Investment Rarities Incorporated
History |  Q & A  |  Endorsements  |  Portfolios  | Flatware | Gold Coins  |  Silver Coins  |  Contact |  Home

Products

Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

..Read More »

The Best of Jim Cook Archive

 
Best of Bill Buckler
June 30, 2010
archive print

“Inflation Is Likely To Be Subdued For Some Time”:

On June 22-23, the Fed’s FOMC got together for what was widely expected to be their most “boring” meeting in years. “There’s nothing they can do”, went the refrain, “so they won’t do anything”. Of course, the Fed didn’t do anything. The Fed funds rate remained at the 0.00-0.25 percent level it had been set at in December 2008. The press release put out was almost, but not quite, a word for word rehash of the one was put out at the last FOMC meeting on April 27-28.

The headline above is taken from that FOMC press release. The phrase which precedes it is the one which is relevant - “With ...longer term inflation expectations stable.” The problem the Fed now faces is that outside the US, “longer term inflation expectations” are no longer stable. If they were, Europe, the UK, Japan, China and most of the rest of the world would not be taking the first steps towards getting the black holes where their “budgets” used to be back in some kind of “balance”. 

Inflation on a global basis over the course of the GFC to date has accelerated at a global pace which has no historical precedent. Government has borrowed new money into existence at a pace never before approached. The reason why all this new money has not been reflected in higher prices is because even this huge orgy of government borrowing and spending has NOT been enough to counteract the fall in collateral values underpinning existing debt and the refusal of the private sector to lend or borrow.

Every government, even the US government, has acknowledged that the build up of government debt is “unsustainable”. But now, only the US amongst the nations which really matter are still sustaining it.

The Descent Into Monetary Chaos:

The global era of fiat and floating currencies is now more than 40 years old. It is true that the final act divorcing the world’s reserve currency - the US Dollar - from Gold took place in August 1971. But the real damage had been done in 1968. In March 1968, the final global attempt to hold Gold to its mandated ratio of $US 35 per ounce failed with the folding of the London Gold Pool. Later on in 1968, the US Congress eliminated the requirement that the Fed hold “Gold Certificates” equal to at least 25 percent of the value of all Federal Reserve notes. What President Nixon did in 1971 was to put the final “seal” on the process and to cut off foreign holders of US Dollars from redeeming them for Gold.

Forty years is a long time in history. Go back to the period between 1910 and 1950. In 1910, Great Britain was the richest nation with the most extensive empire the world had ever seen. It also controlled the world’s “reserve currency” of the day which WAS backed by Gold. By 1950, Britain was financially and economically prostrate, had removed the link between her currency and Gold (in 1931) and had watched helplessly as the role of the world’s reserve currency passed to the US Dollar.
In 1950, the US was richer in comparative terms than Britain had been in 1910. Twenty years later in 1970, the US government had done exactly what the British government did between 1910 and 1930. It borrowed and spent its way into bankruptcy. Britain repudiated its currency’s link to Gold in 1931. The US did the same in 1971. But this time, there was no nation to take over from the US as the US had from Britain 40 years earlier. This time, the world gave up on money and embraced “fiat paper”.

Forty years later, the bill for this entire adventure has come due. And there is NOBODY to pay it.

A Leader Without Followers:

For forty years, the US government has touted the nation it governs as being the “leader of the free world”. In reality, the US government (and, unbeknownst to most of them, the American people) hasspent those forty years getting a free ride. Their status as the issuers of the world’s reserve currency hasallowed them to live beyond their means, issuing the “means of payment” in the form of debt paperdenominated in US Dollars. With the exception of a short period between 1978-82, the US has beeninsulated from the effects of its own actions because the debt paper it issued enjoyed global demand asthe “reserves” behind the world’s financial and monetary systems. The US government has long sincetaken this for granted. They have convinced themselves that it would never stop.

The US government (and the political and financial establishment behind it) is STILL trying to convince themselves that it will never stop. Ten years ago, they were actually boasting that they would pay off ALL the outstanding Treasury debt (the funded debt anyway) in “not much more than a decade”. Not much more than a decade later, they are well on the way to tripling the outstanding funded debt.

Today, the US government has been reduced to a hollow shell which spends its time alternately pleading with the rest of the world to continue to follow its “lead” and/or issuing hollow threats against those nations which don’t. On June 19, President Obama released the contents of a “public letter” to Europe. In it, Mr Obama asserted that: “our highest priority in Toronto (at the G-20 head of state meeting) mustbe to safeguard and strengthen the recovery.” Whose recovery?

It is now crystal clear that whatever the “spin” that emerges from the G-20 meeting, the rest of the world is turning away from the “leadership” of the US. The budget cuts in Europe show this. The decision by China to stop pegging their currency to the US Dollar shows this. The fact that global central banks are now INCREASING their holdings of physical Gold shows this.

The US government is almost alone amongst its peers in maintaining that perpetual debt issuance is the way forward towards prosperity. It is a leader without followers, always a prelude towards the fall.

A “Hoover Moment”?:

This is the latest bogeyman conjured up by the Obama administration in their desperation not to be left as the only nation still frantically operating the “money pump” in the aftermath of the G-20 summit. It is the claim that the “recovery” in the wake of the stock market crash of 1929 was derailed by the Hoover administration because they let up on the “stimulus” too soon. Mr Obama is urging his peers not to make the same “mistake” this time. His peers are listening, but not in the way Mr Obama would like.

In reality, the situation then was almost exactly the opposite to that portrayed by Mr Obama (and Mr Bernanke). President Hoover almost immediately embarked upon an orgy of regulation and government planning to an extent never before contemplated in US history. He also called for prices to be held up by main force and urged the public and private sector alike to borrow until it hurt. By and large, they did.

