Bank runs in Euroland will lead to bank runs globally

Today Mish reports on an FT article entitled "anatomy of the Eurozone bank run".  It is well worth a read from the standpoint of being yet another confirmation that the global debt Ponzi is just entering the pain stage of its inevitable meltdown.  As you read the article, please pay special attention to the chart which shows money running out of the PIIGS banks and into the German banking system.

To be afraid of having money in the PIIGS banks is good sense but the rapid and exponential rise of cash in the German banking system can only be described as a mania in the making.  Why?  Because Germany is in fact no more solvent than the PIIGS who it exported goods to in order to achieve the appearance of prosperity.  Clearly very few understand this mathematical certainty and so the sheeple are all herding into the German banking system "for safety".  More like out of the frying pan and into the fire.  My view is clearly the minority here but I am quite sure that it is correct because math and history and real Austrian economics side with me.  I think we could possibly be working on a 5th of 3rd wave for this flight into German banks.  If this model analysis is correct, the run will likely have a large, vee shaped pullback followed by one more big thrust before the bottom begins to drop out of confidence in German finances.  As counterintuitive as it might seem, that exponential rise is a sure sign of coming trouble for the German banking system.  It represents too many people with too high of expectations moving into it not because of good economic reasons but rather out of fear.  At some point it will unwind as the herd takes losses as a result of its bad decisions which cause it to rethink and move in another direction.

The second important take away is Mish's correct statements about the fraudulent basis of fractional reserve lending and how it, at the end of the day, is always responsible for the bank runs.  He wrote, "The way to stop runs on the bank is easy enough: stop fractional reserve lending and other fraudulent lending practices." That's right, folks, fractional reserve based lending is nothing more than a fraudulent con game perpetrated by money criminals at the Federal Reserve and other global central banks.  It is a true alchemic something for nothing scheme which feeds on itself as useless bureaucrats and moneymen rise to the top of society based on the art of the grift.  This is in no way an emotional statement but rather a calm recounting of the facts.  If you don't believe it then you are the patsy.  Period.  Fractional reserve lending has gotten the world into unpayable levels of debt and thus they will never be paid.  Default, in some form or fashion, is the only recourse.  It doesn't matter what scumbag politicians say.  It doesn't matter what their Keynesian Kon salesmen from academia say (Paul Krugman, etc.).  They are looking out for themselves and for the fraudulent institution upon which their ability to fund their lifestyles depends.  Without the con they would be mowing lawns and taking out trash for a living because they have no real marketable skills.  They are very intelligent but have spent their whole parasitic lives living off of the backs of the working class.  At this point they should just be jailed for their roles in worst financial crime in history: the collapse of the global economy and the likely bloody aftermath of civil unrest, martial law and perhaps even regional or global war.  Yes, the damage is going to be significant.

Finally, I want to address something that even brilliant minds are still confused about: the notion that there is not enough gold in the system to return to gold backed currency.  I've heard it from engineers, lawyers and laypeople who think they understand how money works.  So here is the truth:

