Monday, March 28, 2011

Ron Paul wants to reintroduce gold and silver coins as legal tender

By way of intro to this topic, I wrote some time ago that I believed that the seemingly unending economic problems could eventually cause the US states to begin to compete with each other in an effort to attract and retain the best and brightest workers (i.e. taxpayers instead of  benefit recipients...).  Such tactics have been called "beggering thy neighbor" by some in the financial press.  I consider the use of honest money by any individual state in this union yet another beggar thy neighbor tactic.   In other words, it would be yet another incentive to attract honest, hard working labor and businesses from other states.  Such moves are no different from having lower tax rates, more freedoms and privacy (like simple gun rights, the kicking out of the TSA from airports), the nullification of the good sounding but fundamentally corrupt Obamacare Ponzi (a large number of states are publicly pushing back on that scam) and a host of other incentives designed to attract people like you, the talented labor force, from which all future value (and thus taxes) will flow.  The states which fail to attract hard working taxpayers will be left with an overage of benefit seeking human liabilities.  Sorry if that concept dents people's fragile sensibilities but the math associated with the collapse of the debt Ponzi demands that it be so.

As evidence that this "beggaring" was happening I also reported on efforts by Utah which sought to make gold and silver coins legal tender.  That law is now on the Utah governor's desk under consideration for final signature.  In addition I pointed out that North Carolina was considering returning to some form of honest money.  Others are looking around at these efforts and have begun similar state level efforts.  Those states which return to honest money are going to get ahead while others trying to hang onto the statist quo of funny money and debt based everything are going to fall behind badly.  Hard workers will push though while those who consume more than they produce will get left in the dust.  It's not the way I want it to be but rather where the tea leaves indicate things are headed.  After many decades of borrow and spend generational kleptoparasitism, things are changing rapidly.

Not many have caught onto this new trend but it's becoming pretty clear at this point.  The working person is what is valuable and it has always been thus.  Why else have people throughout the centuries sought to keep slaves?  New future value comes only from human labor multiplied by tools (including animals as tools...).   It does not come by playing games with funny money, high debt, ridiculous leverage, high taxation and other mechanisms used by the elite to steal the wealth of the working class.  All those things do is transfer wealth from the patsies to the con men.  The world is now running short on patsies.

It doesn't matter that people have, at times, been fooled into thinking the elite have all the power.  That was just a con and fake money along with fractional reserve banking were the main tools used to pull the wool over the eyes of citizens.  The elite con is falling apart because their funny money has weakened and the ability for elite con men to take on unreal amounts of debt and leverage is evaporating.  The desire of so many people to return to gold and silver in such a short period of time is unmistakable evidence. The curtain is falling only to reveal that the Wizard of Oz is just a tired old elitist con man who is powerless to maintain the debt Ponzi once people become enlightened to its existence and its operation.

Twilight is indeed falling on the lighthouse elitist and his wise old owl .  They are not nearly so wise as they tried to appear.

More evidence of this arrived today as Ron Paul introduced Utah - like currency legislation at the federal level.  If this passes it is big, big news.  It will change so many things.  There's no use talking about it too much at this early stage but I think Dr. Paul is re-introducing this bill right now because he is looking at states like Utah and North Carolina and others and he is seeing that a lot more people may be ready for real monetary change than ever before.

I'll be watching this closely as it unfolds but if it passes it will likely represent one of the most exciting and significant pieces of US and even global legislation since the Federal Reserve was created in 1913.  Yes, it's potentially that important.  Smart people will be calling their representatives and asking them to support it because if the whole country doesn't support it then states like Utah and North Carolina will be sucking the best jobs and businesses out of your state into theirs over the coming years after they pass their honest money laws.

Sunday, March 27, 2011

Woah! North Dakota residents trying to eliminate residential property tax?

Mish reports today that citizens of North Dakota are working on an amendment to the state constitution that would eliminate property taxes.   Now before all you statists and worry warts start screaming, this does not mean they are trying to eliminate taxes.  We need some level of government albeit it significantly smaller than today.  The property tax revenue would be moved to other consumption items in the economy. 

The true test of who owns something is what happens to it when you stop making payments.  If you stop making payments on your mortgage, the house reverts to its rightful owner, the bank.  In the event that the mortgage is paid off and the resident actually has physical possession of the deed, he still has to pay property taxes.  If he stops paying those the property will be seized by its rightful and true owner which is the state government.  In truth, a deed carrying "homeowner" actually owns nothing.  In fact, quite the opposite.  Homeownership actually means a person has signed up for a lifetime debt (annual taxes) which can never be paid off.  For my modest house in central Texas, that's $5k per year.  If I live another 30 years that's $150k of guaranteed income to the state.  Call me crazy, but $150k should buy a modest house outright (at least in Texas).  So government basically wants me to buy it a home in exchange for letting me live in my own home for the rest of my life.  And of course, taxes will go up with inflation so that's $150k minimum and probably more like 200k before it's all over.  That's a disgusting racket no matter how you slice it.

If I buy a car then it is mine.  I no longer have to pay anyone to keep it (ignoring the annual safety check and registration fees).  But I can never own my house outright.  There will always be some feudal government lord demanding annual tribute for me to live in his house on his land.  The hypocrisy of GW Bush and his "home ownership society" was amazing to watch.  Yeah, I know that property taxes are collected by the state and not the federal government but at some point government is government.  When the states begin to go bankrupt it is certain that they will be seeking federal bailouts.  You can slice it and you can dice it but it all ends up in the same stew pot in the end.

Mish points out that real estate taxes are especially onerous to people who are not working, particularly the elderly living on a fixed income such as social security.  When folks find themselves in this position they learn to cut costs to live within their means.  We've all heard of the joke about old people eating dog food because that's all they could afford.  But property taxes are very difficult to cut and they just seem to go up each year.  The only thing many older folks can do is sell the house which they worked their whole lives to buy and go live in something smaller (or increasingly, on the street).  It is very difficult to get by without paying some form of property tax.  You might as well call it a living tax because most people will have to pay it as long as they are living.

Government does need to raise taxes to provide reasonable minimum services but these taxes should be collected through consumption taxes (sales taxes).  That allows old people who do not have a job or a fat government pension to continue living in their homes.  It's also a way for people to vote on how big their government should be.  If government just hands you a property tax bill each year and demands payment under threat of taking your house from you then how do you tell government it is too big?  How do you tell them they are trying to force you to consume "services" that you don't want?  How do you tell it that it is gluttonous and wasteful?  The only options are to contest your taxes (which only works if you hire a lawyer anymore) or to move away.   In other words, there is no feedback loop built into the system.  This is how government is allowed to run wild.  However, if the taxes were built into the consumption of nonessential goods and services then when the people decide to cut back then it sets a clear signal to government that it must cut back as well.

Under the system of consumption-only taxation government revenues must be "smoothed".  That means government must save money when tax revenue increases above the mean in a strong economy so that the excess can be used in a weak economy.  But over time, the government must right size itself to what the people are willing to pay.  Just forcing additional useless services upon us which are performed by people who will end up with big pensions that the rest of us won't get is a scam.

Now if you think the people of North Dakota are making a big mistake in trying to move property tax over to consumption items, think again.  In fact, I predicted that this beggar thy neighboring state behavior would begin to happen as state economies failed to recover.  I wrote:
"We are now in a very unique time here in the US.  This will likely turn into a big state vs. state struggle for survival.  The states with the best overall tax revenues will win and they will only win by stealing the best jobs and workers from neighboring states.  The way they will generate more overall taxes is to cut individual taxes and to make it up in volume.  That means that states will have to engage in beggar thy neighbor policies, providing all manner of long term incentives to attract businesses and workers." 

To quickly recap, all future value comes from the labor of people.  Leaders of the smart states understand this and so they are taking on policies to attract people (taxable headcount).  Leaders of dying states have not woken up to this fact yet and they are trying to maintain the status quo even as people flee for the borders.  Conversely, in Utah they are trying to make gold and silver coins legal tender again.  Do you think they are doing this for the Hell of it?  Of course not!  They are doing it to attract and retain the best working population because only prosperous workers can pay taxes.  The North Dakota move may sound like a tax reduction effort but it's not.  It's a move back toward honesty and decency and it is really being done in order to attract the best and brightest workers from other states which have not figured out the beggar thy neighbor game yet.  I expect to see states all over the union offer better and better deals as time goes on just like used car salesmen do when customers become scarce.  They know (or will quickly figure out) that they have to compete for your presence because governments have no money except that which they can fleece from their subjects.

