Fractional Reserve Lending is Fraudulent

Ron Paul taught me that the federal reserve is a scam.  It was because of him that I even started researching economics because what he was saying sounded crazy yet it explained so many things. It was during this research which started in early 2007 that I started finding people like Bob Prechter, Peter Schiff, Mike “Mish” Shedlock, Marc Faber, Reggie Middleton, etc. who spoke plainly in common terms with the goal of educating as opposed to Greenspan, Bernanke, politicians and moneymen of all sorts whose actual goal is “the purposeful language of obfuscation” which Alan Greenspan called “fedspeak”.  Read the wiki on this term and if you aren’t a bit pissed off afterward, check your pulse to see if you are really alive.  What’s described is a clear strategy at conning the people by the elite.  Greenspan did not act alone.  He was part of a grand banking conspiracy.  It is no longer a theory folks.   It is more akin to a silent coup.  The bankers own our politicians and they are calling the shots.

I was able to suspend disbelief early and do the initial research because I was not indoctrinated into “the system” in college.  I instead spent those years in the USAF which was more of a school of hard knocks.  It had enough scammers and a$$holes for me to study yet they were unsophisticated enough in their ways that I was able to catch on.  It provided valuable lifelong experience for me.  Contrast that with the con men running the government.  They are well educated, sneaky and generally cover their tracks quite well.  They know every trick devised by man since ancient Egypt to deceive man.  They know how the human mind works and they use it against us.  They know how herding works and again, it is used as a weapon against the individual.  This is why so many people still just don’t (and won’t) get it.

I suspect that few people actually get it even after all that has happened since the crash of 2008.  If you are still unsure what to believe then try this on, a direct quote from Mish:

Fractional Reserve Lending Is Fraud

By lending out more money or gold than exists, asset prices reach unsustainably high levels before they crash. Sound familiar?

Greenspan compounded the problem in 1994 by allowing banks to "sweep" checking accounts (unknown to customers) into savings accounts (via accounting entry).

Savings accounts have no reserve requirements. Effectively, money that people think is in their checking accounts is not really there at all. In fact, it has been lent out multiple times over.

This fact exacerbated the run-on-the-bank problems we saw in 2008. As a side note, FDIC insurance is another form of fraud.

http://globaleconomicanalysis.blogspot.com/2012/07/notes-from-steve-keen-on-lending.html

Do yourself a favor and think about these words very carefully, line by line.  Here’s what I hope you can internalize from it:

·         Fractional reserve lending is indeed fraud.  It is government sponsored, government supported fraud, period.  It is not done without reason; someone is getting rich in the deal but it’s not you.

·         Fraud is crime.  Criminals should be prosecuted.  Apologies and clawbacks are not enough.  Punishments should fit the crime.  Fractional reserve banking has caused mountains of suffering in the USA and even more so abroad.  No serial murderer ever caused so much aggregate suffering.  Few wars have even done so and we are not even in the 4^th inning of this yet.

·         More money has been lent out than exists.  A LOT more.  So much more that it can never be repaid.  Add to that the Ponzi promises of social security, medicare and pensions (which are effectively loans by people to the controlling organization).  Add to that the fact that loans can, are, and will increasingly be dismissed as a result of bankruptcy.  The mathematical result is that a lot of people who think they have something coming to them are not going to receive it.  Plan on it.  Start now or don’t whine later because whining will not fix it.

·         Our banking system is based on fractional reserve lending which is a fraudulent practice.  Fraud is where someone steals your money quietly using guile, deceit, the art of the con, grifter’s tricks and of course sophistry.    In a fraud people don’t know what’s going on, they suspect nothing until it’s too late.  They only become aware when the fraud collapses and it collapses suddenly.  If a very well informed financial person like Mish tells you that you are caught up in someone else’s fraud game, you should listen.  Our banking system is a fraud game.   Don’t leave any more wealth in it than you need to because all fraud eventually is discovered and no con game ever ran indefinitely.  We are in the End Game now.

