Living with the Greatest American Lie

 “Americans are so enamored with equality that they would rather be equal in slavery than unequal in freedom.” – Alexis DeTocqueville 

“Money is coined liberty.” – Feodor Dostoevsky

“Money is a good servant, but a poor master.” – Dominique Boanous

“A single lie destroys a whole reputation of integrity.” – Baltasar Gracian

“Honesty is a good thing, but it is not profitable to its possessor unless it is kept under control.” – Don Marquis (1878-1937)

[The following article is written by MIA Associate Editor Jim Deeds.]

INTRODUCTION

A. A MOB’S DISREGARD FOR ABSOLUTE VALUES… “HONEST WEIGHTS AND HONEST MEASURES.”

America, while professing to being a nation of law, changed the rules for perhaps the very most important measure of all…years ago. In a world where reliance on honest weights and measures are the cornerstone of all commerce, our nation’s founding fathers recognized that honest weights and measures were the keystone of honest government and continued freedom. But after brief financial panics in 1893 and 1907, enlightened liberal leaders who wanted “more control” in Washington determined that a central bank was the answer. The previous “free market” banking system in America consisted of many individual banks that issued their own local currency backed locally by gold and silver reserves held at each local bank.

(As a point of interest, it is interesting that about the same time…100 years ago…the corruption of a recently centralized bank and the resulting hyperinflation (the early years of Chiang Kai-Shek’s rule) in China allowed the formation of the Communist party, as opposition, that subsequently claimed control of China, (see Hyperinflation in China 1937-1949 by Mike Hewitt at http://dollardaze.org/blog/?p=57)

So…the Federal Reserve Act of 1913 gave us new monetary rules and a politicized central bank. Later, FDR finished it off by recalling all circulating gold coinage (with the threat of fines and imprisonment)…so the 5, 10, and 20 dollar gold coins disappeared forever from our American currency. Nixon did his part, reneging in 1971 on our nation’s pledge to foreign central banks to exchange gold for all foreign dollar claims. And shortly thereafter, silver coins disappeared from circulation in our country as well. So…total conversion to fiat currency was complete. “As sound as a dollar” was now redefined “as sound as the latest American politician.” THE LESSON? Once elected to power, most “enlightened” politicians know what is really best for the illiterate electorate who vote them into office. And so today, with total politicalization of both money and credit…our dollar “floats” against other currencies and our nation is adrift. When the valid measure of money (and honest work) is gone…what other rules and laws can be safe?

B. HONEST WEIGHTS AND MEASURES

Are honest weights and measures (including our money) really important?

The Bible says (Deuteronomy 25:13-16 NASB) “You shall not have in your bag differing weights, a large and a small. You shall not have in your house differing measures, a large and a small. You shall have a full and just weight; you shall have a full and just measure that your days may be prolonged in the land which the Lord your God gives you. For everyone who does these things, everyone who acts unjustly is an abomination to the Lord your God.”

And the Constitution of the United States says: Article I, Section VIII: “(Congress is established) to coin money, regulate the value thereof, and of foreign coins, and to fix the standard of weights and measures.”Article I, Section V: “Powers prohibited of States cannot make anything but gold and silver coins a tender of debts.”

No educated voice has ever argued against the need of a factual and accurate standard for trade both within and outside America. Our country’s founding fathers were not just bright…they were brilliant in understanding the frailties of men and the prior lessons of history as they wrote our Constitution.

C. ACCURATE WEIGHTS AND MEASURES IN OUR DAILY LIVES

The cornerstone for survival of any nation depends upon TRUST and confidence in the word of our fellow man and absolute values. Where would we be today without total trust in the following? …a “barrel” of oil …a “bushel” of grain …a “quart,” “gallon,” “pint,” “cup,” or  “liter” of liquid …a “mile,” “yard,” “foot,” or “inch” and “centimeter,” as a common distance measure.

