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The Cultural Shift Away from Parasitic Society

submitted by jwithrow.

Journal of a Wayward Philosopher
The Cultural Shift Away from Parasitic Society

January 22, 2015
Hot Springs, VA

The S&P opened at $2,034 today. Gold is up to $1,296 per ounce. Oil is floating around $46 per barrel. Bitcoin has climbed slightly to $233 per BTC, and the 10-year Treasury rate opened at 1.94% today.

The big news today is the quantitative easing announcement from the European Central Bank. The global madness continues! The ECB will create 60 billion euros every month to buy sovereign European bonds with September 2016 being the target end date.

As we have seen, first in Japan and then in the U.S., once a central bank sets forth to monetize sovereign debt there is no turning back. Japan now plans to buy Japanese equities in addition to government debt. Prime Minister Shinzo Abe is even discussing a plan to print yen and buy every Japanese citizen a gift card! The U.S. embarked on QE1, then QE2, then QE3, and I fully expect QE4 to come by early 2016 at the latest, quite possibly sooner. All of these liquidity programs have caused major distortions and malinvestments in the economy.

Last week we pulled the curtain back and examined how the Fed has artificially propped up the economy with exponential credit expansion and we realized the house of cards will fall when the credit expansion stops. We also discussed some strategies to insulate your portfolio from the coming financial destruction.

We are particularly scornful of the Fed and its policies because most of the economic problems we now face could not exist if it weren’t for the adoption of central banking. It is important to point out, however, the deformation of capitalism and free markets is a much broader issue that is not the result of one or two bad policies thus the problems cannot be fixed with a few simple tweaks. Ultimately, it was a gradual cultural shift that enabled the growth of governments and central banks, parasitic institutions all, and it is a cultural shift that must once again occur before present-day problems can be solved.

This sounds like such a strange thing to say primarily because our school textbooks do not promote an understanding of real history. Instead, the textbooks present current culture and institutions as the inevitable end of history – our way is the best way! With this belief (hurray for our side!) instilled within them at an early age, people are later unable to emotionally detach themselves from large cultural systems even when they know the systems have become corrupt. The corruption is associated with a single individual or group rather than the underlying systems; it’s always the fault of a particular president or political party so people endlessly think the solution is to throw out the bums and elect better leaders. This dynamic has played out all through history just as it is playing out within our current civilization.

The cultural shift in America ramped up at the dawn of the 20th century as Americans increasingly shifted away from market-based societies and towards top-down authoritarianism. This cultural shift fueled the disease of politics to the point where everything is politicized today. Here’s a brief timeline to map this cultural shift:

1913: The Federal Reserve System is established, the Sixteenth Amendment creates the income tax, the Seventeenth Amendment eliminates a major check on federal power by transferring the election of Senators away from state legislatures and to the general populace.

1918: All states have passed compulsory school attendance laws giving rise to the public school system.

1933-1938: The New Deal launches both the welfare state and the regulatory state with an avalanche of federal programs, President Roosevelt confiscates and criminalizes private gold ownership in America.

1944: The Bretton Woods Agreement officially puts an end to the international gold standard.

1950: The Korean War launches the warfare state.

1955: The Vietnam War institutionalizes the warfare state and marks the rise of the military-industrial complex which made perpetual war an extremely profitable enterprise for defense contractors.

1964: The Great Society expands the welfare state tremendously by launching even bolder federal programs to fight the “War on Poverty”, silver is demonetized and removed from U.S. coinage.

1971: President Nixon unilaterally ends the U.S. dollar’s convertibility to gold thus ending the Bretton Woods System and giving rise to a 100% fiat monetary system.

1981: President Reagan announces the “War on Drugs” paving the way for police militarization all across the U.S.

2001: President Bush announces the “War on Terror” leading to the escalation of foreign military interventions, The PATRIOT Act is passed authorizing the destruction of American privacy and civil liberties and launching the domestic surveillance police state.

2008: T.A.R.P. is passed authorizing the federal government to bailout Wall Street with taxpayer funds, The Federal Reserve launches its first quantitative easing (QE) program designed to purchase Treasury bonds from the federal government and mortgage-backed securities from Wall Street using newly created currency.

2010: The Patient Protection and Affordable Care Act is passed effectively cartelizing the already corrupt health care industry in the U.S. with an onslaught of mandates, subsidies, databases, and centralized federal interventions that will undoubtedly lead to reduced quality and skyrocketing prices in the health care industry.

There are certainly gaps and omissions in this timeline but it does illustrate the cultural shift over the past century.

Every one of these bullet points increased the size, scope, and power of existing power-institutions – the U.S. Government, the Federal Reserve, Wall Street, U.S. Intelligence Agencies, Defense Contractors, Police Forces, Public Schools and Universities, Insurance Companies, and a whole host of smaller institutions that benefit from increased centralization, taxation, and regulation. All of these items reinforce the idea that politics should be used as a piecemeal solution to any problem (or perceived problem) that exists. Likewise, these items reinforce the idea that political action is the only solution available to those who do not agree with the political mandates imposed upon them. All of these items serve to transfer power and sovereignty away from individuals, families, and communities to politically connected monolithic institutions.

