Constant
prosperity through credit is no more possible than constant peace through
heroin
Much has been
written about the Great Depression and the present crisis. There is much that
is similar and some that is not. The differences explain why events have
unfolded differently. The similarities explain why the end will be the same.
Deflationary
depressions occur after the collapse of large speculative bubbles. The
collapse of the 1920s US
stock market bubble, then the largest bubble in history, caused the Great
Depression of the 1930s. The collapse of the far larger dot.com and US real
estate bubbles will cause the next.
WAITING FOR THE
OTHER SHOE TO DROP
A daisy chain of disaster
The present
economic crisis is similar to that of a patient who has suffered a massive
near-fatal heart attack. Presently surviving only because of constant care
and unprecedented levels of medication, it is the unprecedented levels of
medication that will ultimately cause the patient’s death.
The amount of
monetary stimulus keeping the global economy afloat has never been greater.
Two of the largest economies in the world, the US and Japan, now have
interest rates close to zero and, along with the UK, are engaged in
“quantitative easing”, a monetary phenomena akin to self abuse,
i.e. self-stimulation.
Extreme measures
of monetary stimulation via money printing are necessary to counteract the deflationary
pressures set in motion by declining asset values against which massive
amounts have been borrowed. But, in the end, creating money out of nothing
will reduce the value of money to exactly that—nothing.
This is the path
upon which governments and central bankers have embarked. Fraught with danger
and pitfalls, it was not their first choice—it was their only
choice—and the rising price of gold is a measure of how far on the path
they have traveled. Just prior to the collapse of the dot.com bubble, gold
was $300 per ounce. Today, it has exceeded $1200.
It is not a
coincidence that as monetary debasement has reached unprecedented levels the
price of gold has also reached unprecedented heights. As money printing has
increased, so, too, has the transparency of its fraud. Money printed in
increasing quantities becomes increasingly worthless; and, gold, as an
intrinsic store of value, reflects the accelerating debasement of money in
its price.
Not all believe,
however, that gold is a function of monetary debasement.
In How
To Survive The Crisis and Prosper In The Process I discuss common
reactions in these uncommon times. Because periods of systemic monetary
distress are rare, most will misinterpret economic signs during what I call The
Time of the Vulture.
In
times of expansion, it is to the hare the prizes go. Quick, risk taking, and
bold, his qualities are exactly suited to the times. In periods of
contraction, the tortoise is favored. Slow and conservative, quick only to
retract his vulnerable head and neck, his is the wisest bet when the slow and
sure is preferable to the quick and easy.
Every
so often, however, there comes a time when neither the hare nor the tortoise
is the victor. This is when both the bear and the bull have been vanquished,
when the pastures upon which the bull once grazed are long gone and the
bear's lair itself lies buried deep beneath the rubble of economic collapse.
This
is the time of the vulture, for the vulture feeds neither upon the pastures
of the bull nor the stored up wealth of the bear. The vulture feeds instead
upon the blind ignorance and denial of the ostrich. The time of the vulture
is at hand.
Chapter One, How
To Survive The Crisis and Prosper In The Process, 1997, www.survivethecrisis.com
Most
investors are unprepared for times of deep systemic change; times when both
bulls and bears are unprepared for what will be. Ignorance will provide no
protection, however, and those who do not understand will pay a high price
for their prolonged denial.
…
Being risk taking or risk adverse is often due to personality. But people do
choose to be ostriches, especially in times of change. This is because denial
of change—the refuge of the ostrich—gives all of us a sense of
security. Though the security is as false as the comfort it offers,
unfortunately many, if not most of us, will choose to be ostriches in the
days ahead.
Chapter One, How
To Survive The Crisis and Prosper In The Process, 1997, www.survivethecrisis.com
In times of deep
change, few will understand what is happening and instead of changing, most
will persist in clinging to the old even as it is being swept away. Events
change but human nature rarely does—at least not yet.
This is a process
that has happened countless times throughout history. That it is happening
today is either fortune or misfortune. Whether it is one or the other will be
determined by each of us.
CAPITALISM’S
FINAL PAROXYSM
The deep systemic
change now in motion will result in the collapse of capitalism. Capitalism, a
system that replaced money and savings with credit and debt, is in disarray
as never before.
Capitalism:
It’s a bit like borrowing from Peter to pay Paul. Except in the case of
capitalism, it’s your money you’re borrowing, Peter and Paul are
the same person and he’s a banker.
Capitalism has
long been identified with free markets. In actuality, capitalism is any
system where the banker’s capital, i.e. credit, has become the engine
of economic growth and debt has replaced savings as an asset. Free markets
existed long before being exploited by bankers and will exist long after.
Capitalism, however,
does thrive in free markets because capitalism, like the parasite it is,
thrives best when attached to a vibrant and expanding host. Unfortunately,
its host is far less vibrant now that the global economy is contracting and
succumbing to the parasite’s destructive appetite.
Not since the
deflationary collapse of the Great Depression has the banker’s system
of credit and debt been under so much stress. Today, that stress has been
temporarily contained. Tomorrow will be another story.
GOLD—THE
BAROMETER OF SYSTEMIC DISTRESS
From its central
bank induced lows in the 1990s, the price of gold has almost quintupled.
Today, gold seems expensive. In the future, today’s price will seem
like a bargain.
We are now
approaching the final stage of the collapse of the bankers’ house of
cards; when debt levels are so high they can no longer be serviced, crushing
those still trapped by credit’s promissory lure.
Hyman Minsky, the
late American economist, made a seminal contribution to the study of debt in
his financial instability hypothesis. In the early stages of capitalist
systems, interest and principal can be serviced out of the debtor’s
cash flow. In the final stage of “mature capitalist systems”,
they cannot.
Capitalism’s
final stage is what Minsky calls “ponzi-financing”, when debt
payments can only be made by additional borrowing. This is what the US, the
UK and Japan are doing today, having to borrow against tomorrow in order to
pay yesterday’s bills.
For 50 years, not
one Dollar of new debt created by the US government to fund the activities it
does not wish to tax for has been repaid. The debt has simply been
“re-financed” with new debt being sold to retire the existing
debt.
The Privateer, Late
November 09, issue 6430100, www.the-privateer.com
At some point,
the end finally arrives. Ponzi-financing cannot service debt forever.
Investing in unhedged paper assets is the bet that it can. Gold is the bet
that it cannot.
TYRANNY FREEDOM
& THE FUTURE
The ideal tyranny
is that which is ignorantly self-administered by its victims. The most
perfect slaves are, therefore, those which blissfully and unawaredly enslave
themselves.
When a
well-packaged web of lies has been sold gradually to the masses over
generations, the truth will seem utterly preposterous and its speaker a
raving lunatic.
Donald James
(1931-2008)
The movie, The
Matrix, has been described as a metaphor for life. The economic matrix in
which we are enmeshed is no less real or unreal. Escape and/or freedom within
it exists but it is not easily achieved.
Those who wield
power within the current economic system are engaged in a life and death
struggle to maintain it. Supporting their efforts are the oppressed who
rightfully believe the end of economic tyranny will only come at a price they
are unwilling to pay.
Those fearful of
systemic change include both who benefit from the system and those oppressed
by it. Neither possesses the requisite power to prevent it.
Power is no more
control than credit is money
We are already
seeing evidence of deep systemic change. The falling away of the old will
make way for what is to be; and, despite our efforts, none of us can stop it.
If we could, we would all still be living in trees.
Buy gold, buy
silver, have faith.
Darryl Robert
Schoon
www.survivethecrisis.com
www.drschoon.com
Also
by Darryl Robert Schoon
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