D. OUR AMERICAN DOLLAR…THE MOST IMPORTANT WORLDLY MONETARY MEASURE…NOW AFLOAT!

What formerly was “good as gold” and became the world’s “reserve currency” is now just the lead figure in a worldwide crap-game of floating currencies. The dollar, perhaps the principal ingredient in relating our personal abilities and work to financial reward, previously also possessed the added benefit as a “store of value.” You could, once upon a time, save a dollar that you earned for “a rainy day.” NO MORE! The American dollar is nothing more than another “chip” on the politicized monetary crap table.

A minute by minute battle now rages worldwide in monetary futures markets as nations,  producers, politicians,  investment bankers, hedge funds, commodity speculators, and now “the public” make moment to moment gambles on various currencies to gain commercial advantage or instant speculative profit on “currency trading.”

Japan, with the lowest interest rates on earth, has created the most beneficial “house” lender ever in being the instigator that made “carry trade” bets possible. HUGE LEVERAGED FINANCIAL SPECULATION WORLDWIDE HAS NOW BECOME COMMON-PLACE. Japan’s open-end currency creation and low interest rates make this possible. But now, the “smartest and the most powerful players” in world financial markets have been joined by perhaps some of the most naïve as they borrow “YEN” in Japan at 0.5 of 1 percent interest, and then quickly sell the yen (there is now gigantic “short” positions worldwide in the yen)…and then buy dollars, Euros, or pounds with which they can apply 10 to 1 or 100 to 1 leverage to speculate on the interest rate differential. This is “easy money” as long as yen rates are at 0.5 percent and European or Ameri-can interest rates are 3.5 to 5.5 percent. Borrowed yen are used to speculate with even greater risk in stock markets, commodities, and the already hugely leveraged derivative markets. THIS IS THE “CARRY-TRADE,” and creates total pollution and watering-down of all previously honored currencies and debt instruments. In search of instant financial gratification with PROS led by Goldman Sachs…LEVERGE is everyone’s new tool and is now KING. And the “FED”…who under the leadership of Greenspan, Bernanke, and now Treasury Secretary Paulson continues to cheer greater and greater worldwide monetary liquidity…all created with a witch’s brew of new leveraged derivatives insuring new mountains of debt.

1. THE “CURRENCY” PLAYERS

A. SOME PEOPLE NOW BELIEVE GOLDMAN SACHS “RUNS THE WORLD.” And certainly, if we measure by current financial success, they’re somewhere near the top. Hank Paulson, Treasury Secretary and former CEO at Goldman, now calls the shots at the “Treasury.” This could indicate our nation’s monetary and fiscal future will be closely aligned with Hank’s past tenure, education, and accomplishments at Goldman Sachs. We know…for sure, that he “thinks big” and can handle large numbers. During his last six months at Goldman before he became Secretary of the Treasury, Hank’s total reimbursement package exceeded $1 billion. This came from executive pay, stock options on GS, and private hedge fund and partnership profits. We can say, perhaps more than anyone else, HANK KNOWS THE MONEY GAME! And, as past CEO of perhaps the leading originator and player in the world’s $470 trillion derivative markets… Hank probably is the only one in the world who may understand the “linkage” in the gigantic derivative “insurance” plan that now is lone guarantor for all of theworld’s currencies and debt.

B. LEADING INVESTMENT BANKERS…both in America and Europe, are truly now the “instant mints” and liquefiers of world markets. Investment bankers create currency on call (and demand), through their ability to create new debt instruments that are quickly “securitized” into acceptable and liquid “currency” that is today deemed as “good as gold.” Investment bankers (i.e. Merrill Lynch, Credit Suisse, Lehman, Citicorp, and Goldman Sachs) have totally replaced the world’s central banks in the creation of new currency and debt. New “outsiders” now quickly trying to break into the international “money game” include China, Russia, and the Middle East.

(Russia, the second largest energy exporter in the world, recently announced it would only accept rubles in payment from Europe for its oil and gas, (a new money-game pressure … forcing Europeans to sell dollars to buy rubles in order to buy energy!)

