2012 Outlook, Part 2: Bombs... er, Bonds; Currencies and Gold
The UNFOLDING destruction of the developed world's economies and financial/currency systems continues apace. Public servants are trying to defy Mother Nature with the stroke of a pen; she will not yield to this. Radical Marxist POLITICAL solutions to practical problems are at the end of their collective ropes (double entendre intended). You CANNOT store wealth in paper, PERIOD. Those who do will get what they deserve: NOTHING. It has been and will be printed endlessly from this point forward as Socialist government policies have destroyed wealth creation and substituted Ponzi asset-backed economies in their place. Now those economic models have reached their COLLECTIVE endpoints.
Economies based on models of consuming wealth rather than producing wealth are DOOMED, and this is the definition of the developed world. Switching back to the wealth-production model used prior to 1971 in the developed world will be painful as our leaders have FORGOTTEN what wealth-creating policies to implement and how to do so.
The financial systems of the world sit on TOXIC paper (government bonds and currencies) and they call them assets and reserves - they are NOT, THEY ARE LIABILITIES! To see the enormity of government debt in the biggest economies in the world look at this graphic from www.demonocracy.info:
These are worthless checks which can never be REDEEMED in the biggest check kiting scheme in history, BAR NONE. They are backed by nothing, redeemable in nothing and PAY nothing and called RISK FREE investments. This is a testament to George Orwell and the financial illiteracy SPAWNED by PUBLIC SCHOOLS.
These financial and currency systems are run by the Central Banks and public servants and prey upon their citizen's wealth for redistribution to government dependents, elites, crony capitalists and government employees. The whole fabric of developed-world governments is PREYING on the private sector in one manner or another: currency debasement; crony capitalism through oppressive regulation; and taxation of virtually any activity in which a human engages, and they say they are serving and protecting the public. THE END IS NEAR. They have preyed on the private sector to the point that the goose is DEAD and can no longer lay eggs.
Something-for-nothing societies are like LOCUSTS searching for something for nothing; they will EAT everything in the developed world right down to the roots including the seed corn for next year's harvest and their children's future earnings (these are morally and fiscally-bankrupt leaders and citizens). They are spending tomorrow's income today and waiting for the bankruptcy to arrive.
They did this years ago in Greece and in mainland Europe for that matter, they are doing it now in the United States. Greece is a Socialist country; it produces next to nothing and has driven wealth creation OUT OF THE COUNTRY. For generations, the people have been taught that they are entitled to a greater standard of living than they produce. Thirty percent of the WORKING population is made up of GOVERNMENT EMPLOYEES (same as in the US). No bankruptcy will restart wealth and income production. The people who are the real income producers left decades ago at the point of a government confiscatory gun and they are NEVER coming back.
the world would anyone start a business in the United States when the Federal Government is DEDICATED to confiscating any wealth they may produce, and with a President that is running for office on the platform of demonizing success and telling people that by supporting him they will be rewarded with all they need? Guaranteed by government, just like the other $100 trillion worth of promises the government has made but not paid for. The people who believe this are his FOOLS; his promises can never be PAID except with increasingly WORTHLESS coupons called US Dollars.
"Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, Its inherent virtue is the equal sharing of misery..." ~ Winston Churchill
GROWTH WILL NEVER RESUME as to do so is to invite punishment and slavery to the WELFARE State. The psychological destruction by the president's CLASS WARFARE rhetoric on entrepreneurs and small businessmen cannot be underestimated; it will take years to undo it.
TAXES are set to SKYROCKET in the United States at the end of 2012 (further punishment for the prudent and hard working) but no public servant dares bring up the subject because both parties WANT the money to FUND their PREVIOUS policies of insolvency. Human behavior is quite predictable with this recipe; IT IS A RECIPE for FAILURE and to substitute for lack of growth and income they will PRINT the MONEY.
"The best way to destroy the capitalist system is to debauch the currency. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens... There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." ~ John Maynard Keynes
Bonds and currencies are the epicenter of the crisis and this OUTCOME was set in stone at Bretton Woods II on August 15th, 1971: Money and credit creation out of thin air which is a mechanism for redistributing wealth, in addition to runaway, LEVIATHAN government that has resulted in the Socialist-Marxist command economies we now inhabit. Now the commanders in Washington DC, Brussels and Berlin know only one policy: Bury them some more under thousands of new laws, taxes and regulations.
Now the bills are coming due and they are un-payable and inextinguishable as REAL wealth and income generation have gone the way of the DODO bird. So it's Hi Ho, Hi Ho off to the printing press the Socialists will go, pretending to pay money back using worthless coupons they call money printed out of thin air. They are fools as are the people that support them.