The corporate media perpetuates this transfer of power from individuals to institutions by conditioning the public to emotionally identify with one or the other political party. Once emotionally attached to a political party people are easily convinced by the same corporate media that the other political party is the enemy. If our team can beat their team in the next election then everything will be fine. This locks people into a perpetual short-term mindset as if the next election is the most important election in history. They forget that they have been participating in the election process for decades only to see political and economic problems grow much larger over the same time period. Even worse, the media perpetuated left-right paradigm turns neighbors against one another over irrelevant issues thus distracting them from the major problems (and solutions) of our time.

It is easy for us to point fingers at the power-institutions but we must also understand that they only exist because we legitimize them.

Fortunately the necessary cultural shift away from parasitic politics and institutionalized authoritarianism is already in motion. The shift is still in its infancy and it is particularly quiet due to the aggressiveness of the power-institutions currently in existence. For this reason the shift is only visible to those who are actively looking for it. But the cultural shift towards free markets and non-coercion will become much more apparent over time as the 20th century political world continues to collapse under the weight of corruption and injustice…

Until the morrow,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the paradigm shift underway please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Employing the Infinite Banking Concept

submitted by jwithrow.

Yesterday we examined the merits of the Infinite Banking Concept. Today let’s look at some IBC strategies to build capital and mitigate inflation.

If you combine the Infinite Banking Concept with a fundamental asset allocation model you have the makings of your own personal central bank. If one were so inclined, just like a central bank, one could establish tangible reserve requirements and use the policy’s ever-growing capital base to purchase tangible assets. Your job as Chairman would be to continuously acquire assets based on your allocation model as your central bank’s capital base grew in size to maintain your specified reserve ratios.

The possibilities with this strategy are endless!

The hardest part of employing the Infinite Banking Concept is being patient enough to capitalize your policy over the first several years until the policy becomes self-sustaining.

Imagine a world in which more people take control over their financial destiny by using the Infinite Banking Concept as an integral part of their financial plan. This strategy has the power to mitigate the boom-bust cycles created by the Federal Reserve and the fractional-reserve banks because people employing the IBC strategy would not have much need for traditional bank financing.

The power of the Infinite Banking Concept can truly be unlocked if families were to implement this strategy generationally. For example: what if parents were to set up IBC policies for their children as soon as they were born?

The IBC policy would have the opportunity to grow for twenty years or more, and the next generation would automatically have a large pool of capital available to them upon their maturation into adult-hood. This pool of capital could be used to finance specialized education or to start a business with no student or bank loan necessary.

The child would also receive a substantial death benefit payment down the road when the parents were to pass on from this world. That death benefit could then be used to set up larger IBC policies for future generations so the family’s pool of capital would continuously grow over subsequent generations. Every single one of your children and grandchildren would have access to a significant pool of capital to help them build self-sufficiency and resiliency.

Talk about an individual revolution!

A generational implementation of IBC in this way could gradually transfer the power of the purse away from governments, central banks, and Wall Street and back into the hands of individuals where it belongs. This would cause the financial sector to shrink tremendously, which would free up capital for more productive purposes across the board.

You see, the financial sector doesn’t really produce much of anything. It is more like the money changers of old in that the financial sector does little more than temporarily warehouse capital and then move it around, siphoning off small fees at every stop along the way. The financial sector certainly plays a very important role in a developed economy, but that role should be much smaller than what it is today.

So how do we know that the IBC strategy will survive the Great Reset? The answer is that we don’t know anything for sure.

But life insurance companies have a built-in inflation hedge as they can charge higher premiums to new customers on an ongoing basis as the currency loses value. Additionally, if the currency were to completely collapse, it is highly likely that life insurance companies would re-value their policies in terms of a new currency or maybe gold (we should be so lucky). Also, if you operate your personal central bank wisely and use your capital to purchase precious metals and other real assets, then you have a currency hedging strategy already in place.

Hopefully this chapter has done the Infinite Banking Concept justice, and you can see why we think it is a powerful tool for individuals disciplined enough to devote the time and resources necessary to capitalize a policy.

How to Insulate Your Portfolio from the Fed’s Financial Destruction

submitted by jwithrow.

Journal of a Wayward Philosopher
How to Insulate Your Portfolio from the Fed’s Financial Destruction

January 16, 2015
Hot Springs, VA

The S&P opened at $1,992 today. Gold is up to $1,267 per ounce. Oil is back down under $47 per barrel. Bitcoin is checking in at $210 per BTC, and the 10-year Treasury rate opened at 1.72% today. Famed Swiss economist Marc Faber went on record at a global strategy session this week saying he expected gold to go up significantly in 2015 – possibly even 30%.