·         The US Dollar is the creation of our fraudulent federal reserve.  If you have all your assets in dollars you will eventually be defrauded of them.  Nobody can say when and I’m not predicting it will be tomorrow or even next year.  In fact, the dollar might even strengthen from here for a period of time as Euroland collapses, Japan collapses and China hits very hard times and has to print.  In fact, I’m on record many times as saying the dollar would strengthen vs. global currencies as the first stage of the collapse and indeed it has been strengthening as you can see from the UUP ETF chart.  But it is a conviction-less strengthening as can be seen by collapsing volume that has been accompanying the dollar’s rise.  People are only getting into the dollar out of fear, not out of real desire.  This is not the underpinning of a long term trend.   The collapse of the dollar is in the cards somewhere on the horizon.  Math will not be denied.

·         The FDIC will not save you.  The FDIC is another unfunded government promise.  The FDIC is another government fraud. 

·        Physical gold is outside of all this fraud.  It is real and true.  Paper claims on gold held by someone else are not the same as physical gold in your hand, not even close.  At some point everyone will give up on the fraudulent money system and everyone will pile into the only source of wealth that can be trusted: gold (and perhaps some silver if you want to have some additional volatility in your metals portfolio).  Gold price may come down even more as deflation of the fraudulent money supply sets in.  Just dollar cost average into it over time with no leverage and you will be a big winner in the end.  The end must arrive before all of the boomers retire because that will be the maximum load on the fraudulent system.  It is what will cause the collapse (if global bankruptcies don't do it before that).  In other words, this is not some open ended fear factor.  It must occur before the patsies get paid otherwise they weren't patsies.  But we know they won't get paid because they are in a fraudulent monetary system ergo the system must collapse in step with or before the mass retirement of the boomers.  There's still some time left to defend yourself but action is required.

The truth about a gold standard for global currencies

I can't tell you the number of really smart people I know who just don't get the fact that not only is a gold standard possible, some form or fashion of it is actually the most likely eventual outcome.  We have a corrupt global money supply consisting of debt based money along with a corrupt global banking system which is also bankrupt.  It cannot be saved.  It will collapse.  Something must be ready to replace it and it must be something that people can have real confidence it.  Period. Nothing less will be acceptable to those who will lose everything while just being told to start over again from scratch.  They might indeed start over if they were convinced that they would not get screwed by the moneymen again.  But nobody is going to agree to anything without some strong assurances at a time when governments have lost the confidence of the people.  Gold is the only thing that will satisfy this need.

What throws people off the gold standard trail every time is the high price of a 1 Troy Oz. gold coin which currently goes for about $1680 on Monex.com.  The naysayers look at average people and know that they cannot afford to buy very many oz of gold and thus the gold standard is unworkable.  Plus, who buys $1600 items with any regularity?  Very few, that's who.  I've explained to these folks that most transactions will take place for far less than one oz of gold and that all you have to do is create electronic (or paper) "shares" that, as a whole, match up to whatever amount of gold weight is available in the economy at some ratio paper currency units to oz of gold. 

In other words, 10 measly lbs of gold could easily back the entire world's paper currency supply if you set the ratio of real money (gold) to Cheerios box top coupon money (Dollars, Euros, Yen, Rubles, Lire, Francs, etc.) low enough.  For example, if 1 USD were backed by 1 trillionth of an oz of gold then 1 trillion dollars could exist for every oz of gold owned by the US government.  Yes, it really is that simple!  And it would also be a significant upgrade from what we have today which is a fraudulent money supply that is worth literally nothing: 1 trillionth of an Oz of gold per paper currency unit is infinitely better than zero Oz, would you not agree?