2. AND NOW… “THE PUBLIC”!

In a break-through article in the Wall Street Journal (March 9, 2007)…the newest entrants in the money game were revealed. And (WOW!)…they are really BIG PLAYERS too! (Anyone who has ever visited the Orient knows that the Chinese and Japanese people love to gamble… and they’re smart too. Macao (Hong Kong) gaming revenues now surpass those in Las Vegas.)

But…let’s talk real money!

Wall Street Journal writer Yuka Hayashi relates: “Now people such as Naomi Kashiwazaki, 29 years old, have joined the fray. She trades currencies from her small apartment in Tokyo’s suburbs. She started about a year and a half ago to supplement the income from her online store, which sells designer athletic shoes that are hard to find in Japan. In recent months, she has  earned an average profit of $8,600 a month.

“I must say, I am addicted to this now,” she says.

Tens of thousands of other investors like her are doing the same thing. With Japanese interest rates hovering at a low 0.5%, they borrow piles of yen cheaply and then invest them in currencies elsewhere, looking for higher returns. Ms. Kashiwazaki makes trades totaling $200,000 or so a day among several currencies, ranging from the U.S. dollar to the Swiss franc.

“Japanese individuals are doing essentially the same thing as hedge funds,” says Tohru Sasaki, chief foreign-exchange strategist at J.P. Morgan Chase Bank in Tokyo. “Together they are acting like an enormous hedge fund.”

Mr. Sasaki estimates that in the months leading up to last week’s sharp movements, Japanese individuals some days held foreign currency valued at more than five trillion yen, or $43 billion. That is similar to his estimate for the amount of yen loans taken out by professional investors in order to speculate in foreign currencies.

So, a future consideration in the value of dollars you save is the gigantic speculative moves caused by $47 billion of leveraged hedge funds and over $40 billion of leveraged Japanese speculators…“regular” folks like you and me, who are day-trading on the floating  dollar/yen/Swiss franc/pound currency relationships.

SAME QUESTION ONCE AGAIN…

Is the American dollar really money and any kind of long term store of value…or just a gambling chip?

E. BAD MONEY DRIVES OUT GOOD MONEY!

History has no exceptions. Man’s desire to dilute currency, whiskey, or personal responsibility always ends the same. THE BAD DRIVES OUT THE GOOD!

For over 90 years (since the Federal Reserve Act of 1913), the increasing exponential diminishment of the value of the American dollar accompanied by the exponential rise in debt have rapidly decreased the purchasing power of the Yankee Dollar. More recently, a total “watering down” of credit (debt) standards has accelerated as the Fed abandoned its position as monetary referee. Money, currency, and debt instruments have all blurred together into one huge mess of worldwide floating instantaneous “currency.” And while the Bank for International Settlements and Hank and Alan brag that “we’ve made a currency restricted by old fashioned banking more liquid with new risk reducing tools (derivatives)…the people of the world, and especially America, live on credit with no fear of debt or the need to ever repay loans. TODAY’S MATURING DEBT OR CURRENT INTEREST PAYMENT IS QUICKLY REFINANCIED WITH SOME NEWLY CREATED SUB-PRIME “PAPER”!!!

Martin Hutchinson reports in his excellent article (THE BEAR’S LAIR, prudentbear.com, January 8, 2007):

The Wall Street Journal Thursday reported that no less than 71% of companies with Standard and Poor’s credit ratings had junk-quality ratings – BB and below – in 2006, up from 32% in 1980. An astounding 42% of companies with credit ratings were rated single B, the lowest possible credit rating that isn’t vulnerable to immediate default. Only 7% of rated companies were single B in 1980. So does B stand for Bankruptcy – or just for harmless, profitable Bubble?

F. NEW TRACKS IN THE SAND

Everyone leaves “tracks”…and America isn’t any different from previous world empires. EMPIRES, sooner or later…ALWAYS OVERSPEND. And today, new tracks in the sand already signal a new direction in worldwide focus as the most recent EMPIRE (America) starts to fade from view: (from Doug Noland’s Credit Bubble, prudentbear.com)

1. March 21—China Knowledge: “China will stop stockpiling its massive foreign exchange reserves,” China’s central bank governor Zhou Xiaochuan said.

