Friday, February 27, 2009

Gold Price Suppression Explained

In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a POLITICAL metal. In the true meaning of the word, its price is "governed".

This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system.

Up until August 15, 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. But since 1971, there is NO escape because NO paper currency has any link to Gold.

All of the economic, monetary, and financial upheaval since 1971 is a direct result of this fact.

The global paper currency system is very young. It depends for its continued functioning on the BELIEF that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.

-The Privateer

Some of you may have seen the following posts on the USAGold forum. But they will quickly be bumped and I thought they were worth framing.

Chris Powell from GATA explains the gold price suppression scheme nicely and succinctly. Given the evidence, it is very hard to deny that this is happening. And more importantly, the implications of this being the reality in which we live are huge. Especially now, and especially for anyone with some gold.

Here is Chris Powell:

It works this way.

While central banks traditionally have said they lease gold to earn a little money on a supposedly dead asset, in 1998 Federal Reserve Chairman Alan Greenspan told Congress that this was not true. Central banks lease gold, Greenspan admitted, to suppress its price:

For years prior to 2000, gold leasing fueled what was called the gold carry trade. Investment houses leased gold from central banks, paying the central banks a tiny annual interest rate, usually well below 1 percent of the value of the gold leased, and then sold the gold into the market and invested the proceeds in government bonds, earning perhaps 5 percent annually. The huge difference in interest rates meant a virtually free stream of income for the investment houses, income paid by central banks as interest on the government bonds purchased by the investment houses, secure as long as the investment houses could be protected against sudden rises in the price of gold.

Gold-leasing governments liked this scheme because it supported government bond prices and government currencies and kept interest rates down — below where a free market would have set them. The results were the worldwide, credit-fueled boom, a vast misallocation of capital into unprofitable, unsustainable enterprises, and the worldwide bust now under way.

When the price of gold reached bottom in 1999 and turned up, threatening the investment houses that had sold leased gold even as Western central bank gold reserves began to decline markedly, the Western European central banks, under the supervision of the U.S. government, announced the Central Bank Gold Agreement:

The U.S. government was not formally a signatory to the agreement, but it was announced in Washington and has been called the Washington Agreement. So it is fairly surmised that the U.S. government helped organize the agreement and had a big interest in it — the continuing support of the U.S. dollar and U.S. government bonds through gold price suppression. Gold price suppression was the essence of the “strong dollar policy.” The Washington Agreement was a plan of dishoarding and sale of the gold reserves of the Western European central banks. While the agreement’s participants said they meant to support the gold price by limiting and co-ordinating their gold dishoarding, in fact they were arranging cash settlement of their gold loans, allowing the investment houses that were short gold to close their positions in cash rather than in gold itself. The investment houses were allowed to settle in cash because if they had been required to settle in gold, they would have had to go into the open market to get it and the gold price would have shot up very high, bankrupting the investment houses and greatly diminishing the value of all government currencies and bonds.

That is, central banks do not want their leased gold back. That is what you are missing.

Ever since the Washington Agreement in 1999 the Western central banks have been managing their controlled retreat with the gold price, letting gold rise a fairly steady 15-20 percent per year on average, stretching out their dishoarding as far as they can while trying to maintain some gold on hand for emergency intervention in the currency markets.

Barrick Gold, the biggest hedger (short) among the gold miners, confirmed all this when it announced some years ago that most of its gold loans had 15-year terms and were what the company called “evergreen” — always allowed to be rolled over year after year so that the gold never had to be repaid as long as Barrick paid the tiny amount of cash interest due on it every year.

Barrick is short more than 9 million ounces of gold and until a few years ago was short much more than that. Who would lend so much gold indefinitely and for a mere pittance in interest? Only a central bank that meant to suppress gold as part of a scheme to keep government currencies and government bonds up and interest rates down.

That is, gold is only the tail on the dog here. But it’s a very strong tail.

You can find more detail about the gold price suppression scheme here:

One more thing. I should have added that in defending against Blanchard & Co.’s gold price-fixing lawsuit in U.S. District Court in New Orleans in 2003, Barrick went so far as to claim to be the agent of the central banks when it leased and sold gold and to share their sovereign immunity against lawsuit:

-Chris Powell, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

This game is ending now, as we await the final decision of paper dollars versus gold.


Thursday, February 26, 2009

Some Thoughts

The problem with gold physical supply is very real indeed! But, there is no way that the CBs will continue to sell off an asset for it's commodity price that has many times more value as money! The talk of sales will continue for years but the real act may come to a close very soon as they try to take the LBMA off the supply hook by offering "gray paper" deals.

If they are not buying it, then: The falling markets worldwide are an early warning that the gold for oil deals are coming undone! As the big players are now heading for the exits in anticipation of exploding oil prices, the selling pressure from the CBs will quickly come off gold. The end of a parallel gold market pricing structure will leave many, many players holding nothing at all! The third world markets are the first to go as their currencies are crushed time and time again. Europe will be next, closely followed by the USA!

As for the US$ and T- bills held overseas, "they don't really exist"!

In the world today there are only three assets, gold, oil and currencies. The paper currencies, so long admired and accepted are now in a war of self destruction. They will consume each other in an end battle of "I'm the last man standing but have lost all use as a unit of value". Each nation state is trying to add a "kicker" or "premium" to it's trading paper as a means of buying oil. This does not mean any country will go without oil, they will have to work with "oil priced at a value rendering them uncompetitive". National stock and bond markets do not like this kind of news!

Inflation? We are not speaking of currency price inflation here. This is currency "destruction" because my national IOUs are being devalued by cheap oil supply problems!

Will Japan sell US treasury debt and risk taking dollars out of "usage"? Not in your life! Nor will any other CB! They will talk about it. They will sell a little. But sell a lot? It will not happen. You see oil is the key and that connection to the dollar is changing. Foreign CBs will even sell some gold to try and keep the US$ in play ( see my other posts ) . Ever wonder why the US treasury has not sold gold, it would have the opposite effect! The oil that since the early 70s, held together the world monetary system is now causing it to slide apart! We are not going to see inflation or deflation again. What we are now seeing is the "destruction" of our paper monetary system.

30 Days

At this moment in time and space, the price of oil in US$ terms is about to roar! It will crush the Pacific Rim and South America. It will drive the US$ sky high in terms of other major currencies but the dollar will collapse in terms of gold! Short term interest rates in the USA will be driven thru the floor much the way they have been in Japan from the early 90s. This will be done to combat an imploding equity market. Long government bonds will almost stop trading as their yield soars from the oil price fears of "inflation"! Because of today's "new digital paper markets" this entire act will be played out in 30 days or less. Yes, you are right! During that time we will have inflation and deflation.

What to look for

The actual buying of gold ( no other metals ) by huge players is not a prediction, it is ongoing. In 1997 it exploded! The price of the metal in currency terms will be made for all to see as it moves quickly upward for a very short period of time ( 30 days ) . After that only black market traders and third world nobodies will understand it's price! When is this going to happen? I have no idea. Is there anything to look for that will tell us when the problems have started? At first the US$ and gold will go up together against all other assets!


The above was written by Another in November of 1997. I ask you, was he wrong? Or was he early?


Ft. Knox Incoming?

I cannot vouch for the credibility of this report, but it does make sense under multiple scenarios...

Just got off the phone with an inside source... As it was explained to me Fort Knox is now seeking the logistical support to warehouse large amounts of new Gold...

This is for incoming not outgoing gold...

What this means I will leave up to you...
Looks like the the US is making moves to BUY Gold while the Dollar is Strong...

LOL. I just had to add this comment someone posted on GIM under this video...
Expect the price of bricks and gold paint to spike soon.

Update -

Sunday, February 22, 2009

Fiat Guarantees and Real World Barter Deals

These two subjects will shape the next year or two as we move forward through time. I believe they will bring about two distinct phenomena. The first is a hyperinflationary collapse of all paper, including paper currencies. And the second is FreeGold.

First, let's look at fiat guarantees. Governments around the world are frantically guaranteeing everything tied to paper money. They do this because they possess the printing press as an ultimate backstop. And they do this to prevent a run on the system, in which anyone and everyone will simultaneously attempt to remove their wealth from the paper/electronic system. This has almost happened twice already in the last 6 months. It will happen again very soon.

