Gold, Paper, and a Train Wreck

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Gold    Silver    Economy    Central Banking

(November 2012)

Begin with a few facts and assumptions and follow the logic:

  • Gold has been a store of wealth for more than 3,000 years. Silver has been used as money in most countries of the world. Both are still valuable.
  • All unbacked paper money eventually reverts to its intrinsic value of zero. Throughout history, there have been no exceptions to this statement. The world’s current experiment with unbacked paper money is only 41 years old and looking rather strained.
  • A person, business, or government cannot increase their indebtedness forever by spending in excess of revenues. This seems self-evident. Eventually, the person, business, or government will become unable to find anyone willing to lend under those circumstances. “Deficits don’t matter” is nonsense.
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    • “If something cannot go on forever, it will stop.” This is Stein’s Law and seems obvious, but we often act as if we don’t believe it.
    • Politicians and governments will do everything possible to retain current power, even if it is destructive in the long term.

    My belief is that most people will agree with these simple and straight-forward statements.

    We know that the United States (and the rest of the world) uses an unbacked paper currency which has lost perhaps 90% of its value in the last 40 years. We know that the official US government debt exceeds $16 Trillion and is growing rapidly – approximately 12% per year for the past five years. We also know that the present value of unfunded obligations of the US government for Social Security, Medicare, Medicaid, military pensions, and other commitments is $100 Trillion to $220 Trillion depending upon who is counting. It does not matter which calculation is correct since it is impossible for the US government to fund and pay either present value estimate.

    The current debt exceeds $16 Trillion and will increase at current growth rates to about $25 Trillion in another four years. Interest rates on the national debt are historically low because the Federal Reserve continues to “print money” and then makes huge purchases of government bonds. Assume a modest 5% interest rate on $25 Trillion of national debt in 2016. Do you believe that our economy can generate $1.25 Trillion in annual taxes just to pay the interest on the debt? How about funding a 6% interest rate on $35 – $45 Trillion in national debt by the year 2020? The interest payments would be about $2.4 Trillion – approximately the entire revenue for the government in 2012. “If something cannot go on forever, it will stop.”

    Our politicians will probably address the budgetary problem, as created by them, by taking the easiest way out, by angering the least number of voters, stalling, blaming others, appointing committees, and by concealing the problems and consequences as best they can. Possibilities include: printing $Trillions and blaming the resulting inflation on a convenient scapegoat, defaulting on all debt owed to foreigners, means-testing Social Security, Medicare, and other programs, forcing pension funds and IRA’s to buy T-Bonds, higher taxes, higher inflation, and reduced military spending. Many more creative suggestions will be set forth, but they probably will not include balanced budgets, fiscal sanity, or debt repudiation.

    If paper money eventually declines in value to nearly zero, the national debt is never repaid, government will continue to borrow and spend in excess of revenues, and this process can be extended for only a few more years, what should we expect?

    • Assume the dollar will decline in value against all commodities. Food, energy, metals, and practically everything you need for survival will substantially increase in price. Jim Sinclair calls this “currency induced cost-push inflation.”
    • Assume that government guarantees, programs, and promises will be changed, reduced, eliminated, or devalued. How much good is receiving Social Security income if your monthly benefit purchases only seven loaves of bread, a few fishes, and a tank of gasoline?
    • Assume that taxes will increase and our standard of living will decrease.
    • Assume that most paper wealth in the form of debt instruments, T-Bonds, T-Notes, state government bonds, and corporate debt will substantially decline in value and purchasing power.
    • Assume that gold re-enters the global monetary system in some form, not because politicians and central bankers want it, but because they are forced to include gold in order to create a credible monetary system that will inspire confidence in the new currency.

    This begs the question, how do you prepare? Perhaps we should cash out all paper investments, buy gold, and hunker down on rural farmland. This will not work for most people. Further, while most people know much is wrong in our economy, they are not ready to abandon their current lifestyle. The problem is that by the time it becomes clear that economic disaster is upon us, it will be too late for most people to protect themselves. A partial solution is simply to buy physical gold and silver – NOW!

    People riding a runaway train can party and remain oblivious to the fact that the train is about to crash into a huge obstacle. Our runaway financial train is about to destroy the status quo as it crashes into the obstacle of mathematical consequences – the inevitable financial train wreck. “If something cannot go on forever, it will stop.”

