Consequences of a Trillion Broken Promises

Posted on September 28, 2011 by Louis

broken promise Consequences of a Trillion Broken Promises

Some topics require lengthy intros.  In our world of ever-decreasing attention spans I better cut to the chase.  Greece is bankrupt, hence the solution for Greece is to declare bankruptcy.  Similarly,  America is a (bankrupt) de-industrialized nation well on its way to becoming a part of the Third World.  What marks the Third World, in my opinion, is the glaring wealth disparity, systemic injustice, and widespread corruption.  Corruption American-style is just a little more sophisticated.  Rather than bribe congressmen or government officials they are merely promised cushy office jobs once their terms are over.  See?  That way you accept payment for services rendered after wards, when you are out of the public eye, out of the limelight.

The way back, logically, to a prospering economy with a growing middle class then, is to bring back manufacturing.  Until that process is initiated we will continue the current cycle of ‘recession’ and (weakest on record) ‘recovery’.

The reason for being so forward is simple.  The opinions expressed here are rarely found in the mainstream media.  Why is that, you should be asking yourself.  Who doesn’t want to see America re-industrialized, and the Greece dilemma settled in a just and fair manner?   The people who have the most to lose, obviously.  The same people who made money outsourcing the Middle Class, the people who are making money as we speak from sweatshop labor in Vietnam.  People who lent the Greek government billions, and now want everyone, any one, to take their bad debts from them.  A 100 cents on the dollar, of course.

Which is ridiculous, the antithesis to what our society claims to espouse, evolution and capitalism.  Survival of the fittest.  Keeping your winnings all to yourself also means accepting  personal responsibility for your losses.  When a society allows losses to be socialized and gains privatized it is firmly in the hands of an Oligarchy.   So who lent all this money to the Greek government any way?  Well, turns out it was the financial institutions and governments of Europe!  French banks just could not keep their snouts out of the trough.  But who are the major investors in French banks?  The financial institutions of Great Britain, United States of America, and Germany!  Well doesn’t that just spell it out for you, why ‘contagion’ will not be allowed to spread?  Why losses on Greek debt must be ‘contained’ and prevented from ‘cascading’?

So back to America.  The Fed recently announced they will buy long-dated Treasury bonds.  But wait, they are NOT printing money.  No really.  The Fed’s plan involved selling other (1 year, or 2 year) debt (and other financial instruments) and using the proceeds to buy 10 year bonds.  The market took this news, and along with the Greek crisis, went into full-on crisis mode.  The US dollar rallied, Gold pulled back close to 10%, Silver closer to 30%.  Equities sold off.  An interesting take on this is that the Fed literally went short the worldwide equities market.  They implicitly were only buying long-term debt, and they even said they would have to sell, in order to fund the bond purchases.   So did the Fed literally sell millions, billions, worth of stock (and precious metals contracts) ALL OVER THE WORLD short?  Its possible.  The truth is, we don’t have a clue what is on the Fed’s books.

I sometimes wonder if people read headlines about FullTilt Poker being a ponzi scheme, and the Greek government being bankrupt and they get it, or if it just goes over their head.  Get what, you might be wondering.

Well, there are much bigger ponzi schemes than FullTilt Poker out there, for one.  *cough Social Security cough*

And what happens to Greece can happen to America.  Bankruptcy means what has been promised will not be delivered.  Like the promises of pensions, health care, and social security payments.  To solve  a problem it must first be acknowledge.  The sooner people realize the government cannot deliver on its promises the closer we are to effectively dealing with the consequences of that broken promise.  Living in denial only postpones and compounds the inevitable pain. One way or another, the world will return to Sound Money.  Lets hope it can be accomplished in an orderly manner.

Thanks again for your time, and remember to check back regularly, as we continue to unravel The Web of International Finance!

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BiMetallic Standard, FAQ

Posted on September 9, 2011 by Louis

wealth BiMetallic Standard, FAQHere at the CRI we have been calling for a return to ‘sound money’. What does that mean? What does it entail? What does CRI think this would accomplish, exactly?

