The Euro vs. Dollar & Gold Monitor

December 2008 (Issue #53)

Want A Way to Make Your Gold Investments ”Stick”?

What if you had a way to make your gold investments stick?

What if you had an actual tool that you can use, the success of which is purely determined by your desire to succeed?

No, this is not a sales job. It is something you can do – today – that will guarantee the ultimate success of not only your gold investments but of all of your past and future efforts to make gold and silver actual currencies again.

I am talking about a tool, a method, that you can use that lies completely within your control (if you live in the United States) to make politicians at all levels of your government actually obey the Constitution and re-institute an honest monetary and banking system.

Too tall of an order? Not likely to ever succeed? You be the judge.

This system was conceived out of a desire to find and elect a constitution-respecting candidate for governor of Texas in 2010.

It’s not really anything new, and it is so bland in its utter simplicity that it completely defies description – along with most people’s immediate expectation of likely success.

The good news is that there are only two ways in which this system can fail to succeed, and those are (a) if you don’t use it, and (b) if you quit after you start using it.

There is no “bad news” component to this. It can’t turn against you. If you do nothing, things will simply stay on the same course they are on right now. Nothing will change.

Does that simplify things? I believe it does.

Now to the fun part of this section: The solution to (almost) all of our problems is as simple as

Taking Your Friends to Lunch

This is primarily a political tool, but as you know by now, the Federal Reserve only exists because Congress passed the Federal Reserve Act in 1913. It is therefore primarily a political issue that can only be resolved through political means – as are most of your other problems. Fractional reserve banking, credit money, are all things bequeathed to us by our elected officials at the behest of their banker friends. Now, you have a chance to un-bequeath yourself.

Here is what you do:

1. Call nine of your friends. Tell them to bring their own booze and have them over for a nice afternoon BBQ. Tell them you want to discuss something of importance to their retirement portfolio. If they are afraid you want them to join Amway, tell them not to worry.

2. At the BBQ, you tell your friends that you want to pass some information on to them that can save their retirement nest egg – because what happens to their nest egg depends entirely on what they do from now on.

3. Next, you had then the handout posted on the “Files” section of the Monitor Members Google group entitled “The Origin of the Global Financial Crisis.”

4. You can then just go through the listed items on the handout, one by one, with a short commentary on each point, or you can just read the items off one by one and ask them to raise their hand if they need clarification one any point listed.

5. Next, you let them know that they have the option of doing what you just did with their friends and neighbors. The point is to build a huge network of people who are informed on the true origin of our current financial problems and who are capable of taking precisely the one action needed to cure the problem: vote out any incumbent politician at the federal level who has contributed to the problem by consistently voting for legislation that is outside his constitutional authority.

6. Make yourself available to each one of your friends who recognizes the opportunity this brings and who wants to be part of the solution, rather than part of the problem.

If you do this, you will never have to deal with more than eighteen people at any particular time: the nine you invited into your group, and one each of each of their groups who will be your contact if your friend is out of town, sick, or otherwise prevented from fulfilling his function as the leader of that group.

Naturally, your friends will teach their friends how to do the same, so the progression is a geometric one. Ten by ten by ten, etc.

If you take this only six levels down, you have a million voters in your state who will know the root cause of the current financial crisis and who will be able to properly identify the solution to it.

It goes without saying that these types of systems never go perfectly by the numbers. It also goes without saying, however, that these types of systems can and very often do produce unbelievable results. It all depends on the appeal of the core message and on the effectiveness of each participant in communicating that message.

That effectiveness is enhanced tremendously if the proper informational tools are created that can simply be passed down the line. This prevents each individual member from having to be a top-notch communicator himself. The handouts do all (or most of) the work.

The rest depends on your desire to (a) stay free, and (b) protect your financial freedom and privacy, and therefore your investments.

Like I keep saying, there is not one financial or investment newsletter writer in the world that can promise you with a straight face that your money will be safe from any kind of political shenanigan, if you only invest in “X”.