Of course, the risk with the use of such small numbers is that gold miners can scrape the gold traces off of their shovels and become millionaires.  A ratio must be picked such that gold miners cannot change the supply dramatically each year.  This is actually quite an easy number to select because the US is supposed to have 8133.5 metric tonnes of gold in its back pocket (2010 figure).  So all you have to do is to determine the number of physical dollars that government wants circulating in the economy and add it to the existing debt on the books and then divide the gold weight by that sum.  Given the amount of debt that needs to be paid back (you would want enough money in the economy to actually pay all debts, public and private, should the desire to do so arise).  It would probably come out to $10,000-$15,000 per Troy Oz. 

If the government is lying about owning that much gold, the dollar price per Oz could be much higher.  At the end of the day, it doesn't really matter what the price of gold is because everything else will adjust in price automatically.  If gold becomes 5x more expensive in dollar terms, expect gas, food, energy, health care and eventually salaries to follow suit.  Ever been to Japan or Taiwan?  Stuff in their markets always costs thousands of Yen and NT respectively.  The price of items will adjust automatically based on how diluted the currency is relative to production.  The absolute numbers are immaterial; actual purchasing power is what determines whether or not you are wealthy.  1 USD=1165 Korean Won.  Does it bother you if lunch costs 5 thousand Won?  It shouldn't because your salary will be a large number of Won as well. 

To underscore my point, please consider that Switzerland is now discussing a new "gold" coin that would be a parallel currency to the Swiss Franc which it seems to be selling down the river by tying it to the dying Euro.  Of course, the Franc is just fiat currency and therefore has an intrinsic worth of zero.  Eventually it will be worth exactly that and the quicker the people are given better alternatives, the quicker they will abandon the money that is worth nothing and which is tied to the dying Euro in favor of currency that has at least calculable and historical value based upon some guaranteed content of real gold.

So how are they doing this?  Backing a paper note with some known quantity of real, existing gold is one thing.  But then you have to trust whoever is auditing the gold and trust in governments is running very short these days.  You could also issue pure gold coins of very small size but who wants to deal with gold coins the size of a shirt button or even the size of a grain of rice?  The answer is beyond simple: you don't have to.  Simply mix a known quantity of gold into a big vat with a known quantity of lesser metals at some known ratio and use this diluted mixture to stamp out coins from.

And so that is what the Swiss are considering.  Read for yourself!.  As to the dilution level, the article states, "A single new gold franc, on the other hand -- with a gold content of 0.1 grams -- could be purchased for just 5 francs (at current prices), which would, in theory, make the metal more widely owned throughout the population. That could lead it to become a medium of exchange as is the case in several U.S. states, where gold has become legal tender."  Since 5 Swiss Francs currently trade for about 5.25 USD, the new coins would value 1/10th of a gram of gold at $5.25.  1 gram of gold therefore would be worth $52.20.  Since there are 31.103 grams in a Troy Oz, this new coin would value 1 Troy Oz of pure gold at $52.20*31.103 or $1632.91.  The fact that this is a few percent cheaper than the price of a pure gold coin today would make such coins a very popular option for initial introduction. 

But more importantly, gold-content coins do not require anyone to trust the government.  It would be ridiculously easy to audit coins in the money supply without the government's knowledge or blessing.  If you ever found them cheating on their promise you could sue them or simply write them off as not serious about supporting honest money.  The fact that you actually have the gold in your hand means you don't have to take government's word for anything.

At the end of the day, people are going to find that gold-content coins and audited gold standards for paper money are not only not impossible, they will instead become the savior of the global economy.  Or maybe there will be world war 3 first and THEN gold becomes money again in the aftermath.  But sooner or later, expect gold to be part of the money supply because, as JP Morgan once said, "Gold is money and everything else is not".

Debt Ponzi Meltdown Snapshot and Gold Chart

This post is a summary of the state of the growing collapse of the global debt Ponzi.  First off, if you have any misconceptions that a soft landing is even remotely possible, abandon them right now.  Childish views of reality do not change reality.  Get through Kubler-Ross quickly.  Get to the acceptance state as soon as you can.  Just avoid the shock, anger, pleading, etc. if possible.  It won't change anything and will only distract you from doing the right thing for yourself and your family.

