Ricks Picks

A World in Upheaval

EST

(The following essay by Cam Fitzgerald, an occasional contributor to Rick’s Picks, drew nearly three dozen responses since being posted Sunday evening, so we are letting it run for another day. Cam sees a world on the brink of financial, economic and political disaster. If the global economy and trade were to collapse – hardly a longshot bet at this point – he notes that there is no “Plan B.” We had better come up with one soon, says Cam, or we could all wind up wallowing in feudal darkness for decades. RA)

The T-Bond market is groaning.  Like a great, creaking ship lurching to one side, the sounds of shifting portfolio positions have grown louder and more ominous by the hour, accompanied by the clamor of bailout pleas and a mad scramble for the life rafts. Rates are on the rise and prices falling. Bonds are dead, long live Bonds!

The pirates off the stern, meanwhile, smell blood and are sizing up the opportunity to take down one of the fattest, easiest targets they have seen in all their sorry lives. They know they can take this craft down with words alone. If only they can spread fear above board and on the decks, they know the crew and its passengers will rush for safety, setting off a panic that sees all hands clinging to the rails on one side, capsizing the ship. But there are not enough life preservers! Blimey! It’s a salty, seafaring epic in the making.

Financial speculators are the pirates of this era, ready to attack when they smell blood

Meanwhile, back in the landlubber’s world there seem to be quite a few asset classes that are being stretched and distorted. Equities in domestic markets have virtually regained their pre-recession highs in the absence of any real buyers other than high-frequency computer traders. Most other investors, insiders, mutual funds and individuals have abandoned equity markets in fear already. And yes, that is a bit of an exaggeration, because many people do remain invested. But we all know the big picture has changed. There are nagging doubts about the sustainability of markets. Who is really interested in buying stocks anymore when markets are looking overbought by computers alone?

Currency Debasement

We have to also contend with currency debasement, which means in other words that holding cash itself is not a good investment at this time, particularly with record-low interest rates. Well, if Bonds are in a bubble about to burst, and holding cash is just a surefire way to watch your wealth and buying power decline, then where do you go for safety?

In the background, the world’s third biggest economy, Japan, struggles under a debt burden that is almost epic, while the United States itself appears headed for a crisis of confidence as it monetizes its own debt obligations, guaranteeing a very painful adjustment in the future. Europe, as we all know, is on the ropes, and the likelihood that its currency union will fail seems a foregone conclusion. It is all about variables. In Europe there are just too many conflicting ideas about engineering a real recovery that have come up against a wall of public disenchantment, political bickering and even rioting from Athens to Paris. Even London is getting in on the action. Clearly, there are just too many moving parts in the machine.

And now China, the engine of the world’s functional economy — the country the world has pinned its hopes on to lead us out of deep and seemingly intractable recession, is itself forming what could prove to be the biggest real estate and credit bubble the world has ever seen. When that bubble bursts, the crash will be worldwide, since China’s influence now reaches all corners of the globe. With major investments on every continent from Africa to South America, and a regional dominance that encompasses dozens of countries, including Japan, Korea, Malaysia and many others significantly dependent on its trade, we now have the makings of something far worse than the Asian contagion of years gone by. With Western nations now heavily invested there too — from the corporate level all the way down to Ma and Pa’s nest egg being held in Asian growth-mutuals, there is no escaping the day when China’s real estate bubble implodes. And it will.  It’s just a matter of time, unless the basics rules of economics suddenly cease to exist.

Bullion Rising on Fear

Gold and silver, meanwhile, are rising on fears of global indebtedness, sovereign default risk, inflation, and the aggressive debasement of the world’s reserve currency, the U.S. dollar. Those who think a bullion bubble is forming are steering clear of its bull market.

Others, mainly those with weak stomachs and a fear of heights, are moving toward the exits but finding few compelling alternatives. Piggybacking on the heated interest in precious metals, commodities such as cotton and copper are in parabolic rallies. Speculative plays that most people thought were dead following the credit crisis have actually sprung back to life with a vengeance. J.P. Morgan was recently revealed to have stretched the limits by buying up almost half the world’s inventory of copper and warehousing it in London. That gambit could secure their very survival if their paper investments or widely reported, massive short position in Silver blow up.

And they are not alone. A single European buyer attempted not long ago to corner Cocoa, while only months ago we watched from the sidelines as the world’s largest miner, BHP Billiton, came within a whisker of controlling almost half the world’s active potash deposits. The Chinese, meanwhile, have shown a sudden reluctance to share their unique wealth in rare-earths. As controllers of 97% of the global supply, they are in the catbird seat as the rest of the world looks no, wondering how they will obtain crucial supplies.

I hope that all of these recent developments are not being lost on investors, because there is a common thread running through them. It should now be perfectly clear that this commodity boom has significant, long-term implications for all of us. And it has legs, so not being invested is just foolhardy. By now, too, nearly everyone has recognized the strong correlation between Gold and most natural resources. These asset classes should outperform for many years, gaining impetus as populations explode higher and demand from the developing world accelerates at an increasing rate, while in the background sovereign default risk crowds out the willingness to lend.

Paper at Risk

One thing else should now be clear:  Some paper investments and cash itself are the risk trades in a world of growing scarcity and expanding populations. Currency trading remains the flavor of the day nonetheless, and I have noticed lately that people with virtually no investment experience are taking an interest. This is just one more destabilizing factor among a phalanx of hazards that are gathering steam. Meanwhile, anyone capable of controlling a single commodity class is almost certain to reign supreme. The new landlord owns much more than land these days. He controls the rights to access of critical resources like food, metals and energy. He holds the keys to power that governments are losing as they destroy the value of their respective currencies. This trend augurs the basis of a new power game. Not that it did not exist all along — only that today there are so many more interests competing for fewer resources, and that is certain to continue driving prices even in the absence of real demand. The new interests include countries, of course, and some of them have very deep pockets.  We are nearer the middle of the next great bubble, in my opinion, but this one involves all regions, all countries and every last soul on earth.

So the gold rush in resources is alive and well, but it too represents a distortion in our system as food prices have now almost doubled in the Third World. Famine awaits where intervention and support will not go, and it is one whose roots are not found in drought but in outcomes of a global financial system straining to remain in balance and a banking system that many still believe is in tatters. Its roots are in the shift of money from perceived risky investments into those that are real. Hard assets are today’s play.

