You are hereFannie And Freddie Went To The Hill To Fetch A Pail Of Bailout

Fannie And Freddie Went To The Hill To Fetch A Pail Of Bailout

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By EWMI - Posted on 21 September 2008

by Albert Persohn
I've told you over and over and over again my friends,

Perhaps now you believe we're on the Eve of Deleveraging.I've told you over and over and over again my friends,

Perhaps now you believe we're on the Eve of Deleveraging.We are definitely at the crossroads. Our money and our culture are worldview issues, they are by nature theological and eschatological. The failure of several major financial institutions since mid September 2008 has everyone's attention. Those who understand the rise and fall of civilisations must surely see the end of The Great Western Empire as we know it. Challenging days are ahead. Those who preach the Rapture and the imminent end of the world are soon to be an historical footnote. Prior to WWI the Kaiser was seen as the AntiChrist, prior to WWII Hitler, Stalin, Mao and many others were touted as the man of sin. We are seeing the same foolish lunacy again. The modern evangelical church has been silent on the issues we will speak about below because they feel that they are soon to be delivered from it. Thankfully many of them are waking up! My apologies to several song and script writers and Mother Goose for title choices.

Fannie And Freddie Went To The Hill To Fetch A Pail Of Bailout

OK, you are a home loan lender. By the miracle of Fractional Reserve Lending you are creating money. You have limited reserves and therefore a limited number of loans on your books. In the next city is one of your pals. He is also a home lender. He too is maxed out. In every city there are others like you.

The manufacturing sector has been exported to other shores. More that 700 military bases, a permanent war condition with North Korea, a losing war in Afghanistan, a faltering war in Iraq and a pending war against the rest of the planet has further hampered the once great economy. On 911 the President advised the shocked American people to 'spend'. How can we keep spending if there are no cashed-up lenders to borrow from? Without more borrowing there would be nothing to drive the economy because we have no savings.

Before Fannie and Freddie went 'to the Hill to fetch a pail of bailout' they were the saviours of the mortgage industry and the economy. Today they, and the economy are on life support.

"I'm Going To Make Him An Offer He Can't Refuse"

They came to you, Mr. Home Loan Lender, and said "I will buy the mortgages on your books". You gasped "That would mean we have cash and can loan even more". Then you found out that Freddie and Fannie also bailed out other lenders. Hey, "that's unfair" you muse. "Not to worry Mr. Lender, there is lots and lots and lots of easy credit out there". In fact, thanks to this magic of easy credit and ready cash at your disposal you can loan money to ... well ... anyone!

The nice El Salvadorian family wearing the MS13 tattoos can get a home, of course they pay cash, but the delivery driver with four children and a sick wife living next to the MS13's can sign up for $400,000 dollars. All he needs to do is adjust his statement a bit.

To Market To Market, So Sell A Fat Debt

Now F&F have a huge inventory of loans. They get a bit greedy and lose perspective. They decide to list on the stock market. They are a sure thing. Everybody buys their stock. Yummy - good dividends. The institutionals love it. F&F are a great place to put your pension money. "Safe as houses" they say. F&F also issue Bonds. These too are delicious. The world buys them, the Chinese buy them, so do the Japanese and the Russians.

CDO/SIV/MBS/BLAH/BLAH

F&F still have your mortgages. So they decide to sell them too. Not one at a time of course. No, they roll them up into enormous bundles and give them fancy names. We are familiar with some of those names. We have heard of 'Collateralized Debt Obligations", "Structured Investment Vehicles" and "Mortgage Backed Securities". They are complicated and mind snappingly huge.

Give Me One More Acronym, Oh One More Acronym

While we are discussing oddly named funds we must mention Credit Default Swaps. A CDS is a wealth sucking behemoth, exuding planet neutralizing dark energy only slightly less dangerous than a Borg invasion. We won't deal with that subject here because we are trying to keep this article on the lighter side.

Raters Of The Lost Integrity

Who would buy things like CDO's? Well nobody if they were not safe. F&F have friends in the ratings game. These are companies everyone trusts - I mean trusted. For a fee they will rate your product: "Triple A" (AAA). It works like this: "Hey rating guy, I'll give you $200,000 if you will send a bean counter over to rate our funds as 'safe'. The rating guy is like you Mr. Mortgage Lender, the easy cash soon dulls his conscience.

