Thursday, March 24, 2011

How Likely is QE-Three?

(or, “Is That Your Retirement Account You’re Holding On To So Tightly? Or Are You Just Happy To See Me?” Said The Man From The Government)
So back in September 2008—in the throes of the Global Financial Crisis—the Federal Reserve under its chairman, Ben Bernanke, unleashed what was then known as “Quantitative Easing”.

Sure: It’s fine when they do it to Saddam—
it’s another thing when they do it to you. 
They basically printed money out of thin air—about $1.25 trillion—and used it to purchase the so-called “toxic assets” from all the banks up and down Wall Street which were about to keel over dead. The reason they were about to keel over dead was because the “toxic assets”—mortgage backed securities and so on—were worth fractions of their nominal value. Very small fractions. All these banks were broke, because of their bad bets on these toxic assets. So in order to keep them from going broke—and thereby wrecking the world economy—the Fed payed 100 cents on the dollar for this crap.

In other words, the Fed saved Wall Street by printing money, and then giving it to them in exchange for bad paper.

Time passes, we move on.

Then, in November 2010, the Federal Reserve—still under Ben Bernanke—unleashed what is colloquially known as QE-2: The Fed announced that it would purchase $600 billion worth of Treasury bonds over the next eight months.

The rationale was so as to stimulate lending. But really, it was so that the Federal government wouldn’t go broke. The Federal government deficit for fiscal year 2011 is $1.6 trillion—the national debt is beyond 100% of GDP, at about $14 trillion. The Federal government issues Treasury bonds in order to fund this deficit. Ergo, by way of QE-2, the Federal Reserve bought roughly 40% of the Federal government deficit for FY 2011. Add on other Treasury bond purchases by the Fed via QE-lite (the reinvestment of the excedents of the toxic assets on the Fed’s books), and the Federal Reserve is buying up half the deficit of the Federal government, as I discussed here in some detail.

In other words, the Fed saved Washington by printing up money, and then giving it to them in exchange for—well, not bad paper, but at least questionable paper.

So! . . . let’s see now . . . Fed money printing—check! Saving someone’s bacon (even though they shoulda known better)—check! Taking on dodgy paper—check!

Did it in 2008 for Wall Street, then did it again in 2010 for Washington.

But the key difference between these two events is, the banks didn’t have any more toxic assets, once they sold them all to the Fed.

But the Federal government will still have more Treasury bonds it will have to sell, once the Federal Reserve ends QE-2 this coming June.

The fiscal year 2012 deficit will be on an order of 10% of GDP—roughly $1.5 trillion. And 2013 and 2014? Around the same range.

Over at Zero Hedge, they are past masters at timing the funding needs of the Federal government. But we don’t need to go into the monthly figures of POMO purchases and Treasury auctions and all the rest of it. All due respect to Tyler and his wonderful team at ZH, all that is merely the mechanics of Federal Reserve monetization.

What we should look at is the simple, macro question: If the Fed ends QE-2 in June as they have said they will, who will take up the slack? Who will purchase between $75 and $100 billion worth of Treasury bonds at yields of 3.5% for the 10-year?

Is there someone?

Anyone?

The answer is, No one will take up the slack.

Who, Japan? They’ve got some well-known troubles of their own—they’re all about selling Treasuries and buying up yens, both now and for the foreseeable future.

The Chinese? They’ve been quietly exiting Treasuries for a couple of years now, and going into every commodity known to man.

Europe? Are you serious—Europe? Please don’t make me laugh that hard—it hurts.

The fact is, there is no one outside the United States that I can think of who would willingly buy Treasury bonds—not to the tune of +$75 billion a month.

Therefore, if no one outside the United States would willingly give money to Washington to fund the deficit, then someone inside the U.S. will have to step up.

The obvious-obvious-obvious solution to this mess is for the Federal government to stop spending its way to oblivion—but does anyone realistically see this happening?

Therefore, as Spock always sez, if you eliminate the impossible, whatever remains, however improbable, must be the truth.

If foreign sources of funding will not cover the Federal government’s deficit after June 2011, and Washington will definitely not cut spending in any sort of realistic sense, then there really are only two—and only two—possibilities:
• The indefinite continuation of QE by the Federal Reserve.
• Or the requisitioning of private retirement accounts and pension funds.
Don’t dismiss the second possibility out of hand—think it over.

What pool of money is just sitting there, not doing much, while being legally barred from its owners? What pool of money is easily accessed, yet is large enough to fund the deficit?

The retirement accounts of the American people: Both individual private accounts, and pension funds.

After all, the total for all pension monies is roughly 100% of GDP (this includes Social Security). And the Federal government has already raided the “Social Security lock box”—that box is stuffed with Treasury IOU’s.

So the Federal government might well turn to the private sector for cash. The Federal government might conceivably claim that ongoing funding needs require that every single 401(k) and IRA divest from its portfolio of stocks and bonds, and be fully invested in Treasuries.

This could be accomplished very easily, from a practical standpoint—just inform banks, and have them turn over to the Federal government all your mutual funds and stocks you agonized over, and get long-term Treasury bonds of nominal equal value in exchange.

401(k)’s and IRA’s would be the first ones the Federal government would go after—for the obvious reason that union pension funds have the union’s political muscle. But individuals? They have no political machine. So they’re screwed.

Anyway, the language used for this maneuver by the Treasury department would make it difficult for a lot of (unaffected) people to get upset over the situation: The Treasury department wouldn’t call this process “retirement account confiscation”. They’d call it something innocuous, like “retirement asset swap”—or better yet, throw in some patriotic bullshit (indeed, the last refuge of the scoundrel) and call it “Americ-Aide Asset Swap”—or even better: Call it “Help America Retirement Treasury Bond Program”—otherwise known as HART-bonds. (Awww!!! Probably maudlin enough to get Geithner an appearance on fucking Oprah.)

