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The Daily Reckoning | Thursday, September 13, 2012 A look back at real money, as the Fed announces more QE... Currency debasement of Titanic proportions... Plus, Dan Denning touts the fiduciary benefits of bacon, and plenty more... ------------------------------------------------------ Byron King’s Energy and Scarcity Investor Presents... Retire Off This One Penny Stock? All of your retirement woes could be lifted thanks to this one penny stock’s massive resource discovery... You could quickly make money no matter how the market moves! But you must hurry before Wall Street catches wind of it... Expert geologist Byron King reveals the full details in his new presentation — here.   Quotes of the Day... “Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium.” — Murray N. Rothbard “The history of fiat money is little more than a register of monetary follies and inflations. Our present age merely affords another entry in this dismal register.” — Hans F. Sennholz Eric Fry and Joel Bowman, checking in from opposite sides of the Atlantic Ocean...   One hundred years ago, the Titanic slipped below the frigid waters of the North Atlantic Ocean. That’s roughly the same moment when the US dollar also hit an iceberg. In 1913, one year after the Titanic disaster, the US government passed the Federal Reserve Act...and the dollar’s value has been sinking ever since. Eight years ago, in an essay for Whiskey & Gunpowder, Byron King, editor ofOutstanding Investments, examined these twin disasters. The insights he shared were poignant then; they are especially timely now...as the Federal Reserve’s Federal Open Market Committee just announced a brand new round of quantitative easing — i.e. money printing. The popular press cheers the QE campaigns as “good for the economy.” Maybe yes, maybe no. But one thing is certain; the QE campaigns, like all other forms of currency debasement, are not so great for the US dollar’s purchasing power. The QE campaigns, like all other forms of currency debasement, create illusions of wealth-generation, while quietly dragging an entire nation to the bottom of the sea. The nearby chart illustrates this phenomenon very clearly...and painfully. Since the end of 1989, America’s inflation-adjusted GDP has grown by 70%. Yet, over this identical timeframe, the inflation- adjusted median household income has declined! In other words, according to the government’s heavily massaged GDP calculations, there’s lots of “growthy” type stuff going on the economy. America is doing just great. But in the real world of real people, incomes are stagnant. (Intriguingly, from 1967 — when the median household income data series begins — until mid-1971, when Nixon removed the dollar’s last link to gold, the median income and GDP advanced in lock step — both growing 7% over that 3-year timeframe.) Net-net, the Federal Reserve may be great theater, but it is not great economics. Sound money creates a starting point for true wealth creation. Debasement never does, as Byron explains below. But thanks to the Federal Reserve’s money-printing schemes, debasement remains the key “policy tool.” Therefore, most Reckoners would probably agree that gold plays a very important role as part of a healthy and balanced portfolio. Conversely, most dieticians would argue that bacon plays a very important role as part of an unhealthy and unbalanced diet. To be sure, both commodities feature their own, unique appeal. And both have the potential, especially when consumed in large quantities, to stimulate robust growth of one’s “bottom line.” So far so good. But did you know that both of these alluring assets also have a monetary function? Guest editor Dan Denning dishes out the juicy, mouthwatering details in the second part of today’s Double Decker Daily Reckoning. Please enjoy...   The “Lost” Gold Bible Congress Never Wanted Anyone To See “Locked away” for almost 3 decades. Kept virtually secret...until now. You’ll soon discover why all the secrecy surrounds this book...and why it would be to your great benefit to read this book now. You’ll also see why I’m doing everything in my power to get this book into your hands for FREE by following one simple step Click here to read more. The Daily Reckoning Presents A Titanic Disaster   Byron King (This Daily Reckoning “Classique” first appeared in Whiskey & Gunpowderon December 1, 2004, recounting a Philadelphia exhibit of Titanic artifacts.) The first item is a set of gold-rimmed eyeglasses. Further on, there is a pocket watch stopped at 11:14. Then there is a brown leather suitcase, somewhat worse for the wear. There are stacks of white dishes and racks of dark green bottles. Another display shows brass plumbing fixtures and a gray, steel wrench. And at another stop along the walk one sees a copper and glass engine thermometer. There is a jade rosary, and a man’s boulder hat, of all things, in remarkably fine condition, considering... And a pair of woman’s shoes, made of black leather. Not one shoe, but a pair, recovered from the sea floor beneath 12,000 feet of cold North Atlantic water. Then there are the coins and paper currency. Gold coins, silver coins, copper. British, American, French. This was real money back then, from a gold standard era. And the paper notes also tell a tale. They are a collection of official British and American treasury promissory notes, and a remarkable amount of scrip from private banks, redeemable in precious metal. Every note has an annotation at some spot or another, promising to pay to the bearer some quantity of gold or silver. “One Dollar Silver Note,” from a bank in New England, redeemable in an ounce of silver from that institution. Or a “Two Dollar Silver Certificate,” to be paid on demand by the Treasury of the United States of America in, not surprisingly, two ounces of silver. Or “Ten Gold Dollars,” half an ounce of yellow metal in 1912, promised by and intended to be paid to the