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The Currency of Last Resort: Money? and Kondratieff Cycle Timing

One of the brightest, most erudite, scribes at Bloomberg News, Caroline Baum, titled her last article with the plaintive wail, "How Can We Get Out of This Mess"! Another asked "When Will the fever break"? The answer is simple. The cycle must be completed. But, people, this is NOT a mess! Indonesia, Turkey, Russia, Argentina, Japan, are a Mess, but N. America is still milk and honey, and not a mess. Yet.

Last week's failure of the Superior Bank in Chicago, (the first of several we believe), after the 20% drop in the S. & P., the 60% drop in the NASDAQ, the 10 year long meltdown of Japan, the Russian default, and the impending default of Argentina and Brazil on their Sovereign debt, enables us to see with crystal clarity where we are, and where we are going on the Kondratieff cycle.

Argentina's default has been "restructured". Re-papered! $708 M. of interest on a mere $130 Billion. The problem is Acceleration. Favorite banker ploy. Billions due soon. If you cannot make the few hundred million now, the Several Billions in a couple of months are not on. Interest goes to 15- 30%. Beautiful! The Game Explained.

What is a "Mess"?
Currency meltdown, banks broke, unemployment over 10%, and in Indonesia's and Russia's case no rule of law. Armored personnel carriers in the streets for elections, THAT'S a "Mess". Reported some time ago, but unconfirmed, is the largest selling consumer item in Japan has been a home safe. The people know that ALL the banks are broke, so they put their Yen under the mattress. A couple of their life insurance companies and big retailers go into bankruptcy, etc.

Russia is now reported to be bringing back their gold coins to get people to save in gold coins instead of Rubles or USD, and Argentina has a run on the banks. Now THAT people, is what constitutes a "Mess"!

What, then, is "The Cycle" that must be completed that Jay Taylor and Mike Alexander keep referring to.

The Kondratieff Cycle
Nickolai Kondratieff was a Russian economist who determined the economic cycle that bears his name. There are people way smarter than me, Mike Alexander, (see Safehaven Archives), Bob Bronson, and Ian Gordon who have described, dissected, and analyzed the timing, length, cause, etc., of the K cycle in great detail. There are, naturally, opinions that differ somewhat about the technical's of the cycle going back two or three hundred years. When are the years of turns, how long was it, Fifty, Sixty, Seventy years, and so on. The cause, effect, and timing of the current cycle is what matters.

Ian Gordon's description is easily understood, as he breaks the cycle into four parts and names them for the four seasons, whereas others refer to the swings as troughs and peaks. A most intriguing factor is the major Wars being started in the cycle when nation states seem motivated to go to war for economic reasons. WW -2 & Vietnam ? Bob Bronson's work on pegging wars to the cycle is a must.

The cycles have been getting longer, going back to 1800. 50 - 70 years. Major characteristics are amazingly similar in macro but HUGELY, differ lots in Micro, as things do change. The primary factors of Interest rates, (Bond Yields), commodity prices, equity prices, inflation, deflation, AND THE Gold Price, are the components to be observed. This one was technically over in 1987, but the FED chose to throw gasoline on the fire then and then again for the LTCM crash.

Ian Gordon's description and breakdown of the cycle, nomenclature, timing and events is well depicted as a clock with the break points between the "Seasons" at 3-6-9-12 O'clock. Corresponding to the others troughs and peaks.

