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?

The Remonification of Gold.

I've written many times that the remonification of gold would be a given.  Look through my past posts and you will even see some of the signs that I believed we would see that would be important proof points that it is happening.   Recently, Jim Sinclair pointed out that a huge sign is happening right here, right now (as Jim likes to say), and it is taking the form of China paying for Iranian oil using gold.

It's no secret to say that the US has it in for Iran.  Part of the reason is probably the stated reason: fear of what Iran might do with an atomic bomb.  Or maybe it is just fear that Iran might be able to defend itself from illegal attacks by big militaries like that of the US or a US led coalition.  Truth is, we do have a reputation of shooting first and asking questions later in that region.  Some of it probably has to do with the fact that war is good business for scum bags and con men and the world is running out of countries to attack without the US being publicy thought of as a hotbed of war criminals.  Perhaps a bigger part of it than most people understand is that Iran is calling BS on the US dollar with its Iranian Oil Bourse which will accept payment for oil in anything EXCEPT US dollars.  Such things are not good for the USA's monopoly on monopoly money...

Whatever the reason, the US has led the economic sanctions against Iran using the excuse that Iran is trying to build a nuclear weapon.  The fact that Israel's top general is on the recent record saying an Iranian bomb is not a credible threat really doesn't seem to matter much.  The Bush-bama war mongering machine will never be satisfied until they get to kill more people and take more things that don't belong to them.  The first step, of course, is to use economic sanctions in order to starve the people into overthrowing their own government.  If this doesn't work then of course, the tanks will roll.

One aspect of the economic sanctions is to not allow Iran to clear any international payments made to it using the so called SWIFT system.  SWIFT is an acronym for the Society for Worldwide Interbank Financial Telecommunication.  In other words, it is an electronic money clearing house for international trade.  Think of it as PayPal for countries.  The US got SWIFT to kick out Iran's banks as part of the sanctions.  This leaves no easy way for other nations to pay for Iranian oil.  The US basically told Iran, "It's our money system and you can no longer play in it.  Go starve.  Go collapse.  Go whatever as long as it is away."

The arrogance of this action is obvious.  The US believes it can push everyone around, foreign and domestic.  But as is often the case, the law of unintended consequences is raising its head and tossing Iran out of SWIFT is having very important but unintended consequences.  You see, China is a major purchaser of Iranian oil and China is really not against Iran having nuclear weapons.  China knows that if Iran launches one weapon against China that China will obliterate the whole country in nuclear rain.  In other words, Iran cannot be a real threat to China (or to Russia or to the US for that matter).  China does not intend to stop buying Iranian oil just because the US said so.  But SWIFT payments no longer work so now China has taken to paying for Iranian oil using gold.  Doop!

As I have written many times, physical gold lives outside of the debt Ponzi.  It is real money, controlled by nobody.  This is why the Ponzi operators hate gold and call any gold standard a "barbarous relic".  Those who trade for goods using physical metal are beyond taxation, beyond sanctions, beyond the control of the evil bastards who are running the global Debt Ponzi.  Gold is money whether or not the US likes it and China is proving that right now by trading gold for Iranian oil.

This has got to be pissing a lot of self-important D.C. bureaucrats off big time.  First of all, China didn't vote for the sanctions so this is not a matter of "cheating".  Second, China is too important to the US to effectively start a trade war with.  China would be hurt but it would wake a lot of sleepy American sheeple up from their slumber if it caused store shelves that used to be full of low cost Chinese goods to suddenly go empty.  A trade war would certainly impact American quality of life in a negative manner.  And it's a way of life we aren't even working for - we just finance it all with debt that we have zero intention of ever paying back.  Messing up that scam will not be politically healthy for con men and politicians should they take on China.

Finally, Iran receiving gold for oil means they need to spend gold in order to run their oil operations.  It's not all pure profit you know.  There are expenses.  If Iran is getting paid in gold it has to be paying others in gold.  That means those people are not getting paid in dollars like the US wants them to.  It proliferates gold into the global economy as a means of exchange, a store of wealth and a unit of accounting.  If this goes on, then companies who have been indirectly supplying Iran with oil mining materials (many of which live in the USA) will start showing gold on their books as assets.  This action is actually speeding up the global remonification of gold even though I suspect that a big reason for doing the sanctions in the first place was to punish Iran for trying to abandon the dollar in it oil sales operations.

