When Leverage Fails

While it is playing out in slow motion, the demise of Ponzi finance continues.  I never imagined that the extend and pretend, delay and “prey”, smoke and mirrors efforts of central banks around the world would have worked into mid-2012. I have learned a lesson. I do not know when the true financial collapse will occur – this year or ten years from now.  I have stopped trying to guess and am focused on preserving what wealth I have left.

It is clear that the banks (both private and government) are extracting as much wealth as possible from the pockets of global citizens before the end game. The demise of the developed world’s currencies, financial systems and economies is set in stone, just as your fate is sealed when you slip below the event horizon of a black hole.  This time the black hole is capital and income destruction, runaway welfare states, crony capitalism, regulation, taxation and endless money printing… a toxic cocktail of wealth destruction.

A depression has been written into law in the United States by the progressive (aka socialist) Congress of 2008 to 2010 in the form of permanent government expansion (20 to 25 percent per year) via the stimulus bill, Obama Care and finally Dodd Frank.

100 million dollar rules

These bills are wrapping themselves like pythons around the U.S. economy and squeezing the life out of it via 80,000 pages of new regulations a year (sold to the highest bidder and the biggest campaign contributors, poorly written in haste by unelected bureaucrats  who have no experience in the industries and businesses they are regulating.

These regulations are central government nationalizing the private sector by stealth and directing economic activity to crony capitalists. Crony capitalists gain these monopolies through regulation; they can behave like any monopolist by providing less to the public for a higher cost. This is the Congress and Executive Branch paying-off special‐interest campaign supporters.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
~ Ludwig von Mises

“The central irony of financial crisis is that while it is  caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending”.
~ Lawrence Summers

Of course, today’s governments have chosen the last route, money printing, as have those who have gone before them. None have succeeded in creating prosperity through debt accumulation and inflation. The coming collapse will destroy Keynesian Economics and expose fiat currency.

Eighty investors out of a hundred will LOSE most, if not all, of their wealth. The other 20% will gather that wealth to themselves through foresight, a solid understanding of financial history and applied Austrian Economics as outlined by Ludwig Von Mises, Frederic Hayak and Bastiat.

This crisis is the greatest financial opportunity of our lifetime – if you’re prepared. The Great Depression provided the basis for some of the greatest fortunes in the world, and this time the opportunities are many times greater. History is repeating. You just need to open your eyes and mind.

Happy 40th, Fiat Dollar!

Exactly 40 years ago today, on August 15th 1971, the US dollar was released from the cruel tethers of an international gold standard. Today, we find notable monetary authorities seeking its return.

In the middle of a lengthy ~2,500 word speech in which Nixon sought to stabilize prices by implementing price controls and stabilize foreign trade by imposing tariffs, he slipped in these 100 words that sought to stabilize the dollar by going off the gold standard:

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy – and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

It turns out that such intervention was actually counterproductive to the stated aims, so we are tempted to suspect that a different set of aims were met instead.  Perhaps these included the aims of unchecked government spending without a pesky gold tether and reinforcement of the belief that poor monetary and fiscal decisions can be eliminated by decree.

If so, then these aims were also not met, at least not over the long haul.

Today we find that the US has trillions in unbacked dollar liabilities lurking in central bank reserve accounts across the globe, biding their time for the day they will eventually be repatriated. And it has a fiscal train wreck in its hands.

Such are the (very) predictable consequences of limiting the rate and amount of money printing and spending solely by peoples’ self-discipline. It has never worked out in the past and – our marvelous technology and sophistication aside – it’s not working out this time either for the obvious reason that humans are still humans. iPads and carbon fiber bicycles do nothing to change that simple fact.

What have we seen in the 40 years since that fateful decision to ‘temporarily suspend’ gold convertibility for the dollar?

  • GDP has advanced by 13.2 times
  • Government expenditures have increased by 17.3 times
  • Total credit market debt has increased by a whopping 31.0 times
  • The US went from a net export positive to deeply negative country

The continuation of these trends requires a complete absence of limits on dollar creation going forward. However, there are abundant signs today that such a future simply is not sustainable, virtually assuring that the prior 40 years will prove to be an historical anomaly.

So happy 40th birthday US dollar. 

Here’s hoping you make it to 50.

This article originally appeared on chrismartenson.com.

Dread The Fed

The beginning of the end for the United States economy started with the inception of the Federal Reserve, the United States Central Bank, some 98 years ago. The Fed as it’s called, is a private bank, separate from (and presumably not under the control of) the federal government. The Federal Reserve has the power to dictate the country’s fiscal policy. The Federal Reserve chairman, not the President, is arguably the most powerful bureaucrat in the nation.

From about 1871 to 1914, when World War I began, most of the developed world operated under the classical gold standard. Most of the world’s currencies were pegged to gold. This meant they were also pegged to each other. This made business planning and investment far more reliable than today. Business people could make plans and  projections far into the future and trade with foreign countries knowing exactly what the currency exchange rate would be.

During this period, on average, there was no inflation – none. Yes, there were the inevitable booms and busts – inflations and deflations, but from the beginning of this period until World War I inflation averaged out to zero. Gold, and the gold standard, was the equalizer.

Here’s how it worked: When a country experienced an economic boom it imported more goods. These goods were paid for with (currency backed by) gold, so gold flowed out of the country. As gold flowed out of the country the currency supply contracted (i.e. deflated). This caused the economy to slow and demand for imports to fall. As the economy slowed, prices fell, making the country’s goods more attractive to foreign buyers. As exports rose to meet foreign demand, gold flowed back into the country. Then the process started all over again. The value of a countries currency (again based on gold) continuously moved up and down in a narrow range.

