first majestic silver

Delusions - US$, Banks, Gold

April 18, 2003

We live in dangerous times. But we also live in times where delusional behavior is raising the risks and intensifying the danger. An unchecked cancer is growing on our nation's consciousness, fed by denial of degenerative hardship, grown from a layer of ignorance, inhibiting the ability to perceive reality and to properly make decisions for the future. The American public clings to a scintilla of hope that all will be well, jobs secured, threats eliminated, wealth restored, pensions returned to health. If anything, the delusions are becoming deeper, wider, more desperate, and departing farther from reality in just the first three months of this new year. A sense of profound denial lingers after the bust of the economic miracle, irresponsibly founded upon the greatest debt-generated speculative mania in human history. What in God's name went wrong? What are we missing? In short, the answer lies in "Economics 101" at a fundamental level. Our entire economics community supports a heretical system that produces apologists for perpetual debt abuse. In this piece I hope to disabuse readers of many persistent delusions in support of fallacious views. My list of delusions outlines the neurotic condition of the American mindset.

USDOLLAR

31. USDollar will level off at equilibrium, stabilize, and not overshoot

More wishful thinking that defies all historical precedent. In almost every single case of currency correction in the last few decades, an overshoot occurs. It not only goes beyond the eventual equilibrium point, but can remain beyond that point for several years before evidence arrives that a correction has indeed been engineered amidst causal imbalances. The pattern has been that a currency corrects until not only the fundamentals behind the trade imbalance is rectified, but also confidence in that nation's economy has hit a bottom. It continues until a renewal is seen in foreign investment and business. In the case of the USDollar, that point may never be reached. Our economy has little mfg capacity inherent as an industrial mechanism; outsourcing continues as a phenomenon in search of lower cost. Our leaders seem hellbent on blocking the currency correction by dismantling the monetary mechanism. They use the Exchange Stabilization Fund to prevent longterm interest rates from rising. No, the norm is for an overshoot in both price and time, and by God, we will see it in full glory.

32. USDollar is invulnerable to international backlash

Since the fall of the Soviet Union, international sentiment has gone from an extreme love affair, to an impasse, and soon to an actual falling out. The top in the USDollar valuation came with the launch of the free euro currency. Our leaders are engaging in diplomatic bully tactics now, largely squandering the sympathetic capital stored up from the WTC attack of 9/11. On the economic side we have functioned as the engine of growth. Soon foreigners might believe we are no longer present for their continued benefit, but instead we require them to be a supplier of credit for our profligate style. As we struggle, they struggle worse. Finally, our strong dollar has begun to produce diverse backlash in resentment. We coerced exporting nations such as the entire Asian continent and OPEC oil producers to recycle their surpluses into US Treasuries and Stocks. Their investments are at risk with the dollar devaluation underway. With 75% of world banking reserves invested in dollar-based USTBonds, their economies are at great risk. We may have led the world economy down an unfortunately destructive path. No, our abuse of the dominant role can quickly lead to international anger, disgust, avoidance, and abandonment.

33. European disunity and socialism obstruct the euro currency uptrend

Americans like to harp on European disunity. The US govt is beholden to lobbyists, debts are ballooning, spending is out of control, military complex is fostered, and corruption is rampant. Which is worse? We like to point the finger at European socialism, when our system is growing in socialist underpinnings each year. Arab petro-dollars are finding a new home in EuroBonds, in avoidance of our markets. European debt levels are nowhere near as deadly large as ours. European deficit spending is much less also. The EU boasts a trade surplus, in direct contrast to the US trade hemorrhage. Consolidations will come, but the new trend has just begun. No, the euro bull trend has more legs, as US securities are shunned, while Asians and Arabs alike will continue to diversify into European assets.

34. New USDollar is intended and designed to thwart counterfeiting

That is the official line of bull cookies. The last new dollar in 1999 with a metal filament and offset large faces was intended to thwart counterfeiting. Saddam's revenge following the humiliating Gulf War defeat was to counterfeit with impunity at least $20 billion annually. The CIA is on record that Iraq printed perhaps as much as $50 billion in a single year. A credible argument can be made that we are in the early planning stages for a "DUAL DOLLAR" which will create a firewall to protect the domestic economy. We might be planning to allow the external dollars to be written down severely, which will have immense consequences to foreign-held Treasury debt. We will likely use the boogeyman tactic to divert attention toward drug cartels, crime syndicates, black markets, and rogue nations. However, a strong conduit will never be cut between an external dollar and a domestic dollar since each is backed by the US Govt, and laundering facilities that cross the virtual border will be a cinch. No, the Dept of Treasury used up that excuse with the last new dollar, now raising suspicions of a protective moat being constructed around our shores.