The facts are exactly as I have laid them out many times on this blog and in private emails to friends and family:

• We the people of the world stupidly let con men get in charge of our money supply.  They corrupted it for their own purposes.  Some of them might have believed they were doing good but most were just in it to win it for themselves.  They were and are greedy bastards; con men and grifters.  Much of what they did wasn't even illegal per se even though it was all immoral.  But the real culprit here is that we gave over control of something very important to us-the soundness and honesty of our money supply.  We should have known that handing keys to the henhouse to a group of foxes will lead to slaughter.  It's in their nature.  They can't really help themselves. 
• The result of decades of neglect regarding this matter is that these con men have created a global debt Ponzi the likes of which the world has never seen.  It is beyond the imagination of man.  Can you imagine a number as big as 1.2 quadrillion dollars?  No, I don't think you can because I have been working hard at it for years and still cannot really fathom it.  But that is the size of the unregulated derivative exposure out there.  In short, all the big banks are leveraged up to their eyeballs trying to fleece suckers out of their money.  But the suckers are in short supply now and the markets are mostly high frequency traders battling it out.  They are hollow.  The recent flash crash was proof of just how hollow.  They are as rotten wood, termite-eaten right up to the paint.  It still looks like wood but you can poke your finger into it at will.  It is a shadow of its former self propped up by regulatory forbearance and lies.
• The initial collapse of 2008 was just the beginning.  The strong players like the US rushed in to prop it all up with money printing and promises.  Bernanke threw the kitchen sink at the deflationary forces.  But it was only a short reprieve.  Gold reacted to his efforts by skyrocketing.  Now the next wave down is happening: the EU is crashing.  It will start with the PIIGS but France and Germany will fall into the black hole quickly enough.  The jig is up.  The scam is bust.  Everyone is finally more worried about return of their capital than return on their capital.
• We don't feel it badly in the US right now.  Unemployment is somewhere between 8 and 15% based on how you count (or obscure) the unemployment data.  The US government is in the propaganda business now, telling the people what it thinks they need to hear in order to not panic, in order to not leave the Ponzi all at once.  They are even trying to make it legal (this has not been an impediment to them to date).  The smart money is already heading for the door.  The herd will get very nervous once the EU begins to collapse.  Expect a breakup of that little scam and the rise of border guards, nationalism, protectionism and trade sanctions if not regional war as those people try to get what they think is owed them.  Spain and Greece are in outright depressions, every bit as bad or worse than conditions experienced during the Great Depression.  The rest of the EU will follow and the rest of the world will not be far behind.  The debt based global economy can, will and must implode because debt based money is a scam and it always was a scam.
• The Japanese Topix stock market index (think of it like the Japanese version of our S+P 500 except broader with 1669 public companies represented) is now at a 28 year low.  Yes, that's right, Twenty Eight Year Low.  Anyone who put a dime into that scam in the last 28 freaking years is underwater in nominal terms and of course they have gotten wiped out in inflation adjusted terms.  In fact, Japan is a failing, bankrupt state.  Their debt:gdp of 220% is far worse than any of the EU PIIGS.  Idiots like Bloomberg concede that they have this debt but then go on to explain how it is still a wealthy country, blah blah blah.  It is more of the same tactic of admitting a little truth and then working to calm the herd with a lot of double talk.  Japan's paper wealth will collapse as soon as people begin demanding higher interest for government bonds.  This is coming sure as sunrise but everyone discounts it.  Except of course, near genius types like Mish who rarely gets anything wrong and when he is wrong he admits and corrects quickly.  Mish sees the continuous credit downgrading of Japan, knows it will eventually drive higher interest rates on government bonds which will lead to collapse and sudden panic.  Read for yourself.  Mish wrote, "... if exports collapse or interest rates rise significantly for any reason, the party will be immediately over.  Bear in mind that "significantly" means a mere hike in the 10-year rate to 2.5% or so, perhaps less. Such a hike would consume 100% of Japan's revenues just to meet interest on the national debt."  Are you getting that?  A rise of interest rates to just a stinking 2.5% on their 10 year bond means economic Armageddon for Japan.  This is math my friends, not emotion.  Everyone will do well to grok this just as soon as possible.  When Japan rolls over, and it must, I think the rest of the world follows quickly.
• China is one big stinking mass of corrupt real estate debt.  It is so bad that I don't have time or words to describe.  It is so bad that the sheer magnitude of it stops people from seeing it.  The lie, the fraud, the corruption is so big, so widespread that nobody can actually get their arms around it.  An economic collapse is certain there and when it picks up speed it will suck Australia and Canada down with it because their recent wealth is mainly based on selling commodities to China.  The crash is already well underway.  It is like watching the twin towers fall.  It takes some time to play out.  It takes time for the smoke and dust to clear.  What is left afterward will be a pile of economic rubble.  It will throw China into a depression.  Expect massive civil unrest there as the core elite protect themselves and throw the peasants to the wolves.
• The final piece to fall will be the US. The US is at the top of the debt Ponzi; the Eye of Horus looking down upon the world from on high.  There have always been financial con men but the financial criminals that have been running the US for the last 5 decades have turned the art of the money con into a global art form.  They control the debt based global reserve currency and use threat of military force to keep the world in line under it.  We basically took the world down this path with Bretton Woods and then the subsequent abandonment of dollar-gold convertibility cemented our future.  Things will get very bad in the US but not as bad as in many places elsewhere. 
• The real question will be is what happens when bankrupt states like California try to pay its ridiculously generous public pensions with "loans" or grants from the Federal Reserve or the national treasury thus effectively making everyone in the country pay for their profligate, liberal left coast ways.  I can tell you now: it will NOT be pretty.  More conservative people living in the likes of Texas, etc. will tell NY and CA to solve their own problems.  It will get ugly and it will get personal.  Political correctness will be out the door.  If forced to pay for others, there is a nonzero chance that some states will decide that involvement in the union has worn out its benefits.  Think it's funny just because it hasn't happened yet?  Tell it to the USSR which is now Russia and a bunch of X-stahns.  It's not funny, it's a real possibility.

