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Nov 12, 2010
For a very long time I have been calling for, expecting and otherwise anticipating the day that the Federal Reserve would begin openly monetizing government debt. I knew the day would come intellectually, but in my heart I hoped it wouldn’t. But with the Fed’s recent decision to directly monetize the next eight months of federal deficit spending, that day has finally arrived. I have to confess, while my prediction has proven accurate, I’m still stunned the Fed actually did it.
In this report I examine the risks that this new path presents, what match(es) may finally ignite the decades-old pile of dry fuel, what the outcomes are likely to be, and what we can and should be doing in preparation.
How is this Quantitative Easing (QE) different from the prior QE?
There are two main points of departure between the two QE programs:
Let’s take the second point first.
QE I consisted of all sorts of liquidity efforts that went by various acronyms, but the main act was the accumulation of some $1.25 trillion in MBS and agency debt. Some might note that taking MBS paper off the hands of financial institutions, which then bought treasuries with the cash, is little different than the recently announced QE II program because at the end of the day, money was printed and Treasuries were bought. In this regard, they’re right.
But let’s be clear about something: the first QE effort had the specific aim of repairing damaged bank balance sheets. That is, banks and other financial institutions had made some colossally poor and risky financial moves that didn’t work out for them and needed some help, and the Fed was more than happy to oblige by handing them free money to patch up their losses.
Of course they didn’t do this outright by saying, “Here take this money!”; they did it somewhat sneakily. But when the Fed hands you huge piles of money (for your dodgy debt) and then let’s you park that very same money in an interest bearing account at the Fed, there’s really no difference between that and just handing banks free money. No difference at all. If the Fed ever offers you free money that you can then park in an interest bearing account with the Fed, you should take them up on it, and you should do it as much as they will allow.
Indeed, that’s exactly what happened. These parked funds are called “excess reserves” and this chart clearly displays the massive program undertaken by the banks and the Fed:
Image: Chris Martenson
Now, it’s also true that the Fed does not pay a lot of interest on this money, just 0.25%, but on a trillion dollars that pencils out to some $2.5 billion a year, handed straight over to the banks. I call this program “stealth QE” because it is nothing more than printing money and handing it over to the banks with a slight bit of complexity thrown in just to put the dogs off the scent. A couple of billion may not sound like much these days, but I raise it to illustrate the many and creative ways that QE I was about getting the banks back to health, and not much else.
So QE I (and the ‘stealth QE’ program) was directly aimed at banks to help them repair their balance sheets and make them whole on their terrible decisions and losses. It turned out, though, that fixing the banks did absolutely nothing for Main Street. The rest of the economy remained mired in a rut, with banks either unable or unwilling to make additional loans. They kept their QE lotto winnings and parked them with the Fed.
QE II, then is about getting thin-air money to the government which, the Fed rightly assumes, will immediately spend that money and push it out into the economy. Here’s how the head of the Dallas Fed, Richard Fisher put it in a recent talk he gave:
The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation’s central bank will be monetizing the federal debt.
This is risky business. We know that history is littered with the economic carcasses of nations that incorporated this as a regular central bank practice.
There it is in black and white. You might want to read it a couple of times to let it sink in. The Fed is directly monetizing the next eight months of excess(ive) spending by the federal government and is doing it despite being perfectly aware of the extent to which history is littered with the economic carcasses of those who have traveled this path before.
Presumably we are supposed to console ourselves with the idea that the Fed will be successful where others have failed, and sometimes failed miserably. Yes, we are talking about the same Fed that fueled that last two destructive bubbles by keeping interest rates too low for too long, failed to see the housing bubble as late as 2007 for what it was, and which apparently entirely lacked the capability to foresee any of the current mess. That Fed.
The one run by the gentleman who said this to the House Budget Committee on June 3, 2009,
“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation…The Federal Reserve will not monetize the debt.”
~ Ben Bernanke
In summary, the difference between QE I and QE II is that QE I went primarily to the banks and QE II is going directly to the government. While this may be something of a semantic difference, it shows that the Fed is changing its strategy again. We might ask: why this shift and why now?
How is QE II being viewed outside of the US?
In a word, poorly.
The German finance minster called the Fed’s application of US monetary policy “clueless” and argued that the Fed decision would “increase the insecurity in the world economy.”
China was predictably unhappy too, but initially used more diplomatic language:
BEIJING (Dow Jones)–China’s state-run Xinhua News Agency published a commentary on Tuesday calling for the Group of 20 industrial and developing economies to supervise the issuance of international reserve currencies, and harshly criticized the U.S. Federal Reserve’s new round of quantitative easing.
The G-20 should “set up a new mechanism that effectively monitors the issuer of the international reserve currency, especially when it is not able to carry out responsible currency policies,” Xinhua said, making an apparent reference to the U.S. as the issuer of the dominant reserve currency.
“Considering the influence of the policy moves in the major international reserve currencies on the global economy, it is necessary for the issuer of the international reserve currency to report to and communicate with the G-20 Group before it makes major policy shifts.”