35. Strong USDollar has benefited the USA for 20 years

The strong dollar policy has resulted in the impoverishment of the entire American economy, its workers, and its institutions, raising to extreme levels our indebtedness. We have displaced and hollowed out almost our entire mfg production. We have coerced foreigners to operate as creditors. We have encouraged consumption of cheap imported products beyond our means, resulting in crippling household debt. We have created an unlevel playing field for our corporations, resulting in the loss of American jobs. Service sector jobs pay less than mfg jobs. We did have a nice few years of benefits late in the 1990 decade, but that was fleeting and may have caused more of a disaster than we can admit. The last decade invited the world to participate in the greatest speculative mania in the history of mankind, which cannot be described in any other way. No, the strong dollar stripped America of its wealth and the engines that produce wealth, replacing it with colossal debts.

36. USDollar lower revaluation benefits far outweigh risks

The dollar cannot arrive at a more beneficial stable lower level without undergoing a painful transition whereby it declines in value over a period of time. The very dynamics of this process of change can unleash powerful forces that damage both our economy and financial markets. A vicious circle has begun, and will not end until the dollar undergoes a monumental correction. But at what value is the dollar properly adjusted? A declining dollar discourages foreign investors operating with shorter horizons. It raises the cost of all things imported, such as basic materials and energy supplies. It also raises the cost of imported finished products and components. In short we import "price inflation" just as inflation was exported in the last decade. Worse still, foreign banking systems will see leveraged damage to their loan portfolio capital requirements as their reserves fall in value. The only benefit is greater price competition among US exporting firms, except we don't manufacture much in this country. Our chief export is debt, and eventually that will suffer. No, the risks lie in an endless worldwide recession, while the benefits are directed to a largely absent manufacturing base.

37. Lower USDollar will close the trade gap, since our prices are coming down

If this were true, then the trade gap would not have increased 15% since last spring, even as the dollar declined 15% over the same time. Foreign economies weaken with a falling dollar, and can ill afford purchases of our finished goods. Farmers enjoy some benefits, to be sure. With a mfg base that has been shifted to Asian and Mexican locations, we have muted the currency translation benefit. Furthermore, ours is an economy gone utterly insane with consumption. We purchase finished goods and components from Asia, by and large. All govt stimulus is intended and directed towards sustaining our consumption trend, even with additional debt. So how would we close this trade gap? If our foreign customers are much weaker than we are, how can they lift their imports of our goods in a significant manner? I truly believe the trade gap will wind down to zero only if a world depression unfolds. No, a lower dollar will reduce the trade gap in a minimal fashion, and frustrate both our govt leaders and corporate executives, culminating in a USDollar freefall !!!

38. Sovereign currency requires no collateral

Can you think of a single debt where creditors do not demand collateral? I cannot. The United States has probably sold off 60-65% of its gold reserves, which had operated as collateral for our burgeoning federal debt. If the dollar decline gathers momentum, as I expect, then we will see rising long-term interest rates. Not at first. We simply import too much. So as costs rise and import prices translate higher, we will see a new price inflation cycle materialize. Our economy will weaken precisely when our Treasury debt securities fall in nominal value. Losses will be amplified by currency translation when held in foreign hands. We do not "owe it to ourselves" any longer. A weakened economy will undercut our ability to repay our debts. No, collateral is not important in times of growth, but as foreigners see our economy achieve downward momentum, they might quickly object to the disappearance of our collateral.

39. Bank of Japan can suppress the yen forever

For many years the Bank of Japan has succeeded in keeping the yen currency at low levels, thus allowing their vast array of exporters to remain competitive in the great American supermarket shopping centers. The BOJ has debased the yen all too effectively, sending their economy to near death, as their banking system is now virtually worthless. Their federal debt is now 140% of their annual GDP. Despite their horrid conditions, and vampire-like kieretsus, powerful forces work in their favor. On a bilateral basis with respect to the USA, their trade surplus is 2.5% of GDP. This provides a capital flow that will be formidable to paddle against. Japan already has entered the twilight zone of accelerating money supply with no benefit to economic activity. Since 1971, the world monetary system has operated on the "triangle" made up by the dollar, the mark (now euro), and the yen. The first round of dollar devaluation came at the expense of the euro. Or is it gain? The next round will likely come versus the yen, signaled by recent new Nikkei index lows. A currency surprise is shaping up. No, with a weak dollar trend underway, and large capital flows favoring a stronger yen, the next moves will be toward a rising yen in the land of the rising sun.

