Sunday, April 25, 2010

Dangerous Paper Bubble Dynamics

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The paper debt tickets (i.e. currency units) that most of us work for are nothing but a concept. That concept is mutually agreed upon. That concept is being abused and will likely be destroyed before a new secular stock bull market can begin.

The paper bubble dynamics are growing more and more unstable with each attempt to stave off pain using the debt press. The debt piles higher and higher and becomes more and more unstable as the deflationary forces in the economy are beat back into submission. But once a critical mass of people realize that the debts are unpayable, what exactly do the debts mean? The United States is unequivocally bankrupt in the traditional sense of the word, as is Japan and most of Europe. And yet, the United States is the largest backer of the IMF and the IMF purports to bail out Greece.

This land of illusion is starting to shatter. The paper fiat international monetary system is one of deception and control. It requires no discipline and is funded by the blood, sweat and tears of those who still produce. Somehow, despite total insolvency by "old school" metrics, the U.S. can now afford universal health care. This is on top of perpetual warfare against imaginary third world enemies, a war against drugs that are less toxic than those prescribed by your physician, social security and all of the other government-sponsored programs/departments/branches and their associated pension benefits that are growing at an exponential pace.

New debt will continue to be piled on top of old and unserviceable debt. Since the private sector is exhausted in aggregate, the government is picking up the slack. But what happens when almost every major economy in the world is the same as Greece and the majority of market participants know it? We are entering the dangerous phase of the paper debt bubble.

This is the phase most beneficial to Gold (and to a lesser extent silver) as the only form of "real" money that can be easily stored/hoarded. People who say we can't go back to a Gold standard are not only wrong, but they are also neglecting the fact that it is already starting to happen in the way that it must to restore balance. This is an optimistic message and one to be embraced by those who actually understand what freedom truly means.

The fiat paper debt hamster wheel forces everyone into serfdom. The greatest years of economic growth and prosperity in the Anglo sphere were during the years of a "hard" Gold standard. I am not delusional enough to expect governments to willingly go down the path that leads to having sound money. I rather trust the free markets to force it upon governments.

I don't see Gold as something to eat in your log cabin while playing with guns, I see it as a way out of the debt morass. Private firms like and are already paving the way. For now it's Gold storage, trading and limited Gold payments to those who have managed to break thru to the other side of the Matrix. But how long before a firm like Wal-Mart embraces the concept of a digital Gold-backed currency? Why hedge currency risk with the vampire squids when you can use digital Gold and avoid the problem altogether?

What of a world where government-issued currency is but a transient thing that is purchased at the last second only to pay the government their taxes? Don't get me wrong, again, I am not delusional. This is something governments will have to be dragged into, kicking and screaming the whole way. But Gold investors need to focus more on the positive aspects of the future of money, for it has the potential to be bright indeed.

When you think of the convergence of advances in alternative energy that allow people to live "off the grid," couple that with the power of the internet and the virtual interconnectivity of the world, adding a global digital Gold-backed currency that allows people to store real money without worrying about its debasement is a natural next step. Though my thoughts may seem quaint and overly naive to the typical (rightfully) cynical Gold bull, there is a real chance the monetary system will begin to be re-pegged to Gold in some manner within the next decade or so. After the next major train wreck in the financial markets destroys the credibility of those who think they can control asset prices, a significant number of people may be ready to call for and embrace this type of scenario.

This is especially true since the next train wreck in the markets, unlike the Great Fall Panic of 2008, will see the Gold price rise as fast as it fell in the fall of 2008. The deleveraging when the government support-of-everything bubble fails will be out of the Dollar and into Gold rather than the other way around. When it is our turn to have a Greek-style crisis here in America, Gold fever will break out with a vengeance.

But what will quash that Gold fever once it breaks out? The most ardent manipulation attempts have done nothing but slow the rise of Gold over the past decade. What happens when 20% of the American population goes looking for an actual Gold or silver coin (no, not the paperbug GLD and SLV ETF versions, the actual shiny stuff)? Once everyone gets back into the Gold and silver bull mind set that caught hold of the American public back in the 1979-1980 time frame, how will it be quashed this time? Because I can tell you without a doubt that America cannot tolerate 15-20% interest rates given the amount of debt we owe to foreign creditors.

Criminal sanctions, capital restriction, heavy capital gains taxation (more than the current punitive 35% rate), attempts at confiscation of paper or even real metal (perhaps in the name of counterterrorism) - nothing is off the table. Gold remains the enemy of the state for now, but things have a way of changing when tyranny goes too far and becomes too oppressive. But it is easy to see this darker side of the evolution that I believe is to come.

What comes next, however, may be an era of prosperity and peace the world has never seen. And Gold is unequivocally a part of this vision. Paper money backed by nothing is the relic, for it is horribly unjust and defies logic. Those people who don't understand why Gold is perfect money are the ones who need to defend their position, not Gold bulls. The idea that money can be created by printing up pretty paper tickets and/or typing in electronic entries without one iota of effort is preposterous. It is a fairy tale (horror story?) told to children who still believe in Santa Claus and will be looked upon as such in the next era.

Imagine how foolish those who follow us will think we were for not having sound money! For humans are filthy and nasty enough animals as it is. They cannot resist the temptations of money created out of thin air any more than a dog can resist chasing a cat. Something for nothing is a proposition hard to turn down. Of course, paper money benefits a certain class of folks who have every right to engage in whatever means necessary to maintain their status quo. It is wrong to assume that dinosaurs became extinct without a fight.

The dangerous paper bubble dynamics now in place are sure to cause much economic hardship when they finally pop. The uncertainty and fear will cause people to delve into their collective psyches and reach for the financial rock that still acts as the anchor of stability for our monetary system today. No, I am not talking about Paul Volcker, I am talking about Gold. When the dust settles upon this secular stock bear market down the road, Gold will still be there. Just maintaing its value and looking all shiny and what not.

Enough people will finally come to question why they would ever want to hold their savings in the stock market or in paper currency that real change is likely to come about this go round. At this point, so many will hold Gold (and silver) that many will question why they should ever let it go. Perhaps, in the future world I envision, they won't need to until it's time to go to Wal-Mart and buy a loaf of bread with their digital Gold currency card.

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