All of the above is loosely coded diplomatic speak for “The US really bummed us out here, they should have stuck to the agreements we thought we had after the Pittsburg meeting. Going off-script like this was really not appreciated. We think an intervention is needed here.”
Later, an advisor to the Chinese central bank went further and called the US actions “absurd.”
Nov. 9 (Bloomberg) — Li Daokui, an academic adviser to China’s central bank, said it could be seen as “absurd” that the dollar remains a reserve currency after the financial crisis.
Here are a few other selected expressions of dismay from around the world:
U.S. decision to pump 600 billion dollars into the economy has sparked a wave of strong disapproval. World leaders, who are preparing for the G20 summit in Seoul this week, warns that the move will complicate U.S. global economic recovery.
The US last week stoked the simmering tensions by unveiling plans for another $600bn (£370bn) of quantitative easing (QE), on top of the $1.7 trillion already in place. The dollar crashed in what is being seen as the latest round of competitive devaluations, as nations seek to debase their currencies to help domestic industry.
Brazil retaliated by buying dollars. Xia Bin, a member of the Chinese central bank’s monetary policy committee, branded the US stimulus plan “abusive” and warned it could spark a new global downturn. German finance minister Wolfgang Schäuble accused the US of breaking the promise made at June’s G20 in Toronto, saying he would “speak critically about this at the G20 summit in South Korea.”
Just two weeks earlier, G20 finance ministers at the warm-up summit in Gyeongju, South Korea, had pledged to refrain from competitive devaluation and Tim Geithner, the US Treasury Secretary, had promised the US would retain its “strong dollar” policy. At Seoul, the US will be facing accusations of empty rhetoric.
The harmonious language of hope at the Pittsburgh summit has now given way to something brazenly belligerent. The Brazilian President, Luiz Inácio Lula da Silva, has said he will go to the G20 meeting in Seoul ready “to fight.” For President Obama, who has just lost a bruising midterm election battle, it will mean another painful encounter.
Speaking on Jeff Randall Live, George Papaconstantinou warned quantitative easing only serves to stoke up inflation.
“You get inflation. You get a situation that’s out of control. People lose their purchasing power. It doesn’t get you very far,” he said.
In summary, QE II has been described by several major trading partners as “clueless,” “abusive,” “absurd,” and even resulted in a lecture from Greece on the subject of printing. By the time you are getting lectured by Greece on monetary actions it might be time for a bit of self-reflection.
It is not too strong to suggest that something of a tipping point has been reached in regards to how the US is perceived as a leader on financial and monetary matters.
Why this is important
Okay, so the US’s international friends are a little upset with the US for deciding to print up the better part of a trillion dollars out of thin air. What’s the big deal?
The big deal here is that the OECD countries have a monster borrowing bill set for next year. There needs to be some level of cooperation and fair play is going to be required in order to pull this off:
Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output.
Image: Chris Martenson
Just ponder those numbers for a bit. The average borrowing across 15 major developed countries is 27 percent of GDP(!). Ask yourself how dependent the entire OECD world is on a smoothly operating financial system in order to merely function next year.
Having the perception out there that the US is being run by clueless (or ‘abusive’) individuals is not going to help the situation much.
In order for the requisite levels of borrowing to be pulled off in a smooth and uninterrupted fashion, there can’t be any hits to confidence and no major disruptions can happen. Everything has to run with clockwork precision. It is against this backdrop that I view the profoundly undiplomatic statements directed at the US as quite a bit more serious than some other observers.
By choosing the path of money printing (instead of austerity like the UK), the Fed has decidedly placed the US on a very risky course. I see the outcomes are almost binary: either this works or it doesn’t.
If this gamble works, business will pick up, unemployment will drop, tax revenues will flow again to the states and federal government, the sun will continue to rise in the east and roses will bloom in the spring.
If the gamble fails? There we can envision an enormous devaluation event for the US dollar and the Fed having to choose between defending the dollar (via rising interest rates) or preventing the federal government from a fiscal emergency brought about as a consequence of rising interest rates. And by “fiscal emergency” I mean being forced to slash expenditures by as much as 50% in order to service rapidly escalating interest carrying costs on the short term portion of the fiscal debt load. But that’s a death spiral because cutting government spending is the same as cutting GDP (it’s practically 1:1) and every cut to GDP leads to lower revenues which will necessitate more expenditure cutting, etc. and so forth until ‘the bottom’ is reached.
I wish there was some sort of middle ground on this one, but I can’t quite see it. Either the Fed’s efforts work or they don’t. Let’s hope for success.
In truth, I‘ve long predicted that the day would arrive when the Fed would monetize government debt, but I hoped that it would never come. Because hope alone is a terrible investment strategy, I prepared for this event years ago by accumulating gold and silver as the core of my portfolio.
But now the rules have changed again, we are on a slippery slope, and gold and silver were always meant to be my “transition elements” put there to help shepherd my wealth through the transition period as the world’s fascination shifted from “paper” to “things.”