There might be short-term political damage, but like losing your virginity or carrying out state-sponsored torture programs, it would be the necessary start for a slide that will never end. After this first “retirement asset swap” carried out on the 401(k)’s and IRA’s, the Treasury department would start doing more of this to ever-bigger pension funds, until eventually all retirement assets would be converted into Treasury bonds.

Hey, they did it in Argentina. And as Yves Smith always sez, America has become Argentina, but with nukes.

Now, this is one possibility, of the only two which I can see.

The other possibility, of course, is that the Federal Reserve will not end Quantitative Easing-2 come June. The Fed will extend the deficit monetization indefinitely. The Fed will be under the mistaken impression that this will somehow save the U.S. economy. (The best metaphor I’ve been able to come up with for this situation is, the Federal government is like a junkie who’s already OD’ed—and the Federal Reserve is trying to “save” him by shooting him up with even more heroin.)

So between these two possibilities—confiscating retirement accounts and forcing some sort of Treasury bond asset swap, or an endless continuation of QE—which is easier?

Obviously QE-three.

Therefore, that’s what I think is going to happen: QE money-printing as far as the eye can see.

Well, look on the bright side: At least you’ll get to keep your ever-shrinking retirement nest egg. Bully for you!

If you’re interested, you can find my recorded presentation “Hyperinflation In America” here. I discuss in detail what I would do, if and when the dollar crashes—or the Fed and Geithner get desperate. 


79 comments:

  1. How likely is the sun to rise in the east tomorrow? I'd say both are about equal odds.
    We've made a call that hyperinflation is near enough to recommend charging silver on a 12 month 0% APR credit card ( http://silverdoctors.blogspot.com/2011/03/crash-jp-morgan-charge-silver.html ) -

    Whats your call GL? Is hyperinflation near enough to start taking on debt with the expectation of not paying it off? I know you're looking for 10% inflation within the next month or 2...thats close enough for us.

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  2. Hey, don't count fiscal discipline out just yet. . .the Democrats have agreed to a $6 billion reduction in the budget. That's some real progress given the fact that the poor and repressed people of America MUST have government aid in every possible form. We must continue to spend money to "help" the good people of America and the world. I think we should spend even more money and even faster. I am going to start voting democrat so as to speed the process of a fucking meltdown as much as possible. Viva la revolucion!

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  3. Print money. What else can Bernake do? You think he wants to be hung up by his ankles as the guy who brought the Federal govt to a screeching halt? The guy who cancelled Grandma's SS check? And believe me, Barney Frank's not gonna be left holding the bag.

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  4. Well they've already floated the trial balloon of federally mandated retirement plans, S3760, with the Treasury running the program so anything is possible.

    All the bastards need to do is bury this confiscation in some omnibus bill and with the stroke of a pen they will plunder our accounts.

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  5. As I must remain anonymous I must say that the loan officer compensation plan that the FEDs have put in place is going to benefit no one but the banks or their managers. My job has been reduced to making nothing and the manager controls the rates that I am able to deliver to my clients. We are all screwed. Gonzalo, take a look at the new legislation regarding Loan officer compensation and see who is making out on it. Check out the tbs daily show that narrates what the feds and the too big to fail banks are doing. That should pique your interest. This will only make the banks and government bigger and more wealthy and more powerful.

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  6. But then the stock and other bond markets plummet as the govt sells off the conviscated assets.

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  7. Chris,
    If they do as you suggest a mob will descend on Washington. Those whom you describe as bastards know it.

    Gonzalo is right. Mr. Bernanke has an even bigger money printing machine on order which he intends to use to replace the one he has now in his helicopter. He expects delivery before June.

    K Smith

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  8. Yeah the retirement accounts can be channeled into an annuity arrangement. It sounds like a plan. I like Keynesian economics- spend all you got and more. We are gonna shop till we drop. Why is everyone complaining?

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  9. Gonzalo here is the link I spoke about earlier. Corruption is rampant, please do a column on it. So much is at stake. God Bless :)

    http://tbwsdailyshow.com/2011/03/22/the-lo-compensation-fed-rule-scandal/

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  10. GL

    HART is not a great acronym. How about "FART" Fund America Retirement Theft... Program

    Its better sounding, and something most of us can relate to.

    Indefinate QE would be known as "DUMP" Dont underestimate Money Printing.

    DEBT would be: Dont Ever Buy Treasurys.

    Nice and simple, something we can all understand.

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  11. I'm thinking that people with money in IRA/401K/etc. accounts should, if possible without penalty, take a loan from said accounts. Use the proceeds to buy silver coins. Silver coins are likely to exceed the return of anything in the accounts, and the account holder then has a source of emergency funds in his/her control, even if s/he has to sell some to make the loan payments.

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  12. Don't underestimate the stupidity of the retail investing public. Bond rates will go up a bit, stocks will tank, and retail investors will sell their stock losses and seek refuge in the "safety" of US government bonds. That's what happened when QE1 ended.

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  13. I've heard about the confiscation of private retirement accounts. I don't think it would happen wholesale. The stock market would crash as people desperately try to sell stocks before the confiscation date. But both the IRA and the 401(k) are legalese "set up" as tax shelters by the government. What the government gives, the government can take away. Why not just end the tax shelter portion? People would have to pay capital gains on their IRAs and 401(k)s. Not that I want that to happen. It just would be less damaging politically to take away a tax shelter by taxing it than by confiscating it.

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  14. Even if the Federal government confiscates the IRA, 401K, etc.... nothing will happen. Why would I say that? Well because most Americans don't even have one and if they do, I believe the average 401K/retirement account is about $2000.

    Joe Six Pack won't care, because it's happening to the "well to do". As a matter of fact, we Americans are so patriotic, that no matter how wrong our government or country is; we will still stand by and do nothing. God bless America and no one else!