• Gold is just a token.  We could just as easily base our paper currency on Yap money stones.  The key is that the number of them cannot come or go based on the whims of central planners.  Invariably these con men game the system to benefit themselves at the expense of everyone else.  The value of gold is that it takes work, time, risk, physical danger and regulatory hurdles to bring more supply online.  It cannot just be conjured up from thin air.  When the price of gold gets  too high, miners kick up their investments thus eventually increasing the supply (with some years worth of lag; you do not just bring a new mine or even a previously shuttered mine backs up at the snap of a finger).  When the price of gold gets too low to be worth the time, investment risk, personal danger level, cost of mining then miners scale back their operations, lay people off and shutter mines.  Gold as a commodity backing for currency is thus self correcting based on valid Austrian market forces, not based on the whims of bureaucrats who want to take credit (or avoid blame) for the economy (which they have no real long term control over anyhow).
• The amount of gold in the system is irrelevant.  One ounce of it could back the global money supply if that was all the gold that was in the world.  So what if each dollar was only backed by a trillionth of an oz?  Would it really matter?  In fact, would it not make auditing the gold supply much easier?  Of course we could not trade physical gold coins with such a valuation.  We would trade electronic claims on it.  But that's how we want to work anyway: debit cards and Paypal do not trade physical dollars either.  It's all electronic and we are unlikely to go back to physical trade for any extended periods.  It would all but eliminate the global market for consumers.  Nobody is going to send gold coins to China in the hope that their goods might arrive.  But they will send electronic gold with the ability to cancel the payment if the goods are not received.
• There is NOTHING backing the current money supply.  So any increase in commodity backing of the currency will be an infinite improvement over the current situation.  Math, not emotion.  It will indeed be infinitely better from a pure economic standpoint.  Something is infinitely better than nothing.
• What throws people off is the perceived high price of gold when priced in US dollars and other funny money.  In fact, gold is cheap because the central banks which back the funny money are all insolvent and failing in domino fashion.  Not as a result of contagion, simply in the order of their relative strength in the Ponzi.  So what if gold had to go to $20,000 per Troy Oz in order to make it worth enough to cover all the dollars and Euros that have been conjured up out of thin air?  Really, SO WHAT?  It will not matter to the economy.  But it will, as Mish states, clean up the banking system: "Under a full-reserve 100% gold-backed banking system, inflation would be nonexistent and bank failures would be few and scattered." By the way, the very fact that Mish believes in gold backed currency ought to be enough for any thinking, observant person to revisit their own beliefs about the inability to back the global money supply with gold.  Mish has been spot on in calling the housing bubble and just about every market move since I began following him in late 2006.  He absolutely understands how money works.  If you disagree with him it's probably because you don't. I'm not saying people shouldn't have their own opinion but true economics is just math and the math we are talking about here is not theoretical.  It's beyond opinion.  You either understand it or you do not. 1+2 can never = 4 except to someone who doesn't understand math.

Note that none of the above is meant to offend.  It is meant to give cause for thought.  Everyone is ignorant about something!  It is not a crime nor even a character flaw.  It is human and to be expected.  But thinking people will reconsider their views when presented with facts and they will avoid the programmed, emotional response which has been whispered into their ear over the years so that it comes out their mouths in conversation.  We are all programmed by the system to some degree.  Not having a college degree has saved me from exposure to the Keynesian lie in my formative youth.  Thus I can see through that con easily whereas many college educated folks, with econ 101 under their belts and little self study afterward have been infected by academia with a belief in government controlled money despite the fact that it has never worked for very long before.

Mauldin: proving just enough information to miss the point.

I hate to pick on John Mauldin so much because he really is a nice guy.  But when I see a pattern of always shooting behind the duck or of simply missing the point I just have to say something because people such as him with a large readership actually think they know what is going on for having read his work.  Unfortunately, Mauldin has been only partially correct for many years now and, unfortunately, the places where he has been wrong are the most important ones for the average people to know.

Years ago, he was talking about "muddle through".   This belief was that the current economic collapse would be sort of a pain in the a$$ but the world would get by.  He portrayed it as generally annoying, not life changing as it is more likely to eventually become.  That pissed me off because when faced with something that will only be annoying, who will make any real changes or course corrections?  Who will plan ahead?  Very, very few.  But if warned that a massive collapse is mathematically in the cards by someone who had the sheeple's attention, a lot more of them would probably take steps to prepare.

Today Mauldin is out with another set of shoot behind the duck observations and thoughts that he entitled Waving The White Flag.  You will have to subscribe to his email newsletter (free) to read the whole thing.  Apparently he cannot create email lists with any sellable value simply by posting his thoughts to the web, he has to have your email address to do this...  In any case, he now sees Germany to have "capitulated" to the other money printers in Euroland. 

According to Mauldin this capitulation is really the fault of that Italian bastard, Mario Draghi who has control over the Euro printing presses right now, blah blah blah.  I'm not buying it and I never have.  The real winners in the assembly of the EU were France and Germany.  Their manufacturing machines ran short of domestic customers who were willing to buy increasingly large amounts of manufactured goods.  They also ran out of credit worthy foreign customers pre-Euro to export their manufactured goods to.  This is why the EU and the Euro were born.  This and this alone.  It gave France and Germany new customers to export things to because the Euro gave the deadbeat, can't-repay-customer a new way to consume beyond his means.  It gave them credit which they could not have received without having a common currency.  It was supposed to eliminate the ability of the debtors to inflate their own currency as the primary means of dealing with overconsumption of foreign goods. The Euro was nothing more than the mechanism to drive a huge credit bubble that would mostly benefit exporters.