Now that we’re “almost there” in terms of the required shift in perception necessary to call an end to one period (the “king dollar” period) and mark the beginning of another, it’s time to begin considering the places, timing and ways that these transition elements can be redeployed to take advantage of the second part of this story.
In particular, concerned minds are looking for answers to questions about what might happen next and how to insulate oneself from monetary madness. These questions are explored in detail in Part 2 of this article (free executive summary, enrollment required to access).
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The Economic Collapse
Nov 12, 2010
Even with all of the massive economic problems that the United States is facing, if the government would just get off our backs most of us would do okay. In America today, it is rapidly getting to the point where it is nearly impossible to start or to operate a small business. The federal government, the state governments and local governments are cramming thousands upon thousands of new ridiculous regulations down our throats each year. It would take a full team of lawyers just to even try to stay informed about all of these new regulations. Small business in the United States is literally being suffocated by red tape. We like to think that we live in “the land of the free”, but the truth is that our lives and our businesses are actually tightly constrained by millions of rules and regulations. Today there is a “license” for just about every business activity. In fact, in some areas of the country today you need a “degree” and multiple “licenses” before you can even submit an application for permission to start certain businesses. And if you want to actually hire some people for your business, the paperwork nightmare gets far worse. It is a wonder that anyone in America is still willing to start a business from scratch and hire employees. The truth is that the business environment in the United States is now so incredibly toxic that millions of Americans have simply given up and don’t even try to work within the system anymore.
Today, the U.S. government has an “alphabet agency” for just about everything. The nanny state feels like it has to watch, track and tightly control virtually everything that we do. The Federal Register is the main source of regulations for U.S. government agencies. In 1936, the number of pages in the Federal Register was about 2,600. Today, the Federal Register is over 80,000 pages long. That is just one example of how bad things have gotten.
But it is not just the federal government that is ramming thousands of ridiculous regulations down our throats. The truth is that in many cases state and local governments are far worse. We have become a nation that is run and dominated by bureaucrats. Yes, there always must be rules in a society, but we have gotten to the point where there are so many millions of rules that the game has become unplayable.
The following are 12 examples of ridiculous regulations that are almost too bizarre to believe….
#1 The state of Texas now requires every new computer repair technician to obtain a private investigator’s license. In order to receive a private investigator’s license, an individual must either have a degree in criminal justice or must complete a three year apprenticeship with a licensed private investigator. If you are a computer repair technician that violates this law, or if you are a regular citizen that has a computer repaired by someone not in compliance with the law, you can be fined up to $4,000 and you can be put in jail for a year.
#2 The city of Philadelphia now requires all bloggers to purchase a $300 business privilege license. The city even went after one poor woman who had earned only $11 from her blog over the past two years.
#3 The state of Louisiana says that monks must be fully licensed as funeral directors and actually convert their monasteries into licensed funeral homes before they will be allowed to sell their handmade wooden caskets.
#4 In the state of Massachusetts, all children in daycare centers are mandated by state law to brush their teeth after lunch. In fact, the state even provides the fluoride toothpaste for the children.
#5 If you attempt to give a tour of our nation’s capital without a license, you could be put in prison for 90 days.
#6 Federal agents recently raided an Amish farm at 5 A.M. in the morning because they were selling “unauthorized” raw milk.
#7 In Lake Elmo, Minnesota farmers can be fined $1,000 and put in jail for 90 days for selling pumpkins or Christmas trees that are grown outside city limits.
#8 A U.S. District Court judge slapped a 5oo dollar fine on Massachusetts fisherman Robert J. Eldridge for untangling a giant whale from his nets and setting it free. So what was his crime? Well, according to the court, Eldridge was supposed to call state authorities and wait for them do it.
#9 In the state of Texas, it doesn’t matter how much formal interior design education you have – only individuals with government licenses may refer to themselves as “interior designers” or use the term “interior design” to describe their work.
#10 Deeply hidden in the 2,409-page health reform bill passed by Congress was a new regulation that will require U.S. businesses to file millions more 1099s each year. In fact, it is estimated that the average small business will now have to file 200 additional 1099s every single year. Talk about a nightmare of red tape! But don’t try to avoid this rule – it is being reported that the IRS has hired approximately 2,000 new auditors to audit as many of these 1099s as possible.
#11 The city of Milwaukee, Wisconsin makes it incredibly difficult to go out of business. In order to close down a business, Milwaukee requires you to purchase an expensive license, you must submit a huge pile of paperwork to the city regarding the inventory you wish to sell off, and you must pay a fee based on the length of your “going out of business sale” plus a two dollar charge for every $1,000 worth of inventory that you are attempting to sell off.
#12 The U.S. Food and Drug Administration is projecting that the food service industry will have to spend an additional 14 million hours every single year just to comply with new federal regulations that mandate that all vending machine operators and chain restaurants must label all products that they sell with a calorie count in a location visible to the consumer.
