despite a massive reduction in the overall money supply due to credit deflation and deleveraging that prices for things stay steady or even rise simply because people assign a lesser value to the money supply that remains.  While this does not change the deflationary argument from the standpoint of economists who just look at the number of dollars relative to the goods for sale to figure out if something is inflationary or deflationary, common people think of inflation and deflation as rising or falling prices respectively.  In the scenario I just mentioned we could see deflation in the money supply while still seeing rising prices including those of gold and silver.

In short, the inflation/deflation argument (at least from the standpoint of asset prices) is more likely to be decided by the mood of the people and more specifically the confidence that the people have (or fail to have) in our government than by any form of math done on the money supply itself. For example, if government does things that reduce the ability of people to trust it then the money is likely to lose buying power despite any deflationary forces that exist. In other words, the future of the purchasing power of the money supply is at the mercy of the mood of the herd which is a chaotic function at best. This is just something to keep in mind the next time you hear someone violently argue either for inflation or for deflation: they don’t really know and none of their math really means very much (assuming inflation is defined as rising prices and deflation is defined as falling prices). Enlightened observers will keep a close eye on the mood of the herd for clues about the future buying power of our currency.

Gold and silver confiscation by the US government: yawn.

A few years ago when gold was completely off everyone's RADAR there was no speculation about the likelihood of future confiscation of gold as was done by Roosevelt under executive order 6102 back in 1933.  Now that gold continues a steady climb, the speculation is all over the web.  The division of opinions is generally such that Joe Sixpack type people generally fear the threat of confiscation (whether they be gold holders or not) while those with more experience and historical perspective tend to not see it as any threat at all.

I personally think that worrying about gold confiscation is an attempt to fight the last war so to speak.  It's shooting behind the duck by about 80 years.  Before gold was confiscated in 1933 it was held in concentrated locations by businesses and banks who thought of it as money and who held it on their publicly visible balance sheets as financial reserves.  Yes, some wealthy people had gold in their safe deposit boxes which was confiscated but this was mainly theater because the amounts there were fairly small relative to the easy pickings at corporations and banks.  I think the government sent out the executive order and publicly threatened private individuals mainly as a smoke screen for the robbing of the corporations.  If people themselves were under attack from government they would be less inclined to speak up on behalf of corporations.  In fact, the one case which was tried whereby the government tried to penalize a private citizen for not handing over his gold resulted in a loss for the government on a technicality.  If the government is really serious about anything then no technicality is going to matter.  Thus, I conclude that government was not serious about targeting individuals.

Because of the last government rip-off of the economy, corporations no longer carry gold on their balance sheets as reserves.   The gold has been spread around a bit more now thanks to online metals dealers like Monex and Kitco, etc.  This means that confiscation is no longer an easy matter.  People have learned from the last rip off and are not likely to fall for it again.   Nobody is going to surrender their gold if ordered to do so and with the economy and joblessness in such a bad state attempting to steal people's gold could actually touch off insurrection.  The government could go looking for cold cash in the form of gold coins and instead be given hot lead.  Keep in mind that government is lazy and greedy.  Doing a lot of work and taking a lot of risk and spending a lot of money to collect broadly dispersed gold is not something it will sign up for.

While a significant part of the gold is distributed widely I do acknowledge that there are some gold concentrations like the GLD ETF.   While it would be cost effective to steal this gold it would also carry significant risks.   For example:

• GLD, a paper investment that is supposed to be backed by physical gold, has diverted money away from the physical gold market.  As a result, physical gold in your hands is only worth about the same as the paper promises that GLD represents.  The very notion that something in the hand is worth the same as something in someone else's hands during times of crisis is insane but that's the reality today.  However, if government confiscated all of GLD holding and cashed the holders out then what do you think they would do with the cash they received back?  That's right, they would go to the black market and try to buy their gold back.  But at that point they would find that physical gold no longer trades at the same price as paper promises.  Government confiscation of GLD would send the black market price of real, physical gold into the stratosphere, perhaps $5k per oz or more.  This is completely contrary to what government wants!  It would show even more than ever that people are losing faith in the government's fiat currency.
• Several very knowledgeable people contend that the GLD fund does not, in fact, hold all of the physical gold that it claims to.  A significant part of the GLD holdings, they assert, are paper claims on gold.  If government stepped in and demanded all their physical gold, then GLD would have to go to the market to buy whatever portion of their holdings that were not physical like they have been claiming them to be.  The result would again be a dramatic rise in the price of physical gold which in fact could spike much higher than $5k/oz because the executives at the GLD fund would fear prosecution if they didn't hand over the gold stated on their balance sheet.  In that event they would expend every resource (possibly to include massive borrowing) acquiring gold in a hot hurry from a marketplace of tight supply.  Again, the end result would be contrary to government desires.  The dollar would be exposed to be the worthless POS that it actually is by the skyrocketing price of gold.  Also, whatever derivatives the GLD fund might be using in place of real gold could default and that could set off a chain reaction of defaults that could have implications far beyond the gold market.  The exact risks are unknown but I'm sure the government recognizes that significant risks exist.  Contrary to popular opinion, government is not stupid.  It's just corrupt and greedy and crafty, and that sometimes causes it to look stupid as it rips us all off.  But a careful review always reveals that we are the real patsies in the deal, not them.  So who, again, is the stupid one?
• Even at $1500 per oz, all the gold reserves of the US  (about 261.5 million Troy oz) are only worth about 392 billion dollars.  In other words, far less than the interest payment for one year on the annual debt.  In other words, gold has been relegated to the status of an economic gnat by the con men with their dishonest fiat currency (Note: gold is still very cheap.).  Assuming that the people privately hold a similar amount of gold as the government does (probably a significant overstatement, but there is no way to know for sure) $400 billion is just not enough money to be worth going after given that trying to pry this money out of the hands of citizens would be very costly and very likely cause a civil war.  To put this into perspective, the US government admitted to "losing" 2.3 trillion dollars of the defense budget just one day before the terrorist tragedy of 911.  Unfortunately, we never got to the bottom of that "loss" because one of the terrorist aircraft happened to take out all the Pentagon computers which were tracking this budget mishap (how very convenient).  Why would the government risk civil war over $400 billion when they are willing to just forget about $2.3 trillion in fraud?

Bottom line is that the sum total of the cost (which is more than money) of the government confiscating broadly distributed gold stashes is just plain uneconomical on too many fronts to be a significant concern at this point.  Again, worrying about gold confiscation is fighting the last war.