Signs of winning states in this battle over you:
  • Intelligent government spending cutbacks, avoidance of punitive cutbacks (i.e. cutting important stuff first and leaving the fat intact in order to punish tax payers for dissenting)
  • More freedoms, especially of the constitutional variety (right to carry firearms, open carry, etc.)
  • Demilitarization of police forces.  Remove the Gestapo uniforms, jackboots, and storm trooper gear and remake their police into "helpful citizens with badges" again like it used to be.
  • Shoving the far left and the far right into a hole.  Moving away from dem vs. GOP because that is just a trap used by corrupt governments to divide and conquer unsuspecting citizens.
  • Honest and transparent government accounting.  Adherence to a strictly balanced budget.  Avoidance of debt.  Elimination of off balance sheet budget tricks.
  • Return to honest money, perhaps even state currency backed by commodities like gold and silver.
  • Actively courting business from other states through means of lower taxes and less union control. For example, Caterpillar is located in Illinois and its CEO is being actively pursued by other states who are trying to convince him (and all those fat corporate jobs that will come with him) to flee the recent Illinois tax hikes by moving into their states where taxes are lower.  Tangental note: if we ever allow one world government there will no longer be any ability to vote with your feet like this.
Signs of losing states in this battle over you:
  • Perpetually declaring a crisis in order to try to scare the people into agreeing to ridiculous crap.
  • Ignoring the exodus of educated productive people, business owners, etc. who have given up trying to change the system and have decided to vote with their feet.
  • Insisting on keeping a level of government that can no longer be afforded given the ongoing collapse of the global debt Ponzi.  Inability to make quick, intelligent, accurate cuts in headcount and spending.
  • Lack of political will to rein in ridiculous pension abuses.  I'm very sorry but no government employee has ever contributed enough to society that the private sector should pay him $50k or more each year in pension benefits (including salary, medical benefits, everything).
  • Allowing politics to drive financial decisions.
  • Adding more laws, restricting freedoms, creating more claims on people's wealth in order to make up for all the people who are leaving.

Saturday, March 26, 2011

DHS claims the legal right to strip search any air traveler.

If that sounds like inflammatory rhetoric, have a read for yourself:

In truth, I believe the Department of Homeland Security (AKA American Gestapo) does have the legal authority to do this.  We foolishly gave them that authority when we allowed ourselves to be collectively bullied into accepting the so called Patriot Act in the wake of the 911 air disasters.  What we should really be questioning is why they still have this authority.  Why are we the people so silent in this regard?

It's one thing to have power and another to flaunt it publicly.  Telling Americans that they can be taken into a back room and stripped down by strangers in order to secure your air travel is flaunting it.  So why did they do this?  Simply because they want to scare us into accepting their x-ray skin cancer acceleration / pornogram machines.  The more power we give these monsters, the more they will use their existing power in order to justify the acquisition of more power.  They don't have to pay for it nor do they have to show any economic benefit so the sky is the limit.  Once they have sufficient power to terriorize us they will begin to abuse it even more overtly just as we see happening in 3rd world dictatorships where police and other government agents routinely shake down citizens in order to augment their salaries.  That is where we are going unless people demand change from their elected representatives.

Howard Davidowitz: nothing works without employment

Henry Blodget recently interviewed Howard Davidowitz for Tech Ticker.  I've seen tens of interviews done with Davidowitz and to say he's charismatic might be an understatement but smart people will see this as sincerity and look right through all the wild tones and emotionalism he displays.  Davidowitz is not an idiot.  Quite the opposite.  I like the guy and I think he speaks truthfully, at least from his perspective, which is all that I can ask from any man.  At the same time, I don't think his views are 100% accurate.  IMO the things he is right about are:
  • The problem is government "programs" (AKA entitlements).
  • Obama trying to solve a debt problem with a healthcare bill which takes us into more debt.  Yes, that's right, Obamacare is about money, not health.  Obama doesn't give a crap about anyone's health except his own.  He's a politician.  It's all about money and power and to believe otherwise is just the tiniest bit naive.
  • The biggest exposure for the US is the dollar (whether via inflation or deflation) and the stock market is on thin ice.
  • We are borrowing 43 cents of every federal dollar we are spending.  Forty Three Cents!
  • Stimulus is not working.  We have increased our debt exponentially and diluted our money supply ($37 silver recently...).  Mish told us long ago and so did Ron Paul and Peter Schiff and Marc Faber and Bob Prechter and just about every other smart money person out there: Stimulus is can-kicking only.  It is not a cure.  It delays the symptoms but they will come back even worse the next time.

Things Davidowitz doesn't understand or doesn't want to say:
  • He wants to get rid of Bush tax cuts to increase tax revenue and cut the entitlement programs big time.  He claims this will not crush the economy.  I say balderdash.  Those programs inject money into the economy and without them we will get a massive deflationary crash.  I'm not saying we should continue those things, only that they will result in a massive crash.   Then again, staying the course will be even worse as massive inflation wrecks the dollar (and our savings with it).  People need to wake up to the fact that there is no soft landing from these levels of debt.  We are as bankrupt as bankrupt can be and that carries consequences that have to be dealt with at some point.
  • He says everyone from all over the world would come running to invest in the US.  I say balderdash because who exactly has all this money?  Euroland is broke.  China is a massive housing bubble and they have to keep spending on housing or jobs will collapse and the people will hang their leaders in the streets.  Japan had a debt to GDP ratio of 220%.  It was screwed before the earthquakes, tsunami and Chernobl 2.0.  Now it is just doubly screwed.  Smart people will move out of Japan and become less xenophobic.  Africa has no money and never did.  Canada and Australia housing markets are rolling over and their housing bubble was bigger than the USA's.  They will have to look internally and spend internally to keep their economic Ponzis supported.  Mexico is having running gun battles in the streets.  So Who is Davidowitz talking about investing in the US, South America?  They can barely save themselves.  The bottom line is that the US is too big to bail. 
  • There is no painless fix.  A crash will eventually happen no matter who is in charge.  We have run up a big debt Ponzi and the only thing that austerity measures will do is collapse it.  So Obama and the other powers that be are just stalling and kicking the can down the road as long as they can hoping that Euroland will collapse first so our politicians can blame the ensuing chain reaction "contagion" on someone else.  Obama inherited an unfixable situation.  Did he make it worse?  Of course.  Every president from now on has to increase the debt exponentially or the Ponzi will collapse.  That's just how Ponzis work.  Who wants to be the guy in charge when it collapses?  Nobody.  Why?  Because they will have to take unfair levels of blame just because it happened on their watch.  Nixon went down in history as the guy who closed the gold window but the damage was being done by Kennedy and others that went before him.  Because of this they will all keep the Ponzi running until it collapses of its own corrupt weight at some point in the not too distant future.
I praise Davidowitz for speaking out.  Too many cowards and con men know the truth and are just hanging back, saying nothing, waiting for the collapse.  They don't care what happens to people and so they don't bother sounding the alarm.  They consider it natural economic selection.  People with a real economic understanding will come through just fine.  Everyone else will get creamed.  Simple as that.  If you want to ensure your financial future, the answer is simple: dollar cost average into gold and silver over time because this takes you out of the dollar debt Ponzi.  If you don't play, you can't lose everything.  Don't do it all at once because you might buy a peak.  Don't panic into metals!  Do it on a measured, regular basis over a period of years and you will do just fine economically.