The Fed cut their discount rate in half between early 1930 and late 1931. The Fed also blew out its holdings of commercial, government and quasi-government debt paper. Sound familiar? The problem is that while this type of thing had worked throughout the 1920s, it didn’t work in the 1930s because the collateral foundation had collapsed underneath the existing loans. Does THAT sound familiar? The event which actually led up to the real economic crash in 1931-32 was a growing questioning in the US and everywhere else about the QUALITY of the credit being issued. Does THAT sound familiar? There are two main differences between the measures taken to fight the depression in the early 1930s and the ones being taken now. One is that the measures being taken now have utterly dwarfed (even on a proportional basis) the almost identical measures taken then. The other is that in the 1930s, there was still a tenuous link between what circulated as money and the real thing. Today, that is long gone.

The “Hoover Moment” nonsense is a mirror image of Neville Chamberlain’s “Peace In Our Time!”

Flogging A Dying Horse:

Mr Paul Krugman won the Nobel prize in economics in 2008. He has a vested interest in being seen to be an “economist”. Barack Obama won the Nobel peace prize in 2009. He has a vested interest in being seen to be a “peacemaker”. The distance between the vested interest and the reality can be best judged in the actions of Mr Obama and the words of Mr Krugman. Mr Krugman is all but Olympian in his scorn for those who are advocating smaller deficits and an end to stimulus through “money creation”.

He is not alone. In recent weeks, a veritable “Who’s Who” of the financial and political establishments inside and outside the US have been frantically battering their keyboards in outrage at the temerity of anyone who would suggest that producing more than one consumes is the only way to prosperity. George Soros has weighed in, saying that German policy is becoming a danger that could destroy the European Union. The German government has announced Euro 80 Billion in government debt tightening which starts next year. This is withdrawing stimulus before “recovery” has taken root, intones Mr Soros.
All these people have long since realised that the global “stimulus” is not “working”. They know that the recession never ended and is soon to get much worse. They are trying to preempt the coming clash of ideas in an attempt to make sure that the NATURE of the “money” fuelling the system does not emerge.

Once enough vested interests have been created by a style of government or financial “management”, the ideas which underpin their claim to rule become sacrosanct. They become far more than “politically correct”, they become politically NECESSARY - to those who hold the political reins. These outbursts are typical of the true power of ideas, in this case the power of an idea whose time is almost up.

In 1896, the US went on the pure Gold standard. In protest, William Jennings Bryan gained the Democrat nomination for president with a speech which ended - “you shall not crucify mankind upon a cross of gold.” Bryan never did become president. But the madness in his method has lasted a LONG time.

INSIDE THE UNITED STATES
HOW BAD IS IT?

It’s pretty bad. All of a sudden, the recovery has almost officially become “fragile” in the US. The official version was stated in the Fed’s press release following the FOMC meeting on June 22-23. “Financial conditions have become less supportive of economic growth on balance”, they said. Indeed they have. A recent report from a department of the US Treasury shows just how bad they have become.

Until this month, the Treasury was predicting that US funded debt would climb to $US 19.6 TRILLION by the end of fiscal 2019. That has been “revised”. On June 4, the Treasury released a report to Congress stating that the climb to $US 19.6 TRILLION would take place by 2015, four years earlier. They also predicted that this would be 102 percent of US GDP by that time. As of June 23, with fiscal 2010 nearing the end of its third quarter, the Treasury’s “debt to the penny” stood at $US 13.042 TRILLION.

 The report said that the debt would reach $US 13.6 TRILLION by the end of fiscal 2010 on September 30. If it does, it will have grown by $US 1.7 TRILLION in fiscal 2010. And there was more. The Treasury projects that “publicly traded debt”, the debt held by entities outside the US government itself, will almost double from its present level of $US 7.48 TRILLION to $US 14 TRILLION by 2015.

Ten years ago, the US Treasury was talking about paying off ALL government debt by 2012. Five years ago, they were talking about returning to “balanced budgets” at or about that date and all talk of “reducing” debt had vanished. Look at what they are talking about now. As we said, it’s pretty bad.

“Greece On The Pacific”:

That is the new description of the US state of California, once touted as the eighth largest economy in the world. California - the headline state, the biggest state in terms of its internal economy - is facing the necessity of budget cuts which make the ones undertaken by the European Club Med nations look benign.

Like most US states, California has a fiscal year which ends on June 30. Like ALL US states, California is barred by law from running a budget deficit. The problem is that California is staring at a $19 Billion “deficit” in the year which ends at the end of June and a $US 37 Billion deficit over the year that ends in June 2011. Given a budget of about $US 125 Billion, that’s a 2010-11 shortfall of almost 30 percent.

Almost all US states are in the same predicament, only the size differs. So far, their budget deficits have been papered over by Mr Obama’s stimulus plan of 2009, but that money has mostly already been spent. Having built their “budgets” on the real estate bubble, their revenues are diving as their costs, especially for “social services” skyrocket. Almost every report on the fiscal carnage going on in the US states has a variation on this theme: “The US government will inevitably have to come to the rescue”. If you think the recent EU “sovereign debt” bailout was big (and it was), wait until you see THIS one!


 

Ó 2009 – The Privateer

http://www.the-privateer.com

capt@the-privateer.com

(reproduced with permission)

SUBSCRIPTIONS:

Delivery via email

Trial: 5 issues (once only)

Six-Month: 12 issues

Annual: 25 issues

Two-Year: 50 issues

Subscribe at www.the-privateer.com/sub.html