What we see is a huge Ponzi Scheme

Apr 22, 2011

Buenos Aires, Argentina Friday, 22 April 2011

First let us catch up with a news report from earlier this week. Bloomberg:

April 18 (Bloomberg) -- Standard & Poor's put a "negative" outlook on the AAA credit rating of the U.S., citing a "material risk" the nation's leaders will fail to deal with rising budget deficits and debt. "We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium - and long-term budgetary challenges by 2013," New York-based S&P said today in a report. "If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA' sovereigns."
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Well, the press described the news as a "warning shot" or a "wake-up call." Both of those descriptions are fairly positive. You get a warning shot...and you can turn around. You get a wake-up call and you wake up.

But what do you do when you're running the world's biggest Ponzi scheme? Do you stop? Do you ‘wake up?'

No, you deny it! ‘Don't worry,' you tell investors.

The New York Times:

...Treasury secretary, Timothy F. Geithner, ... said on Fox Business Network there was "no risk" that the United States would lose its AAA credit rating, disagreeing with Standard & Poor's negative assessment, and said that investors were still confident in government bonds.
Well, yes. Investors are still confident in US bonds. Then again, investors were still confident in US houses in 2007...and still confident in US tech stocks in 1999.

It is only because they are confident that bond yields are so low. But what bond yields do if investors began to be less confident? Imagine where the price of gold would go!

Well, it turns out that confidence goeth before a fall. Especially in the bond market. Bond market cycles move so slowly that a whole generation of investors is led into great confidence...and then another generation mistrusts them forever. The proof comes to us from a report from Credit Suisse, by way of our Family Office strategist, Rob Marstrand. Rob is looking for real returns over long stretches of time. Bonds work...but like everything else, only sometimes. And this is not one of those times.

If you go to an investment manager and tell him you want to invest some money for your children, safely, securely, most likely he'll tell you to buy bonds. And he'll be right – but only when the bond market is one of its boom phases. When it goes into a bust phase, watch out. You could be looking at losses for 50 years. Or maybe even permanent losses.

Rob reports:

The [Credit Suisse] report highlights two major periods when US bonds were in bear markets in real terms. The first was between August 1915 and June 1920. Bond values declined 51% and then remained underwater until August 1927. The recovery period from start to finish was 12 years. Or about the same as the recovery periods for stocks.
But far worse was the second bear market. Between December 1940 and September 1981 bonds fell 67% in real terms. And they took until September 1991 to get back to even. In other words, the bond market recovery period was over 50 years!
And some countries have had negative real returns in their bond markets for the entire 111 years covered by the study – including Belgium, Finland, Germany, Italy, and Japan.

US bonds have been going generally up in the US ever since Paul Volcker tamed inflation in 1983. That's a long period in which to form opinions. Not surprisingly, the opinion shaped by this upward stretch is that investors have nothing to fear from US bonds. Confidence is high. But so is the risk of disappointment.

Today, the feds are committed to EZ money. We look around. We don't see a Fed putting on the brakes after a ‘warning shot.' Instead, we see America's central bank going full speed ahead. We don't see a ‘Tall Paul' Volcker raising rates. Instead, we see ‘Short Ben' Bernanke holding them down at zero. We don't see an administration ‘waking up' to the need to cut spending; we see the Obama Team dead asleep on the job, dreaming of more income redistribution, more social programs, more tax-the-rich money raisers....with no real idea of what is going on.

What we see is a huge Ponzi Scheme...where old debts are serviced only by raising new ones. The schemers don't know it, they they're on the road to Hell.

More news:

And more thoughts:

***.Our old friend Doug was right.

We were sitting at a restaurant in Cafayate. The sun was shining. The mountains turned gray...then purple...then mauve as the sun dropped. Dogs walked lazily across the main street. Women pushed their children in strollers. Pickups drove up, parked directly in front of us. Their owners – sometimes ranchers...sometimes winemakers...sometimes backpackers...often Europeans – got out and chose a restaurant.

Cafayate is what a small town should be. It is safe. It is easy. And yet, it has dozens of good restaurants...and some of the best wine in the world.

You can imagine the town hosting a major film festival... You can imagine it becoming a magnet for the rich... You can imagine all sorts of things. And Doug Casey imagines that it will go the way of Aspen, Colorado, becoming a place where wealthy, successful, fashionable people arrive in private planes and build big houses all around town.

We paid a brief visit to Doug's project next to town – a private development that he hopes to turn into a refuge of sanity, prosperity, and joviality, even as the rest of the world goes through what Doug colorfully describes as a "financial sh**storm."

The place is beautiful...with a small lake nestled between the golf course and the vineyards. The main clubhouse, with its unique dome roof, was completed more than a year ago. Now, a spa/gym complex is under construction...along with several new homes. And a new social club is scheduled to begin in a couple of months.

Physically, the place is magnificent. But Doug's real ambition – which as far as we know has never been attempted before, at least not in the world of real estate developments – is to populate his new community with people he personally wants to live near. It is meant to be a community not only of people who share a certain standard of living, but people who also share certain ideas.

The community is almost completely surrounded by grape vineyards. Part of the cost of maintenance is supposed to be covered by the sale of wine. And if that doesn't work, at least residents will have plenty to drink.

*** Speaking of drinking...

We just got word from the ranch. This year, we harvested 3,700 kilos of grapes from our hectare of vineyard. That should produce about 1,700 bottles of wine. Even for us, that's a lot of wine to drink in a single year!

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

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1 Responses to "What we see is a huge Ponzi Scheme"

Maulik Suthar

Apr 22, 2011

A government big enough to give you everything you want is strong enough to take everything you have.

--- Thomas Jefferson

I couldn't help but try to find what an ounce of gold could buy many centuries ago. Perhaps the historians could help? So, here's my uber non-scientific, back-of-the-envelope-ish analysis.

According to this site, prices in ancient Rome during the 6th century were as follows:

1 donkey = 3-4 solidii
1 lb of fish = 6 folles

Now, some units:

1 solidus = 1/72th of a half pound of gold = 226.79/72 g of gold = US$ 101 (@ 1 troy ounce = US$ 1000)
1 folle = 1/180th of 1 solidus = US$ 0.5626

Hence, we get the following prices in today's USD:

1 donkey in ancient Rome = US$ 303-405 today.
1 lb of fish in ancient Rome = US$ 3.375 today

But in reality, we see the following prices currently:

1 donkey today = at least US$ 500, sometimes close to $3000

1 lb of fish today = US$ 15-20

The interesting thing is that the prices are in the general ballpark despite the centuries that have gone by. Neither the fish cost a tiny fraction of a penny nor the donkey was found to cost a trillion dollars.

So, if that's even close to correct (which I can't confirm), it means that gold mostly retains its value, but "inflation" can catch gold too -- after all, it can be mined and thus diluted. Also, despite all the increased efficiency in farming techniques, raising donkeys and fish didn't seem to get much cheaper over the years but instead have appreciated in gold terms.

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