Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014