Depressing, Isn’t It?

Looking at the world it is easy to get depressed. Everything is tinged with corruption. Food, money, bodies, minds, news, and the whole population are all over-processed. 

Look at the Cyprus bank crisis: money is over-processed. Look in the mirror: are you over-processed? Are you watching the Kardashians? Benny Hinn? Fox News?  Is your mind over-processed? 

The system, The Man, "the powers that be," or Babylon as the Bible calls it, thinks itself immortal and immune. Revelation 18:7 tells us what she thinks:

In her heart she boasts,
    ‘I sit enthroned as queen.
I am not a widow;
    I will never mourn.’

But we as Christians know the ultimate outcome as the next verse in Revelation tells us:

⁸ Therefore in one day her plagues will overtake her:
     death, mourning and famine.
She will be consumed by fire,
    for mighty is the Lord God who judges her.

If we are in Babylon we will suffer along with it. Verse 4 tells us:

“‘Come out of her, my people,’
    so that you will not share in her sins,
    so that you will not receive any of her plagues;
⁵ for her sins are piled up to heaven,
    and God has remembered her crimes.

My main purpose of this blog is to understand that we cannot avoid being in Babylon, but we can avoid being of Babylon. Babylon is extremely intrusive. To paraphrase the radio cartoon character Chickenman "It's everywhere. It's everywhere." One of my proudest blogging moments was a comment by fellow blogger Eric Anderson at Universe of Lies. Commenting on a post about the Agricultural Industrial Complex he said, "Only Dennis would see Babylon in a chicken sandwich—and he is right." 

Yes, even food is over-processed, and it is depressing that there is not a whole lot that can be done about it. Yes, there are a few things you can do. Cook your own food. Know your food. Grow your food. Eat with thinking. It is depressing because most people will not bother. I have lost over 30 pounds mostly by just writing down what I eat in an e-journal called MyFitnessPal and thinking about my food choices. Do the best you can. 

Do you think I am exaggerating the problem? If so watch this documentary, Food Inc. If anything, I have not talked about it enough. But be warned, unless you are doing a lot more about the food you eat than most Americans, you will be depressed too.

Is the Gold Still in Fort Knox?

I never wear such a hat as it is well known that such hats make it easier for the government to track you. Get out your aluminum foil hat. At least that is what I thought about the possibility of Fort Knox being empty before one presentation at the Cambridge House seminars. I had only heard the goofy version of this, that Fort Knox and the gold at the Federal Reserve in New York was missing.

No, the gold is there all right, but the real question is "How much of it is pledged or lent to banks?" This is how it works. The Fed leases gold to a "gold bank" for a modest fee. The gold bank issues certificates can be redeemed for gold. The gold bank then buys bonds, often government bonds in the country that lent the gold to the bank in the first place. This has a great effect from the government perspective. They receive a fee and get to sell their bonds. From the bank's perspective they get a great spread on the difference between what they pay the central bank and the interest they receive from the bonds they buy—a win/win for both parties. Since most money center banks, the big ones, are bankrupt if they marked their assets to the price the market would give them for these assets, this allows them to replenish their capital on the sly. In fact a lot of the various oddness in the financial markets is explained by the banks’ desperate need for capital.

Pay No attention to the Banker behind the curtain. Are the banks doing this? Yes, the Austrian central bank released that they had lent a considerable amount of their gold out. How many other central banks did this? We do not know.

So is everything fine? Sure, as long as the paper gold is not ever returned to the central bank or the Federal Reserve. But if gold goes higher, and the banks are forced to return the gold and draw out the paper gold from circulation, these banks will go bust. In that case what will happen to the paper gold, the ETF? It will be worthless. If you buy gold, do not buy ETF's.

Can we be certain that this is a big a problem as I think it is? No. But there was one new interesting data point that became common knowledge. Germany has its gold stored mostly at the Bank of England, France, and the Federal Reserve. This is a legacy of the Cold War where it was feared that the Soviet Union might steal it in war. There was considerable buzz about German gold in Germany. So it was announced that all the gold would be returned—over 7 years. 

Will the German Bundesbank still love the Fed after 7 years? 7 Years.

7 Years!

7 Years?

Why not 7 months? I have no idea what is going on, but something is wrong. The probability that the gold is being double counted to drive down the price just went up—by a lot.

Here is a presentation similar to the one I saw at the Cambridge House seminars. I have my doubts about the extent of the problem, and we do risk being stuck in tinfoil hat territory, but there is no doubt that this gold lending is happening.

How Banks Work

I do not think that most people really understand how banks work. That includes me.

Oh sure, we understand that when we make a deposit our money is now in the bank. But what we do not understand, I mean really understand, is that it is no longer our money. We have exchanged the money for electronic promises to pay. If things go badly for the bank, we as depositors are creditors of the bank. We stand in line with all the other creditors. In fact we stand behind most of the creditors.

