Of the two, the latter we consider more interesting, for the decline of the dollar - against euros, gold, and financial assets generally - undermines Americans' wealth even as they see themselves living in the lap of prosperity. The decline of the dollar could also push forward the day on which the world's big holders of the greenback look at their piles and begin to worry that they have a trillion or two too many. At that point (which we have been attending for so long we often forget what we are waiting for) you should see some real excitement in the world's investment markets.
The most obvious consequences will be a further sell-off of the dollar, sparking an increase in U.S. dollar-yields. This, in turn, would disrupt millions of financial decisions, making lenders more wary and borrowers more prudent.
That there is still ample room for movement - towards wariness on the part of the former, and prudence on the part of the latter - is demonstrated in today's International Herald Tribune. Yes, dear reader, the mainstream press is finally catching on to the imperial trend we spotted years ago - towards widespread, commonly accepted fraud. Today it is 'fraud for housing.'
"Loans that require little or no documentation of income soared $276 billion, or 46 percent, of all subprime mortgages last year, from $30 billion in 2001," says IHT. Now, these 'liars' loans' are defaulting at eight times the rate of regular, fully documented prime mortgages.
According to the paper, many of the buyers didn't even know they were lying about their income; the mortgage brokers lied on their behalf, inflating income figures in order to get the loans through the approval process.
"I saw account executives openly engage in conduct such as altering borrower's W-2 forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents and similar conduct," said a witness.
But the FBI is not on the case. The G-men aren't interested in 'fraud for housing.' They've got bigger fish to fry - people who lie to get multiple mortgages with no intention of paying them back, known as 'fraud for profit.'
And don't expect the local DA or politicians to go after the small fish either. There's nothing in it for them - no glory…no votes…no path to higher office.
Instead, they will move to 'protect' the hapless victims of mortgage fraud - in many cases, the very same people who lied to get loans. Every era produces its own special variety of fraud; and every great, shining fraud is followed by paler imitators. Typically, borrowers get themselves into trouble; and then the politicians thunder about 'debt relief' or a 'moratorium' on foreclosures.
From Grant's Interest Rate Observer, we learn that in the midst of the Great Depression, many debt relief measures were passed. One of them was a clear interference with the right to contract, and was challenged in the U.S. Supreme Court. The Supremes affirmed the state's power to meddle, saying it was justified by the economic emergency. But Justice George Sutherland, who was writing for the dissent (but who might have been writing for the Daily Reckoning), expressed the view shared by all economists who aren't idiots - both of them.
"The present exigency is nothing new. From the beginning of our existence as a nation, periods of depression, of industrial failure, of financial distress, of unpaid and unpayable indebtedness, have alternated with years of plenty. The vital lesson that expenditure beyond income begets poverty, that public or private extravagance, financed by the promises to pay, either must end in complete or partial repudiation, or the promises be fulfilled by self-denial and painful effort, though constantly taught by bitter experience, seems never to be learned: and the attempt by legislative devices to shift the misfortune of the debtor to the shoulders of the creditor without coming into conflict with the contract impairment clause has been persistent and oft-repeated."
But in the contest between the sanctity of contracts and debt relief, the forces are badly mismatched. For every creditor trying to get his money back, there must be thousands of debtors armed with voter registration cards, determined to stop him.
Monday, June 16, 2008
THE LOWER DEPTHS
USA TODAY tells us that another historic event happened last week. For the first time in more than a quarter of a century, Americans are cutting back on their driving.
We don't know the cause of this big trend reversal. The pundits are blaming high gas prices. Apparently, prices at the pumps are also hitting records - up to $3.18 per gallon on average.
If drivers really are cutting back because of the price of gasoline, it suggests that the consumer is weakening. A poll of consumer confidence says that the poor consumer's spirits have fallen to an 8-month low. And the housing problem seems in no hurry to go away. "Gloom settles over housing market," announces a weekend headline.
It appears that the world is in the grip of two major and contradictory trends. At the top, money has never been easier to get…nor have rich people ever been more eager to get rid of it. Money changes hands so fast…and in such volume…the markets and bankers are having trouble keeping up with it. Institutional investors have so much money they don't know what to do with it.
Meanwhile, down in the Lower Depths…the poor lumpen can't even afford to drive to the store to rent a movie. They're not earning any more money…while their costs continue to rise. Every year, we get a notice that a college has raised its tuition. Our insurance and health care costs seem to go up annually. Every time we fill up our tank…or eat in a restaurant…we get a nasty shock. True, the cost of fuel and food is higher in Europe than in America, but the trends go in the same direction. Thanks to our Dear Readers we have enough income to keep up with these expenses; but we wonder how most people are able to do it. Maybe this latest news on U.S. driving habits tells us something…that they can't.
We don't know the cause of this big trend reversal. The pundits are blaming high gas prices. Apparently, prices at the pumps are also hitting records - up to $3.18 per gallon on average.
If drivers really are cutting back because of the price of gasoline, it suggests that the consumer is weakening. A poll of consumer confidence says that the poor consumer's spirits have fallen to an 8-month low. And the housing problem seems in no hurry to go away. "Gloom settles over housing market," announces a weekend headline.
It appears that the world is in the grip of two major and contradictory trends. At the top, money has never been easier to get…nor have rich people ever been more eager to get rid of it. Money changes hands so fast…and in such volume…the markets and bankers are having trouble keeping up with it. Institutional investors have so much money they don't know what to do with it.
Meanwhile, down in the Lower Depths…the poor lumpen can't even afford to drive to the store to rent a movie. They're not earning any more money…while their costs continue to rise. Every year, we get a notice that a college has raised its tuition. Our insurance and health care costs seem to go up annually. Every time we fill up our tank…or eat in a restaurant…we get a nasty shock. True, the cost of fuel and food is higher in Europe than in America, but the trends go in the same direction. Thanks to our Dear Readers we have enough income to keep up with these expenses; but we wonder how most people are able to do it. Maybe this latest news on U.S. driving habits tells us something…that they can't.
THE MILLION-EYED MARKET
Vanity is probably responsible for more crack-ups than any other character flaw.
The Greek tragedies almost always follow the same plot. Driven by some sort of vanity, a man challenges the gods. He is then humbled…usually in a gruesome or terrifying way. Prometheus, who stole fire from the gods to give it to human beings, was chained to Mount Olympus where eagles set to work plucking out his entrails. If that wasn't bad enough, the poor man miraculously recovered every night…so the birds could come back and do it again, over and over, for all eternity.
The mess in Iraq is also largely a result of vanity. The neocons had a plan for the world. No need to ask the world about it, though - they knew better.
Besides, no matter what the foreigners said, the neocons knew that deep down, they all longed to be just like Americans. All the United States had to do was to storm into Baghdad; the kids would line up to get candy…adults would line up to vote and get credit cards.
And now the U.S. army is chained down in Iraq…where terrorists and military contractors devour its innards.
Vanity gets investors into trouble too.
"There is record brokerage margin money out. There is record insider selling in the U.S. since 2000. There is record corporate buyout activity and mergers. Half of all corporate buyouts are for companies that are not profitable! Did you know that?" asks one commentator.