I'll finish today with a picture of the GLD chart.  Looks to me like 4th wave consolidation is nearly ended and I expect another big move up to a higher high as people around the world start looking for safe havens for their stored wealth.  One by one they are waking up to the fact that the only real safe haven is gold.  The words of JP Morgan are still true: "Gold is money and everything else is not."  Real money is not a risk asset and as governments themselves begin to collapse people will begin to realize that governments are just people, people are corrupt and you want to get away from corrupt people in any way possible during a global crisis like this.  If you buy land then you are a sitting duck for the tax man.  If you invest in paper assets you will wake up one day and find yourself Madoffed in some form or fashion.  The only 100% safe play is physical gold in your hand.  Everything else represents some sort of a default-able promise.  At some point there will be a massive demand for physical gold which will bring down the metals markets (which are basically trading mostly paper promises for metals).  When people figure out that there is no real gold behind the promises, the real thing will rise to its true value.
I don't advocate market timing with gold.  It is for savings, not for gambling.  Just keep buying a little bit each quarter and save it as you would save in your 401k.  By the time you retire you will not be worrying about what the government might or might not do with your retirement funds.  Your funds will be in real money held outside of the corrupt fiat money system.  Still, it is interesting to me to watch the ebb and flow of gold's dollar based price as the global debt Ponzi works through its inevitable collapse.  I like to use Elliott waves for this.  While it is not yet confirmed by the chart data, I suggest that the fundamentals will probably drive gold up into a very strong 5th wave move from here.  Silver, being poor man's gold and thus more prone to more panic based movements, will probably be even more dramatic.

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?