It’s Time to be Concerned About What’s Going On

Ancient Greek mythology tells the tale of Odysseus, the heroic king of Ithaca whose 10 year journey home after the Trojan War became one of the world’s most famous epics.

At one point in the journey, his ship was heading straight for two deadly hazards– on one side was Scylla, a six-headed monster disguised as a giant rock, and on the other side was Charybdis, a sinister whirlpool born from the sea god Poseidon.

Odysseus and the SirensThe perils were close enough to pose an inescapable threat to ships passing through, forcing the captain to choose between the two evils. A Latin proverb from this story, “incidit in scyllam cupiens vitare charybdim” (he runs on Scylla, wishing to avoid Charybdis), is now “between a rock and a hard place” in modern English.

This is exactly where the entire world finds itself right now. With confidence vanishing, markets panicking, and entire nations going bankrupt, ultimately there are no good solutions, and thinking people need to understand some simple truths about the situation:

  1. America’s credit rating was punished by S&P because US politicians failed to reach an adequate solution to the country’s debt woes which are nearing 100 percent of GDP. Investors reacted by buying the Japanese yen– a country whose sovereign debt rating is two steps below the US, and at 220 percent of GDP – more than twice as indebted!

    To add insult to injury, Japan has burned through four prime ministers and eight finance ministers just in the last four years. This is not exactly a country whose government has a successful track record of dealing with its problems.

    How does this make any sense? That’s like firing an employee who gets drunk on the job and replacing him with a crazed heroin addict. Yet faced with a universe of bad choices, investors will pick the one which appears to be the ‘least worse’. And that’s where we are today – where am I least  likely to lose my investment capital?

  2. World governments have gone on the offensive against S&P, slamming the rating agency and trying to discredit the firm’s financial calculations without acknowledging the underlying premise– that America lacks a credible plan to deal with its debt.

    Leaders from countries as diverse as France, South Korea, and even Russia have all shrugged off the downgrade and publicly reiterated their confidence in the United States. (They even rolled out Warren Buffet who said that the US deserves “a quadruple-A” credit rating.)

    You know that old adage– how do you know that a politician is lying? Because his lips are moving. When so many world leaders are expressing nearly unanimous support for the dollar and the US government, it’s time to be very concerned about what’s going on behind the scenes.

  3. G7 finance ministers have pledged to take any steps necessary to calm markets and “avert collapse in world confidence.”

    Here’s the thing: All governments can do is print, borrow or steal from taxpayers. These are exactly the policies that created a loss of confidence to begin with. And now they are pledging to restore confidence by doing the exact same things.

    If they take action, the situation will only get worse. If they don’t take action, the markets will panic and the situation will only get worse. Rock. Hard place.

  4. Trillions of dollars are sloshing around in the financial system right now desperately seeking some modicum of safety. With the wave of downgrades and money creation that’s coming, few asset classes look stable… so that little hunk of yellow metal is starting to look awfully attractive to a lot of investors.
  5. Governments will do whatever it takes to keep the party going and maintain the status quo, whether it’s printing money into oblivion and sticking consumers with massive inflation, or sending police out into the streets to beat everyone into submission.

I urge you to think about your situation and ask yourself a simple question– do you feel secure having the entirety of your assets and livelihood under the control of a single bankrupt nation in the midst of a financial collapse?

If not, it’s time to let go of the excuses and take action.

Faded Glory

Faded Glory

The pattern of government war mongering, currency debasement, purposeful inflation, and excessive spending and growth of government is a pattern that has repeated throughout history. The pattern is nearly always the same:

  1. A sovereign government starts out with good money – money that is backed by something of tangible value, such as gold and silver.
  2. As the state develops economically and socially, it takes on more and more economic burdens, adding layer upon layer of public works and social programs.
  3. As its economic influence grows so does the country’s political and military influence.
  4. Eventually it puts its military to use and expenditures explode.
  5. To fund war, the costliest of mankind’s endeavors, the state steals the wealth of its citizens by replacing their money with currency that can be created in unlimited quantities. It does this either at the outbreak of war (as in the case of Weimar Germany in World War I), during the war (as in the case of Athens or Rome), or as a perceived solution to the economic ravages of previous wars (as in the case of John Law’s France).
  6. The wealth transfer caused by the expansion of the currency supply is felt by the population as consumer price inflation. Over time the inflation worsens, triggering a loss of faith in the currency.
  7. A massive movement out of the currency into precious metals and other tangible assets takes place; the currency collapses; and wealth is transferred to those who had the foresight to accumulate gold and silver early on.

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.

It’s Greek To Me

“The farther backward you look, the farther forward you are likely to see.”

- Winston  Churchill

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.

Throughout history fiat currencies have been used in place of gold and silver as “money” and the outcome has always been the same. It is a pattern that has repeated itself since the first great fiat currency crash in Athens, Greece in the 5th century BC.

Athens was the worlds first democracy. The Greeks had the worlds first free market economy and the first working tax system. For many years Athens shone brightly. They are considered one of the great civilizations of all time. Those amazing architectural public works, such as the Parthenon, attest to that. But as we know their civilization fell long ago. What happened? Why did such a great and powerful civilization fall? The answer lies in a pattern we see time and time again throughout history: too much greed leading to too much war.

Athens flourished for many years. Then they became involved in a war that turned out to be longer and more costly than they anticipated (sound familiar?). After 22 years of war, their resources waning and their money spent, the Athenians came up with a clever way to continue funding the war. They began to debase their currency. In a stroke of (what probably seemed like) genius the Athenians discovered that if you take in 1,000 coins in taxes and mix 50 percent copper in with your gold and silver then you can spend 2,000 coins! The coins no longer had their intrinsic value in gold or silver but possessed a new value set and backed by the government. By government order Greek citizens were compelled to accept the new currency. Does this sound familiar? It should, it’s called deficit spending and our government does it every second of every day.

Because of this currency manipulation for the first time a “fiat” currency was born – a currency that was not comprised entirely of gold and silver. Over the following years the Greeks continued to debase their currency and eventually it became nearly worthless. Within a few years the war that had started the whole process was lost. Athens never again enjoyed the glory or prosperity they once knew, and they eventually became nothing more than a province of the next great power – Rome.