Thursday, March 24, 2011

President of Dallas branch of Federal Reserve: US debt is at a "tipping point"

Richard Fisher, president of the Dallas Federal Reserve, has been a public dissenter of the loose Federal Reserve policy that Bernanke has been driving for years now.  Very recently he spoke publicly in Germany saying that our debt was near a tipping point.  Personally, I'm never sure what is theater and what is real anymore when these people talk. The order of the day has become to lead by managing public opinion.  Government has gotten smart enough to know that if you don't have some internal dissenters then the people sense the one sided-ness and begin to smell the scam.  On the other hand if you allow, encourage and possibly even mandate some internal dissent that can be put on public display then people will settle down because they will be led to believe that the system's supposed built in checks and balances are working.  A small number of internal "radical" dissenters is good for business or they would have silenced Ron Paul years ago.  Of course, that can easily get out of control too if not closely managed and controlled.

Fisher went on to say, "If we continue on down the path which the fiscal authorities put us, we will become insolvent.  The question is when."

Now, while this might make sense to a lot of people it suggests to me that Fisher isn't sincere.  All this talk about future insolvency is disingenuous when the insolvency has already happened.  Insolvency is normally thought of as the situation where you can't pay bills when they come due.  For corporations which can't just print more money from thin air when cash flow from operations falls short, the situation is obvious and impossible to hide. However, when dealing with sovereign nations which can print their own money up from the ether or borrow endlessly in order to make up for shortfalls in taxation, the term insolvency needs to be redefined.

What does not need clarification is that the US went insolvent in November 1971.  That is when other nations were told they could no longer convert their dollars for gold from the US treasury.  That was a strategic default.  We had a deal and we still had gold in the treasury.  We just decided it would be better for us to renege.  People presented us bills to pay in the form of Federal Reserve Notes and the government declared insolvency by failing to pay them.  Since then, the whole nation has basically been practicing a form of "strategic default" wherein we haven't been making payments on the debt yet we aren't moving out of our house either.

So when Fisher suggests that we "might" become insolvent in the future I view that as being the same as someone living in their house without making mortgage payments saying that if he isn't careful he will lose his house someday.  The house is already lost legally yet he retains possession and use of it.  Possession, it seems, really is 9/10ths of the law even now.

What Fisher is really saying is that if we continue down the current path then everyone is going to realize that we are already insolvent and they will lose faith in our funny money.  The fact that silver (AKA poor man's gold) has been skyrocketing over the past year tells me this is already beginning to happen.  Also, the Utah bill which would recognize gold and silver coins as legal tender is another serious sign.  It has now cleared the Utah house and senate and is awaiting signature by the governor.  If he signs that bill it could have far reaching implications.  The most basic one would pertain to the collection of federal income taxes on gold based transactions.  If people are trading gold coins for other items in the economy, should people note the price of gold on the day they accepted the coins and then note the price on the day they spent them?  If not then how will anyone pay taxes on capital gains in the gold which occurred while in their possession?  Nobody will do it and the number of transactions could be too great and too untraceable for the government to enforce taxation of inflation gains on gold and silver.  Lack of enforcement could encourage others to follow in those steps.  It could become a slippery slope for fiat currency in this country.  These are the types of things that will finally get people to realize that paper money is a worthless scam.  All the signs I see indicate that it will happen within a decade.

Wednesday, March 23, 2011

Capitalism theater

I'm just about tired of hearing people go on and on about how capitalism doesn't work pointing to the current economic problems as proof.  Real capitalism is a meritocracy whereby people work smart and hard.  In real capitalism people get to keep what they earn and they control it in all ways.  The concept of private property is a core value of real capitalism.  Armed with their own money, people who were smart enough to earn it on a level playing field are then free to invest their savings in the growth of the country.  The work of millions of smart and hard working people acting in their own self interest results in rapid advances for society as a whole.

Contrast that to the scam which is going on today - crony capitalism.  In crony capitalism the government uses its control over a dishonest money supply to create a tilted playing field that favors friends of government.  How does this work?  In its simplest form, government creates money from thin air and loans it to "special people" at rock bottom rates.  Those people turn around and re-lend it to the rest of us at a tidy profit.  Imagine the profits that could be made if someone gave you something that you didn't have to work for and allowed you to keep all the money made from renting it to other people!  Of course, this is just the visible tip of the iceberg.  What's harder to see is all the government guarantees of private investing (gambling) that are in place.  The bank bail outs were just part of it.  The guarantees go beyond the financial.  If the oligarchs are ever at real risk of losing control to the patsies then there is always the police state backup plan.  Roll your eyes if you like but they didn't build thousands of FEMA camps surrounded by fences and barbed wire for nothing.  They stand empty and ready for whatever their intended purpose is.

Crony capitalism destroys the concept of a meritocracy and thus outs itself as not being real capitalism.  It is capitalism theater.  With real capitalism there is the concept of private ownership.  Again we have ownership theater in this county.  Government tells you that if you take out a home mortgage to buy a house then you are a homeowner.  In truth you are a homedebtor.  Even if you pay the whole mortgage, government still owns your home and charges you an annual fee to live there.  If you don't pay up, they repossess your home.  It's called property tax.  Even the banks are not really private anymore.  Today the Federal Reserve rejected Bank of America's "request" to increase its dividend.  In other words, government controls what is supposed to be an asset which is privately held by the people.  Never mind if you think it is a good idea or not given that BofA is an insolvent crony bank.  The fact is that the government would not have this power in a real capitalism system yet it clearly does have the power.

The thing which changed American capitalism into crony capitalism was the adoption of a dishonest money supply based on fiat currency and fractional reserve banking.  Money is so pervasive in society that when the money turns corrupt and dishonest it drags the rest of us along for the ride.  Nothing is ever going to truly change in this country until we end the Federal Reserve which is the chief Ponzi operator for our dishonest money supply.

Tuesday, March 22, 2011

Boston University professor of economics says DC is doing budget theater.

According to Lawrence Kotlikoff, Washington DC is wasting time and politicians might as well just go home for all the good they are doing with their budget "planning".  After 6 decades of running a Ponzi scheme (his words), it's all coming home to roost.  He claims the government is engaging in Enron style accounting with off balance sheet items that make the whole country bankrupt.'s-kotlikoff-says-536041.html?tickers=%5EDJI,%5EGSPC,TBT,TLT,XLV,GLD,TIP

I wish he was just crazy but well over 4 years of study of this situation has led me to all of these exact conclusions (and I have been outspoken about it the whole time).  I was calling it a Ponzi when Ponzi wasn't cool.  Face it, dem=GOP=con men and most Americans have been willing patsies in the generational kleptoparasitism scam.  It's now just so obvious that even people from academia (academia has been the marketing arm of the Ponzi for decades now) are being vocal and cutting all the fake political correctness and fifty cent words out of their interviews (which is pretty much what I predicted would happen as well).

So at this point we are all an economic version of Charlie Sheen.  We are drunk and disorderly and out of control.  We are completely addicted to debt as a nation.  Half the people are still shouting "winning" when what we really need is massive rehab.  None of the bailouts were actually bailouts.   They were all can kicking exercises to give bankers more opportunity to fleece us.  Nothing has been fixed and at this point you have to be pretty childish not to have figured it out.  Sorry in advance if that applies to you, kudos to you if it doesn't.

So if it is all going to Hell in a hand basket then why not just ride it in like Slim Pickens did in Dr. Strangelove?  Why bother shutting the Ponzi down now?  Just ride it for all it's worth and deal with it when it dies on its own.  Well the problem with this is that the Ponzi collapse will likely wait until the thick part of the boomers are trying to draw benefits from the system.  The very act of attempted collection by too many patsies will collapse the system.  That's how Ponzis always collapse; the outflows exceed the inflows.

If we know there is a huge problem now, why would we wait until our population gets old and feeble before telling them to come up with another retirement plan?  Why would we not give people as much advance warning to make new plans, push out retirement, etc. as we can so that they are impacted the least?  Failure to do this is mean spirited and evil.  These people will be old and incapable of working to generate more value and many of them will be counting on fairy tale Wimpy Promises.  Many will be thrown into the streets where they won't have much of a chance.  What should we do, just push them all into a hole with a bulldozer?  Is this really what we want to do?  Really??  Also, young people are getting screwed in this deal right now.  Do we really want to continue stealing their future with our dishonest debt scam?

