Sunday, February 1, 2009
Currency Evacuation
The following comment isolates a critical concept regarding our depression, and why it is, and will be, a horrible depression. If you understand this, you will understand why it makes no sense to own anything but cash and Treasuries (unless you want to risk some capital shorting stocks in the hope your broker actually survives). All businesses are equally affected in a currency meltdown, which is why there will be no good stock buys for perhaps decades.
An anonymous commenter wrote:
FDR: "All those dollars disappear."
Now I get it! I've been trying to grasp the concept of currency "going away". It's the same as when you pay off a note at the bank...there is no longer a loan, and the note is now worthless.
Correct. Add that there was never any collateral to lend, only a paper debt receipt against phantom money being traded as currency. So when the note is paid down or defaults, the "illusion of money" (paper currency with no backing wealth) simply disappears.
The easiest way to mentally model this massive super-cycle depression, from it's beginning in late-2006, to its end (I'm not ruling out another Dark Age), is as if a high-tech counterfeiter had successfully printed, then spent into circulation, almost all of the currency in existence.
After decades of asset accumulation, the counterfeiter is smart enough to continually lend his phony paper out, at interest. He is sooo greedy, that he lends/prints/counterfeits 40 times as much as he owns (in reality, roughly $500T) at peak insanity. This pumps all prices to the Moon, because he has introduced sooo much artificial, bogus, concocted, counterfeit, fabricated, fake, fictitious, forged, fraudulent, invented, make-believe, mock, phony, pretend, pseudo, reproduced, sham, simulated, spurious, un-backed, funny-money.
Now that the world is indebted to him, at 2006 mega-prices, it's time to cash in.
Turning on a phony dime, he cleverly admits to his crime. Repenting, he agrees to pull back all of the phony cash he introduced. He starts burning every paper dollar he can acquire. His partners in crime do the same. They burn and burn and burn cash. Poof! The entire paper mountain goes up in a blaze.
Prices plunge as his funny-money is destroyed. In the end, all that is left is an Earth brimming with ludicrous, inflation pumped debt (30 year mortgages sporting 2006 price tags at ultra-high interest rates, etc.) payable to the counterfeiter, because he lent and lent and lent before "coming to Jesus." Now there is no cash left in circulation to pay him back.
A world enslaved.
That is EXACTLY what is happening, right now. Our counterfeiter is a private banking cartel with an iron fist monopoly on all U.S. paper currency issue: the Federal Reserve banks.
Light Bulb Moment: If you can manage to smuggle a chunk of phony cash (debt notes) from 2006 into 2020+, those slaves are indebted to YOU, too.
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So when my grandfather said "there was no money" in the Great Depression, he meant "there was no CURRENCY". It wasn't just hyperbole. He had assets (and offered them as payment), but had no CURRENCY to pay his debts, just like everyone else.
ReplyDeleteThen the local bankers repossessed cars and land because borrowers had no cash to pay on loans. Bankers also paid unpaid property taxes on properties (three years in a row) to force a sale. And the bankers were of course the buyers.
And, FDR's banking holiday kept him from getting his cash in savings for two years. Others weren't so fortunate.
This has all happened before, and it will all happen again.
FDR, most will say you're being alarmist, but your principles--on a micro level--check out with all the stories my grandparents told me about living through the Great Depression.
Keep it up until they yank your blog.
Thanks. There is a proper time to sound alarms.
ReplyDeleteMy grandfather hid his money in jars until his death in 1976. He lost his business and money in the early 30s. In November of 2007 I tried to get my parents out of the stock market by reminding them of this and also laying out my case for a similar Depression. They both looked at me like I was insane. My father said "buy and hold is how many is made son". I said "yeah, if it's cash in hand for what's coming".
ReplyDeleteHe won't even look at his brokerage statements anymore.
My father said "buy and hold is how many is made son".
ReplyDeleteAnd for a generation, that has always been true...
10/09/2007 - 09/03/1929 = 78.1 years
Not a coincidence...
Avg American life expectancy = 78.1 years
http://www.medicalnewstoday.com/articles/111095.php
Hi FDR !
ReplyDeleteWhat do you think about
US bond market dislocation ?
http://market-ticker.denninger.net/archives/759-Here-It-Comes.html
Will it cause (in your view) USD devaluation ?
Thanks Wazi.