At the same time, while saying this, I am acutely aware that the original impetus for many investors in subscribing to this or that newsletter, probably including this one, is to find precisely that kind of information.

The unfortunate reality is, however, that this much desired information simply does not exist.

The current state of economical and political affairs is such that no man’s wealth, wherever situated in the world, and whatever asset, tool, or financial product it may be invested in, is safe from overreaching politicians, especially if those politicians hold positions of power in the seats of government of the most influential economic systems in the world.

If you want to retire in relative comfort and security, you have to make the investment decisions it takes to achieve your goal. The point I am making here, though, is that the ultimate achievement of your investment goal also depends on what political decisions you make along the way – and those do not just include the decision of which prefabricated, designer made candidate you vote for. If you want more, more is required of you, and you can’t expect to simply “pay for it.”

If you choose to sit back and do nothing on the political playing field (other than continuing to vote the same old numbskulls and lawbreakers back into office), you will get the results you deserve – and those will be very, very unpleasant.

If you continue to vote along party lines, you will get what you deserve.

If you continue to support, whether by action or inaction, the very system that is now mercilessly whittling down your retirement portfolio, you get what you deserve. If you oppose it only in word and not in deed, you get the same.

I apologize for being so crass. It just happens to be the truth.

On the other hand, if you decide not to be a part of the problem but instead to become a part of the solution, your job has just become so much easier.

All you (literally) have to do to solve the dilemma is – to have lunch!

Build your own lunch (or breakfast, dinner, or supper) group and teach your friends to do the same and continue the process.

I am working with some very active, very knowledgeable people in creating the support materials necessary to keep the process going and to simplify it and speed it up.

Where the Real Power Is

The best method to do this is to do it state by state.

Under the Constitution, the states are where the real political power is supposed to reside – and it still does. It’s only that the state governments where lured into giving up much of their power in return for federal handouts. The point is, though, that they had to give that power up in the first place, and that means they can take it back. Whether or not they will depend on you and your network building and the votes for constitution-abiding politicians you generate thereby.

Even federal senators and congressmen are elected by people who live in the several states.

States are much easier to “take back” than the federal government is, for the mere fact that you need much fewer votes to effect the desired outcome when it comes to the office of state governor, for example. He is the one who has veto power over any laws the state’s legislature presents to him.

The current Texas gubernatorial incumbent, Rick Perry for example, kept his seat by the vote of a mere 1.8 million voters. That’s less than ten percent of the population of his state. Having a constitutional candidate in that office has tremendous benefits for Liberty.

If your state has a sufficiently strong contingent of ‘lunch warriors’, it will have a sufficiently strong army of voters in each congressional district to vote out any outlaw incumbent.

Who is an outlaw incumbent? Any congressman or senator who voted for the recent “TARP” bailout is an outlaw, and that’s just one example. Voters made it very clear to their representatives that they did not want this bailout. After first voting against it according to our instructions, what did our representatives do? They added more money and more pork for banks to the bill they were told not to vote for - and passed it.

Yet, they still were almost all re-elected, at the mind-numbing rate of 97 percent!

If that alone doesn’t convince you to take action, then I don’t know what will.

What If it Doesn’t Work?

I can hear you thinking: “Well, what if it doesn’t work?” The answer to that is “if it doesn’t work, you are no worse off than you are now.”

If it doesn’t work, all you have lost is a few hours at lunch with your good friends, and maybe with some of their friends.

If it doesn’t work, all you have lost is a few heartfelt words out of your mouth that happened to fell on dead ears.

If you don’t sue this tool, however, what you will have lost is – most likely – all of your freedom. All of your financial and personal privacy, most if not all of your investments (or at least the right to enjoy the legitimate fruit of your wiser-than-average investment decisions!)

On the Other Hand …

On the other hand, think about what you will gain if it does work:

If it does work, you will gain your personal, individual liberty and the ability to enjoy it in ways that have, thus far in your lifetime, not been open to you because of the corrupt system we have all become accustomed to live under.

