“Russian Roulette?”

November 14, 2013

One of the biggest shames in the world is when someone else has to take care of your business when you are perfectly capable of doing so yourself. It used to be the ultimate form of embarrassment. However, we in the United States have turned shame into an art form over the past hundred years or so, squandering everything from our riches and blessing to the sacred honor Thomas Jefferson wrote about all those years ago in a document that is barely covered in most school curriculums today.

So what exactly are we talking about here? Our outrageous debt? Our profligate spending tendencies at virtually every level of society and government? The joke of an economic ‘recovery’ that even more realist publications are now subscribing to? Nope. No, this one is a little different. If a certain Russian lawmaker has his way, use of the US Dollar in any transaction involving Russian citizens and banks will become illegal. Why? Are we firing up the Cold War again? Actually, this war is getting pretty hot. Before we jump to conclusions and start calling names, let’s take a look at the justifications for his proposed action and tally the score.

Mikhail Degtyarev, the lawmaker who proposed the bill, compared the dollar to a Ponzi scheme. He warned that the government would have to bail out Russians holding the U.S. currency if it collapses.

“If the U.S. national debt continues to grow, the collapse of the dollar system will take place in 2017,” said Mr. Degtyarev, a member of the nationalist Liberal Democrat Party who lost in Moscow’s recent mayoral election.

The dollar a Ponzi scheme? Who can really argue with that? A Ponzi scheme is defined as the following:

“A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.”

Our fiat dollar standard system is undoubtedly a Ponzi scheme because the first currency units were lent out at interest requiring the creation of subsequent currency units to pay the interest on the initial ones. So in essence, current payments are made from future investments. I won’t bore anyone with the mathematical equation for this, but it results in precisely the curve we’re seeing in the various debt metrics. So Mr. Degtyarev gets a point on the Ponzi scheme allegation.

Secondary to the nature of the fiat system, the two biggest millstones of unfunded liabilities around the neck of everyone who holds dollars are both Ponzi schemes – Social Security and Medicare.

I seriously doubt the Russian government would bail out its own people (at least not all of them) for losses incurred if the dollar were to collapse as he asserts, so he loses a point there. However, you must remember that he’s a politician and as such is prone to such prevarications. More likely what would happen is that Russians holding dollars would receive a ‘haircut’. They’re already receiving one from the not-so-USFed every time it declares itself to have another $100 billion to throw at the banks to keep them happy. Yet people STILL don’t get it. But I digress.

Those of you who are regular readers of this column know that I absolutely despise putting timelines on any of this stuff. A buck gets ten that Mr. Degtyarev doesn’t possess particular knowledge of a series of events that would cause the dollar to ‘collapse’ in 2017. The ingredients for the dollar’s collapse are already in the mixing bowl. It could happen this week or in 2025. Or maybe 2035. Sadly, there has been a great deal of fear mongering and profiteering off the ‘imminent collapse’ of the dollar, crash of US financial markets, etc. These events will undoubtedly happen, however, it is much more likely that we experience a slow burn – similar to what is going on right before your very eyes as I pen this article. Bottom line, Mr. Degtyarev loses another point for putting an absolute date on the demise of the dollar, unless of course he has specific knowledge.

“The countries that will suffer the most will be those that have failed to wean themselves off their dependence on the dollar in time. In light of this, the fact that confidence in the dollar is growing among Russian citizens is extremely dangerous.”

He gets a point back here for absolutely nailing it. And guess what – this applies to Americans too. Confidence is the only thing any fiat currency has going for it. There is no intrinsic value and the dollar has proven to be an absolutely rotten store of wealth. So it’s a confidence game. It is ironic though that while Russia as a country is busy inking deals with the Chinese to cut the dollar out of their inter-country trading; the Proletariat in Russia sees no problem at all. While Vladimir Putin is buying every ounce of gold he can get his hands on because he knows it is real money, his people are racing towards the abyss like a bunch of lemmings who have overdosed on 5-hour energy drinks. For those of you keeping score at home, Mr. D is even right now – despite being absolutely right in principle.

Detractors Galore

I certainly don’t doubt that there are rampant political motives at work here. Anti-American sentiment is high pretty much everywhere right now thanks to bungled foreign policy, blowout fiscal fractures, and the NSA snooping on pretty much everyone – including most of the world’s leaders. Maybe the goal here is to capitalize on these sentiments. However, it cannot be denied that there is a good deal of merit behind any push to divorce from fiat currencies in general. The same case could be made for the Euro. It is every bit the disaster that the US dollar has come to be. It suffers the same ailments: uncontrollable debt and this absolutely idiotic notion that somehow people are entitled to something for nothing. Triple that up for the Japanese Yen, minus perhaps the entitlement mentality. Despite all this, any proposed bill of divorcement from this system is not without its naysayers:

“The American financial system, despite all its existing problems, remains the most stable and low-risk in the world,” said financial analyst Andrei Shenk.