During this period currency, paper money, was just a receipt for actual money – gold. The gold standard stabilized currencies worldwide and acted as a constraint on the growth (inflation) of the currency supply.

Central banking is a controversial subject. Governments have embraced the concept, while sound money advocates increasingly decry the economic destruction caused by central banks the world over.

Central banking offers no benefits to society and contributes, mostly through the process of inflation, to serious problems. The following are just a few of the issues engendered by central banking and inflation:

  • It causes capital consumption and misallocation of capital
  • It taxes fixed income earners (savers and fixed wage laborers)
  • It discourages saving or forces savers to take more risk
  • It encourages consumption and debt
  • It benefits debtors (especially government), speculators, politicians, lobbyists, and fractional reserve banks
  • It produces the business boom/bust cycle
  • It rewards corruption and leads to morals hazards
  • It accelerates the growth of government
  • And if not abandoned it can result in a currency crisis, impoverishment, and economic and social chaos

By manipulating interest rates away from their natural free-market level central banks distort the pricing mechanisms by which entrepreneurs, businesses and consumers make decisions. This distortion results in massive amounts of wasted resources as capital gets invested in unsustainable areas. Row after row of empty houses in Florida, Nevada and Arizona are excellent such examples of capital that was put to work in the wrong area because people were fooled by artificially low interest rates into believing there was a need for new housing in these areas.

This boom and bust process has been recurring over and over for decades and the boom/bust cycle is now accelerating as the system nears collapse. This continual boom/bust cycle and massive amount of misallocation of capital has destroyed trillions of dollars in wealth and is the real reason why the US is in such terrible shape today.
Yet, despite decades of wealth destruction caused by the Federal Reserve, who does the American public look to in order to fix the problems? Unbelievably, they look to Ben Bernanke and the Fed.

    Rome Is Burning

    By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.

    -John Maynard Keynes

    People think currency, such as the U.S. Dollar, is money. It is not. Historically money has an intrinsic value within itself. Think of gold and silver and other precious metals – they are money. Our paper and coins are fiat currency. A fiat currency is an arbitrary order, given by a body, typically a government, which has the power to enforce it. All currencies today are fiat currencies.

    Here’s a dirty little secret: Fiat currency is designed to lose value. Its very purpose is to confiscate your wealth and transfer it to the government. Government monetary policy as implemented with our fiat currency – the U.S. Dollar – is a “hidden tax” on all of us. Consider this: every time the government prints a new dollar and spends it, the government gets the full purchasing power of that dollar. Where did that purchasing power come from. It was taken from the dollars you hold in your wallet, savings or investments. As each new dollar enters circulation it devalues all the dollars in existence because they are now more dollars chasing the same amount of goods and services. This causes prices to rise. This is the insidious stealth tax of inflation.

    Rome supplanted Greece as the dominant power of the ancient world. During Rome’s centuries of dominance it achieved greatness in many ways. However, as with every empire in history, Rome did not learn from mistakes of the past. As a result they were doomed to repeat them.

    Over the course of 750 years various leaders inflated the Roman currency supply by debasing their coinage to pay for war, public works and welfare. Coins were made smaller or a portion of the edge of gold coins were clipped off as a tax when entering a government building. The clippings would be melted down to make more coins. And, just as the Greeks did, the Romans mixed common metals such as copper into their gold and silver. And last but not least they invented the “art” of currency revaluation – they minted the same coins with a higher face value on them.

    By the time emperor Diocletian took the throne in 284 A.D., Roman coins were nothing more than tin-plated copper or bronze. Inflation was raging.

    In 301 A.D. Diocletian issued his infamous Edict of Prices, which imposed the death penalty for anyone selling goods for more than the government mandated price. The edict also froze wages. Prices, however, just kept rising. Merchants who could no longer sell their goods at a profit just closed up shop. People either left their careers to seek work where wages weren’t fixed or they just gave up and and accepted welfare from the state. In fact, the Romans invented welfare. Rome had a population of about one million and during this period of time the government was doling out free wheat to about 200,000 citizens – 20 percent of the population. Today in the United States nearly 43 million – about 14 percent of the population is on food stamps.

    Diocletian put people to work by hiring thousands of new soldiers and funding numerous public works projects (I wonder if they were shovel ready?). This effectively doubled the size of the government and military. Today in the United State more that 1.9 million people, excluding the Postal Service, work for the federal government alone. When you include all branches of the federal government, and state and local governments the total approaches 22 million. See the Bureau of Labor Statistics website for details.

    Of course all these additional government employees had to be paid and the government had to find a way to pay for its welfare programs. Deficit spending went into overdrive. When he ran short of funds, Diocletian simply minted new copper and bronze coins and further debased the Roman currency.

    This resulted in the world’s first documented hyperinflation. At the time of Diocletian’s Edict or Prices a pound of gold was worth 50,000 denari. By 350 A.D. a pound of gold was worth 2.12 billion denari. The price of gold rose 42,400 times in about fifty years. Currency based trade came to a standstill. The Roman economic system reverted to a barter system.

    To put this in perspective, fifty years ago the price of gold was $35 an ounce in the United States. If it rose 42,400 times, the price today would be just under $1.5 million dollars an ounce. That means, for example, that if a new car sold for $2,000 fifty years ago (which is about what they sold for), that same car would sell for $85 million today.

    It was the deficit spending and currency debasement used to fund the military, public works and social programs that collapsed the Roman Empire. As with every empire throughout history the Romans thought they were immune to the laws of economics. They were not.