For confirmation, we turn to today's International Herald Tribune, where we get more details on the sale of Blackstone shares to the public. The article notes that the private equity firm's founders, Stephen Schwarzman and Peter Peterson, will walk away with $2.3 billion of the $4.7 billion IPO. Peterson is retiring. He earned $213 million last year. So, the $1.88 billion he will get from selling his stake in Blackstone will help supplement his Social Security payments. Even at $213 million in last year's pay envelope, he must have felt a little light in the wallet. The average pay of 25 top hedge fund managers was more than twice that much last year - $570 million.
But now Schwarzman and Peterson have hit pay dirt…along with the rest of the Blackstone team. The insiders are being taken out by the outsiders.
Let us pause a second to draw breath. We turn our heads upwards to marvel at the monumental vanity…the outrageous arrogance…of these poor outsiders…the retail investors who are buying Blackstone's shares.
You will recall, dear reader, that every investor needs a certain amount of arrogance. Mr. Market sets a price - taking into account all that is known about an asset. No one knows the future, of course, but Mr. Market has a million eyes…and he sees all that can be seen. He factors the future, as he sees it, as well as the past, into his price.
Then, along comes an investor from Salem or Seattle or Sun City who says to himself: "I think Mr. Market has miscalculated. This share is more valuable than he thinks. It's going up."
What audacity! What chutzpah! What arrogance! The investor is making a remarkable wager - that he can outsmart all the rest of the investing public all put together.
But now think about the poor lames who are buying Blackstone shares. Think of the Chinese government. When it comes to capitalism, these guys were born yesterday; they are still pink and soft. Out on the streets of Shanghai, Moms and Pops fresh off the farm line up to open brokerage accounts. And in the boardrooms of the Peoples' Bank of China, the baby hacks - still wet behind the ears - who guard the people's money have decided to buy Blackstone shares!
Of course, China is a special case. The billions the Chinese spend on Blackstone is chicken feed to them. They've got a trillion more where that came from. They can write it off as cheap tuition - part of the cost of learning how the market system works.
But other investors are merely playing make-believe in Disney World. Money from the IPO will not be used to expand the firm and make it more profitable. Instead, it will go directly into the pockets of the people who know it best. In fact, today's report tells us that the company is likely to show a loss for several years - because of the cost of the IPO itself. So, the investors who pick up Blackstone shares are betting not only that they can outsmart the entire market, but that they can outsmart Mr. Market's smartest lieutenants. Schwarzman and Peterson started the firm with $400,000. Twenty years and nearly 200 deals later, it is worth $32 billion. How can an ordinary retail investor hope to put one over on this dynamic duo?
Well…good luck to him.
The real problem is that most investors completely misunderstand what business Wall Street and the City here in London are in. A baker trades his bread for money; but what does a Wall Street financier trade? His expertise is at making money. If he sells you a share of a stock, he must believe that he can make more money selling it to you than holding onto it. His offer to sell must be weighed against the gravity of his professional ability. The heavier his expertise, the more the offer is suspect. In other words, the more able your financial advisor, the more cautious you should be when taking his advice.
Wall Street is fundamentally in the business of selling things it doesn't want to hold. Blackstone founders held onto their shares for many years, as the company rose to astounding heights. Now, they are selling. Draw your own conclusion, dear reader.
Our conclusion is that the financial industry makes money for itself by unloading investments to the retail public, after they've been stripped down as close to the bone as you'll see outside a video containing a certain "hotel heiress".
The assets are squeezed, picked over, packaged, marked up, advertised, promoted, and then unloaded at retail prices. Often, the best parts are held off the market for themselves, until the insiders choose a time, place and method of dumping them on the public for the maximum profit.
In other words, the financial industry doesn't create wealth; it redistributes it - from investors to itself. And now, in the midst of this Great Worldwide Bubble, business has never been better.
The Greek tragedies almost always follow the same plot. Driven by some sort of vanity, a man challenges the gods. He is then humbled…usually in a gruesome or terrifying way. Prometheus, who stole fire from the gods to give it to human beings, was chained to Mount Olympus where eagles set to work plucking out his entrails. If that wasn't bad enough, the poor man miraculously recovered every night…so the birds could come back and do it again, over and over, for all eternity.
The mess in Iraq is also largely a result of vanity. The neocons had a plan for the world. No need to ask the world about it, though - they knew better.
Besides, no matter what the foreigners said, the neocons knew that deep down, they all longed to be just like Americans. All the United States had to do was to storm into Baghdad; the kids would line up to get candy…adults would line up to vote and get credit cards.
And now the U.S. army is chained down in Iraq…where terrorists and military contractors devour its innards.
Vanity gets investors into trouble too.
"There is record brokerage margin money out. There is record insider selling in the U.S. since 2000. There is record corporate buyout activity and mergers. Half of all corporate buyouts are for companies that are not profitable! Did you know that?" asks one commentator.
For confirmation, we turn to today's International Herald Tribune, where we get more details on the sale of Blackstone shares to the public. The article notes that the private equity firm's founders, Stephen Schwarzman and Peter Peterson, will walk away with $2.3 billion of the $4.7 billion IPO. Peterson is retiring. He earned $213 million last year. So, the $1.88 billion he will get from selling his stake in Blackstone will help supplement his Social Security payments. Even at $213 million in last year's pay envelope, he must have felt a little light in the wallet. The average pay of 25 top hedge fund managers was more than twice that much last year - $570 million.
But now Schwarzman and Peterson have hit pay dirt…along with the rest of the Blackstone team. The insiders are being taken out by the outsiders.
Let us pause a second to draw breath. We turn our heads upwards to marvel at the monumental vanity…the outrageous arrogance…of these poor outsiders…the retail investors who are buying Blackstone's shares.
You will recall, dear reader, that every investor needs a certain amount of arrogance. Mr. Market sets a price - taking into account all that is known about an asset. No one knows the future, of course, but Mr. Market has a million eyes…and he sees all that can be seen. He factors the future, as he sees it, as well as the past, into his price.
Then, along comes an investor from Salem or Seattle or Sun City who says to himself: "I think Mr. Market has miscalculated. This share is more valuable than he thinks. It's going up."
What audacity! What chutzpah! What arrogance! The investor is making a remarkable wager - that he can outsmart all the rest of the investing public all put together.
But now think about the poor lames who are buying Blackstone shares. Think of the Chinese government. When it comes to capitalism, these guys were born yesterday; they are still pink and soft. Out on the streets of Shanghai, Moms and Pops fresh off the farm line up to open brokerage accounts. And in the boardrooms of the Peoples' Bank of China, the baby hacks - still wet behind the ears - who guard the people's money have decided to buy Blackstone shares!
Of course, China is a special case. The billions the Chinese spend on Blackstone is chicken feed to them. They've got a trillion more where that came from. They can write it off as cheap tuition - part of the cost of learning how the market system works.
But other investors are merely playing make-believe in Disney World. Money from the IPO will not be used to expand the firm and make it more profitable. Instead, it will go directly into the pockets of the people who know it best. In fact, today's report tells us that the company is likely to show a loss for several years - because of the cost of the IPO itself. So, the investors who pick up Blackstone shares are betting not only that they can outsmart the entire market, but that they can outsmart Mr. Market's smartest lieutenants. Schwarzman and Peterson started the firm with $400,000. Twenty years and nearly 200 deals later, it is worth $32 billion. How can an ordinary retail investor hope to put one over on this dynamic duo?