The phony liberal do gooders and the phony right wing philanthropists (often a self serving strategy believe it or not) out themselves as con men or willing patsies (there is little difference at some point) when they will not sacrifice anything today in order to make sure that young people and old people don't get screwed.  We need to balance the budget (and take the depression that that will cause), get rid of the federal reserve and return to honest money, and then create a debt work out with our creditors (no, they should not get off scot free because they should have known better than to keep on lending like that).  We need to slash military spending and we need to rethink how we are going to provide for the care of our elderly.  We need to do this now because the bulk of the boomers will be in retirement within a decade and the Ponzi will collapse with a loud splat at that point if we haven't shut it down in a more controlled fashion before then.

Monday, March 21, 2011

First Utah, now North Carolina?

Who knows how real this is or how much of it is just political posturing, but a North Carolina state representative has introduced a bill for the state to issue its own paper currency backed by gold and silver.

There is a huge difference between what UT and NC are considering.  UT wants to use gold and silver coins in the economy.  This is not and cannot be a scam.  Gold and silver coins are honest money.  On the other hand, NC wants people to trust that its suggested metals backed currency isn't a sham like the gold backing of the dollar was.   At first, NC would be honest about it but over time the temptation would be too great not to cheat when people's attention got diverted elsewhere.  Unless NC sets up some sort of ungame-able monitoring capability of the gold supply which contains appropriate checks and balances BY THE PEOPLE as opposed to by government employees, the system is not to be trusted over the long haul.

In either case the implications are significant.  The federal government has no (and I mean zero) power if people stop chasing after greenbacks and instead migrate to alternative currencies which the feds cannot game.  Every single bit of power wielded by the feds goes down the sewer the minute it can no longer pay/bribe/financially extort its captured cronies who rely on the US dollar for their day to day expenses.  If the military cannot be paid, will it follow federal orders?  Of course not.  If the federal law agencies are no longer getting paid will they continue to follow the instructions that pit them against the will of the people?  I think not.  Will the TSA continue x-raying the people and performing airport and train station grope-downs without federal funding?  Certainly not!  Will taxpayers even continue to send in federal income tax if the IRS is not being paid to enforce the federal tax laws?   Let's try it and find out!  The potential implications are massive.

It's one thing for citizens to display a vote of no confidence in federal authority (via protests, etc.) but it is a completely different thing for the states to be doing so with such overt displays of disrespect.  I say again, the only thing that gives the feds any power is their ability to print money from thin air which they can use to pay enforcement officers, bribe people and officials into compliance, buy votes, etc.  If that capability ever dries up the federal government is completely powerless. 

Nobody can predict the future but if states begin printing or authorizing their own currencies then the United States is in serious, serious jeopardy of a breakup.  Anyone holding US federal debt should be quite concerned about these new attempts by states to break free of federal domination.  At the same time it signals that states such as NC are probably bankrupt and have been told by the federal government to handle their own problems (only bankers get bail outs...).  If this is the case they might be left with little choice but to convince people to accept state sponsored currency so that they can extract the value from that scam instead of letting it all flow into the control of the federal government.  Again, the UT situation is completely different.  Gold and silver coins are not a scam, they are constitutionally required honest money.

At this point I think NC is just grandstanding.  They are trying to send a message to the Federal Reserve to stop trying to print everyone's retirement savings into obvlivion.  At the same time, NC is not a traditional leadership state so I doubt they will pass a law which basically makes the state a sovereign entity.  Now, if CA or NY or TX does this then it's a whole new ballgame.  These are traditional leadership states and everyone around the world would watch their moves with great interest.  This would be the most important US news in 100 years IMO because owning a sovereign currency is darned near the same thing as seceding from the union.

Sunday, March 20, 2011

18% of Florida homes are vacant. Does this look like a recovery?

CNN Money reports that nearly 20% of all Florida homes currently sit vacant.  Here is the main graphic chart cut and pasted from that article:
This is approaching depression like levels and this is happening at a time when interest rates are near historic lows.  It's pretty clear what happened: investors and normal people took advantage of the fractional reserve banking scam that is run by the Federal Reserve to leverage up into homes that they could not afford.  Most were hoping for a greater fool to come along upon who the real estate could be sold at a profit.  They were leveraged gamblers hoping to profit without doing any work.  Some were actually living in the places but they didn't understand what a huge economic downturn could do to their jobs or their salaries and so they were living on the edge without any safety margin, many without any clue that this is what they were doing.  In hindsight, few of them would have leveraged up like that if the Federal Reserve had not been manipulating interest rates downward because without that subsidy the people could not have afforded the payments on their McMansions.

Unfortunately, we probably haven't seen the bottom yet.  I reported in the past how some quality rental properties in Detroit were going for as little as $5 a square foot.  It costs more than that to lay cheap carpet down but the buyers were nowhere to be found.  The reason?  No jobs.  I think that price level represents blood in the streets and so investors should be buying those up in anticipation of Americans going back to work in the future at lower wages which better compete with foreign labor rates.  I don't know if Florida properties will get that low but Florida is not exactly an industrial powerhouse and tourism is not to be counted on as a reliable revenue source if things keep getting worse on the overall job front.  I have recently seen a 2200 sq ft pool home with aluminum enclosure with single car garage in the Port St Lucie area going for $22 per sq ft and it was in very livable shape.  The prices seem to just keep falling and falling.  Lots of people talk about reversion to the mean in prices but in any mania collapse it is most likely that there will be a painful undershoot.

Banks in south Florida are still withholding properties from market ostensibly because they are afraid to flood the market and depress prices.  That is a failing strategy and banks know it.  Homes cost money to hold.  You have to pay property taxes and maintain the yard and the house or it will lose value.  If you turn your back on an unoccupied house then squatters will move in or vandals will rip the copper out of the walls in order to get $3.50 per pound from it, no questions asked, from the local metals recycler.  So why are banks really withholding from the market?  Because until the property is disposed of our corrupt accounting rules allow them to hold the assset on their books at fantasy valuations.  If banks had to tell the truth about their capital losses in a true mark to market situation, many would go bankrupt overnight.  So the banks are buying time for themselves but this is resulting in value loss for the economy as these homes go into disrepair.  If government allows banks to play this game too long it could result in property blight in Florida as has been seen in Detroit.

If you are still wondering what the root cause of all these problems is, look no further than fiat currency and fractional reserve banking.  If banks could not create credit from thin air and spend it into the economy as if it were real money then $60,000 homes would never have been bid up to $300k by leveraged buyers.  People would not find themselves in over their heads today and banks would not be at historic levels of risk for bankruptcy.  The carnage in the US is far from over.  Government has been propping things up using increasing levels of debt and money printing but that is an unsustainable strategy, another con game that must eventually collapse.  When it does I fear that housing prices across the nation are going to go down much further than most people think is possible.  Houses are not worth what you paid or what you have into them in improvements.  They are only worth what buyers can afford to pay.  Today 90% of the housing loans are being sold to the government because banks are just originating them and passing them along.  If government ever finds itself in a position where it can no longer do this, the housing market is going to plummet to the point where buyers can afford to buy without big loans.

Contrary to popular belief, sellers don't set the prices in the market place, buyers ultimately do.

Thursday, March 17, 2011

When fiat currency works in your favor...

As a result of an earlier post I made on the potential reverse of Gresham's law I did a bit more research on the intrinsic value of modern coins.  Turns out there is an interesting web site that provides the real time valuations of the metals used to make coins from.  Out of all the modern coins, the Nickel appears to have been significantly overlooked by Gresham's law. 

The following graphic is a snapshot of today's intrinsic coin valuations based on the spot price of metals they are stamped from.  These prices do not include the minting fee (a stamped coin is generally worth more than a lump of metal whose weight and purity cannot easily be determined by a potential buyer of it) so they are probably 5% below actual value because that's what it costs to mint.
While the most worthwhile non precious metal coin out there is the lowly penny, the pre 1983 ones are not common because your fellow citizens have been practicing Gresham's law with them.  Citizens keep the 95% copper ones (or quietly turn them into scrap yards for cash) and let the 97.5% zinc ones float around in the economy.  The fact that government is no longer making the 95% copper style means you can't easily find them.  Thus, your labor of finding penny hoards and sorting though them has to be factored into the value proposition.  That makes the hunt for 95% copper pennies economically unappealing.