2. March 20 – Bloomberg (Chris Young): “Australia’s dollar rose to the strongest in a decade on speculation the central bank will raise interest rates, attracting global currency and bond  investors.”

3. Fed Foreign Holdings of Treasury, Agency Debt jumped $16.1 billion last week (ended 3/21) to a record $1.876 trillion, with a y-t-d gain of $124 billion (30.6% annualized). “Custody” holdings have expanded at a 28% rate over 20 weeks and 18.2% y-o-y ($289 billion).

4. New Debt: Investment grade issuers included Merrill Lynch $4.1 billion.

5. March 22 – Bloomberg (John Liu): “China may account for one third of the world’s most advanced chipmaking factories built during the four years through 2010, said Novellus Systems Inc. Up to 57 foundries capable of making chips on 300 millimeter silicon wafers may be built worldwide by 2010, 19 of them in China, Novellus Chairman Richard Hill said…”

6. March 22 – Bloomberg (Archana Chaudhary): “Mumbai, India’s commercial capital may have its first daily blackouts in a century next month because the government failed to plan for soaring demand. Offices and households may lose electricity for 30 minutes a day starting mid-April,” said Lalit Jalan, executive director at Reliance Energy Ltd., the city’s main supplier.

7. March 19 – Bloomberg (Brian Swint): “London house prices advanced in March as buyers snapped up properties at the fastest pace in almost three years, led by demand from wealthy foreigners and bankers. Average asking prices in the U.K. capital rose 1.8% to 366,302 pounds ($713,000) in the four weeks through March 10, and 22% from the previous year.”

8. March 10 – Bloomberg (Curtis Eichelberger): “The New York Jets and New York Giants will borrow $650 million each to pay for the 82,000-seat football stadium they are building in East Rutherford…The Jets will sell $650 million in bonds through Citigroup Inc., while the Giants will sell $650 million in bonds through Goldman Sachs…The National Football League, which caps team debt at $150 million, is likely to make an exception for the Jets and Giants when owners meet next week…”

9. March 20 – Bloomberg (Bradley Keoun): “New Century Financial Corp., the second-biggest U.S. sub prime mortgage lender, was ordered to halt operations in its home state of California, and Fannie Mae stopped buying the company’s loans. California told New Century to stop taking mortgage applications and turn over pending loans to other lenders…”

10. March 20 – Bloomberg (Will McSheehy): “Shoppers in Dubai, United Arab Emirates, must more than double their spending by 2010 to make new malls being built in the emirate commercially viable, according to U.D.-based real-estate brokers Colliers CRE Plc. ‘Dubai is set to become one of the most intensively shopped cities on the planet’, Stuart Gissing, Collier’s regional retail director, said…”

11. March 9 – Bloomberg (Todd Prince): “Russia’s surging banking, retail and metals industries created 19 new billionaires as the former Communist country challenges Germany for the European title in Forbes magazine’s annual rich list.”

A picture is often worth 1000 words:

And from Michael Hodges’ “America’s Total Debt Report – Update 2007…$48 trillion – and soaring”, Grandfather Economic Report, we see the following headline on March 15, 2007:

THE CONCLUSION OF A DEBT PYRAMID? Best summed up in a famous old American saying: “EASY COME….EASY GO!”

G. THE GOOD NEWS – A NEW BEGINNING.

While most Americans today are addicted to easy credit…nothing down…and “why worry about tomorrow?” these attitudes do set up the once in a lifetime opportunities for the few remaining “conservative” thinkers and practitioners. It’s only a game, but a few of us know what history has always taught:

“The last person standing with a bullet in his gun (in the old west) or some gold coins in his pocket…wins.”

And if you don’t try to plan ahead and preserve your physical well-being and some financial assets…can you really help anyone else when you’re standing in a soup line?

In this MIA, as in the past and future McAlvany Intelligence Advisors, we will mention a few investment ideas geared to present and future preservation of capital. Obviously …all our recommendations won’t prove right. But we’ll follow the old rule of reducing our losses and adding to our profitable positions. In run-away hyperinflation that now threatens worldwide, following our minority view ideas as they gain investor acceptance and begin a rapid assent in price shouldn’t be too difficult to do.

