Sunday, 23 January 2011

A cautionary Tale about Counterfeit Cash

I used to do a bit of counterfeiting back in the day, printing up high value bills. I would loan the counterfeit money out and collect real money back with interest so it looked like the money I was making was legit. It was a pretty sweet deal but I work in a more high-tech way now; I figured out a way of just typing the amount of money I want into my own bank account and then transferring it electronically to my clients. Business is good.

The schmucks I loan the money to have no idea that the money is worthless and because they can use it to buy a house or start a business, as far as they're concerned it HAS real worth. They are, therefore perfectly happy to pay the interest I demand.

As far as the people who sell my clients houses and business services know, they are being paid in legitimate tender that has a real worth so they are happy also.

I've been doing this in my neighbourhood for years now and I have noticed that everything is getting more expensive because all the businesses have had to put their prices up to cover the interest payments on my loans. 

Now the whole neighbourhood use my services just so they can afford the ever rising cost of living. I am typing larger and larger amounts into my bank account, collecting ever more interest and getting richer and richer and guess what? Yep, the prices keep on rising! This is the good life for sure!

I calculated recently that around 97% of the money in my neighbourhood is money I've just typed in on a screen. Only around 3% actually exists in cash and because I am charging interest on the 97% as well, the total amount of debt in the neighbourhood far exceeds the amount of money available to pay it back.

But that's ok. It ensures all the businesses keep trading frantically trying to make enough money to pay me back for business loans they took out and it ensures everyone works longer and longer hours to work off the mortgages they got from me. Productivity and the material standard of living in my neighbourhood has never been higher and as a result all of them end up coming back to me for more money, to get the latest model car, or upgrade their kitchen or get the latest mobile phone. 

Then things start to get a bit tricky for me. Prices had risen so much that people could no longer afford them so they stopped spending money. Businesses started to fail, people lost their jobs and worst of all; people started to default on my payments! 

I was not happy. I needed to do something fast. As far as I could see I had two choices: I could write everyone's debts off as being illegitimate because I hadn't actually loaned them anything of value in the first place (I'd just typed a bunch of numbers onto a computer screen) and free everyone from this crippling economic fraud. But of course that would mean giving up the power and wealth I had accumulated over the years and probably going to prison for a very, very long time. 

My only real option then was to type in more money! So that's what I did. I called it 'quantitative easing' and I loaned it out to businesses I thought were good for the money - the big ones and the ones owned by friends of mine. There was no way I was going to lend to the peons any more. Forget about getting a mortgage or starting a small business! I had learned that there was way too much risk in that and I wanted to be sure this time of getting my money back.

But without the money flowing further down the food chain, even the big businesses owned by my mates started to struggle and they too started to default on my payments. I typed in more and more money and told people they could borrow it at very low interest rates. I called the loans 'debt consolidation' to try and squeeze out the last few drops of interest payments but the well was dry. The money was worthless. It had always been worthless of course but so long as everyone believed it had worth, my scam worked. But now you couldn't start a business, buy a house or even afford fuel and food bills unless you where more or less a millionaire it was worthless to everyone except the very rich.

If you think you might have heard this story somewhere before I have to admit you have. It's not a perfect allegory, but I'm sure you recognise it anyway. In America it's called the story of the Federal Reserve, in the UK it's the story of the Bank of England. Every country with a state controlled central bank has it's own version.

The part of the counterfeiter is always played by the state controlled central bank and in all cases the story ends up the same way. In the UK the Bank of England (which had been privately owned since 1694) was subordinated to the Treasury in 1931 and Nationalised in 1946. During that same period (1930 - 1950) the value of the pound (GBP) halved if you take as an average the comparison in retail price index, GDP deflator, average earnings, per capita GDP and share of GDP. By the same comparisons you would need £163.48 of todays GBP to buy 1 GBP of 1930 money.

It's the same story in America. The dollar (USD) has lost 90% of it's value since the Fed was created in 1913.

I use this allegory now because it illustrates the most immediate and pressing issue facing the public today. And I'm going to stick my neck on the line here. If I'm right then the consequences will be dire:

If you have a pension, stocks, shares, bonds, a bank account with savings in it, or even paper money in your pocket; these things will be worthless in the very near future.

I hope I'm very, very wrong but there seems little doubt that the USD will now collapse. It will happen within the next 24 months and it will be very sudden when it comes. The early warning sign to look out for is any rise in interest rates. The US are just about coping with the debt repayments on their $14 trillion national deficit because interest rates are still at rock bottom. When the inevitable rise happens, America will be unable to meet repayments and the dollar will go into free fall. 50-70% of it's value could be wiped out in the space of a few months, or even weeks.

Shocking? That's not even the half of it! The Euro will collapse around the same period, although it's unclear whether one will precipitate the other or not as they are both failing for very different reasons. In the States it is over-printing of currency that will eventually lead to America's creditors waking up to the fact that the USD is worth jack shit and hiking interest rates to cover the risk. When Spain and Portugal fail later this year/early next they won't be able to sell bonds at any price and there's no-one left in Western Europe with pockets deep enough to bail them out.

But don't panic. You can still keep your nest egg safe. The silver and gold price has continued to rise and will go on doing so while those in the know quietly convert their portfolio into hard assets, increasing the pressure on supply. This trend will continue, but watch for a sudden jump as soon as Spain or Portugal start to wobble.

In short, the sooner you can move on this, the better. Depending on how much you have put by, you may be subject to extortionate capital gains tax or similar, depending on what country you're in, so you may have to move your assets in smaller chunks to avoid this. However, you will quickly make back whatever you lose during the transfer as prices will continue to rise sharply throughout the global currency crisis, which will last at least a couple of years. At any rate, you're better off taking the hit now as it's likely to be far less severe than watching the sudden devaluation of your portfolio when all this kicks off.

A quick word of warning though, do not buy gold stocks. What you're doing there is simply buying a piece of paper with an I.O.U written on it entitling you to shares in a gold mining company. Personally I wouldn't trust I.O.U's in a financial crisis! Buy actual gold: Coins, jewellery or bullion - depending on how much you have saved. Keep it in a safe, bury it in the garden, whatever you want but don't put it in a bank obviously. When the liquidators are called in to strip all the computers and the light fittings, do you really think they're going to leave your gold coins sitting in the vault?

And for the love of all that is sane and rational DO NOT listen to the brokers who are telling you to move your shares and pensions into China and Brazil to protect yourself. Both these economies are heavily dependent on exporting to the States. By swapping your allegiances now, you are only postponing the inevitable.

For those who are keeping abreast of the economic situation, this advice will come as no more of a surprise than the allegorical tale I opened with. Many of you in fact will probably already be taking any money you have saved at the end of the month and buying gold coins with it, instead of putting it in the bank.

But for many, this will seem alarming and hard to believe. To those I say simply this. The time for argument and persuasion has passed on this issue. If I'm wrong and the USD and the EURO survive, then you will have transferred your assets for nothing. Well, check the gold and silver prices now and see what direction they're going in. Get independent advice and see if they are set to continue rising, or are headed for a fall. Please don't take my word for it, but buying gold right now is not such a shabby investment.

If, however I am right, then this advice may just save your pension or your savings.

Either way, get advice, but don't sit on this information for too long. Gold prices are going up fast so the longer you leave it, the less your portfolio will be worth when you make your move.

If you know anyone with a pension, or savings please forward them a copy of this. They may well thank you for it down the line.

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