Gold and Silver Poised to Surge on Ticking Debt Bombs

Commodities / Gold and Silver 2011

Gold and silver are threatening to break new ground driven by one simple fact: Nearly all wealthy nations are labouring under one form of debt/monetary inflation issue or another. Ireland and Greek bonds have now been reduced to junk, Japanese bonds became safer than Chinese as reports of China’s massive deficits internally offset the rosy picture supported by 9.5% performance in the Chinese economy. Italy is looming large as the next bailout candidate, and the United States prioritize political brinkmanship over problem solving. Gold and silver are seeking new highs and threaten to break out strongly – especially now that the Fed has acknowledged a willingness to launch QE3.

The ridiculous posturing by Democrats and Republicans in the U.S. over the imminent rise in so-called borrowing makes it almost embarrassing to be human. They can’t even get out of the way of their own political agendas to solve a problem threatening to make politics obsolete. Certainly, I’d be embarrassed to be American. But on that point, I’d be embarrassed to be English, Irish, German, French, Swiss, Portuguese and especially Greek, Italian or Spanish. Stand close to any of the Davos men who constitute these nations’ finance ministers and you are immediately struck by the impression that you’re in the presence of the best-dressed con artists walking the globe.

But the creative rhetoric that has resulted in 2 + 2 equalling -4 since the deficit spending party got underway with the end of the Bretton Woods Agreement by the hand of Richard Milhouse Nixon is starting to disintegrate under its own inertia. The novelty and creativity of the formulas and structures, and subsequently, new language, required to continue funelling artificial dollars into broken down debt vehicles is yet insufficient and the charade is reaching its unavoidable and imminent end. Is it a coincidence that the debts, currencies, and economies of the top European, Asian and North American countries are all accelerating towards the brick wall of default at the exact same point in history? I smell a rat, or rather, a whole pack of rats. I think the ruling class, which is without a shadow of doubt corrupt beyond redemption, have figured out that if you bury your theft in a mountain of debt, it will never be found and you can ride off into the sunset undiscovered. Its time for the politicos and their brainwashed over-educated economists to disclose publicly both the amount of taxes paid on their sources of worldwide income.

But that’s another story. It amazes me, and then again it doesn’t, that there are no culprits in this grand global forum of doublespeak. The Greeks are guilty, but not a single Greek person has been named as responsible for anything that might constitute a transgression of fiduciary duty. The American president blames the Republicans, who blame the democrats. Again, nobody is fingered as the leader or treasury secretary or central bank chairman who is guilty of a crime, or even of towering stupidity. Greenpspan’s taking some heat, but he rode off into the sunset, and so in his dotage is a safe target. If corporations are the beard for the unsavoury acts of businessmen, then government is certainly the place to hide for leaders who seek to enrich themselves at the expense of the general public.

SELF DELUSION AS DESIRABLE SKILL-SET
It’s true that People tend to embrace the convictions that serve their circumstantial requirements. A cancer patient believes unequivocally he will beat the disease. A gambler believes just as forcefully that he can beat the house. An athlete believes he will win, and a judge believes he is qualified to pass judgment and sentence on the lives of others. In the United States, the President and Congress believe it is both their right and their obligation to pretend that the inevitable will only occur according to their political conditions, and fail to recognize that the inevitable will happen because its inevitable. Both sides know that there is absolutely zero chance of a compromise not being reached, and both sides plan to hold out for their respective demands until the very last possible second. Obama promises the Biggest Deal Possible, and Republicans are obliged to proclaim a Little Tiny Deal.

That means the solution will be the equivalent of little tiny band-aid on a gaping wound in a rain storm. It might slow the tide of the larger inevitability – the collapse of the U.S. dollar and the U.S. financial apparatus – but only temporarily. And then, maybe not at all. Where the boundaries of reason have long ago been surpassed by the astonishing ridiculousness of the economic ruling class, the average intellect is at a loss to opine where the relentless plunge into the apparently bottomless abyss of debt might end. Can we really keep ‘refinancing’ and ‘rolling over’ and ‘reinsuring’ our way into infinity? Is the next debt ceiling measured in quadrillions, and then quintillions, and so on?

At the end of the day, these vast sums being loaned into existence by the collusional participation of elected officials and their appointees is a smokescreen for skimming the national take and paying the minimum tax.

But the scheme has evolved into a scam, and the scam has gotten so mature, that like any Ponzi scheme it needs to replace old investors with new ones to keep the balls in the air. It looks like the principle product of our globalized pyramid economy – indebtedness – is about to collapse, because all the participants are maxed out; there are no new investors to keep the scam going. The central banks can’t create money fast enough to make even the interest payments on these colossal debts. We could theoretically amp up the rate of money issuance, but even with zero interest rates, that’s too much for the already over-inflated financial system. The value of national currencies is in terminal decline relative to real goods, and we are witnessing the birth of the first global hyperinflation in history. Which brings us back to the main thrust of this story, which is that we are on the verge of a major chronic meltdown.

The acuteness of the self-inflicted austerity measures that Obama has as his only bargaining chip, versus the depth of relinquished tax breaks which is the only bargaining chip of the Republicans, is all that remains to be negotiated in America. That and the numerical name of the next debt ceiling. In Europe, the game is slightly different. On multiple fronts, the banks and the governments are negotiating austerity measures as if they were carbon credits. And just as carbon credits are easily counterfeited, or cancelled, or fraudulently re-sold, the promises will be modified by political expediency, the CDO spreads and interest rates will be adjusted to suit the reality required by all the vested interests, and the numerical names of the next bailouts, puny in comparison with America’s, established.

CHINA AND JAPAN
The news yesterday that China grew by 9.5% in the second quarter of 2011 appears to have allayed fears that the Chinese Tiger was growing a little bit tired and threatening to lie down for a while. But not before the Chinese bad news triggered a warning from Moody’s.

According to the Wall Street Journal:
“China on Monday failed to sell some of the 50 billion yuan ($7.73 billion) in local bonds offered at a regular auction. It was the first time one of these Ministry of Finance auctions failed to sell out since they began in 2009. Local governments can’t issue bonds directly so the ministry auctions the bonds on their behalf.

Ratings firm Moody’s Investors Service warned last week that local-government debt posed an increased risk to the central government and the banking system, and said a National Audit Office estimate putting the debt at 10.7 trillion yuan understated the actual amount by some 3.5 trillion yuan.

With Europe squabbling over where to meet next, and Obama sticking to his guns for concessions on tax breaks, the bigger picture is looking an awful lot like gold and silver will be the ultimate beneficiaries of all this debt stupidity.

When the bombs go off and the delusion can no longer be supported, we’ll wake up and understand that defaults on all fronts have been ongoing for quite some time. Then the stampede will really begin into gold and silver.

The Disintegrating U.S. Economic Recovery

Economics / Economic Recovery

The word ‘recover’ always has the connotation of “getting back.” But who is going to get back what when the economy “recovers”? Few at most. So what does an economic recovery look like? No one knows. The word ‘recovery’ can not be applied to objects willy-nilly. A sick person goes into the hospital to recover; a broken automobile is taken to a shop to be repaired. Automobiles do not recover. Neither do economies; they can only get better or worse, and specific information is needed to determine which. Few people realize just how close to the edge of disintegration America is. The Congress meets for one purpose and one purpose alone—to get reelected. The political posturing begins the day after each election, while the nation’s problems go unaddressed, and our media aid and abet the posturing. Such is America today. This recession/depression will never “recover.” Neither will America.

That successful, inveterate liars consistently use a specific group of practices has been known for ages. They, for instance, give long winded answers to questions to distract and confuse the questioner, make assertions that can’t be easily refuted, and keep from saying very much that is specific, making it difficult to confirm or refute details. One prevalent way of doing this is to speak metaphorically.

Those of you old enough to remember the Vietnamese War may remember that whenever General Westmorland was asked how the war was going, he usually replied that there was “light at the end of the tunnel”

Of course there was; there is light at both ends of every tunnel. But no one ever knew which end he was talking about or if we were getting any closer to the end that would get us out. We all now know, of course, that we were not. Telling us that there was light at the end of the tunnel told us nothing at all; yet many were led to believe that “there is light at the end of the tunnel” was synonymous with “we were getting closer to victory” even though there is absolutely no logical relationship between these two assertions. Why did Westmorland always answer this way? The only reasonable answer is to avoid telling the truth.

