Sunday, February 14, 2016

Some previews from the past

Do you remember the 2008 financial crisis?   It will soon be returning to a neighborhood near you, only it's going to be even bigger this time.  In the last eight years every nation has gotten deeper into debt, and the surviving banks (those that were bailed out in 2008) have gotten bigger and have taken even greater risks, thanks to seven years of 0% interest rates, $3 trillion printed by the Fed, and trillions more printed by other central banks in Europe and Asia.

You may think you have money in your bank account, but even in good times the vault doesn't have a single penny with your name on it.  There's a number on a computer somewhere that indicates your account balance, but the money isn't there.

Tom asks for $242 dollars, which before 1935 was equivalent to 12 ounces of gold.  Do you have 12 ounces of gold?  If not, it will cost you $14,800 to get it at February 2016 prices.

On the other side of your bank account there are people with student debt, car loans, and home mortgages who will soon stop making their payments to your bank.  In theory the bank can repossess the cars and homes and get *something* back when the borrowers default, but if everyone defaults at the same time, and cars and homes all hit the auction block simultaneously, then prices will plummet and the banks won't recoup the money that you think is in your account. Corporations have also been seduced into borrowing billions of dollars that they can't pay back, and much of their debt is in the bond market where it waits to implode.  When this all goes down, the ugly truth will finally slap you in the face: the banks can't even maintain the electronic numbers, let alone actual physical money.  It's all gone.

... UNLESS the Federal Reserve Bank steps in first and prints trillions of dollars more in order to bail out all of the bad debt before the implosion happens. Yes, that will ensure that you still have your electronic numbers at the bank, but the fatal side effect is that you'll be spending $1000 per day on food.  As I've been saying for a while now, one way or another, "a great deal of illusory capital is about to disappear."

Sunday, February 07, 2016

OK. I get it now.

History shows that every form of paper currency eventually becomes worthless.  After World War I, European currencies like the German mark and the Italian lira plummeted in value, requiring governments to print larger and larger denominations just to facilitate the simple act of buying food.

In American history we have the examples of the Continental currency and Confederate States dollar becoming worthless during wartime. It will be no different for the yen, the euro, or the dollar, as the central banks in these modern countries have been printing new money at an accelerating rate since the financial crisis of 2008.

A 2,500 year old Lydian gold coin, on the other hand, is just as valuable in terms of its gold content today as a newly minted 2016 American Gold Eagle coin.  The relative staying power of gold compared to paper is nearly infinite.

For a while the U.S. dollar was actually tied to gold. Anyone with a $20 bill could, in theory, walk into a bank and exchange the paper for one ounce of gold.

However that's not the case today.  In 1971 the U.S. government ended the dollar's connection to gold altogether.  From that point on the dollar only had value because Americans and foreigners alike were in the habit of trading with it, and because nearly every foreign bank in the world backed its local currency with the (formerly gold-backed) dollar.  Now that the Fed is gearing up for a fourth round of Quantitative Easing money printing, the dollar's days as the world standard are coming to an end.

I'm convinced that the citizens of the First World will soon have the same reaction that Auda Abu Tayi did in the movie Lawrence of Arabia; they will realize that they've been working all of these years to earn worthless pieces of paper and ephemeral electronic numbers which the Federal Reserve and other central banks can ceaselessly create out of thin air.