Yesterday we examined the Fed’s activity since 2007 and we noticed $3.61 trillion dollars sloshing around in the financial system that didn’t exist previously. Then we put two and two together and realized the answer was four… not five as the mainstream media claims. We came to the conclusion that the entire financial system is now dependent upon exponential credit creation out of thin air and that financial destruction cometh once the credit expansion stops.

Today let’s discuss some ideas for insulating our balance sheet from the ongoing financial crisis and the inevitable crack-up on the horizon.

The first and most important thing to understand is the difference between real money and fiat money. The Fed (and other central banks) issue fiat money at will – created from nothing. Dollars, euros, yen… none of them are real money; they are all fiat. These currencies do not represent real work, savings, or wealth and they certainly are not backed by anything of substance.

Most of these currencies exist as digital units out in cyberspace but if you read one of the paper notes in circulation it is completely honest with you:

”This note is legal tender for all debts, public and private.”

That means central bank notes are really good for paying debts but that’s about the extent of it.

All of these currencies depreciate over time in terms of purchasing power because they have no intrinsic value and their supply is unlimited. Even when a currency is “strong” as the U.S. dollar is currently, it is only strong measured against other currencies. Measure the dollar against your cost of living and you will see the real picture.

The point is we can’t trust central bank money.

Which leads us to the first way to insulate your portfolio from the Fed’s carnage: convert fiat money into real money – gold and silver. Gold and silver were demonetized in the late 60’s and early 70’s and the establishment has been downplaying their significance ever since. But there is a reason every central bank in the world still stockpiles gold. Gold and silver have been money for centuries and that is not going to change in a brief fifty year time span. Maybe one day cryptocurrencies will take the torch from gold and silver but that day is not today.

It is wise to maintain an asset allocation of 10-30% in physical gold and silver bullion. Precious metals will skyrocket in price measured against fiat currency as the Fed’s financial destruction plays out but in reality they are just a store of value. Precious metals will skyrocket in price only in terms of the fiat currency that is depreciating so dramatically.

Energy and commodity stocks, especially well managed resource companies, stand to boom as the monetary madness plays out as well. This is not a long-term strategy, however, so any gains captured during the commodity boom should be converted into hard assets or blue-chip equities after they have finished falling in price. There is enormous risk in the stock market so equities should make up a smaller portion of your asset allocation: 10-15% perhaps.

Despite everything said about fiat currency above, cash should still make up a large percentage of your portfolio; probably 20-30%. Cash loses purchasing power over time but it is still the primary medium of exchange so it is necessary to remain liquid. Ideally you should keep 6-12 months worth of reserve funds in cash and any cash above that threshold can be used to acquire assets as they go on sale. And plenty of assets will go on sale when the credit expansion stops.

The remainder of your asset allocation should be in real estate, provisions, other hard assets, and anything else that improves your quality of life. With all of the unjust systems and institutions to contend with it is easy to forget most of us are far richer than the wealthiest individuals living at the beginning of the 20th century. We have central heating and air in our homes, reliable auto travel over long distances, affordable air travel to anywhere in the world, way too much entertainment, cheap access to the internet which opens the door to all manner of information/commerce/entertainment, pocket-sized computers that double as telephones, and many other modern comforts that would be considered futuristic luxuries by the wealthiest of the wealthy one hundred years ago.

After properly aligning your portfolio to weather the Fed’s financial storm, focus on aligning your life to maximize fulfillment, purpose, and peace of mind. After all, your most valuable asset is time and time cannot be measured in financial terms.

More to come,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” and the fiat monetary system please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

How the Fed Destroys the Middle Class

submitted by jwithrow.

Journal of a Wayward Philosopher
How the Fed Destroys the Middle Class

January 15, 2015
Hot Springs, VA

The S&P opened at $2,013 today. Gold is up to $1,262 per ounce. Oil rallied back up to $48 per barrel. Bitcoin has dived to $216 per BTC, and the 10-year Treasury rate opened at 1.81% today.

The big news in the markets today comes from the Swiss National Bank which announced that they will abandon the Franc’s peg to the Euro. This move suggests the SNB is expecting Europe to ramp up its very own quantitative easing program in a big way. If that happens we can expect the U.S. dollar to strengthen, Treasury rates to continue their decline, and gold to rise in price. Such a move could also spark another bull cycle for gold miners in the equity markets. We shall see.

If you ask the media, they will tell you the economy is recovering quite nicely. They will tell you they are a little disappointed the recovery has taken this long, but a recovery it is nonetheless. And sure enough, the economic landscape does look better now than it did in 2009. If you live in a metropolitan area you may even be tempted to think the media is absolutely correct – happy days are here again! The stock market has boomed, mortgage rates are on the floor, and the banks are lending once again… what more could anyone ask for?

Regretfully, I must point out that whatever recovery has taken place is due exclusively to a credit expansion of historic measures. Take a look at this chart from the Fed’s Board of Governors.

