Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Monday, February 21, 2011 Following the fiat fate...all the way to the golden brick road, A educational look inside Henry Hackel's "Box of Money," Plus, Bill Bonner on "invisible" inflation and the beginning of The Zombie Wars... -------------------------------------------------------- Shock Video: 123 Winners in 127 Moves – Get The Next Profit Alert on Wednesday This new presentation reveals amazing market strategy that recently cranked out gains with 97% success. This is easy. It's fast. You don't need special skills or connections. Check it out – here. A Living Wake for Fiat Currency Preparing for the Inevitable Demise of the US Dollar Eric Fry Reporting from Laguna Beach, California... We gather today to bury the US dollar, not to praise it. We gather to mourn the passing of our beloved greenback while it still circulates among us. This exercise is not ceremonial, dear reader, it is preparatory. We wish to anticipate and prepare for the day when the greenback becomes too frail to provide for our comfort and security. We wish to take maximum advantage of its sunset years. There's no denying the ultimate outcome. The dollar will perish eventually, just like the paper currencies that have gone before. It is the inevitable circle of monetary life, as the first of today's columns makes very clear. This column originally appeared in the December 23, 2004, edition of The Rude Awakening, the former "sister publication" of The Daily Reckoning. On that day, gold was selling for $442.00 an ounce – a gain of more than 70% from the lows of 1999. At the time, many financial market observers considered this advance to be a fluke of little consequence. But the "fluke" continues to this day...and seems destined to continue for as long central bankers pretend to protect currencies by destroying them. The simple lessons of history that the following story contain seem particularly germane today, both because Ben Bernanke is actively playing the matador to the US dollar...and because the dollar lost two thirds of its value against gold, just during the six years since this column first appeared. Seems rather amazing...at least to us. After perusing the column below, don't overlook the second installment of today's special "double issue." Chris Mayer, editor of Capital & Crisis, examines the key insights of the classic book, When Money Dies. Enjoy! From Hulbert Financial Digest's Best-Performing Newsletter Advisory of the last 10 years...Comes... The New OIL WAR and Why Iran Threatens Your Money... According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year. Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue. Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead... Click here to watch Byron's value-packed presentation now. The Daily Reckoning Presents The Box of Money by Eric Fry The most persuasive arguments for buying gold do not reside in musty old economics textbooks or in the minutes of the latest FOMC meeting...They reside in Henry Hackel's "box of money." Henry, as faithful Rude Awakening readers will recall, is the president of R.F. Lafferty, a broker-dealer specializing in options trading and resource stocks. In his 26th floor corner office overlooking the Hudson River sits a non-descript cardboard box – a simple shoebox that contains a powerful message: Buy gold. "Hey Eric, have you ever seen my box of money?" Henry asked one day, wearing an impish grin. "Um...no," your editor replied. "I think I would have remembered that." "You gotta see this... C'mon, follow me," said Henry, as he grabbed the box and marched toward the conference room. After seating ourselves at the conference table, Henry slung the box across the table like a bartender slinging draft beers and said, "Take a look." Your editor peeled back the lid, peered into the box and saw money – lots and lots of money...but all of it worthless. There were rubles from pre-Soviet Russia, 50 million-mark bills from the Weimar Republic period in Germany, pesos from the 1950s government of Cuba's Battista regime, and even a few extinct Brazilian cruzeiros. As your editor sifted through layer upon layer of worthless currencies, he imagined himself a kind of archaeologist, tooth-brushing his way through the ruins of civilizations past – in this case, monetary ruins. The message contained in this "dig" is very clear: The forces of monetary entropy – fueled by politicians and central bankers – continuously erode the value of paper money. One of Henry's favorite "ruins" is an elegant, 1928 10-Franc note. "To think," he says, "at one time, someone held up this note and said 'It's as good as gold'." But of course, the 1928 franc note turned out to be somewhat less good than gold. In fact, not one bill in that box – to borrow a familiar saying – is worth the paper it's printed on. "If the same man who carried around this note in 1928 instead took two and bought a 20-Franc 'rooster' gold piece, it would be worth about $80 today," Henry laments. By comparison, the two 10-franc notes, post multiple devaluations, would be worth no more than a few cents today. "Your box of money is very impressive, Henry," your editor remarked. "But I don't need any convincing about the long-term value of gold... So let's take a shorter time horizon. "How does gold look to you in 2005?" "Well, I think the bottom is in for gold," he