The outcome of sudden price increases in commodities is certain to set off political instability in some the poorest places on earth.  Food is a big worry in countries where incomes range below a dollar or two per day. Food is a big worry for those governing too, as they are often toppled as an outcome of a food crisis. This is a concern for everyone. The last thing the world needs right now is more political instability, and it is not just Africa, (Egypt and Ethiopia coming first to mind) that are now primed for discord over price hikes.

Food Riots

Many of you will recall, for example, the food riots that broke out across the Third World in 2008. There is also widespread poverty in regions of India, Pakistan and even rural China, where wages are minuscule compared to the West.  Food price-shocks are seen as very threatening to the governments of those countries. The advent of rising interest rates does nothing to quell the fears of many in the developing world as its low standard of living drops further yet.

That is only the beginning, though, and we need to keep in mind that as energy prices rise (which I fully expect) that the underpinnings of discord will arrive on the shores of North America too. Unlike Africa, we need to heat our homes, and it is not cheap. Nor will it get less costly as this boom accelerates. We are a widely dispersed population, dependent on vehicles that are in turn dependent on fuel to operate. An energy-price shock here will be met with dismay. Inflation will be the outcome, but it is the wrong kind because this inflation will not be accompanied by rising wages. On the contrary, wages will be falling due to ongoing global competitive forces that seem to still be a mystery to most people, particularly the trade unions. Hello! Those foreigners do all the same things we do nowadays, and they do it much cheaper. What did you think the outcome would be?

In any event, energy costs are set to rise. It is an inevitability that cannot be avoided.

But here again, the commodity boom is just another distortion in the system. Just as all hands on board the “Good Ship Bond” I mentioned above, and the analogy of passengers scurrying from port to lee, we are seeing investors everywhere looking for refuge from a coming storm, yet finding little real safety or even understanding how to both protect their wealth and build on their investments.

Resource Hedges

So they run from pillar to post in confusion, like so many headless chickens.  A great deal of money is shifting to hard assets at this time, and it is not uncommon for a portfolio to have a resource hedge against an unknown future. The hedge is also likely to hold some fraction in gold these days, although many will be feeling underweight, especially after having seen the spectacular returns their neighbours have earned.

Well, this is where it all gets so interesting. Partly as a result of the credit crisis, partly as a result of past excesses and bubbles, many are living through a period of confusion and loss. Many more have never fully regained confidence in our systems nor in our investment choices of the past. There is no certainty anymore. The massive transfer of wealth into bonds has not yielded results so much as it has extra risk. Many even question if the original investments will be returned, given all the default fears. Nothing looks secure anymore — not cash, not bonds, not equities and not real estate.  Distortions keep appearing as cracks in our banking and financial systems, as well as in countries themselves. The overriding concerns naturally are related to worries about debt that cannot be serviced in the future and obligations that cannot be met.

Might the whole system unravel almost overnight? Are we entering a moment in history where all investments carry a high degree of risk, and a major failure in any part of the system could bring down all of the others? We all “know” that something has to give, but we are collectively helpless to prevent it. Systemic risk is obvious to everyone. System risk suggests that if Japan, for example, touches off an orgy of monetization that sends them down the hyperinflationary road, we will all suffer the consequences. No country would be immune. Unfortunately, this is hardly unlikely.  The Japanese are growing less and less confident in their government, and an aging population is facing retirement with a much lower standard of living. Peace and tranquility are not the words that spring to voters’ minds there.  Borrowing, meanwhile, cannot help them pare current debt levels that seem to be pointing toward insolvency.

Not Just Japan

But it is not just a risk that Japan will default against her own people, as there are in fact a myriad of other distortions around the world, each a potential mine field — from the growing threat of a real estate bubble in China, to the very real possibility of European debt defaults and a pan-European currency failure. Even America’s moribund economy starts to look like an attractive investment, relatively speaking. To some of us, the housing collapse looks to be closer to its end than its beginning. Prices may well fall another 30%, but there is a certainty of a bottom, and that should not be doubted by anyone. It is just a matter of when.

So let’s recap. Bonds may well be headed for the trash heap. With rates on the rise, cash is a loser, buying power erodes, resource speculators rule, and stocks are expected to plunge momentarily. We cannot invest safely for the long term in Europe, Japan or China while politics, debt default, credit bubble concerns and currency issues weigh variously on those regions and all of their satellites.  I suppose there will always be canned goods, roasted gopher with mint sauce, and buckshot, but something tells me the problems we will confront are much bigger than that, and there is nowhere to run.  We are all in this mess together, and we need solutions now. Do we have a “Plan B” if The System actually crashes?  In fact, we are trying to live in a world community that cannot even agree on the basics of banking — a world where small minds scuttle every good idea, and true leadership is in extremely short supply. If ever there were a time for serious discussions between nations, it is now. We need a back-up plan, and quickly. The System could unravel at any moment.

Mother of All Shorts?

So perhaps bonds are going to be the Mother of All Shorts. I am not so sure the pirates will collect their booty in a currency that has much value to them, though. The other long trade in a growth pattern now is commodity-based, since resources are at the heart of the shift in power across the globe.  Poorer nations are struggling to maintain their fair share of the wealth, while stronger, militarized nations seek to protect their rights. I anticipate considerable political upheaval, and that in essence is what this article is trying to warn you about today.

By that same token, we can understand on an intuitive level the part that resources will play in settling debts between nations in the future.  It cannot be understated that the day may come when we will trade off ownership and rights to those to whom we are indebted.  This is hardly an unusual relationship, and it is worth noting here that Germany itself made war reparations in the form of agricultural products, industrial goods and other resources. Some have noted that U.S. debt levels can only be compared to similarly high liabilities run up during a war — food for thought and a partial explanation of the rush into commodities that is under way around the world.

Back to Serfdom

The resource trade will not be without its pitfalls, not from an investment standpoint. Nor will it be free of political unrest as rich and poor go eyeball to eyeball.  Some serious setbacks are already on the horizon, particularly if China’s real estate markets suffer the same fate as all bubble markets do. Commodity prices will certainly decline; however, it is becoming increasingly clear that strong hands will move in and buy on weakness, exchanging their falling currencies for rights to build mines, cut forests, farm lands or dam and drain rivers and lakes.  So the trend will remain intact as companies and governments coalesce around what is in the ground and steadily move away from paper trades that could become worthless overnight.