But look at the Nickel. It still only costs 5 cents to buy yet the metals it contains are worth 6.8 cents at today's prices (1.25 grams of nickel and 3.75 grams of copper).  Nickel and copper are not thought of as precious metals today but they are used in so many industrial applications that they are both completely necessary for our economy.  They will never, ever go out of style.  They will never, ever go bust or become valueless. 

Thus, when you can buy them below market price they make a great mechanism for long term storage of wealth as long as you have the space to store them.  Of course, getting your money back out of them might mean that you have to melt them down because the face value - the value set "by fiat" or by government decree is wrong.  Sooner or later the government will fix this free handout.  They will make Nickels out of zinc or some other really common and cheap pot metal and that's when people will figure out they should have been hoarding the coins.  Remember, before government debased the silver coins nobody hoarded the 95% kind because they thought it was normal, common and usual that coins should have intrinsic value.  It was only after they saw government pulling the "looks the same but not the same" game with our coinage that the people began to practice Gresham's law on silver coins. 

Until government stops giving away free metal you can just go to the bank each week and give them a $100 bill and in exchange for worthless paper those morons will give you over $136 dollars worth of valuable metal.   You don't have to sort or search or anything.  Its a simple transaction where you hand them worthless paper money and they hand you very useful industrial metals that have been mined and refined and then stamped and rolled into convenient cylinders.  Today this strategy probably sounds a little whacky.  Check back with me in 5-10 years on this and you will be singing another tune.  Those metals cost real money to mine and smelt and refine.  Those are all very energy intensive operations and unless energy becomes free in the next decade the cost of producing those industrial metals is going to go up dramatically.  That makes the coin worth something.   In contrast, paper money costs very little to produce and so there is no limit on its production.  Paper money has little or no intrinsic worth.  Any time you get a chance, trade it for something that does have intrinsic and lasting worth.

A roll of Nickels a day will keep the government funny money con men away because Nickels are the only currently minted US coins that can be considered real money.  Their intrinsic industrial value is worth more than what the government declares it to be.  Another plus with Nickels is that they do not corrode so you don't have to take any special storage precautions.  You could put them in a wooden box inside a couple of trash bags and bury them for a decade and they would come back out of the ground in pretty much the same shape that they went in.

To get more specific, let's say you wanted to diversify some of your savings into metals.   How does $20k sound?  You don't trust paper claims on metals because you know that Wimpy Promises aren't worth anything.  So you collect 400,000 Nickels over time.  That may sound like a lot but it's only 200 trips to the bank if you buy $100 at a time and I bet you could easily tell them in advance that you wanted to transact $500 at a time (so they should ship in lots of Nickels at their expense for you).

At 5 grams each that comes out to about 4400 lbs of metal.  I'm guessing that would fit into a cube that is 4' on a side.  In other words, roughly the size and shape of a pallet of tile.  It would not be much trouble to dig a hole, put a wooden tile pallet in the hole, put a lid over the pallet and then a PVC tube leading above ground.  Then you cover it with dirt and pour a small concrete slab over the top of it.  Bingo, instant long term savings vault.  When you want to add to it, just drop rolls of Nickels down the PVC and put the cap back on.  If someone wants to steal it they will have to move a concrete slab and then load 4000 lbs of metal into their getaway car.  That is not likely to happen even if thieves have you at gunpoint.   Pull that metal out in 10 years and, by the looks of things today with Bernanke printing dollars like it was his hobby, there is a good chance that it will be worth $100k or more.  But under no circumstances will it be worth less than the face value you paid even if someone invents free energy and mining costs plummet.

Gresham's law in reverse

Today's article from is well worth a read because it describes how Gresham's law will eventually begin working in reverse.

Gresham's law states that in an economy "bad" money will chase out "good" money IFF their exchange rate is set by law.  In this context, bad money should really be thought of as impaired money while good money is unimpaired money.  Impaired money is money that has had some or all of the value removed from it.  In Roman times it meant clipping the coins.  Government would actually clip off a portion of the gold coin and then use it to make new gold coins from.  People would notice this and if they ever saw an unclipped coin in circulation they would hoard it while passing along clipped coins in their economic trading.  In more modern times, the US government removed all value from the dollar (complete impairment) by eliminating government sponsored convertibility of the paper into gold.  US government also removed all silver from most of our coinage in the mid 1960s.  As a result people began picking through their coins and hoarding the silver ones while passing along the silver colored kind that had no silver in them.

At the time such activity seemed a bit miserly and cheap.  After all, a 50 cent piece is just a half dollar, right?  But consider the facts.  Three 1964 and earlier half dollars weigh about 1.2 troy oz.  These coins were 90%
pure silver.  Thus, from 1.2 Troy oz. of these coins you could extract 1.08 Troy oz. of .999 fine silver.  Today's spot price for silver is $34.34 per Troy oz.  That means these three coins can today be exchanged for about $37 (each coin is worth more than $12).  I don't mean $37 if you find the right buyer and I don't mean $37 if you can find someone interested in buying old worn out coins.  I mean $37 all day long in every country on the planet because every country has a metals exchange.  In fact, $37 is the bare minimum.  Sell these on Ebay or Craigslist and the price will be more like $42 from my recent observations.  People are buying the silver content and the form it arrives in is not important.

So the cheap, moronic idiot who picked these silver coins out of the money supply has multiplied his/her dollar value by 24.6 x.  I don't care if you did this in the 1940s or in the 1960s, that kind of preservation of buying power is worth your time.  In fact I think the cheap moronic idiot was really more like a prudent, conservative, insightful saver.  For comparison with other investments, look at the Dow Jones Industrial Average.  If you bought 1 "share" of the Dow in 1964 it would be about $875.  Fast forward to today and that same investment would be worth about $12,000.  That's only a 13x gain.  So who is the moronic idiot, the person who invested in the stock market and paid trading fees and who had to do all kinds of paperwork at tax time and who had to hire an investment counselor and who has to pay capital gains taxes on his "earnings" OR the cheap, moronic idiot who simply followed Gresham's law and saved precious metal coins when it became clear that government was debasing the currency?

The most important part of Gresham's law is the last part.  Bad money will only drive out good IF the exchange rate is set by law.   So if someone is stupid enough to buy a pack of gum valued at $1 using two silver half dollars, the shop keeper will not give him $23 worth of change like he should given that each of the coins is clearly worth at least $12.  No, the shopkeeper will treat the coins as if their combined worth is only 1 dollar because government says that is all they are worth.  In other words, the exchange rate is set by law.  If the shop keeper comes across someone so ignorant, he does the transaction and then when the customer leaves he pulls a $1 bill from his pocket, puts it into the cash register and takes the 2 coins home.

Gresham's law goes into reverse only when people stop listening to government's valuation of things.  In other words, if shopkeepers begin to ignore the fact that government has set the price of a 1964 silver half dollar at 50 cents and instead allow people to spend them at their actual silver content value as defined by the global spot market for silver, then silver coins will come out of the woodwork like roaches.  People who don't know how to deal with the metals exchanges have been hoarding them all these years.  If shopkeepers begin to pay fair value for them then common people will finally have the chance to spend them at their actual market value.  Until that happen, the coins will just stay in the big glass jar.   Why would shopkeepers ever consider exchanging goods at full market rates of the silver content?  Simply because they begin to lose faith in the US government's ability to manipulate the value of its paper money.  In other words, they lose confidence in the con game.  They begin to worry about inflation eating away at the value of their savings.  They would rather have real money instead of fake paper monopoly money and silver colored coins that contain no silver.

There's no telling when Gresham's law will go into reverse but it always does eventually because Gresham's law is part and parcel of a debt Ponzi (fiat currency is a debt note...) and Ponzis always collapse at some point.

Wednesday, March 16, 2011

John Mauldin discusses the End Game

I've been reading John Mauldin's free email "Thoughts From The Front Line" for several years now.  Before I say too much more I want to mention that John's a very smart guy and he's also a nice person.  I have written him several lengthy emails regarding my views over the past couple years, mainly when I disagreed with his complacency on the economic situation.  Each and every time he sent me a thank you response at the very least and on occasion he made positive comments on my views.  It's clear he reads all his emails and responds to them all.