If You Rate It 'AAA' The 'The Insurers' Will Come

OK, now we are cooking with Ethanol. We have a product worth nothing, which a rating agency says is safe which we will sell for an obscene bomb of money. Investors from everywhere are ready to buy big. In fact some of this stuff we are selling is so hot we can insure it - and we do. To sell this worthless paper you need a supplier, a rating agency and an insurer. If it turns out that the supplier is on the skids, the rater is dishonest and the insurer is broke you have, well ... September 2008.

Mirror Mirror On The Wall Street

Who is the fairest of them all? Yes we have turned debt into profit. We have not made the Statue of Liberty disappear; no we have made piles and piles and piles of Federal Reserve Notes manifest from nothing. We have learned at the feet of the Great Greenspan. The bull is smiling.

You Can't Hide Your Liar Loans

Meanwhile things on Struggle Street are not what they were. Remember that first easy mortgage? That delivery driver just can't seem to meet the payments. Well, it serves him right. He told you he was on $120,000 a year - wink wink nudge nudge. You signed for the deal - more winking more nudging. He got his loan, you got your cut and no black helicopters came to visit. So you did it again and again. Initially sleep was hard to come by as your conscience tried to check your honesty, but you reasoned that the one eyed door man with liver disease sitting in your office would either get his loan from you or from the guy down the road. So you signed him up.

Your books are starting to look, how shall we say, less than pretty. One after another your customers are dropping away. Loans everywhere are upside down. (Like Al said in 2006 - just a little shameless self promotion.)

F&F Waterboarded?

Your losses are bad but those 'suits' that bought your loans are really feeling it. Your customers lied to you. You were less than strait with your lenders, they were downright dishonest to their suppliers, F&F were fraudulently malfeasant with their ratings buddies, and the raters; well those guys worship at the "Temple of Economic Doom". Nobody but nobody told the truth. "Won't they get those conmen?" you ask? They will get some of them. People like you for example, who now have to be finger printed, but there will be no 'Chinese Water Torture' for anyone higher up the lender tree.

Fox On The Run

The 'Medja' was no help. When the market began to tank Fox and CNBC kept up pressure to buy. Naysayers and doomboosters were branded and ignored. Nouriel Roubini, Peter Schiff, Bob Chapman and Meredith Whitney were scorned. Instead we hear: "It will never end, the American Dream is here to stay." "Everybody needs a home." "The fundamentals are sound." "We believe in a strong dollar policy."

You Just (Margin) Call Out My Name And You Know Wherever I Am I'll Be Hiding

I've told you over and over and over again my friends,

Perhaps now you believe we're on the Eve of Deleveraging.

The moment had arrived. Fannie and Freddie couldn't meet obligations. Soon redemptions will be withheld there and everywhere else. (That means NO MONEY FOR YOU). Mom and Pop investors don't matter in this scenario. Your pension fund is long gone. In fact, get this, not only will you lose your pension fund and any F&F investments - you will have to kick the can for the bailout. The great sell off is everywhere. Margin calls are no longer reserved for Mondays, they are now occurring seven days a week. We are all reminded that leverage is wonderful on the way up but miserable on the descent.

I Like Chinese

China is our manufacturer in chief. When you buy a computer, baby formula or television made in China your dollars travel there. In order to pay its workers, Chinese manufacturers convert US Dollars to Reminbi. The PBoC and others end up with USD's. They use the USD to buy US bonds. Many of them are F&F. Some say that over $200,000,000,000 of China's foreign reserves are in F&F related securities. Foreign purchases of this nature are the main force propping up the dollar.

There was no choice, Fannie and Freddie could not go down or China, Japan and the rest would stop buying bonds and supporting the dollar.

