From Riches to Rags
Chance of Gold
A thing to fear
What Fools, We
the currency game.
wince every time we get offers to take on debt. We worked a very long
time to shed debt and want to relax for a little while in the
comfortable feeling that comes without the burden of debt. Life being
what it is we may encounter some catastrophe that will put us back into
So, we're interested in the USA Today series on debt. The
newspaper's research indicates that nearly 50 percent of Americans have
not saved enough cash to tide them over for only three months if their
stream of income were suddenly cut off. In our book that's risky.
But with so much confusion these days about what
constitutes money, in what form should we pile up our savings...our
rainy day fund? The Federal Reserve is hellbent to keep inflation
going, which cuts into the purchasing power of the U.S.dollar.
Cryptocurrency is being hyped as the ideal currency but it is having
trouble gaining the traction it needs to gain wide support. Besides, it
won't work very well if the electricity goes off for several days.
And on top of this confusion the winds of war are kicking
up in the Middle East. It would have the potential to return us to the
question: "what IS money?"
Can credit bubbles be
made to run on forever?
Charles Hugh Smith is
the ironclad promises made in bubble economies ultimately depend on
credit-asset bubbles never popping--but sadly, all credit-asset bubbles
pop. So all
the promises--which are
of course politically impossible to revoke--will be broken as all the
credit-asset bubbles that
created the 'wealth' that was to be redistributed--pensions, retirement
Bubbles? What bubbles? The Federal Reserve says inflation is only running a tad under 2 percent, annually. In 1980 it was 13.5 percent.
Now, THAT was a bubble created by cheap currency. It would be
many years before price inflation would decline to about the present
Hugh Smith contends economic bubbles cannot expand forever.
History agrees with him, and so do we. One sign of it is the
trouble the Fed is having finding a way to get the present economy into
Social Security: The Political Third Rail
Mr. Snyder has made a living for years predicting economic downturns.
The downturns occur at regular intervals but never seem quite as horrid
as anticipated. It's true the general economic turn of events is about
to drop another recession in our laps, possibly by mid-2020. It may be
a doozy. Or maybe the Federal Reserve to Quantatative Easy will
rescue us once more. We and the Missus have been through eleven U.S.
recessions since we were wed and conclude we know something about
"There are scores and scores of millions who depend on things remaining
the way they are. Like the 50%-plus of Americans who are net recipients
of benefits from the State… the 60 million on Social Security… the 66
million on Medicaid… the 50 million on food stamps… the many millions
on hundreds of other programs… the 23 million government employees and
most of their families." The
We admit to feeling a sense of guilt from living partially out of the
pockets of strangers. But the New Deal's Social Security system and the
Great Society's Medicare and other government benfits were set up that
way. We have been receiving Social Security funds for 20 years. After
adjusting for inflation we got back every dime of FICA taxes we and our
employers paid into the system since we began our working career in the
The deal was this: If we and our spouse died early that
was that. We would not get our money back. If we lived long lives we'd
get it all back in a tad less than seven years and begin living out of
the pockets of current FICA tax payers.
But a voice in the back row insists "Wait! There's
plenty of money in the Social Security Trust Fund."
politicians keep reminding us. We forget, though, that the Trust Fund
will be running low on money only 14 years from now. Also overlooked is
the fact that the fund's cash has long since been spent by Congress and
government securities (notes and bonds) have been deposited to replace
that money. Increasing amounts of securities will have to be converted
to cash in order to meet future Social Security expenses.
Putting millions of people into the habit of living
out of stranger's pockets is a socialist plan that must eventually
founder in bankruptcy.
healthcare costs, labor shortages and financial services for the
elderly: for the first time Sunday, the world's top policymakers are
tackling economic issues relating to ageing and shrinking birthrates."
Republic or Democracy?
a kid in the town bugle and drum corps in the late 1930s we remember
snatches of patriotic speeches on the 4th of July and other such
occasions. Speakers, usually town politicians, invariably used
the term "republic" as in "Let us not forget the valiant men who fought
to preserve our republic." Or, "It is our duty to preserve the
republic for future generations."
Even to this day we salute the flag "...and
the republic for which it
stands." No reference to "democracy."
Legend has it that at the close of the
Constitutional convention in 1787 a lady asked Benjamin Franklin,
"Doctor, what kind of government have you given us?"
"A republic, if you can keep it," he
It's true the distintion between
democracy and the republican form of government is not at all clear in
the public mind. Nor in the mind of politicians, either. But it's there
and worth a Google search.
It's also true that the world history of
the experiments in democracy have not turned out well; lasting about
two or three centuries before collapsing into another form. To the
casual mind some type of socialism is usually the most appealing.
Does it matter that the U.S. form of
government is now popularly accepted as a democracy and the old term,
repulic, has been put out to pasture? Our instinct tell us "yes."