The Federal Reserve’s balance sheet expanded from $890 billion ($890,000,000,000) to $4.5 trillion ($4,500,000,000,000) in just six years. This balance sheet expansion represents the acquisition of assets by the Federal Reserve – U.S. Treasury Bonds and mortgage-backed securities specifically. What this means is the Fed purchased bonds from the federal government to finance government deficits and the Fed purchased mortgage-backed securities from Wall Street to bail out the banks.

The Fed saved the day!

But we must ask – where did the Fed get the dollars to save the financial system? Well if you are familiar with our work on fiat money then you know the Fed created those dollars out of thin air. That’s 3.61 trillion ($3,610,000,000,000) extra dollars floating around in the financial system conjured into existence. Is it any wonder interest rates hit the floor and stocks boomed?

Go back and ask the media and they will tell you this is normal. The Fed did what it was supposed to do, they will say, it exists to manage the financial system. The media has had six and half years to feel confident in this assessment. But the Fed itself shows us what the problem is – the recovery is unsustainable!

Let’s go back and look at the chart. The Fed has classified the period from the end of 2007 to the middle of 2009 as a recession. The Fed shows how it printed $1.41 trillion during that time period and brought an end to the recession. But then the Fed kept on printing – in even greater quantities! If the recession ended in 2009, why did the Fed need to create another $2.2 trillion over the next five years?

The answer is clear as day and the Fed shows us why – the recovery is solely dependent upon exponential credit expansion. It’s game over as soon as the credit stops expanding.

The fact is no structural reforms have taken place within the financial system since the crash of 2008. All of the underlying problems are still present; they have simply been papered over by credit creation of historic proportions. As much as the media would have you believe otherwise, you just can’t cure a debt problem with more debt.

”Sooner or later everyone sits down to a banquet of consequences.” said Robert Louis Stevenson.

For those living outside of the major U.S. metropolitan areas, that banquet of consequences is here. Middle America has been hollowed out and small town U.S.A. has been destroyed by the fiat monetary system that has been employed since 1971. Income inequality has risen rapidly, not because of greedy capitalists, but because politically-connected institutions have been the recipients of enormous quantities of money and credit created from nothing. What is occurring is a wealth transfer of epic proportions.

It is the middle class that bears the brunt of this massive wealth transfer. As we mentioned in our first journal entry of 2015, the Cantillon Effect is in full swing. The individuals and businesses farthest away from the printing press have their wealth systematically transferred away from them to the institutions with their cup under the money spigot. Don’t believe me? Take a trip to K-Street and observe what goes on there.

Of course there’s nothing new under the sun. This dynamic has played out numerous times in various places throughout modern history. It always leads to the destruction of the middle class and then the destruction of the monetary system itself.

Fortunately, individuals can insulate themselves from some of the financial destruction if they understand what is happening. It is understanding that is the most difficult part.

Until the morrow,

Joe Withrow
Wayward Philosopher

How the Fed Grows Government

by Hunter Hastings – Mises Daily
Article originally published in the January 2015 issue of BankNotes

We are told that elections are important, but the most powerful state institution, the central bank, is totally out of reach of the voter.

Ludwig von Mises viewed democracy as a utilitarian concept. It was the form of political organization that allowed the majority to change the government without violent revolution. In Socialism, Mises writes “This it achieves by making the organs of the state legally dependent on the will of the majority of the moment.” He identified this form of political process as an essential enabler of capitalism and market exchange.

Mises extended this concept of utilitarian democracy to citizens’ control of the budget of the state, which they achieve by voting for the level of taxation that they deem to be appropriate. Otherwise, “if it is unnecessary to adjust the amount of expenditure to the means available, there is no limit to the spending of the great god State.” (Planning for Freedom, p. 90).

Today, this utilitarian function of democracy, and the concept of citizens’ limitations on government mission and government spending, has been taken away by the state via the creation and subsequent actions of central banks. The state carefully created a central bank that is independent of the voters and unaffected by the choices citizens express via the institutions of democracy. In the case of the US Federal Reserve, for example, the Board of Governors state that the Federal Reserve System “is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.”

Independent from Voters, But Not from Politicians

Importantly, the central bank is independent of the citizens in this way, but, in practice, not independent of politicians. Alan Greenspan, former chairman of the Federal Reserve, is quoted as asserting, “I never said the central bank is independent,” alluding to similar statements in two books he has written, and pointing to one-sided political pressure significantly limiting the FOMC’s range of discretion.

This institutionally independent, but politically directed central bank spearheads a process that enables largely unlimited government spending. It expands credit and enables fiat money, which is produced without practical limitation. Fiat money enables government to issue debt, which, at least so far, also has been pursued without restraint. The unlimited government debt enables unrestrained growth in government spending. The citizenry has no power to change this through any voting mechanism.

Thus, the state is set free from having to collect tax revenue before it can spend, and as Mises explained, in such a case, there is no limitation on government at all:

The government has but one source of revenue — taxes. No taxation is legal without parliamentary consent. But if the government has other sources of income it can free itself from this control.

In other words, when faced with the possibility of voter reprisals, members of Congress are reluctant to raise taxes. But if government spending no longer necessitates taxes, government becomes much more free to spend.

