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Monday, January 03, 2011

Silver's climb evidence of the dollar's debasement

Happy New Year!

I just reduced my position in silver. Having run up 200% in just a couple years, I figured I'd better not get too greedy.

I do understand that a media campaign against J.P. Morgan began over their vast short position in silver. The campaign alleges J.P. Morgan's position artificially suppresses the price of silver, in a quid pro quo agreement with the Federal Reserve meant to keep silver prices low, making the effect of so much money-printing less obvious. See Max Keiser explain the strategy in this article from the Guardian.

A group named GATA (Gold Anti-Trust Action Committee) was among the sponsors of the campaign. GATA was founded to counter what are thought to be routine manipulations by major market players like J.P. Morgan in the silver market. The organization's founder, the outspoken Bill Murphy, has for years explained that the gold and silver markets are subject to exploitation by banks and agents of the Federal Reserve, acting discreetly.

Now if indeed J.P. Morgan's short position is so large--3.3 billion ounces, according to the Guardian article--as to be affecting the upward price movement of silver prices, the campaign figures that it would only take ounce of silver bought by every single American to bankrupt the bank. By actually taking physical possession of the stuff, demand for silver would push prices higher and force J.P. Morgan to deliver on its contracts (by buying silver in physical form in vast quantities.)

As it is, rarely do financial entities take delivery of the commodity that they've bought so when the delivery date comes, physical delivery is postponed. The promise to deliver the metal is sold and foisted along in a never-ending parade of never-fulfilled futures contracts. This cascading pyramid is made possible by the use of derivatives, promises to pay like those use with Mortgage Backed Securities that are traded (swaps) and sold.

Unfortunately, if the campaign succeeds, and J.P. Morgan were thrust to bankruptcy by virtue of a successful campaign forcing it to cover its vast short position in silver, I guess we'd see yet another bailout occur since J.P. Morgan is considered part of the inner circle, designated Too Big To Fail.

Control over our money supply has been lost to the Geithner/Fed/Obama cluster in a silent coup. The value of our money itself has come under attack as a result. Preserving the value of our money--vital to the task of storing present wealth for future consumption--has been lost.

How much of this destruction of wealth is preprogrammed? We know that the periodic explosions of inflation and deflation in the past end up leaving more wealth in the hands of fewer, wealthier people and corporations. So can we say that our economic policies are democratically inspired, or do our policies really reflect the narrow interest of the Moneyed Elite, who grow richer by the day? Never in the history of our nation has so much been owned by so few.

This state of affairs didn't occur from nothing, mere chance, or by natural market forces. Monetary policies have expanded the Federal Reserve's traditional role of monitoring banks and reducing unemployment. We're now told to expect "quantitative easing," meaning more government bonds will be sold. Every dollar spent on the Treasuries will generate interest for the bondholders, who tend to be the banks and their wealthy shareholders.

Buying Treasuries shouldn't be the purpose behind creating more money. A vibrant real economy is more interested in stability in the money markets, not the constant increase in money supply generated by spending. The value of the dollar is now subject to constant depreciation as the money supply grows. Have more of any commodity, and what happens? The commodity loses value (assuming the supply of money is constant.) Also, specific to the case of money, more interest is demanded in exchange for buying debt denominated in that currency--what investor wants to lose purchasing power of their money? Instead, potential investors in our government's bonds will require more interest to compensate them for our profligate ways.

Blow up the money supply and all of a sudden commodities look better. Commodities can't be as easily brought into existence as money, which needs only the printing press...or not even that nay more, as money can be magically conjured on a computer screen. The value of a commodity is tied to the effort required to produce it. Now if gold could be conjured into existence--as alchemists attempted in the Old World--all of a sudden it's scarcity would come into doubt. Same would be true if we were to discover easily mined sources of the commodity.

The infinite quantity of money that can be created makes finite things (especially real things) more attractive. Not only do the goods whose supply is constant not grow in abundance, but also the other commodity--money--on which the price of the commodity is based loses value. Investments in the commodity are likely to gain in value both because of too many dollars and limited supplies of the commodity.

This reasoning drove me to silver. However, I don't know if we can say all commodities will go up in value just because there's more money.

Purchasing gold and silver are a natural response to that pending insecurity. While I can't say that what I do in the market represents how the markets will do, I'd maintain supplies of real assets in order to be prepared. Small denomination silver coins, bought on a periodic basis, might be prudent about now. These can cover small costs in the event of a currency meltdown, or economic disturbance caused by something as simple as a power outage.

Real estate is so plentiful, and overdevelopment so common that deflation could keep prices down, with exceptions. In the opposite direction, higher costs for fuel is having an inflationary impact on food prices--just go to the store and see. A shortage of energy supplies could dramatically impact a specific region, so I'd have essentials and a source of backup energy like firewood available.