Now that the bubble is going bust, the deadbeats are getting most of the early pain but it will be discovered in the fullness of time that France and Germany are going to collapse as well.  After all, if their prosperity was driven by debt based exports, their collapse is assured when such export sales collapse.  Their desire to keep the Ponzi plate spinning was always self-serving even though they were politically smart enough to make it seem like they were doing God's work in extending more and more credit in order for deadbeat customers to pay off past debts.  That is a debt Ponzi and I was calling it that back in 2008 (to the rolling eyes of friends and family).  Now Mauldin has finally figured out that "Muddle Through" is really "debt Ponzi" but he still doesn't understand the structure or the magnitude of it.

The fact is that the global economy operates on debt based money.  No modern country has any commodity backed currency since the 1971 default on gold convertibility by the US.  The global money supply is based on fiat currency and on top of it rests a mountain of debt driven by fractional reserve banking.  A lot of people think themselves wealthy because they have paper assets but those debt based assets will eventually dissolve back into the nothingness that they were originally conjured from.  Madoff is the model for this.  People still thought themselves rich up until the day he admitted they were actually bankrupt.

All the focus is on Europe now as I predicted it would eventually be back when the US was taking all the original hits for its banking crisis.  At some point Japan will blow up (badly) and China will too (along with the other BRICS).  We are living in one big, global interconnected market that runs on fraudulent, debt based money.  That is a scam.  No scam ever lasted forever and no, it will not be different this time.  Math demands an eventual global collapse although nobody can predict the date or the time or even the speed of collapse.  At the top  of the Ponzi Pyramid sits the all seeing eye of the United States.  Without the ability to finance 1.5+ trillion of operating expenses every year, the US would have collapsed long ago.  The longer we use debt for this purpose, the greater the collapse will eventually be.  By "greater" I mean the larger the number of people will be negatively affected. 

You can see it already in the skyrocketing number of people on welfare, food stamps and, as Mish points out recently, fraudulent disability claims.  At some point the US will be unable to take on debt to fund these payments.  It then have to choose between massive taxation and massive inflation.  Neither of these will work and it will drive massive change in US politics and perhaps even in the structure of the country itself.  Don't forget what happened to the USSR under similar circumstances back in the early 1990s.  The USSR broke up and became Russia and a bunch of x-stahns.  Sounds ridiculous today, right?  Yeah, I know.  So did the breakup of the Eurozone back in 2008 when I suggested that it was a real possibility if not a probability.  Fast forward to today and it is looking like a certainty.

End game for the "investment" banks

Reuters recently reported on a "surprise" loss at JP Morgan of $2 billion. Well, the exact amount and the exact timing might be a surprise but the fact that the massive losses will come and that nobody will see them coming has been predicted in these blog pages for many moons. In fact, it is not a surprise at all but rather a mathematical certainty. The "investment" (can you really call them that?) banks made all their money on high leverage by gaming the credit system. Without the ever-expanding use of credit and without ever more people depositing ever larger sums of money for them to use as reserves against their leveraged bets the banks could never have grown to the monster size they are today. As the credit recedes (and it certainly is doing so globally) and as boomers leave the workforce and start withdrawing from their 401k accounts instead of contributing more, there is no choice but for the aggregate profits of the investment banks to crash and burn. Such is the nature of a debt Ponzi.

The fact that the curve of the Ponzi was exponential in nature on the way up means that it will also collapse at some point in like fashion. Whenever you hear someone with 30 years of finance experience say "we never saw it coming" you can bet that leveraged gambling in the debt Ponzi was the cause. I've written on many occasions that the former rock stars of finance that emerged during the creation of the Ponzi will eventually be left in shame. Names like Greenspan, Jamie Dimon (Demon?), Lloyd "doing God's work" Blankfein, Paul "Nobel Prize" Krugman, Ben "Helicopter" Bernanke and of course Warren "raise my taxes" Buffett will ALL be dragged through the mud big time before the collapse of the fraudulent fiat currency/credit scam collapse plays out.