Likewise, President Obama is addicted to vapid metaphors: the US still has a “big hole to fill,” “Headwinds” from the first half of 2011 are holding back the recovery,” “There are going to be bumps in the road,” and “on the right track”

The hole that needs to be filled is the lack of specificality in his speeches, but let’s just consider the ubiquitous “on the right track.” It’s very similar to “light at the end of the tunnel.” A train, for instance, can be on the right track but be going nowhere or perhaps even going backwards. When a train is on a siding, isn’t it on the right track? What does this metaphor tell anyone? What kind of evidence could be cited to refute it? It’s one of those perfectly safe, empty claims that people trying to hoodwink others make all the time.

But what has all of this to do with “recovery”? Well, just take a look at how the word is ordinarily used.

“My neighbor has recovered from pneumonia” usually means his previously impaired lungs are now working normally. They have gotten their normal functionality back.

”The police have recovered my friend’s stolen property” usually means that his property has been returned to him. He has gotten his property back.

“The speculator recovered the money he lost” means that he got the amount of money he lost back.

The word ‘recover’ always has the connotation of “getting back.”

But who is going to get back what when the economy “recovers”? Are the people who lost their homes going to get them back? No. Are the people who lost their jobs going to get them back? Not likely. Are the people who lost their savings for retirement going to get them back? Some may; most will not.

So what does an economic recovery look like? No one knows.

If the employed population rises to 94%, will the economy have recovered? What if the workers’ total compensation is only half of what it was before the recession/depression? Will it still be a recovery?

What if GNP exceeds the GNP before the downturn but employment only rises to 85%? Will that be a recovery?

What if the Dow goes to 50,000 but the average wage is only $4.00 and people are starving? Will that be a recovery?

You see, the word ‘recovery’ when used in relation to the economy is just another vapid metaphor. It means nothing. It means whatever anyone wants it to mean. It is not used to describe anything real or concrete. It is used to pull the wool over people’s eyes, to get them to believe what the speaker wants them to believe. If he wanted to tell you the truth, he’d use more specific words, such as, “a few more people are employed today than a month ago.” “The Dow is somewhat higher today than it was last quarter.” “The average wage is $5.00 less today than it was last year.” If anyone ignores the last of these, he could say the economy is recovering. But could he say that if he takes the third into consideration?

The word ‘recovery’ cannot be applied to objects willy-nilly. A sick person goes into the hospital to recover; a broken automobile is taken to a shop to be repaired. Automobiles do not recover. A diseased tree can be treated and recover; a broken stone cannot. An erroneous calculation can be corrected; it cannot recover. Neither can economies; they can only get better or worse, and specific information is needed to determine which.

When people don’t want you to know the truth or even what, if anything, they’re talking about, they use abstract words and metaphors. Looking carefully at the words people use is a sure way of identifying scoundrels. I am no oracle; I don’t have the slightest idea of what the President is up to. But I do know he’s not being honest with the American people. Neither are the members of his Cabinet or even the Congress.

Few people seem to realize just how close to the edge of disintegration America is. Engineers have been warning us for decades about our collapsing infrastructure. This year’s floods have demonstrated just how fragile our earthen dikes are. We have chosen the inefficient automobile as our basic means of transportation, but we lack the money to maintain our highways. Mr. Obama has recently spoken of building bullet trains while even our present railway system is slow and unsafe as two fatal accidents this week alone show. The war on drugs has been a monumental failure; yet we persist on fighting it. Even Congressmen admit that our government does not work.

The President last year initiated a “race to the top” in our public schools; today teachers are being laid off for lack of funding. Up until 2008, many people had lost confidence in all of our institutions except the financial system, but even that confidence has now evaporated. Given the number of people Americans have incarcerated, this nation must be either the most crime ridden the world has ever seen or the most repressed. Homeland Security has done little but annoy people; yet it refuses to change its policies. Two years ago, the Democrats enacted a comprehensive health care bill; today the talk is about reducing its benefits. Our once mighty manufacturing base has been dismantled; yet the government wants more free trade agreements to increase exports. State governments are too impoverished to continue providing even basic services. The number of homeless, impoverished, and hungry Americans is increasing. The number of employed along with their wages is declining. Our superbly equipped and trained military forces have not won a major war since World War II; yet we continually engage them. I suspect the greatest contributor to GNP is political contributions, sanctioned by the Supreme Court, made to buy off our representatives. The Congress meets for one purpose and one purpose alone—to get reelected. The political posturing begins the day after each election, while the nation’s problems go unaddressed, and our media aid and abet the posturing. Such is America today. This recession/depression will never “recover.” Neither will America.

Europe and America are Financially Burning

Politics / Credit Crisis 2011

Markets are what they are today because that is the way government wants them. The stock market has stayed up for quite some time, but the best earnings are fading. The Street is well aware of what has been happening for a number of years. They just do not say anything and go along with the program. They have come to overlook situations worldwide as well as in America, because they believe that, “The President’s Working Group on Financial Markets” won’t let the market fall.

There are not many professionals that believe there will be no extension of the short-term debt limit to $16.7 trillion. They do not believe default is possible. That tells us that extension has already, at least 80%, been discounted in the market. If approved, the event should not cause much of a future rally. Extension of hostilities in the Middle East could put further pressure on the market. There certainly will be much less debt created and that will change fiscal policy. It will tend to further slowdown an economy that cannot stand on its own. In fact, without an $850 billion stimulus it will not most certainly fall into minus GDP growth. If the economy is to stay in growth the Fed will have to create the funds for both the funding of Treasury and Agency debt and perhaps purchase more toxic waste. They own almost $1 trillion now whose value we cannot determine, and simultaneously fund the economy. If all of this does not take place then the economy will fall as will earnings and the market will as well. As you are well aware governmental, personal and corporate debt are overwhelming, which means it is going to take many years to try to pay this debt off. We do not see it ever being paid off. We expect a series of wars or a Third World War, which could cause a debt settlement by many nations, or in absence of a war there could be currency devaluations, revaluations and multilateral partial or full default.

The QE2 program was in effect for a year and unemployment did not improve in spite of stimulus 2, or the injection of $862 billion. Housing isn’t going to improve anytime soon, nor is commercial real estate, both of which could remain moribund for many years. By the end of the year home inventories could be 3 to 3.5 million residences. Government has done almost nothing to create substantial numbers of jobs, as our Congress allows transnational conglomerates to keep foreign profits tax free offshore and under free trade, globalization, offshoring and outsourcing gut our job market. No effort is made to stop it. We have lost 11.7 million jobs in 11 years and 440,000 corporations that have moved offshore. We ask, why doesn’t the President and Congress start here and as well clear the 30 million illegal aliens out of the country? The administration is more interested in selling 30,000 weapons to criminals who operate drug cartels. Unemployment is 22.6% and government has to stop lying about the numbers. Government now wants to change the CPI, so ever more bogus figures can be produced. Do not worry we will always have the true figures.

Under such circumstances how can consumers increase debt and spend more? They simply cannot and that will soon show up in consumption as a percentage of GDP, when it again hits 69% on its way to the long-term average of 64%. Yes, the ratio of household debt to disposable personal income has fallen from 130% to 150%, but with major unemployment will it return to 75% that existed during the last 25 years of the 20th century? Momentum is only headed in one direction and that is down.

We are not the only country with these problems, just look at England and Europe – they are in the same boat. In addition, their financial conditions are continuing to deteriorate. In Asia, Japan is trying to recover from its terrible destruction and China and others are raising interest rates and mandatory bank reserves to combat inflation.

