Transcript Currency Debasement: How to Protect Your

Currency Debasement: How
to Protect Your ASSets
Richard Karn
Managing Editor
The Emerging Trends Report
http://www.emergingtrendsreport.com
In order to survive under a fiat currency
regime, you have to understand the
mechanics of what is being done to you
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Myths about dollar hegemony, the international
monetary environment, and policy repercussions
How the US Household situation will impact the
US Govt’s reflation efforts
Why interventionist policies will ultimately fail
Protecting What Is Yours
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Ignore what politicians are saying and watch what they are doing
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US Treasury inflows in the most recent 4-month period ending in Sept = $204 b; average for 20002008 = $195 b per year
IMF: globally, as much as 50% of losses are still hidden in banks’ books
More prevalent in Europe than the US because the US has written down more bad loans and has
less emerging market exposure
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The US Dollar’s Reserve Currency Status
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Reserve currency status and dollar hegemony
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Dollar derivatives and fiat currency franchises
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Fiat currency regimes weaken from the periphery toward the center
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Central bankers and politicians squabbling like crows but printing like
Greenspan
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China, China, China
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Capital controls
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Threats
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Implications, investment and otherwise
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Source: Societe Generale Global Strategy/Bloomberg/US Federal Reserve
Sector Share
Breakdown
% Share of
Total Debt in
1933
% Share of
Total Debt in
2008
Net Increase
from 1984-2008
(trillions)
Gov’t + GSE
24%
33%
$14.4
Households
18%
27%
$11.9
Business
51%
22%
$8.8
Financials
7%
18%
$8.5
Source: FRB/Wattenberg-Morgan Stanley
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Identical Data,
Different Scales,
Different Perspectives
1914-2008 Growth Statistics
Population: 2.2% per annum
GDP : 6.48% CAGR
M2/M3 : 7.04% CAGR
Public Debt: 9.03% CAGR
Source: US Census, BLS, FRB
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“…the whole point of having a fiat currency is to be able to debase it when the economic
conditions require it”
Judging from this chart, when have conditions not warranted debasing the dollar?
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Note the “elasticity” cited by interventionists to justify use of the fiat dollar
Since 1984, > 30 changes to the computer models used to calculate CPI, each serving to reduce it
SGS figures reflect data unadulterated by tweaked computer models and paint an uglier picture
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The purchasing power of the fiat dollar has lost either 95.5% or 98.4% of its purchasing power, a
compounded annual decline rate of either -3.21% or -4.25%, depending on whose CPI values you
assign the most credence
Note the acceleration in the decline in purchasing power in SGS figures after 1984
We submit the Productivity Miracle Greenspan attributed to computer and information technology
existed largely within the confines of the gov’t’s computers and the information technology of the
financial media that promoted it
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Because this is the most immediately threatened demographic, we are going to
discuss US household debt within this context and segue into the US gov’t situation
The statistically fastest growing data set is public debt
Though slowing from 9.03% to 8.30%, the sheer dollar volume of debt has continued
to accelerate—as has the amount needed to service the accumulated debt each
month
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Baseline layering: please note the shift to linear scale for
comparison purposes on the following charts
Over the last 44 years the dollar has lost either 85.5% or 95.2% of
its value as measured by purchasing power—either a - 4.30% or a
-6.67% compound decline rate—depending on which reckoning you
choose to believe is most accurate
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Average American wages have grown from $4659 to $41,335 per year during this
period-- a respectable 5.09% CAGR
However, adjusted for the loss of purchasing power during this period, Americans
have seen either only a slight net gain in real wages (0.79% CAGR) or a significant
net loss (-1.58% CADR)
Earning more money of less value disguises the real loss of purchasing power
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Simultaneously, prolonged access to E-Z credit has seen debt loads
grow at an 8.30% CAGR
Salary plus debt assumption determines spending power
Over time, as debt accumulates, a larger percentage of salary must
be directed to debt service, but unless wage growth exceeds the
purchasing power decline of the dollar…
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…savings are drawn down to meet shortfall, as they have been for nearly 40 years
The promotion of earning a return from your fiat dollars is exposed as a fraud during
periods of negative real interest rates such as those we have experienced over the
last decade, which direct profits owed to savers to banks, who charge people for
saving while the gov’t taxes them on the ‘income’ from saving
Income and purchasing power shortfalls have been supplemented with debt
Unchecked, at some point debt overpowers the ability to service it, and deleveraging
follows
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The Great Moderation and Productivity Miracle were computer-model enabled, debt-fuelled
Mirages:
Purchasing power loss of -4.30% or -6.67% CADR combined with debt assumption of 8.30%
CAGR eventually overpowers 5.09% CAGR wage growth and drains national savings, making
us poorer over time
Loss of purchasing power is the fundamental agent behind disequilibria that develop over time.
This is engineered by the financial sector via unrestrained credit (money) creation for profit and
is administered by the federal gov’t to tighten its grasp on power.
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Debt overhang suggests substantial period of debt reduction
Consumption is a one-time expenditure; Capital investment
pays dividends
How valid is the “Big Bust-Big Recovery” Theory in the current
environment?
