The Logic of Paper Money, Debt, and Gold

Two red-shouldered hawks are nesting in our backyard along with several squirrels. Hawks hunt squirrels – death from above via flying predators.

Conclusion: We will soon have fewer squirrels.

Politicians get elected by telling people what they want to hear. Politicians are (usually) funded by large corporate interests, particularly the banking industry and military contractors. It takes $ billions to buy a Presidential election. Large corporate interests expect favorable access and legislation as a result of their huge contributions.

Conclusion: Politicians tell voters what they want to hear but do what they must to repay contributors and solicit money to win the next election. Promises to voters become collateral damage.

Bonds rise in price as the yield falls. Over $7 Trillion in sovereign debt currently “yields” negative interest. The bond purchaser lends currency to an insolvent government and pays for the privilege, even though the government has assured the lender that the bond will be repaid in devalued currency units. This is clearly a bubble. Bubbles always pop, though predicting when is difficult.

Conclusion: $Trillions of paper “wealth” will vanish when the bond bubble implodes.

Central banks want debt based currencies because they are easily created. Consequently the currency in circulation and total debt drastically increase and prices follow, sooner or later. Compare the cost of medical care, college tuition, an ounce of gold, a gallon of gas, a six-pack of beer, or a week’s groceries today versus the cost for the same items in 1971. Massive debt, caused by politicians and bankers, also acts as a drag on economic growth. To create more growth the conventional answer is stimulus and more debt, which, at best, delays and aggravates the excess indebtedness problem. Bad policy produces bad results.

Conclusion: Expect higher prices for almost everything you need to live. Deflation in some asset prices and consumer price inflation can occur simultaneously. Stocks and bonds can deflate while food costs increase.

Fort Knox officially holds 147 million ounces of gold, worth at current prices somewhat less than $200 billion. Pretend the gold actually exists and has not been sold, pledged, hypothecated, or shipped elsewhere. The value of that gold is consumed via deficit spending approximately every two months.

Conclusion: Even if the gold exists and is unencumbered, it hardly matters in the face of $19 trillion in debt. Expect the debt to eventually default – either by inflation or outright repudiation.

Pension plans in the western world depend upon adequate contributions plus portfolio earnings. In the United States many cities and states are underfunding their pension plans by reducing their contributions. Further, central bank created near zero interest rates are destroying expected returns on bond portfolios. The underfunding problem is increasing both in scope and depth in US cities and states.

Conclusion: The pension funding problem will become far worse. Some pension promises will default. Others will be fulfilled with drastically devalued currencies.

Death from above: Politicians and bankers, like hawks, are often predators that view the populace as a source for their needs.
Survival down below: We need protection from predators. We also need insurance to preserve our purchasing power from devaluing currencies, failing pension promises, and consumer price inflation.

Gold and silver come to mind.

Gary Christenson
The Deviant Investor

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