Poor Mr. Shenk. Or maybe poor world! If the American system is the truly best the world has, then the world has got more problems than it can possibly imagine. Seriously folks, we’re talking about a system where capitalism is espoused for the select few during the good times and when things go bad, we flip the switch and embrace socialism without missing one snap on Monday Night Football. Our population is largely apathetic towards the entire mess, principles of finance and investment are getting chucked to the floor, and common sense is getting canned on a grand scale.

The absolutely frightening thing is that we are by no means alone. Here’s another interesting tidbit:

“The right to the free exchange of currencies is a fundamental element of capitalism,” said Moscow-based economics analyst Igor Suzdaltsev. “It allows citizens to leave the country when a dictatorship is imposed by selling their property and exchanging their assets for the necessary currency.”

Notice the people are always supposed to trade one Titanic for another in the eyes of the wise ‘financial analysts’. I wonder how Mr. Suzdaltsev feels about the capital controls quietly being erected around the world? In theory though, he’s absolutely correct. Capitalism, at least in the economic definition, is when the vast majority of land, labor, capital, and scarce resources are controlled by the marketplace rather than the government. It’s a continuum, much like monopoly versus perfect competition. On one side, we have the government in a truly laissez-faire role, much like the Founders in America envisioned and on the other side we have the government taking absolute control of everything. Most folks associate the former Soviet Union with the latter example. Now you ask yourself where the world is situated.

I write mostly about America, but recognize that people from all over the world read this column. Where is your country on this continuum? Is your country taking measures to lock down capital? Is your country taking measures to discourage you (either through propaganda or tangible regulatory or legislative actions) from exiting the fiat currency system? Is your government grabbing control of resources, industries, marketplaces, and commerce in general? I know the answers for this country and lose a good deal of sleep over it, not so much for our current generations; we made our beds. Now we can lie in them. No, instead, I lose sleep over future generations and the troubled world that awaits them. And I am unequivocally righteously indignant over the absolute willful ignorance of most of the people in this country who arrogantly assume that somehow we’re entitled to global domination in all things merely because we can wave a flag on a few holidays each year. That our superiority no longer requires work, but simply for us to act the part and the rest of the world will simply acquiesce.

If we desire to pursue this naiveté as a national exercise, then we will reap the whirlwind. In my opinion, the result is already a foregone conclusion. We’re in the damage control phase now, rather than the prevention phase. Despite accumulating zero points in our little exercise, Mikhail Degtyarev was absolutely right in his condemnation of the US Dollar. My only gripe with this man I’ve never met is that he didn’t go far enough. He failed (as most do) to address the root of the problem, which is systemic greed and predation. Back in the day, there were always greedy businessmen and regular folks alike. Nothing has changed in that regard. It has always been that way and always will be; it is the flawed nature of man to give in to such things. What has changed though is that the greed that used to be more passive has now become active and virulent.

A great example of this contrast and transition is the 1990s and NAFTA. It was a more passive form of greed. NAFTA was never well understood by most folks and they drank the Kool-Aid that it was going to solve all the world’s problems. Free trade was the answer. We’d lift the world up to the living standard of America and all that rubbish. While the passage of the agreement, etc. obviously required action, the greed behind it was more passive in nature. Now, compare that to Cyprus and, more recently, Poland. These were overt, in-your-face power grabs. There was no attempt to hide anything. The ends and the means were laid bare for all to see. And virtually no one in America – or the rest of the world for that matter - even blinked an eyelash.

Perhaps the biggest bit of irony in all this is that Igor Suzdaltsev asserts that it is a tenet of capitalism to be able to move from one currency to another. And in his proposed law, Mikhail Degtyarev forbids Russians holding dollars domestically, but has no problem with them holding dollars elsewhere; in places like Cyprus. How one can be spot-on with an analysis yet potentially have the worst of motives is a relatively new feature of our upside-down world. Beware. In today’s brave new world of high finance and hijinks, there is a predator on every corner. He’s got plans for your money, your posterity, and your very way of life, and those plans don’t include you.


Andrew W. Sutton, MBA Chief Market Strategist Sutton & Associates, LLC www.sutton-associates.net[email protected]

Andy Sutton is the Chief Market Strategist for Sutton & Associates, LLC – a Registered Investment Adviser in Pennsylvania. His focuses are econometric modeling and risk management. The firm specializes in wealth preservation and growth and recognizes the validity of non-paper assets in achieving a balanced approach. The firm is also currently working with a growing clientele towards avoiding the risks outlined above.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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