[Originally posted on iTulip.com, in response to a post from Lukester referring to the dollar as 'fiat'.]
You've noted, more than once I believe, Lukester, that the dollar is fiat.
I would disagree. Dollars can always be converted to Treasuries,either way, in one of the most liquid markets in the world. Treasuries have inherent value, as their dividends are a reliable claim on the income stream collected as federal taxes from Americans. This income stream has been "as good as gold" for the better part of a century now.
Rather, I would agree with those here who have described the events in the financial markets of the last few months as a short covering rally, on the dollar. One way or another, in increasing amounts (explosively exponentially increasing, in the case of mortgage backed securities and related derivatives and swaps) the world has been flooded with dollar denominated paper.
Every dollar denominated asset that could be purchased in sizable quantity from a computer station has had its price run up over the last few years. Even a few such asset classes that required "hands on" extraction, such as mortgages in California, Florida and a few other states were run up, in that case using a newly hired army of mortgage brokers.
Dollars came in one door, and were spent on anything for sale out the other door.
For another example, the big runup in gold and gold mining was between 2001 and 2007.
Everyone sold dollars short and bought other dollar denominated assets long.
Well, everyone except perhaps the Japanese, who sold the Yen short and bought Treasuries long.
This is unraveling, dramatically, to the great delight or pain of participants, depending on which side of this crash they got caught on.
I'm fairly optimistic, in that the worst of this house of paper that is burning down around us was built in the last few years. So I trust that there is the financial base for a solid economy, underneath that burning paper, which we have a decent chance of partially rediscovering, without causing the End of Western Civilization.
Sometime in the next one to six months, I expect to see the Dollar reverse, and start back down again, in the Foreign Exchange market. I sold my California real estate and all my stock last year, and have been sitting almost entirely in Treasuries, Dollars and cash equivalents this year. I've downsized my life style from the high flying, debt burdened, Silicon Valley style that I've enjoyed the last two decades to one that has zero debt, cash in the bank, and costs less than one-tenth per month than before, for ordinary living expenses, in North Texas.
When I see the dollar solidly reverse (no big hurry, don't need to jump the gun) I will look for asset classes which are getting some wind in their sales ... perhaps energy related stuff, and stuff that does well in inflationary times. We'll see.
No ... the dollar is not a fiat currency. However, if we increase the national debt sufficiently, perhaps while our economy weakens in a serious recession, the incredible lowering of Treasury rates from 18% to 2% in the last 25 years will reverse. Obviously that 25 year trend must reverse, sometime in the next year or two, if not sooner. It cannot go below zero.
As the rates we must pay for Treasuries starts to rise, higher and higher, this will start to make the burden of these interest payments increasingly onerous on the American tax payer. An increase from 3% to 6% would double our burden paying these dividends. The pain in a long term reversal of these rate trends will be serious.
Given that, along with the unfunded liabilities of Medicare and Social Security, and along with the near certainty that our politicians will continue to be corrupt Socialist fools, we have the makings, over the next five to twenty years, of some very interesting headlines in the news.
Saturday, October 25, 2008
Thursday, October 23, 2008
The Panic of 2008 is a deliberate banking consolidation
[Originally posted on iTulip.com]
May I suggest it [the current banking crisis] is both a runaway disaster, and an orchestrated consolidation.
I imagine that after that famous asteroid hit the Yucatan peninsula 65 million years ago and wiped out the dinosaurs (if that's what happened) that shortly thereafter, the fastest, most ferocious raptors were feasting on the carcasses of their weakened comrades.
Presently, I figure that the debt-based money system of the Rothschilds, Rockefellers and Morgans, which lives on in the financial institutions of JPMorgan Chase, Goldman Sachs, the New York Fed and the U.S.Treasury, inter alia, has achieved its final, greatest, climax.
The asteroid of such excessive leverage that an even greater bubble can no longer be constructed has hit planet earth. The king raptor, JPMorgan, is feasting. Raptor steak is momentarily the coin of the realm.
The main event is a runaway disaster. Credit based money tends to do that. However in this case, Western Civilization had a few centuries of magnificant glory, and terrible wars, in the process.
But the king carnivores are doing their best to herd the weaker animals into killing pens during the chaos.
I do not expect the fall from such heights to be as disastrous as befell the dinosaurs. But looking back on the present from a century in the future, it might look like the decline of the British or earlier Spanish empires. I am optimistic that civilization has well enough integrated into the fabric of everyday human life all over this planet that the fall will not be anything as serious as the Fall of the Roman Empire, relative to the size of the known world.
May I suggest it [the current banking crisis] is both a runaway disaster, and an orchestrated consolidation.
