In Jim Cook's Archive


I don’t know what’s happening in the credit and derivatives market, but here is a guy who says he knows. Jim Sinclair writes, “If you add to the publicly given figures of both the Federal Reserve and European Central Bank concerning their injection of liquidity on two days, Thursday and Friday of this week [August 9 and 10], your number will reach approximately 200 billion dollars. That figure does not take into consideration that both the Fed and ECB says they will buy collateralized bonds and instruments thereon (derivatives) in an unlimited amount. We will never know what that numbers is so add whatever it is to the total. It could double or triple that number in a heartbeat. ….Therefore on Thursday and Friday of this week you have witnessed the largest injection of liquidity in the history of man in but two days.

Injection of mass liquidity on an unprecedented level may well calm emotions, it may not. One thing is for sure: the problems are not going away and it is the Big Kahuna that the Fed and the ECB are trying to stave off….

  1. Everything required will be done to save the world’s equity markets.
  2. Liquidity will be supplied without limit.
  3. The US Fed is buying what basically has no market and are therefore worthless mortgage bonds.
  4. This is not only a crisis in collaterized bonds but infinitely more so in credit derivatives.
  5. The size of the credit derivative market is beyond your wildest imagination.
  6. The unlimited liquidity being supplied in Euro Land and the so far admitted billions in the US by the Fed would never have occurred unless there are major financial entities in trouble. Those big boys that were the major entities in credit and bankruptcy guarantee of derivatives are falling like stones. This is a rescue of the good old boys at any cost to the US dollar.

This event will reverberate through the world financial market for years to come. This is only an indication of what will happen as all this economic sin, instant gratification, profit at any cost economy begins to unwind in the form of the Over The Counter Derivative implosion.”

Easy money and loose lending hatched the current financial upheaval and, unfortunately, the government, who caused it, bears the responsibility for fixing it. The government has a monopoly on money and they use it to paper over trouble. Money performs three functions. It is a means of exchange, a unit of account and a store of value. When we switched from gold money to paper money, the latter characteristic went haywire.

Politicians and bureaucrats print money to cover government spending deficits, rev up the economy, and stave off serious downturns. It sounds great. Got a little real estate crisis; cough out 30-40 billion. War getting too expensive; print up a hundred billion. Want to expand social programs and spend money on anything and everything, hey don’t worry, we’ll pump out some fresh greenbacks. It works so well we’ve got the whole world doing it.

One little problem. The value of the dollar is falling. Everything’s getting more expensive. But, don’t believe your eyes, listen to Washington. Inflation is low, not a problem, the Fed’s on top of it, not to worry.

Once upon a time there were some guys who worried about it. The economist Mises said, “If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely.”

The author Henry Hazlitt warned, “The consequences of inflation are malinvestment, waste, a wanton redistribution of wealth and income, the growth of speculation and gambling, immorality and corruption, disillusionment, social resentment, discontent, upheaval and riots, bankruptcy, increased governmental controls, and eventual collapse.”

Here’s my take. Inflation is, and has been, running at around 10% a year for a decade. It’s getting worse. The money and credit expansion induces bubbles (real estate) and more new money is force-fed into the system when the bubble bursts. It’s a financial system on steroids. When warned about the long-term consequences of spending and inflating, Mr. Keynes famously remarked, “In the long term we’re all dead.” Let’s hope it’s that way and we enjoy this constant inflating throughout our lifetimes. If not, to offset the ravages of inflating we offer silver. To offset the possibility of hyperinflation we recommend silver all the more. To offset the destruction of the dollar, yes silver. To offset a hyperinflationary collapse and a subsequent depression, silver again. And, if everything comes up roses, well, you guessed it.

Here’s the rub. Everyone comes to a point in their life where their income stops or is reduced. You may have to live off capital. How to cope? Theodore Butler argues that silver can go up a multiple of times from here. Putting 10% of your net worth in silver, and holding it for the long term, may be a way to not only keep up with the loss of purchasing power of the money you put into silver, but all your money. You owe it to yourself to learn enough about silver and the arguments that Mr. Butler makes. Nobody knows the future, but holding actual physical silver may be the best option in a world of depreciating currency where anything can happen.

At times like this, when nervous markets threaten instability, it’s comforting to have an asset on hand that is nobody else’s liability. Paper assets can go bankrupt, but silver never can.

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