answered, "but I can't give you any price targets." "That's fine," your editor replied, "what I really care about most is the primary trend. Do you see any evidence that the bullish trend for gold is gathering strength? What about your coin-dealer buddy in Florida? Is he still selling more Beanie Babies than Krugerrands?" "Yeah, I think so," Henry laughed. "I don't think Beanie Babies are the hottest items in the store anymore." (Three years ago, when gold was still languishing below $300 an ounce and trying to shake off the stigma of a two-decade bear market, Henry related the following anecdote about his coin dealership in Hollywood, Florida: "We offered some 'retired' Beanie babies for sale – a set of three particularly coveted Beanie Babies for $1,100. We put the sets one at a time in the window of the store...people were 'daggering' each other for them. At the same time, an elderly gentleman comes into the store and asks: 'How much is a Krugerrand?' "'$285,' came the reply. "'Forget it,' the old man said. 'Too expensive.' "Imagine that. For an ounce of gold you couldn't even buy one Beanie baby. No interest in gold, but these Beanie Babies were flying out the door. It was amazing.") "So let's return to the topic of gold," your editor continued, mindful of his writing deadline. "Are we heading to $1,000 an ounce?" "Who knows?" said Henry, "But that wouldn't be out of line. That's not a crazy idea at all... Gold's gonna keep moving higher. It's easy to buy now. That's a big difference. Buying gold used to be cumbersome and difficult. But now you just toss in an order for 2,000 shares of GLD and boom, you're long $100,000 worth of gold. Buyers now have a liquid market for gold for the very first time. That could be a big influence on the gold price." "Yeah, I'm with you on that," your editor replied. "Okay Henry, since you won't give me a price target for gold, just tell me this: Are you buying or selling?" "I'm buying," Henry replied without hesitation. "But I'm always buying." Regards, Eric Fry for The Daily Reckoning EXPOSED: The Biggest Scam In American History! Mad men drunk on power and driven by greed are robbing YOUR retirement! Most sickening of all, Washington fully endorses this bold-faced assault on your wealth. But Chris Mayer is exposing this scam in his brand new video presentation. PLUS, he'll show you how you could protect and even grow your wealth in spite of this scam, virtually spitting in the face of these elitist thieves. Don't be a helpless victim... Click here to act right now. The Daily Reckoning Presents "When Money Dies" Chris Mayer I didn't come up with the phrase, "when money dies," though I like it a lot. The phrase captures an important idea. It is that money – I refer to that paper kind issued by governments – has a finite life. At some point, it becomes worthless, or dies. The death of a currency is often a protracted affair. It often takes decades. And as it unfolds, the people who experience it hardly believe it. That is the tale told by Adam Fergusson in his book When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. First published in 1975, it had been out-of-print for years and much sought after. A used copy on Amazon cost $300 recently. The book is a history of the death of the German mark in the 1920s. It is also a scary reminder of the devastating effects of inflation and, therefore, a cautionary tale for US central bankers and politicians who play so fast and loose with US Dollar. If you don't know what happened to the German mark, here's what you need to know fromWhen Money Dies: "In 1913, the German mark, the British shilling, the French franc and the Italian lira were all worth about the same. Four or five of any of these would buy you a US Dollar." By 1923, you could exchange one shilling, franc or lira for up to 1 billion marks. "Although," Fergusson writes, "in practice, by then, no one was willing to take marks in return for anything. The mark was dead, one million-millionth of its former self. It had taken 10 years to die." How did that happen? The short answer is that post-Imperial Germany found itself with a crushing load of debt. Raising taxes or cutting spending is politically difficult in any age. And so it was in Germany. To deal with these debts, Germany chose the path of least resistance. It printed lots and lots of money. Sounds like the fiscal position the US government finds itself in today. Bleeding deficits with no end in sight. Piling on debt and entitlements with no end in sight. The solution so far? Why, "quantitative easing." In a new introduction, Fergusson writes: "Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, 'quantitative easing,' that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline." But back to Germany... Eventually, prices started to rise as the mark lost purchasing power. One of the great strengths of the book is the on-the-ground view you get from the people who lived through it. It gives you an unsettling look at German society as it starts to dissolve and as inflation starts to wreak havoc. It started slowly, with commodity prices starting to rise everywhere. But as the years wore on, prices kept going up in big steps. Soon the damage was remarkable. In just eight years since 1913, the price of rye bread rose 13-fold. Beef rose 17-fold. Sugar, milk, pork and potatoes went up 23-28-fold. Butter went up 33-fold! And