Six O'clock = Spring = Start of Inflation - 1949 - 1966
  • DJIA 181.04 - 968.54
  • Best Investments = Equities, Real estate.
  • Consumer confidence rises with employment, and Inflation coming off the recovery from the "Winter" Season's Deflationary Depression of 1929 - 1949. Important to notice the 20 year time frame. Bretton Wods and I.M.F. are done in 1946.
  • Government and corporate bond Interest Rates bottom at 2.5-3%.
  • The gold price was fixed, the USA went from a gold standard to a silver standard to no standard for the dollar. F.D.R. outlawed citizens owning gold, and lots of other interesting events for those interested in details.
Nine O'clock = Summer = Runaway Inflation / 1966 - 1980
  • DJIA 986.54 - 838.74 Equities go sideways.
  • Interest rates triple from 5% - 15%.
  • Vietnam War.
  • Interest rates, commodity prices, real estate explode up with inflation.
  • Capital good sector overbuilds, (malinvestment into over capacity).
  • Gold briefly spikes over $800 in 1980. One ounce buys the DJIA.
  • Oil spikes over $40. Perceived to be going to $60-100, and banks loan on that.
Twelve O'clock = Autumn = Disinflation / 1980 - 2000
  • Commodities Collapse. Oil goes to $10, gold to $280
  • NIKKEI drops 70% 39,000 -12,000. Japanese interest rates go to Zero.
  • USA equities go Mania. DJIA explodes: 838.74 - 11,750 // NASDAQ: 500 - 5,000.
  • Dollar becomes the reserve currency of the world.
  • Commodities drop, rise and drop. Oil $10 - 35, Gold $280 - $500 - $255.
  • Central Bank, the U.S. FED, begins flooding the world with Dollars to stop Stocks from crashing after NASDAQ drops 60% back to 2,000, and worlds markets drop into "Bear" mode of -20% +.
  • Unemployment at all time low.
  • Russian default on sovereign Debt puts markets at no bid. Greenspan, Summers and
  • Rubin make the cover of Time for saving the world.
  • A Worldwide, Huge, malinvestment in over capacity of Automobiles, retailers,Telecom, "high tech", Internet related Mania goods. Mostly funded by debt.
  • Corporations such as IBM borrow $25-30 Billion to buy up $31 Billion of their shares in the market, with questionable earnings of $34 Billion, according to Fortune magazine. Are they soon to be the only shareholder of their shares?

Now it really begins to get interesting. Japan, Korea, Indonesia, Thailand, most all of Asia, and Russia, had the share and real estate markets crash about Ten years ago, entering "Winter". We can see the procession of events in other countries moving in front of N. America. Guess who loaned them the "money"? Russia managed to avoid defaulting on the Sovereign Debt, for years. Of course they never intended to pay it back anyway, any more so than Marcos, Suharto, Sukarno, Mexico, Brazil, Argentina, etc., did.

A VERY, VERY important distinction that Gordon points out is that Japan has been experiencing a 1-2% deflation rate on all goods and services. With the almost Zero rate of interest on the J.G.B's, they are making 2% on the cash under the bed in the safe. They have the highest rate of savings in the world. The government proposed program to put a fund together to buy all the loans in default recently failed. Has their Postal Savings System been raided by the banks and the government like the U.S.A. social security system?

O.K., so there is a debt bomb problem ticking away. Just how big is it? Japan's non performing loans are estimated to be 237 Billion yen, 40% of G.D.P. (PrudentBear )

Elsewhere, it is hard to find a simple example of how big the problem is, but Daewo in Korea is a quick snapshot. Hyundai, the car company of the conglomerate has been for sale for 2-3 yrs. G.M., Ford, Crysler, all courted. Cannot make the deal as the banks cannot take the write off on the $80 Billion of debt for the car company to go out at $5 Billion. Is there any equity in the other businesses in the conglomerate?? Who knows.

Three O'clock=Winter=Deflation/Recession,? Depression? 2000 -2020?

  • Japan: NIKKEI has crashed from 39,000 - 12,000, over Ten Years.
  • NASDAQ drops from 5,000 - 2,000 / DJIA 11,750 - 10,000 (+ / -)
  • Oil surges $10 - $30 (+ / -).
  • U.S. FED slashes Interest Rates 50% in three months, 01/01-06/01. U.S. Bonds Rise as greed converts to fear, Scared Money runs to safety. "Flight to Quality" from around the world.
  • Unemployment rises. Current rate in USA 5-10%. Govt. No.'s are a lie.
  • Consumer confidence drops.
  • Good and services prices fall.
  • Tariffs and trade Wars competing for scarce sales begin.
  • FED Chairman states "Central Banks will loan / sell gold to keep price down". He knows that the gold Price is the "Canary In the Coal Mine"! See his past Speechs.
  • Debt defaults begin and accelerate in earnest.
  • Central bank is flooding the market with money and slashing interest rates to fulfill its
    charter of "insuring the profit of the member banks." (What they did during the Savings and Loan crisis as the banks had the same loans on the same real estate as the S. & L.'s, who had no central bank to save them.) Then as now the income from savings revenue to those who most depend on it is destroyed with the low interest rates. Banks get bigger spreads.
  • Currency depreciation crisis kicks in as no one wants to own any bits of paper with ink on it, and interest rates in the USA eventually spike up as credit contracts and there is no savings to draw on.
  • The currency of last resort, the barbarous yellow relic is recognized again.
  • The Debt is liquidated, and the reflation recovery begins again.