Here's the minimum of what we can expect to see going forward:

· The european banking system eventually collapses as all of the PIIGS eventually break down into economic depressions. Riots become the norm as countries struggle with the fact that everything they believed to be true about their economic system is discovered to be a lie. Their pensions are worthless. Their bank accounts are worthless. Politicians and bankers are chased in the streets by angry mobs with pitchforks. Lawsuits and jail time for con men occur as the ruling elite sacrifice some of their own in order to appease the public outcry for blood.

· People finally lose their fear of bank collapses and pressure to stop bailing banks makes it politically unacceptable to throw more money at them. As a result many well-known banks around the world collapse, have to be nationalized, etc. The bigger the bank, the more likely it is to be in big trouble. Why? Because they got big by using big leverage in an expanding debt Ponzi. Use of leverage in an expanding money supply (can't tell money from debt in a system of fiat currency and fractional reserve lending) is a sure winner. But it is also the kiss of death once the debt Ponzi peaks and begins to revert to the norm. That is happening right here, right now on a global scale.

· Reduction in quality of service of everything. People who find out their pensions are worthless are likely to seek revenge. Expect theft in the mail system and reduction in service quality such as water and electricity delivery to the home, even cable and Internet service. Providers who have been living off of debt will have to either charge what it really costs or cut corners to cut costs. Raising rates in a never ending recession (or worse) is impossible. So they will cut corners. Smart people will see it coming and take steps to ensure that they have essential things like clean water and required electricity (i.e. for the meat freezer, etc.) when the outages/quality reductions become commonplace.

· Tax collection will go into high gear as governments struggle to maintain their Ponzi-enabled size even though the Ponzi is collapsing. Expect the people to start spending increasing amounts of their time caring about the running of the country whereas in the past nobody cared because it seemed that someone else was handling it well enough.

· Expect increasing shortages of products in growing areas of the country as the US eventually loses the ability to borrow $1.5 trillion per year just to get by. Note: this borrowing is not being done to fix the decaying roads and bridges, etc. It is just being consumed in daily living, supporting able bodied people who have figured out how to scrape by on monthly government "safety net" (aka vote-buying) payments, manipulating our interest rates to be low so that housing prices stay too high so that banks can claim they are solvent when in fact they were bankrupt long ago.

All of these things are essentially assured by the math associated with the collapse of the debt Ponzi. Of course it could also get far worse depending on the mood of the herd. The magnitude of the collapse is already assured. What is not known is how quickly it will play out. The faster the return to the mean, the more dramatic the consequences. A very rapid transition could include the rise of the police state/fascism, martial law, complete collapse of the banking system with hyperinflation (following a massive deflationary depression, of course), widespread rioting and even regional or global war. These things are more than possible given how badly many people will end up having gotten screwed by their own ignorance as con men in government and at the banks took advantage of that ignorance to rip them off.

No matter what happens, keep in mind that all of this is part of the healing process. A credit addict must go through withdrawal just as a heroin addict must go through withdrawal.  The process is very much the same.  Signs of the drug addict’s healing include things like:

·         pushing back from further doses of drugs

·         actually listening to and appreciating the people that love them and who have been trying to guide them and tell them the truth the whole time even when the influence of the drug made them not want to listen.

As for pushing back, well, we’ll have to see if Bernanke the credit pusher shoves QE3 down our throats or if the people’s voices have grown loud enough to make him fear for his own life if he does it.

What about signs that people are beginning to listen to truth tellers whose formerly unpopular but 30 year unwavering message of honesty about the scam being pushed by the credit pushers?  To answer that for yourself, just keep an eye on Ron Paul rallies and his growing number of delegates and the fact that he is starting to win some important states in the contest for Republican candidate nominee to go up against socialist Obama later this year.  People are waking up all over the place as the good times fade into the rear view mirror.  They increasingly understand that the Ponzi is in collapse and that all of the mainstream candidates are bought and paid for by one special interest group or another.  They increasingly realize that Ron Paul is not "whacky" or "quirky" but rather a true Jeffersonian statesman and that he is the only honest presidential candidate since Eisenhower and JFK.  Ron Paul's message is one of financial truth (no matter how unpleasant), the rule of constitutional law, personal freedom and privacy, limited government and of course honest money.  Political change is a given in the US over the coming years.  It is up to we the people to make sure that it goes in the right direction for us.