Without restraints on government spending, there are no restraints on government’s mission, or on the growth in the bureaucracy that administers the spending. The result is a continuous increase in regulations, and a continuous expansion of state power.

Has The Central Bank Limited Itself?

In the one hundred years since the creation of the Federal Reserve in 1913, US federal government spending has grown from $15.9 billion to a budgeted $3,778 billion in 2014 (a number we now refer to as $3.8 trillion to make the numerator seem less egregious). Spending as a percentage of GDP has advanced from 7.5 percent to 41.6 percent over the same period. A comparison of regulation growth is more difficult, but over 80,000 pages are published in the Federal Register annually today, versus less than 5,000 annually in 1936.

The evidence, therefore, is that voting makes no difference to this lava flow of spending and regulation. Whatever the will of the majority of the moment, government spending and government power will continue to expand, with consequent reduction in the economic growth that is the primary goal of the society that is being governed.

John Locke opined that, when governments “act contrary to the end for which they were constituted,” they are at a “state of war” with the citizens, and resistance is lawful. (Two Treatises of Government, p. 74). The theory and practice of unhampered markets and individual liberty are particularly relevant at election time.

Hunter Hastings is a member of the Mises Institute, a business consultant, and an adjunct faculty member at Hult International Business School

Please see the January 2015 issue of BankNotes for this article and others like it.

Ron Paul on How to Restore America – Don’t Avert the Government Shutdown!

by Ron Paul – Ron Paul Institute for Peace and Prosperity:

The political class breathed a sigh of relief Saturday when the US Senate averted a government shutdown by passing the $1.1 trillion omnibus spending bill. This year’s omnibus resembles omnibuses of Christmas past in that it was drafted in secret, was full of special interest deals and disguised spending increases, and was voted on before most members could read it.

The debate over the omnibus may have made for entertaining political theater, but the outcome was never in doubt. Most House and Senate members are so terrified of another government shutdown that they would rather vote for a 1,774-page bill they have not read than risk even a one or two-day government shutdown.

Those who voted for the omnibus to avoid a shutdown fail to grasp that the consequences of blindly expanding government are far worse than the consequences of a temporary government shutdown. A short or even long-term government shutdown is a small price to pay to avoid an economic calamity caused by Congress’ failure to reduce spending and debt.

The political class’ shutdown phobia is particularly puzzling because a shutdown only closes 20 percent of the federal government. As the American people learned during the government shutdown of 2013, the country can survive with 20 percent less government.

Instead of panicking over a limited shutdown, a true pro-liberty Congress would be eagerly drawing up plans to permanently close most of the federal government, starting with the Federal Reserve. The Federal Reserve’s inflationary policies not only degrade the average American’s standard of living, they also allow Congress to run up huge deficits. Congress should take the first step toward restoring a sound monetary policy by passing the Audit the Fed bill, so the American people can finally learn the truth about the Fed’s operations.

Second on the chopping block should be the Internal Revenue Service. The federal government is perfectly capable of performing its constitutional functions without imposing a tyrannical income tax system on the American people.

America’s militaristic foreign policy should certainly be high on the shutdown list. The troops should be brought home, all foreign aid should be ended, and America should pursue a policy of peace and free trade with all nations. Ending the foreign policy of hyper-interventionism that causes so many to resent and even hate America will increase our national security.

All programs that spy on or otherwise interfere with the private lives of American citizens should be shutdown. This means no more TSA, NSA, or CIA, as well as an end to all federal programs that promote police militarization. The unconstitutional war on drugs should also end, along with the war on raw milk.

All forms of welfare should be shut down, starting with those welfare programs that benefit the wealthy and the politically well connected. Corporate welfare, including welfare for the military-industrial complex that masquerades as “defense spending,” should be first on the chopping block. Welfare for those with lower incomes could be more slowly phased out to protect those who have become dependent on those programs.

The Department of Education should be permanently padlocked. This would free American schoolchildren from the dumbed-down education imposed by Common Core and No Child Left Behind. Of course, Obamacare, and similar programs, must be shut down so we can finally have free-market health care.

Congress could not have picked a worse Christmas gift for the American people than the 1,774-page omnibus spending bill. Unfortunately, we cannot return this gift. But hopefully someday Congress will give us the gift of peace, prosperity, and liberty by shutting down the welfare-warfare state.

Article originally posted at The Ron Paul Institute for Peace and Prosperity.

The Case for Gold

submitted by jwithrow.

“The process [of debauching the currency] engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – John Maynard Keynes

This chart illustrates the construct of the global financial system denominated in U.S. dollars.

There is an estimated 171,000 tons of physical gold bullion currently in existence which is $7 trillion if priced at $1,300 per ounce. Physical gold served the global financial system as an anchor in some capacity from the Industrial Revolution all the way up until 1971.