I imagine that after that famous asteroid hit the Yucatan peninsula 65 million years ago and wiped out the dinosaurs (if that's what happened) that shortly thereafter, the fastest, most ferocious raptors were feasting on the carcasses of their weakened comrades.
Presently, I figure that the debt-based money system of the Rothschilds, Rockefellers and Morgans, which lives on in the financial institutions of JPMorgan Chase, Goldman Sachs, the New York Fed and the U.S.Treasury, inter alia, has achieved its final, greatest, climax.
The asteroid of such excessive leverage that an even greater bubble can no longer be constructed has hit planet earth. The king raptor, JPMorgan, is feasting. Raptor steak is momentarily the coin of the realm.
The main event is a runaway disaster. Credit based money tends to do that. However in this case, Western Civilization had a few centuries of magnificant glory, and terrible wars, in the process.
But the king carnivores are doing their best to herd the weaker animals into killing pens during the chaos.
I do not expect the fall from such heights to be as disastrous as befell the dinosaurs. But looking back on the present from a century in the future, it might look like the decline of the British or earlier Spanish empires. I am optimistic that civilization has well enough integrated into the fabric of everyday human life all over this planet that the fall will not be anything as serious as the Fall of the Roman Empire, relative to the size of the known world.
Sunday, October 19, 2008
[Originally posted on iTulip.com]
On the other hand, if you're in a conspiratorial mood, check out Jim Willie CB's latest GoldenJackass.com piece "WALL STREET MONSTERS & MEAT (YOU)" over at http://www.gold-eagle.com/editorials...lie101608.html .
By his reckoning, we should have Nuremberg trials for Hank Paulson and Jamie Dimon, and we can expect the dollar collapse, and other spectacular fireworks this year, perhaps even this month, maybe even this week.
One interesting theory he raises is suggesting that the continuing lowering of Treasury rates is a JPMorgan & Associates manipulation, to starve other banks of the capital they need to survive. Recall, as I noted in a post above, that continuously declining interest rates harms existing capitalized firms, just as it benefits those lending to or investing in them.
JPMorgan is able to survive in this rarefied air by periodically feasting on the butchered carcasses of other banks, herded their way by the compliant FDIC, after stripping the carcass of any toxics, to be covered by us generous American taxpayers. Jim Willie further suggests that over the last few years JPMorgan entered into massive quantities of Interest Rate Swaps with other banks, allowing the other banks to offload their rate risk some. This further fattened up the victim banks, kept them alive as their capital structure further deteriorated and made it easier for JPMorgan to control when to pull their plug and harvest their bankrupt carcass.
It is difficult to read a Jim Willie piece with stopping after every third paragraph to log into ones accounts and press the Buy Now button on yet more gold.
On the other hand, if you're in a conspiratorial mood, check out Jim Willie CB's latest GoldenJackass.com piece "WALL STREET MONSTERS & MEAT (YOU)" over at http://www.gold-eagle.com/editorials...lie101608.html .
By his reckoning, we should have Nuremberg trials for Hank Paulson and Jamie Dimon, and we can expect the dollar collapse, and other spectacular fireworks this year, perhaps even this month, maybe even this week.
One interesting theory he raises is suggesting that the continuing lowering of Treasury rates is a JPMorgan & Associates manipulation, to starve other banks of the capital they need to survive. Recall, as I noted in a post above, that continuously declining interest rates harms existing capitalized firms, just as it benefits those lending to or investing in them.
JPMorgan is able to survive in this rarefied air by periodically feasting on the butchered carcasses of other banks, herded their way by the compliant FDIC, after stripping the carcass of any toxics, to be covered by us generous American taxpayers. Jim Willie further suggests that over the last few years JPMorgan entered into massive quantities of Interest Rate Swaps with other banks, allowing the other banks to offload their rate risk some. This further fattened up the victim banks, kept them alive as their capital structure further deteriorated and made it easier for JPMorgan to control when to pull their plug and harvest their bankrupt carcass.
It is difficult to read a Jim Willie piece with stopping after every third paragraph to log into ones accounts and press the Buy Now button on yet more gold.
Saturday, October 18, 2008
[Originally posted on iTulip.com]
Some more thoughts on the present situation, after reading the article:
Borrowing money to capitalize your business at rates that turn out to be higher than the subsequent prevailing rates is a money losing proposition.
A key element of the $700 Billion bailout, notes this article, is that the Treasury passed the new Treasury notes directly to the Fed, bypassing the Open Market, which is a direct act of monetizing debt not seen since World War II. Not only were GM, GE, AIG, JPMorgan, and a host of other major banks and businesses worldwide bankrupt. The Fed was bankrupt as well. We bailed out the Fed.