What an ominous headline! Surely the population is not so out of
balance that the rapidly aging demographic is in for trouble. The
headline actually comes from the G20 meeting in Japan. That nation
faces a serious demographic imbalance. The U.S. faces one, too,
but it will still be a while before taxpers realize how expensive it is
to support their parents and grandparents as they live well into their
80s and 90s. There has already been some static about what to do
when Medicare runs out of money and Social Security digs deeper into
its Trust Fund. (The fund is composed chiefly of government
securities....IOUs. Cashing in bonds and notes at a high rate places
more strain on the U.S. Treasury.)
of the frightening prospects, owing to the nature of humans, is to
examine the bottom line of the major monetary support systems.
When the strain of paying the tab becomes exessively burdensome to
taxpayers we should not be surprised to hear calls for sharp revisions
to the programs. Consider the person who has been drawing Social
Security checks for many years - far surpassing the money they and
their employees paid in FICA taxes, even adjusted for inflation.
They are now living directly out of the pockets of strangers. The
poor may get a bye but the well-to-do will not. Critics will
demand a net worth assessment for upscale Social Security recipients.
"People ask me all the time about how
they can prepare for the
next economic downturn, and one of the key pieces of advice that I
always give is to not
take on more debt."
An acquaintance of ours, now in his senior
years, has often said that
when he dies he wants to be overdrawn $5.00 at the bank. People chuckle
at the remark, but it's not as absurd as it sounds. It's based on the
idea that we all came into this world owing and owning nothing and
there's something to be said for exiting in the same condition.
however, dictates that we ought to
accumulate assets that can be distributed among survivors, pay funeral
expenses, clear up any debts that remain, etc.
We're fond of
the frugal idea of keeping debt
non-existant or low enough that it can be cleared at any instant. This
is easy to do if one is careful to keep expenses below the level of
one's income. A great many people and corporations, as well as the
federal, state, and
local governments, find this impossible to do. Hence the Sword of
Damocles that hovers over our heads today; a momumental and unpayable
ago South Carolina banker once told a
young man seeking a loan that it was very easy to run into debt but
"...you get out, if your ever do, at a walk."
ago a Greek philosopher remarked "The
debtor is slave to the lender." We have never been greatly
attracted to slavery.
Factoid: Gold and silver are not
"investments." They are chiefly a store of wealth - - insurance,
if you will, against the
dollar. To illustrate how the dollar parity has declined against
gold we offer this price comparison. When we and the Missus were
married the official exchange rate was $1.00 = 1/35th of a troy ounce
of gold. Today it is: $1.00 = 1/1,336th of a troy ounce.
A U.S. citizen was not permitted to hold monetary gold when we were wed
in 1948, but the dollar was officially backed by gold at $35 to the
ounce and could be redeemed in that amount to foreign traders.
However, under the terms of the famous Bretton Woods meeting in New
Hampshire three years earlier the dollar became the basic money unit in
which much of world trade was done. Oil and other important
commodities were priced in U.S. dollars.
The U.S. quit redeeming dollars in gold to foreigners in August, 1971
which demolished the Bretton Woods agreement. The dollar is
technically a fiat money unit backed by none of history's most popular
monetary metals. The Constitution prohibits this practice,
but its provision for sound money was tossed aside forty eight years
ago and we are all now happily afloat on a sea of debt-based currency
whose future purchasing power is not known. (Although plenty of
commentators make their living making dire predictions about it.)
If you paid $400 an ounce for gold some years ago.....that is, you paid
$1 for 1/400th of an ounce of gold.....you may feel quite smug about
the fact that people are now paying lots more dollars for that ounce of
precious metal. But upon exmination you will discover that in
terms of its parity against common goods, such as food and medical
care, it has remained quite the same. Moreover, the precious
metals do not yield interest. They are good, though, at maintaining wealth across long
periods of time.
costs the U.S. Mint more than 1¢ to make a 1¢ coin.
We wonder why it keeps doing it.
you like government money handouts you'll hate this guy's comments.
is struck on a 99.2
zinc and 0.8 percent copper planchet plated with pure copper. The
5-cent coin’s planchet is a homogenous alloy of 75 percent copper, 25
percent nickel. Dime and quarter dollar planchets are composed of outer
layers of 75 percent copper and 25 percent nickel bonded to a core of
alternative composition that would reduce the cost of producing and
distributing the Lincoln cent to less than face value. However, the
government has been reluctant to stop producing the coin although many
other nations have ceased production of their cent-equivalent coins.
struck more than 7.8
cents in calendar 2018 and 8.63 billion cents in calendar
in heck is the popular demand for minor coins? Why must taxpayers
underwrite the cost of producing one-cent and five-cent coins if
there's no overwhelming point to it?
can envision a howl from the gallery complaining that greedy
shopkeepers will round prices up to the nearest dime and thereby get
even richer. A similar complaint was made in 1857
when the mint stopped producing the half-cent
ruined!" complained the doubters. "They'll round all the prices up to
one cent!) They half-cent soon stopped circulating and were forgotten.
