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Investment Outlook
January 2013
Money for Nothin’
Writing Checks for Free

William H. Gross

[snip]

“Like gold,” [Bernanke] said, “U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Mr. Bernanke never provided additional clarity as to what he meant by “no cost.” Perhaps he was referring to zero-bound interest rates, although at the time in 2002, 10-year Treasuries were at 4%. Or perhaps he knew something that American citizens, their political representatives, and almost all investors still don’t know: that quantitative easing – the purchase of Treasury and Agency mortgage obligations from the private sector – IS essentially costless in a number of ways. That might strike almost all of us as rather incredible – writing checks for free – but that in effect is what a central bank does. Yet if ordinary citizens and corporations can’t overdraft their accounts without criminal liability, how can the Fed or the European Central Bank or any central bank get away with printing “electronic money” and distributing it via helicopter flyovers in the trillions and trillions of dollars?

Well, the answer is sort of complicated but then it’s sort of simple: They just make it up. When the Fed now writes $85 billion of checks to buy Treasuries and mortgages every month, they really have nothing in the “bank” to back them. Supposedly they own a few billion dollars of “gold certificates” that represent a fairy-tale claim on Ft. Knox’s secret stash, but there’s essentially nothing there but trust.

[snip]

Investors and ordinary citizens might wonder ... why the fuss over the fiscal cliff and the increasing amount of debt/GDP that current deficits portend? Why the austerity push in the U.K., and why the possibly exaggerated concern by U.S. Republicans over spending and entitlements? If a country can issue debt, have its central bank buy it, and then return the interest, what’s to worry? Alfred E. Neuman for President (or House Speaker!).

Well ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Sea Bubble end badly. At the time Sir Isaac Newton was asked about the apparent success of the government’s plan and he responded by saying that “I can calculate the movement of the stars but not the madness of men.” The madness he referred to was the rather blatant acceptance by government and its citizen investors, that they had discovered the key to perpetual prosperity: “essentially costless” debt financing. The plan’s originator, Scotsman John Law, could not have conceived of helicopters like Ben Bernanke did 300 years later, but the concept was the same: writing checks for free.

Yet the common sense of John Law – and likewise that of Ben Bernanke – must have known that only air comes for free and is “essentially costless.” The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold.

www.gold-eagle.com/editorials_12/willie123112.html

The Coming Isolation of USDollar
Jim Willie CB
31 December 2012

[snip]

The typical human reaction to any infection, vermin, danger, or toxicity is to stand back, to isolate the agent, to trap it, to prevent its further spread or release, then to remove it in a safe secure way if possible using trained professionals. Eventually decisions must be made on the level of acceptable risk on the removal, like what is willing to be lost or damaged or killed in the process. Risk analysis, cost trade-offs, and minimization decisions must be evaluated and executed. The toxic agent in global trade, global banking, and global bond market is the USDollar. In 2009, the Jackass began making a certain firm point. Those nations that depart from the entire USDollar system early will be the leading nations in the next chapter, with stronger foundations, richer solvency, emerging economies, healthier financial markets, efficient credit engines, growing wealth, stronger political helm activity, and better functioning systems generally. Imagine a contaminated blood system that infects, corrupts, and destroys all interior organs from the spread of the toxin. Those nations that stick with the crumbling USDollar system stubbornly will find a horrible fate with devastating effects, rampant economic damage, broken financial markets, sputtering credit engines, tremendous loss of wealth, wrecked supply lines, poverty spreading like wildfire, ruined political structures, social disorder, isolation from the rest of the world, and a fast ticket to the Third World. That is EXACTLY what is happening in the last several months. A division has begun, as the East has been busily installing the next generation platforms, as related to trade, banking, and commercial integration.

[snip]

A Paradigm Shift is taking place, and the ASEAN-China summit gave proof positive in a seminal event of the vast changes in progress. The United States just suffered its worst humiliation ever as a nation on the Eastern global stage. It was exceeded only by the humiliation for a US president personally. The story went uncovered by the lapdog inept US press. The late November Asian summit meeting held in Phnom Penh included 15 Asian nations, which represent half the world's population. They decided to form a Regional Comprehensive Economic Partnership that excludes the United States. The Asians are pushing to isolate the United States. Regard it as punishment for hegemony, or a reaction to prevent further capital drainage, or to protect from central bank abuse, or to wall off continued bond fraud export, or to defend against military aggression. Regard it as confirmation that China is the regional leader in Asia, even for military security. Regard it as a response to banker criminality, or simply for being totally full to the brim of American corruption and arrogance and abuse of position, led by creation of the USDollar as an elaborate weapon and credit card whose balance is never to be repaid. Abuse of power and sponsored financial corruption will have extreme consequences in the reshaping of global commerce and banking. The US will be isolated, so as to protect the rest of the world from its fascist exhibitions and deep manifestations.

[snip]

The new system will be decentralized, meaning not funneled through the major banks, not passing through the USFed as clearing house. Turkey will be essential in the formation of the Eurasia trade zone. First comes the Asian trade zone (the US excluded), and next comes the hand shake between the Asians and Europeans to create Eurasia. Some folks have expressed doubt toward the arrival of a vast trans-continental trade region. They seem painfully unaware of an incredible network of railway lines connecting Russia to Germany and China, and of a incredible network of liquified natural gas lines connecting Russia with all of Europe and Central Asia. Across the new trade zone and its diverse commerce, the USDollar will not be at the center. It is in fact being isolated, since it is a toxic agent. Everything US$-based is crumbling, from currencies to bonds to banks to credit lines to economies.

[snip]

The described isolation on numerous fronts, whether trade or COMEX or banks, all work toward the elimination of the toxic agent in the USDollar. The world wants a more just, more functional, more efficient, more equitable global trade system. The United States has abused its global reserve custodian position too long. The world is fighting vigorously to remove it. The usage of the USDollar as a credit card to finance its consumption binge without ability to pay will come to an end. The usage of the USDollar as a device to enable powerful aggression in war to advance syndicate interests like vertically integrated narcotics will come to an end. The usage of the USDollar as a banking monopoly device will come to an end. The usage of the USDollar as an instrument for bond fraud will come to an end. The usage of the USDollar as a free lunch device to finance the USGovt deficit will come to an end. When the USDollar is no longer the global reserve currency, the door to the Third World will be opened wide. When the USDollar is no longer the global reserve currency, the supply lines will be interrupted to the USEconomy, giving off a prominent Third World stench. When the USDollar is no longer the global reserve currency, the price inflation effect will become a national topic of grand debate and extreme anger. When the USDollar is no longer the global reserve currency, the United States as a nation will experience tremendous additional isolation and hardship, as most Third World nations do. The level of corruption within the USGovt and US banking corner offices is already far more entrenched than any Third World nation. The vote fraud for US national elections is equally prevalent, but more sophisticated.

When the USDollar is no longer the global reserve currency, the Gold Standard will be right around the corner, if not already in the implementation stage. The Gold price will react quickly to the removal of the USDollar from its prized perch of abuse. The center of the new trade settlement system will be GOLD, which is not even being discussed by the enlightened denizens of the gold community. It will be the basis of the Letters of Credit, in the form of gold trade notes. The short-term credit that facilitates trade will have a truly magnificent grand Gold core. The common agreement will be to make the Gold price at least $5000 per ounce, probably closer to $7000 per ounce. They will in the process dismiss, overrun, and put into oblivion the COMEX and the LBMA, rendering them to the scrap heap of irrelevance.