The agreement on short-term debt extension will not include any meaningful budget cuts. They will just pile on more debt until the system collapses. For the paid-off politicians and those behind the curtain pulling all the strings it is just another game to control the populace and enslave them. The public is so entrapped they want debt extension and QE3. They do not care what the cost is they just do not want the game to stop and the music to end. Like in Greece if they can they want both parties out of government, but that is not going to happen unless there is a revolution. We will have a 10-year deficit reduction to bamboozle the people and it will mean little. Some higher taxes for the rich and more bread and circuses for the people. Future congresses are not gong to be bound by legislation they’ll just bypass it or pass offsetting legislation. This is really all a game of political posturing and theatre.

Low interest on mortgage loans still is not luring or qualifying many people to buy homes. Most buyers are speculators – many of which pay cash and rent the dwellings. Those millions of homes in lender inventory are not being sold or depleted. That inventory somehow is never mentioned in the mainline media coverage. It tells a good part of the whole story, America was overbuilt and it will take years to clear the inventory, as builders, build 550,000 new homes a year. That means lower prices and years of illiquidity.

The housing bubble is still being liquidated and as long as that is in progress there will be no American recovery. Manufacturing has in large part been shipped overseas, so what will create jobs and prosperity if housing and manufacturing are moribund? It certainly won’t be services that provide $10.00 per hour wages. The lost jobs paid $30.00 an hour. The tacks the US Congress and transnational conglomerates have taken are sure to destroy America as a first world nation. All they have done is enrich themselves and betrayed fellow Americans. Most banks are certainly insolvent and the government made the conscience decision to effectively nationalize housing. We believe that decision was made ten or more years ago, when we predicted this would be the outcome. If government owns all the houses the only people who can rent them are those that do what government tells them to do, such as where you will work and where you will live. This fits in perfect with fascist political and economic philosophy.

We are making major inroads into informing the US and world public about what is really going on, yet, at least 50% have no clue as to what is really going on. They are deeply in debt and psychologically they have been wiped out by real estate losses. They have no food storage; water filters or means to defend their families. They have no gold or silver to carry them through hard times. For years Wall Street and government anti-gold and silver propaganda has left them at best confused. They are totally unprotected and are very liable to end up in dire straights.

We again have been fortunate in predicting this past week’s moves in gold and silver. Gold rose almost $60.00, up some 6% versus euros and almost 4% in dollars. In many countries the yields are rising on government bonds and as we have said since 1967, that has been a harbinger of higher gold prices. Worldwide yields are at record lows, which means that yields have nowhere to go except up. Worse yet, debt is increasing everywhere if for no other reason than it is cheap to borrow. Add to the debts mix in a lack of confidence because of fiat currencies and you have major problems now and looking down the road. As time passes more investors will want gold and that means as currencies are dumped gold and silver will be the beneficiaries.

Investors are concerned because everything government does turns out poorly. Debt based money has always been a ticket for disaster. There is only the euro, which has about 5% gold backing, down from 15% ten years ago. As a result all currencies have lost an average of more than 20% annually versus silver and gold. That means there are some who just do not want paper if they can avoid it. In just the past ten years 60% of US debt has been added of the 97% loss since 8/15/71. Recently we have seen many sovereign-debt down grades, which should have taken place years ago. Why did they now all come at once? It is because those on Wall Street and at the Fed want investors looking at other nation’s problems, not America’s problems, which are 100 times worse than those of Greece and the other five European sovereigns.

Don’t forget the rating agencies are controlled by Wall Street; just look at their deliberate mis-rating of CDOs and MBSs. That should be proof enough. Just recently Germany refused to accept their ratings. They said they were bogus and politically charged. We realize the debt situation with these six countries is dire, and will worsen and more and more funds will be needed to pay interest to the bankers. Their market interest rates have risen and will continue to do so, at rates that will destroy these nations and perhaps the lending nations and the IMF as well. Delaying the inevitable is a very dangerous policy that will end up being terminal for all. If these nations that are in trouble cannot borrow they cannot recover. Austerity eliminates jobs and reduces government income in the form of taxes. Then the victims need more loans, which eventually cause collapse, as we saw in Argentina in the late 1990s. These countries cannot devalue their debts because they are trapped within the euro and the only way to recover is to default and leave the euro and go back to their original currencies. The elitist powers in Washington want the euro to collapse so that the US dollar remains the world reserve currency. This is currency war aided and abetted by the rating agencies captive subsidiaries of Wall Street.

How can a nation such as Greece with 11 million people pay off $675 billion? Obviously they cannot, so we see the exercise of one of destroying Greece, the other five nations, and eventually the euro. The key to the collapse of the weak euro zone members is that they cannot devalue and that is why they have to exit the euro, or remain in bondage for the next 50 or more years. The US on the other hand can raise the debt limit; euro zone members cannot do that. This is what the US has been doing since 2000 via the creation of money and credit and as a reflection of that in dollar terms is the rise of gold from $260 to $1,577 and silver from $3.50 to $50.00. That tells the whole story. Today it is worse as the US borrows about half the money it spends. Over the past three years that debt tripled at the rate of $1.5 trillion annually. Under present circumstances this scenario has to worsen, because just to maintain more and more money and credit has to be shoved into the system. We have just seen in Stimulus 1 and 2 and QE 1 and 2 that the results of almost $5 trillion in spending has brought two, six to nine months periods of growth that fizzled once the infusions ended. QE 3 is now upon us and the Fed will do the same thing again getting the same poor results. In the US economy the minute the money and credit stops the bottom falls out.

As we have said many times before the only way to end this crisis is to have a meeting of all nations. Revalue, devalue ad multilaterally complete debt default. That is what has been done in the past and that is what has to be done now. We know problems are far greater today than the past and the depression to follow will last for five or more years. That is far better than letting the system collapse, trying to rebuild and suffering 20 or more years of worldwide depression. Due to this indecision the crisis worsens with each passing day.

The world financial system has been built on sovereign debt once that system goes into crisis, which it is in the process of doing, and then the entire system will collapse. Europe is the beginning and we believe the interconnectivity will first take down Europe, then England, then the US, and in varying degrees the rest of the world, unless soon the meeting we mentioned begins.

The US needs to act and act quickly to bring about such a meeting – at least within the next few years. At the present pace the dollar problem could be stretched out for a number of years, but the longer it is stretched out the worst will be the final result. During the immediate timeframe the dollar’s world reserve status could be maintained, if the meeting’s held and the dollar returns to a gold standard.

Europe is figuratively financially burning. In Greece everyday there are demonstrations ranging from 200,000 to two million at any given time. The price of gold in euros hits a new high almost every day. The bankers and leadership in Europe are delusional. They simply refuse to face the reality they have created. The end of QE 2 is a joke. The Fed has not refrained from monetizing Treasury debt, as its balance sheet hit another high on July 6,2011. That was a total of $2.854 trillion, consisting of $1.625 trillion in Treasuries. The total was $600 billion plus $250 billion from reinvested funds. We had estimated more than a year ago participation of $900 billion net. This $850 billion will continue to be invested on a rolling basis. The maturities will dictate participation and how much more funds would have to be added to absorb 80% of Treasury issues and to stimulate the economy. As you can see the Fed has lied again and the crossover to QE 3 has been silent and seamless. There is no limit and as we pointed out long ago, there will be no limit. There cannot be because in the absence of perpetual funding comes collapses.

B.I.S. Gold/Currency Swaps and a Greek Drachma?

Commodities / Gold and Silver 2011

In the last year, according to the B.I.S.’s annual report Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past year, the largest withdrawal in more than a decade. The move, disclosed in the BIS’s annual report, marks a sharp reversal from the last year when central banks added to deposits of gold at the so-called “bank for central banks”.

The Bank for International Settlements did not disclose the reasons why the Gold/Currency swaps were initiated in the first place, nor have they disclosed why these transactions were reversed…

Some have speculated that they did not earn enough on the gold they lent out. Lending gold for six months earned a rate of 0.1% recently, according to benchmark market assessments published by the London Bullion Market Association. This is certainly not worth any risk at all.

Some say that it was central bank desires to keep their gold inside their vaults and not loaned outside it.

Some say that the gold is now being lent to the private sector for a better yield. This may well be true, but we note that the risks have heightened well beyond the rewards they may earn.