Unfortunately, many people who think gold is risky because of past confiscation happily store all of their retirement earnings in government controlled accounts whose buying power is just plummeting every single day.  That's what they should really be concerned about because there are trillions of dollars of easy pickings for the government to steal and they don't even have to go door to door or stare their victims in the face to steal it.  All they have to do is have con man Bernanke fire up the printing presses to piss away the buying power of your 401k or IRA which is safely locked away from you by government regulations.  Sorry folks but the big, easy to steal money is in your retirement account, not in publicly held gold coins.  Government will go after the easy money.  Strike that.  Government has been going after the easy money.  Each time Bernanke prints up another trillion it directly waters down the buying power of your IRA or 401k.  You can see the effects directly in the rising prices of food and energy today.  On the other hand, crazy, risky gold is self-compensating for the government theft and fraud.  Wake up people, we are being conned and that makes we the people part of the problem.  Without a willing patsy there can be no con.

Credit downgrade theatrics: S+P puts US sovereign debt on negative watch

The global press is currently abuzz with the recent statements by the S+P credit rating service that it had placed the US sovereign debt on "negative watch".  Articles like this one from The Telegraph are typical of what the media is reporting. 

Despite the fact that it has become a major topic in the financial news, I almost decided not to blog about it because it is just more economic theater.  I finally decided to write a few words on the matter because so few people are yet aware that it is in fact just theater.

Let me explain.  The big US default already happened.  It happened in 1971 when Nixon defaulted on US promises to convert government issued greenbacks into the gold they were supposed to represent.  Nixon didn't just change the rate of convertibility like he could have done.  Instead, he completely defaulted on the entire promise of convertibility.  That was the major economic event of the century yet skillful politicians managed to paper over it for a few decades.  That doesn't mean that they fixed anything.  They simply delayed the day of reckoning. 

It is nearly analogous to a "home owner" (home debtor is more like it) who simply stops making the monthly payment and who refuses to move out of the house until the police forcibly evict him.  A huge number of people are doing this right now.  They count on the fact that banks are insolvent and are stalling for time hoping to become solvent so that they can finally foreclose and evict.  Banks do not want to do this as long as they are insolvent because it will require them to write down the loss on the house instead of claiming the debt as being worth full face value on their books.  Foreclosure is bad for banks because it disallows them from continuing to legally (but nonetheless fraudulently) report an overstated value of the assets they own.

Likewise, the world could not afford to just stop dealing with the US back in the 1970s and so it not only continued doing business with us almost as if we hadn't defaulted but even more ridiculously it allowed us to continue to own the world's reserve currency.  That's right, we completely defaulted after other sovereigns had caught us with our hands in the till and they still let us be the banker in this global game of Monopoly.  Perhaps it was because they could not declare us bankrupt without also declaring themselves bankrupt.  Perhaps the size of our military helped shape their views on the matter (if you try to declare us bankrupt we will kill you in the name of national security...).  The writings of Smedley Butler should be enough to help you suspend disbelief in this regard.  Perhaps it was a little of both.  But the whole notion of US credit rating being maintained at AAA for even a nanosecond after defaulting on the largest financial contract in the history of the planet is so ludicrous that any ratings "negative watch" or actual credit downgrades are complete theater at this point.

Since 1971 I see that the conditions which allowed the US to remain in charge (i.e. be the world's fractional / fictional reserve banker) have only increased in magnitude.  In other words, what other sovereign in the world is actually solvent?  I don't mean "apparently solvent" or "can argue that they are solvent".  I mean actually solvent.  I contend that nobody is.  All nations are either in massive debt or have been lenders to those who are in massive debt or whose apparent prosperity has been driven by debt based spending of insolvent sovereigns.  Is Germany solvent?  Not if the PIIGS default and certainly not if the US defaults.  Are the commodity export superpowers Canada and Australia solvent?  While they appear to be, look at the housing bubbles in those countries which are rolling over right now.  Their banks are insolvent because they lent too much money out on small houses costing many hundreds of thousands of dollars each and recent lessons have taught us that there is no real separation between governments and the banks.  Also, their commodity driven incomes are dependent on the apparent prosperity of China which is dependent on the consumption buying of Euroland and the USA.  It's one big global economic circle jerk.

So at this point, everyone in the world is insolvent and any actual foreclosure of the next guy will only bring to the forefront one's own insolvency.  Why do you think France and Germany are so interested in keeping the PIIGS from defaulting?  They know that the existing debt will lose value and that future debt fueled consumption by the PIIGS will plummet.  If this happens then the export driven scam economies of Germany and France will crash too.  PERIOD.  At the end of the day what will likely keep America on top is the size, technical capabilities and the global precrash deployment of its military.  No other country can touch that and if they try to do so then expect America to react in the name of national security.  At some point America can just allow the whole funny money system to collapse and then insist that the whole world continue to allow US to be its leader.  Or else.  In fact, this is pretty much what I expect will happen.  Why?  Because if I can think this up then the Pentagon has already figured it out 20 years ago.  They have thousands of people playing out "game scenarios" and planning for them in advance.  Nothing they do is random even though it's part of the big con for some things to appear unscripted.

In light of this, only a fool gives a damn what the S+P or any other credit rating system says about the US because it really is just sound effects in a theatrical show.  If you are tired of worrying about the global economy, the answer is pretty simple.  Stop reading the headlines, continue to work hard at productive enterprise and save any excess wealth you might earn into real money which is gold.  Do this month in and month out.  Do not try to use metals as a way to generate profits by trading them.  The house always wins that game.  Just dollar cost average your retirement savings into gold over the long term and you will easily beat the performance of the stock market and other scam ridden paper investments.  This message is especially pertinent to you if you are 40 years old or younger because you will certainly live long enough for any government driven gold price repression scams to collapse under their own corrupt weight.  The younger you are, the larger percentage of your retirement savings should be stored in gold. 

If you are 30 or younger you are completely safe in putting 100% of your  wealth into gold as a storage medium for your long term retirement funds.  Any "diversification" into fiat currency based paper assets will only be diworsification.  As you think about this, please consider the tax aspects.  When you sell your gold coins during retirement one at a time on Craigslist in order to eat and buy clothing each month, how is Uncle Sam going to collect capital gains taxes on that?  There is no way they can track those transfers between private individuals and even if they could there is no way they can assign a cost basis (i.e. what someone paid originally) because gold purchases today are completely un-trackable.  In fact, many states are now trying to write laws that legally exempt gold sales by individuals from state taxes!  If these laws go through then how many people will actually pay federal taxes on fake, inflation-induced "gains" on metal purchases?  Can the same thing be said of stocks and bonds?  Ummm, No.  The government tracks those paper assets completely and permanently.  You will be paying taxes on paper gains of paper assets.  Think about it. 