"When the people find that they can vote themselves money that will herald the end of the Republic. This constitution in time will fail, as all such efforts do. And it will fail because of the corruption of the people, in a general sense." ~ Benjamin Franklin
With a printing press they are stealing purchasing power right out of the bank accounts of the private sector: companies, retirees, pension funds, institutions. These innocents that have full faith in the dollar will soon understand the US Government is not GOD, but rather has now become the devil in disguise and is sending present and future generations to DEBTOR'S hell just like the people in GREECE.
Economic activity, employment, inflation and GDP reports are nothing but a cruel hoax to fool the masses (this will be covered in a future edition, new information indicates the US economy is smaller by 10% or more than OFFICIALLY reported). The mainstream media is misdirecting the anger of the middle class from those who destroy wealth towards those who produce it. They are driving what's left of private-sector growth into hibernation because to create wealth is to invite attacks on oneself for having the temerity to work hard and succeed. This is cannibalism of the worst sort at the hands of government and their something-for-nothing constituents.
Capitalism is dead in the lands of its birth, with socialist dictatorships doing what they always do as their economies DIE from their deadly embrace. Misery-spread-widely is and WILL BE the order of the day as will a shrinking economic pie, taken from the most productive and redistributed to their supporters. As wealth and income creation cease Marxist Socialists turn to printing presses.
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not." ~ Thomas Jefferson
OB@M@care is nothing more than taking healthcare from those that have and pay for it and transferring it to those that don't. Rationing and mandates are just the beginning as Washington writes rulebooks for your physician to follow. Here's a peek: Billing codes under the new healthcare law are going from 18,000 to 140,000. This is going into effect in January 2013, just after the election. Why is no one talking about this? Telling the public about this OBSCENITY... It will never be repealed.
Can you say ABSURD and unworkable? It is only the beginning. Dodd Frank is nothing more than 2,400 pages of political corruption, the nationalization and politicization of the BANKING industry and the allocation of credit. It transfers liability from the nineteen TOO-BIG-TO-FAIL banks to the public who are their DUPES.
Wealth generation in the developed world is a statistical illusion courtesy of the LAWMAKERS and their bureaucrats who rule over us. Public servants are bought and paid for by the Crony Capitalists and Banksters who are their masters to the chagrin of a public who has placed their faith and futures in their hands.
Since my last missive several weeks ago money printing has been the order of the day as Japan and the UK have thrown approximately $200+ billion and the US Congress added over 10% to the $1.3 trillion deficit and sent the bill to future generations when it recently wrote an NSF check of $150+ billion to extend the social security tax cut and extend unemployment benefits as more and more people are impoverished by the policies of leviathan government. $350+ billion all told -- small change by today's measures. Several Bank of England directors voted for 50% MORE money printing. The next tranche is BAKED in the CAKE.
The chosen one is padding his constituency of government dependents prior to his reelection efforts and executing the Cloward Piven Strategy for collapsing the US economy with a deft touch that befuddles and frustrates those with the last vestiges of common sense. Lawmakers vote for something-for-nothing or be demonized as cruel hearted for not spending money THEY DON'T HAVE.
We await the next big CENTRAL BANK cannon firing next week when Mario "BOOM BOOM" Draghli fires the next installment of the European Central Banks' long term repo operation (LTRO). Some project it as high as 1 trillion euros. No matter, it is only the next installment in a never-ending story of the moral and fiscal bankruptcy of the developed world. Trillions and trillions are left to be printed as the bonds going bad were used for CONSUMPTION rather than self-liquidating investment.
The LTRO is VERY toxic, as is the SMP program while the ECB INSERTS itself above all other creditors thereby SUBORDINATING them. Over seven trillion dollars' worth of sovereign debt must roll in 2012; how many institutional investors, pension funds or insurance companies will choose not to ROLL? Many are prohibited from buying or holding subordinated debt, but the question is do they recognize this?
The Bond and Currency Markets are the epicenter of the global-financial crisis and it will not end until they BLOW UP. Currencies in today's world are nothing more than BONDS in DISGUISE, as semi-REAL money CEASED to EXIST in general circulation at Bretton Woods II in August 1971. Bonds are nothing more than IOU's denominated in IOU's. If one creditor doesn't get you the other one will!