FDR, your articles have always been thoughtful, even since the MW days. But, I struggle with inflation vs deflation. Iceland, Argentina, Zimbabwe, etc. Why is US different? Couldn't the Fed simply print sufficient amounts of money to create inflation? Aren't they currently printing massive amounts of money? I see the M1 increased by $100B in Dec alone, according to the fed web site. Are you saying as a matter of policy, they will choose to not print enough to cover the deleveraging, therefore choosing deflation over inflation.
ReplyDeleteThanks
-TonyW
FDR and friends -
ReplyDeleteSomething I came across recently is that the actual printed money supply of US dollars is about 800 Billion, with the majority of the actual bills overseas. I live in a small SAmerican country and dollars have been for years the unofficial reserve currency and used for purchases of $100 and up.
If you figure that if the system crashes and they wipe the computerized slate clean, only people holding actual 'cash' would have the basis for bargaining. While I have physical possession of precious metals, and recommend it as a hole card, I think a good case can be argued that physical paper money will be worth something, if only for the initial few months of shock.
If we bet on 400 Billion in physical paper money in the US, then that would mean 300 million people would have between them about $1330.
So, if you have at least a couple grand in bills on hand, you will have something to bargain with at least.
Let me know what you think. Thanks in advance.
I'd also like to throw a bone into the dogfight on inflation vs. deflation. I think everyone is forgetting about the velocity of money. You can do all you want, but when people hold cash, that causes a radical dislocation in the velocity of money and therefore deflation.
If there was a way to check the volume of credit/debit transactions taking place that would be interesting.
I've heard some well known financial experts say that there's no need taking your money out of the banks because if they do fail your cash will be worthless. My argument is that if my is cash is worthless then my debts are too. My mortgage says that I owe dollars, not gold, or silver, or Euros.
ReplyDelete.
Hi all,
ReplyDeleteObviously no one knows what evil is hidden up the sleeves of the sleezy swindlers and theives who own Washington DC, but we do have precedents and a core of natural laws that rule above all human intent.
As far as the Fed printing enough cash to cause inflation, they have no mechanism to do so. All cash in the US is printed for profit, none can be introduced by will. So no, I do not believe that is possible, and I think that has been well validated in this crash--Bernanke is still promising to maintain the market at 14,300 though Fed policy.
The Fed's irrelevance has been quite spectacular, they are intententionally useless as an altruistic body, they can only feed, by design.
A simplified diagram of this reality is located in "Bailouts Will Never End." The Fed's printing influence is offset by the cost of the cash--albeit delayed payment--at 2.5x face value after interest is bitten out of our children's hide. The Fed also pales by comparison to the commercial banks influence on the cash supply. They are helpless, but they want deflation anyway, so even if they could will inflation they would never do so.
As far as cash being worthless, that is a phenomonen of oversupply, not rarity, so during "prosperity" or booms is when cash is most worthless. During depression, being a creditor is being wealthy, and if you hold cash you are essentially owed treasury money. Yes, the US could stop dead, but if it does I have little faith in any organzized wealth structure. Most likely, we will live in chaos. I hope it doesn't happen, but hope is also the four letter word of trading, so I recognize my own flaw in that reasoning.
Banks have failed en mass at least six times in the US, and it's always been a deflationary event where cash skyrocketed in value. It could "be different this time" but I think the difference will be one of degree: this time will be a lot WORSE. Cash should be proportionately more valuable than in previous depressions.
Or, being worse could push us over the edge to a hyperinflationary failure of all civilized exchange--but do you want to bet on your life insurance policy paying out?
FDR the following chart shows that the bank failures between 1934 and 2007.
ReplyDeletehttp://2.bp.blogspot.com/_otfwl2zc6Qc/R4jwVwesbiI/AAAAAAAADS4/MnK3l6QMC1c/s1600-h/failures.bmp.
As can be seen most of the bankfailures occured between 1980-1990 and that period was an inflationary period.So how do we justify this time it will be deflationary?
"As can be seen most of the bankfailures occured between 1980-1990 and that period was an inflationary period.So how do we justify this time it will be deflationary?"
ReplyDelete1990 was a small correction in a raging 75 year long bull market mania, not a bear market reversal.
10,000 banks failed from 1929 to 1932. We'll beat that by a wide margin between now and 2020.