by Howard S. Katz

7-26-10

Last week I argued that the theory of a coming decline in prices just around the corner was a balloon full of hot air, and like all such balloons it was bound to sail into the atmosphere. So far from this “deflation” theory being true, it is a deliberate falsehood and in fact is a very good indicator that the exact opposite will happen.

The rationale (not the real reason) for the existence of the Federal Reserve is to combat what is called “deflation” and “depression” (both assumed to come causelessly out of nowhere and to be bad. The real reason for the Federal Reserve is to assist (and provide government support for) the bankers in their creation of money.

In the partial gold standard which existed in the U.S. from 1788 to 1933, commercial banks were allowed to create money in excess of their gold. The banker issued a gold receipt. This was sort of a ticket for gold and was similar to the baggage receipt you get at the airline or the receipt you get at a social function when you check your hat and coat. The banker promised that he would always redeem his ticket for gold whenever he was asked. But unlike the airline or the hat check girl, these commercial bankers did not always keep their promises.

This is very well illustrated by the events of the War of 1812. It had become customary for bank tickets to circulate as money (since they could be redeemed as money at any time). So when Congress declared war on England in 1812, the war advocates promised the country that taxes would not be necessary. Their idea was for the Government to borrow bank tickets and use them to pay for the war. In short, the pro-war argument was, let us have a war, and we don’t have to pay for it.

If you study the literature of the day, you will find these bank tickets referred to as bank notes. But this is more economic gobble-de-gook. A note is a financial instrument which signifies a debt. It promises repayment of principal, and it yields interest. It is precisely because a true note yields interest that it cannot be used as money. This is not only true in theory, but the experiment was actually tried by Chaim Soloman (sometimes called the financier of the American Revolution and the man who raised the money so that Washington was able to attack Cornwallis at Yorktown in 1781). Solomon issued low interest bearing notes, which were true notes because they yielded interest, and tried to get people to use them as money. But whenever anyone who carried these notes wanted to buy an item, he would reach into his purse. He would pull out his regular money and Solomon’s notes and think, “Hey, these notes earn me interest. I am going to hold on to them.”
Therefore, Solomon’s notes did not circulate. They remained in people’s purses. But of course to be money an economic good must circulate. It must change hands. That is the distinguishing feature of money. Thus Solomon’s experiment failed. His notes failed to be money (i.e., to circulate) precisely because they were notes (i.e., they yielded interest).

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King World News with Eric King is one of those sites/blogs that should be on your favorite list if you are a student of the markets, gold, currencies and geopolitical events  If you want to acquire a broad based perception of what the markets are doing and why they are doing it, consider King World News.

http://www.kingworldnews.com/is the address

Eric King is the interviewer and he always does an excellent job because he is well prepared, articulate, and well versed in the subject matter. Some of the guests off the top of my head are Jim Sinclair, James Turk, Rick Santelli, Mark Hansen, and Jim Rickards. There are dozens more that you can locate on the home site including a weekly interview with Ted Butler. I have yet to hear a poorly designed interview on his site.

So, besides the obvious of having some of the best fund managers, and market analysts in the world on his show, there is the feeling that you are sitting around your family room talking with these guys. You will be amazed at what you learn.

As a collective body of work, you will pick up on subtle points that individually they reinforce. In other words, in broad general strokes, they are stating similar or corresponding viewpoints meaning that many are focusing on the key issues of the world such as debt, gold, and how do we extricate ourselves from this mess we’re in.

Eric King is not throwing these guys puff balls—he is asking the tough questions as in “what do you think about the markets, how is the QE program affecting the economy, and always how is gold going to impact the future of the financial markets and your portfolio?”

We are at the point in the history of the United States that we need qualitative information. If you hang around with quality people, you are going to pick up quality information.

The sad part of this is that too few people know the difference between quality and schlock. That is not a derogatory assessment of any one person—simply read the papers and listen to the general news and you’ll understand the concept.