But these guarantees don't just end with bank deposits. Government guarantees go much deeper, to include treasury bonds, money market funds, toxic loan performance, retirement funds, failing industries, and so much more. And there will be many more guarantees which will soon present as we find out that state and private pension funds are totally insolvent. You see, governments fear civil unrest more than anything else. And the pension fund crisis will certainly bring civil unrest. So, without a doubt, even private pension funds that are "too big to fail" will be guaranteed. And the only backstop to all these guarantees is the printing press.

Guarantees are made to preserve the status quo. They are not meant to be used. But this year will be different. All these guarantees will have to be used, to prevent civil unrest. But the outcome will be even worse, as the performance of the guarantees will start an unstoppable cascade of exponential growth of the monetary base. And since no new wealth is created by the printing press, the insufficient value that will be redistributed through these worldwide government guarantee programs will be sucked directly away from anyone holding any paper currency or derivative thereof. To quiet two screaming babies, they will yank a pacifier away from one quiet baby.

At the same time, in the real world, a new system of trade will emerge. It is already under development. This system will be a fractal on the global scale of the barter system on the individual scale. When one country ships real goods, it will receive real goods in return. No longer will printed paper suffice.

One of the byproducts of this system of barter will be FreeGold. Gold, as the ultimate extinguisher of debt will be the final trade settlement of any trade imbalance. This will ultimately be true on all scales of the fractal curve. Reserves of gold will be held by nations, private companies, and individuals. And these reserves will lend credibility to each of these market participants under the new barter system. For if at "the end of the day", any imbalance of trade exists, it can be settled with the ultimate extinguisher.

As a trade partner, you will be willing to ship your goods for the goods of another country, but only if you are confident that any imbalance can be settled by something other than the printing press. This is the function of FreeGold.

On an individual level, your gold will bring you credibility as well. NINJA loans will no longer exist. (NINJA = No Income, No Job, No Assets). Some new form of fiat currency will surely replace the old, but credibility will be scrutinized when loans are given. And even the credibility of the fiat currencies themselves will be scrutinized. For a country to print a successful fiat currency, it will need to have reserves of real things with which to settle any trade imbalance at "the end of the day".

And at $1,000 per ounce, there is not enough gold in the world for gold to perform this crucial function. Therefore, as the above chaos comes to pass in whirlwind of change that is about to descend on us all, the trading of gold will simply go into hiding for a period of time and then emerge at a level at which it can fulfill it's new duty. The timing of all of this, I believe, is upon us. Watch the stock markets and gold this week for signs.

Of course this is all just my humble opinion. Please do your own due diligence. ;)


Friday, February 20, 2009

More Deflation/Hyperinflation Fun

Deflation or Hyperinflation?

Both excellent articles.

I have comments on both of these articles, but I will reserve them at this time. I have not changed my position. If anyone would like to comment on these articles in the comment section, I will be happy to engage.


Thursday, February 19, 2009

TARP Visualized

Click the images above to enlarge
PDF version of this post from JSMineset

Wednesday, February 18, 2009

Zimbabwe - Gold for Bread

Hat tip Shanti


Texas financier R. Allen Stanford is accused of cheating 50,000 customers out of $8 billion dollars... now missing!

Let's see. He took people's money and gave them a Certificate of Deposit. He promised them a high return and then invested the money into losing investments. Sounds an awful lot like every single pension fund out there. And the bezzle continues to shrink as more paper wealth burns away...

Manhunt: Accused Financier Scammer Stanford Missing

Authorities say Investor Losses Could Rival Madoff Scandal


February 18, 2009—

Texas financier R. Allen Stanford is accused of cheating 50,000 customers out of $8 billion dollars but despite raids Tuesday of his financial empire in Houston, Memphis, and Tupelo, Miss., federal authorities say they do not know the current whereabouts of the CEO.

The Securities Exchange Commission alleges Stanford ran a fraud promising investors impossible returns, much like Bernard Madoff's $50 billion alleged Ponzi scheme.

Investigators Tuesday shut down and froze the assets of three of the companies Stanford controls and they say the case could grow to be as big as the Madoff scandal. Like Madoff's clients, Stanford's investors are in shock.

"Initially we put our money in this institution and in a CD because we were nervous about the markets and thought it was a safe place," said investor Brett Zagone. "I'm so upset right now I can't even talk about it."

But in addition to angry clients, Stanford, like Madoff, has many friends in Washington.

Stanford's business is headquartered on the Caribbean island of Antigua. In the last decade, Stanford and his companies have spent more than $7 million on lobbyists and campaign contributions in efforts to loosen regulation of offshore banks.

Among the top recipients: Senator Bill Nelson (D-Fla.), Congressman Pete Sessions (R-Texas), Sen. John McCain (R-Ariz.), Senator Chris Dodd (D-Conn.) and Senator John Cornyn (R-Texas), one of the members who took a trip to Antigua where he was entertained by Stanford.

Sen Cornyn's office has said the trip "was strictly a fact-finding trip," and at the time, "there was nothing untoward or unseemly" about Stanford Financial.

Senators Will Return Campaign Contributions from Stanford

Sen. Nelson said late Tuesday that he would return money received by Stanford. "I will give to charity any campaign contributions from him or his employees," Nelson said through his spokesman.

A McCain spokesperson said Wednesday that all contributions from Stanford would be donated. "The McCain Campaign is donating all contributions from R. Allen Stanford, and from individuals associated with Stanford Financial, to charity." This spokesperson said they will donate contributions made to both McCain's Presidential and Senate campaigns, but did not have a dollar amount.

Stanford himself did not contribute to the McCain Presidential campaign. He gave the maximum $4,600 contribution to President Obama's campaign. Indeed, Obama returned $2,300 that was contributed over the limit to Stanford.

Some say the investigation into Stanford should include an examination of his relationships with members of Congress.

"Surely there has to be a part of the investigation to look at what was done in Congress and whether the money that was spent to lobby and make political contributions played any role in all of this," said Sheila Krumholz of the Center for Responsive Politics.

Once again, this could be another case of the SEC asleep at the switch. Allegations of fraud and possible drug money laundering have been made against Stanford in the past ten years, but the SEC took action only after two former employees filed a lawsuit in civil court.

UPDATE: MSNBC is reporting that Allen Stanford tried to hire a private jet to flee the US.

According to ABC News, federal authorities do not know the current whereabouts of Texas banker R. Allen Stanford, who was accused Tuesday by the SEC of trying to bilk some 50,000 customers out of $8 billion. His apparent disappearance comes despite raids Tuesday of Stanford's offices in Houston, Memphis, and Tupelo, Miss.

ABC also reports that federal authorities say the case could grow as big as the $50 billion ponzi scheme allegedly perpetrated by Bernie Madoff

For Stanford's other controversy, click here.

For more information on Stanford's political donations, click here.

For seven surprising shockers from the SEC's complaint on Stanford, click here.

For a slideshow of Stanford's influential circle of friends, including powerful Senator Chris Dodd and golf superstar Vijay Singh, click here.

The Huffington Post intends to dig deeper into this story, and we need your help. If you have invested with Stanford or know about the bank's business practices, we want to hear from you. Email us at

If you have invested with Stanford, let us know about your returns on investment. Have you tried to get your money back and been rebuffed? What have you been told about the bank's portfolio? How long have you been invested with him?

If you know Stanford personally, tell us about him.

Email your insights to


Run on Stanford banks in wake of fraud charges

Hundreds of people in Antigua queued today to withdraw money from banks linked to Sir Allen Stanford, the Twenty20 cricket mogul and US financier, after being panicked by the $8bn fraud charges against his company.

There was a run on two branches of the Bank of Antigua, owned by the Texan billionaire's Stanford Financial Group. The banks have not been linked to the allegations of fraud lodged at a federal court in Dallas yesterday.

In Panama, bank regulators said they had taken over the local affiliate of Stanford Financial Group after a similar run on customer deposits.