My Pension Lies Over The Ocean, My Pension Lies Over The Sea

Paulson's only choice was to use US taxpayer money to protect large institutional and government foreign investors (debt-holders) while sacrificing the holders of common and preferred stock (you). Paulson has had to sacrifice his own countrymen to keep potential enemies at bay. Who knows what we many lose? Where will good-hearted mom and dad investors go if they lose everything? If the nations wealth had not been drained so effectively by globalisation and war you would feel safe living under a bridge, but at the rate they are collapsing ...

Chestnuts Roasting As We Open Fire

Seven years ago this month the US Dollar index began its downward descent. 911 was the visible sign of the beginning of the end of the world as we have come to know it. The events of September 2008 are the first major phase of the death of our current economic framework. We have seen the beginning of the Subprime defaults. ALT-A and Pick A Pay loans are now starting to fail. They will be much bigger than Subprime. Auto loans, student loans and credit card defaults are coming as well. Credit card defaults will be about the same size as Subprime. The biggest range of defaults will come with Commercial loans.

We are soon to see difficulties with hedge funds. The failure of Collateralized Debt Obligations integrated with Credit Default Swaps and other Structured Investment Vehicles will take down entire nations. We now are seeing some of these investment tools begin to work in the destruction of banks. To help keep this in perspective there are 9000 or so hedge funds controlling about $250,000,000,000,000 dollars (250 Trillion - it looks better with the 0's). Most of these will fail in one way or another and not be bailed out. The Credit Derivatives Market is larger than the global economy. Have you hugged your savings today?

Investment Bank Bear Stearns is gone as a result of financial assassination, mortgage resellers Fannie May and Freddie Mac have been taken over by the US Government, Lehman Brothers is bankrupt, Merrill Lynch is going to be bought out by Bank of America at a huge loss and the world’s biggest insurance company AIG is ‘on the ropes’. Goldman Sachs and Morgan Stanley remain and both are under a cloud with thumping share collapses. As of Wednesday September 17 2008 three month US T-Bill yields are at .0304%. That means that an investment of $1,000,000 will pay $1,000,076. Washington Mutual is looking to merge with anyone. This is affecting the world and it is affecting us.

When the French economy failed during the French Revolution, France went to war with Austria. Soldiers were in good supply as the army was one place where a decent meal could be had. Cannon fodder stipend helped the families on the home front. This is a kind of back door draft that we are already beginning to hear about. A global war or a series of long planned smaller conflicts will mark the next phase of the disintegration of the Great Western Empire. Bernard Baruch taught us that 'All wars are economic in origin". This is certainly true of what we are about to witness.

We have begun to tangle with Pakistan, we have armed the Georgians to provoke the Russian Bear, we have sold 1000 Bunker Busters to Israel for an Iran attack, the North Koreans have resumed nuclear research and a huge flotilla waits in the Middle East. More could be said about Kosovo, Lebanon and Venezuela. We could well be in the thick of it by Christmas.

PS By September 26 2008 Congress may pass a bill allowing the government to purchase toxic waste from major financial bodies. This dilution of the money supply generates a great deal of inflation. It is likely this will cost the US taxpayer about a Trillion dollars. This is socialism in action. God Help Us All

Islamaphobe's picture

Somewhat to my surprise, I find much in this presentation with which I can agree. My biggest criticism has to do with the author's underlying political assumptions rather than the economic analysis, which is often quite clever. To me, Al seems quite oblivious to the threat that Islam represents to the rest of the world and I fundamentally disagree with what I regard as his vehement anti-Americanism. To put it mildly, I have a very different view of this nation's role in the world than he does.

There is a pronounced tendency among some who hold preterist theological views to denounce fractional reserve banking as a great evil. I do not. In the centuries before the abandonment of the gold standard in the 1930s, governments amply demonstrated that they were quite capable of monumental monetary mismanagement. Keynes referred to the gold standard as "a barbarous relic," and he was right. As for proposals to eliminate fractional reserve banking, I consider them to be ventures into fantasyland. Any monetary system will be as good as the people who are in charge of providing the basic economic guidance for the economy, and in recent decades, those people have failed us badly. The failures have been more pronounced in Congress and the White House, however, than in the Federal Reserve.

