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March 01, 2009

Best Quotes of February 2009
by John Rubino

Philipp Bagus and Markus H. Schiml, Ludwig von Mises Institute
Only two things can save the Fed at this point. One is a bailout by the federal government. This recapitalization could be financed by taxes or by monetizing government debt in another blow to the value of the currency.

The other possibility is concealed in the hidden reserves of the Fed's gold position, which is only valued at $42.44 per troy ounce on the balance sheet. A revaluation of the gold reserves would boost the equity ratio of the Fed to 12.35%.

It is ironic that in troubled times a revaluation of the "barbarous relic" could save the Fed from insolvency. Yet this would only be an accounting measure and would not change the fundamental problems of the paper dollar. While shooting its last bullets and weakening the dollar, the Fed is outmaneuvering itself. The end of the experiment is getting closer.

Doug Casey, Casey Research
America, which is basically an idea, a concept, is dead and gone. The United States is just another of 200 awful little nation-states that have spread across the face of the earth like a skin disease. There's no longer any difference that I can tell between the U.S. and any other country.

There is no real haven for freedom in the world today. The best you can do is go where the governments are so unorganized that they can't control you effectively. That's one reason I like to spend time in Argentina. They have an incredibly stupid government, but they're also very inefficient and ineffective. So it's wonderful as a place to live. I also spend time in Uruguay, because it's a tiny little country with no ambitions to conquer the world. The nice thing about New Zealand, where I am now, is that it's a small country, only 4 million people, lots of open land. It's got some severe problems, but it's pleasant. I think the U.S. is going to be the epicenter of a lot of problems in the years to come.

...Europe is going to be hurt much worse than the U.S. Europeans are much more heavily taxed and much more heavily regulated. The average European is much more reliant upon the state psychologically as well as economically. So it's all over for Europe and this doesn't even count the problems that they're going to have in the continuing war against Islam, which are much more serious for Europe than they are for the U.S. So Europe is fated to be nothing but a source of houseboys and maids for the Chinese in the next generation.

Gary Gibson, Whisky & Gunpowder
For the first time in history, currencies everywhere are merely paper...including the world's reserve currency. The potential...the inevitability...of a worldwide bonfire of these little paper vanities staggers the imagination. The conflagration will be mesmerizing in its size and intensity. You may even find yourself enjoying the view...if you make it a point to be standing far enough away not to be consumed.

Peter Hambro, Peter Hambro Gold
People can see that the only solution to the credit crisis is to devalue all fiat currencies. The job of central bankers is to allow this to happen in an orderly fashion through inflation. I'm afraid it is the only way to avoid disaster, but naturally investors are turning to gold as a form of wealth insurance.

Eric Janszen, iTulip
There you have it, the foolproof way to get frightened investors out of Treasury bonds and back into stocks if all else fails: central banks around the world print money and buy stocks. In a world where interventionism is the order of the day, government purchases of stocks for the purpose of supporting the stock market is only, in my view, a matter of time. The question is, how to best prepare for it. For all we know, it's already started. And, because [Paulson, Bernanke, et al] are not really gods -- they can't foresee the consequences of all they do -- there will be myriad unintended consequences. One we're pretty sure of, the gold price will continue to climb.

...We are getting a 1930 to 1933 financial system and debt deflation collapse but in Internet time. The Internet that operated so efficiently for ultra efficient transmission of pricing information and execution of transactions is accelerating the financial and economic crisis process far more quickly than governments can respond to it. A 20th century international regulatory and trade institutional framework is no match for 21st century computer networked financial markets. No administration can correct 30 years of errors in a few months. Unfortunately, a few months is all we have because of the accelerated rate of change we are experiencing.

History teaches us that adjustments to imbalances can be sudden and brutal, and we think it imprudent to bet that the mother of all international payments imbalances -- between the US and the rest of the world -- will be the exception. The rise of gold from $260 to $700 in six years followed by an increase from $700 to $1000 in two years may be quickly followed by a rise from $1,000 to $5,000 in just a few months.