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  15. Gonzalo and anyone else on this board, what is the solution to this problem? I agree 100% the federal government won't cut spending. Should I invest in hard assets like gold and silver? Or should I buy short term treasuries?

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  16. Excellent as usual, GL, thank you.

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  17. The buttonwood column in the economist has an article on this very subject: http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=2512631&story_id=18396156

    PIMCO has bailed on treasuries.

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  18. GL:

    Are you going to pen a eulogy? Seems appropriate.

    C deK

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  19. SO; when the former middle class of the USA start a "leaderless" facebook rebellion and start marching in the streets of DC, do you think that BO and Michelle will endorse the revolution as they have in so many middle east countries and then happily step down in obedience to the protesters?

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  21. Warren Buffet and Marc Faber today said go long the US Dollar. Sounds like the US Dollar is going to spike before it heads down again.

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  22. We're actually heading towards some sort of major problem in the currency markets. If the Fed continues this deliberate currency debasement, logically the US dollar should go down. But the $USD cannot go down unless the currencies of one or more of its major trading partners goes up (relatively speaking). HOWEVER, the Japanese economy is precarious now, and they cannot afford for the yen to rise. Intervention is guaranteed. Likewise, how do the weak economies of the PIGS survive in Europe if the euro begins an upwards trend. And finally, the economy of the UK is really in not much better shape, so can they afford for the pound to soar in value? Hardly.

    We're at the point where someone's economy is going to slide downwards into a death spiral. This should show up in rapid rises in interest rates. The question is ... who takes the plunge down the ski jump??

    PeteCA

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  23. What happened after QE1 ended? The economy slowed, stocks went down and treasuries went up as a "safety" play. Why won't that happen again?

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  24. I like you GL...(no...not in that way).
    AND ...your ability to think outside the box.

    But...I notice you have a reversionary tendency, a sudden ...that's far enough...dont go there ...moment. The point where the pain reaches its threshhold and up to the point where the flood of emotions drives the body to succumb.The extremities of the outside are putting to much strain on your system.

    QE III - YES...blind Freddy can see that one coming. But what is it that we all cant see. Reach beyond the box into the darkness and tell me what you fear most....hmmmmmmm!!!

    Let me throw you a curve ball ...if I may.
    Lets talk inflation ( and I know you have had thoughts on that little topic) and INTEREST RATES. Just for the record I am in your court in the direction of where inflation is headed...and yes I have heard/seen all the reports and mis-information denying it all.

    Just for one minute can we consider that the Fed and Government has an option if inflation rears its ugly head ( shhhhhh..as a matter of convenience). That little monetary beast they call interest rates, are an option. AND guess what happens when they go UP and what that does to the auction process for treasuries...???
    All of a sudden "every man and his dog" becomes an interested party......Feasible ???
    YES...and there are other added benefits too :
    - solve/limit the FED buying more Government issued debt,
    - force a sudden repatriation of USD (exactly what happened to the JPY recently)yes its quite likely that CB's who colluded in the last fiasco involving the JPY would continue to be involved ( I'm a bit of a contrarian when it comes to the USD....for the medium term anyway),
    - Kill off the PM market ( after all isn't it the wish of the Government and the FED to keep the faith in the USD...something they can control).

    For sure the other possibility has legs also. The government confiscated GOLD back in 1933, so we cant put anything past them. But that would be suicide compared to the current policy of effectively slaughtering the dollar..IMHO.!!

    AND another curve ball..this time "a slider"...
    We all know how the FED created trillions out of thin air to buy up government debt that effectively pays 2/5's of 5/8's....(read nothing). The debts owed are virtually worthless if we assume the Government is bankrupt (which it is technically). In the corporate world, when debts arent collectable they are classified as BAD...and written off. What's to then say that the FED does the Government a whopping favour and FORGIVES the Debt that they owe. Voila ( as if by magic....it appears acceptable)...the government's debt burden has taken a massive hair cut in one fowl swoop. AND suddenly the debt problem is a lot more manageable.
    A further $1.5tln P.A. is not such a massive issue...when you have ...in one hand out the other...a simple way to look at it I know.
    In this world of twisted and distorted numbers ...things that seem simple arent even close. Sometimes you need to stray a little further than the outer perimeter of the BOX. Go deeper into the woods...what lays there is not for the faint hearted.
    Keep up the good work ol chap !!!!

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  25. Great article, obviously you have been reading Peter Schiff and all the other Austrians. The heroin analogy especially is something Schiff has used. Great insight and so true. Japan has no choice but to buy Yens, and as a result it will rise. This will hurt their exports. The dollar's slow demise is calculated, and in my opinion laying the foundation for a global currency. It will fail too. If you are not in gold and silver assets, what are you waiting for? Hold and watch the profits.

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  26. You make a persuasive case, Gonzalo, however two possibilities you didn't consider:
    1. Start a World War, (NOT recommended, but its' been done before), or
    2. US to join the EU. (not sure if that's a joke or not)

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  27. I'm glad SOMEBODY is thinking on this planet. Great article!

    TX

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  28. There is a third possibility you didn't mention: US commmercial banks buy Treasuries in size. US banks currently have well over 1 Trillion of "reserves" sitting as deposits at the Fed. US regulators can easily "encourage" them to buy Treasuries through "liquidity" requirements.Look at the balance sheets of banks in Japan or Argentina. That could be our future. It delays Armageddon.

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  29. Would another possibility be to tax the hell out of Americans at the Federal level, and use that increase in revenue to buy up 50% or more of our own Treasuries?

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  30. I believe this a likely scenario: Quantitative easing continues and causes the value of the dollar steadily decreases. U.S. exports increase,thus creating U.S. manufacturing jobs. Inflation, measured by food and energy costs, increases steadily but remains relatively under control until the economoy turns around. At that point the threat of hyperinflation kicks in and the dollar is abandoned as the world reserve currency. The U.S. Treasury responds by cancelling the dollar and the Treasury/Fed reissues new dollars pegged to a new set value (perhaps tied to gold), and the Treasury cancels or significantly modifies outstanding U.S. Treasury obligations, the vast majority of which are held at that point by the Fed.