TREASURY DEBT & BANKING

40. Financial derivatives are under control, they reduce spread and offload risk

Derivatives certainly contain and manage systemic risk, but they do not eliminate it. Instead, they concentrate risk within extremely leveraged pyramids of heightened risk. Corporate entities that embrace the risk must realize their limits. As counter-parties to the original contracts, they operate as systemic seawalls to withstand storm fronts. Not only can the derivative contracts be in danger of going bad from underlying asset prices, but the foundation of supporting capital can rapidly shrink from stock, bond, and insurance losses. Derivatives are put in place in order to neutralize a firm's exposure to changing conditions between the time the contract is written and the time the contract is executed or expired. Large unexpected changes have delivered serious blows to the stock market, corporate debt market, and currency market. As a result, base capital has indeed diminished to extremely dangerous levels. The risk is now concentrated within a few elite counter-parties holding a massive number of contracts. No, with such spectacular losses realized, future surprises are more likely at some time to topple pillars of the economy like giant dominoes.

41. Foreigners will never conceive of a default on United States Treasury debt

For decades foreigners have delighted in American opportunity for investment and participation in the great capitalism experiment. However, they are quickly discovering that the experiment was not so much due to innovation and business creation, as it was in debt explosion and currency saturation. Now those unchecked debts are causing a reversal of fortune. The back-pedaling has seen fit to crush the most risky debt securities such as telecom debt first. Weak retailers, overextended lenders, then airlines marched next into the debt inferno. Almost three years into the process, we watch as consumer debt and mortgage debt will soon come under scrutiny. As our nation's Treasury debt kicks into high gear, many questions will be posed on payment and continued floating of this historically unseen monster debt load. The economy did not repay during good times. Foreigners will inevitably question how we can repay during bad times that seem not to end. No, the ebb and flow of foreign involvement has seen its flow, and will soon see its ebb.

42. US Treasury Bonds are safe, since guaranteed

The rush in the last two years by investors into US Treasury debt has been impressive and robust. Money has exited the stock market and higher risk corporate debt securities, finding safe haven in Treasury bonds, as well as less protected real estate and mortgage bonds. The powerful deflationary winds have benefited govt debt issuances. Minor cracks from oversupply have begun to chip away at residential housing, which has defied the entire economy's poor health and general asset price declines. Recent Fanny Mae concerns have been raised by Fed Governor Poole, exposing mortgage finance's insufficient structural foundations. As the USDollar continues its corrective descent, and as commodity and imported price inflation shows its ugly head, our USTBond yields on long-term securities will once again rise. If and when dollar depreciation magnifies bond losses from simple rising yields, investors will exit Treasury bonds. Foreigners will exit twice as fast. The stage is being set now for bond losses. No, govt bonds are guaranteed, but they are not immune to either damage or momentum declines.

43. Social Security Trust Fund will remain solvent and viable

We as a people like to trust. If instead, one examines the trend on Social Security funds and benefits, it can be easily seen that benefits are gradually being cut while new age limits slowly undercut younger workers. Soon enough, benefits will be denied to those who lack need, those who have means. Cost of living adjustments are kept deceitfully low from false CPI calculations. Worst of all, the trust fund itself has been raided by grubby Congressional spendthrifts, and accounted for in a fashion resembling the Enron fraud. Senator Claude Pepper of Florida had been its leading defender. His retirement and death years ago signaled an end to that defense. The demographics work detrimentally toward its solvency. I am somewhat protected by fixed benefits, since my year of birth was before 1960. Not so for many millions of other citizens stuck in contributing into this black hole bottomless pit of govt fraud. No, as time passes, younger contributors will see larger slices taken from their paychecks (not tax deductible) and be promised progressively smaller future benefits (taxable). The system will survive, but the benefits will be reduced and narrowed.

44. Money will always be safe in a bank

The Federal Deposit Insurance Corporation was established in order to protect from depositors losing their savings accounts and certificates in the event of a bank collapse. The 1981 Savings & Loan debacle exposed and highlighted the risk to savers. The original cost was over $800 billion from govt bailouts, a figure reduced to under $300 billion by means of the innovative Resolution Trust Company salvage efforts, expertly directed by Bill Siedman. In the last twenty years, banks have underwritten untold billions in loans for businesses and mortgages. If we suffer a systemic slow bleed for a prolonged period of time, which I expect, then banks will be left holding large portfolios of bad loans. The same happened to Japan, whose collective banking system is now worthless! In a wider series of bank failures, the FDIC will require huge federal infusions, since this self-insured protection has limits to coverage. No, FDIC will be overwhelmed in future years, and savers will at best be left with frozen accounts until govt insurance is resolved and fraud is investigated.