The U.S. dollar became the sole anchor of the international monetary system in 1971 and there is now approximately $25 trillion sitting in cash globally. Additionally, global equity markets are valued at roughly $57.5 trillion and global investable real estate valuations are roughly $70 trillion.

Global debt has reached $175 trillion with governments being the biggest debtors. This number does not include all of the unfunded liabilities accrued by the social welfare states of the world.

Dwarfing all other U.S. dollar denominated asset classes is the over-the-counter derivatives market. According to the BIS, OTC derivatives total $639 trillion with interest rate derivatives being the largest category by far.

So there is approximately $1,028 trillion worth of U.S. dollar denominated global assets in existence and physical gold, the market’s choice for money over several centuries, makes up less than 1% of total global assets.

Gold is the only asset on this chart that has no counterparty risk meaning there are no other contractual parties involved when you hold physical gold.

The U.S. dollar is issued and managed by the Federal Reserve and the Fed can (and does) reduce the value of the dollar simply by creating more dollars. Equity values obviously depend on the particular company’s financial performance. Real estate investments depend on a tenant to make payments in a timely fashion. The counterparty to debt is the debtor who must make timely payments and the debtor typically has counterparties as well. Derivatives, the largest global asset class, come with a complex web of counterparties that are virtually impossible to predict.

Global dollar denominated assets have been able to balloon up to $1,028 almost exclusively because of 40+ years of constant credit and credit-based money expansion. One day credit will have to contract and that $1,028 trillion figure will dissipate rather quickly. Where do you think capital will fly to when that day comes?

My bet is physical gold.

Image Source: Global Precious Metals

Capitalism and Creditism and Corporatism, Oh My!

submitted by jwithrow.

Journal of a Wayward Philosopher
Capitalism and Creditism and Corporatism, Oh My!

December 26, 2014
Hot Springs, VA

The S&P opened at $2,084 today. Gold is flat around $1,198 per ounce. Oil is still checking in at $56 per barrel. Bitcoin is at $326 per BTC, and the 10-year Treasury rate opened at 2.24% today.

All is quiet in the markets this holiday season. We may look back on this time period in a few years and say that we were presented with a tremendous opportunity to buy beaten down energy and commodity stocks during the tax-loss selling season of 2014. We probably will say that we had a great opportunity to accumulate some gold throughout 2014 as well. Just be sure to follow your asset allocation model if you decide to capitalize on these opportunities.

Yesterday we examined our current economic circumstances and realized that we were employing capitalism but we had no capital! Today we must ask the question: How can you have capitalism without any capital?

The obvious answer is you can’t. It’s like making potato soup without potatoes – try as you might it just won’t work.

So if we don’t have capitalism then what do we have? My answer is that we have some weird blend of creditism and corporatism. Governments have colluded with large corporate interests, especially in the commercial banking sector, to rig the economy in their favor.

Though we could go back further, let’s start our story (from the American perspective) at the end of World War II. Prior to the war governments didn’t think they could do everything they wanted due to financial constraints. That didn’t stop them from doing half of what they wanted to do but it forced them to make a choice. Did they want guns (warfare) or butter (welfare)?

The U.S. came out of WWII looking like gold… literally. The U.S. economy was the least damaged by the war which ravaged Europe and it came out holding the world’s largest stash of gold reserves. This relative economic strength gave U.S. politicians the wrong idea: they started to think they might not need to make any choices. Then President Lyndon Johnson came along and he wasn’t shy about it – guns and butter it will be!

So we got the Vietnam War and the Great Society together! And gold steadily flowed out of the U.S. Treasury until President Nixon pulled the switch-a-roo in 1971 and closed the gold window. All of a sudden the international monetary system became elastic. With no more gold restraint, dollars and yen and pounds started to pile up as central banks and commercial banks discovered they could conjure money into existence largely at will. But this was a different kind of money than the gold-backed variety – it was credit-based.

This credit-based money was extremely popular and the money supply grew 50-fold between World War II and 2008. Everyone got used to a constantly expanding money supply and now both the economy and asset prices are dependent upon it. It is the expansion of credit, not real capital, that supports all of the federal spending programs, all of the wars in the Middle East, the mass imports from China and Vietnam, the new housing developments and shopping malls in Middle America, the massive car lots across the country, most of the skyscrapers dotting the city skies, and current real estate and stock market valuations.

Here’s a fun example: do you know how much debt is still owed on the tax-funded Meadowlands Sports Complex in New Jersey? I’ll tell you: more than $100 million is still owed on the facility. Oh, and I am talking about the old Meadowlands Stadium that was closed and demolished in 2009 to make way for a new $1.6 billion facility now known as MetLife Stadium. New Jersey taxpayers are still on the hook for $100 million on a sports complex that no longer exists! New Jersey built the stadium, used the stadium, and demolished the stadium but never bothered to pay for it.

Such nonsense can only occur in a world of ever-expanding credit-based funny money.

This applies to the massive bank bailouts and banker bonuses that one side of the fictitious aisle rails against just as it applies to the massive welfare programs that the other side of the false political-divide takes issue with. None of it exists without perpetual credit expansion; none of it exists without creditism and corporatism.