In the dark ages, the big land holders held all the power, serfs lived and died at the whim of their masters, and those without resources or armies were the weakest of all. We may not see an exact repeat of those bitter times when getting kicked off the land was a virtual death sentence, all but guaranteeing starvation, but it could be close. We’ll need to keep in mind the poorer nations, whose resources we often covet, as we attempt to rebalance the world’s financial relationships. Sharing the gains is essential for stability, particularly as it impacts our key allies and trading partners in far-flung corners of the globe.

Meanwhile, it seems that not much has changed concerning the dynamics of power over the centuries. It is impossible to avoid inequities, but we can still strive for fairness. We live in an age of discord and imbalance in search of a new kind of stability. The planet is being divvied up and there are already big winners and big losers. The developing world is on the rise and wants its fair share. It will come down to who owns the real goods, the hard assets and the lifeblood of the global economy. That is where the real money is.

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Comments on this entry are closed.

George Flint December 20, 2010, 1:33 am

excellent article!!!!!!!Very Impressed!

Cam Fitzgerald December 21, 2010, 5:21 am

Thank you George, you just made my day!

laurent December 18, 2010, 7:04 pm

Another saying: “He sold the farm” meaning the security of last resort is gone and there is hardship ahead.
I am thinking that you don’t have to buy farmland. When the big pile hits the fan no one will know how to use the land other than the very few that were awake and understood the impending collapse, purchased tools and seeds to make use of it. Find a semi-remote fertile spot with a natural supply of water, kiss the ground, thank the Lord and start planting.
Ultimately, get a cow, a sow and a plough, and you will get along somehow.

laurent December 18, 2010, 6:45 pm

There is another saying, one of which the meaning is about to shift. “I hope to win the lottery real soon, this will allow me to keep farming for a few more years.”

ebert December 18, 2010, 6:07 pm

Debt(US DOLLARS) only goes away 2 ways…..pay it off or bankrupt it out. A society has to have a currency…….look @ the nations that have bankrupted their currency and you will see what will happen to the USA. There is not enough $ in the world to pay it off. The new currency will be what the Bible describes. The USA is not mentioned in the end times(read the countries listed in the Ezekial 38 war, therefore it safe to deduce that the USA is irrelavent! The USA cannot be defeated militarily, however it can be destroyed financialy! Sobering thought for most who trust gold and silver!

ricecake December 15, 2010, 12:32 am

The writer assumes governments and people around the world will sit there let the speculators to chop them into pieces or tied them up carry them into the serfdom slave camp. I see the opposite result. Any thing that cause severe social instability and social crisis will only make the political power grab harder and rule with iron wrist. When the chaos and hell break, when the few control most of the resources and hard assets leaving the masses to starve, to dehydrate, to die, revolution will take over and nationalization of the all resources and land is the inevitable. That’s what happened in Russia 100 years ago. That what happened in China half century about. memories are still fresh.

Will US deteriorate back to the medieval time when few lords with their merciless loyal arms to protect them ruthlessly from their serfs rebellions? I think the Americans too will vote to nationalized all land, natural recourses so very rightful citizen will have their fair share of the survival need.

Ironically the government will become much bigger much much more powerful in chaotic time.

Steve December 14, 2010, 7:53 pm

Usury, just change the meaning of the word, and countrymen be damned.

F. Beard December 14, 2010, 8:06 pm

Indeed the definition of usury has changed from “interest on money” to “excessive interest on money”.

But common stock as money requires no borrowing or lending, much less at interest. It shares wealth rather than reaps it. Fractional reserves are not needed either (if indeed they are ever needed).

I’m not sure how the ancient Hebrews invested without lending at interest but of course this is true:

It is the blessing of the LORD that makes rich, and He adds no sorrow to it. Proverbs 10:22

Certainly our banking and money system has created much sorrow.

Steve December 14, 2010, 7:05 pm

F.Beard, Did you read the contract constitution? Or, did you read the private corporate charter created in A.D. 1872? I agree with you that private corporate fiat created by 28 U.S.C. 3002(15) UNITED STATES, a foreign corporation in relation to the several States, has nothing to do with Fair Weights and Measures. The word/words united States, United States, UNITED STATES, [united States is two words, UNITED STATES is one word] means many things around the globe just like the word ‘dollar’ means many things. One must come to terms with the fact that the united States is not the United States, or is the UNITED STATES the ‘several States’ in agency for the Sovereign in Common. We cannot communicate when one speaks of the ‘union’ of several States being the same as the private democracy foreign corporate UNITED STATES ‘federal union of states’ 28 U.S.C. 3002(15).

I hear you and understand what is being said about private corporate government money as fiat, or a tally in fee [federal reserve notes]. The confusion comes in not understanding that Federal Reserve Notes are private money territorially for a democracy/ corporation created in A.D. 1872. Give unto the democracy what is the democracy’s, and give unto the People what is the People’s.

As to the taxing power of the Federal Government against the Sovereign in Common in specie Coin. That taxing power does not exist, only the power to tax the several States exists constitutionally. The 16th Amendment created no new power of taxation, only expanded the power over corporations via excises. The question F.Beard is how did a Man become subject to a corporate excise tax? Which brings question under the alleged 14th Amendment which created a corporate ‘subject’ citizenship domicled within the district OF ______. Don’t make the mistake of thinking that a corporate enfrancisee under 14th amendment corporate creation is not subject to pay the tally to the I.R.S. because one will go to jail under the corporate Code. Don’t make the mistake that voluntary “use” of federal reserve notes is not prima facie admissable fact of corporate enfranchisement to the government 28 U.S.C. 3002(15) in private democracy under Roman Civil Law. Don’t make the mistake that a corporate enfranchisee can make a “use” of specie Coin without the tally of gain being calculated in the variable “Federal Reserve Notes” to tally the work in fee, fife, feod, feud, feudal tenant, peon, serf, slave.

What changed to create the presumption that a Man is not created by the G-d of Abraham, Isaac, and Jacob, and is ‘presumed’ a corporate legislative creation of a private group? That presumption of corporate change happened from 1934 through 1938. The change is based in the need to find all persons equal under some form of law. The only place all persons become equal is under Master/servant Law, where the Congress is Master, and all others in fee, fife, feod, feud, feudal tenant, peon, serf, slave, Blacks Law Dictionary Fourth Revised Edition 1968. It appears that the more the population moves toward evolution and science the more the Rights of Man are lost to corporate structure, and abuse of power.