    When will the collision/collapse occur in the United States? Jim Sinclair, one of the premier financial intellects of our time, thinks we may have until perhaps 2015 – 2017 before the collision. He recommends physical gold bullion – in your possession or perhaps stored in a secure private storage facility. I think silver coins and bullion stored in a secure and private facility are also a wise investment.

    But because we don’t know when the crash will occur, it makes far better sense to prepare now, even if early, than to wait and hope. If all of these potential disasters miraculously disappear and our financial world continues as it has, preparation will be, at worst, inexpensive insurance. “Buy that insurance” while you still can.

    Read $4,000 Gold! Yes, But When?

    Read We Have Been Warned!

    Are you prepared? Do you have enough financial insurance – physical gold and silver?

    GE Christenson
    aka Deviant Investor

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    9 thoughts on “Gold, Paper, and a Train Wreck

    1. I’ve been exploring for a little bit for any high quality articles
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    2. The fiat experiment is 41 years old? It was only foreigners who could redeem dollars for Treasury gold, especially the French were the most avid about it. Americans could not do it, nor even own non-jewelry gold till mid 70’s. We were on gold-less fiat money here since March 1933, and silver certs were terminated in June 1968. Some silver certs were “honored” with granules that amounted to jewelers silver casting shot!

      • Well, yes but…. You are certainly correct that Americans could not own gold nor exchange dollars for gold since 1933. Yes, foreigners were still redeeming dollar for gold, but not American citizens.

        But the essential point is that the value of the dollar was still tied to gold – at least indirectly – until August 15, 1971. Even if Americans could not exchange dollars for gold, foreigners could and that meant that, internationally, the dollar was still backed by gold, and therefore not totally a fiat currency. It is my understanding that the number of dollars in circulation was supposed to be limited by the US gold backing prior to 1971, and I understand that the US only partially honored that limitation. Regardless, the number of dollars in circulation grew slowly until 1971, and then quite rapidly thereafter – which is the critical point. Once there was NO attempt at backing the dollar with gold – post 1971 – the value of the dollar dropped considerably as measured by the price of gold, and that is the essential message of the August 1971 policy decision by Nixon to no longer honor the convertibility of dollars into gold by foreigners. Hence, the money supply surged, inflation surged, and the consequences of the Vietnam era arrived.

        GE Christenson
        aka Deviant Investor

    3. Yup it’s pretty simple, even for a 5th grader. One of the ways we’re preparing up here (Vancouver Canada) is by mobilizing and energizing our silver and gold now, before the collapse, using a secure and convenient trading platform called The Sovereign Exchange. The Sovereign Exchange issues a private digital trading unit called a “Sovereign” that is 100% secured by silver and gold bullion. The platform connects the hard-money crowd with metal hungry merchants, who can bid for Sovereigns with their goods and services, and then use them at any point to ‘claim’ silver and gold bullion. Settle for Metal! More details at sovereignize (dot) net.

    4. How come you don’t talk about DNA markers? DNA markers appoear at every top, and their application allows me to talk from both sides of my mouth and confuse the general public to no extent.

      Try this: DIJO(Daily incidental justification Oscillator) is a proprietary indicator that I developed that helps me understand the turns in the market. I look at various variables in the market as they setup the denominators opposing numerators with the tops that usually oppose the bottoms. They also include the DNA markers that are also present in charts that I look at. I take a swab and swipe them against the 5 4 3 2 1 stochastic numerators to validate the occurrences of the main events that have occurred in every major top from the other side of the bottom.

      • Dear Tim:

        By Jove, I really think you are onto something with that “denominators opposing numerators” idea of yours and that “tops that usually oppose the bottoms” concept is almost brilliant. I’m not so sure about DNA markers because at this point I don’t understand how they can be objectively determined and accurately measured. But if so, then great.

        I’m all in favor of whatever works and if your “54321 stochastic numerators system” is successful for you, then I hope you will continue working on its development.

        As an afterthought, you might want to explore the Calabi-Yau flop transformations as they relate to fractal patterns and apply them to cycle theory – the partial differential equations are pretty fierce but they might help with the further development of that “denominators opposing numerators” idea of yours.

        Best of luck to a fellow analyst!

        GE Christenson
        aka Deviant Investor

      • Tim ? Your Village called. They said all is forgiven and you can come back any time you want. They even said they’d try to keep the pigeons from mistaking you for a statue. Can’t get any more sincere than that, eh ?

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