Well…good luck to him.
The real problem is that most investors completely misunderstand what business Wall Street and the City here in London are in. A baker trades his bread for money; but what does a Wall Street financier trade? His expertise is at making money. If he sells you a share of a stock, he must believe that he can make more money selling it to you than holding onto it. His offer to sell must be weighed against the gravity of his professional ability. The heavier his expertise, the more the offer is suspect. In other words, the more able your financial advisor, the more cautious you should be when taking his advice.
Wall Street is fundamentally in the business of selling things it doesn't want to hold. Blackstone founders held onto their shares for many years, as the company rose to astounding heights. Now, they are selling. Draw your own conclusion, dear reader.
Our conclusion is that the financial industry makes money for itself by unloading investments to the retail public, after they've been stripped down as close to the bone as you'll see outside a video containing a certain "hotel heiress".
The assets are squeezed, picked over, packaged, marked up, advertised, promoted, and then unloaded at retail prices. Often, the best parts are held off the market for themselves, until the insiders choose a time, place and method of dumping them on the public for the maximum profit.
In other words, the financial industry doesn't create wealth; it redistributes it - from investors to itself. And now, in the midst of this Great Worldwide Bubble, business has never been better.
MARKET MADE SHOCK WAVE
Look up, dear reader. There, over The Daily Reckoning headquarters in London - in the building with the golden balls on the roof - is our Crash Alert flag…flying proudly.
Why bother? The stock market looks healthy. The problem in the housing market is "contained" in the subprime sector. And M3 is growing at 13% per annum - the fastest rate in 30 years. With all that new money coming into the system, how can prices do anything other than float higher?
But the risk of loss is always at its highest on the precise moment that most people judge it of least concern. Most likely, there will be no crash tomorrow…nor the day after. But there are some things you are better off preparing for, even though they may not happen for a while.
When money and credit are free and easy, people become free and easy with them. They begin spending more than they should…and investing recklessly. Eventually, there is a shock…a tipping point…a moment of desperate reality, in which people feel the ground give way beneath their feet. They look down and panic.
What kind of a shock? It could be almost anything. Sometimes it is a war…sometimes a bankruptcy…sometimes a market shock - such as a sudden increase in the price of oil…or the collapse of a stock market. Then investors, as if they shared a single mind, begin to worry not about the return ON their money; they are concerned about the return OF their money.
What could cause a shock today? Any number of things.
1) The Chinese stock market is getting hit hard. Its CSI 300 Index is down 17% in the last three weeks. Brokerage account openings have dropped by two-thirds. Could global hot money…and local cold cash…turn bearish on Chinese shares? Could Chinese officials say something particularly stupid? Could the market fall another 20%…50%? Could this trigger a worldwide equity sell-off? Yes to all those questions.
2) The dollar is in trouble. On Wednesday, it hit its lowest level against the pound (GBP) in 26-years. It is now near its lowest level ever against the euro (EUR). Trillions worth of dollars now sit in foreign vaults - while reserve managers openly talk of diversifying away from greenbacks. Foreigners don't have to abandon the dollar en masse to knock it down…all they have to do is to let up on their purchases of dollar-denominated assets - such as U.S. Treasuries. Could it happen? Could the shock cause a crash in major financial markets? Why…yes…again.
3) All paper currencies are dangerous. The dollar is not the only paper currency in the world whose supply is growing rapidly. Practically every central bank is printing up its own money in vast quantities - trying to keep up with the U.S. brand. This is why the world has so much "liquidity." It's why so many assets are rising in price so steeply. But could investors suddenly become fearful of so much monetary inflation? Could consumer prices shoot up…as asset prices already have? Could the world's people want to get rid of their paper currencies in favor of other stores of value - notably gold, as The Wall Street Journal warns in an article entitled "Money Meltdown"? And could this lead to a worldwide crash? Yes…yes…yes.
4) A Milan-based bank, Italease, has just seen its derivative portfolio blow up. So has Bear Stearns (NYSE:BSC). Large lenders are getting skittish of complex debt instruments…just as more deals than ever before come to market. So far this year $1 trillion in deals have been done in the North America - a rate of deal-making nearly 50% higher than the year before. What happens if the wheeler-dealers don't find the credit they're looking for? What would investors think if even one of these mega-deals blew up badly?
Reports Bloomberg: "The world's biggest bondholders have had their fill of leveraged buyouts…
"TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world's largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they're avoiding debt from buyouts.
"You cannot do fundamental analysis and believe that those are creditworthy companies," says an analyst.
"More securities than ever have the lowest rankings, with CCC ratings assigned to 26.5 percent of the new debt, according to New York-based Fitch Ratings. That compares with 15 percent in 2006 for debt that Fitch says has a 'high default risk.'
"Traders demand 3 percentage points in extra interest to own U.S. junk bonds rather than government debt, compared with a record low of 2.41 percentage points on June 5, Merrill Lynch & Co. index data show. That's the fastest increase in spreads since April 2005, just before General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings."
Meanwhile, the Bank of England raised its key interest rate on Thursday by twenty-five basis points to 5.75 percent - another six-year high. This is the fifth time this year. The ECB's Trichet held steady this month but hints that rates will go up in the future. Elsewhere, banks are likely to hike rates too. And watch out if the Chinese decide to do some serious tightening.
Could there be even bigger blow ups waiting to happen? And could they cause a stampede for the exits? Anthony Bolton, Britain's most successful fund manager, worries about it. So does the Bank of International Settlements. And so do central bankers in Madrid, London and who knows where else. And if the pros stop lending so freely, mightn't it trigger a credit crunch…and a crash? Why, yes…now that you mention it.
5) The great millstone of housing debt continues to grind America's middle and lower classes.
The LA TIMES: "Slow job growth and declining home prices are causing financial problems for more Americans, who are falling behind on consumer debt, including home equity loans, at the highest rate since 2001, the American Bankers Assn. said Tuesday.
"Credit counselors said consumers were paying the price for reckless attitudes about debt fostered by years of easy credit, particularly in the mortgage market.
"'It's a monster we all created,' said Todd Emerson, president of Springboard, a nonprofit consumer credit management organization in Riverside."
Let's see, Chinese companies depend on consumer buying from America…which depends on U.S. consumer spending…which depends on consumer credit…which depends on mortgage lending…which depends on a secondary market in mortgage backed securities…which depends on rising housing prices! But housing prices aren't rising; they're falling.
Could housing prices go lower? Could lower housing prices cause consumers to stop spending so much? It seems so. The sale of light motor vehicles in the United States dropped 3.4% month-to-month in June to a seasonally adjusted rate of 15.6 million units, according to Northern Trust's Paul Kasriel. A number of retailers have lowered sales guidance as buyers tighten their belts.
Could an attack of consumer thrift one day swarm over financial markets like Japanese bombers over Pearl Harbor? Your guess is as good as ours, dear reader.
Will there be a crash on Wall Street today? Will the Chinese economic bubble find its pin? Probably not quite yet. But we will keep our eyes open anyway…and keep our ear to the ground for you, dear reader.