Hundreds of Venezuelans mobbed local offices of Stanford International. It was the second day that long lines formed at offices in Venezuela, people with investments at the company said. Venezuelans have an estimated $2.5bn invested in Stanford International, the country's banking regulator has said.

Confusion surrounds 'auditor' of Allen Stanford's business empire

The Antigua-based accountancy firm purportedly responsible for auditing Allen Stanford's $8bn (£5.6bn) business empire is in a state of confusion following the death of its founder last month.

The firm, CAS Hewlett, is described by the US Securities and Exchange Commission as a "small local accounting firm". The regulator said its efforts to make contact had been unsuccessful: "The commission attempted several times to contact Hewlett by telephone. No one ever answered the phone."

Yesterday the SEC accused Stanford of perpetrating a multibillion-dollar fraud, raising questions about how the Stanford empire had been monitored.

When the Guardian tried calling CAS Hewlett today, the phone was answered promptly by an office manager, Eugene Perry. Perry said that CAS Hewlett's chief executive, Charlesworth Hewlett, died in January. When asked who had taken over managing the firm, Perry replied: "At present, the company is in transition and it has not really been sorted out yet."

Indeed, it is far from clear whether CAS Hewlett is still the auditor for Stanford International Bank. Perry said: "That's one of the things I'm not too sure of. You see, their year end is 31st December. Mr Hewlett died on January 1st."

When asked how many people work at CAS Hewlett, Mr Perry said this was "a tough question" before requesting that all further enquiries be made by email.

GoogleImage this guy and check out some of the news stories about him over the past year. It will be very interesting to see if he is ever caught.


2/19/09 - Stanford has been found! He turned in his passport and was served on a civil complaint, but so far he, like Bernard Madoff, is not in jail.

Tuesday, February 17, 2009


I don't expect this will be a very popular post among some of you out there. But I would like to comment on a couple of ratios in light of the writings of Another and FOA some years ago.

The gold:oil and gold:silver ratios right now seem to many like an explosive opportunity in both silver and oil. I would just like to lay out an opposing view of this that was presented many years ago at a time when these ratios were much less inviting.

Another and FOA made some specific predictions which can be compared with the current state of things in order to give us some fresh perspective. It is clear right now that paper-based wealth is burning. This can most recently be seen in the foreign currency exchange-based derivatives purchased as "insurance" by a Polish manufacturing company. Purchased insurance should only come into play when needed, and to positive effect. But in the case of these derivatives, this paper investment has collapsed the very manufacturing company it was supposed to protect. This is what I would call the explosive potential of paper.

Another said that "all paper will burn". This can also be seen happening in your own 401K, and nearly all mutual funds, pension funds, and any other kind of fund you can think of. Paper wealth is burning away.

Because of this phenomena which he predicted would happen, Another predicted that gold would be set free to seize the day, to mop up the mess. This free gold would rise to heights that most people would never imagine, mainly because their foundational understanding of the world is based upon thinking about the value of things priced only in US dollars.

Ratios are simply a way of pricing things in something other than US dollars, and this really gets down to point of this post.

First, let's look at the gold:oil ratio. Most observers assume that regression to the mean will rule the day when all is said and done. This would mean that ultimately this ratio will return to 10 to 1. On average, most people believe that one ounce of gold should buy 10 barrels of crude oil. Right now, one ounce of gold buys 28 barrels of oil. This means that in dollar terms, either oil must go up in price, or gold must come down.

But in Another's world, we are entering a time of transition. Martin Armstrong would call it a phase transition in the wave's frequency and amplitude. If we apply some of Another's more specific predictions, like that a very tiny amount of gold will buy a barrel of oil, we come up with a ratio of 1,000 to 1. One ounce of gold will ultimately buy 1,000 barrels of oil. Or stated another way, 30 milligrams of gold will buy one barrel of oil. More on this in a moment.

If we look at the gold:silver ratio right now it stands at 69:1. One ounce of gold will buy you 69 ounces of silver. In most people's minds, regression to the mean here would be back to around 20:1. But in FOA's world, we are heading to a much higher ratio. FOA puts a worst case ratio for silver at 2000:1, but I find that hard to imagine. Perhaps he was exaggerating in order to make a point. The worst case ratio I can imagine for silver is 500:1.

I am sure this is hard to believe and even harder to stomach if you own some silver like I do. So all I will say is read the entirety of his writings linked on this site and make up your own mind. Also, this does not mean we will head straight from here to there. We could certainly see a great bounce in this silver ratio before it ultimately settles where it will.

The point I want to make is that there is an alternate opinion out there, even among hard money advocates, as to whether these current ratios are an explosive opportunity to buy silver and oil, or whether they are simply confirmation of a very interesting prediction made more than ten years ago that is only now coming to pass. And that this alternate view should be factored into any investment decision.

Back to oil. You might ask "why would the oil producers ever part with a barrel of oil for only 30 mg. of gold?" The answer to that question lies in letting go of your dollar-based thought process. If you can do that and enter into the world of Another, you will see that 30 mg. of gold will be a great increase from the price they are receiving right now. It will be a fair price. And for that price, the oil will flow freely to anyone who has some gold with which to pay for oil.

Most importantly, this price for oil will be stable and sustainable, impervious to speculation, currency fluctuation, market manipulation, inflation, deflation, and even hyperinflation. You need to look no farther than this statement for the answer to many vital questions that plague the world today.


Saturday, February 14, 2009

A Message from Jim Sinclair

I am simply passing this along. I believe that Jim converses with certain people in high places. So when I see him take this dire tone, I pay attention. Not just to him, but to everything currently happening. I note that Jim had direct dealings with Paul Volcker in the 1980's, and I believe they still communicate. When Jim has said the items listed as "The emails of note" in the past, the timing has turned out to be while big things were happening behind the scenes. I believe he is being completely honest when he says his only motivation is that his readers protect themselves.

Officially “Out Of Control”
Posted: Feb 14 2009 By: Jim Sinclair Post Edited: February 14, 2009 at 8:26 pm

Dear Extended Family,

I sent you a certain few emails that I consider to be the most important communications issued in my career that started in 1958.

I am the son of what I know to have been the greatest Lone Wolf trader in Wall Street history ever, Bertram J. Seligman. He was a past master at his business and believed to be a market sensitive. I apprenticed to him, learned from him and inherited some of his ability, not all however.

From this background of experience understanding and sensitivity the following flows.

The emails of note:

1. Said, "This is it."
2. Said, "It is now."

This communication is to inform you as of 2/13/09, "It is totally out of control." There is no longer any means of reversal of the beginning of the final phase of the downward spiral now solidly set in motion.

For your sake, protect yourselves immediately.

Be prepared for disruptions in distribution common to hyperinflation.

1. You should have already distanced yourself from your financial agents. If you haven’t you are headed for significant displeasure and strain.

2. Make sure you stay three months ahead on necessary items that could experience distribution delays such as prescribed medicine and preferred foods.

3. Even though real estate is far from a buy, if you can afford a second home outside of major cities it would serve a good purpose.

4. Own gold.

5. Consider that good gold shares of non-US companies incorporated in a non-US country operating in third country, traded on multiple exchanges are a means of money expatriation legally and in broad daylight if required.

6. For currencies, all you can do is own a spread held by a true custodial ship wherever that might be.

Simply said, as of Friday February 13th, 2009 the situation is in confirmed "Out of Control" mode as this well engineered downward spiral enters into a terminal phase.

The motive was profit and degree of the disintegration caused in the pursuit of this goal was not anticipated.

The key event was when Lehman was flushed - all hell broke loose. The hell cannot be contained in any practical manner.

I seek nothing of you, but the protection of yourselves.

Respectfully yours,

Friday, February 13, 2009

Happy Valentine's Day

Meet John Williams

Wall Street Journal - Market Watch Video (below)
$100 Bills As Toilet Tissue? 2/12/2009
Efforts to avoid a deflationary depression will probably produce the opposite -- a nasty bout of inflation, says John Williams of Shadow Government Statistics, who advises hoarding gold and even Scotch to barter. Alistair Barr reports.

John Williams tracks the monetary stats better than the government itself, and with no need to distort the findings. If you haven't yet, please read John Williams' Hyperinflation Special Report. It is a must-read primer on our future.
Some Biographical & Additional Background Information

Walter J. "John" Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.

