Friday, October 22, 2010

The US Dollar is Doomed

Everyone is struggling to get more money and fund their retirements. Trouble is, with this giant Ponzi Scheme that is the central banking system, the money is soon not going to be worth anything.
From: The Daily Reckoning <dr@dailyreckoning.com>
Subject: The US Dollar is Doomed
To: wdavis@walterdavisenterprises.com
Date: Friday, October 22, 2010, 10:22 AM

D.R. U.S. versionThe Daily Reckoning U.S. Edition Home . Archives . Unsubscribe
More Sense In One Issue Than A Month of CNBC
The Daily Reckoning | Friday, October 22, 2010

  • Mr. Market destroying the idea that "housing always goes up,"
  • The long, slow death of the world's temporary reserve currency,
  • Plus, Bill Bonner returns with Part II of "The Gualfines' Last, Last Stand," and plenty more...
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Slow Growth or Contraction
Following the path of the Great Correction

Bill Bonner
Bill Bonner
Reckoning today from Salta, Argentina...

What's new in civilization? We went to Cafayate last night. Our old friend Doug Casey hosted an intimate little dinner - for about 150 people. He's developing a community down there - the kind of place he wants to live in...surrounded by friends, good food, bright sun, beautiful views...and everything else a man might want.

Whether this is a good idea or not, we can't say. But it is fun to get together with Doug and his crowd.

Since we were back in Internet range, we checked in with our usual sources. Here's what we found:

The economy is either growing slowly, or contracting.

Housing is probably going down. Remember, Mr. Market has to destroy the idea that "housing always goes up." When he's finished people will think that "housing never goes up."

Unemployment? People are gradually beginning to realize that the last ten years were the worst for creating new jobs in America's history. If they keep thinking about it they will realize that it is not just the bust that is destroying jobs; there was something very wrong with the boom too.

Meanwhile, the markets are still calculating, figuring, deciding what things are worth. In the last couple of days, they've been thinking that maybe stocks and gold got a little too uppity. Gold has lost more than $50 in the last two days. Stocks lost ground on Tuesday, but bounced up 36 points yesterday.

From all we can tell, the Great Correction continues. And here's a report from The New York Times that tells us where it leads:

OSAKA, Japan - Like many members of Japan's middle class, Masato Y. enjoyed a level of affluence two decades ago that was the envy of the world. Masato, a small-business owner, bought a $500,000 condominium, vacationed in Hawaii and drove a late-model Mercedes.

But his living standards slowly crumbled along with Japan's overall economy. First, he was forced to reduce trips abroad and then eliminate them. Then he traded the Mercedes for a cheaper domestic model. Last year, he sold his condo - for a third of what he paid for it, and for less than what he still owed on the mortgage he took out 17 years ago.

"Japan used to be so flashy and upbeat, but now everyone must live in a dark and subdued way," said Masato, 49, who asked that his full name not be used because he still cannot repay the $110,000 that he owes on the mortgage.

..For nearly a generation now, [Japan] has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.

"The US, the UK, Spain, Ireland, they all are going through what Japan went through a decade or so ago," said Richard Koo, chief economist at Nomura Securities who recently wrote a book about Japan's lessons for the world. "Millions of individuals and companies see their balance sheets going underwater, so they are using their cash to pay down debt instead of borrowing and spending."
More thoughts, after today's guest essay...


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The Daily Reckoning Presents
The US Dollar is Doomed

Puru Saxena
Puru Saxena
Austerity be damned, at this rate Mr. Bernanke will go down in the history books as one of the greatest money creators ever to have walked this planet!

Never mind sky-high deficits and a crushing debt overhang, at its most recent FOMC meeting, the Federal Reserve all but guaranteed another round of quantitative easing.

While the American central bank did not officially expand its quantitative easing program last month, it did reiterate its willingness to institute more aggressive monetary policy measures in order to combat the risks of deflation. Furthermore, Mr. Bernanke did officially downgrade the Federal Reserve's outlook for inflation.