So the great debate continues… shall we carry on as we have been, waving our Crash Alert flag…or are we 'full of malarkey'?
Why bother? The stock market looks healthy. The problem in the housing market is "contained" in the subprime sector. And M3 is growing at 13% per annum - the fastest rate in 30 years. With all that new money coming into the system, how can prices do anything other than float higher?
But the risk of loss is always at its highest on the precise moment that most people judge it of least concern. Most likely, there will be no crash tomorrow…nor the day after. But there are some things you are better off preparing for, even though they may not happen for a while.
When money and credit are free and easy, people become free and easy with them. They begin spending more than they should…and investing recklessly. Eventually, there is a shock…a tipping point…a moment of desperate reality, in which people feel the ground give way beneath their feet. They look down and panic.
What kind of a shock? It could be almost anything. Sometimes it is a war…sometimes a bankruptcy…sometimes a market shock - such as a sudden increase in the price of oil…or the collapse of a stock market. Then investors, as if they shared a single mind, begin to worry not about the return ON their money; they are concerned about the return OF their money.
What could cause a shock today? Any number of things.
1) The Chinese stock market is getting hit hard. Its CSI 300 Index is down 17% in the last three weeks. Brokerage account openings have dropped by two-thirds. Could global hot money…and local cold cash…turn bearish on Chinese shares? Could Chinese officials say something particularly stupid? Could the market fall another 20%…50%? Could this trigger a worldwide equity sell-off? Yes to all those questions.
2) The dollar is in trouble. On Wednesday, it hit its lowest level against the pound (GBP) in 26-years. It is now near its lowest level ever against the euro (EUR). Trillions worth of dollars now sit in foreign vaults - while reserve managers openly talk of diversifying away from greenbacks. Foreigners don't have to abandon the dollar en masse to knock it down…all they have to do is to let up on their purchases of dollar-denominated assets - such as U.S. Treasuries. Could it happen? Could the shock cause a crash in major financial markets? Why…yes…again.
3) All paper currencies are dangerous. The dollar is not the only paper currency in the world whose supply is growing rapidly. Practically every central bank is printing up its own money in vast quantities - trying to keep up with the U.S. brand. This is why the world has so much "liquidity." It's why so many assets are rising in price so steeply. But could investors suddenly become fearful of so much monetary inflation? Could consumer prices shoot up…as asset prices already have? Could the world's people want to get rid of their paper currencies in favor of other stores of value - notably gold, as The Wall Street Journal warns in an article entitled "Money Meltdown"? And could this lead to a worldwide crash? Yes…yes…yes.
4) A Milan-based bank, Italease, has just seen its derivative portfolio blow up. So has Bear Stearns (NYSE:BSC). Large lenders are getting skittish of complex debt instruments…just as more deals than ever before come to market. So far this year $1 trillion in deals have been done in the North America - a rate of deal-making nearly 50% higher than the year before. What happens if the wheeler-dealers don't find the credit they're looking for? What would investors think if even one of these mega-deals blew up badly?
Reports Bloomberg: "The world's biggest bondholders have had their fill of leveraged buyouts…
"TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world's largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they're avoiding debt from buyouts.
"You cannot do fundamental analysis and believe that those are creditworthy companies," says an analyst.
"More securities than ever have the lowest rankings, with CCC ratings assigned to 26.5 percent of the new debt, according to New York-based Fitch Ratings. That compares with 15 percent in 2006 for debt that Fitch says has a 'high default risk.'
"Traders demand 3 percentage points in extra interest to own U.S. junk bonds rather than government debt, compared with a record low of 2.41 percentage points on June 5, Merrill Lynch & Co. index data show. That's the fastest increase in spreads since April 2005, just before General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings."
Meanwhile, the Bank of England raised its key interest rate on Thursday by twenty-five basis points to 5.75 percent - another six-year high. This is the fifth time this year. The ECB's Trichet held steady this month but hints that rates will go up in the future. Elsewhere, banks are likely to hike rates too. And watch out if the Chinese decide to do some serious tightening.
Could there be even bigger blow ups waiting to happen? And could they cause a stampede for the exits? Anthony Bolton, Britain's most successful fund manager, worries about it. So does the Bank of International Settlements. And so do central bankers in Madrid, London and who knows where else. And if the pros stop lending so freely, mightn't it trigger a credit crunch…and a crash? Why, yes…now that you mention it.
5) The great millstone of housing debt continues to grind America's middle and lower classes.
The LA TIMES: "Slow job growth and declining home prices are causing financial problems for more Americans, who are falling behind on consumer debt, including home equity loans, at the highest rate since 2001, the American Bankers Assn. said Tuesday.
"Credit counselors said consumers were paying the price for reckless attitudes about debt fostered by years of easy credit, particularly in the mortgage market.
"'It's a monster we all created,' said Todd Emerson, president of Springboard, a nonprofit consumer credit management organization in Riverside."
Let's see, Chinese companies depend on consumer buying from America…which depends on U.S. consumer spending…which depends on consumer credit…which depends on mortgage lending…which depends on a secondary market in mortgage backed securities…which depends on rising housing prices! But housing prices aren't rising; they're falling.
Could housing prices go lower? Could lower housing prices cause consumers to stop spending so much? It seems so. The sale of light motor vehicles in the United States dropped 3.4% month-to-month in June to a seasonally adjusted rate of 15.6 million units, according to Northern Trust's Paul Kasriel. A number of retailers have lowered sales guidance as buyers tighten their belts.
Could an attack of consumer thrift one day swarm over financial markets like Japanese bombers over Pearl Harbor? Your guess is as good as ours, dear reader.
Will there be a crash on Wall Street today? Will the Chinese economic bubble find its pin? Probably not quite yet. But we will keep our eyes open anyway…and keep our ear to the ground for you, dear reader.
So the great debate continues… shall we carry on as we have been, waving our Crash Alert flag…or are we 'full of malarkey'?
MORTGAGE BACKED TEMPTATION
Is there anyone in Britain or America who still lives within his means? Does anyone know where their means are?
Only occasionally do they even bother to find out - like a middle aged man hunting around in closets for an old tuxedo. Then, when he puts on the pants, he realizes he has outgrown them…he spills over the top and nearly splits the seat.
Of course, you can't blame people for not living within their means - the whole idea is as quaint as thrift…as antique as spats. New credit card offers come everyday. And when you can buy a house for no-money-down on a teaser-rate ARM…you can afford much more house than you thought you could - as least for a while.
Most of the time, most people get by - just as most of the time, most people don't get themselves into serious trouble with the law. They know what they can get away with and what they can't. But occasionally, the old standards and guideposts get knocked down. Then, they run into trouble.
What gets them into trouble is the subject of today's reckoning.
Junk bonds, margin buying, program trading, portfolio insurance - each one eventually leads to trouble. People get excited about it…they think it is the answer to their prayers…they think it is going to make them rich. They do it. And then they over-do it.
The same is true for the innovation of easy mortgage credit. Now you can get a mortgage, apparently, over the Internet. Lender and borrower never meet. And then, of course, Wall Street created a whole industry - another new innovation - to take these mortgages and turn them into new and titillating products. Now, both the mortgages…and the securities derived from them are landing themselves in trouble.