Formally known as Walter J. Williams, my friends call me John. For more than 25 years, I have been a private consulting economist and, out of necessity, had to become a specialist in government economic reporting.

One of my early clients was a large manufacturer of commercial airplanes, who had developed an econometric model for predicting revenue passenger miles. The level of revenue passenger miles was their primary sales forecasting tool, and the model was heavily dependent on the GNP (now GDP) as reported by the Department of Commerce. Suddenly, their model stopped working, and they asked me if I could fix it. I realized the GNP numbers were faulty, corrected them for my client (official reporting was similarly revised a couple of years later) and the model worked again, at least for a while, until GNP methodological changes eventually made the underlying data worthless.

That began a lengthy process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present. For a number of years I conducted surveys among business economists as to the quality of government statistics (the vast majority thought it was pretty bad), and my results led to front page stories in the New York Times and Investors Business Daily, considerable coverage in the broadcast media and a joint meeting with representatives of all the government's statistical agencies. Despite minor changes to the system, government reporting has deteriorated sharply in the last decade or so. -- John Williams


Here is a great quote from Richard Russell who is not always this excited about gold...
As I see it, the frenzy, the speculative phase of gold, the rush of a frightened public -- lies ahead. Big bull markets always find a way to keep you frightened and OUT. Big bull markets are devils with no conscience -- to get in you have to "close your eyes, and just do it." Not easy, but in this business nothing is easy except losing money. Which is why I've always loved the gold coins. You buy 'em, you're not tempted to trade 'em, they look great and they feel great. And they're not made of paper, nor can they be created with a computer. Ultimately, "There's no fever like gold fever." And I'm beginning, just beginning, to feel the fever now. When I look at the chart, I can sense the fever rising.

Fiat paper fans and the Fed denigrate gold. They fear gold and despise it. They prefer the Federal Reserve Notes that they can manufacture at will. But as gold rises, they must face the fact that the Notes they manufacture are being devalued. You see, for thousands of years gold has been the standard against which all assets and currencies are measured. When the big bear arrives and everything faces the fire, "gold will be the last man standing, not dollars, not political talk or Presidential promises -- the only survivor will be the eternal and ultimate safe asset -- gold.

Notice the difference in gold trading during the day? Very little profit-taking. Buyers are buying gold to hold rather than to grab intra-day profits.
Richard Russel - Dow Theory Letters - Feb. 11, 2009

And this quote comes from Bill H. at Lemetropole Cafe...
I cannot imagine [I have tried] a more bullish scenario for Gold, Silver, and anything related, than what we currently have. This is the end of a global currency system, this is the end of long held "truths", the end of something for nothing. If you hold metals now, you will be paid for at least 40 years of lies and false values. All of the global fiat that has piled up year after year will accrue back into the value of metal. What "could never happen" will happen to the extreme. I have no way to know how this will all shake out except that all roads of capital will lead to metal. The current situation has literally only one exit door, it is Golden. Regards, Bill H. - Feb. 12, 2009

And last but certainly not least, this article is a fantastic addition to the Inflation/Deflation debate...
Puncturing Deflation Myths, Part 1
Inflation During The Great Depression

Daniel R. Amerman, CFA,


As the financial crisis continues to deepen, many people are deeply concerned that collapsing credit availability will lead to powerful monetary deflation, much like it did during the US Great Depression of the 1930s. As compelling as these arguments seem to be – are they backed up by the actual historical evidence?

In this article we will:

1) Ask a crucial real world question about deflation theories;

2) Revisit the US Great Depression with a focus on 1933 rather than 1929;

3) Show that the central monetary lesson of the US Depression is not the unstoppable power of deflation, but rather, the historical proof of how a sufficiently determined government can smash monetary deflation and replace it with inflation – at will and almost instantly, even in the midst of a depression;

4) Examine two historical and logical fallacies that lead to the mistaken (albeit widespread) belief that the Depression proves the modern deflationary case, when it in fact proves the opposite; and

5) Briefly discuss the third logical fallacy that threatens many investors’ standards of living over the years to come, particularly those who are retired or investing for retirement.

A Simple But Vital Question

I received a letter from “GW”, an economically astute and well read person who had attended one of my inflation solutions workshops. GW said that I had made the most compelling case for inflation he had ever heard, but that he remained troubled. There were a lot of deflationists out there, and there were some highly intelligent and credentialed people who were making some powerful theoretical arguments for deflation. GW asked: would I be willing to debate some of those arguments with him?

I replied that I would, but I would only debate theory if he could first answer a simple, real world question:

Name an example of a modern, major nation where the domestic purchasing power (as measured by CPI) of its purely symbolic & independent currency uncontrollably grew in value at a rapid rate over a sustained period, despite the best efforts of the nation to stop this rapid deflation?

GW thought he had two answers – the usual two of the United States during the Great Depression, and modern Japan. Understanding why neither of those answers were correct is the subject of this and the following article. This article, Part 1, will be devoted to uncovering some lessons from the US Great Depression that will surprise many readers, while Part 2 will separate truth from fiction regarding Japan’s deflationary struggles, even as it separates asset deflation from price deflation

Please carefully note the underlined words in the central question above. They are essential. Consumer price deflation has a long and sometimes infamous history, as we will discuss below. However, a specific argument being made by many observers is that the United States (and other major modern economic powers) run the risk of falling into a powerful deflationary trap as the availability of credit collapses, the volume and velocity of money shrink, and this combination will then lead to major and rapid monetary and price deflation that the government will be powerless to stop. On paper – some powerful theoretical arguments appear to exist to support this assertion.

However, before millions of investors shift their portfolios to protect themselves from unstoppable deflation, or neglect to protect themselves from inflation because they do not know whether the future holds inflation or deflation – isn’t it worthwhile to first demand that proof be provided of at least one fully relevant real world case study where this actually happened? Simply stated:

Where’s the beef?

What is the specific example of a modern, major economic power proving powerless to stop the rapid rise in the domestic purchasing power of its own independent currency, as measured by the CPI?

And if such a deflationary example cannot be produced and defended – but we do have a very long and repeated history of inflation across nearly all modern nations with modern currencies – is this not the single most important data point that individuals should consider in weighing the relative risks of monetary deflation versus inflation?

The Great Depression: A Succinct Statistical Summary

The Dow Jones Industrial Average reached a peak of 381 on September 3, 1929. By July 8, 1932, it had reached its floor of 41, a plunge of 89% in less than 3 years. (This is a historical tidbit that those who think they are “bottom fishing” at current stock market levels should keep in mind.)

The United States Gross Domestic Product was $103 billion in 1929. By 1933 it had fallen to $56 billion, a decline of 46%.

Accompanying the freefall in both the economy and the markets, price levels were falling as well – meaning that the value of a dollar was rising rapidly. The Consumer Price Index was at a level of 17.3 in September of 1929, and by March of 1933 had fallen to a level of 12.6. This means that what cost $1.00 in 1929, cost 73 cents (on average) by 1933. This 27% deflation, this fall in the average cost of goods and services, represents a 37% increase in the purchasing power of a dollar.

For some people, the effect of this deflation was to increase both their wealth and their standard of living. These are the people who had substantial money savings, either in physical cash, or fixed denomination financial assets that survived the economic turmoil, such as accounts in banks that did not go bust, or the bonds of companies that did not default. For these individuals, all else being equal, their standards of living rose because they had the same amount of dollars, and each dollar bought more than it had previously.

However, this increase in the value of a dollar was achieved at great cost for most of the nation (and the world). The reason for the increase in value was that dollars had become scarcer for businesses and most individuals. The destruction of the banks and much of the financial markets had dried up access to money on attractive terms. Widespread unemployment meant fewer dollars available to buy goods and services, which drove down the prices, which is what dropped the Consumer Price Index.

Most importantly, the deflation was not independent of the plunge in the markets and economy, and not just a result, but most economists agree that this monetary deflation was actually a reason why the Great Depression got as bad as it did. Because there was not enough money, the source of funding for growing businesses was gone. Because there was not enough money, and the money outstanding had grown too dear, consumers were not spending. Because there wasn’t enough spending, businesses had to lay people off. Which further reduced consumer spending. The nation was caught in a vicious deflationary cycle, which it seemingly could not break out of.