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Increasing under- and unemployment makes debt service
increasingly onerous, suggesting a further drawdown of savings and
continued defaults
Implies more stimulus, more corruption and cronyism, and more
bureaucratic intrusion in our lives as the welfare state grows
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FDIC: Q309 lending down record 3%: banks aren’t lending—they’re
hoarding because delinquencies continue to outpace loan loss reserves
The lack of credit hits small businesses, the largest employer in the nation,
especially hard and curtails small business formation
The decline in revolving credit, which both small business and consumers
use for bridge loans, means both are being forced cut back and to save
money
Money saved subtracts as much from GDP as consumption adds
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WHY YOU SHOULD BE CONCERNED
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Over the last three cycles, credit expansion and contraction in the private sector has been a
leading indicator for unemployment; from 1990 onward, the correlation has been 81%.
Empirical evidence demonstrates credit expansion precedes base money supply by roughly 1
year—not vice-versa as commonly believed—and banks aren’t lending
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1966: $1 of debt produced $.93 of GDP Growth
2007: $1 of debt produced $.18 of GDP Growth
Why? Borrowing went to fund consumption, not capital expenditures
Who benefits from originating debt? From 1980 to 2007, the financial
sector’s share of total US corporate profits rose from 10% to 35%
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The Pursuit of Failed Policies
“We are spending more money than we have ever spent before, and it does not work. After
eight years we have just as much unemployment as when we started, and an enormous debt to
boot.”
(US Treasury Secretary Henry Morgenthau, 1939)
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Gov’t stimulus rewards sycophants and lobbies, and encourages corruption, cronyism and consumption,
not job growth in the real economy
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Loans for consumption are one-time contributions to the economy secured by collateral seizure; in contrast,
loans to business are what Robert Prechter terms “self-liquidating” in that such loans generate the cash
flow to repay themselves
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“Money Multiplier”: gov’t spending = at best 1; business capital investment = +/- 3: until gov’t gets out of the
way and gets money into the hands of business, any recovery will be uneven at best
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Gov’t produces little of value and consumes capital that otherwise would go into the economy; businesses,
especially manufacturing, build economies in that they produce real goods to sell at home and abroad and
provide real jobs that help grow and sustain an economy
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The ratio of civilian to gov’t employees is roughly 5:1
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Excluding benefits packages, average gov’t salary = $73k vs average civilian salary = $41k
Using a single, unmarried civilian worker as an example, it requires the tax receipts from roughly 14 civilian workers to
support each gov’t worker
Who is working for whom?
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Policies promoting consumption = encouraging over-extended people to take on more debt
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Despite the trillions given to banks, defaults are still outpacing loan loss requirements, and they are not
lending.
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Boondoggles ‘R’ Us
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Gov’t promoting the equivalent of sub-prime home loans with a default rate sufficient
to bankrupt most commercial banks
FHA loans, First Home Buyers grants, and Cash for Clunkers were all rife with
corruption– and brought tomorrow’s buyers into the market today
The expansion now to Cash for Appliances and new grants for homebuyers amount
to doing more of what is not working, only harder
Is it an example of the ‘other people’s money’ mentality, and bodes ill for the future.
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Protecting your ASSets
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Keep your job, pay down your debts, watch interest rates, commodity prices, pending US legislation and the
mid-term Congressional elections
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Corruption today in politics, business and science is a global pandemic and will come to a head in the next
few years: hope for the best, prepare for the worst
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Buy physical gold, silver and platinum, not ETFs, as the means to ‘save’ in the traditional sense
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Keep cash in short term Treasuries
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A negative real interest rate environment means you cannot NOT speculate, but do it furtively: reduce your
exposure, limit trade duration, and focus on the sectors that might actually lead to a real economic recovery
should American business be given half a chance
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Australian and Canadian resources and respect for contractual law make them good proxies for emerging
market growth, which is real and will continue—albeit at a slower, more sustainable rate than promoted by
Wall Street and the financial media
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The makings of an American Renaissance originating in the Mississippi River Valley and American mid-west
is currently on hold, frozen in the headlights of pending legislation that is clearly antagonistic to America’s
economic interests; best outcome of mid-term elections may be to divide the houses and hamstring Obama
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Get involved: taxpayer de facto commission by omission contributed significantly to the sorry state of affairs
we find ourselves in today—and if we don’t fix it, clearly things will get considerably worse.
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Conclusions
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The US dollar is not going to fail; but the controlled devaluation the Fed is trying to
engineer is unlikely as well because things have gone too far, and there is too much
corruption and malfeasance present in today’s financial markets. An exogenous
event is likely to drive demand for dollars in a fresh wave of panic and undermine
their efforts.
People are starting to understand how a fiat currency is used to defraud them of their
wealth and a backlash is growing.
Deflation is entirely possible despite the Fed’s clear intentions to reflate the markets
because credit (money) creation precedes employment growth—and banks aren’t
lending, they’re hoarding; further, consumers aren’t spending, they are reducing their
debt loads.
Until gov’t gets capital into the hands of businesses that drive the real economy and
provide real employment, little of lasting value can be accomplished.
An alternative to the dollar is at best years away, and in the meantime, when push
comes to shove all of the world’s governments will support the dollar, for its failure
would mean theirs as well.
Physical precious metals and short term treasury instruments constitute the best
ways to preserve your wealth and to save money; furtive trading is the only
reasonably safe investment strategy because the simple truth is that in a negative
real interest rate environment, you cannot NOT speculate.
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