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  31. I doubt they will call it a confiscation at all. It will be done for our own good. They engineer a stock market crash (or take advantage of an existing one) and they say "Oh we have to protect the retirement assets of the investing public" you have to put 10% in "Safe" Treasury bonds. Pass a law and all the IRA custodians comply. Next year, oh it's not safe enough yet, let's make that 20% and so on...
    There won't be a riot. No political fall-out, easy, done deal. Just like boiling a lobster, slowly turn up the heat and they won't even try to climb out of the pot.

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  32. Speaking of Star Trek:

    "Bridge to engine room: Scotty, have your engineer Bernanke put the printing presses into warp speed 27. And have everyone gather on deck to chant 'Yes we can/Yes we have no bananas.'"

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  33. When the Fed started buying Treasuries, it basically guaranteed no one else would.

    Why? Because the price for treasuries is no longer the market price as long as the fed keeps buying.

    Anyone have tons of treasuries to unload? China? What a great opportunity, the fed will buy those from you.

    Sure, someone might buy treasuries if the fed stops, just not at 3.5%

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  34. I don't see why you guys limit yourselves so much. I imagine that every one of your options will be used in order. (Possibly to include the creation of a mecha-Godzilla to rampage Tokyo.)

    The game contestants are playing chess on a board with only one open square. It's shuffle here and shuffle there time. The end game is to have no open holes so everything remains where they put them. Bernake isn't so dumb as to not see that nothing he will do will fix the system. He and the other players are working instead to change the game rules. Kings and queens will never get taken but pawns remain disposable.

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  35. Dear Nimesh,

    In answer to your query, yes, by all means buy gold and silver and take possession. Most of the richest investors are in cash and gold, dabbling a bit in stocks related to energy and precious metals, and waiting. See guys like George Soros, Jim Sinclair, Thomas Kaplan, John Paulson, Jim Rogers, and Mark Faber. Mark Rothstein is one of the best investment advisors on earth, and is recommending PM's, energy, and cash. THe cash is for deployemnt back into the markets after they tank, when everone else is running madly for the exits, and the rich will get richer. Model your behaviour after them, not the rabbits who think they are sharks.

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  36. perpetual QE the stock is the flow:

    http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/12_Jim_Rickards.html

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  37. As Rickards stated in the KWN article, the Feds balance sheet is so large, the flow principal repayment from their assets should be able to cover future Treasury debt monetization. This is different from QE1 & 2 since the monetary base in not expanding - no new money is printed with the Fed's holding it’s balance sheet constant. This might last 3 to 6 months. That is until things deflate (without fresh QE) to a point that allows the Fed to justify another new round of money printing to save sinking asset prices and the economy.

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  38. GL,

    I enjoy your gloves off insights. As regards government confiscation of retirement funds in exchange for treasuries, as one previous reader commented, this was recently floated in the last congress by Senators John Kerry, D-Mass. and Jeff Bingaman, D-N.M.
    See link http://www.wnd.com/?pageId=196173

    Also it is worthy to note that the late Larry Burkett foresaw the pension raid in 1991 in his book "The Coming Economic Earthquake". Quoted from pages 138-139: "That great hoard of money will simply be too tempting for the politicians to pass up...It is likely that private retirement accounts will ultimately be absorbed into the Social Security system and their owners given 'equivalent benefits'....tax deferred funds are not yours: they are a gift from the government, at least in their thinking".

    Rick, Rice Lake, WI

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  39. TPTB will crash the economy,FRN's will be useless and the masses will beg on hand and knee for any crumb of food or work as the elites bask in their glory........this country has lost its balls to revolt and take vengeance out on the fools that are in power...were in power and all those behind the scenes that are responsible for the circumstances that we are seeing and yet to come

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  40. I'll stick with what I said ... the primary risk is a sovereign default. There are too many debts hidden within the global financial system, and papered over with false accounting and outright lies about valuations. It has to end, and it will end painfully. The idea that the central banks could buy their way out of this with massive liquidity injections was always "whitewash". Nothing more. It is true that muni bonds are also a real risk, but apparently people inside that sector of investments believe that the Fed will buy out those bonds with QE3.

    Bernanke and Geither needed to have some guts and force real deleveraging on the financial system. It should have been done a long time ago. But it wasn't done, and it's probably too late now. The Fed became the lackey-boys for a bunch of big banks who were willing to bet the future of the USA on their own gambling interests. There is no way out of the maze. The Chinese got it completely right ... the futures markets and the shadow banking system are just a "maze of mirrors".

    There are certain lines that can't be crossed. If the US Gov't attempts to seize people's property, then public anger is likely to spill over. That includes seizing retirement funds, gold & silver, land, or other personal assets. Those are the only sources of value left open to the citizens ... robbery of those assets means stealing people's futures. It won't be tolerated - that's my guess.

    The global political situation is changing faster than governments, central banks, or investment brokers can anticipate. Power and alignments are shifting. How much longer will Japan stay as an open democracy? How much longer can the USA lean on Middle Eastern kingdoms, before oil rockets to $200/BL? Too many unknowns. It feels like the pieces of the jigsaw puzzle are coming loose.

    PeteCA

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  41. Auto IRA is coming - R Bonds are the new Treasury bond and the government will try to turn us into Japan and self-finance massive deficits...

    http://www.institutionalinvestor.com/asset_management/Articles/2782947/Obama-Is-Trying-Again-for-the-Auto-IRA.html

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  42. Capricorn said: "2. US to join the EU. (not sure if that's a joke or not) "

    LOL. What makes you think the EU would have them?

    Anyway, 2 sinking ships don't combine to produce a floating one.