In this day of electronic transactions small change is not all that
The zinc industry
will complain if the cent is dropped from production. So will
copper and other metals makers, but it's idiotic to keep manufacuring
one-cent and five-cent coins that cost more than face value to make and
"A lot of Democrat politicians are promising 'free college,' but what
they really mean is 'free for you.' Someone
has to pay, and that someone is me, and I need to level with you.
"I am not
interested in paying for your
some may call me 'greedy' or 'selfish' for not wishing to work and then
have the money I earned taken from me to provide things to you that you
want but did not pay for instead of being able to spend it – the 'it'
being the money I earned – on things that I want. I am okay with that.
I would much prefer having people who fundamentally misunderstand the
concepts of greed and selfishness call me 'greedy' and 'selfish' than
subsidize their educations, educations that evidently did not include
learning about basic concepts like greed and selfishness." SOLVE
YOUR DEBT PROBLEM
Schlichter will win no friends among liberals who think the U.S.
government is a magical fountain of free money to ease the burden of
debt they had taken on with such abandon. They have fallen for the myth
that the government can pull money from thin air to support people who
cannot pay their bills. Schlichter understands the government doesn't
have a dime it hasn't taken in taxes or borrowed with the promise of
paying it back with interest. There's also Congress's trick of monetary
inflation which steadily decreases the buying power of the
dollar. It could stop inflation in its tracks by returning to the
money mandate of the U.S. Constitution. Inflation would also slow
to crawl if Congress would run a balanced budget, which it has
forgotten how to do
2001-2, I had the personal experience of recommending to a number of
friends and relatives what I at that time saw as the most important
asset to hold. I was even so keen on this investment that I talked
about it in 2002 when I gave a speech to one of my daughters at her
wedding. Since the bridegroom was English, the tradition is that the
father of the bride pays for the whole wedding. So at that particular
point, your daughter becomes extremely dear, especially since we have
three daughters who all got married within ten months! I thought I
would give everyone a gift at the wedding breakfast (that’s the name in
the UK even if it is dinner), so in my speech I recommend everyone to
buy gold for wealth preservation purposes. There were Brits, some
Swedes and Swiss etc attending. Of course, a wedding is not a typical
venue for investment advice but still I felt passionate about the risks
in the world already at that time. Gold was then $300 and £200 per
ounce." ~ Egon von Greyerz
This personal story from our favorite
Swiss gold bug reminded us to check on the present spot price of
gold. It was a tad over $1,300 per troy ounce this morning.
In other words, had you bought an ounce in 2002 as Von Greyerz
recommended to his his daughter's wedding audience you'd have done
quite well. Owing to 17 years of price inflation you would not
have cleared much profit but your gold would have maintained its
purchasing power against goods and services. Von
Greyerz on Gold
If you have the time and
rersources, why not?
A young descendant of
ours is recently returned from a European trip. She is now
keenly aware of the variables in the purchasing power between the U.S.
dollar and the euro. And she now knows one euro is a coin, not a
paper note. (The U.S. has been a hold-out for converting its
basic monetary unit, the dollar, to coin form.)
The running disparity between currency values is a means of profit
(and often, loss) for investors (gamblers) who play the spread.
For instance: On October 30, 2000 one could buy one euro for only
86¢. By June 30th, 2008 one euro cost $1.56! That's a gain
81.4 percent. That would have been a nice gain for
investor who had bought, say 10,000
euros in 2000 and sold them
in mid-2008. It would have been a bet against the dollar
which paid off.
Alas, had someone bought euros when the price was
$1.56 would not be so well off today. The price of a euro at
mid-day May 20, 2028 is a fraction above $1.11. Will the exchange
rate rise or fall? That's a question currency traders dwell
on. Some make a nice living buying and selling foreign currencies
while plenty lose their shirts.
NOTE: The U.S. dollar is still the major
trading currency in the world having been chosen as the prime world
trading currency at the famous mid-1940s meeting of governments at
Bretton Woods, New Hampshire. At the time the dollar was backed
by gold and foreign traders could redeem their dollars for gold if they
wished. The gold backing was ended in mid-August 1971 and the
dollar became a fiat currency with the currencies of the rest of the
However, competition is
intensifying from nations such as Russia, China, India, and others who
are inconvenienced by the recent US trade tariffs barriers. It's
a propitious time for the United States to think about the soundness of
its money unit and do something to restore the reputation of the dollar.