Monday, July 23, 2012

The Big Easy

“How did you go bankrupt? Two ways. Gradually, then suddenly.”
                                                - Hemingway, The Sun Also Rises

I wanted to work in a congratulatory note to Ernie "The Big Easy" Els for his perseverance in grinding his way to a British Open victory yesterday.  And then I started thinking about his nickname - which is given for his smooth, easy golf swing - in the context of how Easy it is to understand the U.S. financial predicament.  It's The Big Easy because it's easy to figure out how our systemic problems terminate, which is in one of two ways:  massive default or massive money printing, both of which will lead to "hyperinflation."

I define "hyperinflation" as the parabolic price inflation which occurs once the confidence completely collapses in a paper fiat currency.  Zimbabwe and Weimar Germany being the two most cited but there have been several examples in the last 100 years.

The golden truth of the matter is that despite all of the  political rhetoric, our Government simply can not and will not cut deficit spending and therefore the amount of debt required to keep the Government going is increasing at an increasing rate.  That is, it's going parabolic.  We're well beyond the point at which we can hope or expect that we can "grow" our way out of this debt with economic policies.  That's actually a ridiculously absurd notion.

So there's only two ways ultimately to solve the problem:  either the Government defaults in some fashion - this could take form in several ways - or the politicians decide to hyperinflate the currency in order to pay down the debt with printed money.   Either way the currency collapses and the precious metals go absolutely parabolic, as holders of dollars rush into anything available that can be considered a hard asset.  Gold and silver are both a hard asset AND a currency.

With Spain and Italy both now on the verge of financial collapse, and with three large California cities having filed bankruptcy in the last month plus many more in California and other States contemplating the same, the collapse is happening "gradually" right now.  The question is, what will trigger its "suddenness?"

I don't have that kind of crystal ball, but I know that if the U.S. were to outright default on its Treasury debt it would likely cause some of war with China, our second largest creditor after the Federal Reserve.  Not only that, but the Fed is a private entity owned by the banks which control the Fed.  Since the banks also control your Congressman, Geithner and Obama, I doubt the banks would let the Government outright default.

Thus, The Big Easy solution to the problem will be hyper-printing of the currency. It's just a matter of time and the clock is ticking:
national debt


  1. Nice post Dave.
    I would assume you are familiar with

    1. Thanks! I am familiar with it - he does good work.

  2. ''I doubt the banks would let the Government outright default.''

    Same here! Though I dont think that the government wants to default either. If they default they have to cut +-40% of spending (government spends 40% more then they take in) if the rest of the status quo remains. Since thats unlikely... make that 60+%. Now what wise government (sarc) wants to do that.

    Eric Sprott did some speculation on the Chinese position on the interview on KWN he did sunday that made sense to me. He stated that they can import and get all the gold they want in exchange for not dumping treasuries. Considering most of the world wants to go to gold to settle and revalue it (see many central banks MTM their gold) that can replace the value lost on treasuries. All that is needed to that is destroy the paper goldmarket....

    To me it seems the world is now trying to rebalance the inbalances that occurred during the $ reserve currency (oxymoron). Europe is working on it, China is, Russia is, Japan is. Can you imagine that, a world where gold is the reserve, not the US treasury....

  3. Here's to "QE is irrelevant" motto.

    This is progressing the debate. So ultimately what we need to change is the motto "QE is irrelevant" from an unrealistic "QE to infinity". It's only the time it takes to default, one is the hard default the other is the soft default. Now we can get away from this "QE to infinity" cross which only the precious metals seem to have to carry. Who will convince Jim Sinclair to do the same.

    And this is what those people (Politicians) who continuously ask Bernanke about QE do not understand. ie Deflation in a saturated Debt world means hard default. Deflation in a "no-debt" world is wonderful.

  4. Since politicians only know how to avoid a problem, not solve one, then the dollar and the U.S. Government as we know it, is toast. The real question becomes WHEN does the dollar default? A month, after the election, during CONgressional debt ceiling debates or after the tax laws change in January 2013? Then one has to wonder how the populace will react when their fiat dollars are worthless? God knows that no one in the U.S. population, on a percentage basis, has any hard assets. Maybe 1% are aware of the dollar meme death and a gold or silver solution. How will our friends, neighbors and countrymen react?
    I would predict badly.