To know for sure, we need to be told by the B.I.S. themselves, and that is not likely to happen. Few except ourselves have suggested it had been loaned out as collateral. The return of the gold to the central banks involved — in the light of the worsening international debt situation and the risks to international banks — could easily have played a part.

The BIS confirmed that the fall in the value of gold deposits disclosed in its annual report represented, ‘a shift in customer gold holdings away from the BIS’. Comparisons with previous annual reports showed the withdrawal was the largest in at least 10 years. This implies that more than improved yields were involved. In our opinion, the return of gold to its original owners reflects the higher risks out there for the banking system. No central bank will want it to be known that they have a creditor that cannot return their gold. Should the worst happen that the Eurozone membership changes, then the ensuing financial chaos calls for central banks to be able to cope with any dramas that might come their way.

It would be prudent for all such guardians of national reserves to have their assets in house. To us, this seems the most plausible reason and one all central banks would never dare express!

Extreme Times
One of the most difficult definitions to make is the definition of extreme times for central bankers. Are we in extreme times for most gold holding central banks based in Europe? We would think so, as the abilities of European Finance Ministers are falling short of what’s needed to rectify the Eurozone debt crisis. Matters are worsening every day, and we haven’t seen the worst yet. If matters do decay any further, or if Greece leaves the Eurozone and the Drachma is reinstated, then it will need all the help it can get from its central bank.

While the Greek government cannot instruct the central bank to compromise its independence (unless it leaves the Eurozone) in extreme times the central bank may, on its own initiative, step into the breach of international trade and use gold as collateral, to keep international trade flows moving. That is what really extreme times means.

With Greece, Ireland, Portugal, Spain and now Italy on the danger list of debt-distressed members of the Eurozone we are in extreme times in Europe. This would be gold’s time!

So what can happen to make gold serve as more than its dollar value? Gold is money as a last resort amongst bankers. What would make them activate it?

Departing from the E.U.
We have to do more than sit and wait to see what happens. At the moment the gold price has shot up to €1,107 at Tuesday’s Gold Fix in London, a record almost €30 higher than the previous peak. Confidence in the euro is crashing. It is clear that even Europe’s Finance Ministers recognize that Greece is completely bust. Whichever way the country goes — whether it is into austerity for the next decade or perhaps into a booming exit from the E.U. — it is going to have an extremely hard time. If it does leave the E.U. then what does it do?

Take a look at Argentina, when it left the dollar peg and let the Peso drop. Argentina is still not welcome in the markets, but it benefitted more than it would have suffered if it had kept the dollar ‘peg’. If Greece followed the same road it would have to reinstate the Greek Drachma at a hugely lower rate per Euro, so that its cheapness would attract euro-bearing tourists in droves. The banks would need to be saved by the forcible conversion of euro deposits to Drachmas at a lower level. Capital flows would have to be stopped or heavily penalized through a deep discount to the Drachma used for commercial transactions.

This would give rise to a Financial Drachma and a Commercial Drachma. New investors in Greece would be rewarded with the deep discount that would prevent money flowing out of Greece. Commercial transactions would follow the value of the Drachma established in trade with Greece. If foreign banks wanted to remove the blocks on their capital they would be asked to invest it in 10-year government bonds or bank deposits before it could be repatriated.

The big advantage to new investors would be that they would not simply earn good interest on their deposits but would see a capital profit of the deep discount at the end of 10 years, a boost to their interest income in the amount of the deep discount as income would leave the country as a commercial transaction.

With an economy not built to perform well by itself, the benefits of these changes would enhance the performance of the economy remarkably. Property investments would enjoy the deep discount on capital alongside the new tourist boom. Under any long term bailout none of these benefits would come to Greece.

Will the U.S. Default On Its Debt … Even If It Raises the Debt Ceiling?

Many in Washington are warning that – unless a compromise to raise the debt ceiling is reached – the U.S will default on its debt.

Moody’s has put the U.S. on a credit review for a possible downgrade due to the failure to reach a debt ceiling agreement.

Standard and Poor’s said earlier this month that it would likely consider the Greek bailout plan to be a default. And see this.

But the American situation is different – both because we are the world’s largest economy and because raising the debt ceiling is different from the Greek plan.

Right?

Hopefully. But as Zero Hedge notes:

China Daily has just reported that according to the notorious … Dagong rating agency, “The US’ sovereign credit rating is likely to be downgraded regardless of whether the US Congress reaches an agreement on raising its statutory debt limit. “If the debt limit is raised and the public debt continues to grow, it will further damage the US’ debt-paying ability, which is a key factor in Dagong’s evaluation, and we will consider lowering its ratings accordingly,” said Guan Jianzhong, chairman and CEO of Dagong. “If the raised limit fails to pass and the US faces default, the rating will be immediately and substantially downgraded,” he said. According to Guan, the downgrading is really just “a matter of time and extent”.

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From China Daily:

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Dagong’s rating was downgraded from AA on Nov 9 after the US government announced a second round of quantitative easing (QE2).

***

“Raising the limit is just a legislative measure to allow the government to borrow more money, but it does not change the fact that the US lacks momentum for economic growth,” Guan said, adding that if the inflation and unemployment rates remain unchanged, the US government might turn to QE3.

The fundamental problem is that the US’ ability to generate wealth is far from compensating its increasing debt, and “paying debts by borrowing more is not a solution,” he said.

“Neither the $2 trillion QE nor raising the debt limit is an effective measure. And the sovereign debt crisis will continue,” Guan said, explaining that the US government spent huge amounts on consumption and social security, and had limited resources left for economic development

In fact, Dagong said last month that the U.S. had already defaulted.

Granted, Dagong is a Chinese rating agency which has a Chinese bias (just like Moody’s, S&P and Fitch have a U.S. bias … and they take bribes for higher ratings) and – as Zero Hedge notes in the above-linked article – Chinese and American rating agencies are in a war right now.

But a large German rating agency has also downgraded U.S. debt.

And S & P put the U.S. on a downgrade watch in April.

And as CNBC notes today:

A U.S. default isn’t a matter of “if” but “when,” David Murrin, chief investment officer at [UK-based] Emergent Asset Management, told CNBC.

“It’s inevitable that the U.S. will default—it’s essentially an empire which is overextended and in decline—and that its financial system will go with it,” he said.

The question is: Does the U.S. default when it is forced to by the outside world, probably the Chinese, or does it take the option to default on its own terms in such a way that it may have a strategic advantage, Murrin said.

And, yes, the Federal Reserve could go bust as well.

Tripoli to prosecute NATO Secretary General Anders Fogh Rasmussen for “war crimes.” “1,108 Libyans killed in NATO attacks”

“1,108 Libyans killed in NATO attacks”

Libya’s prosecutor general has said that NATO airstrikes have killed more than 1,100 civilians and injured thousands of others since the end of March.

Mohamed Zekri Mahjubi told foreign journalists in Tripoli on Wednesday that he intends to prosecute NATO Secretary General Anders Fogh Rasmussen in Libyan courts for “war crimes.”

“As NATO secretary general, Rasmussen is responsible for the actions of this organization which has attacked an unarmed people, killing 1,108 civilians and wounding 4,537 others in bombardment of Tripoli and other cities and villages,” Mahjubi was quoted by AFP as saying.

The prosecutor general pressed other charges against Rasmussen, saying the NATO chief sought to murder Libyan ruler Muammar Gaddafi.

Mahjubi also accused Rasmussen of “deliberate aggression against innocent civilians, the murder of children as well as trying to overthrow the Libyan regime.”

The Libyan official said the NATO chief seeks to change the regime in Libya and establish a new government under his control with the aim of exploiting the country’s oil.

NATO has carried out hundreds of air attacks over Libya with the claimed aim of protecting civilians against Gaddafi forces.

The NATO chief met representatives of the Libyan opposition-backed Transitional National Council in Brussels on Wednesday to discuss the way forward in the North African country.

Rasmussen said NATO operations in Libya would continue. However, he added that it was time to find a political solution to the crisis.

NATOs Responsibility to Protect: a lie that shows that people will believe anything if it emanates from an invested authority, has been blown out of the mediterranean waters!