We can have both inflation and deflation. I'd say energy costs will climb, although petroleum demand might flatten out with slower growth.

On a macro level, worst of all economic scenarios might be what's called a hyperinflationary depression where economic activity shrinks even as huge quantities of new money flows into the economy. Declining housing prices might be symptomatic of this scenario. Unemployment and high inflation (stagflation) would be a hallmark of this slide.

Bernanke might be able to stave off inflation by keeping money on the sidelines. Actually if the money created by quantitative easing flows elsewhere, and isn't spent, then inflation need not occur. A former Princeton professor, Bernanke is a student of the Great Depression. He's keen on keeping the fiscal spigots flowing, to placate Obama and the spendthrift Congress' spending alive, to provide Keynesian stimulus.

As long as the new money flows, prevailing logic dictates that more might be spent, if not by consumers than by government. The whole logic between stimulus is flawed due to a key factor: debt. Debt, particularly housing debt which became the single most important factor in economic growth in the United States. Achieving higher home ownership rates became a prime political aim for the Bush administration in the leadup to '04.

Greenspan, then the chairman of the Fed, was charged to keep the spigots open, and feed low interest capital to the banks. The financial system responded, creating a complex scheme of derivatives to capitalize on debt securities, called Credit Default Swaps. We're paying the price now-not only with the casino capitalism bailout but also a vast pile of money (existing in digital form) sloshing around, threatening inflation. It's like the Federal Reserve--a private corporation--created a giant slush fund...with public money...to slather over its friends in the financial industry. And the Federal Reserve's backdoor loans far exceeded the initial TARP, a fact ignored in praise over the "profit" of the recent sale of Citigroup stock.

Why the history lesson? The problems haven't stopped. The liabilities haven't gone away; neither have the bad loans, which appeared to have been transferred to the public through the troubled GSEs. According to analyst Christofer Whalen, appearing on CNBC, Bank of America is paying less than a tenth of its theoretical "mortgage buyback" liability to Freddie and Fannie. Whalen has called Bank of America insolvent, so I was surprised to see him upgrade his rating on the stock.

I guess the Powers That Be decided that Bank of America only owed the taxpayer so much and that was that. Like the sullen response to BP's Gulf Spill disaster, the American public remains steadfast in its preoccupation with sports, celebrity, and consumptionism.

Now if the status quo favored by the Establishment determine something is true, we're all supposed to go along. Winning in Afghanistan? Sure. Just keep us there a few more years beyond the promised pull-out date. Economy recovering? Sure and we can believe that all's well. Just go out and buy something. (Maybe it is that easy but not if the money funnels overseas or out of the community.)

Fredrick Douglass said the power concedes nothing without a fight. So as long as the American people are content to let the Money Power own the monetary system, we're bound to become subservient to a monetary system run for the benefit of the elite and not the general economy. This means it's the needs and priorities of the bankers, not the people, that will shape what the value of our money. Savings will be destroyed, and obligations for TBTF bailouts past and future assigned to the people.

I can't help but think of another of Fredrick Douglass' great quotes:
"Find out what any people will quietly submit to and you have found out the exact measure of injustice and wrong that will be imposed on them."

Public resources have been plundered. In the present case huge sums of debt have been put on the Treasury through the sale of its bonds. Each of these future obligations represents the transfer of wealth from future American's possession to that of their government, and not a small chunk of interest due soon as well, a sum which will climb as interest rates and the overall debt burden rise.

I've heard taxes called legalized theft but not if the benefits of the taxation exceed the taxes they paid. I've also heard inflation called a hiddent tax--by producing money, or by cycling it through the Fed to fund "purchases of our bonds, the government devalues it. Looking at our "entitlement" programs, we can only imagine piles more debt to meet the government's future spending obligations.

This will come on top of all the past debt the Fed has created by buying our government's debt. Like Greece, it'll only be a matter of time before spending has to decline. This last minute orgy of debt is like a credit card junkie out on the town with a newly arrived credit card. Except unlike the individual debtor, our government will be face the prospect of default in lieu of bankruptcy. Like Argentina or some fiscally strapped nation, whose currency had been rapidly devalued, we'll end up submitting to the will of the Money Power, or face the total destruction of our currency.

These scenarios are more than a possibility. I think until people wake up and come together, the destruction of our currency is imminent.


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  • At 6:58 AM, Blogger The Arthurian said…

    Hi, John. Good post.

    Just briefly, on debt: If you look at the growth of total debt since WWII, it is one long, smooth, uptrend. What this tells me is that "Achieving higher home ownership rates" and "keep[ing] the spigots open" and the "complex scheme of derivatives" is all just part of a trend.

    The urgency arises from the fact that debt finally accumulated to the point where it caused financial crisis, and we're stuck in that mess now. But I still think it's not too late to fix the problem, if only they figure out what the right policies are.



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