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  43. In case you don't get over there, Krugman just said that what the FED is doing would lead to hyperinflation... if we didn't have access to a favorable bond market. Which we may discover we don't have when QE2 ends.

    When Krugman says the FED is creating hyperinflation, you know you are in trouble.

    (http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/)

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  44. This is so scary, but you raise a very good point, I can see this happening. Thank-you for your insight!

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  45. Here is how it will play out:

    1. The Fed says it is ending QE 2 in June and actually tricks the market into actually thinking that too.

    2. Stocks start crashing around May 2011 and everybody gets scared...we won't have as much money sloshing around in the markets.

    3. Interest rates start to rise rapidly to say, 5% as our government bonds try to find a willing buyer at market prices.

    4. The government realizes that the higher interest rates are bad for the housing market and an economic recovery, so they require that future contributions to retirement accounts must include a 10% minimum in government bonds. The public reluctantly accepts this because the stock market crash of May 2011 is still fresh in their minds and the relatively higher interest rates of 5% sound like a good deal vs. the near 0% rates we have today.

    5. The problem is that interest rates keep rising into June 2011 and we still do not have enough money to run the federal government....so the fed decides to step in and start pumping more money into the system as QE 3 starts.

    6. Bond prices stabilize as the fed resumes buying. Stocks start to rise as more money is thrown into the system. Inflation goes crazy. silver & gold (and commodities) rise rapidly.

    -Mike Z

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  46. If all countries are broke, is any country broke?

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  47. Mike Z has a valid argument. I could see it play out that way. Rather than looking at the simplified singular theoretical possibilities, the likely outcome will probably be a tandem of events that would indicate the FED and the government are just reacting. But that seems to be how things are happening now.
    Incidentally, the government is already looking into the possibility of 401k & IRA Seizure under the title of "Lifetime Income Options for Retirement Plans". It is already being discussed and this could be more realistic than anyone thinks.
    Additionally, today, one of the FED presidents (Charles Plosser of Philadelphia) said he thought interest rates would rise gradually up to 2.5% over the next year or so. Gold immediately dropped from $1438 to $1421 on this announcement. This was just at the mention of increasing interest rates. So the idea of raising interest rates, while it would hit the stock market and PM's hard, may have some legs to it.
    GL – What do you do see as the overall outcome of an interest rate hike?

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  48. confiscation is too soon / must wait for qe6 / reason - as stated in posts ahead of this - the market will plunge, and with it unemployment will then increase / the lie is the qe is to help reduce the unemployment / they need to lie effectively / so - three years away from confiscation IMO

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  49. Hello. Bill - Bill Gross? Yes, this is Ben Shalom. How are you? Thought I would let you know that - for all of those Treasuries you sold out of, I am confiscating the 401k participants in your fund and forcing them back in.

    Strange irony? Hey, Bill - don't forget to donate to our hebrew skool fund too. We 2% do own you - fooool.

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  50. The late, great George Carlin (comedian/social commentator/genius) was 100% spot on when he said that "they" would be coming for the American people's pensions. Take 3 minutes to watch.

    http://www.youtube.com/watch?v=ALlzClE67os&feature=related

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  51. 1) Japan will NOT sell its Treasurys. In case you have forgotten, they have a Central Bank. If they need yen, it can simply print them. Oh, wait, it has already started doing so - by the trillions. Of course, the result will be that the yen will tank and the holders of Japanese Government Bonds will be screwed - but who cares, hey? As we all know, "there is no inflation" and the retires (who are the main holders of JGBs) are always screwed.

    2) It's not Spock who said that originally; it was Sherlock Holmes.

    3) QE2 WILL end in June. Trust me. This will cause tremendous sell-off in practically everything (stocks, commodities, precious metals, etc.) and a jump of the US dollar. The economy will tank. Only then the Fed will "come to the rescue" and will start QE3.

    4) Eventually, we will have BOTH. Both endless QEs AND pension funds confiscation. (Argentina is not the only one that did it. If memory serves, Hungary did it too, and Bulgaria did it to some extent - or is consider doing it.)

    5) The government will confiscate the pension funds to HELP the people, you see? As the market tanks (Again. For a third time in a decade.), it will become obvious that the average public is not qualified to manage their retirement accounts. They keep investing them in speculative assets and losing their shirts, you see? So, here comes the government to "save" them from themselves, by converting their holdings into "safe" and "risk-free" government bonds.

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  52. And to insure endless purchasing of Treasuries, what if they decided to institute mandatory funding of your retirement account!! Say, 5% of salary to start off, then higher percentages as the borrowing needs increase. Kind of makes mandatory health insurance look like a bargain. At least you get something for your money with the latter.

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  53. There is no such thing as "yens".
    The singular is "en".
    The plural is "yen".

    Hitotsu en, futatsu yen.

    ReplyDelete
  54. 'Warren Buffet and Marc Faber today said go long the US Dollar. Sounds like the US Dollar is going to spike before it heads down again. '

    Yes, the dollar will actually have a fierce rally coming out of this bottom. But this is only a short term thing, something to trade on. Read up on it if you want to take advantage of it. Typical market gyrations.

    However, like Gonzalo said, the dollar is in a long term death spiral. Lower highs, lower lows. It is something you could TRADE, but do not INVEST in it.

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  55. The Anonymous poster above who referenced the Jim Rickcards piece last week sees correct.

    Keep in mind that ours is Very Much a Political Economy. Driven by the Politics of envy, class warfare, business interests and selfish interests all - save for Your best interests...

    It is also driven by the unseen and intangible aspect that is Confidence - as in: CON-fidence...

    We are in the beginnings of the 2012 election cycle. The 'perception' of a rising Economy is priority #1 for those self-interested types in DC, up to and including the staff and cabinet members in the Out-House.

    Whatever maneuvering or manipulations that need be done to maintain that perception (rigging the unemployment numbers to remain under 10%, the CPI at 0, etc.), will Be Done.