Silver Breaks Out of Basing Pattern, Starts Next Major Uptrend

Commodities / Gold and Silver 2011

Yesterday’s high volume breakout above its 50-day moving average marked completion of the intermediate basing pattern and the start of the next major uptrend in silver. Everything in now in place for a substantial uptrend to develop in coming months that should take silver comfortably to new highs. Fundamentally yesterday’s breakout was due to the realization in the markets that QE is set to continue, whether called QE or not, and in fact it must continue, as any attempt to apply the brakes at this late stage would result in a global systemic economic collapse.

Hyperinflation will be the inevitable end result, as will prices for gold and silver at levels that many now would consider to belong solely in the realms of fantasy. We already had a foretaste of this coming ramp in Precious Metal prices earlier this year with the big runup in silver prices, before powerful interests decided the time was right to put the boot into the little guy by repeatedly hiking margin requirements over a short period. This served big money interests in 2 ways – first of all it crashed the silver price so that they can move in and scoop up more of it. Secondly big money is not all at concerned about margin requirements, since being wealthy in the first place they don’t need to bother with margin at all, although it suits them to use it at times to maximise leverage. What the hiked margin requirements did do was to throw the little guy off the train, and like one of those old westerns big money is stood at the open end of the train carriage lighting up a cigar and grinning with satisfaction as the little guy rolls down the embankment and is left lying in the dust as the train chugs off into the distance without him.

Our 6-month chart for iShares, which is a good proxy for silver, shows the now extraordinarily bullish setup for silver. For some weeks it was not clear whether the C wave of the now completed A-B-C correction would take the silver price below the A wave low in May, which for iShares was exactly at $32, and had Greece not been bandaged up it would have, of course. The first sign of improvement was the breakout from the C wave downtrend channel about a week ago, after which the price was temporarily restrained by unfavorably aligned (falling) 50-day moving average, which forced a test of support at the top line of the channel, which we correctly anticipated. Then just yesterday the price blasted through the 50-day moving average on the highest volume for weeks, the importance of the resistance in the vicinity of this average being illustrated by the way the price gapped above it – a bullish “breakaway” gap. This is what we have been waiting for. This marks the end of the intermediate base building phase and the start of the next major uptrend.

The picture could not be more bullish. The price and its 50-day moving average have corrected back almost to the rising 200-day moving average which is now coming into play to support a major advance. The volume pattern during the base building process has been positive, with volume contracting, and the Accum-Distrib line shown at the top of the chart rising, indicating accumulation. Finally the COT charts are at their most bullish for ages with Commercial short and Large Spec long positions being at their lowest levels for a very long time.

The lower COT chart is courtesy of the renowned Scarborough Bullion Desk in England.

CYBERSPACE: Pentagon Declares the Internet a “War Domain”

The Pentagon released a long-promised cybersecurity plan Thursday that declares the Internet a domain of war.
The plan notably does not spell out how the US military would use the Web for offensive strikes, however.

The Defense Department’s first-ever plan for cyberspace calls on the department to expand its ability to thwart attacks from other nations and groups, beef up its cyber-workforce and expand collaboration with the private sector.

Like major corporations and the rest of the federal government, the military “depends on cyberspace to function,” the DoD plan says. The US military uses cyberspace for everything from carrying out military operations to sharing intelligence data internally to managing personnel.

“The department and the nation have vulnerabilities in cyberspace,” the document states. “Our reliance on cyberspace stands in stark contrast to the inadequacy of our cybersecurity.”

Other nations “are working to exploit DoD unclassified and classified networks, and some foreign intelligence organizations have already acquired the capacity to disrupt elements of DoD’s information infrastructure,” the plan states. “Moreover, non-state actors increasingly threaten to penetrate and disrupt DoD networks and systems.”

Groups are capable of this largely because “small-scale technologies” that have “an impact disproportionate to their size” are relatively inexpensive and readily available.

The Pentagon plans to focus heavily on three areas under the new strategy: the theft or exploitation of data; attempts to deny or disrupt access to US military networks; and attempts to “destroy or degrade networks or connected systems.”

One problem highlighted in the strategy is a baked-in threat: “The majority of information technology products used in the United States are manufactured and assembled overseas.”

DoD laid out a multi-pronged approach to address those issues.

As foreshadowed by Pentagon officials’ comments in recent years, the plan etches in stone that cyberspace is now an “operational domain” for the military, just as land, air, sea and space have been for decades.

“This allows DoD to organize, train and equip for cyberspace” as in those other areas, the plan states. It also notes the 2010 establishment of US Cyber Command to oversee all DoD work in the cyber-realm.

The second leg of the plan is to employ new defensive ways of operating in cyberspace, first by enhancing the DoD’s “cyber hygiene.” That term covers ensuring that data on military networks remains secure, using the Internet wisely and designing systems and networks to guard against cyberstrikes.

The military will continue its “active cyber defense” approach of “using sensors, software, and intelligence to detect and stop malicious activity before it can affect DoD networks and systems.” It also will look for new “approaches and paradigms” that will include “development and integration … of mobile media and secure cloud computing.”

The plan underscores efforts long under way at the Pentagon to work with other government agencies and the private sector. It also says the Pentagon will continue strong cyber R&D spending, even in a time of declining national security budgets.

Notably, the plan calls the Department of Homeland Security the lead for “interagency efforts to identify and mitigate cyber vulnerabilities in the nation’s critical infrastructure.” Some experts have warned against DoD overstepping on domestic cyber-matters.

The Pentagon also announced a new pilot program with industry designed to encourage companies to “voluntarily [opt] into increased sharing of information about malicious or unauthorized cyber activity.”

The strategy calls for a larger DoD cyber-workforce.

One challenge, Pentagon experts say, will be attracting top IT talent because the private sector can pay much larger salaries — especially in times of shrinking Defense budgets. To that end, “DoD will focus on the establishment of dynamic programs to attract talent early,” the plan states.

On IT acquisition, the plan lays out several changes, including faster delivery of systems; moving to incremental development and upgrading instead of waiting to buy “large, complex systems”; and improved security measures.

Finally, the strategy states an intention to work more closely with “small- and medium-sized business” and “entrepreneurs in Silicon Valley and other US technology innovation hubs.”

The reaction from Capitol Hill in the immediate wake of the plan’s unveiling was mostly muted. Cybersecurity is not a polarizing political issue in the way some defense issues are, like missile defense.

Claude Chafin, a spokesman for House Armed Services Committee Chairman Buck McKeon (R-Calif.), called the strategy “the next step in an important national conversation on securing critical systems and information, one that the Armed Services Committee has been having for some time.”

That panel already has set up its own cybersecurity task force, which Chafin said would “consider this [DOD] plan in its sweeping review of America’s ability to defend against cyber attacks.”

As the Pentagon tweaks its approaches to cybersecurity, Senate Armed Services Committee ranking member John McCain (R-Ariz.) on Wednesday wrote Senate leaders saying that chamber must as well. McCain asked Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) to establish a temporary Select Committee on Cyber Security and Electronic Intelligence Leaks.

“Cybersecurity proposals have been put forth by numerous Senate committees, the White House and various government agencies; however, the Senate has yet to coalesce around one comprehensive proposal that adequately addresses the government-wide threats we face,” McCain’s office said in a statement. “A select committee would be capable of drafting comprehensive cybersecurity legislation quickly without needing to work through numerous and in some cases competing committees of jurisdiction.”

The Collapse Of Paper Money and The Vertical Move Of Gold

Currencies / Fiat Currency

Paper money, invented by the Chinese, first appeared in the West in the 13th century. Brought back from China by Marco Polo and his uncles, author Ralph Foster describes the West’s reaction to the hitherto unseen phenomena of money as a piece of paper.

Upon returning to Italy, Polo showed off some Chinese currency notes and explained how they were used…An article by Will Willbond in the November 1995 issue of ‘The Bank Note Reporter’ describes the Venetian reaction:

The Emperor of China (who we call Kubalai Khan) gave the Polos a camel loaded with 1,000 cash paper notes as a gift from their sovereign. The doge (chief magistrate of Venice) and the cardinal (the Pope’s cousin) looked at these…notes in awe and dismay.