Capitalism would have nothing to do with any of it.

It is important to understand that we have only seen one side of the credit cycle within the current monetary system. Credit has been expanding constantly for more than forty years now. But if we look around our world we can clearly see that nothing expands forever. Waves rise then fall. Trees grow then mature. Balloons inflate then pop.

One day credit will have to contract; it is inevitable. What happens when that day comes? Ludwig von Mises, the late Austrian School economist, offered some insight:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”

Was he right? Time will tell.

More to come,

Joe Withrow
Wayward Philosopher

Debt as Far as the Eye Can See

submitted by jwithrow.

Journal of a Wayward Philosopher
Debt as Far as the Eye Can See

December 9, 2014
Hot Springs, VA

The S&P opened at $2,056 today. Gold is up around $1,218. Oil is still floating around $64 per barrel. Bitcoin is down to $347 per BTC, and the 10-year Treasury rate is 2.21% today.

In other news, U.S. national debt has now eclipsed $18 trillion. That’s: $18,000,000,000,000.00. Debt to GDP is now around 99%. To put this in perspective, U.S. national debt stood at $398 billion back in 1971 – 34% of GDP – when Tricky Dick put the “Out to Lunch” sign up in front of the international gold window.

Even more startling, total credit market debt now checks in at 330% of GDP. Mr. Market has been trying to wind down the credit market bubble for some time now, but the Federal Reserve has been fighting tooth and nail against him. The Fed’s weapon of choice: funny money! The Fed has purchased more than $4.3 trillion worth of bonds since 2008 in an effort to prop up asset prices and strangle interest rates.

Where did the Fed get this $4.3 trillion? As we pointed out in last week’s journal entry, the Fed got this $4.3 trillion from the same place it always gets money… it conjured every dime of it from thin air!

Still, the economists pretend like this is all normal. Some of them say that the Fed should have bought fewer bonds; $4.3 trillion worth was too much. Other economists say the Fed didn’t buy enough! So they write their articles and conduct their interviews and everyone sleeps sound at night. I can’t help but wonder – do they think this can go on forever? Do they think the Fed can reverse course whenever they darn well please? Do they think at all?

I don’t know if mainstream U.S. finance really is arrogant enough to think there are no consequences to all of this financial chicanery or if they are just playing a big sleight-of-hand game, but the world seems to slowly be waking up to the fiat monetary system that has allowed debt to pile up faster than 5:00 Beltway traffic.

Though the Swiss Gold Referendum didn’t pass last month, it does suggest a change in the financial wind. The initiative would have prevented the Swiss National Bank from selling any of Switzerland’s gold reserves and it would have required a 20% gold backing to the Swiss Franc. The fact that this initiative made it to a vote indicates a growing apprehensiveness towards the international monetary system.

This apprehensiveness is not limited to Switzerland. Germany, France, Belgium, and the Netherlands have each expressed interest in repatriating their gold reserves held in foreign central banks. Additionally, both China and Russia have been buying gold hand over fist. The Russian Central Bank bought nearly 20 tons of gold in October alone. We don’t know exactly how much gold China has been buying – they haven’t reported their full reserve numbers in several years. China and Russia aren’t alone; global gold demand now eats up more supply than miners can produce at current prices.

2013 was a record setting year for precious metals purchases from the U.S. Mint and 2014 sales are on pace to surpass that record. The U.S. Mint sold 3,426,000 ounces of silver in November alone. Perth Mint sold 851,836 ounces of silver in November. India imported 169 million ounces of silver through the first ten months of 2014. The precious metals are clearly being viewed as a life-boat in a sea of rising debt.

In addition to the precious metal rush, several major U.S. financial firms have been using depressed interest rates to gobble up real assets recently as well. The Blackstone Group has been buying domestic real estate like it was last call and Berkshire Hathaway acquired Burlington Northern Santa Fe Corp (BNSF) – a railroad company. Shrewd analysts suggest Berkshire’s purchase of BNSF was a hard asset play to mitigate expected inflation; railroads are nothing but hard assets hauling other hard assets around the country.

Are all of the precious metal purchases and hard asset acquisitions just a coincidence?

Maybe deficits really aren’t that big of a deal. Maybe the Fed really can navigate through the uncharted waters of debt and derivatives. Maybe the fiat monetary system really has supplanted Mr. Market’s choice for good. Maybe financial asset prices really can go to the moon and never come back down.

But I wouldn’t bet on it.

More to come,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on the “Great Reset” please read “The Individual is Rising” which is available at http://www.theindividualisrising.com/. The book is also available on Amazon in both paperback and Kindle editions.

Image Source: WilliamBanzai7 – Zero Hedge

Real Money

submitted by jwithrow.

Journal of a Wayward Philosopher
Real Money

December 4, 2014
Hot Springs, VA

The S&P is buzzing around $2,069, gold is back up over $1,210, oil is checking in just under $67 after OPEC announced that they would not cut production, bitcoin is hanging around $373, and the 10-year Treasury rate is checking in at 2.29% today.