The truth is that the US is insolvent and its policymakers will stop at nothing in order to avoid sovereign default. So, it should come as no surprise that at its latest meeting, the Federal Reserve downplayed the risk of inflation, thereby setting the stage for another round of money creation.

Make no mistake; Mr. Bernanke has already created copious amounts of money. Granted, the Federal Reserve's previous monetisation was highly secretive, but you can be sure that it did occur. Allow us to explain:

You will recall that during the depths of the financial crisis, the Federal Reserve expanded its own balance-sheet and bought all sorts of toxic assets from the financial institutions. By doing so, Mr. Bernanke created money out of thin air and bailed out the major banks.

Thus, the banks were able to dump their garbage assets on to the Federal Reserve and once they received the newly created cash in exchange for these securities, they loaned this money to the US government by purchasing US Treasuries. In summary, in the previous round of quantitative easing, the Federal Reserve created new money and instead of lending it directly to the US government, it used the banking cartel as its conduit. Back then, not only did the Federal Reserve create more than a trillion dollars, it also dropped its discount rate to almost zero; thereby allowing banks to borrow money cheaply! It should be noted that since the banks were able to obtain such inexpensive funding from the Federal Reserve, they had absolutely no qualms about re-investing this capital in US Treasuries.

At first glance, the Federal Reserve's stealth monetisation plan seemed flawless. The banks offloaded their toxic assets on to the Federal Reserve, they made fortunes by investing in US Treasuries and the American government got access to a cheap source of funding. Magic!

Despite the fact that this financial wizardry was a lifeline for American policymakers and their banking cronies, let there be no doubt that it was an unmitigated disaster for the American public. Not only did the Federal Reserve nationalise the banks' losses but more importantly, Mr. Bernanke's money creation efforts have seriously undermined the viability of the US Dollar.

It is noteworthy that since bailing out the major banks and orchestrating the stealth monetisation, the Federal Reserve has been busy purchasing US Treasuries. Furthermore, it is now almost certain that in next month's FOMC meeting, Mr. Bernanke will unleash yet another round of quantitative easing. In other words, in order to fund Mr. Obama's out of control spending, Mr. Bernanke will create even more dollars out of thin air! Allegedly, this new round of money creation will drive interest-rates lower, thereby helping the US economic recovery. Or so the story goes.

Unfortunately, as any serious student of economic history knows, there is no such thing as a free lunch. By adding trillions of additional dollars to the monetary stock, Mr. Bernanke may succeed in bailing out his friends in high places but he is seriously jeopardising the US Dollar. In fact, bearing in mind the recent developments, it has become clear to us that the Federal Reserve wants to debase its currency. In our humble opinion, the US Dollar is a doomed currency and there is a real risk of an abrupt plunge in its value.

If our assessment turns out to be correct and Mr. Bernanke unleashes the second phase of quantitative easing, you can be sure that the US Dollar will slide against most un-manipulated currencies (which are few and far between) and hard assets. In fact, monetary inflation is the prime reason why we believe that the ongoing bull-market in stocks and commodities will continue for several more months.

Look. The US economy is swimming in debt and the total obligations (including social security, Medicare and Medicaid) now come in at around 800% of GDP! Furthermore, this year alone, Mr. Obama's administration plans to spend another US$3.5 trillion, meanwhile the US Treasury will raise roughly US$2.2 trillion from issuing new government debt! Clearly, these numbers are unsustainable and you can bet your bottom dollar that the Federal Reserve will end up buying a large proportion of the newly issued US Treasury securities. As the American central bank funds more and more of Mr. Obama's spending by creating new money, it will trash the value of its currency. In fact, given the growing imbalance between the government's spending and tax receipts, very high inflation is inevitable and even hyperinflation cannot be ruled out.

For the sake of their financial well being, it is crucial that investors understand that inflation or even hyperinflation is a monetary phenomenon and a strong economy is not a pre-requisite for the debasement of a national currency. Whatever the reason, if a central bank decides to significantly increase the quantity of money in the system, that currency's purchasing power will always diminish. This is how fiat-money regimes have operated since the beginning of time and this era is no different.