If it does work, you will have done your part in creating a network of independent, constitution minded, privacy respecting voters who will completely neutralize the liberty-destroying effect of the current two-faced, one-party system. You will have helped to restore the rule of law in this country, right alongside a newfound respect for the freedom that is enshrined in the organic law of the land, the law that tells politicians what they can do and what they can’t do when they are writing and voting for their legislation.

You will have been instrumental in assuring that the future currency and payment systems of this country are based on true value, on solid, tangible wealth, rather than the mere whim of politicians and bankers who are only bent on covering their own asses whenever something goes wrong – as it inevitably does.

You will have made sure, by doing whatever you can, that you no longer have to ship your wealth outside the country into so-called safe haven jurisdictions whose security is now under more threat than ever as a direct result of the lawlessness of our US politicians.

I have uploaded all of the materials I make available to my own lunch group members to the ‘Monitor Members’ Google group page. You can also go and visit this blog I have created for that purpose. It was originally conceived for the purpose indicated by its title, but it has since grown way beyond that.

There is quite a bit of reading to be done there, but it is directly and intimately relevant to your quest to keep your wealth intact in this maelstrom, this vortex, this black hole of financial destruction and mayhem that was unleashed by … no, not the profligacy of our elected officials, but by the lackadaisical attitude of those who were entrusted by our Founders with the duty to enforce our Constitution on our leaders.

That would be you – and me.

I firmly believe that what you have just read, what may seem to you to be a purely political diatribe, may be the very best investment advice you have ever come across.

Your investments will not be safe under the current political reality of this or any other country in the world as it exists today – unless you do something about it.

This tool, this approach I am proposing to you here is the only thing that promises appreciable results in any reasonable period of time. Everything else has been tried for decades or even centuries – and has abysmally failed.

Only your personal and direct involvement at keeping our elected and appointed officials at bay will yield any realistic results.

Everything else is just wishful thinking. Nobody will do what you need done for you. It is absolutely and undoubtedly up to you. Please consider this very, very closely.

If You Do Not Live or Vote in the United States

As a non-resident non-voter, you obviously cannot effect any political changes in this country by networking and voting, but to a lesser extent the same principle applies to your country. You can mobilize a voter drive to abolish your own country’s central bank, for example. You just don’t have as powerful of a law as the US Constitution to back you up.

However, if your US counterparts succeed in their efforts to do what I just described, you will benefit immensely.

The US alongside the EU is a major driver in the move to shut down investment havens like Switzerland, the Channel Islands, and the Caribbean offshore financial centers. Without the US pushing so hard, your chances at retaining some financial privacy will be much, much greater.

If you live in an EU country, you can organize along the same lines to get your own country’s financial, economic, and political sovereignty back. That would definitely be an improvement – and a worthwhile goal as well. The possibilities are endless. The only question is whether you make them possible.

Conspiracy – or Mind Set?

In the past, I have quite often made the case that there are a number of conspiracies going on in the world of finance and government. This was done from the vantage point of one simple proposition: if you combine power, motive, and opportunity, you probably have a conspiracy of one kind or another going on. To some degree, I still hold to that tenet.

Where I am beginning to differ, though, is the very definition of conspiracy. In criminal and even civil law, the term is defined as combination of individuals getting together to plan something that they know to be either illegal or immoral/unethical from the very outset. In legal terms, this attitude is known as “mens rea” or “guilty mind.”

What I am proposing and suggesting here, though, is to look at the subject from another angle, namely that of human nature.

As humans, we are first of all limited. We have limited perception, limited understanding, and limited ability to do something about it all. Our perception is limited by our viewpoint, and our viewpoint is what we develop in the course of growing up in society. It is not impressed upon us by society from the outside, but it is developed by us as a necessary component of our ability to deal with the world as we encounter it – given our previously mentioned limited capacities.

If that is too abstract for you, let me try to give it a face and a body….