First, it is crucial to understand, as more and more people are everyday, that our current money system is dishonest and crooked. We are talking about the fiat fractional reserve system, whereby new money comes into existence when banks extend credit (out of thin air). Fiat can only be exchanged for more fiat (unbacked).
The major differences, then, under a sound money system would be in terms of where NEW money comes from. Currently private banks get to decide when new money should be created, and hence, business conditions for THOSE private banks will determine the money environment FOR EVERYBODY. This is the current situation, where banks are so illiquid and insolvent that they plainly refuse to extend credit on reasonable terms. This results in a feedback loop such as the world experienced in 2008 (when credit dried up) as well as what we are experiencing currently.

Under a gold/silver BiMetallic Standard the price of gold and silver would both be fixed. That means your salary of $30,000 would buy as much gold/silver this year as next year. The price of goods would still fluctuate, but over the long-term they would not trend higher, but rather stay flat. Obviously knowing that your money will retain its purchasing power is a powerful incentive to continue working hard, whereas our current system of nonstop devaluation encourages nothing but speculation.

But how would new money come into circulation, if banks are no longer allowed to create it through keystrokes on computer screens (and then lend out the previously non-existent money at interest)? Its simple, new money comes into circulation as it is mined, milled and minted. To anyone who tells you that private banks or central banks or ‘the Elite’ will benefit the most from the Gold Standard, this is why they are wrong. Yes, holders of gold would benefit from the initial changeover, from fiat to sound money, but after that it is a system that is more fair (nothing is perfect in this world) for everyone. An initial one time gain (of perhaps 300%) on the 10 ounces you hold might seem like a big deal, but the real change in the switch to sound money would come from banks losing the ability to create money, and the average person gaining that ability.

How would you feel if your retirement savings increased 66%, but your income decreased to almost zero? Probably mixed emotions! So now you know why private banks (and hence, their employees, analysts, researchers, etc.) will not be supporting a BiMetallic Standard without some, erghm, persuasion.

So how does new money come into circulation, again? The Federal Mint (of America, Canada, etc.) would be obliged to mint bullion into coins, free of charge (a small seignorage for operating costs was historically charged). You mine it, pay someone a nominal fee to mill it, you take the bullion to the mint, and you walk out with money. Notice a key difference, new money comes into existence, and no one is owed interest on that money!

Now there are lots of questions, lots of choices, how to go about something like adopting a BiMetallic Standard. A common one is, where will loans come from, if banks can no longer lend out more money than they have in reserves? Easy, loans will come from savings. If the bank has made $10,000 on ATM fees it can lend out $10,000. Not $100,000, $10,000. If you have some freshly minted coins, or some saved up, you could lend money. Simple interest would replace compound interest, ideally, as well.

Remember to check back with the Capital Research Institute, as we continue to unravel The Web of International Finance! Thanks for your time.

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The Debt End Game

Posted on September 6, 2011 by Henrik

financial deadend2 The Debt End Game

Let us review some of the topics the Capital Research Institute (CRI) has discussed during the last few months and how they have come to fruition since then. In July, in our post “Creative Destruction – A New Economic Order” we mentioned that we believe that the US is on the same path as Japan, which resulted in the “Lost Decades” during which zero interest rate policies (ZIRP) where used to try to keep the bubble from busting, leading to insolvent zombie banks and corporations. The Fed announced on Aug 10, 2011 that interest rates are to be kept at close to zero until 2013, which illustrates our point that the US is on a similar path as Japan has been for the past decade.

We also mentioned in July in “The Financial System – A House of Cards” that the US was likely going to enter a recession in 2012. That was one week before the abyssal US GDP report that sent the markets tumbling. According to a recently released study by Merrill Lynch that used modeling done by Bank of America predicts that the chance of a US recession is as high as 80%. With the Philly Fed Index at its lowest level since March 2009 and consumer confidence at its lowest since May 1980, a recession is very likely. It’s fairly simple, without jobs people don’t have money to consume, without consumption and home purchases the US economy cannot grow.

This is the perfect storm in order for the Fed to implement further stimulus, since we believe it is unlikely that the Fed will lower the interest rate paid on excess reserves stored with the Fed, which amount to $1.6 trillion. If the Fed would reduce the rate to zero banks would have no incentive to store the reserves with the Fed and would be forced to choose higher risk loans to individuals and businesses, which could lead to out of control inflation. Another method of easing is called Operation Twist which was used in the 1960’s to lower the long term rates on US debt by selling short term treasuries and buying long term treasuries, therefore removing short-term liquidity from the system and driving down long-term rates. Such a strategy would help reduce costs for the US to refinance long-term treasuries with foreign central banks and reduce the amount of debt that would need to be monetized.

