AMERICA´S LEADERSHIP UNDER CONTENTION - HAS MONETARY, FISCAL AND POLITICAL EXCESS RUN ITS COURSE?

Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments.

~ Plato


Dear Mountaineers,

I just finished reading Richard Russell´s ‘Latest Remarks´. He sums things up with the following comment: "The bear keeps torturing the majority. If only the authorities could straighten out the oil problem, the housing problem and the unemployment problem, everything would be fine... But the market is not interested in current problems; it is looking ahead to the disaster that we will see in late 2010...

"Holding stocks here is a sure ticket to a smaller bank account. People cannot take it into their psyches that this is the resumption of one of [history´s] great bear markets."

I largely agree with this assessment. The reason I am concerned about the approaching second-half of 2010, is that several recent occurrences at the geo-political level have confirmed the accelerating currency war we have commented on recently. America is defending its world reserve currency status with all means available. However, in order to do that successfully, the US is dependent on the concerted support of several foreign nations, including China, Russia and Europe. That "life support team" is falling apart RAPIDLY.

The signs that the party is indeed almost over are all around us and are becoming VERY difficult to ignore. The seemingly relentless rebound on global stock markets ended two months ago. Despite a small rebound in mid-June, stock markets are getting increasingly fragile.

Europe and America no longer see eye to eye

Over the past 4 to 5 decades, we have seen growing monetary and fiscal excess across the globe. Governments of OECD countries in particular, with very few exceptions, have ‘solved´ every problem with ‘cheap and cheaper´ money.

The excesses culminated and accelerated in the aftermath of the subprime crisis in 2008. Since then, in a desperate attempt of spurring growth, monetary inflation (money supply growth) has become the standard government reflex. The US government took the lead and fully opened their money floodgates. The recovery needed to be forced at all cost and they expected everyone to follow their ‘good example´.

And this is where recently the differences in the European and American monetary mindset and philosophy have become very visible. Europe, contrary to the US, is not as willing to force a recovery with more and more money. European governments, no matter how socialistic their political systems may appear, is not convinced of the Keynesian panacea, at least not as convinced as Timothy Geithner, Barrack Obama and his ‘star economist´ sidekick Paul Krugman.

The legendary investor George Soros has joined this ominous team of stars, telling Germany to step up to its responsibilities or leave the European Monetary Union. His tonality, although not quite as much as Krugman´s, was one of authority, a wise professor talking with his unknowing disciple. Soros demands that Germany embraces the ‘growth strategy´ (??!!), describing Berlin´s austerity doctrine as a threat to democracy and political stability in Europe.

This hits precisely at the heart of what is a growing point of contention between the US government and Europe. However, it is not only the European governments that are jumping off the Keynesian ship; Russia and China have recently taken a very different stance.

In the wake of the latest G-20 meeting and after Britain´s serious budget cuts, the UK Chancellor of the Exchequer Osborne summed it up like this:

"Some have suggested that there is a choice between dealing with our debts and going for growth. The crisis in the Euro zone shows that unless we deal with our debts, there will be no growth."

You can rest assured this is not what either President Obama or Treasury Secretary Geithner wanted to hear during their preparations for the G-20 meeting. According to a Bloomberg article, "President Obama pushed his G-20 counterparts meeting in Toronto to focus on spurring growth". However, other G-20 leaders commented that "nations can move at their own pace to reduce budget gaps".

Memories of Weimar don´t exist in America

The global era of fiat currencies is more than 40 years old. The final act of divorcing the world´s reserve currency - the US Dollar - from gold took place in August, 1971. However, the slow death of a reliable reserve currency, based on disciplined and accountable monetary and fiscal policies, was initiated in 1968, when the mandate of holding gold to a ratio of US$ 35 per ounce failed. First, the London Gold Pool failed. Then, later in 1968, the US Congress terminated the Fed´s obligation to hold gold equal to at least 25 percent of the value of Federal Reserve notes.

That was the beginning of the descent into the monetary chaos we are getting the first glimpses of today. Greece is only the beginning. And, if you believe the majority of US mainstream press, the crisis is centered in Europe. As forcefully purported by the likes of Paul Krugman, it is Europe´s fault if the "recovery does not come to fruition".

Having won the Nobel Prize in economics, Mr. Krugman understandably expects to be seen and hailed as an ‘economist´. And, I suppose a lot of people do precisely that. Equally, President Obama won the Peace Nobel Prize. Possibly, a lot of people hail him as a ‘man of peace´. Both of these hailed Nobel Prize winners are hell-bent on inflating the world out of this crisis. And, they have forcefully, and not so peacefully, voiced their dissatisfaction, first with the Chinese, and now with Europe, over the fact that others are not fully committed to their leadership and right cause.