By the way, I am not advocating tax evasion in any fashion. I am simply observing the reality of the situation and speculating on what others will likely be doing.  I believe that unenforceable rules will eventually not be enforced and that the federal government will one day formally recognize the unenforceability of taxing fake, inflation driven capital gains on gold and silver in the same way that many states are working on as I type this.  At this point you can think of gold and silver as tax deferred investments in which the government will likely waive all taxation at some future point given that no economic value was added to the metal after your purchase.  The value of an ounce of gold does not go up simply because it takes more units of a debased currency in order to buy it.  An ounce of gold has always been worth exactly one ounce of gold, no more and no less.  It is immoral to tax something whose economic value (purchasing power) did not increase even though its dollar price went up due to government money printing operations.  I believe that governments of, by and for the people will eventually validate this view by eliminating taxation on these metals.

Don't worry about daily or weekly or even yearly price fluctuations of metals because that is the fiat currency value fluctuating, not the value of the metal.  Gold that was saved in 1920 still buys today what it bought back then.  Dollars that were saved in 1920, well, not so much.  In fact, those dollars have lost 96% of their purchasing power since then and in the next decade they will probably lose another 75-80% or more as the global fiat money scam continues to crater at an exponential rate.  If you want to do a little gambling, buy some silver too, but again, accumulate over time on a dollar cost averaged basis.  Silver is looking a little frothy right now and so a pullback (AKA buying opportunity) is not out of the question.  Then again, the metal might skyrocket to $100/oz before a pullback to $70 so if you want to get into silver the best advice is just to buy a set number of coins on a quarterly basis instead of throwing more good money after bad into your government controlled retirement account (IRA, 401k, etc.).  Anything controlled by government will eventually be revealed to be a massive scam, a trap.  Tax deferrals, corporate matches, etc. are nothing but bait.  On this point there should be no confusion or uncertainty.

We are approaching a very, very important time for the dollar.

There are two main forces tugging at the dollar.  The first one is deflation which is caused by de-leveraging and credit destruction along with debt repayment and / or default.  This force causes a reduction in the supply of money and credit relative to stuff for sale (i.e. deflation).  This is a monster force because there are 50 trillion dollars worth of credit running around in the economy (to say nothing of a $quadrillion in derivatives which in many ways act like a form of debt given that they are promises to pay if some conditions are met - in other words, conditional debt).  The second more visible force and the one everyone is focused on is the ever increasing national debt which is funded by Bernanke’s printing press.  Bernanke fears deflation above all else because deflation was part and parcel of The Great Depression and Bernanke has sworn an oath that deflation will not happen again on his watch.

What he really means is that he will bail out his insolvent banking pals to whatever degree he is able and he doesn't care if it results in hyperinflation even though the net impact to the people would be much worse for the general population than a deflationary crash.  Today Bernanke only cares about the banks but if he causes hyperinflation then he better worry about getting hanged in the streets by the starving masses whose savings have all been inflated away.

In any case, this is a huge battle.  Credit has been going away at a rapid pace and Bernanke has been printing and stimulating in order to keep up.  So far the results are a mixed bag.  Bernanke's main target to prop up with QE was housing but housing continues to slide downward and rising interest rates are only going to make that condition worse.  At the same time, some inflationary signs are being seen as evidenced by rising food and energy prices.  “Super” gasoline is nearly $4 a gallon in oil-rich Texas no less.  This has nothing to do with supply and demand.  As you can see from this recent press release, the Saudis are cutting back on production due to an oversupply condition.  A supply glut should be driving prices lower, not higher.  The weak US economy has led to oil consumption cut backs while China was taking up some of the slack but now China's economy is overheating and they have to cut back too and that means less global energy consumption.  Regardless of the demand reduction, Oil is up due to inflation concerns which have driven dollar holders into the energy markets seeking a safe haven for their evaporating wealth.  Gold and silver have been strong due to weakening of the dollar as well.

As you can see from the USDX chart at left, the dollar now has to make a choice.  It either has to find support here and then bounce big time or it will break down and it could lead to significant more downside.  Many are calling for the start of hyperinflation.

Of course, the US Dollar Index cannot go to zero because it is a scam measurement.  It measures the dollar not against something of fixed value like gold but rather against a basket of other fiat currencies which mainly consist of the Euro and the Yen.  If you look at the crap going down in Euroland - Greek 2 year yields topping 20%, etc. - then it's pretty damning for the dollar to be retesting the lows of 2008 relative to the piece of crap Euro.  The other major currency - the Yen - is controlled by a government which is in debt 200+% of GDP and whose country is still struggling after a major tsunami and nuclear power plant disaster.  Again, for the Euro and the Yen to compare so strongly against the dollar during a time when those currencies are under such stress really tells you how hated the dollar is - perhaps unfairly so given the state of the competition.  

Nobody can say whether people will just give up on the dollar or begin to treat it like it was a safe haven (at least relative to other POS fiat currencies).  What will be most telling would be if the dollar takes a big bounce while at the same time gold and silver hold their own or even continue to rise.  That would tell me that a significant number of people have given up on all fiat currencies and are now running for the shelter of real money, constitutional money.  It would be a signal that people no longer care what currency traders think of the funny money.  It would tell me that confidence is being lost in all the scam ridden governments of the fiat money controlled world.  Should this become the case, expect major changes ahead.  If people lose confidence in the funny money con game then the game is over, period. 

Yuri Maltsov: There is no such thing as good big government.

At a Mises Institute event recently held in Naples Florida, Russian Yuri Maltsov discussed life under socialist Russia.  His point was pretty clear: there is no such thing as good big government.  Governments are socialist by nature and so the bigger the government you have, the more socialism you end up with.  His conclusion is that you cannot fix government so that big government actually works.  Thus, the only workable strategy to avoid government abuse is to keep it small.  In his experience, big government=socialism and socialism requires that government eventually engage in domestic internal terrorism against its own people.  The more its policies fail, the more it has to turn to fear and terror and propaganda in order to save face and to stay in power.  Big government eventually begins to view the common people as what Maltsov calls "public slaves".  People in this catagory are worse off than privately owned slaves because a private slave owner will take better care of his slave property than government will take of common people who do not serve the needs of government.  Some of the things he discusses as having happened in Russia and in Cuba under socialism are pretty graphic.

As I have written in the past, these things don't just happen, they evolve.  Government gets into trouble and so it has to "do something" to fix the problem.  The "fix" is invariably an attack of some sort on the people and, as Yuri makes it a point to say, the people are made to pay for the very attacks on themselves.  I see the TSA as a good modern day USA example of exactly this.  In fact, government hacks even publicly admit that crises are an opportunity to expand government.

Bottom line is that when people give over the management of their daily lives to someone else they can scarcely expect to receive the same treatment as if they retained control of their own lives.  This is why we cannot leave the solving of all problems to government.  This is why we cannot continue giving government unlimited funds to spend however they see fit and without any accountability.  We have no idea how government actually spends the cash they tax and borrow but given that there is no verified accounting we can only believe that there is massive fraud and abuse. 