At the beginning of 1992, Dryden Press published my textbook in international finance. The book was adopted at a number of leading universities in this country. In that book, I called attention to a fundamental structural problem for the world economy that I felt was the source of potential danger, namely the fact that the richest nation in the world, the United States, was what economists call a capital importer, in fact, by far the largest capital importer. The root cause of this situation, I suggested, was the low personal saving rate of the United States. Because of that low saving rate and our correspondingly high level of spending for consumption, both domestically produced goods and imports, we had a large "current account deficit"; i.e., a huge excess of imports of goods and services over exports of goods and services. We financed this deficit by the payment of dollars, which foreign governments, businesses, and individuals then used to obtain dollar claims on the United States--Treasury securities, bank accounts, bonds, stocks, real estate, etc. In effect, therefore, we were financing the real investment necessary for economic growth through heavy foreign "borrowing." This made the United States dangerously dependent on the rest of the world and drained funds from nations that could conceivably have provided good opportunities for economic growth if they could achieve the needed restructuring of their political and economic systems.

The structural problem that stood out so much in mind in 1992 has continued into the present. As the total accumulation of dollar claims in foreigners' hands has continued to grow, so has the pressure on the U.S. government to follow policies that will keep them from dumping dollars. Given the fall of the dollar's value in recent years, our government has obviously not been entirely successful! Fortunately for us, the U. S. economy has actually peformed relatively well compared to the welfare states in much of the developed world, and that has helped prevent the dollar from falling even more than it has.

How does all this relate to the subprime mortgage crisis that has produced the current chaos on Wall Street? In my view, this crisis can be traced directly to the government's policy of pressuring mortgage lending institutions to provide home loans of questionable soundness, the parallel policy of allowing financial institutions to manufacture debt instruments that would allow them to profit from financial leverage, and the adoption of various measures designed to make mortgage-backed securities attractive to foreigners. Leverage refers to the practice of raising the proportion of debt to equity so as to magnify the rate of return on equity. It works as long as the rate of return on assets stays sufficiently above the rate of interest paid on debt.

Besides passing laws designed to "encourage" lenders to lower credit standards, our brilliant leaders in Congress--mostly Democrats--attacked excessive pay packages for top corporate executives. The astronomical compensation packages for top execs are indeed a problem, but Congress's approach to dealing with it was not a good solution. What happened, in effect, is that corporations found other ways than straight salary to compensate the corporate bigwigs, and these ways put a premium on short-term performance.

When lecturing to captive audiences of beginning students in economics at the U. of Alabama some years ago, I used to comment that in politics, the long run is the period after the next election. Naturally, the result is a tragic bias in favor of neglecting long-term considerations. In its wisdom, our government has succeeded in giving corporate executives to also neglect the long run.

With Fannie Mae and Freddy Mac, we created a way to provide great liquidity to home mortgages, and that led to opportunities to create debt instruments collateralized by them. Although the debt and equity of Fannie and Freddy was not government-guaranteed, foreigners assumed--correctly--that there was de facto guarantee behind them. So they snapped up their securities as well as many of the mortgage-backed debt instruments that financial institutions created.

In my view, what we need to learn from all this is that we need to devise policies that will give great encouragement to personal saving and to do what we can socially to deemphasize copying the lifestyles of the rich and (in)famous. We need to reexamine how we compensate corporate executives and to figure out how to encourage companies to look beyond the next election. We need to go all out to develop domestic energy sources, including Anwar. And we need to get away from political correctness and the idea that financial institutions should be bludgeoned into making home loans to people who are not good credit risks. In my judgment, the last thing we need to do is to have more regulation on the private sector dreamed up by Congressional Democrats.

John S. Evans

coop's picture

Keynes is wrong about the gold standard for two reasons. First, it is important to hold money that has intrinsic value, rather than the fiat (because the government says so) currency issued by the FED. Second, by tagging the currency to something of limited supply you automatically limit the size of government because it is no longer able to steal the wealth of it's people through inflating the currency. What incentive do we have to save when our savings will be consumed by inflation. The mess we are in now would not have occurred had the welfare/warfare government not been able to raise money through any means other than taxation. People will revolt due to excessive taxation. You should never accept a wooden nickel. When the price of copper rose to the point that we had to start making pennies out of zinc, that should have been a wake up call. Now, it takes 1.7 cents to make a penny out of zinc. This only demonstrates how worthless our money has become. At one point the FED lowered the discount rate to 3/4%. The artificial interest rate created artificial loan demand and that, along with ridiculous hedging schemes at the mega-banks has caused the current meltdown. The government needs to step back and let the market re-allocate these assets where they are best utilized. This would likely cause a recession but there is nothing that will get us out of this mess except for hard work and fiscal conservatism. Bank deposits must also be insured by private companies. In turn they will audit the banks assets to asses their risk, promoting soundness and accountability.

