Gold and Dow Flash the Same Warning Signal

Add caption

On Friday, both gold and the Dow flashed the same warning signal—the economy is in deep trouble.  The Dow plunged nearly 275 points on the news of a weak jobs report, and gold rocketed higher by $66 on speculation global bankers are going to print money to resuscitate a dying financial system.  You do not get this kind of tandem move in opposite directions by coincident.  Last week, both the stock and gold markets appeared to stop pretending and acknowledged the vortex of debt and insolvency that could suck us all into a black hole.

Renowned gold expert Jim Sinclair of JSMineset.com said Friday, “Those popular gold writers calling for much lower gold prices are simply out of their mind and disconnected from reality.”  Sinclair has been calling for “QE to infinity” (money printing) for years now, and he’s been right.  Of course, money printing masked the recession/depression since 2008; and now, it looks like more of the same bad medicine is on the way—only a much higher dose.  My only question is when does the money printing stop working and turn the currency into confetti?  It appears we will find out sooner than later. Read more >>

Hyperinflation Watch – Numbers Don’t Lie

Image by Getty Images via @daylifeFor several months I have been warning that hyperinflation of the US dollar is looming. The ominous signs of this impending currency train-wreck are becoming increasingly clear.

For example, crude oil is threatening to break above $90 per barrel. Copper has broken through $4 per pound to a record high price. The prices of many other commodities are also in uptrends. These commodities are not in short supply. There is no shortage of oil or copper. Rather, these high prices are the result of too much money printing, which if not quickly stopped by returning to a sound money policy will ultimately lead to hyperinflation.

Last week another important part of the hyperinflation puzzle fell into place. Long-term interest rates surged, continuing their sharp upward path that began two months ago. The 10-year T-note during this two month period has risen from 2.4% to end last week over 3.2%, a remarkable and therefore telling jump.

This rise in long-term rates lays bare the flawed logic of the Federal Reserve’s newly announced $600 billion so-called “Quantitative Easing” program supposedly designed to help the economy. This new round of money printing is not going to help the economy, which has been hollowed out by years of debt financed consumption along with too little savings and production. This money printing is serving only one purpose. This central bank trickery is providing the federal government with all the dollars it wants to spend.

So despite the fact the Fed will be purchasing $600 billion of US government debt instruments, T-bond and T-note yields are climbing, a clear sign that investors are rushing to sell their US government paper. Why? Because they know the purchasing power of the dollar is being debased by QE, and more importantly, will continue being debased. More...

Depression 2010 - Western Fiat-Money Finished

Image via Wikipedia

thedailybell.com
Sluggish economy leaves many Japanese in the cold ... The global economy may be on the mend, but times are still tough for the masses of homeless, jobless people in Tokyo, where the only meal of the day is often a bowl of rice handed out by charities. Although Japan's export-driven economy is back on track, largely due to rising demand from Asia, the United Nations said its recovery was slower than other countries, and predicted only 0.9 percent growth in 2010 compared to 8.8 percent for China and 2.1 percent for the United States. This sluggish growth, combined with troubles at giant corporations in the world's second-biggest economy, has made earning a living very difficult for scores of Japanese. "I see no jobs around. It's a really tough situation," Eizo Tsuruga, a 50-year-old homeless man, told Reuters as he sat among others people eating a bowl of hot rice in the winter night. A Welfare Ministry survey showed the actual numbers of homeless had fallen to 15,000 in 2009 from 25,000 in 2003. Homeless people in Japan have traditionally been elderly, social dropouts, but with the economic situation, the demographics have changed to include laid-off workers, both young and old, and university graduates unable to find work. On a recent Sunday, more than 400 people flocked to a Tokyo park to receive free meals and blankets distributed by local charity Shinjuku Renraku Kai, more than twice the number of people the charity used to see two years ago. Many had queued for hours to ensure they got some cooked rice, often their only meal for the day. "More and more people of all ages are gathering here," said Kazuaki Kasai, a volunteer who has worked at the charity's distribution point in the park for the past 16 years. - Yahoo

Dominant Social Theme: Sometimes the global economy is down, and sometimes up.

Free-Market Analysis: Is the Western world struggling through a bad patch? Our argument, voiced with various levels of clarity at various times, is that the West is currently living through a failure of fiat money - specifically a failure of the global anchor currency: the greenback. The dollar is on its way out not because people want it to be necessarily (though some do) but simply because it is failing as a fiat currency. Central bank fiat currencies always fail. China had a number of fiat episodes and the populace was so scarred that fiat money was reportedly even banned in the 1800s. Here's a bit of history on China's melancholy brushes with unbacked paper money:

Fiat Money - China -- Flying Money

When the Chinese first started using paper money, they called it "flying money," because it could just fly from your hands. The reason for the issuance of paper money is simple. There was a copper shortage, so banks had switched to the use of iron coinage. These iron coins became over-issued and fell in value.