After the stock market initially began crashing in late 2007 and all though 2008, John thought that we were going to have a "muddle through" economy.  In other words, things would get better but it would be sort of slow and annoying.  He never really believed that a serious global crash was in the cards in those days.  As time went on he began to change his tune.   His new book - just released - based on his new realization is called "End Game".  End Game is not "Muddle Through" - John has changed his views on what is coming.

As you can see from this early 2010 video he was already formulating his thoughts for the book at that time.  It is a fairly slow moving video but its well worth your time to watch anyway if you still haven't figured out that something dramatic has got to happen to the global economy in the next few years.  We have a global debt Ponzi in the end stages and Ponzis always end up collapsing.

The problem is completely simple:  everyone, and I mean everyone in the world is neck deep in debt.  Even the people who act like they have a surplus are really in debt even if they don't get it yet.  How can that be?  Well, imagine that you make products and I buy them from you.  I don't have the money to pay so you loan it to me so that I can buy.  I buy a lot of your products like this so you took out big loans in order to buy manufacturing capacity to produce lots of products to sell me so you could get rich quick. 

Unfortunately, I don't have the cash to pay you for the products.  I owe you the money and I have owed you the money for decades.  At this point you are afraid that if you cut me off that you will be out of a job.  As a result you keep producing products and giving them to me and taking IOUs in exchange. 

Now, if I ever had the ability to pay you, I would have done it years ago.  Each year that goes by I pile up more debt.  Do you think I'm ever going to pay you?  No, I never will.  Not because I don't want to but because I don't have the ability to.  Of course, I have gotten used to having all your nice products without paying for them.  I have come to think that everything I consume each day is my birthright.  It has become so natural for me that I don't even think about it anymore and I certainly don't worry about repaying you.

At some point you are going to have to accept the fact that I am a deadbeat and that you have been a greedy fool trying to sell someone like me more products each year even though it has been clear for years that I don't intend to pay up.  When you accept that fact you are going to stop sending me products.  Up until this point, you have been telling your parents you are rich because I owe you so much money.  You have been treating a Wimpy Promise as if it were cash.  At times like this, two birds in the bush does not equal one bird in the hand.  When you do cut me off then how are you going to pay the debt on all that manufacturing capacity that you put in place trying to make bank on my over consumption?

And so it is clear.  Even the overproducers that everyone considers rich like Germany and China are not only broke, they are in big time debt and they will have to admit it when they finally stop their ill advised vendor financing scheme.

All we are waiting for is some catalyst before it all topples over in a loud crash.  What we think of as normal in the USA is in no way normal.  Our lifestyles have been completely debt funded for many decades now.  Government keeps putting on a theater about cutting spending but as I have posted before, if government simply balances the budget (i.e. moves the deficit to zero and does nothing about the debt), the GDP will plummet by 18%.  That is a massive depression level and it would probably result in a much higher GDP collapse because when governments stop spending, businesses would stop spending to some degree as well.  In other words there would be some knock on effect that could lead to a 25 or even 30% drop in GDP.  Unemployment would be 30% and people who are out of work soon begin to consider revolution as an option.  So the government is just going to talk, talk, talk about cutting the budget but spending will have to continue going up exponentially anyway or the Ponzi will collapse.  Of course, at some point it will collapse no matter what the government does because once people stop loaning our government money, it's game over for the debt Ponzi.  I really can't believe anyone still thinks we are going to ever repay the national debt much less have a balanced budget.  It will never happen because the act of it happening will in and of itself cause a depression.

I'll leave you with the final thought on a couple of charts starting with the Dow Jones Industrial Average.  Look at this chart which goes back to around 1929.  You see that exponential "hockey stick" curve?  No properly functioning economic system can have that type of growth because the growth should be based on work and people have not worked exponentially harder or more productive since 1980 when the chart went wild. That chart is due to credit growth, not real economic growth. 

Now that credit is collapsing, guess what the Dow is eventually going to look like?  Well, it will probably look a lot like the Japanese stock market since they entered a multi-decade deflationary crash.  This chart which is shown below using the Nikkei 255 (sort of like the DJIA of Japan) is known as a mania chart.  There are many in history including things like Tulip Mania of the 1600s, the South Sea Trading Bubble. etc.  Whenever you have that exponential left hand side you have to expect an eventual reversion to the mean and probably an undershoot by some degree. 

So here we are in the End Game.  People keep talking about cutting the government spending but that is exactly what will trigger a deflationary crash.  We HAVE to continue borrowing and spending ever higher amounts.  If that ever stops then we will begin the slide down the right hand side of the mania collapse.  The sooner we all realize this and take the pain the better off we are going to be.  But if we try to forestall the inevitable forever then it is going to bleed us slowly before the collapse happens.  The best move is to allow the collapse to happen quickly and then begin working toward a new stasis while we still have a lot of fat on our collective economic bones.   Think of it like getting heart surgery.  You know your heart is giving out and that surgery will eventually be required.  Should you do it now while you are strong or wait until you are weak and feeble to go under the knife?  It really is just about the same thing with the economy.  Smart people will use the time leading to the collapse to try to get themselves as well positioned as possible.  Well positioned means "as far away from the debt Ponzi as possible".  Here are some specific actions can you take to get there:
  • Get your long term savings out of debt based money like the dollar and other fiat currencies.  Put it into real money like gold and silver.  Don't do it all at once, convert your savings into real money over time (AKA dollar cost averaging).  10 or 20 years from now you will still have your buying power if you stored it in real money.  If you store it in fake money like dollars or other fiat currencies you will eventually lose the vast majority of your buying power.  $1,000,000 will spend like $100,000 or maybe even $10,000.
  • The stock market is a Ponzi scheme.  401ks and IRAs and any other savings plans where government controls your access to your own money are TRAPS.  All of them.  Why do you think they put the bait of tax deferral in there like that?  Because they like you?  HA! HA! HA!  Please don't tell me you think the government gives two $hits about you after the way they ripped us off bailing out their banking and finance pals!  The tax deferral is nothing more than bait.  Government knows that you have to bait a trap if you want to catch any game.  Save for your retirement but avoid tax deferred programs which give control of your retirement fund to the government.  Unless you have your money in your hands, you don't really have your money.  "They" have it.  And when push comes to shove, they will steal it just like Argentina and other governments have done to their people over the years.  Count on it.  Our government is corrupt to the core and there is nothing it won't do to try to save itself, including stealing your retirement money either outright or covertly through the sneaky tax called inflation.
  • Don't assume that all the nice things that are available to us will always be available.  Folks, we are not paying for all the imports and so at some point the imports we are not paying for must stop. 
  • Don't count on government to save you.  Americans need to work our way back towards the fierce independence exhibited by early Americans.  Government has no money of its own and it will have increasing problems asking me and other people for more of our money to spend on its projects.  I don't get anything I want from government spending at this point so I am not happy giving them more of my money.  I know a lot of people who think the same way.  Many of them now call themselves "Tea Party" members.  I do not call myself a Tea Party member because it has too many fake posers like Sarah Palin associated with it for me to want to affiliate myself with it.
  • Don't count on world class infrastructure in this country forever.  Our infrastructure is expensive and we paid for it with credit.  As the credit runs out we will find that maintaining big roads, bridges, underground pipes, etc. is very expensive and in fact more than we can afford.  When your cable TV starts to get glitchy, your electricity seems to be having brown outs where you never used to have them, you start getting lots of boil water orders due to broken pipes, etc. then that is a sign that infrastructure maintenance is being neglected because it's just too expensive.

Friday, March 11, 2011

The idiocy of an export driven economy

In this post I want to discuss the simple math and logic associated with trade.  This needs to be discussed because people have been led to believe all sorts of stupid things about economies and trading.  Like just about everything else there has been a method to the madness - it was not accidental.  Someone is profiting from the madness, just not who most people think.