these were official prices. As a practical matter, real prices were often a third higher. It's hard to fathom. All this brought out the worst in people. Germany became an ugly society, looking for blame. As Fergusson writes: "They picked upon other classes, other races, other political parties, other nations." There was a long list of villains: "the greed of tourists, or the peasants, or the wage demands of labor, or the selfishness of industrialists and profiteers, or the sharpness of Jews or the speculators making fortunes in the money markets." Erna von Pustau, who lived through it, described what it was like: "My allowance and all the money I earned were not worth one cup of coffee. You could go to the baker in the morning and buy two rolls for 20 marks; but go there in the afternoon and the same two rolls were 25 marks. The baker didn't know how it happened... His customers didn't know... It had somehow to do with the dollar, somehow to do with the stock exchange – and somehow, maybe, to do with the Jews." As we know what would happen later in Germany, her comments are particularly chilling. Each year, people thought it couldn't get worse. "And yet things always did, from bad to worse, to worse, to worse," Fergusson writes. "It was unimaginable in 1921 that 1922 could hold any more terrors. They came, sure enough, and were in due course more than eclipsed, with the turn of the following year." Germany plunged into hyperinflation. The price changes get ridiculous to talk about – the numbers so large that they are practically meaningless. Who can imagine paying 500 billion marks for a dozen eggs? It's also interesting to see how society dealt with this breakdown in the currency. The idea of real wealth became very important. Not the kind of wealth denominated in abstract printed marks, but real wealth that one could use. People bought things. Hugo Stinnes, an industrialist, bought factories, mines, newspapers. The man on the street bought what he could trade. Fergusson ends with a powerful observation: "In war, boots; in flight, a place in a boat or a seat on a lorry may be the most vital thing in the world, more desirable than untold millions. In hyperinflation, a kilo of potatoes was worth, to some, more than the family silver; a side of pork more than the grand piano." Despite the awful experience of the 1920s, Germany would repeat its errors again and again. In the 1930s, Hitler would crank up the money presses. By 1948, the reichsmark (which replaced the old mark) died. So Germany created the deutsche mark. Yet it wasn't much better. It lost two-thirds of its purchasing power by 1975. Such is the fate of all paper money. I will leave it to you to decide how much relevance Germany's experience has to the US today. I find many alarming parallels. I would point out, too, that the US dollar has lost 95% of its purchasing power since 1913. And the US dollar is among the best currencies of the last hundred years. That says something about paper currencies, doesn't it? It's also why staying ahead of inflation is one of the chief tasks of investing. The monetary puppet-masters at the Fed will have you believe inflationary pressures are inconsequential or a far off mirage. Don't believe it for a second... QE2 is humming along with the prospects of a QE3 right around the corner ready to pump untold billions into an already cash-flush banking system. Now is the time for investors to take action and protect capital from the inflationary pressures building up in our economy. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: Have you browsed around our newly acquired Laissez-Faire Books yet, Fellow Reckoner? Founded in 1972, Laissez-Faire Books is a treasure trove of required reading for anyone serious about discovering liberty and protecting themselves against those who would attempt to rob them of it. You'll already be familiar with many of the themes, as they tie directly in with the editorial you read here in The Daily Reckoning each and every day. So, if you wanted to learn more about the mortality of fiat currencies, as both Eric and Chris touched on in today's essay, a great place to start would be by grabbing a copy ofWhen Money Dies by Adam Fergusson. In it, Mr. Fergusson explores Germany's hopeless (and very costly) experiment with money printing in the 1920s Weimar Republic. Aside from providing some rich historical context to the great currency debate, When Money Diesalso offers a warning for over-zealous central bankers today. If you haven't yet visited our Laissez-Faire Books website, be sure to check it out here. And, if you're interested in any of the titles – like When Money Dies, for example – just punch in your Daily Reckoning discount code [E401M202] when you check out and get 20% off the retail price. Easy. Microcap "Stealing" Oil from Iran Could Return 4,599%! One tiny company has found a way to legally "steal" oil from Iran's largest oil field... Which means it's now sitting on oil reserves that could be worth over fifty times its total market-cap, setting the stage for an astronomical run-up of 4,599%! Resource expert Chris Mayer shares everything you need to know about this urgent opportunity in his brand new presentation... Click here to watch it right now. Bill Bonner Imported Inflation Hits US Consumer Prices Bill Bonner Reckoning from Paris, France... The big news at the end of the last