The primary activity for the "Winter" is the liquidation of the massively excessive debt that that has been allowed to be created out of nowhere from nothing. Now how can this liquidation happen? It can be inflated away, or wiped out by writing it off after it is defaulted. Japan has been postponing it by obfuscating it in subsidiary companies, etc. Not taking the write off. The friendly bankers and brokers in the USA have been repackaging and reselling it as described in the F.I.A.S.C.O. book. "How can the inevitable be postponed until after we have collected this quarters bonus."

The Currency of Last Resort in Micro
Now if you choose to disbelieve this cycle, I must ask if you are old enough to remember the currency meltdown in Germany, where after "Old Marks" became "New Marks". It took a bushel basket and then a wheelbarrow to go to the store. In the Chinese version, it was reported to be cheaper to burn the paper with the ink on it than to use the paper to buy coal. So on and so forth.

Some simple arithmetic shows that after the Turkish Lira dropped by about 100%, going from 750,000 / 1 U.S.D., to 1,500,000 / 1, (Bloomberg News 07/17 2001), that One little Ounce of gold will only get you a mere 400,000,000 Turkish Lira. Indonesia is not so bad, yet, as with the Rupiah between 10,000 and 11,000 to one, that little Ounce gets you almost 3,000,000 Rupes. I happened to turn on CNN one morning and saw the camera at the line of bank tellers in a bank in Korea. The announcement was regarding the call for the patriotic sheeple's to bring in their gold to sell / give to the banks to save the country. The poor souls did. 400 tonnes.

The East Indian government tried a similar scam. Tried coaxing the people into turning in their gold for some kind of government backed gold bond. Never saw any reports for sure, but where the life savings of much of the populace is worn by the women, and the country is the largest importer of gold at 700 tonnes per annum, they must have laughed out loud. Those folks have seen the movie before, and know better. One Oz = 7,500 rupee.

A friend has to go to Indonesia occasionally for business. He was buying finished gold jewelry there for the gram price of gold, with no mark up for the cost of making the jewelry. When they dropped into "Winter", and the Rupiah dropped several hundred percent, a bit over 6-7,000 there was NO gold on the streets. It had all been taken out of the country to Singapore, or where ever. The people sold most of the rest at 15,000 Rupes to the dollar and bought the gold back when the Rupe dropped back to 7,000 or so. Rupe is now about 10,000 to 1 USD.

The Currency of Last Resort in Macro
It was no doubt sheer coincidence, (we all believe in coincidences don't we?), that shortly after Uruguay defaulted on their Brady Bonds they sold their 1.5 Million Oz. of gold. Just did not need it any more so what the heck. Hit the bid. Had to Pay the interest.

It was very briefly reported that Deutsche Bank had 50% of their shareholders equity out in Russian Bonds, and another 25% in Brazilian Bonds. How much in Turkish Bonds? When Bank of Boston was put up for sale as they were broke, friends in the banking business reported there was no bid from anyone in the U.S for almost a year. Losses from the gunslingers in investment banking on emerging markets and derivatives were to huge.

So, Deutsche buys them. "This acquisition will give us access to Investment Banking expertise in the USA." (Read monster fees in a bull market.) (Now "the Alex Brown Investment Banking model does not work. And is for sale.") Shortly thereafter they show up on the B.I.S. list with about a 4,500 tonne gold derivative position and Alan Greenspan and friend take a seat on the board of the B.I.S. There was one and one only bit on suggesting that the Russians hand over their only foreign currency earning asset for the defaulted bonds, the Oil fields. Apparently the Russians declined. Surprise, surprise.

Now, with Reg Howe's fabulously brilliant lawsuit, http://www.goldensextant.com, and the great work of Frank Veneroso documenting the gold derivative position, we have the documentation of recent "reclassification" of gold in the U.S. Treasury by Jim Turk. Coincidences for sure!

I was watching all this over a year ago and was compelled to go verbal then. http://www.gold-eagle.com/editorials_00/doran040400.html If you have not read it, I must recommend again the book mentioned in this piece, "F.I.A.S.C.O.", where the details of how to package toxic waste called "Emerging Market Debt", (wall paper), and repackage and resell it to the gullible, unwitting, unknowing, and just plain stupid and ignorant, like Orange County. How do you bankrupt a wealthy county? "Derivatives". Merrill Stench paid something over $400 Mil., but of course admitted no wrong doing. Poor sap at the county just did not read the VERY fine print.

Are the "emerging markets" going to emerge, from submergence? If so how? Read the business plan of the failed Superior Bank. "Making Sub Prime loans on cars and real estate at higher than usual rates for packaging and reselling to investors." "Sub prime's are individuals who do not do well when the economy slows." Wow! Who have thought?? Seems the same as loaning Billions to "Sub Prime" countries that cannot EVER repay, much less even pay the interest!