By way of obvious background and lead in, if people work a little they can provide the necessities of life for themselves and their families: food, clothing and shelter.  If they work a bit harder they can produce more than their own family can consume.  The problem here is that hunting, clothing manufacture and making shelters can all be done reasonably well by a single person but there is just too much to know for one person to be really good at everything. 

If you have 3 cavemen trying to survive, they can each of them go it alone or they can divide up the work so that each of the 3 can specialize and become really good at his specialty.   In fact, one really good full time hunter who has learned to use specialty tools like snares and traps can deliver more food than 3 poorly trained part time hunters.  Likewise 1 full time master clothing maker who has taken time to make specialized tools for his craft like needles and thread can outperform 3 part time clothing makers who have not had time to make special tools for making clothing because they have also had to work on shelter and food gathering.

When people produce more of a given thing than they need and then they trade the excess of what they are good at making for the excess of what someone else is good at making we call that an economy.  An economy is all about trading real stuff that took real work and skill to produce for other real stuff that again took real work and skill to produce.

All of this should be obvious so now we will get into the less obvious part.  Now imagine in that 3 person economy if the hunter decided to work extra hard.  He would produce more meat than the others could repay him in terms of clothing and shelter.  In this micro economy, there are no other choices for him to trade for.  Sure, he could find ways to preserve the meat but at some point he would just have too much stuff.  What he should be doing at this point is either relaxing and enjoying life a bit or pursuing new ways to enhance his life - perhaps finding a woman or making cave art or something.  But it is wasteful to just keep producing more and more meat after his needs are fulfilled and past the point where his excess can be traded for more clothing or a better shelter. 

Cavemen were smart enough to know this but fast forward to today and we see that central bankers have made us forget it.  Central bankers have us trade our goods and services for paper or electronic fiat currency.  They have tricked us into believing that it is just as good as receiving real stuff in return for our labor.  Because they can print an endless supply of it, we can never work hard enough to collect it all.  Thus we are on a lifelong treadmill of unnecessary and wasteful production.

So called "export economies" are the result.  They produce way too much stuff for their own people to consume and they also produce so much excess that other people cannot produce enough stuff to trade for their exports.  I'll use Germany as a proxy for all net export economies.  So instead of Germany exporting a car and getting a trainload of apples from Spain in return, Germany exports the car and Spain gives them IOUs called Euros in return (Germans can only eat so many apples after all).  Germans accept these IOUs as if they had value.  They look at their growing pile of IOUs and they think they have become rich.  So if exporting worked a little bit then more exports must be better.  Germans thus take on debt to create ever more stuff that they can't consume and that their trading partners have nothing tangible to trade for.

At some point (like right now), the net exporters begin to realize that the IOUs they have been accepting are worthless.  If their trading partner cannot trade goods for goods then what is supposed to be an economy turns into a vendor finance scam.  That is what being a net exporter actually boils down to.  Should the net importers have taken real goods knowing they could never return real goods in exchange some time down the road?  Probably not.  But expecting people to show self control is stupid.  If you put a bag of tasty candy in front of a group of children and then walk away, the bag will be empty within a few minutes.  Does it makes sense to go back at that point and be angry at the children?  Of course not, they were just following their nature.  It is up to the person who has something to reasonably protect it.  When net exporters send goods to net importers for years at a time, that is not reasonable protection.  It is giving candy to children.

The only real economy is where exports and imports are balanced for the most part.  Sure, if there is a bad harvest of apples this year perhaps Germany can send a few extra cars over to Spain anyway but only if they are willing to accept next year's bumper crop in return.  But if year after year after year Spain does not produce enough apples OR if Germans develop a dislike for the taste of apples then Germans are to fault if they keep on sending cars over.  It means they got greedy for paper profits and didn't want to figure out that they were just giving candy to children.

Keep in mind that none of these imbalances could occur without the scam created by fiat currency and fractional reserve banking.  The dishonest/fake money conditions producer nations to take on debt to create factories to produce far more than they can ever consume themselves.   They do this because they have been taught that paper profits enhance their lives and that they can export their stuff to other countries.  The problem is that consumer nations don't create enough stuff to trade back in kind so they resort to using debt in order to "purchase" stuff they got from someone else.  In the case of Germany and the PIIGS, the debt market is called the Euro.  At some point the consumer/debtor decides to stop paying on past debt.  That's when the producers/creditors begin to figure out they will never get paid because the consumers don't have enough to pay.  The producers then default on the loans they took out for their factories.  The industrial oligarch con men walk away with billions in their pockets and the debt falls to the people of the exporting nation.  The notion of export based economy is a scam (a vendor finance scam to be exact), always was a scam, always will be a scam.  Soon enough everyone will know what I am writing is correct even though it might still seem strange to many reading this today.

Tuesday, March 8, 2011

What does it mean when the big boys are afraid to invest in their own Ponzi?

The Houston Chronicle reports today that famous investor Carl Icahn has decided to return money to outside investors, citing an unwillingness to manage their money through another downturn.  As you can read in a similar article in the Financial Times, he is not the only one.  Hedge funds are falling like flies.  People should not be ignoring this.  If there was any money to be made, these guys would be in there making it but instead they are bailing out of the game.  It is the hedge fund equivalent of insider selling. 

So why are they nervous?  Hasn't the stock market been on an incredible roll since March 2009?   Well, maybe these guys know that the rally has been driven by support from the Federal Reserve in more ways that anyone can count (but principally through low interest rates which push pension funds out of fixed investments into the risky stock market, the taxpayer debt supported bank bail outs, and of course quantitative easing money printing / legalized counterfeiting).  Maybe these guys know that the Fed's inflationary policies are pushing up the prices of food and fuel and that this will eventually leave less money for cars and big screens and fancy cell phones. 

Then again, maybe they just understand that the stock market is essentially a Ponzi scheme which must dry up and blow away when baby boomers move from work mode where they are pumping 401k dollars into the Ponzi to retirement mode where they will be pulling money out of the Ponzi to live on.  It could also be that new regulations are limiting their leverage and increasing their own exposure to legal attacks.  While this may sound like good government going after risky traders, any money that doesn't go into the stock market cannot be used to pump the Ponzi.  Lack of new money inflow is the death knell for any Ponzi scheme.  That is true in triplicate when the money we are talking about is invested by leveraged hedge funds.  Those guys can use leverage to make $2 billion spend like $20 billion when it comes to paper investments and trading. 

Whatever the reason is, when the smart money bails only the patsies are left.  Follow the smart money.

Monday, March 7, 2011

The truth about stock market valuation

In this post I am going to discuss some mathematical and logical truths about the stock market and not everyone is going to like what they read.  Still, not wanting to hear bad news does not make it go away.  The head in the sand strategy is a fail.

I'll just jump right in here because there is no good place to start.  The stock market is mainly a Ponzi scheme.  Not 100%, but at least 80-90%.  Before you roll your eyes, consider what a Ponzi scheme is: a system whereby profits paid to the first to exit the scheme come from the most recent to enter the scheme.  This makes the Ponzi appear as a perpetual fountain of wealth as long as there are new suckers coming in the front door.  But when the suckers dry up and those in the system begin to head for the door, the Ponzi collapses.  If you still don't get it, go review the life and times of Bernard Madoff.  Keep this in mind as I touch on the salient details of the stock market.

People put their money into the stock market in the hopes that they will be able to pull more money out of it someday than they invested.  Everyone has the same goal. They hope that their money will "work" for them.  Of course, it takes real work to create new value and money does not do work.  People do work aided by machines.  That is how new value is created.  Making money without doing work is called gambling.  Many people who thought housing could only go up learned the hard way that the profits were a temporary illusion.  People gambled that they would be able to get out of the housing market by unloading their overpriced home onto a greater fool.  At some point the greater fools dried up and the housing bubble went bust.

So where do people think this extra money is going to come from with the stock market?  Does the stock market have some sort of influx of money other than investors?  The truth is that most people have no idea.  They have been herded into the stock market like cattle by government working with corporations just like government herded people into housing by telling people that we live in a "home ownership society" (GW Bush).  By "herded" I mean that people have been pushed into 401k programs and those programs mainly invest in stocks.  The 401k system became law in 1980 and corporations quickly incorporated them into their retirement programs.  Why wouldn't they?  The savings of the employees were going right back into corporate stocks which is where corporate officers make their real money!  Of course they are going to set up a plan to enable this. 