As we have been stating since April, further stimulus is in the cards, just what they will name it is the question. Unless some real budgets cuts are made and the deficit substantially reduced, things will only get worse rather than better, which holds true for the US as well as Europe. The great debt experiment is coming to an end, but the debt crisis is here to stay for many years. We need to start designing a financial system that works, fiat currencies and money based on debt might have been nice ideas back then, but it is time to go back to sound money under a gold standard. With a gold standard banks are not able to create money out of thin air and lending should come from private savings.

Since we started discussing “The End of US dollar Dominance” in January, the US dollar has lost value relative to all major currencies and will continue the decline due to the Fed’s attempt to print the debt away by devaluing the US dollar. China is tied to the US economy, even though they do not want to buy US treasuries, they have to in order to keep inflation manageable by reinvesting their account surpluses, but also in order to keep feeding the US more debt for Americans to purchase cheap Chinese made goods and therefore maintain consumption that the economy is dependent on. This interdependent relationship between the US and China is a real problem, since they are damned if they do and damned if they don’t.

Europe is in similar trouble, about 80% of Germans are against further bailouts and the German President Christian Wulff is accusing the European Central Banks (ECB) of violating its mandate with the mass purchase of European bonds stating: “I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,”. He further warned that Germany is reaching bailout exhaustion since Germany’s public debt has reached 83% of GDP and asked who will “rescue the rescuers?”…“we Germans mustn’t allow an inflated sense of the strength of the rescuers to take hold.”

The Bundesbank also slammed the ECB this month stating that bailouts violate EU Treaties and lack “democratic legitimacy”. Nobel laureate Joseph Stiglitz said at a forum of half the world’s Economic Nobel laureates that the Euro will likely fall apart unless Germany is willing to form a fiscal union with the rest of Europe since additional austerity in Greece and Spain is not the answer. He further stated that Argentina’s 8% annual growth rate after breaking its tie with the US dollar illustrates that “there is life after default, and life after breaking out of an exchange rate system”. Germany will lose a lot of money one way or another, either through bailouts or by sovereign debt defaults of the PIGS (Portugal, Italy, Greece, Spain).

Germany is facing hard times; they could create a new Deutsche Mark (DM), but as soon as that happens a lot of money would flow into it from the Euro since the DM would be considered a safe haven similar to the Swiss franc. A strong DM would hurt German exports and be bad for the export driven German economy. Sticking with the Euro means further bailouts and no end in sight of how many trillions of Euro’s are needed to back the PIGS finances. Similar to the interdependency between the US and China unfolds the relationship that ties Germany to the EU.

The IMF stated this weekend that the global economy is facing a “threatening downward spiral” and calling for the US and EU to abandon austerity measures in favour of stimulus. The Italian treasury has to redeem $14.6 billion in debt this week alone and $62 billion by the end of September, the largest amount in any given month ever. Even though the ECB has been buying Italian treasuries to stabilize the long term rates, the question is where all the money is supposed to come from? The ECB can continue buying treasuries from the PIGS for several trillion Euros or someone could realize the insanity in such a proposition and realize that default is the only right choice. Short term chaos is the price to pay, as long as we can implement a financial system that is not based on debt, it is worth the price.

Thank you for your time, please check back with the Capital Research Institute soon as we bring you further analysis of the current sovereign debt and currency crisis. It is time for a sound international monetary system, the longer it takes for everyone to wake-up to the facts and address the system, which is the real problem; all we are doing is kicking the can down the road again and pay the price later.

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Debt Crisis? Or Currency Crisis?

Posted on August 19, 2011 by Louis

prediction update Debt Crisis? Or Currency Crisis?

CRI’s Prediction vs Actual

In our most recent post we described the recent market volatility as being the result of ongoing currency crises in Japan, Europe and America.  Many are probably thinking: Currency crisis?  I thought the problem was debt?  It’s true, the massive debt burdens of the above mentioned countries serves as the catalyst for the crisis.  But it is due to the un-backed nature of the currencies involved that the impact ripples through all the world’s markets.   All three continue on with their unsustainable spending practices, on top of which they have already high levels of indebtedness.