The following short video produced by the Institute for Justice examines some more examples of completely ridiculous regulations across the United States. The video is very funny, but please keep in mind that all of this red tape is absolutely killing many very real businesses….
So is this what “free enterprise” is supposed to look like?
Over and over again I have written about the dangers of globalization, but no matter what changes are made a lot of companies will still not want to set up shop in the United States until something is done about all of these ridiculous regulations.
As mentioned earlier, the U.S. economy is facing a vast array of incredibly serious problems, but if government would just get off our backs at least we would have a fighting chance.
Instead, it gets worse every single year. Each new wave of bureaucrats just seems to get worse than the wave before it. They always seem to think that if they just write more regulations and impose more fees and require more licenses and raise more revenue that they will be able to “fix” things.
But the truth is that they always make things worse. Our economy is literally being suffocated by red tape. A “total control grid” is being erected all around us and most Americans are so numb that they don’t even realize that it is happening.
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The American Dream
Nov 12, 2010
Today, most American students don’t even understand what a central bank is, much less that the battle over central banks is one of the most important themes in U.S. history. The truth is that our nation was birthed in the midst of a conflict over taxation and the control of our money. Central banking has played a key role in nearly all of the wars that America has fought. Presidents that resisted the central bankers were shot, while others shamefully caved in to their demands. Our current central bank is called the Federal Reserve and it is about as “federal” as Federal Express is. The truth is that it is a privately-owned financial institution that is designed to ensnare the U.S. government in an endlessly expanding spiral of debt from which there is no escape. The Federal Reserve caused the Great Depression and the Federal Reserve is at the core of our current economic crisis. None of these things is taught to students in America’s schools today.
In 2010, young Americans are taught a sanitized version of American history that doesn’t even make any sense. As with so many things, if you want to know what really happened just follow the money.
The following are 41 facts about the history of central banks in the United States that every American should know….
#1 As a result of the Seven Years War with France, King George III of England was deeply in debt to the central bankers of England.
#2 In an attempt to raise revenue, King George tried to heavily tax the colonies in America.
#3 In 1763, Benjamin Franklin was asked by the Bank of England why the colonies were so prosperous, and this was his response….
“That is simple. In the colonies we issue our own money. It is called Colonial Script. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers.
In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one.”
#4 The Currency Act of 1764 ordered the American Colonists to stop printing their own money. Colonial script (the money the colonists were using at the time) was to be exchanged at a two-to-one ratio for “notes” from the Bank of England.
#5 Later, in his autobiography, Benjamin Franklin explained the impact that this currency change had on the colonies….
“In one year, the conditions were so reversed that the era of prosperity ended, and a depression set in, to such an extent that the streets of the Colonies were filled with unemployed.”
#6 In fact, Benjamin Franklin stated unequivocally in his autobiography that the power to issue currency was the primary reason for the Revolutionary War….
“The colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction. The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the prime reason for the Revolutionary War.”
#7 Gouverneur Morris, one of the authors of the U.S. Constitution, solemnly warned us in 1787 that we must not allow the bankers to enslave us….
“The rich will strive to establish their dominion and enslave the rest. They always did. They always will… They will have the same effect here as elsewhere, if we do not, by (the power of) government, keep them in their proper spheres.”
#8 Unfortunately, those warning us about the dangers of a central bank did not prevail. After an aborted attempt to establish a central bank in the 1780s, the First Bank of the United States was established in 1791. Alexander Hamilton (who had close ties to the Rothschild banking family) cut a deal under which he would support the move of the nation’s capital to Washington D.C. in exchange for southern support for the establishment of a central bank.
#9 George Washington signed the bill creating the First Bank of the United States on April 25, 1791. It was given a 20 year charter.
#10 In the first five years of the First Bank of the United States, the U.S. government borrowed 8.2 million dollars and prices rose by 72 percent.
#11 The opponents of central banking were not pleased. In 1798, Thomas Jefferson said the following….
“I wish it were possible to obtain a single amendment to our Constitution – taking from the federal government their power of borrowing.”
#12 In 1811, the charter of the First Bank of the United States was not renewed.
#13 One year later, the War of 1812 erupted. The British and the Americans were at war once again.
#14 In 1814, the British captured and burned Washington D.C., but the Americans subsequently experienced key victories at New York and at New Orleans.
#15 The Treaty of Ghent, officially ending the war, was ratified by the U.S. Senate on February 16th, 1815 and was ratified by the British on February 18th, 1815.
#16 In 1816, another central bank was created. The Second Bank of the United States was established and was given a 20 year charter.
#17 Andrew Jackson, who became president in 1828, was determined to end the power of the central bankers over the United States.
#18 In fact, in 1832, Andrew Jackson’s re-election slogan was “JACKSON and NO BANK!”
#19 On July 10th, 1832 President Jackson said the following about the danger of a central bank….
“It is not our own citizens only who are to receive the bounty of our government. More than eight millions of the stock of this bank are held by foreigners… is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country? … Controlling our currency, receiving our public moneys, and holding thousands of our citizens in dependence… would be more formidable and dangerous than a military power of the enemy.”
