The Enemy Within

"If tyranny and oppression come to this land, it will be under the guise of fighting a foreign enemy.  But, in reality it will be an Enemy from within”  

James Madison (1785)

"No people will tamely surrender their Liberties, nor can they be easily subdued, when knowledge is wide spread and Virtue is preserved. On the Contrary, when People are universally ignorant, and debauched in their Manners, they will sink under their own weight without the Aid of foreign Invaders”

Samuel  Adams (1775)

"Using history as our guide, the new wealthy will be those who had the wisdom to get out of paper money before the BREAKDOWN of the current financial system."

Aubie Baltin

The most massive and most intelligent pools of capital on the planet are now looking to crowd into gold and silver. So far, they have been accumulating it on the QT so as not to drive their prices up before they have had a chance to buy back all the gold that they foolishly dumped from 1980 until 2001. This is great news for a sector that has been in a state of consolidation for over a year and strongly supports the thesis that 2013 will be a banner year for gold and silver - just as the Stock Markets will also be a banner year but on the downside for stock markets around the world.

Don’t listen to all those Johnny Come Lately Precious Metal Bulls that have now turned bearish. Silver is actually in the process of forming a very strong base to set the stage for the beginning of a strong new up leg. Its technical’s and fundamentals are very bullish, contradicting the prevailing pessimism gripping traders. This glaring disconnect between price action and sentiment won’t last much longer; start accumulating your PM stocks that you have been watching now. My two favorites are FNV and SLW as the first rounds of accumulation will start with the biggest, most profitable and most solid companies.

HISTORY TEACHES US ALL LESSONS: But it is the responsibility of each individual to learn these lessons by himself.

ERA OF MONETARY STABILITY (1950-1963)

On average, the Fed grew its financial assets by only 3.4% every five years.  The result being inflation and interest rates were very subdued. Any speculative bubbles and busts were limited to niche sectors. Recessions were relatively mild and the U.S. Dollar was king throughout the global economy.

ERA OF MONETARY EXPANSION (1964 - 2007)

The Fed began expanding its balance sheet at an extraordinary rapid pace, by an average of 37.2% every five years, or ELEVEN times faster than in the prior era of monetary stability.  This resulted in inflation surging and interest rates going through the roof. Moreover, toward the end of the period, two boom-bust cycles and the worst Recession since the Great Depression nearly destroyed America's middle class. The U.S. Dollar fell precipitously and America's global leadership became a shadow of its former self.

ERA OF MONETARY EXPLOSION (2008 - PRESENT)

Chairman Ben Bernanke, true to his nickname "Helicopter Ben," has expanded the Fed's financial assets at an average five-year clip of 194.9%!  This is FIFTY-SEVEN times faster than the pace of monetary growth recorded during the era of monetary stability!  The end result thus far is unknown, but we can look to history for a description of the unimaginable. And as if this weren't enough to rekindle some of the worst inflation of our lifetime, this time around the world's other powerful central banks are following our lead, compounding the world’s problems.

EUROPEAN CENTRAL BANK'S QE2 IS FAR LARGER THAN ITS QE1!

While the Fed launched QE1 with a big bang in September 2008, the European Central Bank (ECB) grew its assets from 1.9 trillion Euros (nearly $2.8 trillion) on August 31, 2008 to 2.6 trillion Euros ($3.4 trillion) less than two months later — the greatest increase in Europe since Weimar Germany (1922 – 1923). Then, beginning on April 29, 2011, the ECB accelerated their money printing, and today their balance sheet is up to 4 trillion Euros ($5.1trillion)!

What used to be the world's most "conservative" major central bank is now printing money at an even more rapid pace than Bernanke himself! And yet the Euro is appreciating against the US Dollar. Explain that, I can’t.

The Bank of England, the Bank of Japan and especially the Bank of China as well as other central banks all around the world are following a similar pattern. The total Balance Sheets of the four major Central Banks (USA, England, ECB, and Japan) have increased by more than $10 trillion.

That's $10 trillion in paper money that's been pumped into the global economy with zero positive results. So what will they be doing from here on in? Even in the early 1930s, when the nation's entire banking system shut down and in the early 1980s, when hundreds of U.S. banks were failing each year, the Fed and the other central banks never came close to today’s monetary expansion.

