Archive for the ‘Fractional Reserve Banking’ Category

Charles Goyette proves I am not insane

January 4, 2010 Leave a comment

I’m not as alone as I thought!

As you begin to appreciate the gravity of the situation Charles lays out in a most eerie fashion what the most likely scenario awaits us and builds a strong case for why he believes the dollar will collapse. At this point most readers not familiar with economics or America’s history of debt may begin to panic and pass out from fear, as Charles’ arguments are extremely convincing. From a long term perspective there is very little to argue about, our fiat pyramid of debt has to and will eventually collapse – the only question is of timing. This question is crucial to properly answer as it will spell out the direction of the next several years. While Charles attempts to answer the question with an open mind, his views can be best described as inflationist and he firmly believes that the forces in charge of our destiny will turn to the only tool available to them – currency depreciation.   Once again, in the long run this may be true, but for the time being America finds itself in a unique situation where our dollar is still the reserve currency and is still trusted around the world. Certain technical reasons also suggest that the dollar may strengthen in the coming months not so much due to any internal policy, but the systemic failures in other parts of the world. Still, as Charles poignantly argues our status as the reserve currency is on borrowed time and can change with a blink of an eye.  For this reason the book’s last section presents advice valuable for every American regardless of what one’s prognostication may be.

Charles is partial to value, a concept easy to grasp when you realize just how worthless the dollar can become. Therefore common sense approaches involving gold, silver and oil are presented. Charles makes a deliberate effort to provide options for any would be investor regardless of experience and if you are under the impression that you must build a ten ton safe and start hoarding gold ingots then you are mistaken, it is easier than you could ever imagine.  Several sections are also devoted to address other popular investment strategies like equities and treasuries and why you should think twice before you invest in these increasingly risky asset pools. A rather amusing analogy between America’s credit strength and a shady uncle constantly looking to borrow should be reprinted and distributed all over the Internet.

The Dollar Meltdown is a unique and valuable book, offering the complexities of economics in order to explain where we are and how we got here while presenting investment strategies for those people interested in taking control of their financial feature.  If you prefer eating glass over reading economic text or think Wall St. is a prerequisite before making investments, then this book is a must read for you and your family.


Is the American economic model a sustainable Ponzi scheme?

January 3, 2010 Leave a comment

“Trader Mark” poses this interesting question:  Is America a Ponzi scheme that works? 

To quote from the article:

America is a uniquely attractive place to live: a lifestyle superpower. But it cannot afford to be complacent, for three reasons.

First, other places, such as Australia, Canada and parts of Western Europe, have started to compete for footloose talent.

Second, rising powers such as India and China are hanging on to more of their home-grown brains. There is even a sizeable reverse brain drain, as people of Indian or Chinese origin return to their homes. But neither India nor China attracts many completely foreign migrants who wish to “become” Indian or Chinese.  

Third, since September 11th 2001 the American immigration process has become more security-conscious, which is to say, slower and more humiliating. Even applicants with jobs lined up can wait years for their papers. Many grow discouraged and either stay at home or try their luck somewhere less fortress-like.

The stakes are high. Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank.

By 2050, there could be 500m Americans; by 2100, a billion. (I am not sure how Earth would support 500M or 1 billion Americans consider 300M use 25% of all it’s resources!) That means America could remain the pre-eminent nation for longer than many people expect.

My take on this article: The question is not whether a Ponzi scheme can work (all Ponzi schemes that get off the ground work to some degree).  The essential questions are (1) can a Ponzi scheme work indefinitely (answer: no, no Ponzi scheme has ever worked indefinitely) and (2) has the U.S. Ponzi scheme just irreversibly burst (answer: yes, immigration levels are falling dramatically if you count illegals and, incredibly, net repatriations of money to Mexican relatives have in many cases reversed – poor Mexican relatives are now in many cases giving money back to newly homeless Mexican families living in the US!).

Once a Ponzi scheme bursts, you cannot ever put it back together because the suckers have dried up and are unwilling to finance the earlier entrants. The latter entrants always have to subsidise the earlier entrants.  Once there are no more “latters” the whole thing blows up. 

The U.S. is simply running out of “latters”.  It’s over, in my view.

The new Ponzi schemes will continue in places like Cambodia, Vietnam and (perhaps) Australia and New Zealand.  Until environmental and population problems mean the “latters” again have to go elsewhere.