Oh, I know, I know, that's all conspiracy talk best left to crazy people.  I hear it all the time.  However, in my view, brushing it off so lightly is the easy way out.  It's the path that allows the lazy part of our brains to prevail.  It's much more difficult to come to grips with the fact that government even admits that trillions go missing without any accountability.  Ignore the facts if you like but the facts show that big government is corrupt by nature.  A big problem that we will have to deal with in the not too distant future is that government debt is actually going to be the cause of major problems which the government will then claim to be the solution provider for.  They are actually creating the big crisis which they will be very careful not to "waste" in their ongoing efforts to create bigger, more powerful government.  You know you are being conned when the fox who has been guarding the hen house steps forward (pushing all others out of the way no less) to solve the the problem of chickens which mysteriously go missing.  It's going to happen.  The only question is what are you yourself going to do about it.

US budget theatrics: the denouement

de·noue·ment/ˌdāno͞oˈmäN/Noun

1. The final part of a play, movie, or narrative in which the strands of the plot are drawn together and matters are resolved.

2. The climax of a chain of events, usually when something is decided or made clear. 

Today's headlines report that the US House of Representatives is considering a new spending plan that would cut 6.2 trillion dollars from the budget over the next decade.  Of course, the cuts are not immediate, but rather slated to begin "tomorrow".  It's always tomorrow.  Tomorrow is the Keynesian's national anthem.  The article states "The GOP plan proposes a federal budget totaling $3.5 trillion next year, while promising more than $6 trillion in accumulated spending cuts over the next decade compared with the budget that President Barack Obama offered in February." So, basically 2012 would see no cuts at all and then after everyone gets elected again (or not) then we can start making those pesky cuts.  Of course, when 2012 comes around some new political hacks will get voted in and the first thing they will do is repeal the cuts in some form or fashion.  And even if the cuts aren't repealed it's impossible to know how much of the $6.2 trillion is just a headline number vs. being actual fact.  For example and as reported earlier, $38 billion in cuts slated for this year turned out to really only be $352 million after the bull$hit was wiped away from the picture by the CBO. 

Just for a lark, let's assume for a second that they really do plan to cut those $6.2 trillion and that they have the political spines to make the changes stick without making up for it some other way.  That's $620 billion per year.  The current deficit is $1.3 trillion.  That still means we go $700 billion more into the hole each year under this new plan.  Think of that as a new bank bailout each and every year for a decade.  Of course, this doesn't count the risk of rising interest payments on the debt.  If our best effort means that we go into debt by an amount equal to the GDP of The Netherlands or of Turkey or of Indonesia each year then who can continue to have long term confidence in the dollar?  One thing is pretty certain: as soon as Bernanke stops printing money to buy treasuries with, the unsustainably low interest rates that he has been creating with this process are going to go up and that means higher interest payments on the debt going forward.  Given that they have been held down a very long time there is significant risk that when they do rise it could be dramatic in nature.

OK, so enough about Keynesian dreams of future budget cuts that may or may not ever actually materialize.  In the here and now, President Obama is warning congress that if they don't raise the debt ceiling it will cause a global recession.  Of course he has to have a higher debt ceiling because without it the debt Ponzi will indeed collapse and the result will be worse than a "recession".  Add it all up and it looks a lot like another Keynesian Wimpy Promise.  If you just give us our hamburger today (again) we will begin asking for less hamburgers sometime in the future (if we don't change our minds between now and then of course).  Heck, one day we might even pay you back a hamburger but be careful because it might not be the same kind you lent us.

The little details can be made as complicated as you want them to be but overarching truth is fairly simple.  If these guys make any real cuts in federal spending then it will whack the economy which will whack housing prices which will whack the balance sheets of their banking buddies and threaten the stability of the entire funny money system.  Without having a funny money system in place, lazy good for nothing con men will actually have to work.  Instead of making millions by conning people out of their wealth they will only make average salaries given that they have no real economically useful skills to speak of.  Could you image Ben Bernanke without the funny money game?  The guy wouldn't even be allowed to teach high school math.  He'd be competing with retirees for the position of Wal-Mart greeter.  So the bottom line is that they will do what it takes to save their funny money system and that means supporting the banks in any way needed even if it causes the debt enslavement of the nation or its eventual bankruptcy.

Gold and silver rise as the reality of theatrical budget cuts is exposed

I recently posted about how the supposed $38 billion budget cuts were mainly theatrics but little did I know how right I actually was.  After all the flash and bang of the budget headlines faded, the stodgy accountants at the US Congressional Budget Office admitted that the actual cuts this year would amount to only $352 million with an "m".  To put that into perspective, here is a table of actual debt interest since 1988.  In 2010 we paid $413 billion for the year just in interest payments. 
It looks to be increasing by about $30-40 billion per year of late so let's assume 2011 will be $450 billion or about $1.2 billion per day.  That means that the $352 million that our "leaders" agreed to cut this year amounts to about 8 hours worth of interest accrual.  Eight stinking hours!  Look how long and loud they fought over eight measly hours of savings on just the debt interest!  In other words, nobody gave anything up at all.  The budget theatrics themselves probably cost more than the supposed savings!  Heck the warmongers even got their budgets increased in this deal by 8 billion!  If this is the best that we can expect from our "leaders" then it should come as no wonder that gold and silver continue to rise.  It's not that gold and silver are becoming worth more, folks.  It's that the dollar is becoming worth less in the minds of people.  The value of any fiat currency is intrinsically zero and unless these clowns get serious real soon they are going to ruin the confidence of the patsies (I mean people) in the value of the dollar.  How many articles like this one can the people stomach before they start to lose faith in our currency en masse?  Bernanke wants to avoid deflation at all costs in the belief that he can remove the stimulus just in time to avoid the onset of massive inflation or even hyperinflation.  But if Congress won't agree to cut spending dramatically then it's very questionable as to whether Bernanke will be able to ever stop printing money because the money for all this congressionally approved spending has to be gotten from somewhere.  Congress actually seems to be trying to hyperinflate our way out of debt.

My fellow Americans, let me tell you right now who is really to blame for all of this.  We are.  We the people sit here and argue about Dem vs. GOP when both sides are just debt addicted con men.  Very few people complain to their congressmen.  Very few people even seem to care.  I promise you that the day will come when complacency turns to panic and history suggests that such turns often occur with exponential speed.  We the people are ignoring all the warning signs.  We are busy thinking good thoughts about peace and light while the country is literally burning down around us, fueled by the economic apathy of the citizens. 