Everyone knows that a man who wins the lottery is a threat to himself, his family and everyone around him. He runs wild, simply because he can get away with it. And yet everyone still hopes to win the lottery. That is why Christianity regards temptation as such a threat that we don't even bother asking God's help to resist it; we know that's impossible. Instead, we pray to "lead us not into temptation."
Here at The Daily Reckoning, we've had our fair share of temptation and enjoyed every minute of it. But what we've noticed is that temptation delayed is temptation denied. Things we would have found irresistible at 25 have only a passing attraction at 50. Fortunately, most people are spared too much temptation - at least, until they are old enough to resist it. Then, it isn't so tempting anymore.
But to a huge number of people in the last 10 years…the innovation of easy credit - especially easy mortgage credit was like catnip. Not only could they not resist it, they reveled in it. They rolled around in it. They salivated over it.
And now they are praying for help to…well…not to God, but to as near an imitation of Him as we have these days - the government.
According to a Bloomberg analysis of data from the National Conference of State Legislatures, legislators in some 30 states have introduced about 85 bills to protect mortgage borrowers from deceptive lending practices, foreclosure, or fraud. Now, from Illinois to Maine, lenders will be banned from tempting borrowers with enticing loans.
Yes…a ban on temptation. We are glad we are not young now.
Imagine if there were a ban on…but, there - we'll leave the rest to use your imagination, dear reader.
Although the government is stepping in now - the damage in the housing market has been done. And really - no smart investor is going to count on the government to protect their portfolio…that's something that we suggest you do yourself. Find out how you can protect your assets - and make some extra cash while you are at it - from the second wave of housing hurt, here:
Only occasionally do they even bother to find out - like a middle aged man hunting around in closets for an old tuxedo. Then, when he puts on the pants, he realizes he has outgrown them…he spills over the top and nearly splits the seat.
Of course, you can't blame people for not living within their means - the whole idea is as quaint as thrift…as antique as spats. New credit card offers come everyday. And when you can buy a house for no-money-down on a teaser-rate ARM…you can afford much more house than you thought you could - as least for a while.
Most of the time, most people get by - just as most of the time, most people don't get themselves into serious trouble with the law. They know what they can get away with and what they can't. But occasionally, the old standards and guideposts get knocked down. Then, they run into trouble.
What gets them into trouble is the subject of today's reckoning.
Junk bonds, margin buying, program trading, portfolio insurance - each one eventually leads to trouble. People get excited about it…they think it is the answer to their prayers…they think it is going to make them rich. They do it. And then they over-do it.
The same is true for the innovation of easy mortgage credit. Now you can get a mortgage, apparently, over the Internet. Lender and borrower never meet. And then, of course, Wall Street created a whole industry - another new innovation - to take these mortgages and turn them into new and titillating products. Now, both the mortgages…and the securities derived from them are landing themselves in trouble.
Everyone knows that a man who wins the lottery is a threat to himself, his family and everyone around him. He runs wild, simply because he can get away with it. And yet everyone still hopes to win the lottery. That is why Christianity regards temptation as such a threat that we don't even bother asking God's help to resist it; we know that's impossible. Instead, we pray to "lead us not into temptation."
Here at The Daily Reckoning, we've had our fair share of temptation and enjoyed every minute of it. But what we've noticed is that temptation delayed is temptation denied. Things we would have found irresistible at 25 have only a passing attraction at 50. Fortunately, most people are spared too much temptation - at least, until they are old enough to resist it. Then, it isn't so tempting anymore.
But to a huge number of people in the last 10 years…the innovation of easy credit - especially easy mortgage credit was like catnip. Not only could they not resist it, they reveled in it. They rolled around in it. They salivated over it.
And now they are praying for help to…well…not to God, but to as near an imitation of Him as we have these days - the government.
According to a Bloomberg analysis of data from the National Conference of State Legislatures, legislators in some 30 states have introduced about 85 bills to protect mortgage borrowers from deceptive lending practices, foreclosure, or fraud. Now, from Illinois to Maine, lenders will be banned from tempting borrowers with enticing loans.
Yes…a ban on temptation. We are glad we are not young now.
Imagine if there were a ban on…but, there - we'll leave the rest to use your imagination, dear reader.
Although the government is stepping in now - the damage in the housing market has been done. And really - no smart investor is going to count on the government to protect their portfolio…that's something that we suggest you do yourself. Find out how you can protect your assets - and make some extra cash while you are at it - from the second wave of housing hurt, here:
REQUIEM FOR AN ECONOMIST
Kurt Richebächer died two weeks ago at his home in Cannes, France, at 88 years old. R.I.P.
One of our greatest complaints is the way the modern world pays homage to its dead. When a good man finally has the mud tossed on his face, he is almost instantly forgotten; so little notice is taken, it hardly seems worth dying. Meanwhile, those who are widely mourned and greatly regretted usually don’t deserve it. When Paris Hilton dies, for example, America will probably declare three days of national mourning and hang black crepe on the capitol.
Kurt Richebächer met his end with hardly an “ave” from anyone but friends and family. We pause to remember him here for both sentimental reasons and practical ones. On the sentimental side, we remember him as an old friend and fellow idealist. On the practical side he, and practically he alone, understood the worldwide economic boom for what it really is – a sham.
Kurt Richebächer was born at the wrong time, in the wrong place. He came into this life in the middle of WWI, on the losing side. He was a young man when another losing war got underway. He was one of the generation who were plucked up by the Wehrmacht in ‘39…and lucky to still be alive by ‘45. Kurt was lucky, in a way. He suffered a disabling accident while still in training. He spent the entire war in various military hospitals, unable to walk; the rest of his life he walked only with a cane. Doctors didn’t know exactly what was wrong with him; at one point German military officials threatened to prosecute him for malingering. Had Kurt’s father, a Nazi party member, not intervened, he might have been shot. Instead, in his hospital bed, he began to read economics.
The classical economics texts Kurt read made sense to him. They described not merely the world as it was, but the world as it ought to be. They emphasized discipline, hard work, and capital formation as the essential elements of wealth creation. And they warned against excess credit and inflation as if they were loose women and demon rum; both were sure to lead to ruin.
The war over, Germany threw off the bad advice of its American overseers. The deutschemark was made a rock-hard currency. Germans clove to the old economics. The country prospered. And Kurt Richebächer rose to be chief economist for Dresdner Bank.
But then, in the 1970s, classical economics – known as the Austrian School today – was going out of style, even in Germany. Economists – those in the United States and Britain – found they could upgrade their trade. Instead of merely reminding people of the old, un-yielding truths they began offering new tricks and innovations. They promised not merely to explain how the world works, but to make it work better…by taking the devil out of it and making it a more agreeable place. Using their new tools, econometrics and statistical analysis, they believed they could manage an economy, so as to achieve full employment and steady growth forever.
Kurt saw the new trends in his profession as dangerous; he regarded their proponents as quacks.
”You anglo-saxons…” he said to us once… “you just have no concept of financial discipline. Just look what you are doing – at every level. In Europe, we have high levels of state debt, but at the individual and business level, our balance sheets are pretty strong. But in almost every English-speaking country, people borrow for everything.