The realization that developed economies are not recovering has in turn been compounded with the fear that governments will rein in their spending, further accelerating the economic decline.  Add Options Expiration Week, High Frequency Trading, and tremendous leverage to the mix and equities markets experience extreme volatility like yesterday (August 18th, 2011).

But fundamentally the same game is still being played.  Japan, Europe and the US all plan to continue devaluing their currencies.  The beauty is this.  Their exchange rates relative to each other will stay fairly close to what they currently are, which facilitates trade, and keeps the average person oblivious to what is happening.  Until the cost of groceries and utilities go up, any way!  Purchasing power will decrease for all who have stagnant wages (almost everyone).  And to top it all off, the respective countries can all blame each other for devaluing their currency.  “You did it first.  We had no choice!”

Ultimately, more stimulus will be announced, but not until new names for it have been propagandized.

Gold will probably take a breather and could even correct 10% over the coming weeks, but gold mining stocks have barely moved as the barbarous relic surged.  On July 11th, gold was at $1550 US.  It is at $1850 today.  That’s a 16% move in 6 weeks.  Many miners on the TSX are forecasting their profits based on $1200-$1500/oz.   CRI does not offer investment advice at this time, but I personally own several shares of Primero (TSE:P), as they are upgrading their production facilities and are likely to merge with Northgate Minerals (announced, yet to be voted on) in the next two months.  Northgate has a mine coming online in about 15 months, Young-Davidson, and although their costs at their Australian mines have been relatively high if gold even averages $1500 for the next couple of years they will do well.

But don’t forget about silver.  Even through the recent carnage silver held on strong.  But now that gold has run away look for silver to play catch up (i.e. if gold stays around where it is now, expect silver to rise, if gold declines in the short-term, expect silver to stay where it is).  I invested a modest sum, years back, in Silver Wheaton (SLW) and Coeur D’Alene (CDE), more recently.

Over in Europe there have been suggestions of ‘Eurobonds’ and a central budgetary authority.  Wow.  That is all I can say.  Basically it means all of the (former) nations of the European Union would have their debt pooled.  Investors could no longer buy German bonds, but shun Greek debt.  It would become an ‘all or nothing’ affair.  “You want .60 of German debt?  You got to take .30 of Portuguese, Italian and Greek debt along with it.”

The aimed for result would be that the less credit-worthy countries could then borrow more, and at lower rates, than currently.  The trade-off would be nothing short of a complete loss of sovereignty, as budgets for each country would be handed down by the EU’s central authority.  The CRI does not think this plan will work (the less creditworthy would over time borrow massive amounts), nor will the people of Europe allow it to be implemented.

Enjoy the weekend, and thanks again for joining us as we continue to unravel The Web of International Finance!  Preserve you wealth, AND your health!

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Who’s Afraid of the Gold Standard?

Posted on August 17, 2011 by Louis

10687wooden ruler1 Whos Afraid of the Gold Standard?

The last few weeks have been volatile, if nothing else.  Markets worldwide, currency, debt and equity alike, have been pummeled.  The only ‘winners’?  Gold, US dollars and US bonds.   There were a number of catalysts but ultimately, at its heart, what we are witnessing is a continuing currency crisis.  The Eurozone, Japan and America all have their share of problems.  All three have currencies backed by “the full faith and credit” of their respective governments.  In other words, fiat money, backed by nothing!

Japan has massive amounts of debt, relative to their GDP, but most of it is owed to the citizens of Japan.  In contrast, much of America’s debt is held by the Japanese gov’t, the Chinese gov’t, and financial institutions all over the world.  The difference is that not only does America still currently have the world reserve currency, their debt is owed in large part to foreigners.  Those two facts could very well create a perfect storm down the road, as foreigners liquidate their Treasuries (US gov’t debt)  and then look to buy tangible goods with the proceeds.   As America does not produce much in the way of goods they are unlikely to see much benefit.  In fact, that the US dollar still serves as reserve currency makes it more likely, IMO, that foreign dollar holders will use their dollars to buy commodities such as oil, wheat, timber, natural gas, copper, silver, and of course, gold.

As a natural consequence, the price of Treasuries would drop, and commodity prices in general would surge higher.  When, well that is any body’s guess, but it could very well occur in the next 3 years.  Europe’s problems are of a different nature, and will be discussed in full in the future.