In the 11th century, a bank in the Szechuan province of China issued paper money in exchange for the iron coins. Initially, this was fine, because the paper money was exchangeable for gold, silver, or silk. Eventually, inflation began to take hold, as China was funding an ongoing war with the Mongols, which it eventually lost.

Genghis Khan won this war, but the Mongols didn't assume immediate control over China as they pushed westward to conquer more lands. Genghis Khan's grandson Kublai Khan united China and assumed the emperorship. After running into some setbacks with paper currency, Kublai eventually had some success with fiat money. In fact, Marco Polo said of Kublai Khan and the use of paper currency:

"You might say that [Kublai] has the secret of alchemy in perfection...the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world."

Even Helicopter Ben would be impressed. Marco Polo went on to say:

"This was the most brilliant period in the history of China. Kublai Khan, after subduing and uniting the whole country and adding Burma, Cochin China, and Tonkin to the empire, entered upon a series of internal improvements and civil reforms, which raised the country he had conquered to the highest rank of civilization, power, and progress. ...

"Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both...All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves...The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion." (- Daily Reckoning)

Interestingly, we can see in the above observations that fiat money first created a wonderland of progress and amusement. That's just what fiat money has done in the West and in Japan as well. It is now happening in China. Wherever fiat money travels it brings tremendous euphoria in its wake, though only to begin with. Cities are energized with false booms. Farm children flock to the urban environment to take jobs in factories producing ephemeral goods or work at useless government jobs - that are created from tax revenues during the boom time. Initially, because fiat money inevitably has a relationship to government, much of the perfection of society is attributed to a wise, fair-minded bureaucracy. The bureaucracy, by the way, believes it.

Monetary stimulation can go on for years. In America, it's been going on for nearly a century - which is probably the far end of what can be expected. But people can live and die under a central banking regime - which is usually a fiat regime (or ends up that way, anyway). Yes, it cannot be emphasized enough that fiat money (along with its enabler, central banking) is a foundational curse. Just as in China, it funds wars, makes the government look wonderfully efficient and even omnipotent, fools people into believing that the non-essential jobs they have are actually essential "modern" work - and sets the stage inevitably for regulatory regimes that must eventually descend into madness and ruin.

Fiat money empowers corporatism (in the modern age anyway) and distorts civilization by helping to implode agrarian republicanism. It is no coincidence that Thomas Jefferson despised central banking - and was in fact the most famous and influential agrarian republican. We can see the remnants of this sort of society in Switzerland, which has passed laws to maintain small farms. It is difficult to create a totalitarian society - even an ephemeral one - in a land of sturdy farmers. Such individuals grow their own food, have access to water and are willing to defend their land. America was a bit like Switzerland before the Civil War but is not now.

But today, dear reader, we would propose that the West, and the entire globe, is living through a fiat money collapse. Economies all over the world have been inflated to their fullest and people can buy no more useless gadgets and work at no more superfluous jobs. Too many useful endeavors have been marginalized and phony ones have been elevated. An implosion is taking place. The world is reverting to a kind of mathematical practicality. In America, car companies have shrunk because there are too many cars, and houses are not being built because there are too many houses. Banks are not doing deals because too many deals have been done. All that is working overtime are the printing presses. While the greenback is exceptionally at risk we would argue that the same thing is occurring, to a greater or lesser degree, in Europe, in Japan, and even in China - despite all the happy talk about the Chinese miracle. Here's a famous investor on the subject of China:

Contrarian Investor Sees Economic Crash in China ... James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true. Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc. As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China's hyper-stimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like "Dubai times 1,000 -- or worse," he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent. "Bubbles are best identified by credit excesses, not valuation excesses," he said in a recent appearance on CNBC. "And there's no bigger credit excess than in China." (- New York Times)

Everywhere, major economies are having difficulty. We do not believe by the way that it is absolute serendipity. The power elite knows very well how fiat money and central banking work. Those at the top of the economic food chain readily anticipated more power falling into their laps - and ultimately facilitating a worldwide economic regime. But we have to re-emphasize that these same powerful people apparently did not take the Internet into account. This is most important.