As this article further explains, in different terms, this is the curse and the blessing of using a convertible currency that depends on interest rates, rather than on precious metal.
The blessing is that the base for the worlds reserve currency the last half century or so, essentially monetizing the tax income stream from the American worker, has been able to grow faster than the worlds mined gold reserves, while remaining "as good as gold." A world prosperity unlike any ever seen before in civilization has been funded on the back of this currency.
One (not the only) curse is what the above article terms the "wrecking ball" of interest rates. Unlike the quantity of mined gold available to Western Civilization, which is "rock solid" (ignoring such times as the Spanish conquest of the New World), interest rates can swing back and forth. Declining rates hurt those who have already borrowed, while they help those who have already lent. Rising rates do the reverse.
A near three decade decline in rates has wrecked great damage on, and embedded great distortions within, the capital base of America's economy. This will be reversed when the secular trend in rates reverses. This should be fun to watch.
Those capital businesses that can:
Hmmm ... I wonder what those businesses might be.
Some more thoughts on the present situation, after reading the article:
http://www.safehaven.com/article-11601.htm
The above article explains how the falling interest rates over the last 28 years have been generally destructive of capital based businesses, including industry and banking, and the banking cartel known as the Federal Reserve.October 18, 2008
The Mechanism Of Capital Destruction
by Antal E. Fekete
Address at the Annual Dinner of the
Committee for Monetary Research and Education, CMRE
on October 16, 2008
New York City
Borrowing money to capitalize your business at rates that turn out to be higher than the subsequent prevailing rates is a money losing proposition.
A key element of the $700 Billion bailout, notes this article, is that the Treasury passed the new Treasury notes directly to the Fed, bypassing the Open Market, which is a direct act of monetizing debt not seen since World War II. Not only were GM, GE, AIG, JPMorgan, and a host of other major banks and businesses worldwide bankrupt. The Fed was bankrupt as well. We bailed out the Fed.
As this article further explains, in different terms, this is the curse and the blessing of using a convertible currency that depends on interest rates, rather than on precious metal.
The blessing is that the base for the worlds reserve currency the last half century or so, essentially monetizing the tax income stream from the American worker, has been able to grow faster than the worlds mined gold reserves, while remaining "as good as gold." A world prosperity unlike any ever seen before in civilization has been funded on the back of this currency.
One (not the only) curse is what the above article terms the "wrecking ball" of interest rates. Unlike the quantity of mined gold available to Western Civilization, which is "rock solid" (ignoring such times as the Spanish conquest of the New World), interest rates can swing back and forth. Declining rates hurt those who have already borrowed, while they help those who have already lent. Rising rates do the reverse.
A near three decade decline in rates has wrecked great damage on, and embedded great distortions within, the capital base of America's economy. This will be reversed when the secular trend in rates reverses. This should be fun to watch.
Those capital businesses that can:
- Survive the depression,
- Adapt to a lower, world competitive, wage base,
- Survive serious inflation and dollar damage, and
- Avoid the burdens of excessive socialist regulation,
Hmmm ... I wonder what those businesses might be.
[Originally posted on iTulip.com]
Our dollar is not a simple fiat currency. It is not just monopoly money that Parker Brothers can print by the truck load for the cost of wood pulp, printers ink and rental time on the printing press.
Our dollar is a convertible currency. Gold certificates were convertible to gold, and held value so long as the Kings store of gold was not near depletion. Dollars are convertible to Treasuries, and hold value so long as the burden of interest payments on those Treasuries is not so honerous on the American tax payer as to be put in doubt.
Total debt, public and private, on the American taxpayer is two or three times GDP, which is starting to get up there, but still not presenting immediate risk.
What is collapsing now is the massive bubble of finanicial paper built on top of this currency, including domestic and foreign debt, derivative, stock, bond and asset valuations.
Yes, that collapse of bubble paper can take "seven years", though gloomy me tends to expect that collapse to be harder and faster, with a long depressing bottom.
It seems, from what we are learning now, that so long as the dollar remains strong (Treasuries are the preferred "safe" store of wealth), then the collapse of the financial bubble built on top of the dollar is good for the dollar. This is to be expected, now that I think about it. When bubbles collapse, the underlying "safe" currency becomes more valued.
What will drive gold up is the recognition of a serious threat to the underlying "coin of the realm", the worlds reserve currency, the dollar.
One cannot anticipate the timing of such a gold boom by looking at how much longer it will take the financial derivative bubble to burn out. The dollar could start to collapse while we're still shredding the financial derivative bubble paper, or it could collapse later on,due to other strains.