F. Beard December 14, 2010, 7:40 pm

@Steve

Wow! You are some lawyer. I am an ex-engineer with only limited (and unpleasant) experience with the law.

Don’t make the mistake that a corporate enfranchisee can make a “use” of specie Coin without the tally of gain being calculated in the variable “Federal Reserve Notes” to tally the work in fee, fife, feod, feud, feudal tenant, peon, serf, slave. Steve

Yes, the question of taxation is a crucial one to be solved before we can have a true free market in private money creation which I think is essential for genuine capitalism. I think separate government and private money supplies is necessary as a minimum.

The gold and silver bugs think their money form will solve all our economic problem wrt money. Well, they forget the prohibition against usury (Deuteronomy 23:19-20) between fellow countrymen and also the absurdity of tying money creation to the mining rate of a metal among others.

Steve December 14, 2010, 8:04 pm

F.Beard, in all probabilty your bad experience was with private corporate contract, and Nash’s Non Co-operative Game Theory within a private democracy. When an issue goes before the jury today, there is little hope that they will understand the differences between the private corporate scheme, and Sovereign World. It is the same problem wherein persons cannot get it that a federal reserve note is not a “Dollar” as defined for the several States, but; a tally note of no value to keep track of the get territorially.

FranSix December 14, 2010, 6:25 pm
F. Beard December 14, 2010, 5:13 am

I agree with the premise that the Creator cares more about justice and Fair Weights and Measure. Steve

Fair weights and measures have nothing to do with government fiat. Government is force ( 1 Samuel 8:4-22 ) and takes what it wants hence fiat money is ideal for it. However, it should only be legal tender for government debts, not private ones.

OTOH, to be freely accepted, private monies must have value and thus fair weights and measure apply to them. However, for the government to accept any money other than its own fiat for taxes and fees is to cheat users of all other monies that are not equally accepted.

F. Beard December 14, 2010, 12:31 am

F, your plan for conjured fiat money insures that He is mocked. Larry D

So God cares more for shiny metals than for justice?

‘They will fling their silver into the streets and their gold will become an abhorrent thing; their silver and their gold will not be able to deliver them in the day of the wrath of the LORD. They cannot satisfy their appetite nor can they fill their stomachs, for their iniquity has become an occasion of stumbling. Ezekiel 7:19

Steve December 14, 2010, 2:21 am

F.Beard, Great quote. The scripture seems to be saying that one cannot purchase, with gold Coin, a reprieve from the penality for corruption of body and soul. It seems to say that specie Coin obtained by greed and wrongdoing will seem useless in the hands of persons who have no morality, as they try to buy their way out of Sin Judgment. I would think that the G-d of Abraham, Isaac, and Jacob puts great measure in the issue and use of Specie as Fair Weights and Measures. I agree with the premise that the Creator cares more about justice and Fair Weights and Measure. And yet; the issue from Ezekiel does not appear to be about gold and silver Coin use, but; about the sinner who thinks he can buy his way out of judgment. How useless gold and silver, when one discovers delivery from judgment/punishment cannot be bought.

And yes; U.S. justice is bought and sold every day, especially in regard to banksters who pay a fine and never serve the time. The just mean in today’s thinking is that I can buy my way out of everything, and anything. Isn’t it so, that the greater the coin the less likely one is going to be punished by the federal union of states? Too big to fail. Too big to be punished. Too great a star to go to jail.

Imagine the Immutable Law not being bought like the U.S. excutive is bought – imagine . . . . how worthless is money in the face of righteous judgment and condemnation?

Jeff December 14, 2010, 12:17 am

Mario You forgot to mention the literal cities, including both commercial and residencial, along with all the malls vacant like a ghost town. So are those controlled by extremely rich, as you say, or extremely poor minded investors…3-5% carry costs ? Don’t forget maintenence and deterioration. Time has a way of destroying capital, regardless of your wealth. And time will prove you wrong….This year, I suspect.

mario cavolo December 14, 2010, 3:43 am

Hi Jeff….good grief mate, stop reading and get on a plane…There’s no correlation or meaning because its MINISCULE. This is like pointing to a crappy looking alley way buried somewhere in Little Italy or Chinatown in Manhattan, there’s plenty of those, and then saying that’s an excellent indicator that Manhattan is in trouble. Ridiculous rhetoric.

Cheers, Mario

roger erickson December 13, 2010, 10:47 pm

There is so much misinformation on what it means to have a currency “standard”. As Prof. Brad Lewis of Union College kindly pointed out:

1) Only four countries (Britain, the U.S., France, and Germany) followed what was called a “true” gold standard from, and then only from 1870-1914 (meaning circulating gold coin and/or paper money and token coins convertible into gold) . Somehow a number of other economies that were moving up in economic importance seemed to have gotten along without one.
[And, of course, commerce flourished throughout history via increasingly efficient exchange of whatever counter parties deemed equal value at any one time & place. My kingdom for a horse? Or for Helen’s face?]

2. There is a section in the following review that is on “cashless” payments like bills of exchange. Is it a coincidence that they’re mentioned below as having originated in Italy with its relatively vibrant city states?

Handbook of World Exchange Rates, 1590-1914
http://www.eh.net/book_reviews/handbook-world-exchange-rates-1590-1914

My only point is that there’s still much to know. It’s hard enough to survive the folly of neighbors who don’t have your back in any useful way. That task is only made harder by superficial understanding of our own supposed history.

Re the rise of Euro-US bankers post 1870? Strikes me as an example of bankers snatching defeat from the jaws of total victory?

I don’t suppose that adaptive groups, from Alexander the Great to Genghis Khan to the British Navy & on to von Moltke & Gen. Patton cared about stable values, only the return on coordination.

Why is it that organizations sometimes get soft & start placing accountants in mgt instead of just records keeping?

In the end, these records are eerily reminiscent of University Department committees trying to manage faculty selection by publication records alone, and losing track of net impact on community and economy.

Just another statistical example of institutional decay; and another signal lost in the “fog of context”?