Yet, the United States did break out of the deflationary cycle, as illustrated in the graph above. After rapidly plunging for about 30 months, with the CPI seemingly in free fall and not able to find a floor – there was an abrupt turnaround. Not only was a floor found, but an immediate cycle of inflation replaced the seemingly unstoppable deflation. The nation turned essentially “on a dime”, from unstoppable deflation to inflation instead. A cycle of inflation that has continued until this day.

What happened?

March 9, 1993

President Franklin D. Roosevelt was inaugurated on March 4, 1933. He came into office with a mandate and agenda to stop the Depression, and that meant breaking the back of the deflationary spiral. His actions were swift, beginning with a mandatory four day bank holiday imposed the day after his inauguration. Five days after Roosevelt took office, on March 9th, the Emergency Banking Relief Act was passed by Congress. This was the first in a series of executive orders and bills that would take place over the following weeks and year, and would cumulatively take the United States government off the gold standard – and would also effectively confiscate all investment gold from US citizens at a 41% mandatory discount.

From 1900 to 1933, the US government had been on a gold standard, and had issued gold certificates. In a matter of days in March of 1933, there would be a radical change, a veritable 180 degree turn, that would not only repeal the gold standard, but effectively make the use of gold as money illegal in the United States.

Fallacy One: Confusing Apples & Oranges

There is a common simplification that people make when they look at money over time. They think that a dollar is a dollar, even if the purchasing power has changed a bit. This is a quite understandable mistake, particularly if your profession does not involve the study of money.

When we look back over history – nothing could be further from the truth. This assumption instead reflects an elementary logical error, that may be quite dangerous for your personal future standard of living, if it leads to your drawing the wrong conclusions. The term “dollar” is only a name (the same holds true for the “pound”, “franc”, “peso”, “mark”, and all other currencies). What matters is not the name, but the set of rules – or collateral – that back the value of the currency, during a particular historical period. When we look back over long-term history, then sometimes it is gold, sometimes it is silver, sometimes it is both, and sometimes it is something else altogether. (As a creature of politics, money has always been of a complex and quite variable nature, given enough time.)

So when we say history “proves” something about a currency, we need to be very, very careful that we are talking apples and apples, rather than apples and oranges. For instance, when we look at precious metals backed currencies, the deflation of 1929 to 1933 when the US was on the gold standard was nothing new. It was just the latest development in the ongoing cycle of inflation and deflation that characterizes this type of currency. Indeed, there were four major deflations during the century before Roosevelt ended the domestic gold standard, and the deflations of 1839-1843 and 1869-1896 were each much larger than the deflation of 1929-1933, with the dollar deflating roughly 40% in each of those earlier major deflations. This deflationary history does not, however, reflect the value of the “dollar” (as we currently know it) bouncing up and down, but rather the value of the tangible assets securing the dollar bouncing up and down around a long term average.

Going off the gold standard was nothing new either. Many nations have gone through periods, particularly during wars, when more money is needed than there is gold or silver to back it up. So, they issued symbolic (fiat) currencies that were backed only by the authority of the government, or debased the metals content of the coins. These fiat currencies almost always turned out badly. Instead of cycling up and down in value over time, they tended to go straight down and never come back up. While global monetary history is complex and long, it is highly, highly unusual for a symbolic currency to experience major and sustained deflation at the levels that are the norm with precious metals backed currencies.

It is this quite understandable but wrong belief that a “dollar” is a “dollar” that creates the ironic situation of many millions of people believing that the deflation of the US Great Depression proves the case for deflationary dangers in the current crisis. Not at all – what we have instead is the elemental logical fallacy of mixing up apples and oranges. Yes, the US experienced powerful monetary and price deflation during the early years of the Great Depression, but that was with a dollar that was backed by gold. A currency in other words, that has almost nothing to do with today’s dollar, other than the name. A currency type whose long term history is radically different than fiat currencies – such as the dollar today.

Fallacy Two: Reversing The Historical Lesson

Let’s revisit the sequence of events and what actually happened. The United States was stuck in a powerful deflationary spiral with a gold-backed currency, that seemed unstoppable. A currency that had little to do with what we call the dollar today, other than sharing the name.

So, the government changed the rules, and replaced the old dollar with a new dollar, whose value was not based on gold. A dollar much like we have today (albeit not quite the same as there was still a gold backing on an international basis). And what happened?

In the depths of depression, at the height of a deflationary spiral, the government successfully broke the back of deflation within one week. In the midst of deflationary pressures far greater than we are seeing today, the government not only stopped the deflation, but replaced it with inflation. Indeed, by May of 1933, only two months after the currency rules changed, the monthly rate of inflation hit an annualized rate of 10%, and even hit a 40%+ plus (annualized) monthly rate by June of 1933.

If you’re concerned about a new US depression leading to unstoppable price or monetary deflation because of what happened in the 1930s, let me suggest that you study and remember the graph above. When you get worried about monetary deflation – take another look at March of 1933. Remember as well the one near universal lesson from the long and convoluted history of money: every time the rules governing a currency lead to a problem that causes too much pain for a government to bear – the government just changes the rules. The bigger the problem – the bigger the rules change (and the bigger the wealth redistribution, as discussed in the full version of this article).

So, when we look not at near irrelevant gold certificates, but the dollar we have today, what the Great Depression of the 20th century in the United States historically proves is not the unstoppable power of deflation, but the opposite: that a sufficiently determined government can smash deflation at will, virtually instantly, even in the midst of depression, and replace it with inflation.

In the process of breaking the back of deflation - the nature of the dollar itself fundamentally changed. Throughout the 19th century and the first 30 years of the 20th century, the value of the dollar went both up and down, as the (usually) gold-backed currency experienced regular cycles of both inflation and deflation. This cycle was replaced entirely by a new pattern – which could be characterized as down, down, down, as illustrated in the graph below.

(The graph below may look like it starts at 95 cents, but it doesn’t, it starts at $1.00. The fall in the value of the dollar in 1933 once the gold standard was abandoned was so fast it can’t be seen with a 75 year scale and monthly increments.)

A 76 year old man or woman born in the 19th or 18th centuries would have seen the value of their currency go both up and down over their lifetimes, and there is a pretty good chance that at age 76, the dollar (or pound) would be worth the same or more than it was when they were born. When the US Government fundamentally changed the nature of money in 1933, it created an entirely different pattern – all down, and no up, so that for a 76 year old person today, a dollar will only buy what 6 cents did at the time they born.

So as we try to decide whether the danger ahead is inflation or deflation today, what is the monetary lesson for us from the US Great Depression?

The common belief is to say the Great Depression proves the awesome power of deflation, that the government can have a great deal of difficulty in fighting it, and may not be able to fight it at all. This is an extraordinary misunderstanding, and constitutes the second of our logical and historical fallacies.

What the Great Depression showed was that if you have a tangible asset backed currency, such as gold or silver, and you enter a depression, then history has shown time and again that you're likely to have a period of substantial deflation. However what March of 1933 shows us, is that even in the midst of a terrific burst of asset deflation, even in the midst of a terrible depression, if you take away the tangible assets that back your currency and you introduce a purely symbolic currency, than the force of inflation that is associated with a purely symbolic currency (as well as the changes in monetary policy that are thereby enabled) can be so powerful that it overcomes the depressionary economic pressures and forces inflation.

Indeed what March of 1933 shows is that the value of money can turn on a dime when we are using a symbolic currency. We have absolute proof that even in the middle of a depression, the government has the power to stop a deflationary spiral at will. We further know this deflation fighting strategy was not a one time anomaly, but was so successful that it broke the ongoing inflation / deflation historical cycle, and led to a 94% destruction of the value of the dollar over the next 76 years.