“All this emphasis on statistics and calculations…,” he went on, rapping his silver-handled cane on the table for emphasis, “without a proper theory, it is all nonsense. And your economists seem to have no theory at all…they just think they can manipulate the system in order to get whatever outcome they want. They think economic growth comes from consumer spending and that they can control consumer spending by adjusting lending rates. It is unbelievable that anyone takes this seriously. It is capital formation that really matters. A rich society is one with a great stock of capital…one that builds capital and puts it to work to create more capital. A rich society is not one where people consume. Just the opposite. It is not what is consumed that creates wealth; it is what is NOT consumed. Yet, all the Anglo-Saxons focus on motivating consumers to consume. And now they are consuming more than they make. I tell you, in 70 years of studying economics, I have never seen such nonsense.
“I have always thought it was the duty of each generation to leave the next one a little better off. That means, each generation has to consume less than it produces. It has to leave a little something extra. The problem, you see, is not an economic one…what we are doing to our children with this use of credit and debt is deeply immoral. It is wrong. It is wrong to burden the future with our mistakes, our conceits, our ambitions. This is what we are doing, and it is shameful.”
Kurt warned against the bubble in tech stocks in the late ’90s. Then, he warned against the great bubble in housing. In September 2001, he wrote: “The new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fueled the stock market bubble.”
In one of his final letters, he concluded, “The recklessness of both borrowers and lenders has vastly exceeded our imagination.”
He went on to predict “that the housing bubble – together with the bond and stock bubbles – will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.”
Paul Volker once remarked that the challenge of modern central bankers “is to prove Kurt Richebächer wrong.” Instead, they are proving him right.
One of our greatest complaints is the way the modern world pays homage to its dead. When a good man finally has the mud tossed on his face, he is almost instantly forgotten; so little notice is taken, it hardly seems worth dying. Meanwhile, those who are widely mourned and greatly regretted usually don’t deserve it. When Paris Hilton dies, for example, America will probably declare three days of national mourning and hang black crepe on the capitol.
Kurt Richebächer met his end with hardly an “ave” from anyone but friends and family. We pause to remember him here for both sentimental reasons and practical ones. On the sentimental side, we remember him as an old friend and fellow idealist. On the practical side he, and practically he alone, understood the worldwide economic boom for what it really is – a sham.
Kurt Richebächer was born at the wrong time, in the wrong place. He came into this life in the middle of WWI, on the losing side. He was a young man when another losing war got underway. He was one of the generation who were plucked up by the Wehrmacht in ‘39…and lucky to still be alive by ‘45. Kurt was lucky, in a way. He suffered a disabling accident while still in training. He spent the entire war in various military hospitals, unable to walk; the rest of his life he walked only with a cane. Doctors didn’t know exactly what was wrong with him; at one point German military officials threatened to prosecute him for malingering. Had Kurt’s father, a Nazi party member, not intervened, he might have been shot. Instead, in his hospital bed, he began to read economics.
The classical economics texts Kurt read made sense to him. They described not merely the world as it was, but the world as it ought to be. They emphasized discipline, hard work, and capital formation as the essential elements of wealth creation. And they warned against excess credit and inflation as if they were loose women and demon rum; both were sure to lead to ruin.
The war over, Germany threw off the bad advice of its American overseers. The deutschemark was made a rock-hard currency. Germans clove to the old economics. The country prospered. And Kurt Richebächer rose to be chief economist for Dresdner Bank.
But then, in the 1970s, classical economics – known as the Austrian School today – was going out of style, even in Germany. Economists – those in the United States and Britain – found they could upgrade their trade. Instead of merely reminding people of the old, un-yielding truths they began offering new tricks and innovations. They promised not merely to explain how the world works, but to make it work better…by taking the devil out of it and making it a more agreeable place. Using their new tools, econometrics and statistical analysis, they believed they could manage an economy, so as to achieve full employment and steady growth forever.
Kurt saw the new trends in his profession as dangerous; he regarded their proponents as quacks.
”You anglo-saxons…” he said to us once… “you just have no concept of financial discipline. Just look what you are doing – at every level. In Europe, we have high levels of state debt, but at the individual and business level, our balance sheets are pretty strong. But in almost every English-speaking country, people borrow for everything.
“All this emphasis on statistics and calculations…,” he went on, rapping his silver-handled cane on the table for emphasis, “without a proper theory, it is all nonsense. And your economists seem to have no theory at all…they just think they can manipulate the system in order to get whatever outcome they want. They think economic growth comes from consumer spending and that they can control consumer spending by adjusting lending rates. It is unbelievable that anyone takes this seriously. It is capital formation that really matters. A rich society is one with a great stock of capital…one that builds capital and puts it to work to create more capital. A rich society is not one where people consume. Just the opposite. It is not what is consumed that creates wealth; it is what is NOT consumed. Yet, all the Anglo-Saxons focus on motivating consumers to consume. And now they are consuming more than they make. I tell you, in 70 years of studying economics, I have never seen such nonsense.
“I have always thought it was the duty of each generation to leave the next one a little better off. That means, each generation has to consume less than it produces. It has to leave a little something extra. The problem, you see, is not an economic one…what we are doing to our children with this use of credit and debt is deeply immoral. It is wrong. It is wrong to burden the future with our mistakes, our conceits, our ambitions. This is what we are doing, and it is shameful.”
Kurt warned against the bubble in tech stocks in the late ’90s. Then, he warned against the great bubble in housing. In September 2001, he wrote: “The new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fueled the stock market bubble.”
In one of his final letters, he concluded, “The recklessness of both borrowers and lenders has vastly exceeded our imagination.”
He went on to predict “that the housing bubble – together with the bond and stock bubbles – will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.”
Paul Volker once remarked that the challenge of modern central bankers “is to prove Kurt Richebächer wrong.” Instead, they are proving him right.
Saturday, June 14, 2008
Honest Money: Gold & Silver Coin
Top to Bottom
The United States used to be the largest creditor nation. Now we are the largest debtor nation. One bread winner used to earn enough to support the entire family. This is no longer the case for most American households. It now takes two. Why?
The savings of the American people is at all time lows, less than one half of one percent. Debt levels are at historic highs. Our government is running deficits of unprecedented proportions. What has happened in the past few decades to cause such drastic changes in our standard of living and way of life?
Something is going on, and whatever it is, it isn’t good. The goal of this work is to ferret out what is wrong with our monetary system, and to offer a possible solution before it is too late. Not so much for ourselves, as for our children, and their children to come. Time is of the essence.
Appearances
Money is not easily understood, at least not in the way it has been presented by the international bankers and the establishment. But why would anyone make it appear different than it is?
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” [2]
The question is – by whom and towards what end? Cui Bono?
The Issue
Many issues need to be corrected in any society: past, present, and to come – including our own. Poverty, homelessness, and lack of affordable medical care are some of the more obvious problems. There are others as well.
Our aging infrastructure needs to be rebuilt. The viability of a transportation system dependent on fossil fuel must be addressed. A comprehensive energy program should be developed and put in place.
Highway bridges are in a state of disrepair. Care for the elderly is in a state of denial. Our educational system requires constant attention to remain up-to-date across a broad range of issues, from buildings and supplies, to teachers and the curriculum, and everything in between.
All these problems have one thing in common – money. Not one of them can be corrected without money. This is why the money power is the greatest power that man has, even greater than the military power.