Michael Maloney, GoldSilver
One last thing, anyone predicting a gold price of less than 5 digits, clearly does not understand the fundamentals of gold or the current economic situation. Over the long haul, I think $10,000 is the minimum target, but it is far more likely that the dollar price of gold will become infinite. That is what happens in a hyperinflation.

Trace Mayer, Seeking Alpha
What if silver trades in backwardation for an extended period? It means individuals are unwilling to take the risk of holding national currency illusions or the risk of an exchange's failure to deliver. Potentially the national currency illusions could be pulled into the event horizon leading to the fiat currency graveyard. Watching the gold and silver prices in euros and pounds is getting exciting.

David Morgan, Silver Investor
The easy money has been made in the precious metals but the BIG money lies ahead, because if you think like I think, once this "disinflation" turns into a dollar collapse people will be looking for anything that will hold value, and that certainly includes both the precious metals. Remember there is no fever like gold fever, and that will ignite the silver market, as those looking to gold might be priced out of the market and, thus, willing to buy silver!

Doug Noland, Prudent Bear
Analysts made a momentous blunder earlier this decade when they mistook the collapse of the technology Bubble (and attendant recession and corporate debt problems) for the onset of "deflation." Reflationary policymaking without regard to the nature of inflationary consequences proved disastrous. We're about to repeat this error. The Burgeoning Bubble in Government Finance is poised to make the Mortgage Finance Bubble appear tiny in comparison.

The Government Finance Bubble is enormous and powerful - and should be anything but underestimated. Akin to the previous Bubble in Wall Street finance, the epicenter of this Bubble is here in the U.S. But I would argue that this unfolding Bubble dynamic has greater potential to engulf the entire world than even U.S.-style mortgages and derivatives did starting back around 2002. Welcome to the new world of synchronized stimulus, deficits, and reflationary policymaking. I don't believe true systemic deflation (as opposed to collapsing asset Bubbles) is a high probability scenario as long as the Government Finance Bubble is rapidly inflating. All bets are off, however, if confidence in government debt falters.

Gary North, LewRockwell.com
The West's economy really is at the edge of a leveraged disaster. The politicians know only one answer: deficit spending. The central bankers have only one significant tool: monetary inflation. The speed of events is increasing.

The markets don't reflect this yet. This gives time to a few people to get out. But the vast majority cannot get out. There are too few escape hatches open.

Steve Saville, Speculative Investor
The famous economist J. M. Keynes didn't understand the link between the boom/bust cycle, fractional reserve banking and the central bank's manipulation of interest rates. He therefore relied on mysterious changes in something he called "animal spirits" to explain how booms would evolve into busts. Many of today's economists operate from within a similar faulty framework, and thus believe a key to turning the economy around is boosting the confidence of consumers and businesses. They don't seem to appreciate that the problems are REAL, as opposed to figments of our collective imagination. A loss of confidence, leading to less spending on current consumption and a consequential increase in saving, is a RATIONAL response to the current economic REALITY. By putting a hallucinogen in the water supply you could probably make people feel more confident and thus cause them to go out and spend freely for a while, but how could this possibly help given that the current predicament involves too much debt, too little savings, and a mismatch between production and consumption? Obviously it wouldn't help; it would just make a bad situation even worse.

...1959 was the year when a critical mass of people came to realise that a knock-on effect of the changing nature of money would be unrestrained growth in the money supply, making bonds inherently riskier than stocks over the long haul. Such 'sea changes' naturally happen very rarely, but they do happen.

2008 could have marked another such change -- one that could prove to be far more dramatic and to have far wider implications than 1959's crossover in bond and stock yields. We are referring to the potential for 2008 to go down in history as the year when the secular expansion of private-sector credit came to an end.

For decade after decade after decade, the total amount of private-sector debt increased with only brief interruptions. This multi-generational upward trend was supported by central banks, especially by central bank policies that attempted to cut-short every pullback in the economy-wide level of indebtedness and keep commercial banks in operation regardless of how over-extended their balance sheets became. The trend eventually/inevitably culminated in a multi-year credit binge, which, in turn, led to the current situation in which the total amount of private-sector debt is potentially so high relative to real economic output that no amount of monetary manipulation will bring about the resumption of the former trend.