No new value is created without the injection of work and this applies equally well to stock markets.  There are three times where work is actually injected into the markets.  First, when a company does an IPO (Initial Public Offering) of stock, it basically trades the labor of the employees that has taken place thus far for money from investors.  The second way that companies inject work into the stock market (and thus add value) is through share buy backs.  The employees work to create value, the company profits from it, and some of those work-generated profits are pumped back into the market in order to drive share prices higher.  Corporate officers love higher share prices because, again, that's where they make their real money.

Another way that value is pumped back into the markets is via the payment of dividends.  Dividends work basically like share buybacks but with a twist.  The employees work to create value, the company profits from it and some of those work-generated profits are pumped back into the market.  But instead of using the money to buy shares, the company sends cash back to investors.

Because they inject work-generated value into the markets, IPOs, share buybacks and dividends are not Ponzi schemes.  Assuming sufficient value is pumped into the associated shares by these mechanisms, those taking money out of the market via these methods are not depending on new investors bringing their money in so that it will work.  They are thus not counting on a greater fool to come along and pay them more than they paid.  This is the key factor which mathematically legitimizes market value increases based on these mechanisms.

Unfortunately, IPOs, share buy backs and dividends are a small part of the stock market.  That means the lion's share of the market valuation is due to people (and organizations like pension funds, etc.) bringing their money into the market with the hopes of taking more money out than they put in.  This cannot possibly happen when such a small portion of the market valuation is supported by the addition of real value to the system through work as defined by IPOs, share buybacks and dividends.  The vast majority of the stock market is a Ponzi scheme based on greater fool theory. [2014 edit: in hindsight the data now shows that there is an even bigger source of new money into the markets and that is margin debt].

America has had a big population bubble called the baby boomers.  The boomers worked hard and saved a lot of money.  Much of that money was funneled into the stock market.  Boomers were told that it was the responsible thing to do.  They have been told that it makes sense.  But it doesn't make sense at all.  When boomers stop putting money into the markets as they retire, who is going to come along and fill that gap?  There simply are not enough younger workers to make up the difference.

When people buy stocks, the price goes up based on the law of supply and demand.  All the boomers have been buying lots of stocks since the 401k program was created.  This has driven up the price of the Dow Jones Industrial Average exponentially.  But now those boomers are beginning to retire.  They will want to pull money out and that means they have to sell stocks.  Unless enough young people come in to buy the stocks that oldsters will be selling, the stock market must fall. 

That is just how a Ponzi scheme collapses.  The buyers dry up and then everyone who is already in the system is left scrambling for the exits.  The last ones out get left holding an empty bag. There are not enough young people in America to keep the Ponzi pumped while boomers exit.  In addition, young people have high unemployment and lower salaries [2014 edit: "and how!"].   Less new suckers with less invest-able money per sucker and you have the makings of the coming Ponzi collapse of the stock markets.  There is no way around this because math dictates that it cannot end any other way.  Those who say it cannot happen are ignoring the facts just like homeowners ignored the facts as the housing bubble peaked.  The only question is when this will happen and nobody knows the answer to this.  However, it mathematically has to happen before most of the boomers extract their value from the system.  If it is like other Ponzis, things will seem OK until the trap door opens and then everyone will head for the door at once leading to dramatic price declines in stocks.  See the Japanese stock market chart (Nikkei 225) over the past 30 years if you want to know what that looks like.  Keep in mind that the stocks kept falling despite massive money printing and inflation by the Japanese government during that time.

The reason that gold and silver are moving up rapidly is because people do not trust the stock markets like they used to.  Many boomers lost huge portions of their retirement accounts because they bailed out when it crashed into 2009.  Even though the stock market has bounced part of the way back, those who got out and moved their money into metals are never going back into the stock market [2014 edit: note that the subsequent highs in the markets occurred on collapsing volume so I still stand by this statement].  Metals can be volatile too but they can never go bankrupt and the same cannot be said about the stock markets.  Besides, metals markets are very small relative to stock markets.  Metals are likely to benefit from the coming market crash.

Friday, March 4, 2011

The philosophy of liberty - video

The following video should prove educational to many people who have been led down the wrong path about the purpose of government and its impact on liberty when misused.

In short, the assumption that someone else has any claim on your life is absurd.  In order to create wealth, people have to work.  That work consumes a portion of your life.  Life is a consumable resource.  Once your life is exhausted, you die.  If you use your youthful life to create wealth for your own retirement then it means you are not counting on someone else to save you later on.  Such use of life is considered acting responsibly.  In this case your wealth must be considered either as stored life or as expended life depending on how you want to look at it.  In either case it is a one way street.  You traded your life for some money.  Or, as Jim Morrison sang it,“trade in your hours for a handful of dimes....".

When other people try to force you to spend your money on their pet projects, they are trying to claim a portion of your stored life force.  They are trying to steal a portion of your life.  When someone does this we call it slavery.  Nobody has the right to enslave another person by any means or for any purpose.  No matter how civilized or emotion-wrapped the threat presents itself, it is still a threat against one's freedom.  People have the inalienable right to defend themselves against those who would enslave them, including the use of physical force if there is no other way to defend oneself from this threat. 

The concept of slavery is far from hypothetical even in our modern age.  There is a thriving slave trade in many places in this world, including right here in the USA.  Slaves are used for many purposes including the sex trade as well as forced labor in low income countries.  Slavery is not just something you read about in the history books, it is alive and well on many levels today.  If your children were taken by slavers and then forced into prostitution, what limits would you place upon them in trying to secure their own freedom?  I can't speak for everyone but in my mind there would be no limits on what I would condone them doing in order to achieve freedom.  That's how terrible slavery is.  We only get one life and for someone else to steal all or part of it from you whether by physical force or through sophistry, guile and threat of law makes little difference.

If slavers broke into your house and threatened to take you away and sell you into the slave trade you would be justified in using any means available to you in resistance of their immoral acts.  It is thus justified to protect oneself from slavery by degree using all reasonable methods available commensurate with the degree to which someone is trying to enslave you.  If they want to steal 100% of your work output (complete slavery) then you have the right and even the moral imperative to shoot to kill in order to avoid being completely enslaved by criminals.  But what if the slavery is not 100%?  What if slavers only demanded 50% of your work output or maybe only 20%?  A reasonable person would probably conclude that the resistance used be scaled down so that it was proportional to the threat. 

The only problem is the definition of what is reasonable to put up with when it comes to something immoral like slavery.  Some people might be content to endure 20% slavery but others might believe that any amount of slavery is too much.  History shows that 100% slavery is not the standard by which resistance by deadly force is warranted.  The founding fathers of the United States believed that the government of Great Britain was effectively enslaving them thus making moral and just the need for a bloody revolution.  It was certainly not 100% slavery which would have meant the theft of all the productive output of the people.  In fact it was not even 50% slavery.  People in the colonies did not live a standard of living that they would have had to suffer had Great Britain been stealing half their productive output.  Maybe it was as low as 30% slavery.  So history shows us that there is no hard and fast standard for how much slavery people should be forced to endure before they resort to resistance by the use of physical force.  This concept is actually the very essence of the Declaration of Independence of the United States which is backed by the constitution and the second amendment to the Constitution.  

When people try to use government to take your money from you in order to fund their pet projects they are really trying to use government to enslave you and to remove from you your right to spend your life force on improving your own living condition.  I don't care if the amount in question is a penny or a pound and in fact history shows that the demand for a penny always turns into a demand for a pound over time. 

It is shameful for people to try to enslave their fellow citizens like this, even if the slavery happens over time and by degree.  If some people want to support special causes then they need to use their own labor to earn money to support them instead of promising votes to politicians if they will only steal from the rest of the people and enslave them by degree on behalf of these "do gooders".  It is a dishonest and nefarious practice to enslave one man in order to provide for another and it is bad for the economy as a whole.  People who think they have the right to steal other people’s lives like this are not doing good in aggregate.  The bad done in enslaving others far outweighs any perceived good being done.
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