Larry D December 13, 2010, 11:06 pm

Good Professor Lewis seems to have neglected to mention the 10 other countries that joined with France to form the Latin Monetary Union of that 1870-1914 period:

Belgium
Italy
Switzerland
Spain
Greece
Romania
Bulgaria
Venezuela
Serbia
San Marino

roger erickson December 14, 2010, 12:23 am

thanks for that;

ps: the list of 4 was by the original authors, not Prof. Lewis;

ps: ps: devil is all in the details; was local currency in those accessory colonies, er, countries, convertible to gold upon demand? Have no idea, but would be interested in hearing inputs.

Benjamin December 14, 2010, 2:01 pm

A minor and maybe meaningless point, but I think one of the reasons the classic standard failed was because of the redemption of paper coin. Long story short…

I think it would’ve been better to use expiring certificates instead. That way, bondholders could always be assured their coin would be there to be reclaimed. They would more willingly lend because of it, voluntarily, rather than relying on, say, taxation (another grand and ongoing failure).

Anyway, let the sum total of expired certificates determine in part where the revalutions of currency weight go, so as to give the certificates a means to circulate and be accpeted. What would be lost to expiration would be regained in reweighing to the down side (and on a sweet, sweet side note, the practice of saving would be ressurected, as would the size of government be limited to exactly what people, on the whole, want or not).

As for the rest of the world getting along without the standard…

Might it be possible that because some held to gold and silver money that the rest were able to maintain themselves so well?

Antal Fekete often seems to imply this. The dark ages were not dark for everyone, just western Europe, who apparently shunned gold. But eastern Europe adopted the gold bezant, and Fekete makes a great case that that is what saw Western civilization through to the end of the tunnel. Too, that real bills circulated throughout much of history because ultimately they were rooted in gold and silver coin.

I’m no history professor to say, but the logic of it all is certainly there. Can’t print gold and silver, and, despite rising industrial use, are the two most stable things, compared to all else. If gold-less economies existed, and can exist, I doubt that _all_ economies could long get by without it. Kind of like saying because we have paddles, we never needed sails (let alone engines), I suppose!

rich December 14, 2010, 5:32 pm

USA on a defacto silver standard from 1497 to 1857 with the first world species currency, the Spanish Silver Dollar Piece of Eight.

http://en.wikipedia.org/wiki/Spanish_dollar

It proved itself so well during the Continental Paper inflation of the Revolutionary War, that the US Constititution says only gold and silver are legal tender in settlement of debts, which the Mint act of 1792 further codified, adding copper coins.

http://en.wikipedia.org/wiki/Coinage_Act_of_1792

Now, copper, silver and gold all worth more than the paper, illustrating Gresham’s (Copernicus’) Law, bad money driving out good.

http://en.wikipedia.org/wiki/Gresham%27s_law

Newton, a scientific member of Parliament, as Master and Warden of the Royal Mint used silver to Unite and preserve the Kingdom with Sterling Pounds.

http://en.wikipedia.org/wiki/Isaac_Newton

It seems the only way the US Treasury can regain control of the money supply may be to fire the Fed, replace the income tax with the 28 basis point transaction tax and return to the steady money supply Milton Friedman said a computer could provide.

No wonder Mr Geithner got kidney stones. Many tried to oppose central bank tax usury, from Buddha to Moses to Jesus to Mohammed to Jackson to Lincoln to Kennedy…

F. Beard December 13, 2010, 9:50 pm

In the background, the world’s third biggest economy, Japan, struggles under a debt burden that is almost epic, while the United States itself appears headed for a crisis of confidence as it monetizes its own debt obligations,… Cam Fitzgerald

If debt is the problem then why don’t we directly deal with it? Dr. Michael Hudson (and Deuteronomy 15) call for a debt Jubilee. But since fractional reserve banking cheats savers too then why not a bailout of the entire population?

It’s only fiat money. It’s not like we have to dig it out of the ground; the US Treasury could create it at will and give it away to every US adult.

Instead, we give it to the villains, the banks, not the victims.

Are we betting that God is dead? If not, then rest assured that He is not mocked.

Larry D December 13, 2010, 10:56 pm

F, your plan for conjured fiat money insures that He is mocked.

Biblical money consists of gold, silver, and bronze, not paper, credits in a ledger, or little plastic cards.

david December 13, 2010, 8:55 pm

Well done Cam.You have a unique way of making your point without overly committing to it.The tone is much more subtle then faber or Roubini, gata ,Taleeb Etc. I believe that good will ultimately prevail in this world over evil.I believe the banks run the government and they do so because they feel the people are more interested in things than thinking for themselves.Their will be some pain but it is cyclical and necessary.A sort of cleansing if you will….a global enema.Watch what gov. and business are doing and don’t listen to what they or the main stream media are saying and you will be better off.Good luck and God bless you all.

Elaine Douglass December 13, 2010, 8:52 pm

Mr. Fitzgerald writes with heart and depth of intellect. He reassures me there are still people like that around. I am grateful to him.

Cameroni December 14, 2010, 4:14 am

You just made me blush!

fallingman December 13, 2010, 8:21 pm

Nice analogy John Jay.

John Jay December 13, 2010, 7:56 pm

The citizens of the United States continue to get bitch slapped by the government from the local to the Federal level and everywhere in between.
Now, just like a wife beating husband, they are blaming us for the economic mess and telling us it is all our fault that they have to beat the hell out of us some more.
All this while they lavish love and affection on their “girlfriends”, big banks and the military industrial complex on the Federal level, and government employees at all levels.
Sucks to be us!

pete nash December 13, 2010, 8:58 pm

Reply to the last post,…..Welcolme to Australia!!

Mercurious December 15, 2010, 4:21 pm

If I only had one opportunity to implant any idea into the vast expanses of the average American head, it would be this: The government of the United States does not represent you any more. It has not for some time. It represents the interests of the rich, powerful and well-connected. What you take to be their interest in your well-being is nothing more than greasing a cog to keep it from jamming the system. If they didn’t have to, they wouldn’t do it. How are you going to respond to a government that doesn’t really care if you live or die? That’s the sum total of the reality of our situation, and of governments all over the world. It can’t change until those being victimized by government shake off the positively loony idea that the government is there to help them. If it does so, it is only incidental to providing a much larger benefit for The Elite. Make all your choices, plan all your scenarios, and prepare for all contingencies with that in mind.