    Failing that, there are always other distractions - like lobbing cruise missiles (ala Billy Jeff and Bosnia), and amping up the 'patriotism' for yet another overseas adventure - whatever it takes...

    All the while so-called 'conservatives' (read: Neo-Cons), harumph-harumph-harumph over a HUGE $61B haircut that is sure to tame the Debt monster while currying favor with AM talk commentariat and their dutiful
    'patriots'

    "You're a Great American..."

    If you really care about this country, and something other than 'Republipukes' vs. 'Libtards', look for those who have Liberty on their mind as priority #1, rather than a sick economy and mindless police actions going on all around the globe.

    The economic future of this place is for all intents and purposes, set in stone. We must worry about preserving a Constitution in its aftermath.

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  56. Sorry I am just an ignorant, the way I see it is that the US controls the price of two very important assets -US Dolllar- and oil. So ...

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  57. GL Thanks for your great blog.

    I'm sure you have come across the idea of the Fed accumulating a large enough book so as to pay future needs out of monies coming due each month. Not saying that amount would necessarily be sufficient but might it reduce QE enough to give the illusion of ending or reducing QE and therefore have the appropriate effect on the dollar and metals- even if only for a time? Just curious what you made of that.

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  58. A snapshot of what's ahead....IMHO.

    USD down further in the short term.
    Markets and commodities up exponentially over the same period.
    QE II ends in June.
    Markets tank along with commodities (including PM's.
    USD strength continues ...until....
    Interest rates are increased...and they will.
    Treasuries are back in vogue.

    QE III is palatable and passes through without a second thought sometime in 4Q 11.
    At that point the USD will start its next cycle and will head much lower than the low we see in May- Jun 2011.
    This will start another rally in stocks and commodities...possibly the last rally of this bear market. AND it will trap the unsuspecting.
    Housing will also fall over ...taking a further 10-20% adjustment.

    It does pay to adhere to the great players of the market..the gnomes of investing (Soros,Rogers,Faber, Paulson, Rothstein)...I have followed the exact same path that
    djealas posted above... via physical PM, cash, stocks in energy and precious metals even without their influence.
    It pays to have conviction and stay ahead of the curve.

    I would say that many astute investors can make enough money over the next 5 years to retire on and ensure that the "thieving hands of confiscation" ....are kept well away. The years ahead will be the best opportunity in our lifetime to invest in the biggest fire sale of financial assets. Get your house in order.
    Be high in your conviction and dismiss the noise.
    Be prepared to take action. Stay fluid and liquid for the opportunities.
    There will be many in the weeks, months, years ahead. One thing that is static ..is change...and we will see a lot of it.

    The question is are you willing to go for the ride of your life ??

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  59. BENNY and the Ink Jets can always dip into the Strategic INK Reserve and print forever.
    The paper (and hemp) purchases will contribute to the GDP, and they will have to construct warehouses to store all the ZEROs the will need to add to the money as hyperinflation rages.
    WIN-WIN-WIN.
    With dollars, as with anything:
    "If a little is good, A LOT IS BETTER."

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  60. For the record..here is my post from 17.3.11 "Dollar about to fall over"
    note: the comment about the next auction process below. Ties into your opening comments
    beautifully.

    "The next leg down only completes another cycle...of which there have been many over that period. Its absolutley correct that all fiat currencies are losing ground - not against themselves - but in purchasing power. After all they are only paper..and paper is worth ...????

    Japan is a concern (read no show in next bond auction), so too is China, UK, Europe and Brazil.

    Denial...Denial...DENIAL !!!
    The "Elitists" are out manoeuvred. Game almost over....but it was fun while it lasted (67 years worth of it) !!!! MMMMMMMM...warm and fuzzy. Oooooohhhh that pile of shiny metal sitting in the corner looks glorious. Who owns that ??

    March 17, 2011 7:44 PM

    You are on a winner here GL.Hmmmmmmm....!!!
    Never too late to start making predictions.
    But both You and I can be so very wrong about the "NO SHOW". We have both overlooked the fact that the thing that binds the CB's together is the USD. Without it being the world's reserve currency, then we may as well just pack our bags and move to the north pole and wait for the earth to shift off its axis. After which the north pole resides somewhere near the new equator.
    Radical ..YES you betcha.

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  61. Well... I wouldn't underestimate the pension way. Maybe Americans are able to defend their freedom and money better than us (Europeans), but here in Europe the government is going both ways.

    The federal government (EU/ECB) is printing money (and giving them to PIIGS). But local governments can't print own money so they attack pensions. And ofcourse they're doing it to help people :-), to increase their safety - because the Bond is obviously the safest investment.

    So the government regulates pension funds and one of those regulations says that funds have to invest partly into "safe" assets. And another government paper says that only the bond is a safe asset.

    So the US gov might go the same way - they may force pension funds to invest at least 10% into bonds next year and then they may increase this number by 5%pts every year.

    And obviously they may combine both ways - it only depends on what scares them more - angry clients of pension funds or declining role of USD as world reserve currency.

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  62. President "Bobby": Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
    [Long pause]
    Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
    President "Bobby": In the garden.

    "Being There" 1979

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  63. Post by GR
    (I am a bit slow in the tech world, “Post by Anonymous” for those that are as slow as myself, are Posts by a variety of different people. I have not quite figured out how to make a profile I can use for posting here, hence “Post by GR”.)

    OK, I am concerned about the future.
    I get it, the USD is in the toilet, and one day the toilet will be flushed.

    WHAT I AM TRYING TO LEARN/UNDERSTAN IS:

    1. A lot of people buy gold/silver and have physical possession of it. When the day comes these people are convinced the government is serious about fighting inflation and raises interest rates above the rate of inflation, say 5% (as suggested by GL in his excellent and informative Hyperinflation presentation). How do these people sell the physical assets to obtain the fiat to buy equities?

