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Catching a Falling Financial Knife

The Reality of Gold and the Nightmare of Paper

Commodities / Gold and Silver 2013 Jan 01, 1970 - 01:00 AM GMT

By: DeviantInvestor

Commodities

Since Nixon "temporarily closed the gold window" in 1971 all currencies have been created as debt, not as asset backed real money, like a gold Double Eagle.

Year US National Debt in $Billions
1913 3
1971 398
2013 16,730

The value of the debt backed paper is supposedly based on the face value, yield, duration, and the probability of repayment. Examples:

If I lend my (hypothetical) broke, unemployed, and irresponsible friend $1,000 on an unsecured note, and he is unlikely to repay the loan, then the loan has a value of approximately zero.

If you lend the government of Greece $1,000,000,000 on an unsecured note, to be repaid in 10 years, I suspect the value of that debt could be near zero sometime in the future.

If you loan the US government $1,000,000,000,000 by purchasing 10 year T-Notes, you probably think the value of those notes is near face value. Let's hope so, but consider:

  • The US government (and most other governments) repays its debts by rolling over the notes through the issuance of new notes. The debts are never truly paid, just rolled over and extended.

  • The US government spends far more each year than it collects in revenues. Hence the total debt increases each year due to the shortfall.

  • Further, the US government must borrow additional money each year to pay the interest on previously accumulated debt.

  • Do you see a problem here?

  • The official debt of the US government is approximately $17,000,000,000,000. Since it increases exponentially, we can assume that it will double approximately every 7.5 years. The last "double" occurred in 7.4 years. Further, the unfunded liabilities for Social Security, Medicare, pensions and so forth are much larger - perhaps $100,000,000,000,000 to $230,000,000,000,000.

  • Repeat: Official debt - about $17 Trillion. Unfunded liabilities - around $200 Trillion. Problem!

  • If the official debt doubles every 7.5 years, then by 2050, after 37 years and 5 doubles, the official debt will be approximately $500 Trillion. The unfunded liabilities will be - who knows - maybe $5,000 Trillion.

  • Do you see a problem here?

  • Will the debt continue to increase through the end of this century? Government debt increases far more rapidly than revenues, plus compounding interest paid on old debt increases rapidly. We can safely assume this Ponzi scheme of government financing will not continue forever.

  • At what point do we acknowledge that the real value of debt in the amount of $17 Trillion, or $170 Trillion, or $500 Trillion is worth a great deal less than face value, or perhaps close to zero?

  • Someday, maybe not soon, the realization will dawn upon us that government debt cannot and will not be repaid. Already the Federal Reserve, instead of private individuals, pension plans, and other governments, is forced to purchase much of the US government debt. The Ponzi scheme will be near to disaster when the Fed is the only remaining purchaser and all others are selling their Treasury debts to the Fed.

  • Do you see a problem here?

  • And if all unbacked paper fiat currencies are debt based and the debt is worth less each year, when will both the debt AND the currencies collapse in value and become entirely worthless? A worthless currency means that consumer prices will blast off "to the moon."

  • A currency collapse is a disaster for nearly everyone - since assets and income are probably valued in the local currency and therefore the purchasing power of assets and income is severely diminished.

  • In the past a cup of coffee cost $0.05. Now it costs $2.00, forty times more. Realizing that, is coffee at $100 per cup impossible? What about gasoline at $10 per gallon, or $100 per gallon. Impossible? When coffee sold for a nickel, who would have believed it would one day sell for $2.00? When the US National Debt was $1 Billion, who would have believed it could grow to $17 Trillion?

  • This unbacked paper money monster that grows exponentially seems more like a nightmare than a glorious way to run an economy. Unfortunately, the nightmare can always get worse, last longer, and destroy more lives. Every other experiment in unbacked paper money has eventually ended in tears for the masses. Do you see any reason to think it will be different this time?

Caveat: This paper money machine is a beneficial servant to the political and financial elite. Examples that come to mind are: hedge fund managers, central bankers, national politicians, investment bankers, military contractors, oil company executives, venture capitalists and others. The paper money machine will not be changed easily.

Reality for the rest of us: The paper money machine seems to be a destructive monster that sucks the economic life blood out of most people, including wage earners, retirees, savers, the unemployed, disabled, and essentially everyone in the bottom 90% as measured by income and total assets.

If something cannot go on forever, it will stop. If Ponzi financing, paper money, budget deficits, and exponentially increasing debt cannot grow forever, they will eventually stop. The collateral damage will not be pleasant.

This is why it makes sense to convert some unbacked paper and digital currency into real money - physical gold and silver. Store it someplace safe - outside the banking system and possibly in a country other than where you live.

Physical gold and silver are for savings and insurance, not trading. Paper currencies that are certain to decline in value are for everyday transactions and convenience, until they are no longer useful. Don't confuse paper currencies or debt based paper with real money. Gold will remain valuable, while debt based paper can disintegrate easily and quickly.

A few questions to help clarify thinking and future actions:

  • Did you have digital currency stored in a Cyprus bank or MFGlobal?

  • Do you expect to receive a pension in digital currency from Detroit?

  • Do you expect your retirement from Chicago, California or other cities and states to be fully funded and safe?

  • Do you expect gasoline to remain below $5.00 forever?

  • Do you have the majority of your assets in dollar denominated investments?

  • Do you expect the US Dollar, Euro, or Rupee to retain their purchasing power?

  • Do you remember Nixon temporarily closing the gold window and launching this paper nightmare?

  • Do you remember gasoline at $0.19 per gallon, and can you imagine gasoline at $10.00 or $30.00 per gallon?

  • Do you remember gold priced at $42.00 per ounce? It is currently about $1,400 per ounce. Can you imagine gold priced at $3,500 (or more) per ounce?

  • Do you remember when the Dow was 100, and Dow 15,000 was a "pipe dream?"

  • Why is it easier to imagine much higher values for the Dow than for gold?

Repeat: This is why it makes sense to convert some unbacked paper and digital currency into real money - physical gold and silver. Store it someplace safe - outside the banking system and possibly in a country other than where you live.

Read: Gold, Silver, and the Sins of the Past

Read: Silver: The Noise is Deafening!

GE Christenson aka Deviant Investor If you would like to be updated on new blog posts, please subscribe to my RSS Feed or e-mail

© 2013 Copyright Deviant Investor - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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Catching a Falling Financial Knife