#20 In 1835, President Jackson completely paid off the U.S. national debt. He is the only U.S. president that has ever been able to accomplish this.
#21 President Jackson vetoed the attempt to renew the charter of the Second Bank of the United States in 1836.
#22 Richard Lawrence attempted to shoot Andrew Jackson, but he survived. It is alleged that Lawrence said that “wealthy people in Europe” had put him up to it.
#23 The Civil War was another opportunity for the central bankers of Europe to get their hooks into America. In fact, it is claimed that Abraham Lincoln actually contacted Rothschild banking interests in Europe in an attempt to finance the war effort. Reportedly, the Rothschilds were demanding very high interest rates and Lincoln balked at paying them.
#24 Instead, Lincoln pushed through the Legal Tender Act of 1862. Under that act, the U.S. government issued $449,338,902 of debt-free money.
#25 This debt-free money was known as “Greenbacks” because of the green ink that was used.
#26 The central bankers of Europe were not pleased. The following quote appeared in the London Times in 1865….
“If this mischievous financial policy, which has its origin in North America, shall become endurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe.”
#27 Abraham Lincoln was shot dead by John Wilkes Booth on April 14th, 1865.
#28 After the Civil War, all money in the United States was created by bankers buying U.S. government bonds in exchange for bank notes.
#29 James A. Garfield became president in 1881, and he was a staunch opponent of the banking powers. In 1881 he said the following….
“Whoever controls the volume of money in our country is absolute master of all industry and commerce…and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”
#30 President Garfield was shot about two weeks later by Charles J. Guiteau on July 2nd, 1881. He died from medical complications on September 19th, 1881.
#31 In 1906, the U.S. stock market was setting all kinds of records. However, in March 1907 the U.S. stock market absolutely crashed. It is alleged that elite New York bankers were responsible.
#32 In addition, in 1907 J.P. Morgan circulated rumors that a major New York bank had gone bankrupt. This caused a massive run on the banks. In turn, the banks started recalling all of their loans. The panic of 1907 resulted in a congressional investigation that ended up concluding that a central bank was “necessary” so that these kinds of panics would never happen again.
#33 It took a few years, but the international bankers finally got their central bank in 1913.
#34 Congress voted on the Federal Reserve Act on December 22nd, 1913 between the hours of 1:30 AM and 4:30 AM.
#35 A significant portion of Congress was either sleeping at the time or was already at home with their families celebrating the holidays.
#36 The president that signed the law that created the Federal Reserve, Woodrow Wilson, later sounded like he very much regretted the decision when he wrote the following….
“A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men … [W]e have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world–no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.”
#37 Between 1921 and 1929 the Federal Reserve increased the U.S. money supply by 62 percent. This was the time known as “The Roaring 20s”.
#38 In addition, highly leveraged “margin loans” became very common during this time period.
#39 In October 1929, the New York bankers started calling in these margin loans on a massive scale. This created the initial crash that launched the Great Depression.
#40 Rather than expand the money supply in response to this crisis, the Federal Reserve really tightened it up.
#41 In fact, it was reported the the U.S. money supply contracted by eight billion dollars between 1929 and 1933. That was an extraordinary amount of money in those days. Over one-third of all U.S. banks went bankrupt. The New York bankers were able to buy up other banks and all kinds of other assets for pennies on the dollar.
But are American students being taught any of this today?
Of course not.
In fact, it is a rare student that can even adequately explain what a central bank is.
We have lost so much of what is important about our history.
And you know what they say – those who forget history are doomed to repeat it.
It is absolutely critical that we educate as many Americans as possible about what is really going on in our financial system and about why we need to make some truly fundamental changes.
So what is your opinion about central banks? Feel free to leave your thoughts in the comments section below….
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Silver has had quite a run the last couple months, rising from about $18 an ounce to $25 recently. It’s no surprise then, that it has gained much attention and interest from investors. Even more so than gold. How do I know this? I write brief commentary on gold and silver at Hubpages.com using the alias ‘Gold Money’. During this last run up of the silver price, the number of reads of a piece I wrote titled ‘How High Could the Price of Silver Go?’ literally exploded. That did not happen with my gold pieces. Silver is where current interest lies and it’s not surprising. Silver is an extremely volatile market and tends to rise or fall in spurts. I’d like to focus on silver, its attributes as compared to gold, make a case for holding some, and discuss some ultimate price possibilities.
Gold is known as the ultimate form of money; the king of money. Silver is generally thought of as gold’s little brother or ‘Poor Man’s Gold’. It is said that:
Gold is the money of Monarchs,
Silver is the money of Gentlemen,
Barter is the money of Peasants, and
Debt is the money of Slaves.