Iran is definitely getting the better end of this deal!  The US has suppressed gold prices which means China is paying a lot more gold to Iran than it would otherwise have to in exchange for oil.  This is pushing more gold into Iran and thus into the global trade than it would have done if gold was allowed to rise to a natural price of perhaps $3500-$5k per troy oz.  The US better be very careful about next steps.   Everything Sinclair stated in his article is true.  The past gold price suppression has left the physical gold supply much lower than it should be today.  Any sort of global shock that involves gold (i.e. the need for Iran to rapidly fund a war) could actually cause gold prices to skyrocket.  This alone would wreck more havoc upon the US economy than anything Iran could ever hope to achieve militarily even if it had a nuke!  Rapidly rising metals prices have always been a signal to the people that confidence is being lost in the fiat currency.  If the US isn't careful it could in fact start a stampede out of the USD with its continued economic attacks on Iran.

Global credit is crashing. Markets will likely follow.

Mish is reporting on the most important economic data in the world today while sleepy sheeple are kept in the dark by the completely useless news at Google, Yahoo and Bing.   While it may not be as easy to understand as Lindsay Lohan's new role playing Liz Taylor, the fact that global credit is collapsing at a staggering rate is completely understood by anyone who knows how money works and who understands the eventual result if this continues.

First, please understand that the importance of this is directly tied to the fact that our money supply has no real money in it.  It consists completely of debt.  The dollar, the Euro, the Yen: all debt notes.  The US started the world down this fraudulent path in 1913 with the creation of the Federal Reserve and then sealed the world's fate in 1971 when Nixon defaulted on gold convertibility of the dollar.  Since then, all paper money in the world has had no backing whatsoever.  You might just as well call it "faith money" as fiat currency.  Another word for faith is "con".  As in con game.  More to the point, a global debt Ponzi scheme.

Once the value (i.e. the work needed to create new money into the economy) was removed from the currency then it was not difficult to game the system by creating seemingly unlimited amounts of credit in that system.  After all, if debts go bad in such a system, just print up new money, right?  Well the truth is that you don't even have to do that!  You simply change the rules to allow more loans on top of the reserve cash you already have.  So instead of loans being backed by 50% in cash reserves or even 10% cash reserves, they are backed by 3%.  In other words, leverage is increased by those who have been given special permission to create credit (i.e. the banks).  If asset prices drop by as little as 3% for many big bankers, all of their assets (and the assets of the people who stored their money with them) are wiped out.  If you don't understand this leverage, read up on Bear Stearns. As all of this was happening, the global money supply expanded mainly because of the expansion of credit, not primarily because of the expansion of actual money (aka the monetary base).  But the markets can't tell the difference between money conjured into existence by the Federal Reserve and credit conjured into existence by banks in the Federal Reserve system and so prices are pushed up across the board by the exploding credit supply.  Over time, credit becomes the major component of the global money supply.

Unfortunately for the con men running this scam, what looked initially like a "free money", "can't lose" scenario for them was actually a "guaranteed to blow up in your face eventually" scenario from the very start.  There are two reasons no con ever lasted (or will ever last) forever.  Either the con men wipe out all the patsies and there is nobody left to try to con (except other con men) or the patsies wake up, smell the con and run away.  In the case of the former, the patsies wish they could still play but they have been fleeced.  The casino has all their money and so they are out of the game not by choice but by circumstance.  As for the remaining players,  well,  you can't con a con.  So if all that are left in the game are con men then the con is ripe for collapse.  The con men will take to infighting, trying to run the con on each other, etc.  Equally matched, nobody can make further gains despite hundreds of millions invested in attempting to do so.  So they either go to war or they give up and go do something else.  In the case of the latter, the patsies have had enough.  They have gotten pounded and now they are afraid of losing everything to the scam.  So they are hunkering down.  They are saving instead of spending and what they do buy, they buy with cash. 

In either case, the credit / debt supply of the world begins to reverse course and with it the money supply contracts.  Governments try to counteract this deflation by printing up money from thin air but they have to be very careful because after a certain point the people realize that the government knows no constraints on money printing.  When the people finally realize this they run away from the scam of fiat currency itself.  This is what Ben Bernanke fears right now.  He sees the rising prices of gold and silver and he knows that the smart, educated money is taking this time to build a large store of wealth outside of the fraudulent paper money system.  He is monitoring gold purchases very carefully and trying to keep gold prices from going wild.  Unfortunately for him, China and others know that Ben's QEx efforts are screwing them out of the wealth that they have stored in USD denominated assets.  As a result, each time Ben and friends drive the price of gold lower, China and friends buy more of it on the cheap.