Conclusion: By putting in place the mechanisms that guarantee endless quasi-collapses, the power elite profits inordinately. By not understanding that this time around the entire circus would be available for endless replays on the Internet, the power elite has put the system into tremendous jeopardy. Too many have run across free-market arguments on the Internet and come to believe (this time around) that the system is unfair and even impractical. Too many have witnessed and comprehended the full gamut of central banking's apparent destructive tendencies. None of this was in the game plan, in our opinion. Yet this seeming unraveling of financial certainty has tremendous ramifications for your portfolios, dear reader. We might suggest a modicum of gold and silver as you watch various fiat money economies of the world, especially the dollar, sputter and sink.

The Continual Failure of Paper Money

Image via Wikipedia

History of Chinese Currency
The currency issued by the Yuan was the world's first fiat currency, known as Chao. Every paper currency that the Chinese ever implemented failed.

During the early Song dynasty (Chinese: 960-1279) China again reunited the currency system displacing coinages from ten or so independent states. Among pre-Song coins, the northern states tended to prefer copper coins. The southern states tended to use lead or iron coins with Sichuan using its own heavy iron coins which continued to circulate for a short period into the Song dynasty. By 1000 unification was complete and China experienced a rapid period of economic growth. This was reflected in the growth of coining. In 1073, the peak year for minting coins in the Northern Song, the government produced an estimated six million strings containing a thousand copper coins each. The Northern Song is thought to have minted over two hundred million strings of coins which were often exported to Inner Asia, Japan, and South-East Asia where they often formed the dominant form of coinage. Song merchants rapidly adopted forms of paper currency starting with promissary notes in Sichuan called "flying money" (feiqian). These proved so useful the state took over production of this form of paper money with the first state-backed printing in 1024. By the twelfth century various forms of paper money had become the dominant forms of currency in China and were known by a variety of names such as jiaozi, qianyin, kuaizi, or guanzi.

The Mongol-founded Yuan dynasty (Chinese: 1271-1368) also attempted to use paper currency. Unlike the Song dynasty they created a unified, national system that was not backed by silver or gold. The currency issued by the Yuan was the world's first fiat currency, known as Chao. The Yuan government attempted to prohibit all transactions in or possession of silver or gold, which had to be turned over to the government. Inflation in 1260 caused the government to replace the existing paper currency with a new paper currency in 1287, but inflation caused by undisciplined printing remained a problem for the Yuan court until the end of the Dynasty.
Silver sycee (yuanbao) ingots

The early Ming dynasty (Chinese: pinyin: Míng, 1368-1644) also attempted to use paper currency in the early re-unification period. This currency also experienced rapid inflation and issues were suspended in 1450 although notes remained in circulation until 1573. It was only in the very last years of the Ming dynasty when Li Zicheng threatened Beijing in 1643 and 1644 that printing took place again. For most of the Ming China had a purely private system of currency for all important transactions. Silver, which flowed in from overseas, began to be used as a currency in the Far South province of Guangdong where it spread to the lower Yangzi region by 1423 when it became legal tender for payment of taxes. Provincial taxes had to be remitted to the capital in silver after 1465, salt producers had to pay in silver from 1475 and corvée exemptions had to be paid in silver from 1485. The Chinese demand for silver was partially met by Spanish imports from the Americas, in particular Potosi in Peru and Mexico, after the Spanish became established at Manila in 1571. However the silver was not minted. It circulated as ingots (known as sycee or yuanbao) which weighed a nominal liang (about 36 grammes) although purity and weight varied from region to region. The liang was often referred to by Europeans by the Malay term tael.

Late Imperial China maintained both a silver and a copper currency system. The copper system was based on the copper cash (wen). The silver system had several units which by the Qing Dynasty were: 1 tael = 10 mace = 100 candareens = 1000 li (silver cash).

In 1889, the Chinese yuan was introduced at par with the Mexican Peso and was subdivided into 10 jiao (not given an English name, cf. dime), 100 fen (cents), and 1000 wen (cash). The yuan was equivalent to 7 mace and 2 candareens (or 0.72 tael) and, for a time, coins were marked as such in English.

The earliest issues were silver coins produced at the Kwangtung mint in denominations of 5 fen, 1, 2 and 5 jiao and 1 yuan. Other regional mints were opened in the 1890s producing similar coins. Copper coins in denominations of 1, 2, 5, 10 and 20 wen were also issued. The central government began issuing its own coins in the yuan currency system in 1903. Banknotes were issued in yuan denominations from the 1890s by several local and private banks, along with the "Imperial Bank of China" and the "Hu Pu Bank" (later the "Ta-Ch'ing Government Bank"), established by the Imperial government.