The easy credit culture has caused an illusion of wealth to the point that a young couple just married buys a 3000 square foot "starter home" and parks a new lexus and a new escalade in the drive. My first house in 1980 was very nice and larger than most at 1850 square feet and I drove a chevy love truck to work every day but I lived within my means. No one thinks that way today. The scary thing is, back then when a government employee showed up at your door and said "I'm here to help you" we thought that was the worst thing that could happen. Today, the government takes over the largest mortgage and insurance companies in the world and everyone thinks it is wonderful, our savior has arrived.

We need freedom, sound money, and a culture of saving and producing rather than spending and consuming.

Sorry if I rambled a bit to get to the point.

Sincerely,
Mark

Islamaphobe's picture

I consider it fruitless to argue with "gold bugs" and will not spend more than thirty seconds in reply. While I fault Keynes on various points, I believe he was right to view gold as "a barbarous relic." Again, a monetary system will no better than the people who oversee it, and history amply demonstrates that governments have historically messed up the operation of the gold standard.

JSE

coop's picture

You are correct sir, but this is not about governments. It is about safety, security, and freedom that will ensue when people hold currency of intrinsic value not dependent on the "full faith and credit of the U.S. government." At the rate thing are going, we will look up one day and these federal reserve notes will be best used as toilet paper as it has been in other countries where you had to have a wheel barrow full of paper money to by a loaf of bread. All fiat currencies have failed from the Romans to WWII Germany to the good old U.S. greenback some day. And I assure you, when that day comes, if you are still alive, you will not dismiss the "gold bugs" so flippantly. In fact, you'll be asking them for a job.

Cordially,
Mark

tom-g's picture

Dr. Evans,

Possibly you could tap into your 42 years of experience as an undergrad professor of economics and explain that the modern subjective theory of value has completely refuted the objective theory of value that this person is advocating. Also possibly you could explain that currency has no intrinsic value or store of value, currency is solely a medium of exchange to facilitate a market or indirect exchange.

The problem with inflating the quantity of currency is that not all members of the market obtain the same quantity of inflation at the same time and thus creating the distortion and shift in purchasing power to those who first obtain the inflated currency from those who are last to receive it.

Just a helpful suggestion.
Tom

Islamaphobe's picture

Tom,

I do not want to take time to explain what I think is wrong with the gold standard. I have done that in other writings posted at this site. I wish our poster would concentrate his fire on the political leaders who have insisted on pursuing politicies that lead to inflation. Yes it does lead to arbitrary redistribution of income and wealth and to market distortions. Unfortunately, modern government seems to be grounded in principle that in a democracy, you can fool most of the people most of the time and remain in power by promising them benefits that others will pay for. That is one reason that we need to restore and preserve a government that is the republic that the founding fathers had in mind.

John S. Evans

coop's picture

John,
I agree that we must pay attention to our political leaders but I can assure you they will do what political leaders have done forever. As John Lennon wrote in the song Revolution; "You tell me it's the institution, well you know, you better free your mind instead". The government will never provide a lasting solution to this problem and that is why it is so important to me to attempt to protect myself with tangible assets.

I'm sure you know in May 2007 the Sudanese called in the dinar to be replaced with a new currency. If the dinar had been redeemable in gold or silver, or better yet, coined in gold and silver, it would have value in the rest of the world. As it is, it is worthless. Their only option was to trade it for a new currency which may be worthless one day as well. In Zimbabwe, in June of 2006, inflation was so bad that Z$130,000.00 was worth US$1.28. So you might buy a loaf of bread with it. We seem to think that can't happen here, but it can. As Tom pointed out, there are many people that can't keep up with anything near that kind of inflation. Sound money, tied to something real so it can not be produced out of thin air is the only way to protect the average citizen.