It is interesting to note that throughout recorded history, the worst excesses of inflation occurred only in the 20th century. Undoubtedly, this was a direct consequence of the adoption of fiat-money.

The following chart highlights all the hyperinflationary episodes in recorded history and as you can see, with the exception of the French Revolution (1789-1796), all of the other disasters occurred in the last century. In fact, it is an ominous sign that 29 out of the 30 recorded hyperinflations in human history occurred during the 20th century!

Hyperinflations in History

Let there be no doubt, a paper money system usually ends in the reckless destruction of money and it is no coincidence that all hyperinflations in history have occurred in the presence of discretionary paper money regimes. Furthermore, it is important to understand that a political system based on democracy is inherently inflationary and political leaders have been responsible for all major inflations in the past. Conversely, history has shown that monetary systems binding the hands of political leaders are essential for keeping inflation in check. If history is any guide, metallic monetary systems have shown the largest resistance to inflation and this is due to the fact that currencies anchored by a tangible asset cannot be inflated ad infinitum.

It is our conjecture that the current monetary system is absolutely pathetic; a system designed to enslave society. Unfortunately, the vast majority of humans do not understand the endless inflation agenda and this is why the perpetrators get away with this crime. Furthermore, let it be known that the Federal Reserve is largely responsible for the incredible inflation we have experienced over the past century.

The chart below plots the cost of living in Britain, France, Switzerland and the US. As you will note, the cost of living in these nations was relatively stable for over 160 years (1750-1913) but once the Federal Reserve came to power in 1913, everything changed. Suddenly, the cost of living exploded in these nations, so it should be clear that the Federal Reserve's covert policy of currency inflation and debasement is solely responsible for this mind numbing inflation.

Cost of Living in Various Nations

Unfortunately, the Federal Reserve and its allies have not finished inflating and over the following years, they will create even more confetti money. Under this scenario, cash will continue to lose purchasing power and the asset poor middle-class will get even more impoverished. If our assessment is correct, cash will prove to be a disastrous 'asset' over the next decade and once the Federal Reserve's manipulation ends, fixed income securities will also depreciate in value.

Bearing in mind our grave concern about high inflation and the very real possibility of hyperinflation, we continue to favour hard assets such as precious metals and energy. At present, we have allocated roughly half of our clients' capital to these sectors and it is our belief that this should be an adequate inflation hedge.

Regards,

Puru Saxena,
For The Daily Reckoning

Joel's Note: Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here.

Mr. Saxena is also the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.


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Bill Bonner
The Gualfines' Last Last Stand, Continued...

Bill Bonner
Bill Bonner
The air was cold. We mounted up after breakfast. We were headed up into the hills for a showdown.

The horses seemed eager to get underway. They headed out at a fast trot, down the hill, past the stone pillars that marked the entrance to the house, then across the front stockyard, between the rows of Alamos trees and out through the gate.

The sun hit our backs as we cleared the trees. It was only about 8 AM, but the sun was already hot.

"This way," said Jorge, pointing off to the left, the road to the high pastures.

We stuck with the main track for about an hour...then, Jorge led the way over the edge, down among the rocks. We put our heels forward and arched our backs to keep from falling over the horses' heads.

The trail led by a couple of adobe houses...through terraces that had been laid out by Indians hundreds of years ago and then maintained and recycled by generations of people since. Finally, we got down to the deep sand along the river. Jorge edged his horse down the bank and into the water, and then up the other side, rockier and steeper than the way we had come down. The horses' hooves slid on the rocks and clattered among the stones. But they kept going. Up, up, up...through channels worn into the rock...until they finally reached the top. At the top of the hill they seemed relieved and slowed their pace.

We were going through an area of abandoned Indian terraces, houses, storerooms and other ruins whose usefulness was not apparent.

"This is the Quebrada Chica," Jorge announced.

Everywhere we looked there were ruins. At first glance, we barely noticed them. There were rocks everywhere. But then the patterns became clearer and we realized that they were all around us. Terraced walls to hold the dirt and provide level places to plant corn. Small walls of what must have been dwellings or workshops. Walls probably designed to protect the community.