The historic memory of mankind is generally quite short. That goes for Americans as much as it applies to Europeans. However, unlike America, Europe experienced first-hand what unlimited, out-of-control money supply growth can do to an economy and the social fabric of a country and an entire continent.

The effects of Weimar are much more present in the minds of Europeans. But, you don´t have to go back that far in history. Great Britain, around 1910, was still the world´s richest nation. They were the leaders with an extensive world empire. Great Britain was in charge of the world´s reserve currency, a currency that was even backed by gold. Some 40 years later, Great Britain was financially broke and economically ruined. Britain eliminated its currency´s link to gold in 1931 and watched the enormous benefits of holding the world´s reserve currency pass over to America in the following years.

The US became the richest nation; richer in comparative terms than Britain had been in 1910. In 1970, the US government did what the Brits had done: borrowed and spent their way into bankruptcy. Britain repudiated the link to gold in 1931. The US did the same in 1971. But this time, there was no nation to take over from the US as the US had from Britain 40 years earlier. This time, the world gave up on money and embraced ‘fiat paper´.

Some forty years later, the bill for this fiat-currency adventure is being presented and that is where we stand today.

The US is losing its followers - one by one

On June 19th, President Obama released the contents of a ‘public letter´ to Europe. The letter Obama asserted that: "Our highest priority in Toronto (at the G-20 head of state meeting) must be to safeguard and strengthen the recovery."

Over the past few weeks, and in Toronto, it became crystal clear that the rest of the world is turning away from this Keynesian "leadership" of the US. The budget cuts in Europe show this. The decision by China to stop pegging their currency to the US Dollar shows this. The fact that global central banks are now INCREASING their holdings of physical gold shows this.

Economically, things don´t look good in the US to start with. The ‘recovery´ is nowhere to be seen. Most states are approaching bankruptcy, California is bankrupt, a growing number of banks are going belly up. In America, this year alone, more than 86 banks have gone bankrupt. Last year, the FDIC closed some 140 banking institutes. The total number in 2010 will break that record easily. The commercial real estate market is about to enter very rough waters. And it looks like another wave of defaults in the housing market is about to break.

In addition, the US government is increasingly isolated amongst its peers in maintaining that perpetual debt issuance is the way forward towards prosperity. It is a leader without followers.

To me, it looks very much like the excesses of the past are finally coming home to roost. As Plato knew a long time ago: Excess generally causes reaction, and produces a change in the opposite direction...

Sincerely,

Your "Swiss Mountain Guide"

Frank R. Suess

THE GREAT DECEIT

by Kenneth Gerbino

It is the paper money created out of thin air that creates the unfair distribution of wealth that is making the middle class fall more behind and the poor more poor. Newly created money and credit in a paper money system benefits those that can access the money first and buy capital goods and real property at one price before the new money circulates and makes all prices go up. Wages also do not keep up with inflation and that creates another squeeze on the middle class.

The man on the street sees his purchasing power decreasing (from his savings and take home pay) and thus his standard of living declining. Capitalism and free enterprise have historically always benefitted the lower and middle income earners when paper money issuance has been curtailed. Most wealthy people became wealthy through hard work and supplying something to society of value. But because of this paper money dislocation, the average wage earner has not kept up.

One of the "causes" of socialistic thought is that the rich really do get richer and the poor really do get poorer in a capitalistic society that uses fiat money as opposed to a monetary unit that is tied to a standard measurement for its monetary value. A standard measurement of length (12 inches to the foot) ensures everyone a measurement that cannot be altered and used to swindle or deceive people in transactions as time goes on. A fiat money system negates a standard of monetary value or worth. The new money injected into the economy upsets and distorts the old monetary standard that existed before the new issuance of money.

Paper money and government spending are the culprits in the destruction of the lower and middle wage earners standard of living. The table below shows how lopsided and inefficient this system has become.

These glaring statistics below are an indictment of fiat money and waste in government. The Median Household Income has been left behind by the U.S. policies fostered on the population by both liberal and conservative politicians. This has allowed the insane policies of Communism, Socialism and Fascism to gain ground in the intellectual arena. Note: these other "isms" create even more fiat money and waste! The moral of the story is government spending and increased money supplies are totally inefficient as the solution to household betterment.



The graph below shows that despite a 450% increase in money supply in 28 years the GDP did not remotely keep up. Real economic goods, actual things such as cars and energy consumed which are good measurements of economic output, these items have barely budged. The simple conclusion: real economic gain in the U.S. has been small when measured by real stuff.

      

The graph below is even more of an eye opener and another indictment of paper money and government waste. From 1950 to 1965 the money supply and government intervention and waste in the U.S. economy was just starting but was still nothing compared to the 1980 - 2008 period.