We feel safe because the FDIC, the Federal Depository Insurance Corporation, promises that if things get dicey at our bank the reserves of the FDIC will bail the depositor out up to $250,000. But the reserves of the FDIC are 1.35% of the insured amount. In normal times this is adequate. Not every bank will go broke at once. I am sure that whatever money that is needed to insure the deposits will be provided, even if this means printing it.

At least I used to think that.

ATMs still work, for now. The crisis in Cyprus did not work out that way. The government of Cyprus does not have the money to guarantee €100,000 per account. Thus the country’s banks must be bailed out by an outside force, but there are strings. Each depositor will lose about 6% of "their" money, any money over €100,000 at the bank will lose 10%. (My guess is that these numbers might change.)  There is a technical name for this. It is called a whoopsie.

Although all sorts of hyperbolic analogies are being drawn to the US, this really does apply. The US will print whatever money it needs to insure the banks do not fold. I used to be 100% sure of this, now I am only 97% sure.

Banker Tweetie says, "I've Been Sick."No, the Cyprus situation is not the dead canary in the mine I talked about in a previous blog post—unless you are a depositor in a Cypriot bank. But I do picture Tweety Bird saying, "I've been sick."

The risk to the banking system is why on a recent post on pre-investments I suggested that one put some money in the bank, and have some at home. While there could be a riot from a bank closure that also burned down your home, this is not likely—you can't hedge everything.

Remember that once the money is in the bank, it is now the bank's money.  I doubt that things will get bad enough that this money would ever be lost, but it might be delayed in returning to you in a crisis. If things get that bad, the money won't buy anything anyway—you can't hedge everything.

Do not be surprised like this one depositor at a Cypriot Bank was.

Do we really understand how banking works? In our head we do. But in our hearts we do not. Reviewing how Fractional Reserve Banking works might be a helpful reminder.

The Man

I liked this mini-drama a lot. As is typical in such productions, the writing and acting are first-rate. I almost included the tag humor as it is a good example of typical wry British humor. 

John Mauldin is Guardedly Optimistic

John Mauldin Is Guardedly Optimistic. Mauldin tries to justify this by quoting Lenin, who said:

 "There are decades where nothing happens, and there are weeks when decades occur."

We are in such a period. But Mauldin thinks it is a transition into something better.  "If something cannot be sustained, it will change," he said. Mauldin then quotes economist Laurence Kotlikoff who estimates that the US has 200 trillion in unfunded liabilities. (I have talked about this previously.) Mauldin comments, "We can't pay that amount. What happens when we realize this?" He thinks that when this becomes evident change will occur.  "Expenses cannot rise faster than income," he says.  He thinks that, "It is the end of the world, yet I am excited" because things will have to change for the better. 

2020 will be great, after the world economy goes through this transition period. What will be the characteristics of this transition? Here is what he thinks (note that what I put in quotes is not his exact words, but it is close. When I put something in parentheses, it is me speaking.):

Pension and health care are the reason for the troubles due to demographics. Sweden tied benefits to GDP, it is necessary, not heartless. (This means that a certain percentage of the economy is devoted to helping people. This is something I have long advocated.) Eventually everyone will do the same. (I hope he is right.) 

Peak oil is false; energy prices will go up, but no catastrophe. (I agree.) 

Japan is a bug in search of a windshield. (What a great line!) 

In Europe, France is the new Greece—then the US.

In China the demographics are awful—they have more people leaving the workforce than entering it. Japan and Europe have this problem as well. 

"Of course austerity does not work, that is why it is called austerity." (My question would be, "What choice did Greece have?")

"Government has made promises they cannot keep." 

Krugman is not an economist. (Ha.)

Adapt to change, not fight it. We don't have enough money to protect people from change.

Social Security is welfare.

Invest in things that central banks can't print—gold, technology, and corn, for example. 

Alas, his presentation was not well rehearsed for the time he was allotted, so the speech ended somewhat abruptly, but Mauldin does make you somewhat more hopeful. What he calls optimistic is what I have been calling guardedly pessimistic. No, I do not think the crisis I have been predicting to happen in 3 to 7 years is The Powers That Bethe Apocalypse, nor Ragnarök, but it will be very bad.  I am guardedly pessimistic because I do not think the "powers that be" will act against their own best interests. No, the "powers that be" do not meet in secret conclaves and decided the future. They each act in their own best interests, and since they all have the same interests it can appear there is collusion. (The TV drama, The Man, I will post tomorrow assumes that there is a conspiracy. It is a great "drama," but quite wrong-headed.)  

Here is Mauldin's presentation.