  5. Inflate inflate inflate, pay with cheap fiat trash. It's not an outright default but that's what our plan is. In the meantime we buy precious metals and other items on distress.

  6. Glad to hear from you again, Dave! You or your relatives were not injured in the cinema shooting, were you?

    1. No, that theatre is on the other side (wrong side) of Denver. It gave Obama a nice campaign stop paid for by the taxpayers.

  7. Nice post, Dave! The path of least resistance for the body politic is to inflate and then to pretend that they did not see the ultimate result coming.

    Term limits on our politicians is not a complete answer to our problem but it would eliminate some of the issues.

  8. To complement your article here the newest by Jason Hamlin. Worldwide Debt Default the only Solution.

    So what in actual fact will happen with a Worldwide default - we may think as debt being single item but its not because the debtors and savors are linked in this system.

    It doesn't only mean debtors will get a jubilee it also means that everything that has been saved thus far will go to zero because all savings are based on debt. Savers have been handing over their money to debtors to get a return for as long as the system has been created. Most savers aren't aware of this!!!


    After 1990 we removed what was left of financial regulations following the flurry of deregulation of the early 1980s that had freed the thrifts so that they could self-destruct. And we are shocked, SHOCKED!, that thieves took over the financial system.
    Nay, they took over the whole economy and the political system lock, stock, and barrel. They didn’t just blow up finance, they oversaw the swiftest transfer of wealth to the very top the world has ever seen. They screwed workers out of their jobs, they screwed homeowners out of their houses, they screwed retirees out of their pensions, and they screwed municipalities out of their revenues and assets.
    Financiers are forcing schools, parks, pools, fire departments, senior citizen centers, and libraries to shut down. They are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go in firesales at prices rigged by twenty-something traders at the biggest and most corrupt institutions the world has ever known.
    And since they’ve bought the politicians, the policy-makers, and the courts, no one will stop it. Few will even discuss it, since most university administrations have similarly been bought off—in many cases, the universities are even headed by corporate “leaders”–and their professors are on Wall Street’s payrolls.

    Bill Black joined our department in 2006. At UMKC (and the Levy Institute) we had long been discussing and analyzing the GFC that we knew was going to hit, using the approaches of Hyman Minsky and Wynne Godley. Bill insisted we were overlooking the most important factor, fraud. To be more specific, Bill called it control fraud, where top corporate management runs an institution as a weapon to loot shareholders and customers to the benefit of top management. Think Bob Rubin, Hank Paulson, Bernie Madoff, Jamie Dimon and Jon Corzine. Long before, I had come across Bill’s name when I wrote about the S&L scandal, and I had listed fraud as the second most important cause of that crisis. While I was open to his argument back in 2006, I could never have conceived of the scope of Wall Street’s depravity. It is all about fraud. As I’ve said, this crisis is like Shrek’s Onion, with fraud in every layer. There is, quite simply, no part of the financial system that is not riddled with fraud.

    As Sherrill said, without regulation, capitalism is thievery. We stopped regulating the financial system, so thieves took over.

  10. With all that's been said in print above this caption , it is conceivable to realize gold in the $ 10,000 per ounce and silver in the $ 2000.00 per ounce ranges within the for see able future.

  11. Playing the deflationist card, how can an outright default lead to hyper-inflation? Default would lead to massive fiat money destruction, a contraction in the money supply. It would be a domino of defaults as everything would collapse due to counter party risk. Can someone please explain to me how this would lead to hyper-inflation? In my mind, at this point in the game, counter party risk will be the driver to higher PM prices (supply and demand, not monetary inflation) as everyone is seeking safe haven. Please help me understand.

    1. People will take what cash they have and pile into any kind of hard asset, most likely gold and silver for the most part. It will lead to relative "hyperinflation" of anything usable. And by that point the Fed will have already printed a serious flood of paper money that will be in circulation so there will be massive conversion of dollars into hard usable assets/gold/silver

  12. Ok, here we are, right on time for my comment.