bearer from the precious gold assets of the Government of the United States. These artifact paper notes, recovered against all odds from their watery grave, still retain a certain sense of dignity. They do not declare mightily and officiously that they are “legal tender for all debts, public and private.” They do not have to... The notes represent a solemn promise by the issuer that, in return for a person lending a sum of honest money to the bank or government, the issuer of the note will repay an equal sum of precious metal at a time and place of mutual convenience. There is, it seems, a sense of financial humility, respect and national or corporate duty to these documents. The Titanic exhibit explains that within about two years of the ship sinking, the British and American governments changed the methods by which they permitted currency to be issued. The exhibit does not go into detail, which is understandable. This is a display of artifacts from a sunken ship, not an exposition on monetary history. But it is interesting that the curators would mention it at all. In late 1913 the US government enacted the Federal Reserve Act, which removed the power to issue monetary notes from private banks and the US Treasury, and gave that power to the newly established Federal Reserve, or the American central bank. And in 1914, Great Britain’s central bank, the Bank of England, went off the gold standard shortly after Britain entered into what became the Great War, now known as World War I. For the 100 years before this time, the respective values of the British and US currency had held more-or-less steady, excepting a period of inflation during the American Civil War. But after 1914 the value of the respective currencies was set by... well, by a monetary system, for lack of a better term, run by each nation’s respective central bankers. The idea was to have an “elastic currency,” meaning a currency base that could expand to meet the needs of a dynamic and growing economy, or in the case of Britain, to fight a war that the nation could not afford. In the ninety or so years since those monetary milestones of 1913 and 1914, both the British pound and the US dollar have lost about 98% of their value due to inflation of the national monetary supplies. That sure makes for one heck of an “elastic currency”, eh? But because this monetary debasement has happened so slowly — year by year, decade by decade, generation by generation — this decline of the value of national currency has seemed almost a natural phenomenon, an immutable law of nature. This is the way that monetary theory is taught in all of the best schools, and is how all modern monetary systems work, right? Typically the politicians have demanded, and people have grown to accept, “a little bit” of inflation fostered by the central bank as the price of progress. Except that “a little bit” of inflation over a long time is actually “a lot” of inflation. Over the long term, the nominal savings of one generation are reduced, in the aggregate, to a pittance. This matters quite a bit when one goes to retire a generation or so after going to work. And in an inflationary environment, valuations of capital become meaningless over the long term, absent using statistical guesses to determine deflation factors. Keep in mind that savings create capital, and inflation destroys savings, hence destroys capital. From the standpoint of ethics, it would seem that the people who run the Federal Reserve and the Bank of England have a responsibility to their respective citizens to maintain a stable value to their currencies, and not to destroy that value over time. It would seem that the managers of a nation’s currency have a duty to maintain monetary standards, and not to wreck savings and impoverish one generation to benefit another. It would seem so, but apparently this is not how the monetary system works. By way of comparison, this ethical duty to maintain standards is much the same as the duty of the principals of the White Star Line to design and build a fine ship, appropriate to the hazards of oceanic crossings. And this is much as Captain E.J. Smith had a duty to train his crew and sail his vessel along a track that would bring her safely into the port of destination. But on the night that the Titanic sank, there was a failure of duty by the Captain to sail a safe course, even after an ice warning was received over the radio. And the iceberg, scraping the rivet heads off the steel plating of the Titanic and permitting the sea to flood the ship through hundreds of small penetrations, revealed a flaw in construction. And the sinking revealed the failure of White Star Line fundamentally to design a proper ship, with lifeboats sufficient to the need of passengers and crew in a time of peril. As fate would have it, J. Bruce Ismay, one of the directors of the White Star Line, survived the Titanic’s sinking by leaping into one of the last lifeboats that dropped from the doomed vessel into the freezing ocean. Later on, Director Ismay was greatly criticized from almost every quarter, because he survived the sinking when over 1,500 others did not. One of the most trenchant critiques of Ismay came from Admiral Alfred Thayer Mahan, the great historian, strategist and sea power visionary of the US Navy, who reviewed Ismay’s retreat to the lifeboats and his abandonment of hundreds to death by freezing and drowning, and wrote: “We should be careful not to pervert standards. Witness the talk that the result is due to ‘the system.’ What is a system, except that which individuals have made it and keep it? Whatever weakens the sense of individual responsibility is harmful, and so likewise is all condonation of failure of the individual to meet his responsibility.” What will the central bankers say in their own defense when the dollar, or the pound, vanishes like the Titanic beneath the sea? Will they simply shrug their shoulders and blame “the monetary system”? What will they say to those doomed souls who are the victims of their failure, and whose lives, communities, nations and cultures are shattered? What will they say as the wreckage of their monetary system slips away and rains down, like the artifacts from the Titanic landing on the dark abyssal plain far below? Regards, Byron King,  for The Daily Reckoning   Byron King’s Outstanding Investments Explains... Why “gold $2,000” is a joke... On April 24, 2007... one gold expert said “gold is on its way to $2,000 per ounce.” At the time, gold was trading around $688 and the mainstream figured he’d lost his mind. But anybody who listened had the chance to make up to 175% on the metal alone... and up to three times more on related metal plays, as I write you today.  So what’s this gold expert’s latest prediction? Click here to find out.   The Power of Pork   Dan Denning Bacon. That’s been the secret to everything all along. If only we’d known! We would have told you sooner. More on the power of bacon shortly. Today’s Daily Reckoning reveals a simple answer to a question that has troubled economists and central bankers for ages: how do you spot a bubble? It’s easy. Look for the government’s latest tax! Manipulating the price of credit is how central banks cause asset bubbles. But popularly elected governments only become aware of a bubble when prices are high, mainly owing to the imbecility of most politicians. High asset prices attract government tax collectors the way car accidents attract ambulance chasing lawyers. So it was in 2010, when Kevin Rudd, Wayne Swann, and Julia Gillard unleashed the Resource Super Profits Tax on the Australian economy. The tax was announced on a Sunday night and the market trended lower for about a month. But as stocks like BHP Billiton made new highs over the next twelve months, Wayne Swan must have dreamt of extra billions for his budget. Super Profits Tax Announced as BHP Records Blow-out High Source: Yahoo Finance In August of 2011 BHP reported the largest corporate profit in Australian history of $22.5 billion. Revenues were up 35% year-over- year thanks to the booming steel industry in China. The company said at the time, “Another strong year of growth in Chinese crude steel production ensured steelmaking material prices were the major contributing factor to the $US17.2 billion price-related increase in underlying earnings.” We now know that was probably the top...for everything. China’s 4 trillion Yuan 2009 stimulus translated into BHP’s $22.5 billion profit blowout. And that was the peak of the iron ore bubble. Since then BHP’s stock price, Chinese steel production, iron ore prices, and coking coal prices have all fallen. The Federal Government’s covetous glance at the mining industry’s profits was the signal that the profits had reached a cyclical peak. This reminds us of Ronald Regan’s famous quote: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it. If iron ore and coal prices keep falling at this pace, and China’s ‘moderation’ becomes a hard landing, it won’t be long before the government subsidises the mining industry the way it subsidises the car industry. We’re not there yet. But we may be headed that way. Chinese imports fell 2.6% from a year earlier in August, according to data released yesterday. Japanese exports fell by 7.4% as well. The two data points are related. China imports raw materials (from Australia) to manufacture goods for export. Like Japan, China’s economy is powered by exporting goods to the rest of the world. The rest of the world — at least the United States and Europe — are in the middle of a debt crisis they can’t come to grips with. The business of globalisation is not good. You wouldn’t have guessed any of this based on yesterday’s price action in the market. But then, markets seem to be front running the idea of more money printing by the US Federal Reserve and the European Central Bank. In our view, this is setting up for a big fall if the size of the eventual money printing disappoints. Meanwhile, the fall-out from the bursting of the iron ore bubble continues. BHP and Xstrata announced a combination of 900 job cuts from their coal operations in Queensland. This comes at just the time the Liberal government in Queensland seeks to raise royalties on coal producers. Government incompetence is bi-partisan. It doesn’t cheer us to bring you any of this analysis. But our job isn’t to make you feel good. Our job is to tell you what we think is really going on. Since we don’t depend on advertisers of purveyors of financial products for our revenues, we have the independence to call it like we see it. You may be surprised to know that we see a lot of this as positive for investors. Investors like it when they can buy assets on the cheap. Normal market cycles see stock prices move from undervalued to overvalued. The intervention by the Fed and other central banks has made all assets overvalued, which makes it really tough to spot a bargain. A good cyclical crash in the resource sector actually works to the advantage of the diligent investor. Provided you don’t get wiped out on the way down, you’re left to pick up the pieces on the cheap at the bottom. That’s where we reckon we’re headed...but not before a much bigger fall first. Maybe your safest bet is to begin stockpiling bacon and other pork by-products. In a hungry world, bacon is as good as gold. An American man is setting out on a cross-country trip to see if he can make it from coast to coast with no Federal Reserve notes or credit cards to pay for things. His only currency will be a tonne and a half of sweet, delicious, butcher thick cut bacon. Josh Sankey calls his trip the Great American Bacon Barter. And as you might have guessed, the whole stunt is a publicity exercise for Kraft Foods to promote its new bacon. If you want to follow the bacon barter tour, be advised that it could make you hungry. Regards, Dan Denning 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 at joel@dailyreckoning.com