Ben knows the golden rule is still true: at the end of the day, he who has the gold makes the rules.  This is because educated people know that gold is money and everything else is credit.  Credit can be defaulted on but money cannot.  If Ben keeps trying to drive gold lower while at the same time printing more funny money dollars from thin air then China will build up a gold stash to rival the U.S. and what will follow is the rise of China as a world leader.  Not just as a place to buy low cost, high quality goods but as a global power that actually sets policy, wins disputes over lands and natural resources and other sovereign claims.  Elements of Chinese law would become global law.  Elements of Chinese culture would become global culture.  Chinese military power would settle arguments the way US military power does today.  In other words, the very concept of western dominance of the future of the world is at stake here.  Perhaps 1 in 1000 have even a clue about this but it is the story that has been told and retold throughout human history: he who has the gold makes the rules.

Because of this, Bernanke is being very careful about announcing any further stimulus.  It may just be that he thinks that if he announces QE3 then it will be the straw that broke the camel's back.  Many things Bernanke is saying lately tell me that he is fearful that such a move would drive so many people out of his funny money and into physical metals that he and his cohorts will not have the means to suppress the price of gold anymore.  If he allows that to happen, the gold price will skyrocket and the currency will crash.

At the same time, if he doesn't continue printing money to make up for the falling credit and debt supply then the overarching money supply will massively contract and there will be a greater depression globally than the world saw during 1929 and following years.  Without intervention, the math of the current system demands that deflation occur.   But, if the people stop trusting the current system and abandon it at the herd level then the historical result is hyperinflation.  I can't tell you how few people understand this delicate dynamic.  It means that very few people are factoring in the risks that are in play today.  I say again, deflationary depression is what will happen if Bernanke goes laissez faire on the system like he should do but that hyperinflation could rapidly result if he continues printing money or if Congress takes over the responsibilities of the Federal Reserve.  If Congress ever takes over control of the money supply, that's it, game over, hyperinflation is assured.

The above paragraph will confuse many and so I want to say some final words about it.  The main question from people will be how can we go from deflation to hyperinflation at the drop of a pin?  How can the whole thing possibly rest on a knife edge like that?  It is the basic lack of understanding about debt based money which makes people ask such a question.  So here is the answer: the money in your wallet, in your bank account, and in your 401k has no inherent worth.  Why?  Because it took no work for the issuers of it to conjure it up in the first place.  In the case of bank accounts and 401ks, nobody has even bothered to print up most of the paper bills to back it.  It's all just numbers in a computers.  Once the act of money creation is separated from the act of working to bring it into existence, the money is inherently worthless.  I didn't say that you didn't work to get it and I didn't say that other people won't still accept it in trade (key word: "still").  I said that the owner of the money supply, the Federal Reserve, didn't work or even collect taxes on your labor in order to get the money in the first place.  This did not used to be the case when the USD was gold and silver backed but that ended long ago.  So today, the only thing and I mean the ONLY thing that gives your US dollars any purchasing power in the market is faith and confidence.  If the faith and confidence in the issuing authority of fiat currency collapses, so will the purchasing power of the currency it issues.  Again, this is history talking.  It cannot be argued.  It is what it is.

As you can see, there is a lot more at stake here than the price of gas or US employment numbers.

Bill Black: Our System's Fraud is Mathematically Guaranteed

I've referenced Chris Martenson several times in past posts but he probably deserved more of my attention because he really does "get it".  I'm sure he will get more of my attention going forward.  Today I want to point out his recent interview of Bill Black.  Bill Black was a lead regulator in investigating the 1980's banking crisis.  His Wiki entry is well worth a read.  Bill's concept of Control Fraud closely matches what I have been writing about for years: governments get in place initially to serve the people but over time they start looking out for themselves.  They begin to treat the people like chattel; property; a renewable resource to be harvested.  In order to do this, they, over time, systemically remove any safeties that limit their power grab.  They create more and more restrictive laws and they enforce them selectively.  If you are not a friend then you are an enemy and you are probably breaking some law.  At the end of the day everyone can probably be convicted of some felony. They hollow out the money supply and begin to run Debt Ponzis.  They reduce individual rights and freedoms all the while explaining how it is being done for the greater good, blah, blah, blah.

The reason that the United States became great over the past 200+ years was that people were free to work hard and to keep what they worked for.  Without extensive "social nets" or a nanny state, people just did the right and sensible thing in order to maintain themselves.  They did it because it was in their own selfish, self-serving interest to do so.  They did it in acknowledgement of the fact that it is the nature of man to be selfish and to look out for #1. With everyone working in their own best interest, GROUP productivity was high and GROUP prosperity followed. 

