Tuesday, December 30, 2008

Paper claims on real assets

The United States, although a very wealthy country, has a finite amount of wealth in terms of the resources of its government, its land/natural resources and its citizens. When every tree, building, mine, deposit, bank account and company is valued and added together, there is an actual value that could be "assigned" to the country.

Every time we issue a new bond (also known as an "I.O.U."), this is essentially a claim against a portion of the assets the United States "owns." Alternatively, you could consider each U.S. dollar as a share of stock in the USA company. While these are wild oversimplifications, you get the idea.

If the USA company starts issuing bonds and stocks without increasing the value of its underlying assets and/or revenue streams, the company is diluting the value of the stocks and bonds held by existing investors. Investors know that when a company issues new stock, the stock price is usually punished because of the anticipation of the future dilution.

Currently, the USA company is issuing stocks and bonds at a record pace to stave off short-term pain caused by a recession. This weakens the future prospects of the USA company and also ensures that its stock price (i.e. the value of its currency) will be punished and will decline significantly.

Where this analogy fails is the fact that American citizens are essentially forced to own stock in the USA company, as this stock is the only legal currency in our country. When people begin to learn that every time they get a piece of paper with a number printed on it that the real value of the number on that paper bill is declining every year consistently, moral values change and begin to decay.

As inflation proceeds down the path of least resistance that has plagued every fiat currency in the history of the planet, hard work and savings begin to be replaced with speculation and borrowing. Since you cannot save money and maintain purchasing power without taking significant risks, why save at all? If you're going to embrace risk, why not go for a bigger risk and bigger reward? If it doesn't work, just borrow more money and try again!

Persistent, continuous inflation leads to moral and social decay. It has led to the bling bling, big screen TV, Hummer, McMansion culture that we find ourselves in today. Think end of Roman empire decay. Why save for tomorrow when you can borrow and have it today? The overwhelming majority of people don't realize that monetary decay leads to moral and social decay. As the government prints more and more money and gets itself further and further into debt in a fiat money system, it essentially encourages its citizens to do the same by both the example it sets and the debasement of our currency that it sets into motion.

The U.S. government is a subprime borrower looking to max out another credit card after it spent all its family's money and then hocked all their possessions and spent that money, too. Instead of correcting its ridiculous fiscal habits, it makes new promises to new naive family members (e.g., China) to draw them into yet another round of the ultimate Ponzi scheme. The current power brokers in Washington no longer care about debt reduction and are scrambling to increase the debt load of our country at an ever-increasing pace. In addition, the government wants banks to resume lending despite the fact that most people have already borrowed too much from banks as it is.

The government cannot save you. It hardly knows how to save itself and no longer even pretends to think beyond the next election. Common sense is ridiculed and bread and circuses are favored over serious intellectual or political debate. This is a direct end-stage effect of the cancer introduced into our society when we gave control of our money to a private, secret cartel of bankers and then severed all links between our currency and gold in 1971.

The early highs of an inflation cycle are positive and pleasant as they affect asset classes like stocks and real estate and make most feel prosperous and bold. Now, in the later stages of inflation, we have a rabid and unsustainable addiction to cheap money that reveals us for what we are: junkies needing a fix as bad as a heroin addict does. Though the printing presses will run full steam, the highs produced by this easy money are no longer pleasant and simply keep us from going into withdrawal. We spend more and more and accumulate more and more and feel hollower than ever.

The debt created by all this inflationary borrowing and spending in both the public and private sectors has painted our government into a corner. The only realistic options are extremely aggressive further attempts at inflation (which will either fail or lurch us into a hyperinflationary currency crisis) or a deflationary collapse where all domestic money moves from the stock market into government bonds. There is no turning back from this debacle and there is no "goldilocks" scenario. The world is not ending but your 401k might if you don't move to protect yourself.

Gold is a protector of savings in times of uncertainty. It holds its value in a deflationary debt collapse as well as a runaway inflation. In short, gold becomes strong when the currency it is denominated in becomes unstable. As we all know, promises made by an addict are not particularly reliable. If the government gets desperate, they will confiscate assets and will declare anyone making over $20,000per year a rich swine that deserves to be taxed at a 90% rate. Gold is no ones liability and asks for nothing. It can be buried in the backyard quietly until our government dries out, wises up and kicks its addiction so that a new cycle of prosperity can begin.

Got out of DIG with my 10% profit today. Got out of RGLD and looking to re-enter in the next several weeks on a decent correction. Looking to get back into SRS as a short-term trade if the price dips a little further into the 50-55 range.

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