But the U.S. in my view has just run out of suckers.  The price for entry into the scheme is too high and the rewards too low.  Everyone sees the Ponzi scheme is a fraud and once that’s exposed it’s all over for any Ponzi scheme.  The illusion is shattered – and once the love’s lost, there ain’t no goin’ back.

I’m with MISH

December 21, 2009 Leave a comment

MISH, noted deflationist, does a superb hit piece on the inflationists here on his blog.

Bottom line is that banks cannot use “excess” reserves to kickstart the FRB process if there are no creditworthy borrowers to lend to.

Either mass debt forgiveness will have to take place to allow lending to restart, or Bennie Boy will have to get the helicopter powered up and literally throw money out into the streets for the plebs to pay back their loans and start borrowing again.  If the plebs don’t get the money to pay back their loans when the velocity of money slows down due to the high leverage levels grinding down the velocity of money to a crawl in every area other than where the banking parasites live, lending will continue to be frozen.

You cannot convince someone about to lose their job to borrow to gear up into the stockmarket or property market.  You cannot convince a bank to lend to a borrower who will go bankrupt in a few short months.

The US has reached “Peak Credit.”

What is hard to understand about that?

Why some Austrians are confused on this issue is beyond me.  Frank Shostak isn’t.  Robert K. Landis wasn’t in 2004.  Ludwig von Mises didn’t predict hyperinflation at the end of a credit-fuelled boom.  He predicted “catastrophe”, not “hyperinflation”.  Catastrophe in my view means “extreme price volatility in all asset classes leading to collapse of the division of labour and eventually state bankruptcy” – not hyperinflation.

So, excess reserves will subsidise the banks back to profitability, but the big banks will be islands of paper profits  in sea of red-ink insolvency in the real economy.

Visualising the deflationary denouement

December 18, 2009 Leave a comment

We already know it’s going to be hyperinflation or deflationary depression.

The Makian Distribution predicts this: unprecedented public and private debt means unprecedented volatility.  The one absolute certainty is that you will no longer get steady 4% returns year-by-year in any asset class.  You will either double your money in a year or be wiped out completely.  Government bonds will have insanely low (even negative) yields – and then suddenly be worthless within weeks.

Now, David Calderwood imagines the deflationary scenario as vividly as anyone has this year.  As a deflationist, I’m visualising something very similar to happen, short of Bennie Boy dropping toilet paper fiat from helicopters – which ironically is unlikely given he speculated he’d do it if he had to.  Once an academic speculates on something so stupid in an academic paper, he’s highly unlikely to follow through in reality.

The only question I have for David Calderwood is the same one I have for Steve Keen: WHEN?

Jim Willie (a.k.a. The Golden Jackass) nails it

December 15, 2009 Leave a comment

Fantastic blockbuster post, predicting multiple, cascading sovereign debt defaults, a run on US debt and a final run to gold and silver.

I agree with all of this analysis, as can be seen in previous posts on gold, silver, fiscal Armageddon and other entries.

This is the best current synopsis on what’s coming that I’ve seen to date.  The question is timing.  I cannot say this will happen in 2010.  But it will happen.

The only question is when.

Top bankers destroy value

December 14, 2009 Leave a comment

According to a recently published study bankers negatively contribute to society whilst nurses and teachers and other providers of essential services have had their pay cut in real terms, so that massive distortions now exist in the remuneration structures in the UK.

Has any parasite done anything else other than destroy its host?

The solution is not a tax on bonuses.  The solution is to outlaw the practices that are themselves damaging to society – namely embezzlement and counterfeiting.

Banks looking to lend to any mid-east sucker with a pulse after Dubai bail-out

December 14, 2009 Leave a comment

I like my headline compared to’s: “Risk appetite surges on Dubai bail-out.”

Who wouldn’t want to lend to Dubai now that Abu Dhabi has confirmed it will play market sucker?  This isn’t moral hazard – this is a licence to print money out of the oil wells of the Middle East.

The solution?  For Abu Dhabi to reign in Dubai’s excesses and slow down the debt-deals that are clearly killing the region.  Circuses have got to stop – sustainable farming has got to replace the mad casinos.

Low IQ borrowers meet sharp London bankers.  The mix is never good.