"There must have been more rain back then," Jules suggested. "Otherwise, this place doesn't make any sense. You couldn't plant anything here now. "

We came to the top of a ridge and looked ahead. There was a house...some trees - weeping willows, poplars and molles - and fields. The fields were meant to be pastures. In one of them there were two white horses. But there was not a blade of grass. It looked more like a giant parking lot than like a pasture. All it lacked were lines painted to mark the spaces.

In one of the fields, someone was working. A stout young man looked like he was hoeing something. But there was nothing in the field. It was nothing but sand as near as we could tell.

"Edouardo," Jorge called out.

"Hola..."

"What are you doing?"

Edouardo was not as lean and weathered as the other pastajeros we had met. He couldn't have been more than 30 years old, with a full, unlined face under a broad blue Andean hat. His clothes were clean. He might have been a clerk at Wal-Mart.

"Nothing... I'm planting...but if it doesn't rain soon, I'm just wasting my time. It is so dry... I don't know how much longer I can go on like this... I don't know where this leads..."

We passed through his parched fields and then went up another rocky hill. The horses followed the track...up along the ridge...and then down the other side to another group of houses, fields and trees in what must have been a very beautiful valley, when there was enough water.

We crossed a junction in the 'acequia,' the irrigation ditch. One stream flowed down the hill. The other cut off towards the adobe house in front of us. Jorge stopped. He studied it for a minute.

"They're using water."

"They're not supposed to?"

"No, not today. Each one has the right to use water only one day out of every 10. This is not their day. And these are the insurgents. I've got to have a talk with them..."

We rode up to the miserable adobe house. There was smoke coming out of the door. Jorge, Jules and I stayed on our mounts...

"Come on out," said Jorge, or words to that effect.

"We know you're in there..."

Jorge's two dogs circled the local animals. The dogs growled at each other...

"Chango...where are you?"

Then, a boy of about 14 came out...hitching up his pants. He looked mildly retarded...or maybe he was just a teenager.

"Why are you using water? You know it's not your time..."

"Uh...."

"Where is your uncle?"

"Uh...por arriba..."

"The family is up in the high pastures with their animals," Jorge explained. "We're not going to be able to meet with them. They left him here to keep an eye on things."

Jorge turned back to the teenager.

"How come the water course is open? It's supposed to be closed. This is not your water day..."

"Uh... I dunno..."

Jules and I were waiting for one of them to go for his gun...

But Jorge soon tired of politely trying to get an answer out of the kid. We turned around and went back to the acequia. Jorge dismounted and blocked it with stones and mud.

The whole ranch is dry. The pastajeros are not only refusing to pay their rents and claiming they own the land...they're also cheating on the water...

Where does it lead for any of us?

Enjoy your weekend,

Bill Bonner,
for The Daily Reckoning

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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
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The Bonner Diaries The Mogambo Guru The D.R. Extras!

Plaza II
What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this: There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.

Money Printing: How Counterfeiters Saved the World

Why Bernanke's Money Printing Promises Spell Disaster

An Economic Standoff to Save the Neighborhood
I am clearly yelling through the door, "It is an insane, disgusting, bizarre, despicable display of monetary and fiscal incest that always produces a mutant economy and inflation in prices, a destructive arrangement which can only be maintained by more – always more and more! – deficit-spending and money creation to maintain a constantly rising inflation, year after year, yea unto hyperinflation and total ruination!"

Why Inflation is Always a Bad Thing

Doubling the Value of Silver

Creeping Inflation Reveals Recession's Trapdoor
As the Fed's stated intention to execute QE2 lurks ever closer — plans to resume asset purchases, including Treasuries, are slated for the November 2nd FMOC meeting — even a few more than average regional Fed bank presidents are breaking rank. According to Bloomberg, Philadelphia president Charles Plosser said unemployment is a "terrible problem," but he flat out prefers it "to monetary-policy solutions at this point," that increase inflation.

UK Hacks Away at Budget, Feels "Like an Amputation"

Gathering Storm: Govt's, Central Banks Pushing Toward Even Bigger Meltdown

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