Without money, a military presence is impossible. It requires huge sums to pay for a standing army in full array. Since ancient times it has been known that “endless money forms the sinews of war.” [3] The merchants of death know this all too well. War is business to those who profit thereby.
None of the above problems can be fixed until the money problem is fixed. Gold and silver can restore the loss of purchasing power that results from paper money.
Without paper money it is much more difficult to rage war in the imperialistic manner it is today. A monetary system of gold and silver coin would hold the purse strings tight, reining in the dogs of war, and the inflation paper money breeds. Only an honest currency can cure the ills of a cancerous debt based system.
The Need to Know
This is why it is so important to understand money, and the money power, as they are the keys to the proper functioning of society.
Spiritual, emotional, and other non-physical ideals are of great importance as well, but the present work concerns itself with the economy of man: his need to exchange with one another for life’s basic necessities: food, water, shelter, and their like.
“Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon.” [4]
It is difficult to get excited over monetary theory. The reasons are many. We are all so busy trying to put food on the table, who has time to study money? But that’s the rub. It is exactly because we do not understand money that we have to work as subjects of feudalism 21st century-style – at the behest of the new world order.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” [5]
Money has been made a difficult subject to understand, and this is not by accident, but by design. Those who control the money power do not want the common man to understand it, lest they forsake their power.
“The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class. The great body of people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint.” [6]
If we understood the way money works, we would not accept paper money. We would realize why the Constitution provides for gold and silver coin, while bills of credit, are disallowed. The Founding Fathers knew full well that paper money is an evil contrivance that swindles the common man.
“Whoever controls the volume of money in any country is absolute master of all industry and commerce.” [7]
The Constitution
According to the Constitution our money is gold and silver coin, not Federal Reserve Notes of debt-obligation. Silver is the standard by which the dollar is defined – the unit of account of the United States.
• Article I, Section 8, Clause 5: The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. [8]
• Article I, Section 10, Clause 1: No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt. [9]
As the Constitution states, Congress is empowered to coin money out of gold and silver, not to emit bills of credit. Nothing can be more simply said, yet that is not the form of money we have today. Why?
Instead of gold and silver coin, we have dollar bills – bills of credit that the Constitution disallows, paper fiat money.
The dollar of the Constitution is a weight of silver: the then current circulating silver dollar. The dollar bill or Federal Reserve Note is not the silver dollar of the Constitution or the Coinage Act of 1792. One is an honest weight of silver – the other a mere piece of paper.
Perhaps there is something being hidden from our sight, so we do not understand this thing called money, and thus accept the unacceptable in its place – paper money.
“All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” [10]
The goal of this work is to shed some light on the ignorance that John Adams mentions, an act of omission by the majority, and commission by a select few, one that has been designed to hide the truth – not to reveal it. It is easy to stumble by that which has been hidden out of sight.
In the Beginning
For most of the first century of its existence, the United States adhered to the monetary system of the Constitution: gold and silver coins. No bills of credit were allowed.
The Constitution expressly forbids such paper money. As the Supreme Court has said:“The prohibition in the constitution to make anything but gold or silver coin a tender in payment of debts is express and universal. The framers of the Constitution regarded it as an evil to be repelled without modification; they have, therefore, left nothing to be inferred or deduced from construction on this subject.” [11]
The words “emit bills of credit” were hotly debated during the constitutional convention. Not only had the issue been discussed, it had been voted on to disallow them – in clear and precise terms.
“Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.” [12]
“Mr. Read thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.” [13]
“Mr. Langdon had rather reject the whole plan than retain the three words (and emit bills).” [14]
“Mr. Sherman thought this a favorable crisis for crushing paper money. If the consent of the Legislature could authorize emissions of it, the friends of paper money, would make every exertion to get into the Legislature in order to license it.” [15]
According to the Constitution, the Supreme Court, and notes from the constitutional convention, a monetary system that allowed bills of credit to circulate as the currency was not only unconstitutional, but an evil blight to be wiped out, once and for all. Yet today we have it in spades. Why? The purpose of this book is to answer this and other similar questions.
Why has our money been allowed to devolve from gold and silver coin, to the present paper fiat money known as Federal Reserve Notes?
Why have Federal Reserve Notes lost 95% of their purchasing power since the Fed was created in 1913?
Why are we not taught in school the importance of purchasing power?
Why are we not taught in school the definition of a dollar according to the Coinage Act of 1792?
Why does Congress act as if it is completely unaware of what the Constitution states is money?
How can the greatest nation on earth accept the debasement and destruction of its own currency?
Black & White
Our monetary system has stepped over the edge – into the abyss. With the unlawful suspension of gold as money, the last vestige of an honest monetary system disappeared. In its place paper money is allowed to circulate as the currency de jour – in complete opposition to the Constitution.
“We are in danger of being overwhelmed with irredeemable paper, mere paper, representing neither gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” [16]
All through our history, there has been a fight between those who desire paper money, and those who want gold and silver coin, as money, as mandated by the Constitution.
It has always been the banking establishment, and those closely associated with it, that fought for paper money. This is because the bankers want to control the issue of money, and hence reap the profits such monopolization breeds.
If the bankers can simply create money out of nothing, it is easier for them to control the entire monetary system. If, on the other hand, money is gold and silver coin, then it is much harder, perhaps impossible, for the bankers to control money.
“Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back.” [17]
Watching the Watchers
Gold and silver do not lend themselves to the control of man – paper money does. Paper is easily had. Gold and silver must be removed from the bowels of the earth by hard and dangerous work. It cannot simply be spoken into existence – by fiat.
Today’s paper money system is the elite collectivist’s dream come true, the perfect wealth transference mechanism, not only here in the United States, but across the entire world. Such a system is a vile and wicked thing – an abomination that walks the earth in darkness, casting shadows far and wide.
In the words of Alan Greenspan, whom some consider the overlord of paper money:
“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.” [18]
The beginning of our new nation was witness to money of gold and silver coin. Slowly, however, things changed. Gold certificates were first authorized by Congress in the Currency Act of March 3, 1863, but were not issued until 1865.[19]
Silver certificates were created by the Coinage Act if 1878.[20] Both were backed by gold and silver coins held on deposit as reserves. A holder of these certificates could redeem them at any time for gold or silver coins.
Then paper bank notes were issued, but they were only partially backed by gold and silver reserves, which generally amounted to 40%, and steadily declined there from. Finally, our monetary system devolved into the dysfunctional mess of paper fiat money we have today, backed by nothing.
The United States used to be the largest creditor nation. Now we are the largest debtor nation. One bread winner used to earn enough to support the entire family. This is no longer the case for most American households. It now takes two. Why?
The savings of the American people is at all time lows, less than one half of one percent. Debt levels are at historic highs. Our government is running deficits of unprecedented proportions. What has happened in the past few decades to cause such drastic changes in our standard of living and way of life?
Something is going on, and whatever it is, it isn’t good. The goal of this work is to ferret out what is wrong with our monetary system, and to offer a possible solution before it is too late. Not so much for ourselves, as for our children, and their children to come. Time is of the essence.
Appearances
Money is not easily understood, at least not in the way it has been presented by the international bankers and the establishment. But why would anyone make it appear different than it is?