Anyone who thinks they have savings in stocks, bonds, annuities, 401ks or other paper holdings is simply watching the buying power of those things erode at an ever increasing rate.   When it all collapses, do yourself a favor.  Don't blame your neighbor or the guy in the other political party.  Blame yourself because you are part of the "we" who didn't vote for people like Ross Perot and Ron Paul who clearly warned us of what is happening and gave us the painful message of what we needed to do about it.  They didn't have the Hollywood good looks and strong speaking voices to get the votes.  Their logic and math wasn't good enough for us.  We needed charismatic speakers with strong facial profiles even though all they ever did was lie, lie, lie to us.  They in fact told us what we wanted to hear.  So now we have nothing but useless liars running the country and we the people are still just watching, hoping beyond hope for an economic miracle to save us.  Sorry if the truth hurts but we either take our pain now or it is going to be much, much worse later.

Rolling Stone magazine's Matt Taibbi discussed the Fed loan scam.

In a very interesting read from Rolling Stone online magazine, Matt Taibbi (of "Goldman Sachs is a giant vampire squid sucking the life out of America" fame) discusses questionable loans by the Federal Reserve citing documents that were recently released by congressional mandate.  Caution, Taibbi uses strong but situationally appropriate language in the article.

In case you have a short attention span, get easily confused by details or are just interested in the bottom line, Bernanke saw that the global credit system was locking up.  The cause: too much existing debt.  Banks didn't want to lend and people didn't want to borrow.  Bernanke knew that without ongoing credit increases the global credit/debt Ponzi would go bust.  He wanted to buy time but things were breaking down at an exponential rate.  Congressman Kanjorski discusses the first wave of this on Youtube but there have been several follow on waves that have also been handled quietly by Bernanke and company, most recently with trillion dollar deficits and the printing of $600 billion from thin air in what has been called QE2.

The goal of buying time was so that banks could recapitalize themselves so that they could avoid admitting that they were (and still are) completely insolvent.  They could do this several ways including floating bonds, selling stock, selling assets, borrowing cheaply from the Fed and loaning to the people with a 4-5 point spread, etc.  In order to buy time, Bernanke knew that he needed to pump credit to anyone who was willing to take it on.  As you can see from Taibbi's article, that included nearly a quarter billion dollars loaned to the wives of a couple of big Wall St. bankers.

The problem with all of this is that it gave a few special people gobs of risk free, low cost money to buy assets at fire sale prices when others did not have access to credit.  Well connected people, including apparently their immediate families, got massive loans so that they could buy stuff.  So they went out and bought stuff at the bottom and made massive profits off the inflation and debt induced bounce.  This had the effect of buoying asset prices as Bernanke was hoping it would but much of the economic benefit for the bounce was concentrated into the hands of a few special, connected people.  In other words, not you or me.

Now, all of this money-giving was supposed to be loans that had to be repaid.  Thus, some people are not going to see the problem with it but there are huge problems nonetheless.  The first problem is that these were basically gift loans.  The repayment terms have not been released but we know the money was lent at very close to zero percent interest.  Who knows what the loan term was.  It could be a million years for all we know with the minimum annual payment being $1.  We just don't know.  But we do know that the Fed was desperate to lend money and so the loans it offered would have to be at very, very favorable terms.  We also know that they were in many cases uncollateralized.  If the rich banker's wives (or any other recipient) had invested in stuff that crashed instead of bouncing, how would they have been able to repay?  They simply could not have repaid and that would be that because we don't have debtor's jail for the elite.  Bottom line is that it was essentially a risk free transaction for them.  They could win or break even but they could not lose.  This is how wealth is concentrated into the hands of the few, essentially nonworking elite under a fraudulent money system such as ours. 

The second problem is that while everyone else is losing jobs or getting pay cuts, the new funny money loans injected into the economy created inflation which drove up prices of food and energy.  This reduced the discretionary buying power of the people, pushed people out of their homes and is responsible for a significant reduction in the middle class.  The final problem was that of moral hazard.  Since they got away with it once they are likely to do it again the next time the debt Ponzi begins to show weakness.  In fact, even more pigs will be lined up at the feeding trough than before because now everyone knows what was happening the first time around.  When too many people become the beneficiary of a con then it has to collapse due to an insufficient number of patsies to fleece relative to the con men who are trying to get paid.  At some point the con is more likely to go against them.  Instead of making massive profits they will lose the money and then the scam will blow wide open.  Of course, they never had the ability to repay the loans and so their debt will again be laid at the feet of the sleepy taxpayer. 

Historically speaking regarding times like these, at some point the slumbering giant which is the general population wakes up and decides not to take it anymore.  The result is civil unrest.  The fast talking, fast moving, weasel-like con men eventually get body slammed by the slow-to-anger but unstoppable-once-they-are-pissed public (the proverbial "hanging in the streets").  If you want to know what that looks like check out this short video.  If all of this is finally beginning to catch your attention then I would be remiss not to remind you about the only 2008 presidential candidate who was actively warning us about the Federal Reserve.  That would be none other than Dr. Ron Paul.  Back in 2008 people told me that voting for him was a "wasted" vote because that's what the media was saying.  In hindsight, the data clearly shows that any vote which was not cast for Ron Paul was wasted.

Will the end of QE2 kick off a big deflationary event?

John Mauldin's web site has a very insightful interview with Austrian-leaning David Galland of The Casey Report, a well regarded paid investor's news service.  It's well worth your time to read.  Galland makes many points I have made over the past several years:

• Nothing has been fixed by all the bailouts and stimulus.  All it did was to paper over the problems and to make them worse.  It basically threw good money after bad and allowed people with bad financial behavior to do more of same.
• The fed is operating as if the economy has had a heart attack instead of as if it ran out of gas.  In other words, Bernanke assumes people just got scared and thus stopped borrowing instead of the truth which is more like the people are up to their eyeballs with debt as many of them enter retirement.  They do not want more debt, they want to be debt free in retirement.  A debt based economic Ponzi requires ever increasing levels of debt or it will collapse.  That people are not borrowing ever increasing amounts of money (i.e. the paradox of thrift) is the primary cause of the global economic problems. 
• With a heart attack you can stimulate the heart and get it to beat again but if the gas tank is empty then spraying starting fluid into the engine will only make the engine run in fits and starts and it will eventually damage the engine by wiping all the oil off the cylinders.
• The fed is not a bottomless pit of free wealth.  There is a limit to how much they can stimulate even if we don't know exactly what that is at this point.  They only have so many cases of starting fluid in reserve.  After they burn through that they are essentially powerless to do anything.  This fact requires them to stop spraying the fluid once in awhile to see if the damned car will actually run on its own.  This is what Galland expects will happen with the end of QE2 - Bernanke will signal that he is stopping the stimulus and then he will observe market behavior.  Galland suspects that markets will take a nose dive because the only reason anyone was in the markets in the first place was because Bernanke was pissing away their buying power via inflation.  He made them get into the gambling pit by debasing the currency.  Thus,  if he stops they they will march right back out because the markets are overvalued given that we have 16% real unemployment, tens of millions are on welfare and food stamps, historically high levels of debt, a big portion of the population entering retirement, etc.
• Gold and silver could see a big pullback if the stock markets collapse.  Remember, the higher level trend is actually deflation because we have many trillions of Wimpy Promises out there and not nearly enough money in existence to pay them off (a point which Bob Prechter made very strongly in his 2002 book, "Conquer The Crash").  The monetary base may have been expanding because of Bernanke but the credit supply is still in a long term downtrend.  Indeed, the reason he has been expanding the monetary base is to try to counteract the effects of collapsing credit on the money supply.  I say that if gold and silver get a big pull back then buy into that action because the dollar is eventually doomed just like all other fiat currencies.  Dollar cost average into gold and silver but if they take a big hit (i.e. 38% pullback) then double down.  If they pull back to the 50% fib, triple down.  If they go back to the 61.8% fib, go all in.
• When Bernanke cuts off the free money and the markets panic, Galland believes Bernanke will again come in with another round of Quantitative Easing.  There is no telling how much of a tantrum Bernanke will allow the markets to throw before re-starting the fiscal pacifier.  I personally suspect that if he waits too long before repacification that it might not work - markets can lose confidence in the fed if they lose too much in the short term.  It's just like a teething baby.  Pull the pacifier out of its mouth and it starts crying.  If you quickly put it right back in then there is a very good chance that the baby will re-pacify and forgive the recent removal.  But if the pacifier stays out long enough and the baby gets whipped up into a full blown tantrum then you can shove that pacifier back in 20 times and the baby will spit it out and just cry harder.  This is truly the best analogy that I can think of to cover my humble view of the situation. 
• The US and other large nation states are "fundamentally bankrupt" and will eventually have no other recourse but to default according to Galland.  Physical gold and silver in your hands (not paper gold or silver of any sort) can never, ever default.  The world will blow up before people look at gold and silver coins and say "they have no value".  Fiat currency, not so much.
• Galland states that US spending and deficits are out of control and, worse yet, politically uncontrollable.  That is a direct indictment of the American people.  Galland is basically saying that even if a politician wanted to do the right thing, the people would not vote for him because they correctly fear that he would pull back the spiked punch bowl and everyone would develop a massive hangover.  Of course, such thinking ignores the fact that your liver is going to fail if you stay drunk continuously and that is a Hell of a lot worse than the worst hangover can possibly be.  Every fiber of my being hopes that Galland is wrong about the American people.  I hold high hopes that Americans will one day wake up en masse and figure out that all wealth held outside of commodities in a fiat currency and fractional reserve banking system is nothing but a Grand Illusion. I hope that as a result of this awakening they will tear that old system down and return to honest money.

Markets operate under the rules of chaos so nobody can say anything will happen for sure or when.  The best observers can only hope to call the overarching trend of the fundamentals correctly (the fundamentals always control the long term outcome) and to anticipate the mood of the herd (the mood of the herd controls the short to medium term behavior of markets).

I will leave you with the observation that I made very early in 2008: Alan Greenspan (architect of the big con) said many times that there is no sustainable recovery until real estate stabilizes.  Smart people will not ignore the con man in chief's advice on this.  According to many analytical sources with great track records (including Meredith Whitney), real estate is still overvalued by at least 20% and has another leg down coming.

Kudos again to John Mauldin for having such a useful free website for people to get the real economic picture that the mainsteam media has been ignoring up for several years now.  Mauldin is one of the good guys IMO.

George Soros: Keep digging the economic grave until the shovel breaks off in your hand...

Business Insider's headline reads "George Soros says The US should take on more debt and not be obsessed with budget cuts".  I personally think Soros is quite intelligent but I question his motives.  Intelligence does not automatically imply integrity.  The US does not need more debt.  It is drowning in debt and unfunded obligations which are really just another form of debt.  So why is Soros suggesting that we should just take on more debt?   

Of course, the good sounding cover story is that if we don't continue piling on the debt then it will lead to recession.  I guess George is willing for us to dig a deeper ditch for tomorrow in order to avoid pain today.  Gee, thanks a lot, György.  Soros himself says that we can currently absorb more debt to keep the economy going (is an economy that needs debt to maintain the status quo a real economy??) but that having too much debt in a recession is called a debt trap.  So it appears that his strategy is for us to continue using debt to goose the economy and then when we can no longer play this game we will have a lot of debt as the economy falls back into a recession.  In other words, Soros appears to be trying to talk us into the perfect setup for a debt trap.

So why would Soros do this?  Well, Soros is a known globalist, someone who believes that having a single overarching world government would solve all the ills of war and conflict, etc.  Soros also knows that individual sovereigns have a lot to lose if they cede control to global super sovereigns.  Because of this, people living a big country like the US are not likely to want to put themselves under the control of some global organization.  The people have to be maneuvered and manipulated into agreeing to something like this and that requires a crisis or multiple crises of some sort.  It requires US leaders and others like Soros to sell the people out.  Thus, it seems, Soros would like the US to spend itself into oblivion in order to create a crisis which would convince the American people to cede its sovereignty to some larger global organization.  Dear Mr. Soros, how do you say "con man" in Esperanto?

Of course, claims that one world government will solve anything are bogus and disingenuous.  They are just more Wimpy Promises.  Look at all the problems the PIIGS have because they joined the EU.   They had to give up control of their own money supplies which made it impossible for them to weasel out of their debts via inflation.  Now, unless they exit the EU, they will be debt slaves to Germany and France.  Soros likes central control because he assumes he will be at the top level of the pyramid, standing on the shoulders of billions of little people below him.  Soros likes central control because he believes it will allow him and his cohorts to treat everyone like debt slaves, serfs, and inferiors.

If this is Soro's goal then I think he is reading far too much sheepleness into the American people.  An awakening is already occurring and it can be seen on all of the social media that is not controlled by corporate interests.  Yes, there are a lot of Americans who have given their lives over to government control.  They believe that they cannot survive without support of the welfare state.  Those are the people who are being targeted by the globalists.  Those are the people to whom promises are being made and against whom threats are being levied.  But there are just too many strong willed independent, freedom loving Americans still standing in order for the Welfare Statists to have their way with ceding American sovereignty and I think the younger generation trends toward independence.  In addition, many of the welfare statists have been promised things which they will indeed not be receiving.  As soon as they don't get what they were promised they are at risk of waking up to the fact that they have been made patsies and fools.  Such a realization will not engender their continued support of the globalist agenda. 