In other words loaning money to people who are not credit worthy for huge fees, and then repackaging and reselling it and counting on the FED and F.D.I.C., (the taxpayer), to bail you out. The identical business plan of Mr. Milken and pals with the S. & L. loans.

Walter Wriston said "We can loan lots to Sovereign nations as they will never default." (Or words to that effect.) Whoops! Then the banks had to get the I.M.F. to bail them out of the loans to Sovereign Nations that started defaulting. Superior Bank In Chicago writ large for years!

Currency of Last Resort Verified and Confirmed
What assets was the I.M.F. founded with at Bretton Woods in 1946? 153,000,000 Oz of gold. At $35.00 only a mere $5.355 Billion. Real money in those days. Want to see Alchemy at its finest? Go to: http://www.imf.org .

Click on the gold article and the other articles. They still carry gold at $35.00 and still use the old S.D.R.'s. They sold 50,000,000 Oz at $35.00 from 1976 - 1980, to buy currencies, (guess which ones), just before the spike to +$800. When the U.S.A. stated the S.D.R.'s were good as gold, the French showed up to trade theirs for the gold.

I.M.F. Only has 103,000,000 Oz. left, which at current price of $270 is a mere pittance of $27,000,000,000. 3,217 tonnes. The B.I.S. has the World gold derivatives position reported of $262 Billion. About 26,000 tonnes. Assume every ounce sold has a call to balance it and all is well. You bet. If you assume a one to one call for ever ounce sold, then 13,000 tonnes, sold consumed and gone forever. About Veneroso's numbers. The Total derivatives outstanding are + $30 Trillion, interest swaps, etc.

No wonder the I.M.F. has a plan to increase the capital of the I.M.F. to $280 billion. Gee whiz, why would they need that? Where can it possibly come from? What will it be? More S.D.R.'S? Yen? USD? Rupiah's? Euro's? The New USD? Similar to my friends wife. Never overdrawn, only under deposited. Thankfully when Slick Willies pals tried to raid the I.M.F. gold last year to "Help the poor people in the poor countries", read "sell bullion to make bond payments to banks", our Congress prevented it. Read how the I.M.F. did the "Gypsy Swap", to bail out the Banks on the loans to Mexico and Brazil. The Gold on the books at $35, is sold at the market price. Profits used to make the bond payments and then take the gold back, as the charter forbids selling, leasing or doing anything to dispose of the barbarous yellow relic that is the …………

"Currency of Last Resort"!
Does anyone out there know of an auction where the low bidder wins, other than the Bank of England gold auctions? If indeed the gold being sold out of the central banks vaults at purposely depressed prices in auctions where the low bidder wins, is replaced with bits of paper with ink on it that drops dramatically, nay disappears, as has always happened before, maybe Mr. Schicht's comments about hanging Bankers in the square will come back in fashion.

Is there any other commodity that passes for a currency, something that can be traded for anything anywhere, and get bits of paper with ink on it, "Money", or critically, goods and services?? Amazingly, it has also had the demand exceed the supply for the last 5-10 years and sits at a 20 year low?

In conversations with friends and relatives about this I am always told that "I do not want to hear about all that depressing Gloom and Doom." "Stocks are the road to sure wealth forever." "Buy and Hold". Certainly for the last 60 years if you just picked the right ones. Blue chips. Stay with the low risk blue chips. Nortel, Lucent, Zerox, ATT, CSCO. Seen the charts lately? Seen the commercials where the visibly concerned audience of middle aged folks asks what can we do? Charlie Schawb tells the audience to "Just Relax". Everyone relaxes and smiles on cue. The last serious down draft and Fidelity brings the gray haired Patriarch, Peter Lynch out of retirement to say "Buy and Hold." (Don't you miss seeing the freaky kid Xeroxing his face for Ameritrade.)

I ask again, "Is This Just A Simple Old Fashioned Bear Raid?"
Do you believe in Magic, the "Tooth Fairy", and years of Coincidences?
What if the signs at the bank were changed to REALITY. "Loan us your money". Instead of "Buy your CD here"?
Simple really, after every boom is a bust, and after every bust is a boom. How high is up and how far is down. http://www.prudentbear.com/pastmanias.htm To quote Mr. Ripley. "Believe It, or Not."

My Sincere appreciation to Gordon, Bronson, Alexander, and others for the education.

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