week was barely noticed. Inflation – which had been going down for the last 30 years – may have finally bottomed out. It's too early to know for sure. But January showed an up-tick. Prices rose 0.4% during the month, say the number crunchers at the BLS. Last year, the core rate of consumer price inflation in the US was only 0.7%. Nothing, in other words. The feds were desperately adding to the base money supply. But the banks didn't lend. And people didn't have jobs. So the money never got into the consumer economy. It was, after all, a Great Correction. Instead, the hot money went overseas, where it bid for hot foreign stocks and hot "auction-priced" global goods – like food and energy. Commodities soared. Food riots broke out. Cotton just hit a new record high. Oil is trading over $100 a barrel, for Brent Crude. And then what happened? What goes around, comes around. Inflation began leaking back into the US. Inflation went out of the US – courtesy of the feds. Foreign central banks had a hard time keeping up with it. They had to increase supplies of their own currencies to soak up the US dollar liquidity. Pretty soon, the whole world seemed to be bubbling up. But now, the foreigners are re-exporting inflation back to us. How do you like that? Surely there is some congressional committee ready to investigate. Surely there's some member of Congress ready to make a jackass of himself by calling for a ban on it. In the meantime, if you want to buy a food item imported for abroad you'll pay about 30% more than you did a year ago. Or, if you want to buy a barrel of oil, that will cost you about 60% more. And now this imported inflation is raising consumer prices across the USA. Almost every business in America uses imported energy. Every American eats. As far as we know, you can't buy home-grown pineapples or coffee beans – not in the 48 states! And so, what do you know? Prices are going up. In January, core consumer prices – not including food and energy, directly – rose 0.4%. Wait a minute. If that happened every month, it would put the CPI at 4.8% for the year. That would be a lot higher than the 2% maximum allowable CPI that Ben Bernanke will permit. If it gets any higher – he promised on national television – he'll put a plastic bag over its head...just as he would to an aged relative. Of course, we don't know whether disinflation has really bottomed out or not. And we remember the early '80s, when inflation topped out. Nobody knew for sure that Paul Volcker really had the matter under control. It took years before the new trend was clear. Most likely, we'll see the same phenomena again...but distorted, as though reflected, grotesque and absurd, as in a bent-up mirror. This time, we'll find out that Ben Bernanke has lost control completely. He may want to raise rates. But with 30 million people unemployed...will he be able to do so? And let's imagine that this inflation squeezes corporate profits – it's already happening. How long will it take before investors begin to dump stocks? In the early '80s, they slowly, cautiously began to buy stocks...this time they'll be selling. So, Ben Bernanke – guardian of the nation's money, guarantor of full employment, promissor of a bull market on Wall Street – will be in a very uncomfortable position. He'll have the plastic bag in his hands. He'll want to stifle inflation. His hands will shake. His voice will quake. And he won't be able to do it.... But heck, that's still in the future...maybe far in the future. If disinflation has bottomed it could still be years before we're sure of it...and months or years before Bernanke's bluff is called. In the meantime... And more thoughts... The Zombie Wars have begun. Social welfare governments are in trouble. They've made promises they can't keep. Will they own up and scale back the spending? Or will they go broke? We've seen the massive strikes in France and fighting on the streets of Athens. We've seen the Prince of Wales attacked on the streets of London. And now the battles have begun in the US too. Look at what happened in Madison, Wisconsin. Rep. Paul Ryan put it in perspective for MSNBC's "Morning Joe": It's not asking a lot, it's still about half of what private sector pensions do and health care packages do. So he's [the Governor is] basically saying, I want you public workers to pay half of what our private sector counterparts and he's getting riots – it's like Cairo has moved to Madison these days. And here's the New York Times' report: MADISON, Wis. – As four game wardens awkwardly stood guard, protesters, scores deep, crushed into a corridor leading to the governor's office here on Wednesday, their screams echoing through the Capitol: "Come out, come out, wherever you are!" Behind closed doors, Scott Walker, the Republican who has been governor for about six weeks, calmly described his intent to forge ahead with the plans that had set off the uprising: He wants to require public workers to pay more for their health insurance and pensions, effectively cutting the take-home pay of many by around 7 percent. He also wants to weaken most public-sector unions by sharply curtailing their collective bargaining rights, limiting talks to the subject of basic wages. Mr. Walker said he had no other options, since he is facing a deficit of $137 million in the current state budget and the prospect of a $3.6 billion hole in the coming