Below you can see smaller money increases (and a much smaller government) had an almost equal increase in GDP. It is almost 1 to 1. But during the1980 - 2008 period (graph above) it is now 3 to1. In other words more and more new money has to be issued to keep the economy going. And the more money created the more the wage earner will fall behind. 

     

The bottom line is that printing money and big government do not help the economy move forward but, in fact, hurt it. The following are the consequences:

- Paper money masks the real inefficiencies of government waste and interference in the economy

- The created money creates inflation robbing savers and pensioners

-Wealth is redistributed to the banking elites and corporations who can take advantage of the monetary stimulus and get access to the new money and credit first and buy resources and capital goods ahead of the currency depreciation. Note: good companies and good capitalists do not need paper money and government handouts to do well.

- The lower and middle income earners see prices going up and wages not keeping up and start to buy into the socialist arguments and political elite propaganda about more regulation, more taxes and more laws to make things go right.

There is no attack here on corporations. They thankfully produce all the products we need and use. It is just a statement that they are, in general, currently benefitting unfairly under a paper money system at someone else´s expense - the little guy.

Corporations should and can make plenty of profits without a paper or fiat system. In fact, by eliminating all the dislocations and waste from government intervention caused by paper money, corporations would probably do even better with a stable and honest monetary system. The banks would not. They would downsize and be forced by the free market to only lend money they have on account. But the banking system under an honest money system would also become stable and safer.

Keynesians Go Home

The two graphs above absolutely make John Maynard Keynes, Paul Krugman and all the other economists that think like they do, absolutely wrong, wrong, wrong about government spending, paper money and deficit spending stimulating the economy, helping the poor and making life better for people. These are dangerous concepts to society.

Keynes did not have the intellectual capacity or personal integrity to really understand basic economic truths and concocted his own egocentric and stupid ideas that big government proponents and the banking establishment loved. It was the bankers who promoted him far and wide (the more money circulating the more loans could be made). Between him and Karl Marx, billions of people have been led down the path of economic slavery and deceit.

The Coup de Grace Against Big Government and Paper Money

The graph below is so revealing that I would think that arrest warrants should be filed against anyone even saying the words "socialism, deficit spending, paper money or big government." 



Ironically, some of these statistics are from a "liberal leaning" wealth sharing, quasi-socialist group.

What they are missing is that the "system" they are deploring - capitalism, private property, and lower taxes - is not the culprit. They are totally confused. It is big government waste and paper money that is dictating the horrible loss of income gains by the lower and middle income earners. Almost 50 years ago, the average wage earner was getting a fair share.

One can see that the paper money system and big government wasteful spending has created a situation where the bottom 90% of our citizens went from owning a big piece of the income gains (65%) in the 1960´s to being squashed in the 2002 - 2007 period to 11%.

This inequity was caused by an almost 1,000% increase in the money supply from 1960 to 2007 and a federal budget that went from $92 billion to $2.8 trillion. These increases were destructive. They have almost destroyed America and Americans. They have allowed an elite group of politicians, bankers and social engineers to create a very dishonest and corrupt system over the past 50 years, a system with paper money and big government as the cornerstones of policy.

Conclusions

- Liberal and Conservative newspaper editorial boards, politicians, and leading intellectuals all have "bought into" and helped policy makers create a system where the little guy gets a bad deal. And where hard work - blood sweat and tears - for business owners, entrepreneurs and able and productive people is attacked because they are doing well in life. The big players have benefitted unfairly as the charts show. But stop printing money and stop big government and the big players will do fine but so will the little guy.

- Liberals proclaim we have to help the little guy and their solution is big government, which hurts the little guy.

- Conservatives proclaim liberty and capitalism but the banking system and the Federal Reserve allow money to be created out of thin air to bail out Wall Street and the banks when needed, and this hurts almost everyone.

- What is needed is real free enterprise and honest money where the government is taken out of everything but making laws that only protect the Life, Liberty and Property of citizens. That´s it. All the other laws can be scraped. That means a 75% reduction of government responsibilities and expenditures. As far as my libertarian friends are concerned, our ideals are great but mankind is too irrational, unethical and insane at this stage to really have zero government. Give me a sane and ethical human race and no government would ever be needed. Until then we have to at least get rid of the obvious flaws in these policies with the smallest government possible.

- These graphs tell a story of political economics but to translate this into preserving your wealth and investment capital, you can unfortunately count on more paper money, more inflation and more taxes in the future. So plan accordingly by owning some gold, silver and quality mining companies. Be careful with the rest of your money.

Kenneth Gerbino heads up Kenneth J. Gerbino & Company, which is in its 34th year. From its offices in Beverly Hills, California, the company manages portfolios for individuals, pensions, trusts and corporations. For more articles on Gold, Economics and Markets visit Ken Gerbino´s website at: http://www.kengerbino.com/.