A price revolution is unfolding like a tsunami ready to strike shore. When it hits you don't want to be in its path or you may perish as those poor people in Japan did. The Tsunami is growing in size and magnitude as I shall illustrate. When it hits is another story, but the timeframes are accelerating as public servants, banksters and crony capitalists try to print and borrow their way to solvency. They will fail as all others have done in the past, throughout history, but not being students of history THEY WILL TRY...
Austrian economics are extremely predictive, to which my long time readers will attest. The longer this takes to unfold, the more prepared you can become. Thank God for a poorly-informed public, as the day they understand what is transpiring is the day the NUCLEAR financial bombs GO OFF. The CONFIDENCE game will end on that day! The day when the public's eyes cease to glaze over is the day you must have your final preparations in place. When the Baby boomers pull into the retirement station they will be greeted by the greatest bankruptcy in history and their retirement plans will VANISH as their wealth stored in paper VAPORIZES at the hands of the people holding the financial system monopolies. This is history repeating on an inconceivable scale. Will it be crisis or an opportunity for YOU?
This is the greatest OPPORTUNITY in HISTORY or your demise. In order to thrive you must be able to restore the functions of money to your portfolio. Short circuit the printing press. Make the printing press your friend. Learn to make money in falling and rising markets. Preserve and build your wealth for the greatest buying opportunity in history for stocks and real estate. Volatility is opportunity to the prepared investor. Diversification into Absolute-Return alternative investments with the potential to thrive in up, down and sideways markets are part of the answer. This is what I do, for more information and private consultation CLICK HERE(www.TraderView.com/portfolio/)
When properly measured and adjusted for inflation, the economies of the developed world are no longer growing and haven't done so since 1998. Subtract government spending which is errantly counted as growth and we see the private sector hasn't grown for an equally long period. Take a look at this chart from John Mauldin and Rob Arnott (research affliates):
When adjusted for real inflation, private-sector growth has been in FREEFALL since 1998; the public has been impoverished by unsound money and runaway inflation. This chart uses official inflation numbers so the reality is MUCH worse. Think about it, debt in the developed world is up 300%+ but private-sector income is ZERO. Government doesn't create wealth which can service debt. All debt, public and private, is serviced by private-sector growth and tax receipts.
Over $15 trillion have been printed and borrowed since 2008 and there is ZERO growth to show for it throughout the developed world. The money has been consumed in transfer payments to government dependents and has funded the further expansion of government. The consumption economies -- where growth is measured in how much more you can consume than you produce and pay for it with borrowing -- is failing. Ponzi finance is at the end of the road. Consumption is not wealth production, not in the public or private sector.
US Federal debt is up over 50% since 2008 and its angle of ascent is going VERTICAL:
This picture is echoed throughout the developed world. These illustrations are extremely predictive when applied to the gold price (perfectly correlated) in context with deficit spending as this chart illustrates:
The exponential rise in gold is dead ahead as debt creation and printing presses accelerate. Notice that the last 2.3 trillion dollar debt increase has NOT been PRICED IN. Gold has been in a ten-year BULL market (no market has outperformed in that timeframe). Bull markets DO NOT end with a whimper; they end with a BANG.
Now let's look at what's in the PIPELINE as illustrated by the combined Central Bank balance sheets of the 8 biggest Central Banks, below:
This is up over $2 trillion since this graph was created at the end of November. The average money creation is now almost $500 billion a quarter, that ½ of the TARP in 2008. The money to prop the financial system and fund the welfare states is spiraling out of control. Since 2006 this measure is up MORE than 200% and NOTHING has been solved. NOTHING. If that Central Bank balance sheet chart didn't scare the pants off you, the next one will. This is a picture of global money supply in the last two years; it has increased 20%, hitting new highs:
This is MONEY PRINTING. The insolvencies are multiple times greater than in 2006; Billions of new, unfunded promises have been made. How many Trillions are left to be created (I believe at least $30 Trillion). Do you really think you can store wealth in paper currencies and bonds after seeing these two charts?
The Question is: When will consumer prices adjust to REFLECT the debasement and loss of purchasing power? How much will your cash and bonds be worth in purchasing power when they reflect this graph? The next question is: How much more balance sheet EXPANSION will occur to SAVE the BANKSTERS and feed the WELFARE states? We will have the answer to all these questions. Now let's look at the future UNFUNDED welfare state promises:
Japan is not shown, but its debt-to-GDP is already over 200%; ½ is due this year and unfunded liabilities are more than likely right in line with these other countries. Keep in mind these economies DO NOT GROW (correctly adjusted for inflation and minus government growth, called production), they have HUGE and growing structural BARRIERS to growth erected to protect Crony Capitalists from competition and reward the latest crops of campaign donors, they have tax systems that PUNISH wealth creation, entitlements which are on auto pilot, and populations and their representatives which REFUSE to act prudently.