45. Greenspan is the greatest central banker of the 20th century

I am reminded of the Sports Illustrated cover effect, a sure sign of a career reaching its crest, or a team hitting its peak, only to see a decline. Sir Alan Greenspan, knighted before the Queen of England, after a tragic bust branded by his own imprint !!! The title of "greatest central banker" is given by Senator Phil Gramm, who strikes me as a "Economics D-student lackey." But is he the greatest banker, or just the most accommodative central banker bartender? He did close his eyes to warning on "irrational exuberance" uttered by his own lips. Did he produce prosperity through unrestricted credit extension and mismanaged money supply? Did he ignore rising asset prices, declaring victory over inflation, while focusing too narrowly on the distorted hedonic CPI index? Did he build a collapsing foundation for debt only to risk economic depression? Time will tell. He reminds me of a drug dealer whose clientele saw ruin in addiction. Surely, his style of communication is hardly worthy of the word "communication." The economics field is the province of the abstruse, and no doubt incomprehensible to the illiterate unwashed masses. No, Greenspan will be vilified as the economic recession proves endless, will be made a scapegoat for the magnificent wealth destruction nowhere near completion, and will see this upcoming calamity labeled "The Greenspan Depression."

GOLD

46. Gold & silver short positions can hover indefinitely

The futures contract world has never seen anything like it. Short interest among gold futures now sits at more than two years worth of world production, wholly out of proportion with mining economics. The same can be said for silver short interest. Many of these contracts are offset by expected future gold and silver mine production, as mining firms hedged unwisely, often selling to great excess their future production. Some experts believed the shorts would witness calamity when gold surpassed #330 last autumn. They did not. However, shorts unfortunately either watch their portfolios dissolve completely by standing idly by, or suffer Chinese torture from stepwise movement of critical lines in the sand. No, unprofitable shorts eat at balance sheets, and contribute to mounting long-term debt, eventually pressing for resolution.

47. USA monetary system will never return to gold standard

The United States will never re-employ a gold standard unless our country experiences desperation to save its currency from implosion and collapse, or unless the dollar's descent threatens the US or world economy. On its face, this statement sound naïve, simplistic, and overly trusting. Kondratiev Winter works its magical devastation in sequential stages, in culling and cleansing the nation's economic and financial landscape of excessive and abusive debt. The entire United States economy, its sovereign debt, and its dollar currency will in time be targeted by the K-Winter's judgment over irresponsible debt. Unspeakable abuse of debt at every level has clearly exceeded anything ever observed in human history. Our entire nation will soon be subjected to ruthless debt liquidation, debt write-down, business failure, and personal bankruptcy. It will occur in stages though, not all at once, starting with the weakest indebted tree limbs, gradually working to prune among the stronger limbs. Perceived corrupt corporate governance during threats to debt default, reduced cash-flows in the weakening economy, massive federal deficits, hemorrhaging trade gaps, incredible increases in required foreign capital flows, and a war effort viewed as reckless, these all contribute toward a potential abandonment of the USDollar. No, the USDollar Decline Vicious Circle will month by month gather momentum and almost surely reach crisis proportions ultimately, at which time our government will have few options besides a gold cover clause for our distressed currency.

48. Central Banks will never actively purchase gold again

The 1990 decade paid witness to the unrestrained drain of gold reserves from central banks led by England, Germany, Japan, and the United States. The 1999 Washington Agreement isolated the USA as the principal participant, as Europe's bankers decided to retreat from this unwise process. Now the USA is doing the lion's share of gold selling, and probably lending other nations enough gold to continue the charade of balanced overnight selling on the world market. Meanwhile, Asian central banks (most notably China and Russia) are buying gold to accumulate bank reserves. The deflation underway in Europe, Japan, and the United States goes one foot after another with the irresponsible extension of credit over decades inside their respective economies. Insane selling of gold should be regarded as parting from collateral to secure large sovereign debt. They also are running their printing presses overtime, thus debasing their currencies further. The debtor is running in both wrong directions simultaneously. An Argentine presidential candidate proposed just in early March a new gold-backed Peso. Gold convertibility can both prevent calamity and rebuild after calamity. Centuries attest to its stabilizing capability. The last 50 years attest to the instability bred by its absence in the currency. No, the certain upcoming world currency crisis will require and demand a gold backing of ailing currencies.