Both have been used as money since forever. Historically, the price of gold has almost always been greater than that of silver. This is because silver is somewhere around ten to twenty times more plentiful in nature. Does this mean that we should only hold gold? I say no for a variety of reasons. One, being that you get more (metal) for your money holding silver. Two, being that the price of silver has more room to appreciate, both because of its relative low price and because of the current relatively high silver:gold price ratio. Does this mean we should only hold silver? I say no again. Gold is highly recognizable, highly desired, and coveted in all societies. Most World Governments and Central Banks hold gold but virtually no silver, save a few notable exceptions (Russia, China, and India). They know that gold is the ultimate money. Just as you would diversify your portfolio among asset classes and large/small cap stocks, etc., so too should you diversity between the metals. No one knows which will appreciate faster or further and be the superior investment going forward. Therefore, I hold both.
Silver has three huge attributes or qualities that make it special, valuable, and unlike any other metal: its versatility, its inelasticity, and its duality.
By versatility I mean that it has many and varied important uses where it is the best solution. It is either the best material to use for a given application or it is the least expensive of all the alternatives.
By inelasticity I mean that more of it is not produced as price increases because most silver comes from other-than-silver mines, and less is not consumed as the price increases because there are no less-expensive alternatives.
By duality I mean that silver has the potential to do well price-wise in both an up and a down economy. Being both an industrial metal as well as money in and of itself, it tends to have a market no matter the condition of the economy.
These three characteristics make silver unique among the metals and thus valuable in that uniqueness.
Here are some things to ponder when comparing and contrasting the metals. In no particular order…
What of these differences?
Silver has a tendency to underperform gold as a rally in the metals gets going. However, it tends to greatly outperform gold near the market tops. During the first two years of this bull market, silver did indeed lag gold. It then cought up to gold and tracked it the next couple of years, and then outperformed gold until early 2008 when the markets crashed. At its peak, gold was up nearly 250% in early 2008 but silver was up well over 300% at the same time from the beginning of 2002. As the metals both declined throughout the remainder of 2008, silver fell farther than gold from peak to trough. Silver fell nearly 60% while gold fell about half as much or 30%. Now on the way back up silver is again leading.
Precious Metal Related stocks tend to greatly outperform on the way up but terribly underperform on the way down. On the way up, many stocks leveraged the metals 3, or 4, or 5:1. But on the way down some pm stocks lost 90% or more of their pre-crash market value.
One other conclusion to be made is that when the economy is good, silver will tend to outperform.
When the economy is bad, gold will tend to outperform. This is because silver is also an industrial metal besides being a monetary metal. It is in great demand when the economy is rolling along but less in demand when the economy is in recession. Conversely, gold tends to be forgotten when times are good and remembered when times are bad. Even though it did fall substantially during the financial meltdown of 2008, it fell less than did the stock indexes, silver, or oil.
I believe silver may outperform gold dramatically before the bull has run its course. Silver rose more than 38 fold in the 70’s bull market; from a fixed price of $1.29 to $50 ($52.50 CBOT). Silver bottomed just above $4 in 2001. 38 x 4 = $152. Not a bad initial target.
Interestingly, the Silver/Gold ratio bottomed at ~ 16:1 in 1980. In other words, you could exchange one ounce of gold for 16 ounces of silver near the end of that bull market. Today, the ratio is about three and a half times higher (~56:1). Should gold get to $6375 and the ratio return to 16:1 at the top, silver will reach almost $400 an ounce. That’s a 100 fold increase from its pre-bull low. Remember, we’re only playing with numbers here, the markets will surprise and do their own thing in due course.
Which is better to own? I own some of both but do believe that silver will outperform in the end.
There have been two extremely important and potentially explosive events for silver that happened just this past week.
CFTC commissioner Bart Chilton, in regards to the trading of silver on the Commodities Exchanges, said;
“There have been fraudulent efforts to persuade and deviously control that price”, and “I believe there have been repeated attempts to influence prices in the silver markets”, and “the public deserves some answers to their concerns that silver markets are being, and have been, manipulated.”
Two separate lawsuits against JPMorganChase and HSBC for manipulating and suppressing the price of silver futures on the Comex in violation of the Commodity Exchange Act and the Sherman Anti-Trust were filed as class action suits.
Any hint that these suits have merit and may be settled in favor of the complainants, or a finding of price suppression by the CFTC in its current silver market investigation could send the silver price sharply higher.
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John R. Taylor, Jr.
Now that Ben Bernanke has re-introduced quantitative easing (QE2) to a mostly incredulous world and, across the ocean, the Eurozone has begun unraveling again, our thoughts should turn to the parlous state of the world and the risks ahead. These are amazing times and seem to grow more so every day. Policy errors are popping up everywhere and are likely to multiply dramatically as the political problems are serious, answers hard to find, and the decision makers are not up to the task. Bernanke has proven that he is more a college professor and less a trader, which will cost the world dearly. Sometime between June and August Bernanke lost his stomach for the “exit strategy,” probably influenced by his predecessor’s summer announcement that the US economy had ‘hit an invisible wall.”