Unfortunately, not all people are created equal.  Some are smarter, some are natural leaders, some are physically stronger, some are harder workers and some are better looking.  In the past, people would take stock of their God given gifts and make the best of them.  Unfortunately, some people apparently have little to offer.  They are weak, stupid, ugly, boring, lazy, crippled, etc.  They either have to work extra hard within their God-given constraints to add value to society or they will not do well in life.  Steven Hawking is the  poster child for this.  He worked hard to overcome his God-given constraints.  He proved that his apparent disability did not stop him from contributing.  He did not need to be coddled.  This is the natural order of things: no free rides, period.  It is not a happy thing that this is the case but it cannot be denied and it cannot be changed by government mandates and "programs".  People must remain in charge of their own lives or society will eventually crumble and collapse.  When government tries to remain relevant by stepping in and controlling people's lives, it defies nature.

When Dubai created massive islands in the shape of world continents I laughed out loud and told my wife that if the ocean didn't put them there then they would not be there for very long.  Today those multimillion dollar islands are sinking back into the sea.  It is just ridiculous to do things that are so out of synch with nature because nature never sleeps.  Thus, the maintenance of these things begins to require unlimited resources.  In the end they collapse because nobody has limitless resources to maintain things.  This is the problem with big government and the nanny state, especially when such governments have access to seemingly endless amounts of credit.  It creates unnatural situations that are in government's own interest to perpetuate (bigger government) while being completely against the nature of man which is to profit from his own labor and to live in freedom and privacy while pursuing one's own view of happiness.  At some point the ability to take on more debt collapses and all of the artificial things that government was paying for using debt collapse as well.

For its first 200 years, the United States was the engine of global progress because our government was relatively new.  It had not had time to become infested with self serving bastards who actually think public money is their own piggy bank.  But now the whole damned thing is one big corrupt mess.  When some organization like the GSA gets caught partying too hard, the rest of the government slaps it down in a public show, but this is all just theater.  The real con men running the government are stealing billions through Control Fraud all the while convincing ignorant citizens that it's all for the better.  The fact that all of this fraud is being "paid for" with mounting debt seems to mean little to most people.  The fact that many cities and states are bankrupt also seems to have escaped people's attention.

Folks, it's time to revert to the natural order of things gracefully before an un-orderly reversion to the mean occurs simply because there is no other choice.  We need to honor hard working producers and reward them by letting them keep more of what they earned instead of uplifting people who have given up on the natural daily battle for existence and prosperity in favor of receiving government assistance.  Handouts for every special interest are now just assumed.  Nobody cares who pays for these but if you ask the proponents of them to bear the cost for their own special interest they would not like it and they will not pay it.  They shamefully want all of us to share their special interest.  They want to use rule of taxation laws to force us to participate in supporting their socialistic ideals even though history has shown time and again that they don't work.  They want to steal the profits of our work and redirect it for their own purposes.  The historical term for this is slavery.

Sorry folks, I have my own charities that I contribute to.  I don't want to contribute to yours and I'm not trying to demand that you contribute to mine.  When I see an able bodied homeless man on the street corner begging for cash I want to get out of my truck and give him a medicinal back hand and tell him to go get a fraking job - any job - just like the rest of us.  I don't care what their hard luck story is.  They are walking around just fine so they can work instead of begging.  When I see people asking for free needles for drug addicts, free condoms for children, free ANYTHING, it makes my blood boil.  Nothing is free.  Making anything free to some people is simply wealth transfer from other hard working people.  It is a form of theft.  History shows very clearly that all it does in aggregate is to encourage people to ask for more free stuff.  Government does this because it is playing on people's desires to receive something-for-nothing.  In other words, government is playing the nature of man against the citizens it is supposed to be representing.  It does this to the detriment of society for the sole purpose of buying votes so that useless bureaucrats can remain in power.

Along these same lines, I'm very sorry that it is the nature of man to grow old and to die. It is very unfortunate that we were not designed to live forever.  But it is the natural order of things and we all have to come to grips with it.  Creating a socialized medical system that promises old people unending medical care at exponential cost to be borne by the working class is mathematically unworkable.  It is a vote-buying scam propagated by politicians in order to stay in power.  If allowed to occur it will mean yet another burden on the working class to pay for something that will not be there for them when they get old. 

Social Security is the same thing: it is already bankrupt and all social security payments being made today are only possible because of the United States' ability to take on more debt.  This cannot last forever.  Someday people will recognize that we cannot pay our debt and indeed have no plans to do so.  At that point interest rates will skyrocket like they did in Greece and are now doing in Spain and Italy.  That is when people will be told that the programs they have been paying into all their lives must be abandoned.  That is when fools who have been supporting the nanny state will finally realize the actual degree of their ignorance and foolishness.  That is when people will finally figure out that government has been running a Debt Ponzi.