We simply must align ourselves with the web sites and the people who choose to speak their minds and tell it like it is. If we align ourselves with quality individuals some of that quality is going to rub off on us.

Remember, nothing occurs in a vacuum; this financial collapse is orchestrated by those who have a different agenda than does the average American; and is it being accomplished by design and over time. The later statement is going to be the most difficult statement of all of them for people to assimilate.

We cannot tax away, inflate away, or earn away our current debt which is now close to 130 Trillion dollars on a National Basis.

I am working on the 2010 Gift to the Gold Community, Part II. Eric King’s program will be included in that piece as will Roger Wiegand, Stewart Thompson, Howard Katz of the One Armed Economist, Shadow Stats with John Williams, and James Turk of Gold Money.

The usual group of favorites including but not limited to Jay Taylor of Mining Stocks , Peter Spina and Julien Phillips of the Gold Forecaster and the Silver Forecaster, Bill Buckler of The Privateer and Bill Murphy /Chris Powell of GATA will all be highlighted.

There is absolutely no substitution for quality.

Until Next Time,
D. Stewart Armstrong

by Jim Willie CBJuly 7, 2010

home: Golden Jackass website

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Jim Willie CB, editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Time to awaken to a new dreadful reality. Just like autumn 2008, all over again, the stock market is breaking down in a powerful visible manner, after nothing was fixed with the vast financial structures but much money was spent. If only the USGovt had decided to address the problems instead of funding the myriad liquidity facilities, which by the way serve as a virtual banking system. If only the USGovt had decided to address the problems instead of funding the US Federal Reserve equity reserves, as in excess bank reserve lures. If only the USGovt had decided to address the problems instead of funding the bank preferred stock and bank executive bonuses. If only the USGovt had decided to address the fundamental need for capital formation toward job growth instead of simple extensions of jobless benefits. If only the USGovt had decided to address the dire need to liquidate impaired assets instead of warehousing them, which happens by the way, to produce irreconcilable bank system constipation within the loan processing system. If only the USGovt had decided to address the cancerous large corporations too big to fail that must be permitted to die, instead of letting them seize greater power in USGovt and Wall Street functions. If only the USGovt had decided to address one of the root causes of USEconomic deterioration, namely endless war, so that more funds would be available for that essential capital formation and job growth, not to mention state budget plugs, as the 50 states suffer from massive capital drain through taxation squandered at the federal level, a drain that includes war.

When no solutions are achieved, even no solutions pursued, the sugar high vanishes, the adrenalin rush wears off, and the underlying root causes return as the same symptoms to the sick patient. With no remedy, the symptoms turn much worse!! The symptoms return with a vengeance, like right here, right now. Shocks to the body economic are imminent, assured by lack of required credit for almost two years, compounded by the Gulf of Mexico poison event, sure to result in a killed exterminated appendage.

One of the most pernicious dirty secrets is that the supposedly excess bank reserves parked at the USFed are actually Loan Loss Reserves attracted by the USFed itself, by virtue of interest yield offered. Banks are running naked and insolvent and constipated, hardly a pretty image. The extraordinary measures have worn off, even as the political will to continue them has faded away. Reality has a way of returning to the scene, front & center. A rot has permeated the USEconomy. Personal bankruptcies are up 14% in the first half of 2010, hardly a sign of a recovery. Home sales are down. Foreclosures are unrelenting. Retail sales are down. Factory orders are down. California might look worse than Greece. About one million Americans have dropped out of the jobs market in the last two months. Eight million jobs have been lost in the recession that never actually ended. The rolls of people unemployed but not receiving a jobless insurance check amount to 9.2 million. The USFed has begun to eye the Printing Pre$$ once again. Internal battles within the USFed center upon asset deflation and resumed bond monetization. The august body of hacks who occupy offices at the venerable US Federal Reserve Board is arguing in heated fashion about QE2, a Round #2 of powerful monetary printing, bond purchase, and financial market defecation, with predictably destructive capital formation effects toward which they remain blind.

Urban Bread Line

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