While it can be argued that QE1 has been a success due to the liquidity crisis, it did not expand the Fed’s balance sheet and came when the economy was still reeling. This new edition dramatically expands the balance sheet, actually funding the entire projected government deficit over the next few months. Although the world believes that QE2 is there to push the dollar sharply lower, Bernanke argued that his goal was something else. On the day after the Fed’s move, he wrote in a Washington Post editorial piece that QE2 would push up the equity market, bonds, and other risky securities thereby stimulating consumption and economic activity. Even Greenspan did not publicly proclaim his “put,” but now Bernanke has made it the centerpiece of US strategy. Equities are already overpriced, with profit margins at all-time highs and PE ratios far above average. Speculation is now more American than apple pie – but this is a very risky time to practice it. As one highly respected analyst noted about Bernanke’s article, “these are undoubtedly among the most ignorant remarks ever made by a central banker.” As we and many others have noted that QE has shown little or no positive impact on actual economic activity, so the Fed has taken a big gamble, and if it fails as we expect it will have nowhere else to go. With the Republican victory tainted by the Tea Party “starve the beast” mentality, austerity has come to Washington. This next year will be a terrible one for the world’s biggest economy, so we would go against Bernanke on the equity side, but buy government bonds along with him.
The Eurozone has begun its collapse a little later than we thought. My compliments to the political prowess of the euro-leaders for holding things together for so long, but this is an impossible situation and the crisis is on its way. Jean-Claude Trichet caught the spirit of the situation today in Seoul when he said that “it is absolutely necessary to change the governance of Europe” and called for moving “as far as possible in the direction of an economic and budgetary quasi-federation.” I only disagree with part of one word, ‘quasi,’ as Europe must move to a full economic federation if the euro is to survive. With 16 countries using the euro and Estonia on the way, the odds of moving there is currently lower than infinitesimal. Things will change after the approaching horrible economic and political catastrophes that will wrack some of these economies and societies. Unfortunately nothing will happen before the current situation gets unbearable – this is the way of democratic politics. As all the leaders are still working toward the same goals, and no one has stepped forward express the inchoate fears of the European populace, this should take years. By the start of next year the Eurozone will enter a recession that will test the current leadership. The euro, which has been perceived as if it were a German mark, has already topped and will decline until it is priced like an Italian lira in the next few months. With Europe and the US in recession next year, commodity prices will drop again and global growth will suffer despite the outperformance of domestic Asian economies. With the policy stresses, and the risk of significant errors in judgment, international strife becomes more likely as well.
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I’m from the government and I’m here to help…
I’ve been reading more and more people come out and say it, something is broken in this country. People are beginning to question their “leaders” in government and wonder if they are to blame for the mess the world finds itself in. In fact, it’s not just happening in this nation, it is happening worldwide, even in places where people traditionally have nothing but the greatest respect for those in power and accept their fate in the most humble manner a fatalistic philosophy allows. Well, I’ve had an epiphany. There’s no reason to question authority. Government is good. It is made up of nothing but nice people with only the best intentions who simply want to protect you from the cruel, cruel world and lighten the burden that thinking puts upon you.
Put your heads down, sheeple. There’s nothing to see here. There’s nothing to worry about. Don’t listen to the warnings of those who may think differently. They are just fear mongering. Pay no attention to rising prices or massive unemployment. We are in a recovery. Don’t question the experts who are proclaiming the recovery. They are, after all, the same experts who have been predicting the economy for years, the same ones who proclaimed a few years ago that everything was chugging along fine, the housing market was doing great and would continue to rise, and there was nothing to worry about and no trouble on the horizon. They’ve done a wonderful job so far forewarning the world as to the reality of the economy. Why should we start questioning them now?
Don’t question the constitutionality of legislation that’s been passed over the last few years. Don’t worry about losing your individual, God given rights. The government is here to protect you. It has to spy on you in order to protect you, don’t you know? Being secure in your persons, houses, papers and effects, that’s passÃ©. The government has every right to strip you down naked and examine all your orifices, if it wants. After all, it has to make sure you’re not a terrorist threat. Don’t worry about all those provisions that allow them to secretly arrest and try citizens labeled enemy combatants, you don’t need to know about them. The authorities would never use such provisions to quell political dissent. No sir. Our government is nothing but benevolent and would never even consider violating free speech rights.
Don’t question the secrecy surrounding so many details of how government runs. Those secrets are there for national security purposes. Don’t believe for a moment that the secrecy is there to cover up crimes. Why would anyone in authority want to do that? There are no criminals in our government. We have the most honest, best people ever in our government. No corruption here. There’s no one in authority who would ever even think of using the national security excuse to cover up any wrong doing, immoral or unethical behavior. Besides, what you don’t know won’t hurt you. So, don’t you worry your little head over government secrets. Nothing to see here. Move along.