Soros and his ilk might be successful in talking us into spending ourselves into economic oblivion but then we will just start over, still independent, never agreeing to global control.  It's either that or a new American revolution will occur.  In that case who do you think has the advantage: wimpy statists who have ignored their 2nd amendment rights and who have tried to get others to give them up or the rest of us who are literally armed and diligent?  Hint: don't bring sophistry and guile and con games to a gun fight.

Now that it's time to collect, retiring boomers better watch their assets.

For a long time I have been writing that I think allowing someone else to have physical control of your financial assets is just a very bad idea.  My view has been that the US and the world have been building an unsustainable, scam ridden economy based on fiat currency and fractional reserve banking which has resulted in unpayable piles of debt in America and abroad.  Dishonest money leads to dishonest dealings at all levels and every country in the world is now in a race to debase their currencies.  I have conjectured many times that when it all comes tumbling down as it eventually must, possession will again become 9/10ths of the law.  Well, maybe not 9/10ths of the law but certainly 9/10ths of reality. 

If you loan your assets to a bank, for example (something that most people euphemistically call "deposits" or "savings" when in fact it is a loan to the bank so that they can invest it on your behalf), and the bank goes under then you could lose everything.  Of course there is the FDIC to bail you out but the FDIC was insolvent as of August 2009 (did you know that?).  Oh, but the government will just bail the FDIC out, right?  Well, it has been considering that and probably even doing it in some sort of sneaky, off balance sheet way given that banks continue to fail each Friday like clockwork, and this is happening in a recovering economy.  But this whole concept that government is some sort of bottomless pit of money that can never be exhausted is just crazy.  If people stop loaning money to government cheaply and if government cannot tax people more without creating riots and if further money printing is likely to result in hyperinflation, then how is the government going to bail the FDIC out so that the FDIC can bail you out?  What cannot happen will not happen.  Government is not big enough to bail everyone out and so that will not happen.  The first to receive bailouts will get bailed out but after some point the bailouts will stop (just like Nixon had to stop paying gold at the gold window at some point) and everyone after that point will get stiffed.

As long as the shocks remain fairly small, the Ponzi system will continue to appear to work but if the problems continue to grow then past promises might not be worth anything.  When a sitting US Governor is quoted in the national media as saying that past pension promises for public union employees are actually "fairy tale promises" then you simply cannot write that off as rhetoric and a healthy mistrust of government at all levels is highly advised.  Such moves prove that government will say anything it wants in the short term in order to buy votes but if the promises cannot be met then all you can expect is a slap on the back and a government employee telling you "too bad so sad".  If you don't like it then there is a nice warm cot in a FEMA detention camp ready and waiting for you.  We will be told "we all have to chip in to the recovery of America" and "everyone has to take some pain" but the con men at the top won't have to give anything.  Only the sheeplized masses will be doing the giving.

It is because of this line of reasoning that I have been telling people for a long time that any government controlled retirement accounts are nothing but honey traps.  You get sucked in with what appears to be a sweet deal but you find out too late that you were the patsy in the deal.  This latest article from the LA Times is more evidence that I am right.  When government is going to steal from you the first thing it needs to do is to demonize you publicly.  It doesn't matter that all you were doing was following government's own agreed upon rules.  Government is not about doing what comes honestly but rather about what it can get away with.  Government has to show the people who aren't getting the fat deals just how good the people who did take advantage of the programs are making out on their dime.  It has to divide the people and to set them bickering amongst themselves lest the people wake up and figure out that Dem=GOP=scumbag con men.  It has to turn the rule of law on its ear so government hacks can just make up the rules as they go along.  None of this is possible without some degree of social disorder.  Government believes that crises of all types are nothing but opportunities to grab further undue control over the people.

As the LA Times article states, government created the Roth IRA in 1997.  The Roth basically trades off a lot of future tax revenue for a little more tax revenue today.  From the perspective of the individual, it is a mistake by government, a permanent tax shelter, something to take advantage of so you can make out like a bandit.  It was all good and fine to contribute to the Roth since 1997 but now that people are actually on the verge of collecting the advertised benefits, here comes the demonization.  If government can sufficiently demonize Roth participants then it can rewrite the whole deal retroactively in favor of the government just as Chris Christie is doing with public service union contracts and obligations.  Someone has to pay for the massive money scam we allowed ourselves to be drawn into and the only money available to do this is the retirement savings, pensions, etc. of boomers.  We have to expect that this will be heavily targeted for theft by government con men over the next decade.  They have control of those tax deferred accounts, not the people.  Possession will be 9/10ths of the law again because how else can government steal its way out of this mess?

And so goes the honey trap.  For public servants who were promised ridiculously fat retirement benefits it was all well and good until they started trying to collect and, now that they are, the whole program is exposed as a "fairy tale promise".  For Roth investors, their program is a "fiscal Frankenstein" which is robbing the government of much needed tax revenue.  I sense a pattern forming.  The big, dripping fat programs are being demonized and then dismantled first but at the end of the day all the retirement savings programs will come under attack because government never had any intention of paying up.

That's right, I said it.  Anyone who can do math could see that not everyone could get paid what they are owed under these programs (IRAs and 401ks in the stock market, pensions, annuities, any form of deferred retirement compensation).  Government has plenty of bean counters.  They knew that they would end up defaulting on the American people's retirement programs just as the US government defaulted on gold convertibility of the dollar in 1971.  At this point government simply has too much debt and too little income and this is happening at a time of aging demographics as a credit bust plays out.  In other words, it's a perfect storm which will pave the way for legalized government theft of retirement funds through various mechanisms including default and massive inflation (which is actually just another form of default).

If you think about it for a second, government is struggling to remain in operation today and this is before the big wave of boomer retirement has even begun.  The nanny state system is stressed out without any real stress having been applied yet.  What can we expect it will be like in 5-10 years when the bulk of the boomers are in retirement and beginning to get sick more because of aging and are no longer productive to the economy?  In the words of the elite, they will have become "useless eaters".  Maybe we can all just think happy thoughts and immerse ourselves in an aura of bright, new wave mental energy to make it all go away.  Or maybe a big awakening is ahead of us where we finally figure out en masse that government has been conning us since at least the closing of the gold window, and probably all the way back to Ike's presidency.

Iceland tells the rest of Euroland to go fish.