So to the point of this article.  If we are having problems with currencies, specifically currency devaluation, then it follows  the solution will not be to do more of what we are already doing (printing money, devaluating currency), but to do something different.  The different thing to do in this case, would be to return to the Gold Standard, and forbid fractional reserve banking (along with usury, while we are at it).

Who would ‘win’?  Well, the average person, of course, as your wages and savings would not lose purchasing power.  Who would lose the most from this proposition?  Banks.  Specifically central banks, who would be severely limited in terms of their ability to manipulate the currency or the economy.  Banks in general would be forced to change their entire business model, which would undoubtedly result in a period of volatility as the business world adjusted.  Most importantly, though, money could no longer be printed out of thin air.

Check back with the Capital Research Institute in the following weeks as we continue to explore this topic, and continue to unravel the Web of International Finance!

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It’s Time for ‘Sound Money’

Posted on August 7, 2011 by Henrik

gold maple leaf coin back12464639171 It’s Time for ‘Sound Money’

With Friday’s news that the US sovereign debt was downgraded by S&P to AA+ with a negative outlook is the first real work the rating agencies have done in many years. It is about time that the facts are being considered when making rating decisions not how much they get in fees for handing out AAA stamps. But it is not just the US that is in big trouble, Europe is also having a difficult time containing contagion risk as Italy needs a major bailout which the Germans are not likely to agree with as they are the ones bearing most of the costs. Even if the recently implemented European Financial Stability Facility (EFSF) to bailout Greece was tripled, it would not be big enough to bailout a large country like Italy according to sources from The Spiegel. Even Germany cannot support the $1.8 Trillion debt of Italy and investors would question Germany’s financial stability if they would have to bailout Italy as well.

Reported by the Nikkei Newspaper, today the G-7 Finance Ministers and central bankers are conducting an emergency conference call to discuss the spreading European debt crisis as well as Friday’s downgrade of US sovereign debt by S&P. Since Asian countries have been reluctant to purchase Italian treasury bonds due to the European Central Bank (ECB) not purchasing a convincing amount, the ECB will have to consider increasing purchases of Italian debt in order to incentivize Asian central bankers to follow suit. Come Monday morning we might hear an announcement about a massive bond buying program to contain the sovereign debt crisis from spreading further. The stock markets will definitely react to what is going on in Europe and the US, the coming weeks might yield the perfect storm for the Fed to announce QE3 or a derivative thereof as markets decline and economic prospects appear gloomy at best.

During the recent selloff, Gold continued to climb and only slightly sold off when margin calls forced traders to sell assets in order to come up with the cash to cover the calls. What usually happens is that traders would sell of more gold and silver in order to have cash to cover equities, but what happened in the last two weeks is a sign for the continued bullishness in gold as traders did not sell their gold but their equities instead to get cash for the margin calls. The Capital Research Institute considers that a good sign for the stability of the gold price and it’s continued appreciation.

Reuters reported last week that the central bank of South Korea announced that during the last two months the Bank of Korea had purchased 25 metric tons of gold for $1.24 billion raising their holdings to 39.4 metric tons. An official from the bank stated that fiat currencies such the US Dollar and the Euro “have been losing their clout since the recent global financial crisis partly due to abnormal monetary policy adopted in many countries and fiscal deficit problems”. It was the banks first gold purchase since the Asian Financial crisis at the end of 1990’s.

Gold has always represented a good store of value, especially when people lose confidence in fiat currencies due to a financial system that is build on excessive bank credit rather than sound money. Gold money has been around for thousands of years and fiat money without a gold standard has been in existence for only forty years, anybody who thinks that people around the world will chose worthless paper over gold needs to come to terms with reality.

It is time for sound money to return to the world’s financial system, because it means stability and keeps central banks from running amok with their printing presses, these days more known as a mouse-click, to flood the markets with easy money in hope for a trickledown effect to stimulate the economy. As you can see in the background image of our website, on the day we started the Capital Research Institute (CRI) the Dow Jones Index was trading at 11,726 as Gold was trading at $1364 per ounce. As of last Friday the Dow is trading at 11,445 and gold is trading at $1666, which should illustrate our point that gold is a way to preserve wealth compared to equities and fiat currencies.

Thank you for your time and for checking our blog regularly for updates as we unravel the Web of International Finance and bring you the truth about the global economy. If you are not already subscribed, join over a thousand others and sign up for the Capital Research Institute (CRI) newsletter.

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