Don’t question the wars we’re engaged in. Don’t think of them as occupations and don’t equate them to nation building or running an empire. There are bad, bad people over there. They did bad things to us and now we must exact our vengeance. They are Muslims and everyone knows Muslims are blood thirsty, mind controlled, vampiric monsters that want to kill everyone who isn’t Muslim, all one billion of them. Muslims aren’t just normal humans like you and I doing their best just to get along in the world. They must be destroyed over there so they don’t come over here. The wars have nothing to do with money, or oil, or drugs, or hegemony, or any other natural resources. These wars are strictly for national security, to protect you, so shut up all you un-American war protesters.
Don’t question the police state. Don’t wonder about all the stories of police abuse and the disdain they seem to be showing the general public. The police are all good people. None of them could be control freaks. None of them could be on power trips. They don’t just simply want you to obey their commands, they want to help people. That’s all they’re about, helping communities and citizens to peacefully exist. They would never persecute anyone simply because they stand up for their rights. They would never try to intimidate innocent people who haven’t harmed another. They would never illegally disperse peaceful protestors. They would never use such devices as tasers for pain compliance purposes. That would be immoral and unethical. We don’t need anyone watching over the police, so just don’t you worry about who they’re picking on. Just go about your business, citizen.
Don’t question the results of elections. Why would anyone in authority want to fix them? I already told you we have only the best, most honest, most upstanding people in our government. Our system is the greatest ever. There’s no way anyone would ever rig an election in this nation. That’s something that only happens in other nations. So what if there’s problems with the security of electronic voting? So what if it’s not the most transparent method? At least we get to see who wins nearly right away. Besides, no one would dare to think they could get away with fixing an election in the freest nation in the world, right? They would certainly get caught if they tried, so don’t question it.
Don’t question their motives. Since they’ve already passed their Patient Protection and Affordable Care Act, we shouldn’t question it’s wisdom even after we’ve had the chance to read it in detail. Don’t question whether or not it benefits corporations or the insurance industry. It was passed for your benefit, so that everyone can go through life knowing they’ll be well cared for thanks to our benevolent government. Don’t question the death panels, or the mandatory insurance, or the fees and fines, it’s all for your own good. Nationalized health care, that’s been the goal of every good socialist, er, American for years now. Certainly you don’t think anyone would have ulterior motives for passing such legislation. Now that we have it, we may as well just move on, let’s not revisit that debate and try to repeal it.
Don’t question their plans for the future. Don’t question their plans to regulate the Internet. Again, such things are for your benefit and protection. Why, we don’t want people on the Internet hurting each other’s feelings now, do we? We can’t just leave it as a playground for all those nasty child pornographers, can we? We can’t just let it become an information depot and recruiting tool for those scary terrorists. Just let the nice people in government infringe a little on your free speech rights. They’re nothing but good people there and they’ll make sure to only protect you from the bad speech of bad people. They would never try to keep truthful information about their wrong doing away from you. They would never even consider keeping someone from posting opinions just because those opinions might be critical of those in authority. That couldn’t possibly happen. This is nothing but a necessary precaution to make sure the children aren’t exposed to harmful materials and radical thought. God knows we wouldn’t want that to happen. We wouldn’t want future generations thinking critically. It’s all for the children.
Don’t question cap and trade taxes. That’s money that’s necessary to make sure the environment is well cared for and that the climate won’t change. After all, isn’t it obvious that carbon dioxide is changing the climate? Al Gore says so and he wouldn’t lie. Do you know anyone better able to take care of the environment than government? Don’t worry that they’re the worst polluters right now. Once they get their tax passed, I’m sure they’ll change their ways and become wonderful environmental caretakers. Such a system could never become corrupt.
Don’t question taxation at all. Your money is well spent. Government services are the backbone of the economy. Isn’t that what our system was predicated on? Isn’t that why we became such a prosperous nation, because of government? There’s no inefficiency in government. There’s no waste of money. We have nothing but the best and brightest in our government. Isn’t that why we have elections, to make sure we get only the most qualified leaders? Just stop complaining and pay your taxes, citizen. Don’t worry about where the money goes or what it’s used for. Those in government will make sure it’s well spent for your benefit.
Don’t question the judgment of the Federal Reserve. Don’t question where the money for the bailouts has gone. Don’t question the shroud of secrecy veiling their decision making process. They are all good people. They wouldn’t think of robbing the nation. They wouldn’t think of destroying the dollar so they can better sell their idea of a world fiat currency controlled by a world central bank. They wouldn’t think of benefiting themselves by trying to control all the wealth there is. No one is so evil or greedy as to want to financially dominate the world. They wouldn’t try to start a currency war to get themselves out of trouble and at the same time forward their agenda. There’s no need to audit them. They couldn’t possibly have anything to do with the mess the economy finds itself in. In fact, we should give them even more power because they’re so benevolent.
Time now to stop questioning authority. It’s all good. Don’t get involved. Just relax and watch your sports and shows on the television. Just keep your heads down and move along with your normal lives. Go out and spend money. The economy needs it. Don’t have a job? Not to worry. Just run up the debt on those credit cards. Don’t try to become self reliant, whatever you do. Government will take care of you. Just listen to the authoritarians and everything will be fine. Really.
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