For those who have not been following the Iceland saga, the quick overview is:

• Icelandic con men took over the 3 major banks of that country and worked in collusion with government and its fractional reserve lending scam to get rich quick.  They had nothing in the game (the credit they lent out for interest was created from thin air) and so they leveraged up with basically no oversight from a complicit government.  The whole thing stinks of organized crime to this day.  Very few prosecutions have occurred as a result.
• The scam worked for awhile and the con men got very rich as a result but when the global debt Ponzi began to collapse the ridiculously leveraged Icelandic banks were wiped out early in the process.
• In order to lend out that much money, the banks had to have some form of cash reserves to serve as an "anchor" for all that leveraged gambling.  Those reserves came in the form of deposits from Icelanders and from foreigners.  Bank deposits are not savings contrary to what many people believe but rather loans made to the banks which banks pay interest on (which in many cases includes "free" services like free checking, no ATM fees, etc.).  In reality, nothing is free.  They are investing (gambling with) deposits in order to pay interest on accounts, pay salaries and pay for buildings and infrastructure.  Gambling always carries with it the risk of loss.
• Icelanders put their money into their banks because that's what people have been taught to do.  But foreigners put their money into Icelandic banks because the banks were offering higher interest rates than banks in their own countries.  No doubt there was a lot of money laundering and tax evasion going on there too.   In other words, foreigners wanted higher returns and more anonymity than they could get at home but they completely discounted the risks.
• When the Icelandic banks collapsed, the Icelandic government created money from thin air to pay off its own citizens.  The Icelandic citizens still got screwed in the deal because by the time they got paid the purchasing power of the money had plummeted by more than half.  The Icelandic government paid off its own citizens in order to avoid being hanged in the streets.  But foreigners?  They do not even live in the country so the government deemed it an acceptable risk to stiff them.
• In order to avoid public unrest in their countries, foreign governments made their citizens whole regarding their Icelandic losses and then went after Iceland at the sovereign level to repay.

Today's update article shows us how the drama continues to unfold.  As the article said, the first "offer" for repayment was at 5.5%.  When Icelanders voted that down by a 9 to 1 margin, the foreign losers made more threats and then came back with a 3% repayment offer.  But smart Icelanders again decided that they were not liable for banking losses and so now they have voted that down as well.  Moreover, the Icelandic government is indicating that it won't float another repayment offer to its people on behalf of foreign governments. 

So what now?  Are the creditors going to invade Iceland to get their money back?  No, I think not.  Their only play at getting paid is to starve them of credit and hope that everyone there is too dependent on it to do without it.  In other words, stop giving the credit addicts their drug fix until they agree to lifetime debt slavery.  I don't think this is going to work on Icelanders.  I think they live in an oftentimes inhospitable country and they are used to adversity of many kinds.  It has made them strong.  Also, they have a big ocean with which to catch their own food so they can't be starved into submission either.  I think that if they had to they would quickly get used to living without foreign credit and they would eventually have a stronger economy as a result. 

This is absolutely not what the global credit con men want to happen.  The very thought of it terrifies them.  What if other people were to observe Iceland getting ahead and living better lives by shunning credit?  For this reason I think they cannot and will not allow it to happen.  If people start believing that they can live without credit then the con men will have to get real jobs and they will no longer be able to make a fat living off the global credit scam.  Mark my words: Iceland will not repay and they will only get a tiny slap on the hand from the credit mongers.  Within a year or two the credit will be available again for the very reason that the credit mongers cannot have their addicts kicking the habit - it's just bad for the business.

Iceland may very well end up serving as the model for all other underwater EuroPIIGS.  If Iceland doesn't have to repay then why should anyone else?  The leaders of the EU should just quietly give Iceland the cash to repay the debt so that it will appear as if Iceland caved and paid up.  Their actual debt is small compared to others like Spain.  It would set a good precedent for the other PIIGS to follow.  But regardless of these kinds of tricks, all of the PIIGS will eventually default because they don't have the money to pay.  What cannot be paid will not be paid.  All of the bailouts are just throwing good money after bad so that the statists and con men can remain in charge for a bit longer.

US government avoids shutdown with dramatic budgetary theatrics

In a move that can only be considered by intelligent people to be stalling for time, President Obama and the con men of Congress are claiming victory for avoiding a big, scary government shutdown by agreeing to cut $38 billion from a $3.5 trillion dollar budget.  That means that the $1.3 trillion deficit will remain at about $1.3 trillion once the $38 billion rounding error is factored in.

What a ridiculous joke this was.  It's an insult to Americans and to the rest of the world.  If you don't see this, please consider that in the 6 months leading to June 2011 Ben Bernanke will have printed up $600 billion from thin air and used it to buy treasuries (i.e. to fund government operations).   How can anyone get excited over $38 billion?  Bernanke can print that up as a weekend project or during a layover between flights or during half time at a football game.  Seriously, where is the outrage from thinking people?

Of course we were told that this miniscule, rounding error and noise level budget cut is only the start and they are kicking around numbers that are more like cutting $400 billion per year, every year for the next 10-15 years running.  Why are they not doing $400 billion today?  Why is everything tomorrow?   Perhaps we can derive a clue from other forms of theater.  For example, from the movie, Annie,"So ya' gotta' hang on 'til tomorrow, come what may...  Tomorrow, tomorrow, I love ya' tomorrow, you're only a day away".  Or if you like Popeye better, think of Wimpy promising to pay you that hamburger next Tuesday.  They are promising something that will never happen because making it happen will cause a crisis and the crisis will be an excuse for stopping the austerity measures.

Bottom line, all of this theater is being done to appease people in the US and our creditors across the world so that we can continue spending far more than we take in from taxes.  It's a stall job done by con men.  But what are they stalling for?  What do they hope to gain?  Well, it's hard to say but I think the leading contenders are:

• Hope that science will have some big, Earth shattering breakthrough that will overshadow the debt Ponzi and make people stop caring about it.  For example, if science figures out how to reverse the aging process or if intelligent extraterrestrial life is found or if cold fusion/free energy becomes real.  Whatever it might be, it would have to be truly life changing for everyone for it to matter.
• Hope that Bernanke can sneakily inflate us out of this mess without interest rates skyrocketing which would shut his money creation machine down.  Gold and silver are already telling us that fiat currency is a fraud but if interest rates go back up above 10%, the debt scam is over, period.  In that event we won't even be able to pay the interest on the existing debt.  That's how the markets tell governments that they won't tolerate any more money scams.
• Hope that some other major player stumbles and falls, thus causing a global domino effect melt down.  The powers that be don't care about having a melt down, they simply care about being blamed for it.  So if someone else (like Japan, Euroland, or China) stumbles and crashes in a fiery ball then con men in the US can credibly declare that they had it all under control but they were taken down as part of a unforeseeable global economic collapse that they could not avoid once it got started.  
• Hope that all the irresponsibility and gamesmanship pisses some people off so much that it generates a rise in domestic terrorism so that they can suspend the rule of law, suspend elections, grab all the power and become dictators in the name of saving us from the civil unrest.
• They actually have no hopes.  They are stalling for the sake of stalling.  They are milking the con for as long as the suckers will allow themselves to be conned.  They are collecting salaries and racking up pension benefits for as long as they can.
• Some combination of all of the above.

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