How about those prices at the pump, huh? Some resource analysts think that oil won’t remain this low for long. They point to the fact that several OPEC nations are dependent upon high oil prices to run their social welfare states and suggest that, coupled with increased demand over the coming winter, oil will be forced to climb back up the ladder. Other analysts suggest there are numerous oil companies still profitable at current price levels thus supply will remain strong and oil will hang around current prices for longer than expected.

We can’t know which analysts are right and which are wrong but we do know that numerous well-run resource companies have seen their stock price hammered as a result of oil’s decline while the S&P has continued to escalate up its stairway to heaven. Speculators may see this as the best opportunity to get into resource stocks since 2009. Natural resource prices are especially cyclical – low prices drive marginal producers out of business which reduces supply and leads to higher prices which attract marginal producers back to the industry. Booms lead to busts which lead back to booms. Those disciplined enough to buy the bust and sell the boom tend to do well in the resource sector.

Speaking of natural resources, it is the rejection of real money backed by precious metals that, more than anything, has led to the disturbing macroeconomic trends we have been analyzing recently.

In October we examined fiat money and realized that it has always been a major drain on society when implemented throughout history. We agreed fiat money is any currency that derives its value from government law and regulation and we noted that legal tender laws are what force the public to use the government’s money rather than the market’s money.

The academic economists would have you believe we have a complex and sophisticated monetary system. They would suggest that you cannot possibly understand it so you may as well leave it to the experts. The economists will use strange terminology when discussing the economy in newspapers and on television in order to confuse and bore you. Want to know their little secret?

Our economy operates mostly on fake money.

I know, it sounds ridiculous. How is it fake money if you can spend it? That’s exactly what makes the fake money so insidious – you can’t tell that it’s counterfeit.

I will attempt to explain myself by asking a simple question: where does our money come from?

Take your time, I will wait…

If you said “from thin air” then you are the winner! For the last forty years or so our money has been loaned into existence. The Federal Reserve loans new money to its member banks and to the U.S. Treasury and the new money then eventually finds its way into the general economy. Where did the Fed get this money to lend? It created it! From nothing. Ex nihilo nihil fit.

But wait, it gets better. This same process takes place every single time a bank originates a new loan. Say you go get a mortgage to purchase a new home. The bank supposedly lends its deposits to you at interest to finance your home. But this isn’t entirely true. First, the bank is only required to have a fraction of the loan in reserve – roughly 10%. So if your mortgage is $100,000 the bank is required to have at least $10,000 in deposits to support the loan. But does the bank actually take that $10,000 and give it to you? Of course not! That $10,000 in deposits stays right where it is. It could be spent tomorrow if the depositors took a trip to Vegas. So where does the money come from to finance your home?

Hint: it’s the same answer as above.

So you get $100,000 in fresh new money and give it to the seller in exchange for the house. The seller uses your new money to pay off his mortgage and often there is a little bit leftover. The seller calls this profit and puts it in his account and the economy’s money pool gets a little bit bigger: there is now more money in the system then there was before you financed your house.

The economists use terms like ‘M1’, ‘M2’, and ‘money multiplier’ to make this seem like a complicated system but as you can see it’s pretty simple. It’s just a journal entry and a few clicks of the mouse and… PRESTO!

No one noticed a little extra money sneaking into the system here and there at first. But the rate at which new money entered the system increased dramatically as the money supply grew. Forty years later we are starting to see the ill-effects of exponentially expanding credit-based money. This credit expansion has distorted all aspects of the economy because money is half of every transaction. Financial planning and analysis is extremely difficult if no one knows what one unit of money will be worth from one year to the next. It’s always apples to oranges.

So where did our money come from before the fiat money explosion? Money has taken on many different shapes and sizes throughout history but if you go back just a little bit in modern history, say to the mid-19th century, you will probably find yourself using the market’s choice for real money – gold and silver. A little bit later – the late 19th century or so – governments muscled their way into the money business and, instead of just minting gold and silver coins, they created national currencies but they fully backed these currencies with gold or silver. While fully convertible, the currencies operated much like real money but it didn’t take long for governments to reduce the real money backing. They found this so pleasant, they eventually got rid of all currency ties to real money altogether!

One of the big advantages to using real money is that it tends to maintain purchasing power over long periods of time. You can expect real money today to be roughly as valuable as real money ten years from today. You could actually save this real money if you wanted to! Saving leads to capital formation which can drive steady economic activity without the need for massive credit expansion which always results in booms and busts.

There are numerous other advantages to using real money but wife Rachel will fuss at me for making this post long and boring as it is so we will have to come back to them in a later entry.

More to come,

Joe Withrow
Wayward Philosopher

For more of Joe’s thoughts on monetary history and real money please read “The Individual is Rising” which is available at http://www.theindividualisrising.com. The book is also available on Amazon in both paperback and Kindle editions.