The hen-scratched writing was not in Latin or Greek but in a secret language, most likely the language of the Devil. They proceeded to burn these notes and accused Polo of heresy.

pg 38, Ralph Foster, Fiat Paper Money: the History and Evolution of our Currency, 2nd ed.

In retrospect, the disturbed reaction of the Venetians was not without cause. For when paper money was later issued in the West, it was to assume a far more sinister guise—no longer was money a savings-based instrument of exchange as it had been throughout human history. In the West, paper money was to become an integral part of a scheme to profit by the spread of debt, i.e. usury.

DEBT-BASED CAPITALISM AND THE RISE OF MODERN BANKING

The human species, according to the best theory I can form of it, is composed of two distinct races, the men who borrow, and the men who lend.

Charles Lab, Essays of Elia, 1833

The above quote is from Will Slatyer’s The Debt Delusion, Evolution and Management of Financial Risk (2008). In his remarkable book, Slatyer traces the origins of debt to before the coinage of gold and silver.

Slatyer notes: In ancient times, interest was rarely charged on advances of precious metals … However, if one did not pay the loan back as agreed, interest was charged at very high rates …The word ‘interest’ refers to the compensation under Roman law which was due to the debtor who had defaulted, i.e. compensation. (pg 12)

Debt distinguished the West’s paper banknotes—issued from central banks in the form of loans—from China’s paper money issued by the state. In the West, however, debt was to replace savings as the basis of commerce.

Although it was two Scots, William Patterson and John Law, who introduced paper money to the West, paper money as debt, i.e. capitalism, can be traced to the Jews who had observed the earlier use of paper money and paper financial instruments in the East

Ralph Foster notes: Jews doing business in China observed and studied the use of promissory notes, vouchers, draft notes, and negotiable certificates of deposit. They saw how this paper circulated freely among the general population rather than only among merchants. Eventually, they adapted these financial instruments to their own use—long before the first Christian travelers had even heard of them.

Europe was thus an indirect beneficiary of eastern financial knowledge. Max Weber, the famous sociologist, recognized the importance of Jewish contributions to the development of capitalism and lectured on their common oriental origin.

pg. 34, Ralph Foster, Fiat Paper Money: the History and Evolution of our Currency, 2nd ed.

HOW CHINA’S FIAT MONEY BECOME DEBT-BASED PAPER BANKNOTES IN THE WEST

Ralph Fosters’ Fiat Paper Money: the History and Evolution of our Currency explains how China’s paper money came to the West: Those who benefit from fiat money’s devious gifts would rather its origins remain forgotten. Thanks to Ralph Foster’s scholarship, however, the history of fiat money is now known.

Note: To order Fiat Paper Money send check or money order for $29.95 to Foster Publishing, 2189 Bancroft Way, Berkeley, CA 94704, free shipping in USA, Global Priority mail outside USA $18.00, email: tfdf@pacbell.net

When the Scot, William Patterson, proposed his idea of a central bank to King William III of England, banks and paper money were unknown, at least in the West. In the East, paper money had for 600 years led to reoccurring episodes of runaway inflation and the collapse of dynasties. Finally in 1661, China outlawed paper money; and thirty-three years later, in 1694, paper banknotes became accepted as money in England.

Patterson’s central bank combined paper money with usury, i.e. money-lending. In Patterson’s scheme, money would henceforth be issued as loans from banks, i.e. if all loans were repaid, all money would disappear. Earlier, the Venetians had feared China’s paper money was the work of the devil. They were wrong. Patterson’s money was.

The underlying purpose of Patterson’s central bank was not to replace gold and silver with paper money (although it eventually did) but to instead profit by the charging of interest on the loaning of paper banknotes as if they were gold or silver.

Debt-based money issued from central banks on which interest accrues is the basis of capitalist economies. In capitalist economies, central banks are engines of credit which emit debt just as internal combustion engines emit carbon dioxide.

Debt accruing from money issued by central banks constantly compounds and unless capitalist economies also constantly expand, constantly compounding debt eventually overwhelms all economic activity, resulting in ’parcus nex’, i.e. economic death.

It is the charging of interest on money issued as loans from a central bank that is the foundation of capitalism. It should be noted that prior to capitalism, charging interest on money lending was considered immoral by Christians, Muslims and Jews alike.

Outlawed by Islam, considered by the Catholic Church to be a sin and contrary to the Law of Moses, because of William Patterson’s combination of money and debt, money lending is now the basis of all modern economies.

BE CAREFUL WHO YOU SHUN

Jews, barred from all trade guilds in Medieval Europe, were allowed only two avocations in the Middle Ages, that of money lending and the selling of used clothing. It is not without irony that the once shunned practice of money lending has now catapulted Jewish bankers to their pre-eminent position of power and wealth in the world today.

The Catholic Church’s ban on usury, i.e.money lending, came originally from Talmudic law which banned Jews from lending money at interest to other Jews. Jews, however, interpreted this ban as still allowing them to lend money to non-Jews.

In Hebrew law, an indulgent perception of usury meant that one could loan at usury to a racial alien or one not of the Jewish faith…In early Palestine, loans with interest had been allowed to gentiles and Samaritans, and the practice had spread to Europe.

pg 17, Slatyer, The Debt Delusion, Evolution and Management of Financial Risk (2008).

Today, some three hundred years after William Patterson introduced central banking’s debt-based paper money in the West, the centuries-long prohibition against money lending is as long-forgotten as China’s 600 year history with paper money, hyperinflation and dynastic collapse.

Oh laddie of the highlands

What changes you have wrought

With your bubkes paper banknotes

Governments you have bought

You fueled a Tower of Babel

Where banks and bankers rule

With nations now the victims

Of your monetary tools

When capitalism—institutionalized money lending in debt-based economies—became the world’s predominant economy, bankers found themselves temporarily on top. The operant word is temporarily because where credit and debt is concerned, that which goes up always comes down.

In 1971, capitalism began to unravel when the US was forced to suspend the convertibility of the US dollar to gold. Without gold’s constraint on the money supply, governments—especially the US—began printing and borrowing money virtually without limit. Today, that limit has been reached.

William Patterson’s 300 year-old house of cards and credit is now collapsing as defaulting debt consumes what’s left of savings. Despite the efforts of governments to save the system that allows them to spend money they don’t have, the end of the banker’s reign is near.

Since the advent of paper money, bankers have tended to form an unholy alliance with elected governments to expand debt. Both prosper until the time when debt cannot be repaid.

pp. 32-33, Slatyer, The Debt Delusion, Evolution and Management of Financial Risk, 2008

WAR AND THE RISE AND FALL OF CAPITALISM

The chartering of the Bank of England changed the course of history. Central banking allowed governments to go to war on credit, an advantage England parlayed into world dominion over the next 150 years.

In Dollars & Sense show 8, I describe what happened when central banking transformed both England and the US. But the ability to arm the military on credit would ultimately indebt nations beyond their ability to repay and, in the end, would contribute to the end of capitalism itself, see http://www.youtube.com/user/SchoonWorks#p/u/3/deRQOa2EIxM

Since WWII, the US has maintained a costly war footing in peacetime and in so doing dissipated the greatest hoard of monetary gold in history. John Exter, a central banker, tells what happened when the US removed the gold-backing of the US dollar in 1971:

The final link between the dollar and gold was broken. The dollar became nothing more than a fiat currency and the Fed [and especially the banks] were then free to continue monetary expansion at will. The result..was a massive explosion of debt

p. 77, Ferdinand Lips, Gold Wars, 2001

Gold was the cotter pin that held capitalism’s scheme of debt and usury together for almost 300 years. In 1971, the removal of gold from paper money caused the rapid expansion of the money supply and debt, and ultimately, the end of capitalism itself

GOVERNMENTS WILL FALL AND GOLD WILL RISE

The collapse of Chinese dynasties caused by the excessive issuance of fiat money is about to be repeated, albeit in a modern iteration and on a much wider scale. The recent and unprecedented increase of credit in China and the negative interest rates in much of the world are no less consequential than the excessive printing of fiat money that caused the serial collapse of five Chinese dynasties.