It is a great irony that this lesson is so widely misunderstood. Unfortunately, this misunderstanding is highly dangerous for investors, as it leads them to worry about what is likely not a problem, instead of concentrating on the grave dangers illustrated by this same historical example. Dangers that involve the simultaneous combination of asset deflation (the destruction of the purchasing power of your assets) and monetary or price inflation (the destruction of the purchasing power of your money). As I have written about in other articles and books, these are a potent wealth destroying combination with a long and very real history of destroying wealth in general – and retiree wealth in particular – in societies that are in economic distress.

Some People Understand What Happened Very Well Indeed

While misunderstanding what happened in the Great Depression is common, it is not at all universal, particularly among economists. Indeed, what really happened during that period between 1929 and 1933 has been a career-long source of fascination for one important economist in particular: Ben Bernanke, Chairman of the Federal Reserve. Bernanke believes that a major mistake was made – and it wasn’t abandoning the gold standard. No, Bernanke’s quite public belief is that the economic contraction that was the Depression was much deeper and longer than it needed to be, and the reason was that monetary stimulus was too small and too late in coming. In other words, his belief is that if the rules governing the nature of the US dollar had only been changed earlier, so that there was inflation instead of deflation by 1930 or 1931, the economic devastation inflicted on the nation by the deflationary spiral would have been much less. (Some economists look to the example of Japan abandoning the gold standard in 1931, two years earlier than the US, and the shallower and shorter economic contraction that was experienced there.)

Bernanke got his nickname of “Helicopter Ben” from a flippant comment he made, in which he dismissed deflationary fears with a joke about dropping money from a helicopter if needed. This is a very important joke, with drastic implications for your personal net worth. Instead of fearing deflation, Bernanke finds fears about deflation to be humorous because he understands the principles described in this article very, very well indeed, and has for many years. There are no immutable and awesome powers of deflation that render governments helpless. Because once it is freed of its connections to precious metals or other currencies – money is really just a symbol with an inherent value of zero. What gives a national currency value are the rules that are set up by the government. And if the rules become inconvenient, well, what’s the point in being in power, if you can’t change the rules when you need to?

Changing the rules is not a theory about what Bernanke might do. It is a description of what he has already been doing on a massive scale. The self-imposed shackles that used to restrain past Fed chairmen are already history. The Fed is creating money at a rate never seen before, trillions of dollars a month, effectively out of thin air. The Fed typically doesn’t do this, because, of course, such actions rapidly destroy the value of the currency. But if the person in charge of the money supply understands that destroying the value of the currency is how you prevent deflationary spirals from getting started – and believes massive and fast government intervention is the best way to stop an incipient depression before it gets any worse – then much of what the Fed has been doing becomes more understandable.

The Third & Most Dangerous Fallacy

Our first fallacy was the widespread belief that the Deflation of 1929 to 1933 proves that major deflation is a major risk for a nation in depression – when what it actually proves is that deflationary spirals are a major risk for gold-backed currencies, even while providing concrete historical evidence that symbolic currencies which are backed by nothing but government policies (like the dollar today) can be forced into inflation even in the very middle of a severe depression.

Our second fallacy was believing that price deflation can grow so powerful that it can render a country’s monetary policy almost helpless to fight it – when what March of 1933 shows is that a sufficiently determined government can break the back of monetary deflation at will and almost instantly, simply through changing the rules that govern the value of that currency. (The far more dangerous problem of asset deflation is a quite different matter, as we will explore in Part 2.)

There is a third fallacy which is perhaps the most important, and that is the belief that inflation or deflation changes wealth for the nation as a whole and there's nothing that you personally can do much about it. This belief that we are all in the some boat together is perhaps the most dangerous mistake of all for individuals seeking to protect their wealth. Inflation and deflation do have an impact on the real wealth of society, they do affect the creation of real goods and services, and impact the real GDP, but they also do something else that is every bit as powerful, that is even more immediate and that is deeply personal. What inflation and deflation do is that they redistribute the rights to wealth within our society.

When we look back to the Great Depression in the years 1929 to 1933 then, for retirees at that time who did not have their savings in the market or in banks that went bust, those were actually good years for them financially, particularly relative to the rest of the population. Monetary deflation redistributes wealth from society at large to many retirees.

However, sustained and major monetary deflation with a symbolic currency is quite rare, and hasn’t happened in modern times. This brings us back to that central question regarding the case for deflation: “where’s the beef?” Where is that example of “a modern, major nation where the domestic purchasing power (as measured by CPI) of its purely symbolic & independent currency uncontrollably grew in value at a rapid rate over a sustained period, despite the best efforts of the nation to stop this rapid deflation?”

If actual history is what matters to you rather than theoretical discussions, unfortunately, we have a long history of what happens with nations in severe economic distress, when they have a symbolic, independent currency (not explicitly tied to another currency). That history isn’t one of those fiat currencies soaring in purchasing power, despite the best efforts of the economically wounded nation to keep that from happening. No, the very well established pattern is that the currency collapses in value (price inflation), even as the purchasing power of assets is collapsing (asset deflation), much like what is happening with Iceland today.

That collapse in the value of the currency necessarily forces a major redistribution of wealth, and the segment of the population that is most devastated by this seems to always be the same. It’s the retirees, and the people close to retirement. When we look to Germany, when we look to Argentina, when we look to Russia – it is the pensioners who are impoverished more than any other group.

Unfortunately, history is repeating itself again. When we look at the headlines about the destruction of retiree investment values, pension assets and so forth, we're really just seeing the beginning. Because the crisis "solution" that is being chosen, which is creating dollars without the ability to pay for those dollars, essentially represents the annihilation of most of the retirement dreams of the baby boom generation, even if that is not yet recognized. There is not an even cost that is being born by society as a whole, rather some segments are bearing much more of the burden than others. If your peer group (particularly Boomers and older) is headed for disproportionate financial devastation, then happenstance is unlikely to offer a personal way out. Instead, you must instead take quite deliberate actions to change your personal financial position so that wealth is redistributed to you, rather than away from you.

To get out of step with your generation, and have wealth redistributed to you even as your peer group is being devastated by this extraordinary destruction of wealth, you need to start with an essential and irreplaceable step: education. You need to gain the knowledge you will need to turn adversity into opportunity. This will mean looking inflation straight in the eye and saying: “Inflation, you are likely to play a big role in my personal future, and instead of ignoring you or thoughtlessly flailing away at you – I will study you and your ways. I will learn the deeply unfair ways in which you redistribute wealth, and the counterintuitive lessons about how some investors will be destroyed by inflation and repeatedly pay taxes for the privilege, even while other investors are claiming real wealth on a tax-free basis. I will learn to position myself so that you redistribute wealth to me, and the worse the financial devastation you wreak – the more my personal real net worth grows. I will examine the official blindness to inflation within government tax policy that creates the Inflation Tax, and instead of raging or despairing, I will understand that a blind opponent is a weak opponent, and I will take advantage of your blindness and use tax policy to multiply my real wealth.”

(This article is Part 1 of a series of public and private articles on puncturing deflation myths. Part 2 will separate truth from myth with Japan’s deflation, and uncover some dangerous logical fallacies in the common treatment of this deflation. In addition to Japan, the relevance of modern era deflation in China, Hong Kong and Argentina will also be briefly examined. The full versions of these articles, with expanded discussion of the investment implications for investors in general and retirement investors in particular, are available to Turning Inflation Into Wealth mini-course subscribers. Subscription is free.)



Wednesday, February 11, 2009

Interesting Times

"May you live in interesting times" is reputed to be an ancient Chinese curse.

Rumors seem to be flying around on a number of different topics, and it would seem to be an insurmountable task to make sense out of all of them. But once again I fall back on the Economic Confidence Model of Martin Armstrong and his theory of waves of energy that pass through the people and converge in amplified peaks at very specific times.

According to Armstrong, it is actually the time of his prediction that is most accurate and not necessarily the content of the predictions. At very specific times, and in very specific intervals, things simply happen. At some intervals, with enough convergence, his model is expected to be exact TO THE DAY. At other times, it is expected to be correct within a couple weeks. The name of his 77 page tome, "It's Just Time" is a great description of this principle. He got the name from something Margaret Thatcher said to him personally in the 80's. That the conservatives were going to lose the election in England not because of anything specific they had done, but because "it's just time".

