The dollar may have no value left

Apr 1, 2011

Los Angeles, California

Free Baron von NotHaus!

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Poor Mr. NotHaus. He thought he was doing something good...something that needed to be done. His idea was to mint silver coins, which he called Liberty Dollars, or simply Liberties.

These were real coins, with real value. In fact, their value has been going up. Silver has been the big star of the latest hard money drama; compared to gold - which has also gone up nicely - silver is at its highest level since 1984. And compared to itself, it is as high as it has been in 30 years.

Silver has now gone mainstream. Even Jim Cramer advises listeners to buy the physical metal. They would be glad if they had. Almost nothing has outperformed it.

Compare Mr. von NotHaus's money to the money issued by the US Treasury Department. The Treasury's dollars have no precious metal content - none. At best, their content comes from trees and cotton plants, with a scrap value that is probably negative. Meaning, if it loses its value as money, you'll have to pay someone to haul it away.

The record on that point is clear. Go back to when the Fed was set up to protect the value of the dollar in 1913. If you want to buy the same things, you'll need 50 times as many dollars today as you have back then. Since 1971, when the last traces of gold were removed from the dollar-based monetary system, the feds' money has lost value even faster.

The past is prelude. The feds are working hard to make the dollar worth even less in the future. Given the Fed's current enthusiasm for debasing it, in a few years, the dollar may have no value left.

Even state governments - hardly visionaries - are looking for ways to protect their citizens from the feds' fast-disappearing cash. A dozen are considering measures to coin their own money. Smart families are setting up their own reserves of real money - gold. Nobody trusts the dollar over the long term.

So, who do the authorities haul to the hoosegow? The guy who mints honest money in tiny quantities...or the guy who puts out $2.2 trillion in 'paper' money that is sure to lose its value quickly?

Go ahead...take a guess.

Poor Mr. von Nothaus got taken to court...and may be taken to prison...for competing with the feds' monopoly on issuing money. The Constitution - Article 1, Section 8, Clause 5 -- gives Congress the power to issue money. Apparently, it makes it a federal offense to compete.

According to the Wall Street Journal report, that provision was cited in paragraph 33 of the indictment against Mr. von NotHaus and then later removed from the charges against him. What was left to convict the man on, we don't know. But the court did so. And now he must appeal...or face penalties, possibly time in jail...and possibly a long time.

But what about the rest of us? Are we sentenced too? Will we be forced to pay the price for the feds' goofy monetary policies?

Your editor is now flying back from California. He has no internet connection, but he has a copy of Barron's and the Wall Street Journal with him. Alas, he will have to read them.

Among the ideas we found in Barron's was an article on gold. As background information, throughout the entire 11-year bull market, as far as we know, Barron's never counseled its readers to buy gold. On the contrary, it generally discouraged them. Whenever it mentions gold, it talks about it as though it were some sort of crank market phenomenon...a marginal investment for the marginally insane.

As Michael Santoli put it in this week's issue -- gold is "not terribly useful." He quotes a fellow named Jeffrey Christian who believes gold buyers are in for a 'gut check' - a drop in the price of 15% to 20%.

He may be right about that. Every bull market has its countertrends and back-stepping. We'd be delighted to see the price 20% lower . "Buy the dip," we'd tell you.

But as to the usefulness of gold, Mr. Santoli is dead wrong. Yes, gold is useless - most of the time. And, as anything but money and jewelry (a form of money in many countries), it is useless all the time.

But sometimes it is almost essential. When the other money - the feds' money - goes bad, you need some good money to protect yourself. That's the role gold has always played; it is natural, uncompromised money.

It does nothing - but it hides no mistakes.

It holds no press conferences - but it tells no lies.

It makes no promises - and never delivers less.

Any anyone who bothers to mint coins of gold or silver is doing the world a favor.

Free Baron von NotHaus!

*** Here's a shocking disclosure. Somehome, WikiLeaks got a copy of private memos - diary entries, really - written by David Sokol. As you know, Sokol was the man who was the front runner to replace Warren Buffett at Berkshire Hathaway. He was also the man who made $3 million by frontrunning Berkshire's latest purchase. Both Sokol and Buffett denied that the purchase of Lubrizol shares had anything to do with the former's departure. The diaries confirm the claim.

"I'm leaving. I've had it. I just can't stand the guy's folksy wisdom," wrote Sokol to himself. "Yes, the decision will probably cost me some money. But it's worth it not to have to spend another day in Omaha listening to the so-called 'Sage of the Plains.' Sage? The guy is a boring, old finger-wagger. And if he had dumped all those value stocks and bought gold when I told him to, we'd be a lot richer now."

*** And here's another shocker. Ireland's premier, Enda Kenny, has appeared to break down under the strain of trying to avoid bankruptcy. He called a press conference yesterday, after Anglo-Irish Bank announced losses of more than 17 billion euros - the largest corporate loss in Irish history.