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.” [2]
The question is – by whom and towards what end? Cui Bono?
The Issue
Many issues need to be corrected in any society: past, present, and to come – including our own. Poverty, homelessness, and lack of affordable medical care are some of the more obvious problems. There are others as well.
Our aging infrastructure needs to be rebuilt. The viability of a transportation system dependent on fossil fuel must be addressed. A comprehensive energy program should be developed and put in place.
Highway bridges are in a state of disrepair. Care for the elderly is in a state of denial. Our educational system requires constant attention to remain up-to-date across a broad range of issues, from buildings and supplies, to teachers and the curriculum, and everything in between.
All these problems have one thing in common – money. Not one of them can be corrected without money. This is why the money power is the greatest power that man has, even greater than the military power.
Without money, a military presence is impossible. It requires huge sums to pay for a standing army in full array. Since ancient times it has been known that “endless money forms the sinews of war.” [3] The merchants of death know this all too well. War is business to those who profit thereby.
None of the above problems can be fixed until the money problem is fixed. Gold and silver can restore the loss of purchasing power that results from paper money.
Without paper money it is much more difficult to rage war in the imperialistic manner it is today. A monetary system of gold and silver coin would hold the purse strings tight, reining in the dogs of war, and the inflation paper money breeds. Only an honest currency can cure the ills of a cancerous debt based system.
The Need to Know
This is why it is so important to understand money, and the money power, as they are the keys to the proper functioning of society.
Spiritual, emotional, and other non-physical ideals are of great importance as well, but the present work concerns itself with the economy of man: his need to exchange with one another for life’s basic necessities: food, water, shelter, and their like.
“Money is the most important subject intellectual persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and its defects remedied very soon.” [4]
It is difficult to get excited over monetary theory. The reasons are many. We are all so busy trying to put food on the table, who has time to study money? But that’s the rub. It is exactly because we do not understand money that we have to work as subjects of feudalism 21st century-style – at the behest of the new world order.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” [5]
Money has been made a difficult subject to understand, and this is not by accident, but by design. Those who control the money power do not want the common man to understand it, lest they forsake their power.
“The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class. The great body of people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint.” [6]
If we understood the way money works, we would not accept paper money. We would realize why the Constitution provides for gold and silver coin, while bills of credit, are disallowed. The Founding Fathers knew full well that paper money is an evil contrivance that swindles the common man.
“Whoever controls the volume of money in any country is absolute master of all industry and commerce.” [7]
The Constitution
According to the Constitution our money is gold and silver coin, not Federal Reserve Notes of debt-obligation. Silver is the standard by which the dollar is defined – the unit of account of the United States.
• Article I, Section 8, Clause 5: The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures. [8]
• Article I, Section 10, Clause 1: No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt. [9]
As the Constitution states, Congress is empowered to coin money out of gold and silver, not to emit bills of credit. Nothing can be more simply said, yet that is not the form of money we have today. Why?
Instead of gold and silver coin, we have dollar bills – bills of credit that the Constitution disallows, paper fiat money.
The dollar of the Constitution is a weight of silver: the then current circulating silver dollar. The dollar bill or Federal Reserve Note is not the silver dollar of the Constitution or the Coinage Act of 1792. One is an honest weight of silver – the other a mere piece of paper.
Perhaps there is something being hidden from our sight, so we do not understand this thing called money, and thus accept the unacceptable in its place – paper money.
“All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” [10]
The goal of this work is to shed some light on the ignorance that John Adams mentions, an act of omission by the majority, and commission by a select few, one that has been designed to hide the truth – not to reveal it. It is easy to stumble by that which has been hidden out of sight.
In the Beginning
For most of the first century of its existence, the United States adhered to the monetary system of the Constitution: gold and silver coins. No bills of credit were allowed.
The Constitution expressly forbids such paper money. As the Supreme Court has said:“The prohibition in the constitution to make anything but gold or silver coin a tender in payment of debts is express and universal. The framers of the Constitution regarded it as an evil to be repelled without modification; they have, therefore, left nothing to be inferred or deduced from construction on this subject.” [11]
The words “emit bills of credit” were hotly debated during the constitutional convention. Not only had the issue been discussed, it had been voted on to disallow them – in clear and precise terms.
“Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.” [12]
“Mr. Read thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.” [13]
“Mr. Langdon had rather reject the whole plan than retain the three words (and emit bills).” [14]
“Mr. Sherman thought this a favorable crisis for crushing paper money. If the consent of the Legislature could authorize emissions of it, the friends of paper money, would make every exertion to get into the Legislature in order to license it.” [15]
According to the Constitution, the Supreme Court, and notes from the constitutional convention, a monetary system that allowed bills of credit to circulate as the currency was not only unconstitutional, but an evil blight to be wiped out, once and for all. Yet today we have it in spades. Why? The purpose of this book is to answer this and other similar questions.
Why has our money been allowed to devolve from gold and silver coin, to the present paper fiat money known as Federal Reserve Notes?
Why have Federal Reserve Notes lost 95% of their purchasing power since the Fed was created in 1913?
Why are we not taught in school the importance of purchasing power?
Why are we not taught in school the definition of a dollar according to the Coinage Act of 1792?
Why does Congress act as if it is completely unaware of what the Constitution states is money?
How can the greatest nation on earth accept the debasement and destruction of its own currency?
Black & White
Our monetary system has stepped over the edge – into the abyss. With the unlawful suspension of gold as money, the last vestige of an honest monetary system disappeared. In its place paper money is allowed to circulate as the currency de jour – in complete opposition to the Constitution.
“We are in danger of being overwhelmed with irredeemable paper, mere paper, representing neither gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” [16]
All through our history, there has been a fight between those who desire paper money, and those who want gold and silver coin, as money, as mandated by the Constitution.
It has always been the banking establishment, and those closely associated with it, that fought for paper money. This is because the bankers want to control the issue of money, and hence reap the profits such monopolization breeds.
If the bankers can simply create money out of nothing, it is easier for them to control the entire monetary system. If, on the other hand, money is gold and silver coin, then it is much harder, perhaps impossible, for the bankers to control money.
“Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back.” [17]
Watching the Watchers
Gold and silver do not lend themselves to the control of man – paper money does. Paper is easily had. Gold and silver must be removed from the bowels of the earth by hard and dangerous work. It cannot simply be spoken into existence – by fiat.
Today’s paper money system is the elite collectivist’s dream come true, the perfect wealth transference mechanism, not only here in the United States, but across the entire world. Such a system is a vile and wicked thing – an abomination that walks the earth in darkness, casting shadows far and wide.
In the words of Alan Greenspan, whom some consider the overlord of paper money:
“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.” [18]
The beginning of our new nation was witness to money of gold and silver coin. Slowly, however, things changed. Gold certificates were first authorized by Congress in the Currency Act of March 3, 1863, but were not issued until 1865.[19]
Silver certificates were created by the Coinage Act if 1878.[20] Both were backed by gold and silver coins held on deposit as reserves. A holder of these certificates could redeem them at any time for gold or silver coins.
Then paper bank notes were issued, but they were only partially backed by gold and silver reserves, which generally amounted to 40%, and steadily declined there from. Finally, our monetary system devolved into the dysfunctional mess of paper fiat money we have today, backed by nothing.
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