Gasoline is still quite cheap when priced in real money.

Back when I was in high school, gasoline in Northern California was 65 cents per gallon. I recall this because I used to work at a gas station after school and on weekends pumping gas, checking people's engine oil and doing light mechanic work around the garage. If you had dimes which were minted in 1978 (no silver content) and wanted to pay for gas using those dimes it would take 6.5 of them to buy one gallon of gas. 

Back then, silver was only $5.50 per troy oz so at the time there were still a good number of pre-1965 90% silver dimes floating around in the economy. If someone back then were to have melted down 90% silver dimes and sold the metal to pay for gas, it would have taken about 1.63 of those silver dimes to buy 1 gallon of gas. The calculation for this is simple:

·       90% silver dimes have 2.50 grams of total metal in them consisting of 2.25grams of pure silver mixed with .25 grams of copper.  For this calculation we’ll ignore the value of the copper as it was a small amount of metal and copper was really cheap back then.

·       1 Troy Oz = 31.1 grams.

·       31.1 / 2.25 grams per coin means you have to melt down about 13.82 dimes to recover 1 Troy Oz of pure silver.

·       $5.50 dollars per Troy Oz pure silver / 13.8 coins = $0.398.  In other words, each silver dime was actually worth around 40 cents in 1978 dollars. That means if you melted those dimes down and sold the metal it would take about 1.63 dimes to buy a gallon of gas.

Fast forward to today. Gas is around $3.75/gallon in Texas. It's substantially the same gas as we sold in California back in 1978. In other words, it has not gotten much better and so hedonics cannot explain the difference in price.  Everyone in the media is complaining about the price of gas and even asking politicians to "do something" about it.

However, if you were to pay for gas in silver (i.e. a monetary metal), gas is about the same price today as it was back in 1978!  How so???  Well, the spot price for silver today is $30.35/Troy Oz.  If you divide that by 13.8 silver dimes you get a metal value of $2.19 per dime (again, ignoring the copper value for simplicity).  Again, this is not the collectable value, just the value of the silver metal if you sold it to a metals recycler.  $3.75/2.19 = 1.71.  This means it takes about 1.71 silver dimes today to buy that same gallon of gas that cost 1.63 silver dimes back in 1978.  In fact, over the last several years the price of oil has actually been falling in terms of real money (gold):

So the next time you feel like complaining about the price of gas, please ignore the emotional argument which is replayed time and again by those who are economically ignorant.  Instead, carefully consider the fact which is that gas costs the same as it did 30+ years ago if you pay for it with real money instead of monopoly money that the government and its Federal Reserve have sneakily foisted off on us.  Coincidence??  I think not!  Careful thinking shows that there is nothing wrong with the price of gas! There is only something wrong with the value of the dollar. Asking politicians to "fix" this will only make it worse because they are the ones who messed it up in the first place!

What amazes me is that people seem to "get it" when I show them examples like this and so I then start telling them how they should save for retirement in metals, not paper (fake) money. Their eyes just gloss over. No amount of facts seem to be able to change their minds. They think money metals (gold and silver bullion coins) are "an investment" and a risky one at that!  I'm not talking about rare coins here (I think the rare coin market is a scam), I'm talking about coins minted very recently whose only value is the weight of the metal they contain (AKA "bullion coins"). No matter how badly most people are getting fleeced by the government con men in this deal, they still have blind faith that the scammers have the best interest of the people at heart. Math doesn't seem to matter to people and neither does logic or history. In fact, not only will they not save themselves from the corruption, they look at me as if I'm the crazy one for avoiding paper assets and owning physical metals for retirement...

The lemming style herding behavior is completely in charge. So, as Hans and Franz would say, hear me now and believe me later: at some point there will be a mass awakening of the people to this fiat currency and fractional reserve banking scam. At some point math and logic and history will again matter to people. When they finally wake up from their G-23 Paxilon Hydrochlorate style, fiat currency induced mental slumber they are going to realize just how badly they have been scammed and a significant percentage of them will become as Reavers. Or did you think that Joss Whedon didn't have a social message hidden inside of the plot of his famous Firefly series and movie?