There is no better way, perhaps, to drive this point home than by reading Michael Lewis’ article “The End”. Michael Lewis is the author of the book “Liar’s Poker”, published on November 11, 2008 on Portfolio.com. In his article he manages to put names and faces on the very subject of last month’s Monitor issue that dealt with the school districts and their CDO investments, except that the names and faces are those of Wall Street traders. Those traders, by pure chance, it seems, by having still a modicum of discernment and integrity left in spite of what they do for a living, figured out the complete evil of the monstrosity our global financial system has become.

Weaponizing Risk

In a world where credit is money, interest drives everything, and interest is in essence a measure of risk, and risk drives modern markets.

As the risk of a financial asset increases, interest rates increase, at least under normal circumstances. A bond, for example, will offer higher interest rates for longer maturities because the more time passes, the more uncertainty enters into the equation that ultimately determines whether and how much of your original investment you will get back if you (a) hold your bond to maturity, or (b) trade it before that date.Ordinarily, in truly free markets, interest rates are determined purely by the combined perceptions of all market participants, and those enter into the calculation by how the market as whole buys and sells the bond at issue. When interest rates are kept artificially low by central banks pumping more money into the system, this measure of risk is distorted. A very risky bond appears less risky because its interest rate, or yield, is so low.

At the same time, the low yield makes investors hungry for more yield, i.e., higher returns on investments, and that hunger (let’s call it greed) creates incentives for some of the more crafty investment bankers to create financial structures and instruments that allow them (and greedy investors) to leverage that risk into creating higher and higher returns for investors.

Essentially, that’s why investors in paper based systems always feed the beast. They enable this process to play itself out to the very maximum possible.

Now, please understand that this is not to be read as an indictment of human greed. That would be the same thing as indicting human nature, by which we would only indict ourselves because we are human as well. Trying to re-engineer human nature is best left to socialists, communists, Fabians, and other utopians. Greed by itself can be a good thing if it is allowed to play itself out as the “enlightened self-interest” observed and named by Adam Smith. It can, however, be redirected and channeled into trenches that flow in a very different direction.

Virtually every day you read in the financial press that either “risk appetite” is returning or that “risk aversion” is causing traders to unwind risky bets. In that context, risk appetite is seen as something healthy because it means that people are willing to forego financial safety in order to achieve higher returns.

Enter the CDO Bomb

CDO’s are financial and corporate structures that bundle risk like a laser beam. Everybody knows that the bundling of light can be very, very destructive.

Originally, CDO’s bundled mortgages together and resold slices or “tranches” of these bundles to investors worldwide. Naturally, the riskiness of mortgages sold to borrowers who can’t really afford them make these prospects of future loss of investments very hard to predict. As already shown in the last issue, some of those we tend to regard as financially super-successful thought they were smart enough to sidestep that risk by spreading it around the world.

Little did they know that, by spreading this risk, they did not dilute it as they intended to so. With every new transaction designed to “dilute” the risk, they actually cloned it. In other words, instead of taking a quantity of nitroglycerin and cutting it up into many smaller quantities and the spreading them geographically over a large enough territory, they produced additional quantities of explosives of equal or greater destructive force and spread those around the globe. That is what we are dealing with now, and that is the situation we find ourselves in.

Let’s go back to the CDO model again to explain how this happened.

The theory behind the bundling and reselling of risk was that a single bank that lends to subprime customers takes all of the risk of default that these customers pose, but if the bank offloads part of its mortgage pool onto several of these SPE’s or special purpose entities and then sells slices of their risk quantities to many different investors, then first of all the bank itself is exposed to less risk, and secondly each individual investor bears only a very small fraction of the overall risk.

Sounds good in theory, but it doesn’t work that way in practice.

A normal, straightforward CDO is constructed like this:

1. The bank creates and SPE, which is nothing other than an offshore corporation in a Caribbean banking center like the Cayman Islands, for example.

2. The bank ten contracts to “sell” its mortgages to that SPE, but the SPE has no money yet. It is just an empty shell – so the SPE employs securities brokers (like Goldman Sachs or Lehman Brothers) to sell investors on the idea of making above-average returns by accepting only slightly higher risk.

3. The money pouring into the SPE from investors (most of them institutional ones) around the globe is then used to buy the mortgages the bank wants to unload.