H. UPDATES…FOR BOTH MODEST AND WEALTHIER SAVERS.

1. It was probably too simple an idea, but setting some of the change in your pocket aside for a “rainy day” makes good sense. Nothing to lose…and perhaps a big gain!

Some clients have already discovered the availability of a $100 “brick” of nickels available at some branch banks. And while getting 9.6¢ worth of copper and nickel in a nickel coin (25% nickel and 75% copper) doesn’t sound like much, exchanging a $100 bill for $180 worth of copper and nickel coins does make sense to some MIA subscribers. If saving money isn’t old fashioned to you…a $100 brick of nickels a month will add up to 12 bricks ($1200 saved) in a year. If (as we expect), nickels duplicate what happened to silver dimes in the 1970s, then $1200 in nickels (no downside risk) could appreciate 10 times or more in value over the next few years…to $12,000. If you need added retirement funds…or kids will be going to college in 3 or 4 years…an idea?

Unlike silver dimes in 1969, nickels are not made of a precious monetary metal. The increased consumption of both nickel and copper (“something people need and use”) appears to have bright prospects in both China and India as they rush to rapidly expand infrastructure and power supply facilities. Nickel…used to make stainless steel (China is now the #1 steel producer in the world), became so short in supply during WWII that our mint replaced 40% of the nickel in our “war time” nickels with more plentiful and less expensive silver. Demand may not be the only reason for future price rises in copper and nickel. The more rapid decline in our dollar versus some other stronger currencies and “real things” can well mean higher metal prices ahead.

So…to some degree, our copper-nickel nickel provides an honest weight and measure when compared to fiat IOU nothing American dollars.

LATE NEWS…GREATER NICKEL, COPPER, AND ZINC CONSUMPTION IN OUR FUTURE?

February 27 – Bloomberg (Cherian Thomas): “India’s government may spend as much as 60 percent more on ports, power plants and roads in its next budget, allowing companies to cut costs and help damp the fastest inflation in two years.”

March 8 – Bloomberg (Chanyaporn Chanjaroen): “Nickel advanced to a record for a second day…on expectations dwindling stockpiles of the metal will create a second year of shortages. Copper and tin rose for a third day. Rising demand for industrial metals has left mining companies struggling to fill a supply gap, causing inventories to shrink. Nickel stockpiles monitored by the London Metal Exchange have plunged 90 percent in the past year and those of tin have fallen 34 percent.”

March 1 – Bloomberg (Xiao Yu): “China, the world’s biggest consumer of copper, imported more of the metal in January than in any month since June 2005 and demand is showing no sign of slackening as the country enters its peak demand period.”

2. We mentioned the exceptionally low premiums on uncirculated $20 gold Liberties and Saints in our March MIA letter. Since then, we’ve seen two separate million dollar orders for these gold coins with two different coin dealers in our region.

With 19 new billionaires in Russia and untold new billionaires in China and India…do you suppose a few other conservative investors are looking for a true store of value for a part of their recent winnings?

A suggestion: Check the availability as well as the price of your favorite gold or silver coin. Paper gold and silver prices as shown in commodity markets may be a very poor indicator of actual PHYSICAL SUPPLY or coin availability.

CONCLUSION

When a centrally planned and manipulated money system goes bad…really bad, bad things happen to a nation. Bad money and destroyed savings can often cause REVOLUTION. America, as the value of our dollar collapses, is in grave danger. Our country’s future freedom is now at stake.

DO YOU HAVE FRIENDS OR FAMILY WHO PLAN AHEAD? If you have friends or family of moderate means who need to save…with an outside chance to see their savings grow with no downside risk…call us. We’ll send a free copy of Don’s MIA that explains why and how a nickel saved is a nickel earned…and maybe a whole lot more! And if you think nickels and  pennies will get scarce…wait until you see what happens to 100 year old gold coins. 

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