    2. Forgive me for a lack of current research, but I am under the impression that if I buy an amount of physical silver/gold today, and want to sell it tomorrow/next month/etc., it will be difficult? Not to mention I would have to sell it at a discount of the published price?

    OBJECTIVE
    Just to be spot on point and clear I would like to outline the motivations, as I see them, for those of us reading GL blogs, or at a minimum for myself. Please let me know if I am missing anything.

    1. It is accepted reality that we as individuals cannot change or stop our government from destroying our economy. In different words, failure of the USD is immanent.

    2. Therefore, we are trying to figure what to do to accomplish the three levels of interest:
    a. Have food to eat when it is not available or becomes unaffordable. (This is easy, buy a year’s worth of non-perishable food. Make sure it is food you would normally eat, so if things never get bad, you have not lost anything. You will simply just have paid for your food in advance.)
    b. Protect what we have from loss or diminishment, namely financial type assets such as savings, investments and so on
    c. To understand how/when to invest money available to each of us so as to maximize our return with the least amount of risk and come out way ahead on the back side of this catastrophe

    SUMMARY
    I hope I am correct as I firmly believe what Liquid Motion wrote in the March 26, 2011 9:24 PM post, “I would say that many astute investors can make enough money over the next 5 years to retire on and ensure that the "thieving hands of confiscation" ....are kept well away. The years ahead will be the best opportunity in our lifetime to invest in the biggest fire sale of financial assets.” I am just trying to get a handle on how to accomplish this.

    Serious feedback would be appreciated.

    Thanks!

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  64. I completely agree with you.I believe that QE3 is around the corner and slowly but surely the FED will announce a new round of quantitative easing.
    I put up a video on youtube and addressed the same questions.
    http://www.youtube.com/watch?v=H7ZhlB64aCk

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  65. @ GR...Anonymous 28 March 2011

    Your plight is probably that experienced by many others. They see the issues, but dont know how or have the inclination to act.

    If you truly have a desire to do as you say, then find yourself a good investment adviser to help you steer your way through this mess.
    It can be quite daunting and overwhelming and it will be several years (to come) in the making.
    Do your own research and learn to question everything. I try to steer away from mainstream press, they usually have agendas.
    You need to be across all things economically and politically and geo-politically. We live in a globalised world. Actions cause reactions.
    Keep abreast of trends...especially demographics and the advancement of emerging nations.
    Markets are continuously mis-pricing...and this leads to opportunities. If you have some general understanding of how markets work, you have a better chance at staying ahead, rather than being reactive.
    Additionally, Government and Fed hubris leads to a lack of confidence. Confidence has a material impact on every market. In light of the Govt. debt situation (which doesn't appear to ever be able to be repaid) and ongoing printing by the Fed to allow for increased debt, there exists a current lack of confidence in the USD.
    Taking on debt to solve debt issues never worked. NEVER WILL !! It is a short term fix for a longer term issue. Hence the lack of confidence.
    But in saying that, the FED took action some would argue to save the global financial system. Instead of unemployment at 10% we would be seeing numbers as high as 25% ++. There is no doubt in my mind that the world is teetering on the edge of a precipice, in a financial sense.

    With all due respect, your understanding of precious metals is not that of a person who needs to hold precious metals, as your questions portray.It is not an investment ....it is a protector of wealth. Always has been. If you view it as an investment then I suggest you look at staying in cash. Wait for the "fire sale" then go shopping with some conviction. It is all about preserving ones wealth, to allow for investment as the time arises. When dollars (fiat money) are debased, effectively everyone loses through loss of purchasing power. Hard assets can preserve some of that purchasing power.
    Nothing in this world ever comes easy. Learn and acquire knowledge as fast as you can.

    I leave you with a little well known latin phrase......
    Scientia potentia est.

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  66. When countries run into financial trouble, especially those that are using a fiat currency, the traditional response is to devalue the currency. For the US to take such an action is widely considered politically unpalatable. Therefore; Quantitative Easing. It dilutes the currency, thereby devaluing it, without officially devaluing it.

    I'm physically in Switzerland therefore I measure the USD against the CHF. Right now it is 0.91CHF to the falling buck. Methinks that is because everyone has been pumping money into the falling buck's arteries in order to keep it on it's feet. This isn't sustainable with the amount of hemorraging that is QE 1,2, and 3.

    A few weeks ago, the Swiss Federal Government directly ordered the SNB to stop all attempts to prop up the EUR and the USD (actually, to stop depressing the CHF).

    Right now, I can't imagine the hurculean efforts the Fed is using to keep the USD propped up but with declining support, they cannot keep it up forever and when it goes, it will be catastrophic.

    With the amount of Quantitative easing in play right now; the USD should be around 0.85CHF or lower. Yes, IMHO, the USD is way over-valued.

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  67. GL,
    Interesting and I agree with you up to a point. Japan will buy bonds and we will buy theirs. They will do it through the Bank of England more than likely. See my article here last few paragraphs;

    http://screwtapefiles.blogspot.com/2011/03/weekend-roundup-focus-on-japan.html

    There are a couple of red herrings floating around out there courtesy of Forbes which I get into.

    ReplyDelete
  68. Anonymous at 11:25 said:
    "1. people buy gold/silver ... have physical possession. ...How do these people it to obtain the fiat to buy equities?”

    There will always be a market, official or unofficial. Some people will accept barter; technology makes it easier to match up willing participants. Any currency replacing the dollar will be given time to turn in the old. But, many people will not trust the government for years.

    “2. I am under the impression that if I buy an amount of physical silver/gold today, and want to sell it tomorrow/next month/etc., it will be difficult? “

    Most trades will be off the books, especially if the government tries wage and price controls. The authorities will have no easy time persuading people to trust them. Hence, a black market.

    "OBJECTIVE: ...I would like to outline the motivations, ..., for those of us reading GL blogs,...