The slowing of the global economy in 2008 was met with an immediate flood of fiat money from China hoping to reverse the severe economic contraction. It worked, albeit temporarily and at a perhaps fatal cost.

The flood of fiat money in 2008/2009 set in motion inflationary forces that will dwarf the inflation of the late 1970s that in the US sent gold surging almost 2300 % between 1971 and 1980 (9 years); shaming the Dow’s historic rally between 1982 and 2000, an increase of 1500 % over 18 years.

The rise in gold and silver prices has been underway since 2001. The process itself has been underway since 1971. There is further to go and the price rise will be steeper. In an interview with Ralph Foster, I discuss this process with the noted author and gold and silver dealer, see http://www.youtube.com/user/SchoonWorks#p/u/0/pFx9EfM_Ugs.

China may well play the unfortunate role for the world economy that it did for its own for five successive dynasties. China is once again issuing excessive amounts of fiat money. Then, governments fell. Today, they will fall again; and when they fall, the price of gold will rise vertically.

YOU CAN’T EAT GOLD

The study of capitalism is like the study of religion in a time of idolatry

“You can’t eat gold” is a sophomoric assertion intended to dismiss the value of gold in times of severe economic crisis. Professor Antal Fekete who lived through such times, i.e. the post-WWII Hungarian inflation, simply dismisses this absurd statement by answering, “You can always eat what gold will buy”.

I was fortunate to learn much about the Austrian school of economics from Professor Fekete. The Austrian school holds that human choices and interaction play causal roles in economies, i.e. Human Action by Ludwig von Mises.

I recommend that for those interested in matters of economics, there is no better venue for discussion than with Professor Fekete, a man of towering intellect, humor, compassion and a concomitant love for discourse and argument.

From August 20-29 in Munich, Germany, Professor Fekete will lecture on The Austrian Theory of Interest and Discount. He will be joined by Sandeep Jaitly whose study of the gold and silver basis, an area first explored by Professor Fekete, has led to the basis as a strategy for profitably trading gold and silver.

Note: For inquiries about Professor Fekete’s seminar, email nasoe@kt-solutions.de

The Austrian school of economics emerged at a time when communism and socialism were offered as alternatives to the capitalist model. Because of the central role of government inherent in communist and socialist models, the potential for tyranny was obvious.

That capitalism, however, offered the same potential is less obvious. The threat of capitalism to human freedom is even more insidious because of its covert agenda and global presence, an agenda described by Carroll Quigley in his seminal work, Tragedy and Hope (1975)

Quigley was a professor at Princeton and Harvard Universities, and later at the School of Foreign Service at Georgetown University where he was a mentor of Bill Clinton. Quigley’s observations are to be valued as they are an insider’s look at the activities of powerful elites who use government and commerce to accomplish their aims and disguise their activities.

Because of his position as an academic and scholar, Quigley had access to individuals and elite groups who influence events and activities far outside the purview of others; and, in Tragedy and Hope, he exposes the hidden agenda of these elites:

The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements, arrived at in frequent private meetings and conferences. The apex of the system was the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the worlds’ central banks which were themselves private corporations. The growth of financial capitalism made possible a centralization of world economic control and use of this power for the direct benefit of financiers and the indirect injury of all other economic groups.

The global economic collapse is perhaps humanity’s greatest hope for escaping the debt slavery the world’s financiers and bankers have planned for the world. However, to escape slavery one must first know he is a slave.

Debt is the slavery of the free

Publius Syrus, Sententiae, c 50 BC

Man’s wisdom is most conspicuous where he is able to distinguish among dangers and make choice of the least.

Niccolo Machiavelli, The Prince, 1513

The above quotes are from Will Slatyer’s The Debt Delusion, Evolution and Management of Financial Risk (2008)

Buy gold, buy silver, have faith.

U.S. Debt Ceiling Show Baloney

Interest-Rates / US Debt

The mainstream media are all a-twitter. Speaker of the House John Boehner has given up in the President’s offer of a solution to the deficit crisis: a $4 trillion deficit reduction package. Oh, the horror! Oh, the pigheadedness of the Republicans!

Oh, the chicanery of the media. Maybe you have noticed the game that the media manipulators play: they announce a Big Government Deal in the headline, only to add later in the story these words: “over the next decade.” This is the baloney factor.

To take away the hype, divide by ten. Then try to find a breakdown of the figures. Without exception, most of the savings or benefits in the heralded breakthrough are scheduled for the last three years. The package is back-loaded.

With spending cuts, this decade gives Congress plenty of time to write new laws that spend far more than the proposed savings promised in the last three years.

Here is how one media outlet presented the story. It describes the Republicans.

Tax hikes, by any name, are a nonstarter for a party that forged its brand on the mantra of lower taxes and less government, and Boehner’s willingness to talk rates with President Barack Obama – particularly in the context of House Majority Leader Eric Cantor’s (R-Va.) refusal to do so – raised eyebrows within his conference. The uproar among Republicans, on and off Capitol Hill, forced Boehner to back away from the “grand bargain,” setting up a testy White House meeting where little was accomplished Sunday night.

Ah, yes: the “grand bargain.” Let us examine this bargain. The $4 trillion reduction deal meant on average $400 billion per fiscal year of reduced deficits. But the country is running a $1.6 trillion deficit this year. This is the new normal. Take away $400 billion, and the deficit is $1.1 trillion. Give the government the benefit of the doubt: $1 trillion a year for the next decade. That is the package that Boehner abandoned. He was supposedly forced to do this by Cantor.

Cantor walked away from a round of debt-limit talks led by Vice President Joe Biden when Democrats asked Republicans to identify taxes they would be willing to raise in exchange for spending cuts of as much as $2.4 trillion over 10 years. Then Boehner and his top aides worked with Obama and senior White House advisers to try to find a sweet spot. Cantor and his top aides were then letting it be known on Capitol Hill that he was not supporting the large-scale deal, terming it a tax hike – with the implication that Cantor was plainly not with Boehner.

The story is presented as one of political intrigue, of back-room deals, of closed covenants secretly arrived at.

They’ve long shared a frosty rapport, which extends to their top aides. And this episode serves to illustrate that Boehner has a No. 2 who is unafraid to go his own way on an extremely tricky issue. It wasn’t the first split in recent weeks. Boehner told House Republicans in a closed-door meeting last week that he was not going to provide details of the negotiations to the full conference. Cantor, for his part, wanted lawmakers to be kept apprised of the blow by blow of the discussions.

Nowhere in the article is there one word about how the United States government could fund the proposed deficit of a trillion-plus dollars per year. “The biggest question in Washington – and Wall Street – now is what happens next.” (http://bit.ly/GrandBargain) The issue is described as “tricky.” It is not described as fundamental to the survival of the government.

Note what the biggest question of Washington supposedly isn’t: How will the Treasury get the money to keep the doors open over the next decade?

FREE LUNCHES ARE SO EXPENSIVE

The media want to play up the political aspect of the kabuki theater that is being performed in Washington for the rest of the month. There is no open discussion about which programs will be cut and by how much if there is an impasse over the deficit debate.

There are so many thousands of invisible Federal programs that should be cut by 100% on a permanent basis. The voters should not worry about these cuts for fiscal 2011. The government could easily shut down these programs, and the voters would not feel the pain. A few voters would: the ones on the receiving end of the subsidies. They would feel the loss substantially. But the broad mass of voters would not.

The biggest sinkholes of spending – Medicare, Medicaid, Social Security, and the military – are the big problems. They constitute almost 70% of the Federal budget. If the deficit of $1.6 trillion were eliminated, which is 40% of the budget, there would have to be cuts in one or more of the big four. The politicians are not ready for that kind of Big Deal.

This is why the debate over the deficit is a sham. It is political theater. There is no majority in either political party to balance the enormous budget of the U.S. government. To do so would require a drastic shrinking of expenditures.