"I think this has gone on long enough. We tried in good faith to save the system from default and to avoid national humiliation. Instead, the situation just grows more humiliating with each passing week.

"It's time we called a spade a spade...and be done with it. We all know the banks are controlled by the English. And we all know English speculators were behind all of Ireland's recent property problems. They drove up prices. They lent money to Irish people. They built houses that were both ugly and unaffordable. And then, when the bottom fell out of the market, they expected Irish taxpayers to make up their losses.

"Well, that's it. That's the end. Henceforth, all banks and all bank assets are to become the property of the Republic of Ireland. Bank premises will be turned into useful resources for the people, such as pubs or pizza parlors.

"If a bank owes you are out of luck. You should have known better than to put your money in a bank anyway. Everyone knows you can't trust them. Especially when the English are involved with them.

"And don't come running to me telling me that Ireland's default will trigger a wave of defaults across Europe...and possibly bring down the euro and the European Union. I don't want to hear it. It was the European Union that got us into this mess. The frogs and the krauts can go f*** themselves."


Tomorrow Happened Yesterday

A shocking figure came out last week. In the US, fewer new houses were sold last month than in any month since they started keeping records in 1963.

How is it possible? Simple. The houses that would have been sold to today's able buyers were built and sold years ago. That's what excess credit does. It doesn't really enlarge or enrich an stretches it, bringing things that would have happened tomorrow forward, to yesterday. Only a certain number of people every year can afford a new house. If in 2005, you give credit to buyers who won't be ready for many years, or perhaps never -- who will buy a new house in 2011?

By the time the bubble popped in '07, there were few able buyers still looking. And then, a US federal tax credit program in the fall of '09 and the first part of '10 finished them off. That program expired a year ago. Housing has been an empty husk ever since.

The latest data show more remarkable developments in time travel. You have to see it to believe it. And even then, you rub your eyes and wonder. In the US, the financial sector is riding high. Again. After bringing the whole world economy to its knees three years ago, profits for the industry are back where they were before the crisis began 4 years ago. For every dollar of corporate profit made in the United States of America in 2011, nearly 30% comes from shuffling money.

A good bartender will stop serving a customer who is in danger of falling on his face. No such decency exists in finance. Even with the crisis of '07-'09 fresh in their memories, the debt mongers keep the taps open. At the low end, borrowers increased their credit card debt over the last 2 years. The word 'usury' must have been invented to describe the interest rate charged sub-prime borrowers - an average over 18%. Meanwhile, total debt in the US is now above where it was when the correction began. At the end of 2008, debt crested at $56.4 trillion. In the last quarter of 2010, thanks to the tsunami of cash and credit coming form the feds, the total had risen to $56.6 trillion.

And it's going higher. Clive Crook gave us a peek into the vanities that make it possible. Writing in the Financial Times, he says the Fed made "the decisive interventions that stopped the recent recession from turning into something much worse..." Yes, the Fed probably did overstep its boundaries. But "thank heaven" it did, he says. "By every commonsense measure, what the Fed did was right."

This year marks the beginning of the 5th decade of the world's latest experiment with a free floating, paper-based monetary system. The authorities are taking no chances. Lest member governments slip into integrity, the IMF bans them from backing their currencies with gold. And now, under pressure from insolvent banks, natural catastrophes, and a Great Correction, the authorities are introducing huge new amounts of this paper money - trillions of it.

For example, the Irish needed cash to bail out their banks. Wiser providence had the solution already in hand - bankruptcy - when the government committed 46 billion euros to save them, an amount equal to more than a quarter of GDP. They may need 35 billion more.

In Japan and America, as in Ireland, the feds try to shift the finance industry's losses onto taxpayers. Unlike the Irish, they use absurdly low interest rates to push the cost into the fog of the future; at zero interest rates it costs less to carry bad debt than to bury it.

Most beguiling of all, they can print an almost unlimited supply of non-interest bearing securities - cash - with which to keep the ponzi plan going a bit longer. In Japan, for example, the authorities responded to the recent disasters with money-printing on a Godzilla scale. The Bank of Japan announced that it would create 39 trillion yen - about $481 billion. In proportion to the economy, it is as if the Bernanke Fed said it would run off $1.5 trillion in stacks of 20s and 50s. In America, the central bank covers more than 100% of the government's IOUs - equal to more than $5 billion in new currency every business day. Money-printing used to be what central bankers hoped no one would notice. Now, they call press conferences to announce it. And no one cares.

Mr. Crook even wants more of it: "When QE2 ends in June, QE3 should start." He should watch out. For the gods of money are as mischievous as they are unrelenting. They use short term success like the mortgage industry uses teaser rates.

The record from yesterday is clear: Once they get a taste for it, few economies can resist spending money they didn't earn. First, they borrow from the future. Then, they steal from it, by simply printing up new money. Finally, you get déjà vu tomorrow, as yesterday's greatest financial disasters happen, once again.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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