C.C. December 13, 2010, 6:23 pm

“On the contrary, wages will be falling due to ongoing global competitive forces that seem to still be a mystery to most people, particularly the trade unions. Hello!”

I could not help but catch the above perspective. Full disclosure: I am not now, nor have I ever been a member of the Communist… – uh, trade Unions…

What IS a mystery however, are the brain-dead attitudes of the electorate that seem perfectly willing and content to vote in corruption, largesse, cronyism and general anti-Liberty, election cycle after election cycle. Look no further than California’s recent election – basically a total and complete repudiation of the principles of Liberty and the Free Market.

As a result of that brain-deadness, we get the Stifling, Regulatory Nightmare that has become U.S. domestic economic policy, where no man in his right mind would set up anything but a 1 – 10 person shop, and maybe not even that.

Wages, schmages. ‘Wages’ will take care of themselves – just fine, when government gets the HELL out of the business of micro-managing its citizens.

That right there of course, is Not going to happen any time soon – in fact, the Tax & Regulatory Hell is going to do nothing but intensify until a winning percentage of the brain-dead electorate has finally had enough. So… on that fine note, I happen to not only agree with Mr. Cam’s outlook, I think the Spectre of government will be on most everyone’s lips, before their last worthless $dollars are spent.

Rich December 13, 2010, 7:06 pm

CC:
“What IS a mystery however, are the brain-dead attitudes of the electorate that seem perfectly willing and content to vote in corruption, largesse, cronyism and general anti-Liberty, election cycle after election cycle. Look no further than California’s recent election – basically a total and complete repudiation of the principles of Liberty and the Free Market.”

And the Communist Party–er CA Government Unions plus vote rigging…

Rich December 13, 2010, 5:46 pm

Cam, energy and food certainly seem to be in fashion, even in MA where farm courses are setting records for attendance. Doug Casey marketing a retreat in Argentine polo and wine country.
Re higher interest rates, are they not bullish for cash?
Target for CZI 26 from 18…
http://stockcharts.com/charts/gallery.html?s=czi
Regards All

Cameroni December 13, 2010, 6:23 pm

I agree Rich that this is a very good time to be involved in agriculture one way or another and returns should improve across this cycle for those who participate.

I am a big fan of dairies but that is an incredibly costly business to break into as an upstart particularly as quota costs keep rising. It is about time that the trend away from farms was reversed though and from my perspective that is where the cycle will take us next albeit in a smaller more focussed way.

Cheese production for example, beekeeping, goat dairies and related agricultural value added products come to mind along with any other agricultural endeavors that can be undertaken without having to acquire huge tracts of land.

mario cavolo December 13, 2010, 6:46 pm

nice Rich, I’m thinking the same thing…no reason to expect stellar growth continuing here in HK/China, equity markets could continue weak for many more months no matter whether the U.S. market rallies or not….price here are a big time pressure cooker forcing the Chinese govt’s hand to tighten….because of the societal demographics including 700 million plus lower income folks, food/consumables price inflation here is a bigger concern and impact and its in an ugly upward trend…

Cheers, Mario

Steve December 13, 2010, 7:46 pm

One cannot grow wheat unless one buys seed from the master supplier. Or, should I more correctly say one cannot sell wheat unless the seed is bought of the master. Those growing Green Beans are told how many acres they may plant, must use the master’s seed, and cannot harvest, that left to the master. It has been this way for quite awhile now. Learn to grow for one’s self, or for barter. But, to believe that one has liberty to sell commercially, what they grow from a feudal deed as a tenant is ignorance. The master holds the deed, controls the seed, and says how many acres one may farm for them.

redwilldanaher December 13, 2010, 4:40 pm

Nice job Cam. It may be mostly HFT but let’s not overlook that the HFT and much of the non HFT are backed by near-instant monetization that funds cartel member stock purchases and futures manipulation. I’ll have to look for an update to the study regarding how much of this “bull market” rally has been ginned during off-hours. I’d like to hear estimates from Rick’s forum members on just how quickly they think the “feudal” times could be back for most of us. My estimate is days and for me that’s the most serious problem for all of us. The cartel can control transit and thus they can control the food supply. The cartel can control the water supply. That’s why these times are far more dangerous than most Americans currently imagine IMO. If reform or exposure ever “get anywhere”, I suspect that our malevolent friends simply won’t turn the keys back over to the people and walk peacefully into retirement. I’d guess that things get pretty feudal, pretty quickly. From what I can see, the con is air tight right now. We’ll have to wait until the Banksters et al. believe that they’ve forced enough capitulation in one form or another and then we’ll see some downside because they’ll be positioned to profit from downside. Just like old times.

Cameroni December 13, 2010, 6:10 pm

Thanks Red,

Credit goes to Rick though for having laboriously sorted through tangle of discordant and random thoughts I originally wrote and turning it into a more focussed and coherent article.

By the way, that JP Morgan copper purchase was an absolute coup in my opinion and a brilliant move on their part. I would have done the same if I was so well capitalized and especially given the optics of a coming realignment in the distribution of wealth and debt settlement.

You will want to be similarly placed on a personal level and I do think that they have tipped us off as to how our own thinking should be redirected to reflect a sea change underway in wealth dynamics. There is a warning for us all too in their actions that cannot be ignored and a hint to what lies ahead in the future.

The division between the have’s and the have-nots will be apparent to all soon enough.

Steve December 13, 2010, 7:38 pm

Redwill, Look at the Deed to your estate ! Fee Simple absolute, yes. Fee, fife, feod, feud, feudal tenant, peon, serf, slave, Blacks Law Dictionary Fourth Revised Edition 1968. U.S. citizenship is legislatively created under Master/servant Law via the 14th voluntary polical act. The office of the corporate successor under 28 U.S.C. 3002(15) in Obama is subject to no law, constitution, treaty as the Commander in Chief [Bush Theory]. We are all witnessing the feudalism. The master has not squeezed the people yet because there has been no need. Yes, the estate of slavery may be inherited, but; not Liberty.

redwilldanaher December 14, 2010, 12:16 am

Steve,

Agreed. Great reasons why there isn’t any point to anything but reestablishment. My favored option is peaceful secession. I know that some, possibly yourself included, favor nullification. I’ve had a nominal group on FB for some time but recently pitched in with another group in my state because these fellas have more time and more firepower (the social networking kind) than I do. After revealing that to several “friends”, the standard and universal ridicule followed so I know I must be on the right path! Yes, I realize it is the longest of shots, a lost cause. It doesn’t change the fact that I believe it is the right thing to do, that it is the moral thing to do, and thus I do it.

sam spetzigue December 13, 2010, 3:10 pm

China is a giant bacterium, out of control. A society that would build entire cities fully intending that they will remain empty until filled with mold and then demolished is a society that will collapse. I recall the Soviets doing the same thing. And how did that turn out?