Here is one paragraph from "It's Just Time":
The 37.33 month cycle is equal to 3.11 years. This also is very close to Pi being 3.141. To show the hidden order, I will for the first time publicly or even privately illustrate a point. Take the high of the previous wave 1998.554298. Add Pi in terms of years and months 3.141. This produces the date 2001.695. Take 365 days and multiply .695 yields 253.675 days into the year 2001. That amounts to September 11th, 2001. So much for the CFTC claiming that my forecasts manipulate the world economy because nobady can predict a specific day years in advance. For as much as things may appear to be random, it is more like Neo in the Matrix. Suddenly he can see not the walls, but the code.

I am sure that most people will dismiss this for any number of reasons. But I suggest that you read the entirety of "It's Just Time" before you make up your mind. There are many including Jim Sinclair who hold Marty Armstrong in very high regard.

The Economic Confidence Model turning point we are approaching right now is April 19, 2009. It is one that is expected to be correct within a couple weeks. The next point that is expected to be correct TO THE DAY, is June 13, 2011.

The rumors that interest me the most relate to gold, a change in the monetary system, and supply line failures, or shortages in the necessities of life. I read one thing in the last 24 hours that makes me speculate that our government has planned a practice exercise for some sort of emergency. And this exercise is scheduled for... early April.

As I have speculated on this blog, shortages combined with monetary stimulus can lead to rapid hyperinflation which can lead to a change in the monetary system which can lead to FreeGold. So that is the basic structure I am building around the evidence I am seeing. Perhaps, and this is only speculation, we could see shortages this spring and the monetary change during the "hot" days between Independence Day and Labor Day. This timing reconciles with multiple sources I follow.

There was an interesting note I came across out of the UK that makes me think the contango trade we saw recently with oil tankers being used to store oil while anchored at sea has spread into grains. I'm not sure what this means, but I also anticipate gas shortages at some point this year. So it seems to fit.

This has all reminded me of a fictional story I read back in October, when things were looking pretty bad. This short essay was written by John Galt and posted on his blog on October 26th, 2008:
Mary Jo Schlumpunfunk (with all kudos to Glenn Beck) was driving home from work in the suddenly cold November air of her home town of Jeffersonville, Indiana. Mary Jo was sick and tired of listening to the depressing news about all the problems all those rich bankers and Wall Street types were having so instead of listening to the news station, she switched over to her favorite pop music station tuning out reality and enjoying the drive back to her humble apartment on the outskirts of town. Her neighbors greeted her with a friendly ‘hello’ as she walked up the steps and they asked her if her company was going to shut down or not next week for the holiday. Mary Jo paused with a puzzled look and said “We are open, even for Thanksgiving Day as far as I know.” They nodded and looked at her like she was crazy and then went inside out of the cold air of the night. Mary Jo’s position as the Assistant Manager at the local Kroger’s gave her the confidence that her job was secure because after all, people had to eat.

As the alarm went off at 3 a.m. Mary Jo did not even think about what was being broadcast and just hit the off switch on her clock so she could start getting ready for work. She turned her computer on as she passed by it on her way to the bathroom so she could get ready to relieve the night manager at five. Mary Jo returned to her computer after getting ready to log in and check her email only to receive a message on her browser that there was a connectivity issue. With that frustrating bit of news, she looked at the cable router and sure as heck, it was down again. The regular routine of having to dig an old cable bill out to call the idiots at Time Warner has long been replaced by having the tech support number on speed dial on her telephone and cell phone. When she picked her telephone up, it was dead with no dial tone or service of any kind. Then she grabbed her cell phone and called finally getting through only to get the message “We are aware of the current outage in all of our services and we are working diligently to restore service to all of our customers as soon as possible. At this time, all internet access is restricted to certain business accounts only and will be restored to residential customers as soon as we can.” With that cheery bit of good news, she grabbed her coffee and hopped into her car to go to the local combination gas station to grab some breakfast and gas on her way to work.

With a little bit of stunned disbelief she pulled into the pumps at the local Gas-N-Go where literally every pump but hers had a car sitting there and the inside of the store was packed with people. She dutifully popped the gas cap off and slid her debit card into the slot as her breath steamed up the morning air. The card reader displayed “INVALID CARD, PLEASE SEE CASHIER” in the tiny LCD display. With that she grabbed her keys and purse and huffed inside to the station now leaving her only forty minutes to get to work. The line at the poor cashier was murder with people yelling and screaming at the young lady demanding that she fix the problem immediately but she kept saying she couldn’t and was on the verge of tears. Mary Jo grabbed a bagel and a bag of chips the hopped into the line from hell. When it was her turn at the front she started to say “My card…” and was cut off by the young lady who blurted out “I know, I know, it does not work. It doesn’t matter what card, what bank, whatever but none of them are working and I don’t know why. I can only take cash now. Would you still like to buy gas at Pump 4 or not?” Mary Jo said “Sure give me $20 worth plus this stuff”, knowing full well that would leave her less than twenty bucks in her wallet after buying all the groceries and gas but she could get more food at work because after all, she worked in a grocery store.

After that encounter she turned the radio off in her car and headed off to work, listening to her favorite Johnny Cash CD. “The heck with all this idiocy” she thought to herself. Maybe work will be peaceful and we can get the Christmas food display moved to the front of the store to boost the sales. Mary Jo pulled into the parking lot expecting to see only the usual five or six cars that were normally there. Instead of a usual day, she would see what happens when the world is turned on its side, as the lot was full and there was a line of people standing in front of the ATM machine outside which had to be forty plus people deep. On a day like today, Mary Jo knew she would have to park in the back and sneak in through the receiving door just like it was the peak shopping season. After parking the car, she wolfed the bagel down while walking inside while trying to slurp down her coffee. Oh the shock she would see.

The night manager was sitting in the receiving area with his head in his hands sobbing like a baby. Mary Jo would not think this was unusual except he was a fifty-three year old man, and as an ex-Marine his will usually was emotionless, all business, and stalwart. “Mike, what is the matter, are you okay?” Mary Jo tried to ask as she approached him in an effort to comfort him. Mike replied “You should never have come here Mary, this is a disaster. Do you know how many times we have had to call Law Enforcement out here to restore order? Don’t you listen to the news or anything? This is a nightmare, an utter, disastrous nightmare.” Mary Jo noticed a half empty bottle of bourbon at his feet and that enraged her immediately. She snapped back “Get your self together mister. There is nothing that severe that justifies drinking on the job. You have a job to do and you need to get your damned butt on that floor out there right now!”

“Mary Jo,” Mike said in a soft spoken and measured manner, “you do not have a job. I do not have a job. Kroger’s does not have a job for us any longer. You need to go report to the new resource manager who is running the show here. We are just clerks in their eyes and you had best get used to it. The State of Indiana Resource Manager showed up at one o’clock in the morning. His name is Tom O’Donnell and he’ll remind you of his power every hour, on the hour. Our store has never been the same since.”

“Mike, you’re drunk. You need to get home and sober up. I’ll go meet Mr. O’Donnell and straighten this out now!” Mary Jo confidently stated as she slammed the doors of the docks open and walked out on to the floor. As she looked at the shoppers in the meat and deli section, her only reaction was to drop her full cup of coffee on the floor, creating a huge puddle of hot steaming java on the floor. She stomped up to the manager’s office in the front of the store only to be greeted by a deputy in the doorway who told her “Ma’am, only authorized personnel are allowed in that office.” She snapped her name badge off her bloused and put it in the deputy’s face and in an angry tone told him “I’ve been in this office longer than you’ve had your job son. Now let me into my office to meet with Mr. O’Donnell and find out what is going on in my damn store.”

As she walked into the office she closed the door and saw another deputy, this one armed with a shotgun, the resource manager and the store manager, Bill. Mary Jo looked at him sternly and spouted out “Why are there two men armed with assault rifles in my deli department?” Bill, looking tired, disturbed and frustrated already said “Mary Jo, please sit down. We have a lot to cover. Let me introduce you to our new boss, Tom O’Donnell from the State of Indiana Department of Resource Allocation.” Stunned and now silent, she fell back into a chair in the office as Mr. O’Donnell arose to shake her hand and said “Hello Mary Jo, I know this is going to be difficult, but I think we can all work well together. I assume you have not heard any news since you woke up early this morning?” Mary Jo in a soft voice said “No, I was listening to a music CD in my car. I noticed my debit card did not work and that is about the only thing that was unusual other than my internet being down, but that’s a regular problem now.”