two-year budget. "For us, it's simple," said Mr. Walker, whose family home was surrounded by angry workers this week, prompting the police to close the street. "We're broke." *** World improvers are nice people. But they are egotistical morons. They always want the best for humankind. How do they know what's best for people on the other side of the planet? Well, they don't. But they're vain enough to assume that everyone wants to be like they are. So, if there are riots in Bahrain...it's because the locals in the desert want to be more like the locals in, say, Madison, Wisconsin. From Byron King, editor of Outstanding Investments, rated #1 by Hulbert for the last 10 years. The mainstream media is playing this as some sort of "democracy" revolution, where the hip, savvy, tech-head youngsters want to challenge the authority of the old princes and emirs, etc. Soon, the Middle East will be run just like Madison, Wisconsin...or something like that. Not to be too flip, but that's way too tame. Nope, this is religion and demographics boiling over. The Facebook folks might be part of it...but that's not the key to the story. We need to assemble the pieces of this puzzle, and be prepared for what it may show...a civilization in open conflict and likely collapse. Back in the 1990s, I spent a fair amount of time in Bahrain. Bahrain is about 70% Shiite, and 30% Sunni. The Sunnis run things, as in... government, industry, business, banking, commerce. Which is another way of saying that the Shiites are consigned to the other side of the camel-tracks. I recall driving (and walking, too!) around Bahrain, and encountering these surly-looking groups of under-employed young men – mostly Shiites, locked out of the economy. Nothing to do but smoke cigarettes, make a few dinar in the underground economy (as in, hauling 100-lb bags of stuff on their shoulders, loading trucks and such)... and nurse grudges against the guys on top. It always struck me that Bahrain was a pot – one pot among many on the stove – that would boil over, sooner or later. I guess we're there.... Across the Middle East, we're watching a large-scale earthquake occur within Arab-Muslim culture. Different elements in different places, of course. In Bahrain, the lines are between the Shiite majority and the Sunni bosses, who lord it over. This aspect of Arab religious feudalism is falling apart. My bet is that the Bahraini bosses have dusted off the Chinese playbook from Tien an Minh Square. Elsewhere (Egypt, maybe Libya?) we're seeing the end of the secular- military bosses running things – Egypt's 1952 coup that spawned "Col." Nasser, and the subsequent ruling junta – Gens. Sadat & Mubarak. And Libya with its 43 year rule by "Col" Khadafi. (I guess he let it get too public that he's hanging out with that buxom Ukrainian babe who goes everywhere with him.) Now the "rule by colonels" is giving way to a rising desire for rule by clerical principles – in lands where there's little in the way of a real economy to support what's coming. As to that last item, at least in Iran, post-1979, they were exporting 5 million barrels of oil per day. That kind of oil money can subsidize a lot of utter stupidity. So what to do? Here in the West, we've seen nations collapse... Germany, Japan after WWII. We've seen empires collapse – USSR. We've seen upheaval in global relationships – the 1990s, as the "Soviet Bloc" unwound. We've never seen a civilization in upheaval – like now across that North African & Middle East arc. We're looking at the past 75 years or so of the "basic assumptions" about the Arab world breaking down in front of us. Even when China had its war & civil war (1920s through 1940s) – it was contained within China. What happened in China stayed in China. China had no key, crucial exports for the world. And the Chinese worked it out internally – not pretty, but they worked it out. We've never seen something like what's about to happen in the Arab world. We in the West had better batten down the hatches for this one. And do our best to invest around it. Regards, Bill Bonner, for The Daily Reckoning -------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com The Like-Minded Mechanics of the Economic Machine What if you didn't believe that the grease-monkeys working for the Fed really could make things better? What if you thought an economy wasn't like a machine at all? What if you didn't believe economists could control it? Or improve it? Or even understand it? On Humanity's Instinctual Need for Democracy Government Spending to Perpetuate Fiscal Insanity Buying T-Bonds for Dummies I was somewhat staggered when I saw that Total Fed Credit shot up by an incredible $31 billion dollars last week, which (in the history of new Fed Credit) is right up there with "the biggies." Another biggie was that the Fed created the money to buy $28.3 billion in US government securities! All of this in One Freaking Week (OFW)! Calculating the Misery of Inflation Why You Should Be Using Gold to Buy Your Groceries How Fear of Economic Shock Drove China's State Control and Forex Hoarding In an interview by The Browser discussing Yasheng Huang's book, Capitalism with Chinese Characteristics: Entrepreneurship and the State, Northwestern University political economist Victor Shih looks inside the searing-hot, state-controlled economy. The Secret to Valuing Options Buying T-Bonds for Dummies