Thank you for giving us something to think about.

Mark

tom-g's picture

Mark,

If you understood the Federal Reserve System you would understand that it is the "Reserve" function that is the "Engine of Inflation". It is debt that is the cause of monetary inflation

If you want to cure inflation (the cure for inflation is deflation- witness the current housing market) then debt should be paid down. At a 10% reserve every dollar of debt that is reduced, causes 10 dollars to be taken out of the system. As you can see it would not take long to accomplish your goal if the people, independent of government, were to eliminate personal debt. Or if the government were to do the same with the federal budget.

As you may know, it was not the Hawley-Smoot Tariff Act, it was the contraction of the money supply by the Fed that caused the recession in the 1930s. At that time the U.S. was still on the gold system that you advocate and the simple act of a substantial reduction in gold reserves caused the monetary contraction that we know as the Great Depression. The gold window was finally closed by President Nixon in 1971.

Keynes advocated deficit government expenditure to stimulate the economy in times of a down business cycle, it was left to the conservative Freedmanite Chicago School to advocate a perpetual 6% inflation of the money supply whether we needed it or not.

Tom

tom-g's picture

By the way Alan Greenspan, if you did not know, was a devout disciple of Ayn Rand's economic capitalism and was a member of the exclusive small group of Rand insiders. We all know where his monetary economic policies have led us.

Tom

EWMI's picture

Just some general thoughts -

I think Keynes was a shill for the banksters. He called the Gold Standard a barbaric relic yet the farther we move from a fixed money standard the worse it becomes.

While western governments stupidly liquidated gold holdings eastern ones have bought and held. It is serving them well while we are being gutted.

I hear comments about gold not returning etc. The fact is that the gold carry trade and gold ETF's demonstate that it never went away.

As for physical gold itself, no one who cashed in their investments for gold or silver in the last 10 years is feeling any regret today. The upcoming crash will result in a flight to safety, gold will exceed 2000 and silver will pass 100.

Keynes was part of the socialist Society of the Apostles, "Dirty Bertie" (Bertrand Russell) was a member. Keynes supposedly opposed collectivism yet his theories have done much to collectivize us. Hegel would be proud of Keynes accomplishments.

Here a thought for those who love a good conspiracy:
Nixon created the EPA the same year that he broke the final gold pegging in 1971. Why? Closing the gold window would eventually lead to the meltdown we are just starting to see. The EPA kept our resources in the ground as collateral for our creditors. We are seeing this happen today.

Islamaphobe's picture

I confess that I have underestimated the appeal of gold in the past because I have overestimated human rationality. Some investors will recommend holding some gold because they effectively assume that people will continue to be irrational and may even be more so in the future than in the past. They may be right. Personally, as a retired person I prefer to derive much of my income from interest-bearing sources. Since gold pays no interest and does entail storage costs, I prefer not to put my hopes for the future on an asset that depends on human fear and ignorance for increases in value.

By the way, Keynes was a rat personally. He was also a very smart fellow who may even have been right occasionally. For example, he predicted that the Treaty of Versailles would lead to another great war, and he made a fortune himself as a speculator.

JSE

coop's picture

Hello,
Gold is not an investment, it is insurance against currency collapse. As a retired person you must have your money in interest bearing accounts, but stash a little bullion gold in you safety deposit just in case. I recommend a person have five to ten percent of his assets in gold or silver. Hopefully we will never need it. I'm forty eight years old and I really don't think I will live to see a currency collapse, but I want to be prepared.

Thanks,
Mark

tom-g's picture

Hey Mark,

Far be it for me to question your personal choices, but you say: "gold is not an investment, it is insurance against currency collapse." You then recommend that 5%-10% of assets be in gold bullion as an insurance policy against that potential currency collapse.

While this is not a new idea that I have never heard before, it is the standard hard money siren song that is preached 24 hours a day, 7 days a week by the Antichrist pied pipers. You know them, these are they whose hope lies in the love of money above love of God, family and country.