The above paragraph is consistent with the writings of prominent deflation forecasters, but where we have always differed from the deflationists is in our belief that faced with a 'tapped out' private sector the government would become the sole engine of credit creation and monetary inflation. In particular, we have always thought that a reduction in the amount of money borrowed into existence by the private sector would prove to be a fairly minor obstacle to the long-term inflation trend because when 'push came to shove' the government would make full use of its unlimited borrowing power. The amount by which a private entity is willing or able to go into debt is limited by its ability to repay the debt, but there is no limit to the amount of debt a government can take-on provided that the debt is denominated in a currency that can be created out of nothing by its central bank. Witness how rapidly the US government has been able to expand its indebtedness over the past few months and the complete lack of concern about how the debt will ever be repaid.

If we are correct that a secular change has occurred in the realm of credit creation then it makes no sense to compare the current situation to the recessions that occurred during the 1970s, the 1980s, the 1990s, or even 2001-2002. Also, it opens up the possibility that the Dow/Gold ratio will not stop falling after it reaches one.

Peter Schiff, Euro Pacific Capital
Although it may sound harsh, it would be far better for all involved if our foreign friends simply cut us off. Since their loans are merely fueling the growth of our government and artificially pumping up consumer spending, their savings will not only be lost but their sacrifice will severely exacerbate our problems as well.

Darryll Schoon
The day people realize that paper money is worthless is the day economic activity as we know it will come to a halt. What happens next has happened before. Barter begins the movement of goods and services until a trustworthy medium of exchange arises to take the place of the bankers' debased paper.

Currency collapse is a reoccurring story. Because we denied its reality does not mean it would not happen. Denial is very powerful but, in the end, it changes nothing except the ability to effectively respond. Our wish that gold achieve its rightful price level in today's accelerating crisis is tempered by our realization that when that day is reached, the human carnage and suffering will be without precedence. It is best, then, to buy gold and silver whenever possible and to wait patiently for things to unfold as they will.

Mike Shedlock, Mish's Global Economic Trend Analysis
The idea of a deflationary trap is in and of itself complete nonsense. Deflation is actually a natural state of affairs. As productivity increases, standard of living rises and prices fall. Absent government intervention, productivity would actually increase the amount of goods produced, causing prices to drop. Falling prices are a good thing not a bad one.

Fed and government policies rob taxpayers by promoting policies of inflation. Look at what accompanies rising prices: rising property taxes, rising sales taxes, and rising income taxes. Is that a good thing? The answer is no, especially when wages fail to keep up, which is exactly what happened.

Who benefits from inflation? The answer is government, banks, and already wealthy because they are first in line to receive money. Everyone else is screwed. Inflation is theft from the middle and lower classes for the benefit of government and the wealthy.

Eric Sprott, Sprott Asset Management
So here we are today with governments the world over taking an increasing role in the functioning of the economy and the financial markets. But are they trying to solve the main problem; namely, too much debt? Quite the contrary, every single solution they've adopted has been trying to get the good ol' days back. Cutting interest rates to zero. Throwing money at the banking system so it can lend again. All these solutions have one goal: to bring back debt. They are ignoring, at least for the time being, the paradigm shift. But the markets aren't buying it... literally. Debts continue to implode.

Every bailout is being followed by an even more massive bailout down the road. The government's solution has been to shift debt from the financial markets to the taxpayer. Is there a difference? Instead of individuals living beyond their means, we now have governments living beyond their means. Substitute taxpayers for governments and you will quickly realize how the whole thing is a farce.

Take no solace in the fact that the government is the buyer of last resort. It is really you who are the buyer of last resort. In the end, people will be even more indebted than they were before, setting the stage for the next crisis: a currency crisis. This is why governments aren't, and cannot be, the solution.

James West, Midas Letter
The true reflection of the value of any currency, the only one that's really left, is how much gold it can buy.

John Rubino
DollarCollapse.com

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

Copyright © 2006-2009 John Rubino

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