But here's the greatest irony of all: It's not working. So what are their solutions? Why more of the same naturally (The definition of insanity).  To make matters even worse, they are running into the law of diminishing returns — more and more money, less and less positive benefits.

WHAT TO DO

First, remember that you can't expect inflation to suddenly appear immediately because the Governments are fudging the inflation numbers. More importantly, no one will be ringing any bells to let the world know precisely when the Dollar and Euro (in fact the Euro is strengthening against the US Dollar) will collapse in value. So you have to be well prepared in advance.

Second, make sure gold and Silver are a part of your preparedness strategy. Among all the asset classes, it has been and should continue to be the most reliable hedge — not only against inflation, but also against crises of nearly any kind, especially depreciating currencies and out of control government spending.

Third, be sure that it’s gold bullion that is at the core of your strategy and not gold’s paper derivatives, remembering that MF Global’s can and will probably infect the gold and silver exchanges. Buy Either CEF and/or PSLV or the bullion itself.

ALL THAT GLITTERS IS GOLD

Veteran gold investor, Jim Sinclair, posted no less than three of his own comments on the recent gold take-down on his own website, jsmineset.com, describing the latest gold price moves brought on by heavy opening selling on the COMEX as a ‘move of desperation by the Fed’, which has seen the gold price fall over $100 in three weeks. It is in fact a concerted effort by the Fed and its bullion bank allies, to artificially depress the gold price and by so doing, hide the true state of the U.S. and global economies in a last ditch effort to protect the dollar.

You cannot fix the problems of the Western World’s economic system by breaking the telltale thermometer, which is the price of gold. Sinclair and I have long held the view that gold is going substantially higher, despite what he and I and a number of others see as a gold price suppression scheme with gold seen as the bellwether of True Economic Value. There is not one professional who does not know that high volume sell orders at a time when London, Switzerland and Wall St. are closed, have but one purpose, and that is to reduce the price of gold.  Why would the Fed be prepared to do this? Well, the view is that in modern day politics, perception is everything. Rising gold prices are seen effectively as dollar devaluations, so if you can control the gold price – or at least mitigate its ongoing rise – the perception amongst the general public is that the value of the dollar in your pocket remains reasonably stable. If the gold price is allowed to rise precipitously, then the perception is that all is not well in both the World and the U.S. economies.

Now whether there is indeed a concerted ploy by the political and financial elite to control the global economic thermometer (gold) remains to be proven – and probably never will be – but the machinations on the COMEX give increasing credibility to the view that someone, with unlimited pockets, is trying to control gold and silver prices. Logic suggests that this can only be accomplished by government – or rather by major financial institutions with tacit government approval and support. That this solution is now beginning to gain coverage in some of the mainstream financial press says much for the distrust of the government’s motives in economic manipulation (as seen by 4 consecutive QE’s, which are not producing the expected positive results).

The idea that the patient will recover because Dr. Ben is manipulating the fever thermometer (the gold price) is the height of blatant foolishness and ignorance. They did this in the 1970s and it failed then as miserably as this act of desperation will also.

The only thing that this is achieving is to drive gold into Asian hands at bargain prices, thereby ultimately transferring global economic leadership from West to East. This is a process which can only be accelerated by this kind of intervention in the markets (particularly if one observes that China is taking this opportunity to build its gold reserves on the way towards making the Yuan at least a part of the coming next global reserve currency). 

Japanese pension funds are investing in gold for the first time in an effort to hedge against economic upheaval.  They hope that it will shelter them from the problems of the global economy, with low interest rates as well as newly elected Prime Minister Shinzo Abe’s demand for “unlimited easing measures” from the central bank further justifying the inclusion of non-yielding gold in their portfolios.

The Central Bank of Iraq’s quadrupling of gold reserves is important as there are many oil rich nations in the world with sizeable dollar and euro currency reserve and only a small allocation to gold by these central banks alone could lead to higher gold prices.

The world order is changing – a process which is being facilitated by the US’s own economic mismanagement leading to an enormous debt burden which has now reached proportions from which there can be no return. Gold is going to $6,250 over the next 4 or 5 years (as I predicted as far back as 2002). I have often been said “that the only difference between the government and the mafia is the cost of their suits.