4. What the SPE now actually sells to investors are not the mortgages themselves but notes or bonds it issues based on the portfolio of assets consisting of the mortgages. The SPE sells several kinds of bonds, though, each bond being backed by a separate “tranche” of mortgage assets. These bonds are what we call “CDO” or collateralized debt obligations. (Common usage can be confusing here because it often calls the entire SPE structure a “CDO” as well. We will stick to calling the entity that sells the CDO’s an “SPE” and will call only the debt obligations they sell CDO’s in order avoid confusion)

5. These tranches, in order to be sellable, must be imbued with some sort of stamp of approval from a recognized and respected institution. Enter the world’s top credit rating agencies: Moody’s, Fitch, and Standard & Poor's.

6. The bank that originated the SPE hires Moody’s, for example, and asks Moody’s to “rate” these CDO notes issued by the SPE. Moody’s is only too happy to comply because the bank pays it good money for this rating, and because Moody’s wants future business from the bank it gives the bank a “good deal”. It agrees to accept the bank’s risk analysts’ calculations as a true indication of the risk involved.

7. The SPE now issues three different classes of CDO’s or debt obligations. Each is based on a different category of mortgages grouped by the creditworthiness of the home-buyer/borrower. The safest mortgages from the creditworthiest borrowers are the assets backing the “senior” tranche of CDO’s issued by the SPE. Next comes the “junior” or “mezzanine” tranche, and lastly, there is the “equity” tranche that contains all of the subprime mortgages.

8. Moody’s now rates the SPE’s safest tranche of CDO’s “AAA”. (That, by itself, is an act of deception, but court opinions have already held that ratings agencies cannot be sued on their ratings because they are just “opinions”. Never mind that the entire financial world treats these opinions as completely reliable and navigates the waters of world finance by the beacons they supposedly provide!)

9. The “junior” or “mezzanine” tranche is usually rated “AA”, and the lowest is the “equity” tranche, is usually rated “BBB”

That’s what the picture is with a straightforward CDO. The trouble comes in when you understand that crafty financial engineers (like Hankie Paulson when he was still at Goldman Sachs) now constructed new SPE’s that purchased as their collateral nothing other than BBB-rated junk CDO’s from one of these original SPE’s. That means that now you have an entity that issues CDO’s based on an asset portfolio of nothing other than the riskiest possible asset from the original SPE.

And here, Moody’s comes back into the picture. Because this new SPE follows essentially the same structure as the original with several tranches of CDO’s, Moody’s graciously assigns the same ratings to the CDO tranches of this new SPE – even though the SPE owns nothing but “BBB” assets.

This means that an investor relying on Moody’s reputation in the ratings business can easily end up with an “AAA”-rated CDO that is riskier than the “BBB”-rated CDO of the original SPE.

That is how risk is never actually diluted in this process. It certainly is “spread around” – but it is never weakened. It is actually magnified tenfold, a hundred-fold, even a thousand-fold – and there is no way of calculating how many times the original mortgage risk was magnified in this process.

Now, add into the equation the simple fact that even prime-credit borrowers are walking away from their mortgages because house values have decreased to such an extent that the appraised value of their properties is less than the amount they borrowed on them, and you can construct in your mind a very rough, wholly inadequate picture of the risk that is looming out there in the world’s financial system.

But, that is not even the worst of the problem.

This hyper-magnified risk scenario is now endlessly complicated by the fact that the special purpose entities of many of these CDO structures don’t even buy actual mortgages from actual banks, nor do they buy the BBB-rated junk from other SPE’s that do buy actual mortgages.

Some of these SPE’s hold as their “assets” nothing other than credit default swaps (CDS’s), which are nothing more than bets on the creditworthiness of other banks and big corporations – and these bi banks and corporations are all invested up to the hilt with this CDO slime we have just discussed!

AIG, for example, backed a lot of these CDS-bets taken out by some companies on other companies’ future creditworthiness. Many SPE’s issuing CDO’s have nothing more than these shaky CDS’s as their asset base that backs the CDO’s they issue.