When she was finished, the news was dropped on her. Mr. O’Donnell explained to her that 11:30 p.m. last night President Bush declared a banking holiday and shut down all civilian internet access and non-emergency telephone communications to insure a smooth transition while the cash rationing and bank consolidation programs were implemented nationwide. Mary Jo stuttered “why the internet, if you do not mind my asking?” He explained to her that it was to prevent an external internet based attack on the financial system and that the U.S. stock and bond markets would now be closed for thirty days until the new banking system could be implemented. Mr. O’Donnell then went into a detailed explanation that ATM machines would be reactivated at 6 a.m. sharp and that each individual will be limited to $50 per week, regardless of the number of bank accounts in their name. He went on further to highlight that all credit cards will be suspended for the same time period as the stock market to enable the banks to evaluate who would be allowed to own or utilize the cards in the future.

After that bit of shocking news causing tears to well up in her eyes, Mary Jo then asked the obvious question, “So what is your position in all this?” O’Donnell knew this was coming and replied “Emergency food, gas and energy rationing has been declared nationwide. Every state officer or manager with a certain clearance level received training from FEMA and the Department of Treasury as to this possibility this past summer. Every American has to be guaranteed access to food and energy and those gas stations that do not have a military or state police unit there by now, will have one by 7 a.m. We have to insure safety and stability to prevent people from over-reacting as the Bush administration transitions over to the Obama administration in the next sixty days. I will be helping you with re-organizing your store into a more efficient model to deal with the foodstuff and merchandise purchase restrictions so the civilians will not freak out. Only forty customers will be allowed into the store at any given time and each customer will be handed a shopping list that they can abide by until the rationing program moves into full swing. Price controls are in full effect and we are in the process of working with your main offices to reprogram all computers to these limitations. We can accept cash today and hopefully the debit card system returns to normal in the next two hours. Sadly, we are rationing everything this cold winter, including electricity and most importantly, money.”

Mary Jo was speechless. She looked at her store manager and wanted to cry but couldn’t. “What do you need me to do?” was all she could say. Mr. O’Donnell explained that the entire Christmas display had to come down as well as any non-essential goods removed from the shelves. He handed her a file and said “At all times you will have an armed escort for your protection. I know these are your neighbors and regular customers but you never know when someone will go Waco on you.” As she opened the file, she realized the gravity of the situation. She had to remove the entire electronics and gift section. Christmas decorations and greeting cards had to be removed; alcohol shipped on a company truck to the new “State of Indiana Resource Distribution Center”; all drugs including over-the-counter moved into the pharmacy. It was a stunning bit of news. And she realized with the dread of the moment that this had been planned for months, perhaps years.

Mary Jo now realized why the headline on the Louisville newspaper said “Closed for Business” and announced the government program on the front page as well as a brief story about the midnight bankruptcy filing for the paper. She thought to herself “I guess America is now closed for business also” as she sauntered over towards the cashiers to comfort them and begin the process of re-organizing the store to the new Federal and state mandated standards.

John Galt also posted some commentary after this story and you can read the rest of his post here.


Sunday, February 8, 2009

On the Pension Front

Detroit Municipal:
DETROIT—Two Detroit municipal pension plans have lost $2.5 billion over 18 months, and analysts say the 30 percent drop could create a cash crunch in a police and firefighters retirement fund.

The losses between June 30, 2007 and Dec. 31, 2008 aren't much different from those of other American public pension systems hit by the worldwide economic downturn.

For example, holdings by the California Public Employees' System fell 26.7 percent to $184 billion, and the Florida Retirement System Pension Plan lost 28.6 percent of its worth, falling to $97.3 billion, the Detroit Free Press reported Sunday.

An analyst for Detroit Police and Fire Retirement System, Richard Huddleston, wrote board members Jan. 28 that while the fund had $3.1 billion at year's end, only $1.27 billion was readily available.

"The cash requirements are dangerously high," Huddleston said. He said cash management could become an "untenable proposition."

"I'm concerned," said City Councilwoman Barbara-Rose Collins, a member of the police and firefighters fund board. "We should be responding to this as an emergency."

Ford and General Motors:
Feb. 6 (Bloomberg) -- Ford Motor Co. may have to contribute $4 billion to its pension plan after a 2008 shortfall, a cash drain that risks dragging the second-largest U.S. automaker closer to a federal bailout.

The collapsing stock market left the fund with a $4.1 billion deficit for its projected obligations...

“Any time you’re underfunded, that’s not a good thing,” Executive Vice President Mark Fields said in an interview. “We’ve got to watch it carefully.” ...

The prospect of a pension contribution is “further stressing cash levels,” and Ford may need to seek government assistance later this year...

General Motors Corp., which has been pledged $13.4 billion in federal loans, has said its pension plan had a shortfall of $1.8 billion as of Oct. 31, down from a $20 billion surplus 10 months earlier. The biggest U.S. automaker has said it has no plans to contribute to the fund soon.

Ford and GM’s pension liabilities also may put stress on the government.

The Pension Benefit Guaranty Corp., which bails out failed retirement plans, estimated that there was a collective pension shortfall of $47 billion at companies with debt ratings below investment grade, a group that includes Ford and GM.

Almost half of the deficit was from manufacturers including automakers and suppliers. The PBGC said it has worked with 13 bankrupt auto-parts companies since 2005 to keep their plans from failing, and took control of the program at partsmaker Collins & Aikman Corp. after its 2007 liquidation.

The spectre of huge losses at large Canadian pension funds has people in the financial sector calling for a re-evaluation of risk models adopted by the Canadian institutions...

If it's true, "that's a staggering loss," says Tawfik Hammoud, partner and managing director at The Boston Consulting Group in Toronto. "It's unclear to me how you get out of that hole," he adds...

There is an expectation that many pension funds will face a public backlash. "I think the person on the street looks at the headlines and says: ‘Those idiots lost [a huge amount] of my money,'"

And from The Privateer:
When Governments Go Broke - Public Servants Go Bankrupt:

It is an economic truism that public servants cannot pay taxes! Their entire salaries and wages ARE taxes. It follows directly from this that when they go shopping, they pay for everything with taxpayers’ money. And that goes for whatever “contributions” they make to their public service pension plans.

The US Center for Retirement Research has just reported that state governments ran up pension fund losses totalling $US 865.1 Billion in 2008. The assets in 109 pension funds dropped 37 percent to $US 1.46 TRILLION in the 14-month period ending December 16. CalPERS , the biggest fund of all, had $US 260 Billion in assets at its height in October 2007. That’s comparable to the GDP of Poland or Denmark.

At the end of 2008, CalPERS stood with $US 186 Billion. This is repeated across all state governments.

The “Hidden” Deflation - Global Pensions:

In the above analysis The Privateer has, perhaps, gone into somewhat turgid details. This problem must be understood, however, because it is both global and truly enormous. It includes both public and private pension funds! In this sense, the US has only been used as an example. Across the world, global pension fund assets in the 11 major Western pension markets fell by a huge $US 5 TRILLION in 2008!

Over 2008, Western global pension assets fell to $US 20 TRILLION from $US 25 TRILLION, a fall of 20 percent. That is the same as taking $US 5 TRILLION out of the purchasing power of pensioners’ money which would have been spent during their retirement. In historic terms, those who are near retirement placed a huge bet - not only on the honesty of their politicians but also on the credit money system - when they were younger. Forty years ago in 1969, had any of them bought a single one ounce Gold coin for $US 35.00, that coin would today get them $US 900. That’s an increase of 2470 percent.

Had they bought one such coin each month over the past forty years, they would today have no fears about retirement. What must be understood here is that it is NOT gold which has climbed in purchasing power, it is paper and credit money which has fallen in purchasing power. When paper and credit money fall in purchasing power, it is called inflation. Gold cannot be inflated, it can only be mined.