    1. It is accepted reality that we as individuals cannot change or stop our government from destroying our economy. In different words, failure of the USD is immanent.”

    Think of it as risk avoidance -- insurance. You have to buy insurance before you get sick or the currency is on its deathbed.

    "2. Therefore, we are trying to figure what to do to…:
    Have food to eat “

    We don’t know how bad things will get. History says it can get awful. It doesn’t matter if the food is what you normally eat, so long as you don’t starve.You will adapt. If you judged the situation too harshly, it is cheap at the price to avoid hunger.

    Protect what we have from loss or diminishment,”

    Capital rushes to safety in risky times. When the risk is a currency debacle, then the rush is to commodities. The point of preparation is to avoid the rush.

    To understand how/when to invest money “

    There is great uncertainty. You need flexibility as well as asset protection. You need privacy -- be off the books. Trust that the politicians will try to screw you up in a dozen ways.

    Wealth is neither created nor destroyed, It merely changes hands in a crisis. Wealth is not money, nor even Gold/ Silver, it is the necessities which keep us alive: food, water, shelter, medicine, protection, useful skills, etc. During a currency collapse, most investment vehicles, such as Real Estate and stocks, lose value. Far sighted people will find opportunities to trade, but only if they have put aside hard assets. People will take Gold/ Silver because they know it can be traded for real wealth. Stock certificates for food or Precious metals? Sure.

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  69. slamlander said ... "Yes, IMHO, the USD is way over-valued. "

    YES. It's probably worth about 50% of its current valuation.

    PeteCA

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  70. Wealth isn't the necessities that keep us alive, it's the surplus we don't need that we can put to work to generate *more* surplus, which is how we get "wealthy". And wealth gets destroyed all the time - the Fukushima reactor complex is a perfect example. Billions of yen invested now a total loss ( actually now a libility since the cleanup costs will drain insurance pools). Plus the loss of generating capacity that will hamstring industrial and private wealth creation for years to come. Wanna destroy some wealth yourself? No problemo, just pour some gas around your house and light up a smoke.

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  71. Kevin, what I meant to say was that a currency crisis, itself, does not destroy wealth. What happens is that subjective valuations change in a crisis. Starving people will sell off those things which have no immediate use. It doesn’t matter that these items once had great value and will again after the crisis passes.

    This is how, in the hyper inflation of 1923, German farmers were able to exchange bags of potatoes for works of art.

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  72. Looks like the Chinese bankers agree w your assessment..Benny is such a one-trick pony. You probably have seen this article:
    http://www.businessinsider.com/chinas-dagong-sees-no-threat-of-fed-monetization-ending-believes-world-credit-war-is-about-to-escalate-2011-3

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  73. won't happen.
    The fed will release CPI figures showing deflation and people will be begging to buy treasuries at 0% yield.

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  74. You’re not thinking things through, Kevin. The surplus you speak of is known to economists as “savings.” Savings need not be in a monetary form. It can be unconsumed or unsold production which is wealth only when you trade it for something you need.

    Value or worth is subjective. It’s the old question of “What is a bottle of water worth?" Under normal conditions, not much. But in a hot desert, when it is the only bottle left and it stands between you and death, it is worth a lot.

    No object is inherently worth anything. Nothing is worth more than what you can exchange it for, despite a personal valuation. A house could be a showcase or an abandoned, ramshackle ruin no one would live in. You could burn it down and lose nothing. Because It had no worth to anyone, it was not wealth.

    Pieces of government paper have no intrinsic worth. This is why currencies can be valuable one day, and worthless a few years later, like in Zimbabwe. A worthless currency can be exchanged for nothing; it was pretend wealth.

    I was talking to Anonymous about conditions during a crisis. Under normal market conditions, you can sell intangible or fixed assets to buy the necessities of life. You can charge top dollar because there are many buyers. It’s easy to confuse assets with wealth, only because they can be readily converted in a market. A lack of competing buyers means a very low selling price.

    The Fukushima power plant was not wealth; the electricity it produced was. The power plant was an investment which was amortized before 2000 and should have been replaced with a safer design.

    Can wealth be destroyed? Sure, when you consume it -- use it up. But, I was addressing a marketing question. Depreciating a currency does not destroy wealth. The amount of wealth remains, although a rapidly depreciating currency produces market disruptions making it impossible to create wealth. Government interference can hamper production. The lack of a reliable currency makes exchange difficult.

    Gold and Silver will be a valuable medium of exchange in a crisis. Their value increases because they facilitate trade.

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  75. As an investment advisor who oversees my client's retirement funds, I have worried about this situation for quite some time. I have played the "inflation trade" for the last year or so, positioning accounts towards commodities, natural resources, REITs and equities and largely away from bonds and especially US treasuries. But if a true meltdown of the financial system comes into play, than owning the paper assets for commodities would really be of no benefit, correct? If the dollar, and all paper currencies, lose the faith of the people then the only solution is hoarding food, fuel and other items of "real" value. It feels to me like we are all being played by the powers that be, operating in some sort of Matrix like environment in which we all go to work for paper money and exchange them for products/services, yet the puppeteers all know this financial system is farce. It is clinging together by the flimsiest of strings, and when the public confidence busts it will all collapse under its own weight. Can you imagine how difficult if was to convince people hundreds of years ago to stop bartering with real goods and use a paper currency? Today, we just except that the paper is valuable, and it will probably be equally as hard to convince everyone that it is (or eventually will be) worthless. GF - Chicago

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  76. I must say that overall I am really impressed with this blog.It is easy to see that you are impassioned about your writing. I wish I had got your ability to write. I look forward to more updates and will be returning.

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  77. I'm from Indonesia, and I don'y know anything about your country's economy. But I really appreciate this article. It help me to understand the american opinions about the US econony. I like your article and all of the comments above. Thanks

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  78. Waw... PR 4 and alexa 134591 excelent!

    ReplyDelete

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