That’s how our current global banking system has managed to utterly “weaponize” risk. This form of risk is so concentrated and so virulent that it has infected the entire world financial system. There is no way to predict which one of these structures will fail and when, and how many other entities will be affected and virtually wiped out by these potential failures.

Picture in your mind a plutonium atom that has the capability of multiplying just like a biological cell. You now have a fairly good idea of how unbelievably dangerous this global financial system is.

We are currently in the reactor-phase of the nuclear chain reaction this system has begun. There are still sufficient cooling rods that prevent the chain reaction from getting out of hand – but the system is reaching critical temperature, and a financial Chernobyl is pretty much a forgone conclusion. What we do not know is whether we will only deal with a meltdown – or whether a full-blown nuclear explosion will occur.

How Not to Deal with the Problem

The one way of dealing with this problem that is absolutely certain not to work is the way in which our US and other world leaders are trying to deal with it. They have no clue what they have created, and no idea about how to even pinpoint the problems, much less design a workable solution. What’s worse even if they did come up with a real solution, they would rather let the whole damn thing blow up than implement it.

Why?

Because the solution inevitably requires allowing people to use gold and silver as a full-fledged parallel currency. That is the only possible way in which some form of sanity can be introduced back into the system. It is the only way in which this chain reaction can be kept from melting down the financial reactor core.

Instead, the “solutions” being proposed and which they attempt to implement unavoidably involve more of the very same thing that caused the problem in the first place: too much credit in the system.

There is extreme over-borrowing to the point where even other countries can no longer absorb the IOU’s we put out, which means that the difference is simply monetized, i.e., borrowed from the Fed, which causes the money supply to increase. Al of this is done at a rate that is impossible to control.

What is lost in the global system is so-called “wealth”, not actual money. The money/amount of credit floating around in the system remains the same. What is dropping is the valuation of assets of all sorts. Equities, commodities, corporate bonds, real estate, CDO’s – you name it, it’s losing value.

Yet, this does not affect (decrease) the amount of credit in circulation. It does affect the rate of circulation of that amount of credit. In other words, the velocity of money is decreasing rapidly because banks are afraid to lend to both customers and other banks. While credit is growing, its circulation is decreasing and is even threatening to come to a full stop in certain parts of the economy.

Even though credit is dirt-cheap right now, especially in the US, the rate of borrowing has decreased.

How is that possible?

Isn’t the money supply dependent on the rate of borrowing? Isn’t it true that borrowing is what increases the money supply because the result of borrowing – credit – is counted as part of it?

Yes, that’s true, but consumer and business lending are not the only components of the domestic inflation machine. Government borrowing is the other half, and it is government borrowing and spending that drives up the money supply during these crunch times.

The problem is that even though credit is being created en masse,/I>, it only circulates in banking circles, and not as a result of banks lending it to each other and to private and business customers. It is being used by bigger banks for buying up smaller banks.

Without lending to consumers and companies, the added credit never reaches the general economy.

There is a credit-bottleneck, and it exists exactly at the point where credit is usually flowing like a wellspring under more normal conditions – within and from the banking system..

Commercial banks no longer create credit. They now absorb it. Not only that, they absorb it - and sit on it! The Fed has become the “Lender of First Resort”! It lends at cheaper rates than any US bank could, just to keep the system going. As we have discussed previously, many of these loans are “non-recourse”. They don’t even have to be paid back!

The very lifeblood of the credit-based pseudo-economy is freezing up, and there is no end in sight to this. Only if gold and silver can freely move as parallel currencies in commerce can this be counter-acted in a meaningful way.

The only way out of the lending bottleneck under current conditions is (a) for government to get into the lending business itself by nationalizing the biggest banks, or by mandating legislatively that the commercial banks lend to the public. Both would amount to the same thing, in the end. Any private bank whose every lending decision is dictated by the government are no longer private.

That is the future for what was once America and for the rest of the world, especially under Obama – unless you avail yourself of option No. 1 above and start your own lunch network.

See you next time.

Alex Wallenwein