There are rumors about this or that Grand Bargain, or Mini-Bargain, but the bargains all involve enormous deficits for the next decade and presumably far beyond 2020. The government’s budget-related agencies simply refuse to publish the numbers beyond 2020. The politicians have no intention of dealing with the #1 issue of the deficit: the size of the proposed deficits in relation to the available private capital required to finance them, year after year.

We hear about the size of the deficit in relation to gross domestic product. But the GDP includes government spending at all levels. What if the Federal deficit were discussed in relationship to the net domestic product: the private sector? The private sector is Atlas. He holds up the public sector.

Atlas legally can shrug. Investors can refuse to buy Treasury debt at any time. Because the economy is still stagnant and getting more stagnant, investors buy Treasury debt because they believe it is the lowest-risk investment available. It is the most liquid asset. They think they can sell their T-bills, notes, and bonds at any time at close to face value. The average maturity of the Federal debt is in the range of 50 months. Investors prefer safety to profitability. This is why Treasury interest rates are so low. Investors are afraid, and for good reason.

Every dollar lent to the U.S. government is a dollar not invested in a potentially productive venture. The government is a sponge for private capital. The Treasury Department is the source of that giant sucking sound.

The media do not explain the deficit in terms of the fundamental economic truth about the Federal deficit. It sucks.

ECONOMIC GROWTH

The recovery is weak because it is not being capitalized. Small businesses are the source of job creation, and owners of small businesses remain pessimistic about business conditions. They are not borrowing money to expand.

We are in a Keynesian-induced productivity trap. The government is absorbing capital on an unprecedented scale for peacetime. There is no light at the end of this tunnel. The government is becoming the borrower of last resort. Businessmen see the future. The future is marked by slow increases in the productivity of capital, high unemployment, and lethargic demand. The so-called wealth effect of rising home prices is now operating in reverse.

The American housing market has lost at least seven trillion dollars since 2006. Zillow, a private firm that specializes in monitoring residential real estate prices, puts the loss at $9 trillion.

This much is sure: most people feel poorer whose homes were their major capital asset. People who were in debt for their homes were leveraged. They have seen their equity fall like a stone. This has harmed 80% of the 20% of the nation who are the main investors. The super-rich are not feeling much pain, since they were not in debt. The average investor does feel the pain. The middle class has been decimated. Its hoped-for capital reserves are gone.

As growth slows and unemployment rises, two years after the recovery officially began, there are signs that 2012 will be worse. Business opinion is pessimistic.

Economic growth is the supposed source of salvation – deliverance – from debt. The optimists recite the mantra, “deficits don’t matter,” because they have faith in the ability of economic growth to enable the government to meet its interest payments. Even if it can’t, the Federal Reserve will be the lender of last resort. So we are assured by the experts.

This theory is being sorely tested in full public view for the first time since 1944. The economists who shrugged off a deficit of 2% of GDP are finding it hard to shrug off a deficit of 10% of GDP. But they are doing it. They have risen to the challenge. There is no hue and cry from economists to balance the budget. Only the Austrian School has opposed Federal deficits as a matter of economic analysis. All other schools of opinion call for deficits in recessions. But today’s economy is said not to be a recession. This makes it more difficult for economists to stay quiet in the face of today’s 10% of GDP deficit – not impossible, of course, just more difficult.

The effect of a series of trillion-dollar Federal deficits for the next decade is obvious: reduced economic growth. So, the system’s savior is growing weak. Atlas looks like he will shrug at today’s interest rates whenever the demand for capital rises. He will demand higher rates of interest to persuade him not to shrug.

Investors search for lower risk. They buy Treasury debt. But this guarantees reduced economic growth. This threatens to produce a permanent deficit. If things ever do get better for the prospects of businesses, the result will be higher rates for the government. The only thing keeping Treasury rates low is the rotten economy.

To attract more loans, the Treasury will have to raise rates. The return of optimism will assure this result. There will be competition for funds. But this will create a nightmare for Washington. The increase of the debt, when facing 5% or higher rates, will lead to a worse deficit. The interest component of the debt will rise. This is the Keynesian productivity trap.

The total payments by the government in 2011 are about $400 billion. This is in the range of 10% of the budget, This comparatively low percentage creates no sense of fear in Washington or on Wall Street. But if this percentage doubles in response to higher interest rates, the extra payments will have to come from somewhere. Where?

The political pressure to cut spending is minimal. The media are opposed to a deficit freeze. So is the economics profession. So are the politicians. Most college-educated voters have adopted some version of Keynesianism. The politicians cannot ignore the tea party, but they need not take unpopular stands. A fringe group of voters is up in arms over spending, but that is because the promoters of a freeze on the debt ceiling have not identified where the spending cuts must come from.

NO PAIN, NO CHANGE

I learned basic politics from Bill Richardson, the state senator in California who created the lobby, Gun Owners of America. I worked with him from time to time in the late 1960s. He is the author of the classic book on politics, What Makes You Think We Read the Bills?

Richardson’s lobbying efforts inside the state were legendary among political operatives. They were based on this principle: the most important goal of politicians is to avoid electoral pain. If you can inflict pain, you can get them to change their votes.

Richardson adopted this tactic in his direct-mail campaigns. He was the state senator who ran them on a regular basis. (He had been in advertising before he went into politics.) In the district of a gun control advocate there may have been a strong majority favoring gun control. It would have been wasteful to target him on gun control. So, Richardson would identify an issue on which the voters were opposed to something the guy voted for. The local voters just did not know that he had voted for it. So, Richardson would do a direct mailing into the guy’s district exposing his vote on whatever it was. The guy would know who did the mailing. He would come to Richardson and beg him to back off. Richardson, who cared little about how the guy voted on the vulnerable issue, would agree, in exchange for a vote against gun control, or whatever issue Richardson was promoting. On some issues where the vote was going to be close, it paid Richardson to adopt this tactic.

There is no well-organized voting bloc that is adamantly in favor of spending cuts. There is a bloc that is opposed to raising the debt ceiling. There is no voting bloc that is in favor of massive spending cuts to balance the budget.

This is why the debate in Washington over the debt ceiling is really about forcing one party or the other to face the music on either spending or borrowing. The Republicans seek to pin the tail of big spending on the Democrats. The Democrats are trying to pin the tail on the elephant for spending cuts on the middle class. Both parties are big spenders, which is why we are facing a long-term crisis of debt. But the public feels no pain on debt yet. Voters feel the pain of unemployment, job insecurity, rising food prices, falling home prices, and curtailed dreams for their children. They do not relate big spending and big deficits to these issues. They fear cuts in old age spending, which they are counting on for their old age.

This is why the debate over the budget is without substance. Nobody is identifying those voters who will be asked to bear the pain of cuts.

The greatest pain that threatens a politician is the Medicare-Social Security pain. This is felt by the middle class. Medicaid will at some point go onto the table, because Medicaid is paid mainly to the poor. Obamacare added a few million middle class voters to the ranks, but in general, the program is for the poor. The Middle class would be willing to make these cuts if the pain of the deficits ever hits them. But it won’t. Anyway, the voters’ knowledge of economic cause and effect is so minimal that the rise in spending in the programs they love will not be perceived as the cause of rising interest rates, rising unemployment, and all the other negative outcomes of the deficits.

Where there is no pain, there will be no political change. Where the cause of any pain is not understood as the inevitable outcome of existing programs, there will be no political change.

CONCLUSION

The debate over the debt ceiling is political theater. There is no commitment to cut spending, because cutting spending creates negative voter responses by specific groups who vote as a bloc. Politicians will not risk this. They prefer to vote for another increase in the debt ceiling, because the pain is diversified over millions of unorganized voters. These voters do not perceive the increased deficit as an immediate problem causing intense pain. They prefer to have Congress kick the can. That is what Congress will do.

There may be a few weeks in which the government is forced to balance income with outflow by cutting spending on marginal programs. When I say “marginal,” I mean programs whose cancellation does not produce voter bloc pain. This is Washington’s definition of “fat.”

These programs are the equivalent of a diet soda on the tray of the 300-pound person who has filled the tray with potatoes, biscuits, fried chicken, and a piece of pecan pie.