49. Gold even now has no monetized role or function

Since 2000, debt has been defaulting, and stocks have been revalued downward. Many stocks have succumbed to 95% reductions. Even as capital has found sanctuary in guaranteed government bonds, the returning yields have reached such low levels that they no longer exceed price inflation levels. We have now negative real returns on short-term Treasury yields. Against this backdrop, gold has come off its 20-yr bear trend and risen 30-40% off its low at $265/oz. Japanese citizens have found safety in gold. Many of the world's wealthiest people have turned to gold, eschewing meager bond yields and retreating from stocks. As debts continue to be liquidated, as institutions continue to be threatened, as paper-based securities continue to be priced lower, gold will continue to be chased by those seeking safety in real money. Such pursuit of sanctuary from so many diverse asset classes speaks volumes about gold's monetary role. No, gold is sound money and will see growing demand for at least the next three years as economies falter and monetary systems break down further. The next stage will see gold used to hedge against actual price inflation, as Asian imports rise in price following the inevitable upward revaluation in the Chinese yuan currency, combining forces with the lagged effect of simply monumental increases in our money supply since 2001.

50. Higher gold prices will unleash huge new supply

A paradox exists which testifies to the inelastic supply for gold, at least in its initial stages of rising price. Miner hedgebooks consist of vast forward sales contracts for gold that went far beyond justification by the economics of mining and prudent money management. They got greedy, lured by leveraged profits under advisement by gold bullion bankers. Now miners are caught in a vise. Since mid-2001 they have been diverting valuable capital toward covering and buying back their excessive forward contracts. Gold mining firms have become principal buyers of gold on the world market! I find such a trend worthy of extreme derision. Wall Street investment bankers cannot yet assist the process with stock issuance, since the gold sector is painted as a pariah still. No, money is being diverted from operations and production toward the covering of losing forward contracts, thus obstructing and inhibiting supply.

51. Our US gold reserves are safely vaulted in Fort Knox

We suffer from Enron-style accounting of our gold reserves. In fact, Enron probably learned the methods from the US Govt. Congress has shirked its responsibility in tracking our nation's reserve wealth, placing total trust in the Federal Reserve, which hides behind security clouds. The IMF has promoted a type of accounting that recently saw confrontation by Portugal. The IMF allows leased and sold gold to be counted as vaulted gold on the books. Experts estimate that as much as 50-60% of United States gold reserves have been leased and sold, mostly by elite Manhattan crooks, in collusion with gold miners, in order to suppress the gold price and to satisfy greed. Their collusion keeps the USDollar aloft. No, much of our nation's gold is gone, setting the stage for the Mother of All Scandals.

52. Islamic Dinar is a meaningless novelty

Such is claimed for any financial instrument or vehicle during inception. The Dinar is ridiculed and belittled in established circles as it undergoes birth pangs. So far, plans are for the Dinar to be used in settling bilateral commerce in the Islamic world on a quarterly basis. Efforts are underway for six major Islamic nations to use the Dinar for wider commerce, led by a credible Saudi Arabia. The stage is set for petro-dollars to build a new currency in future years, one with enormous potential and ramifications, in defiance of the western world's sickly, debased, saturated currencies. The biggest effect of an emergent Dinar might be to extend or accelerate a USDollar decline, by diverting a major capital flow away from the dollar world and toward the gold world. No, the Dinar might join the Dollar, Yen, Euro, and Yuan later this decade as a major world currency.

53. Reduced jewelry demand at higher gold price will hurt the bull market in gold

No question about it - gold jewelry demand slows when prices rise. However, a closer examination of history indicates clearly that long-term gold bull markets are based fundamentally on investment demand, not jewelry demand. Every past gold uptrend saw reduced jewelry demand which did nothing to forestall the growing mania for gold. At the depths of gold bear markets, jewelry enjoys a revival in demand, naturally. Gold bulls should revel in diminished jewelry demand, and tolerate it after substantial gains in the price of gold. No, waning jewelry demand is a positive signal for a growing gold bull market.

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

Jim's career continues to make waves in the financial editorial world, free from the limitations of economic credentials.

Jim is gifted with an extremely oversized brain as is evidenced by his bio picture. The output of that brain can be found in his articles below, and on the Silver-Phoenix500 website, on his own website, and other well-known financial websites worldwide.

For personal questions about subscriptions, contact Jim Willie at [email protected]

 


It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.
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