Robert December 14, 2010, 11:48 pm

Interesting perspective.

I won’t argue for or against Chinese real estate bubbles, but I will question the rationality of building empty buildings. The whole thing reeks of resource allocation distortion, and the distortion is being funded by debt, so we must surmise that it will have a very bad ending.

gino December 13, 2010, 2:41 pm

You have to find it, then mine it, then process it, and the smart people want it- always have and always will.

Robert December 14, 2010, 11:48 pm

Everyone that is, except Warren Buffet 🙂

Jack L. Earl December 13, 2010, 10:40 am

Cam, maybe the treasury does have a plan B.

I recently saw an article on the net that I believe was published by GATA that speculated that the government would allow gold to go to $8,000 an ounce and then would have a currency recall and a new currency that would be partially backed by gold. I am assuming that they would do this by printing so much money along the way that debts could all be paid off and just as everything was totally colapsing, they would come out with this new currency and we would all trade in our mountains of worthless fiat currency at $100 for a new partially gold backed $1, or maybe 1,000 for 1, or 100,000 for 1, or whatever.

This isn’t a new story, lots of speculation and theories along these lines, but here is the good part:

I few months ago I saw a display from the bureau of engraving and printing for the new $100 bills. They are beautiful, with many new and updated security features; color changing ink, a 3-D ribbon that is woven into the bill and featuring gold printing on both sides, kind of a Road to Roota sort of thing. I was looking forward to seeing them when they were scheduled to be released in February to replace the old hundreds.

But now a story released by CNBC and other sources says that they have printed one hundred ten billion dollars worth of these new bills and have discovered a printing error that has left an unprinted streak across an unknown number of the bills from a creasing problem in the paper.

Can you buy that? If they had said, “We have printed several thousand sheets of the new bills and have found persistent problems and so we are shutting down production until we have corrected the problem”, I would belive that, why not. These bills were printed in the most sophisticated printing plants in the world with the finest equipment, the newest technology, the highest possible security and the most stringent quality controls possible. And yet, they claim to have produced over one hundred billion dollars worth of new bills and no one noticed this problem until they were printed. Now that is enough bills to fill 1300 pallets and if they were stacked one pallet high, they would fill over 50 semi trucks, or you could stack them in one stack that would be over 70 miles high.

That is over 10% of all of the currency now in circulation and it is just sitting in warehouses in Fort Worth and Washington D.C. They won’t be releasing them in February. They will be storing them, they said, for at least a year while they remove all of the defective notes.

Maybe. Or maybe they do have a plan B.

Benjamin December 13, 2010, 7:16 am

Nice to hear from you again, Cameroni. Let’s see if you get another 100+ responses, like the last time (remember that?).

Among the many points made, I’d like to focus on the point you made concerning the importance of land. Indeed, it has a long history in all things financial. I don’t recall where, but I once read that land during portions of the dark and middle ages was even more valuable than gold!

But here’s the thing about land… Among one other problem I see, it’s too stable. Land needs to become liquid (much preferably not in the same fashion as the Good Friday of 1964). So, sooner or later the medium of exchange becomes just as important.

Which brings me to Mario’s interesting and apparently factual point of view. This is quite unlike saying a broken clock being right twice a day. More like saying that we are in a shifting trend… that can and probably will shift again in future. From there, it’s a matter of how land is, um, liquified. Hard money, and I’d say the Chinese invested in land are wise. Paper currency, and it’ll be the further graying of yin-yang, the same old gloomy shifts as we’ve always had. Or maybe not…

Likewise, as you (Cameroni) pointed out… denominated in the currencies, everything is distorted. Too many cooks spoil the broth, but too many theives tear the cloth! So clearly, land will have to skip the chicanerous middle-man of irredeemable paper currencies.

At this point, gentlemen, it’s collapse and/or change. There is no tomorrow for this system and all of its “risks” (read: inevitable failure). It’s just that the waiting is the hardest part. As for the answer-to-all-prayers, its still currently in development and pending approval…

One bad apple spoils the barrel. While the U.S. was the only country to try living bottom-up, we still had the thread of top-down rules. Our strings, so to speak, or perhaps they are/were chains: We are and were forced to pay taxes. The solution, however, is summed up here…

http://www.rickackerman.com/2010/12/it%e2%80%99s-business-as-usual-says-tea-party%e2%80%99s-meckler/#comment-14934

Funny how Cameroni mentioned the ageing Japanese. Funny how I came to see that those depending on social security can be valuable allies, which would and could pull all other groups as we know them today into nice, orderly lines. Nope, no coincidences here, in my view. The solution is right under our noses: we each have to demand that our personal power be acknowledged, respected, and practiced. Forget about all politics, as they are only a poor defense against the attack on the individual. Forget about shifting seas of distorted wealth, as that is only the fading Yin-Yang that is destined to grey out everyone. Instead…

Demand that your right to mint coinage (or not) be respectged. Demand that governments value the currency in those kindly offered donations, rather than reaching into your pockets, over-riding the power of your choice. Remember (and not to get all 1980s cheesy kung-fu movie) who The Master is…!

http://www.youtube.com/watch?v=PWVhiIisH30

Oh and by the way, is the picture in today’s article from that movie, ‘The Goonies’? Sure looks like it. So I guess that makest TWO cheesy 80s flicks referenced today! Ah, the good ol’ days…

Anyway, okay… Go get ’em, tigers! 🙂

Cameroni December 14, 2010, 4:01 am

Many thanks Benjamin. Not sure we will see quite so much response today (because I am a little too long-winded and put some people to sleep) but I am really excited about another article I have written describing the incredible inflationary trend underway in Africa right now and how Chinese interest in that continent and the commodity boom are perhaps coalescing conflicts between the US and Asia.