The Federal Reserve under Project Twist is still monetizing most of the new treasury issuance, as this table outlines:
The Chinese and Russians are dumping treasuries at a rapid rate seeing the upcoming train wreck and trying to get off the train, as this chart illustrates (courtesy of www.zerohedge.com):
Notice how the Federal Reserve, the Bank of Japan and the Bank of England are monetizing US debt and increasing their reserves? They call them assets, but how can that be when both the bonds they bought and the money they printed to buy them were PRINTED OUT OF THIN AIR? It is an illusion. For the most part, all three economies are barely growing and running MASSIVE deficits for government spending, which they report as GDP.
In order to put in perspective what has been done by the Federal Government in Washington, in addition to the present and FUTURE destination of money printing and the debt requires that we look at a recent debt clock (www.usdebtclock.org, as of Feb 23, 2012):
This is ugly, but at the current rate of DEFICIT spending, at the next presidential election in November 2016 the bills will have LEAPT to:
Image courtesy of www.ZEROHEDGE.com
A breathtaking leap of almost 60%, after 60% growth in the president's first four years. Of course, don't forget that the paper in which you store your wealth will have LOST an equivalent amount of purchasing power; yet the federal government REFUSES to cut spending. These numbers DO NOT INCLUDE future BAILOUTS of the financial system, Fannie Mae, Freddie Mac, FHA, unfunded government pensions, and state and municipal insolvencies which will be TRILLIONS & TRILLIONS more.
Alan Greenspan, before he breathed the contaminated air of Washington DC, wrote this about gold in 1966:
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which - through a complex series of steps - the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., the equivalent of what was formerly a deposit of gold.
The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.
The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government - created bank credit would be worthless as a claim as goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights." ~ Alan Greenspan, Gold and Economic Freedom, 1966
Thank you Bert Dohmen and his outstanding Wellington Letter (I highly recommend it) for this wonderful quote which sums up quite nicely how wealth cannot be stored in paper. Greenspan recognized it 50+ years ago when he was a close associate of Ayn Rand. As Federal Reserve chairman he was the perpetrator of it.
In closing: This is not Doom and Gloom; it is the reality of the situation. In Fact it is the greatest opportunity in history. Furthermore, you know about it and can arrange your affairs to profit from it. Huge opportunities are presented to YOU. If you store your wealth in paper and government bonds you may want to consider changing your plans as there is no escape from the final denouement.
Bonds and currencies are classic Austrian Mal-investments just waiting to fall to their real value, their value before regulatory favoritism - in other words, before the leverage used to purchase them and that has driven them to these levels, combined with a GLUT of paper money that has been printed to BUY THEM. They must decline to provide a real return in excess of 10.5% after real, as measured by www.shadowstats.com
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A number of questions come to mind: The first question is when will the BOMB.... er, Bond Market crash as investors WAKE UP to the reality of the paper assets in which they attempt to store their wealth? What prices will Gold, commodities and natural resources rise to reflect past and future monetization? How much of your gains are nothing more than your assets RE-PRICING to reflect the lower purchasing power of what they are denominated in? Answer: most of them. How much of their value is the result of the leverage used to purchase them? How much will you lose if your paper assets LOSE 90% of their value?
In the Eurozone, United kingdom, Japan, Switzerland and all countries which hold dollars as reserves get a double dose of debasement, 1st from the Federal Reserve debasement of their reserve holdings (approximately 60% of Central Bank reserves are US DOLLARS), then again from their respective Central Banks as they debase and carry out quantitative easing. The dollar will be the last to fall as everything is a derivative of the dollar. Also keep in mind that the dollar, as the world's reserve currency, is the only currency in the world which both the shorts and the longs do not want it to fall. The shorts are printing it endlessly and the longs are trying to store wealth in it. Bond auctions will NEVER fail as success lays just a phone call away to another Central Bank writing worthless checks to buy worthless bonds.
The confiscation of purchasing power Greenspan spoke of is now almost COMPLETE, the final stretch run to worthlessness will be MAYHEM run wild. People DO NOT KNOW what money is, how it must function to be a store of value, and move purchasing power through time and space. Currencies DON'T FLOAT they just SINK at DIFFERENT rates.
Repeat after me: PAPER is POISON, PAPER is poison. It is the final BUBBLE. Don't miss the next issue of TedBits 2012 Outlook, subscriptions are free at www.traderview.com/subscribe/ . If you missed part one I urge you to read it. Thank you.
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