ENDING THE ERA OF PONZI FINANCE

“Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is a large and larger weight given over to the units engaged in speculative and Ponzi scheme finance. . . . The greater the weight of speculative and Ponzi finance, the smaller the overall margins of safety in the economy and the greater the fragility of the financial structure.”

—Hyman Minsky, 1992

The greater the amounts of speculative and Ponzi finance, the smaller the overall margins of safety in the economy and the greater the fragility of the financial structure.”

—    Hyman Minsky, 1992

WILL WE EVER LEARN?  NO COUNTRY CAN BUY ITS WAY OUT OF TROUBLE BY PRINTING COUNTERFIT MONEY.

By far, the second-biggest Ponzi scheme was organized by the New York hedge-fund manager Bernard Madoff, which led to losses of approximately $20 billion in 2008. However, the biggest Ponzi scheme is still ongoing: The one organized by the US FED and Treasury involving US Treasury Notes and T Bonds. It is not simply that the developed world has borrowed significantly from future wealth to fund today’s consumption, leading to huge burdens for the next generation. It has also reduced the potential for future economic growth, making it more difficult for the next generation to deal with this legacy.

It may seem harsh or exaggerated to liken the current troubles of the developed economies to a Ponzi scheme. I do so deliberately to emphasize the scope and seriousness of the problem. After nearly six years after the financial crisis, the leaders of the developed world are far too complacent. Politicians and central bankers have continued to “kick the can down the road,” pursuing policies designed to postpone the day of reckoning and avoid telling the public the truth: that a sizable part of the debt will never be paid back in an orderly way.

Fortunately, there is still time to act. But leaders from all social sectors—government, business, organized labor, environmental and other stakeholder groups—need to act decisively and quickly in order to secure future economic prosperity, social cohesion, and political stability. It is in the nature of Ponzi schemes to collapse suddenly, without warning. No one knows what event may send the developed world and the global economy as a whole back into crisis.

THE ORIGINS OF THE GOVERNMENT PONZI SCHEME

The developed world’s Ponzi scheme is caused by record-high levels of public and private debt. And it is exacerbated by huge unfunded liabilities that will be impossible to pay off owing to long-term changes in developed-world demographics. According to a study by the Bank for International Settlements (BIS), the combined debt of governments, private households, and nonfinancial companies in the 18 core countries of the OECD rose from 160% of GDP in 1980 to 321% in 2010. In real terms, after inflation is taken into account, governments debts have increased more than four times, private households more than six times, and nonfinancial companies more than three times the debt they had in 1980.

There is, of course, nothing wrong with taking on debt, as long as that debt is invested to create additional economic growth. In recent decades, however, the vast majority of debt has not been used to increase future income but to consume, to speculate in stocks and real estate, and to pay the interest on previous debt. One indication of this trend: During the 1960s, each additional dollar of new credit in the US led to 59 cents in new GDP; by the first decade of the new century, that same dollar of credit was producing just 18 cents in new GDP.

These rapidly rising debt-to-GDP levels are a sign of the growing share of what the late economist Hyman Minsky termed “Ponzi financing” in the global economy. Minsky distinguished three types of credit-based financing, determined by the financial strength of the debtor:

• Hedge financing, in which the debtor has sufficient cash flow to pay interest and to pay back the principal.
• Speculative financing, in which the debtor can service the loan—that is, he or she can pay the loan interest that is due but not repay the principal out of income cash flows. Therefore, the debtor needs to continuously roll over liabilities by contracting new debt in order to meet the obligations on maturing debt.
• Ponzi financing, in which the debtor doesn’t have enough cash flow to cover either the principal or the interest. While hoping that the asset will rise faster in value than the total financing cost, he or she must borrow even more to meet the interest payments. The ultimate goal is to be “bailed out” by selling the asset to the next buyer.  

Today the developed world looks for a “next buyer” to take over its excessive debt load. Unfortunately, there is no such buyer in sight. The Ponzi scheme will have to be unwound.

GOOD LUCK AND GOD BLESS

We are into the most trying times in our nation's history. We can either succumb to our Government’s folly and go down with the ship or personally prosper. As always, the choice is yours.

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Aubie Baltin CFA, CTA, CFP, PhD.

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Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information and data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.