It is going to run later this week I think and it is an eye-opener for anyone not familiar with the Horn of Africa. It is a story that very few have heard before and I feel it is one of the most important pieces I have written.

And just to give you a little hint for fun, the outside theme relates to water, power and African industrialization.

Benjamin December 14, 2010, 1:13 pm

Hi Cam,

Looking forward to it! I haven’t exactly been keeping my eyes on various world trends of late, but a few years back I kind of figured there would be Chinese rush into Africa, at some point. If that is so, I’ll say this much…

It’s not you that are boring. It’s this entirely too predictable, ho-hum world.

Anyway, off to read some comments. Take care!

Other Paul December 13, 2010, 4:48 am

Prices of almost all tangible and intangible assets have risen in price or at least stabilized.

The US Dollar index has hardly moved, net, since the crisis in Sep-Oct 2008, even though the Fed, with the cooperation of the Treasury, has poured trillions into the US and other economies.

Store shelves and vault cash will not be emptied until people perceive that the “hurrricane” is only a day or two away.

The standard of living of most Americans has “room” to fall without serious social upheavals.

I propose that the above situations are the Fed’s and Treasury’s current analysis of the situation. So, they believe, “Printing money” and “propping up” has worked.

A certain percentage of the printing is going to go into bonds or bills, the latter being more attractive to investors in a rising interest rate environment. The Treasury has, can and will shorten up the duration of its debt profile to fit investors’ risk tolerance.

Rick December 13, 2010, 4:14 am

Your perspective from Shanghai has been invaluable to this forum, Mario. Thanks for weighing in on China’s supposed real estate bubble, the extent of which, as you suggest, has been greatly exaggerated by the Western press.

Bradley December 13, 2010, 4:08 am

Please forgive my attention to detail, but if “passengers are scurrying from port to lee”, and the wind is from the right, (as surely it is these days), then would an outside observer notice the scurrying?

mario cavolo December 13, 2010, 3:52 am

An outstanding, insightful treatment Cam, thank you very much.

As to which problem may be a catalyst to impending disaster let me help readers to rest that the supposed real estate bubble in China is not likely to be it.

“And now China, …….is itself forming what could prove to be the biggest real estate and credit bubble the world has ever seen….”

I suspect here you may be simply following the mainstream media and Jim Chanos party line on this popular item which is easy enough to refute.

First, while there is a sector of the real estate market in China rife with leveraged speculation, the vast majority of China home and commercial real estate enjoys 50 to 100% equity, rather than being mortgaged to the hilt 95 to 110%. This point alone should be enough to quell fears, but there’s more.

Secondly, this talk about all the empty apartments in China is also in fact empty talk; it is normal in China to choose an apartment as an asset store, keeping in mind typical property carrying costs are a pittance in the range of a $10-$50/month management fee. Back in the U.S. costs are more like 3% to 7% per year on assessed value…ouch.

Third, the apartment flipping speculators are a small group, not the mainstream market and most of them too are so wealthy beyond what anyone in the West imagines that they too can absorb and reversals of fortune.

Fourth, keep in mind the size of the grey economy here in China, I mean the unreported cash economy. Unlike the U.S. where 99% of every dollar spent is known and tracked, in China the cash economy is estimated at a few trillion USD….a massive buffer to say the least.

For the most part, if China real estate prices went down 30%, they would still have plenty of equity, and still have much lower debt payment to income ratios, so it wouldn’t be ruinous. Most Chinese would lament it for a moment and then take another sip of their tea while equally lamenting that the price of garlic and ginger have doubled in the past year due once again to speculators.

Cheers, Mario

Cameroni December 13, 2010, 4:23 pm

You are too kind Mario. Many thanks. I think I could use some of your positive thinking. I have noticed that almost everyone who has spent time in Asia has a completely different outlook than the rest of us. I need to get over there and see it for myself.

Nonetheless, I do not feel wildly optimistic lately. As above, I have my moments when I seem unable to fully articulate my concerns and so end up walking myself through a long thought process without reaching any decisive conclusion.

I will tell you this, I believe we are headed for a second great crisis and it is one that will fundamentally change the way the entire financial system functions.

I believe we are quickly headed for a day when there is a single global currency and that it will be substantially built around a combination of a nations real output and what physical resources they possess. This is not necessarily a gold backed currency but one that is commodity based in essence.

And I also think we will be forced to bargain with our creditors in striking an accord that ultimately covers all nations, all sovereign indebtedness and the huge distortions in imbalances that now exist between countries.

I can forsee a time when currency speculation simply no longer exists and many of the paper trades that are substantially behind the continuing debt crisis are simply wiped from the slate in order to bring balance back to the system.

But it won’t happen until our backs are literally to the wall and we have already seen a financial collapse. Hopefully we can survive that sorry day.

ricecake December 13, 2010, 6:35 pm

One of the most important influential economist in China (sorry forget his name but I watched him speaking on Chinese TV) said: ” The difference between the Subprime loan crisis between the US and China is:

US – bank loans to individuals who can’t afford to buy (any) house while in

China – bank loans to local governments who can’t afford the infrastructure and Real Estate developments. These government back those loans with the local lands in the hope of future increase in the value of the lands to pay off the loans.

Chao’s right on China’s “Razor Cutting Sharp profit margins.”

Despite of the severe inflation, China can’t and won’t dare rate hike because many businesses especially the Real Estates will collapse over night easily. It’ll kill the disease and the patient at the same time.

Andy B December 13, 2010, 1:50 am

I sure like gold. What can be more stable and offer more stabilily than gold, particularly at these prices? Farm land.

John P December 14, 2010, 2:36 am

Andy B December 13, 2010 at 1:50 am wrote:
I sure like gold. What can be more stable and offer more stabilily than gold, particularly at these prices? Farm land.
==============
My extended family were farmers. The one remaining, a cousin, owns 1.5 square miles of wheat farmland. That land today, after his parents and he owned it for over 70 years, will just barely buy a house in town today. So much for investing in farmland. Where I come from, there is an expression:

“Crime doesn’t pay. Neither does farming.”

There is another expression,

“He bought the farm”

That means, the farmer died and the life insurance paid off the mortgage on the land. In other words, a farmer is in debt all his life, until he dies.

It seems to be the traders who make the money on agriculture, it is definitely not the farmer.

JP

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