Just as one looks to see how much gold remains in the Kings treasure to estimate how near the threat of collapse is to gold certificates, similarly one must look to how soon the convertible base of dollars, the reliable interest income on Treasuries from the taxes on American taxpayers, is at risk of depletion or collapse, if one is to determine when the dollar starts melting down, and gold becomes much more valuable.
Predicting runs on the bank, which in this instance would be a spiralling collapse of confidence in Treasuries, is not easy. The events can be sudden, and involve the extremes of human emotion. The events will certainly involve massive, deceptive, almost inescapable (for us little people) actions by the largest holders of Treasuries, as they decide, one way or another, to rid their coffers of Treasuries.
I'd first look for Treasury rates to reverse their long term (since early 1980's) decline in yield, which will cause holders of existing Treasuries to start to lose, rather than gain, profit on the principal value of their Treasuries, and start to escalate the burden of the interest payments on the American tax payer. This is rather like noticing when your Credit Card company starts raising the interest rates it offers you, as you become a less worthy credit risk. If you are rolling over your credit card debt, as we are our American Treasury debt, rather than paying it down, this can be a good sign of the beginning of the end.
The unfunded liabilities of Social Security and Medicare payments to Baby Boomers, the increasingly outrageous corruption and profligacy of our political representatives, the costs of bailing out the bankers, the costs of a Military that would make the Roman Empire jealous and of wars past and likely future, the direct and indirect costs of a massive and corrupt federal bureacracy, and the lowering of GDP due to a serious depression (seemingly imminent) all look to put Treasuries under further strain, as paying the interest on them becomes an increasingly large proportion of American cash flow.
Our dollar is not a simple fiat currency. It is not just monopoly money that Parker Brothers can print by the truck load for the cost of wood pulp, printers ink and rental time on the printing press.
Our dollar is a convertible currency. Gold certificates were convertible to gold, and held value so long as the Kings store of gold was not near depletion. Dollars are convertible to Treasuries, and hold value so long as the burden of interest payments on those Treasuries is not so honerous on the American tax payer as to be put in doubt.
Total debt, public and private, on the American taxpayer is two or three times GDP, which is starting to get up there, but still not presenting immediate risk.
What is collapsing now is the massive bubble of finanicial paper built on top of this currency, including domestic and foreign debt, derivative, stock, bond and asset valuations.
Yes, that collapse of bubble paper can take "seven years", though gloomy me tends to expect that collapse to be harder and faster, with a long depressing bottom.
It seems, from what we are learning now, that so long as the dollar remains strong (Treasuries are the preferred "safe" store of wealth), then the collapse of the financial bubble built on top of the dollar is good for the dollar. This is to be expected, now that I think about it. When bubbles collapse, the underlying "safe" currency becomes more valued.
What will drive gold up is the recognition of a serious threat to the underlying "coin of the realm", the worlds reserve currency, the dollar.
One cannot anticipate the timing of such a gold boom by looking at how much longer it will take the financial derivative bubble to burn out. The dollar could start to collapse while we're still shredding the financial derivative bubble paper, or it could collapse later on,due to other strains.
Just as one looks to see how much gold remains in the Kings treasure to estimate how near the threat of collapse is to gold certificates, similarly one must look to how soon the convertible base of dollars, the reliable interest income on Treasuries from the taxes on American taxpayers, is at risk of depletion or collapse, if one is to determine when the dollar starts melting down, and gold becomes much more valuable.
Predicting runs on the bank, which in this instance would be a spiralling collapse of confidence in Treasuries, is not easy. The events can be sudden, and involve the extremes of human emotion. The events will certainly involve massive, deceptive, almost inescapable (for us little people) actions by the largest holders of Treasuries, as they decide, one way or another, to rid their coffers of Treasuries.
I'd first look for Treasury rates to reverse their long term (since early 1980's) decline in yield, which will cause holders of existing Treasuries to start to lose, rather than gain, profit on the principal value of their Treasuries, and start to escalate the burden of the interest payments on the American tax payer. This is rather like noticing when your Credit Card company starts raising the interest rates it offers you, as you become a less worthy credit risk. If you are rolling over your credit card debt, as we are our American Treasury debt, rather than paying it down, this can be a good sign of the beginning of the end.
The unfunded liabilities of Social Security and Medicare payments to Baby Boomers, the increasingly outrageous corruption and profligacy of our political representatives, the costs of bailing out the bankers, the costs of a Military that would make the Roman Empire jealous and of wars past and likely future, the direct and indirect costs of a massive and corrupt federal bureacracy, and the lowering of GDP due to a serious depression (seemingly imminent) all look to put Treasuries under further strain, as paying the interest on them becomes an increasingly large proportion of American cash flow.
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