But, since you seem to be caught up in this gospel of faith in "Gold" to see you through a currency collapse, I thought I would ask you: "How do you see gold being able to accomplish that goal?"

Perhaps you could correct me if I am wrong in seeing today a failure and disruption of banks and financial markets and by your own statement we are no where close to the total currency collapse you are insuring against.

In the event of this total currency collapse you envision might happen, obviously the banks, financial markets, food supply, energy, and transportation markets will all be in total chaos or have collapsed and be non existent, how then do you see your 10oz. or 100oz. bars of gold acting as an insurance policy to guarantee your ability to secure these needed commodities?

I liken a person in that circumstance to a person with all of these gold bullion bars, dying of thirst in a desert. How much of his gold will he be willing to give for a glass of water? How much will he be willing to give for his next glass and his next, until his gold is gone, then how will he purchase water? When the currency collapse is resolved and markets restored, who now will be the new owner of all of what used to be his gold bullion insurance policy?

If I were the one with the water, just enough for my own wife and family's needs to keep them alive, do you envision that I will part with it for your gold bullion? I would suggest to you that it would profit you little if you owned all the gold bullion in the world and lost your soul. I would sincerely be interested in seeing the mechanics (the devil is in the details) of how your bars of gold bullion will be converted into securing for you those needed commodities to sustain your life. Perhaps you could walk me step by step through the protracted process.

But, then my trust and hope is in Christ, not in those whose hope is in the love of money. Unfortunately, shame on me, I and my family have in the past been in the condition of needing water with no gold bullion to pay for it, but by the grace of Christ we discovered that there were those with water who gladly parted with enough for our needs and asked nothing in return to pay for it.

Fortunately we have the Word of God, in Matthew 24 and the history recorded by Josephus of the horrible atrocities that occurred in 70AD, to show us that storing up your treasures on earth will not be sufficient to see you through the tribulation and stress of a catastrophic currency collapse.

It would behoove you to honestly accept that gold bullion is an investment not an insurance policy and that the only insurance policy you can possibly have is hope in Christ.

Tom

coop's picture

Tom,
Taking care of yourself on this earth does not indicate a love of money or a lack of faith. I sure that when illness strikes you or a loved one, you'll seek out a doctor first and then do your praying.
If you will do a little study, you will discover that gold is money, and it always has been. It is the default currency. I'm talking about making it through a currency collapse, not a nuclear winter. I will trade my gold for things that I need, and I'm not precluded from helping family, friends and total strangers if I have enough to go around.
So please, let's try and stay in the real world okay.

Mark

tom-g's picture

Mark,

The real world is that gold is not money as defined by a circulating medium of exchange. It is a commodity period. The same problems for any other commodity apply to gold also if it is to be used as money in the market to obtain needed commodities in the absence of a functioning valid commodities clearing house. which is the scenario you are describing that you are insuring yourself against by holding bullion.

You conveniently skip over the realistic realization that the market functions required to convert your bullion into a usable money that would be accepted in consumer transactions would have collapsed. You would have no way to convert your bullion into usable divisions to obtain the products you need to sustain your life if you were able to find someone who would accept gold as payment. Who would establish the value of the gold you would use? Each transaction would be at a spot price for that particular transaction at the price each seller would establish.

If for instance the price for a gallon of milk at a specific transaction time is 100 pieces of paper money with a face value of 1 dollar each, and you offer to pay with your 10 oz. bar of gold. How do you envision that transaction taking place? How will you divide that 10 oz. bar? What will you accept as change due to you from that 10 oz. bar? When the only thing the seller has to give you is paper money? Do you envision walking into a supermarket and accomplishing this transaction?

For years my wife and I followed the Drum Corps International drum and bugle corps tournaments, and one that we especially enjoyed was the Canadian Open in Toronto. At the time the exchange rate was approximately 67 cents American for a Canadian dollar. As we would leave the stadium at intermission time and go to a McDonald's or Burger King for a quick meal, if the bill would come to $8.55 and we did not have any Canadian money and offered an American $10 bill in payment, it was accepted as payment and we would receive $1.45 Canadian as change. In effect we paid $11.88 Canadian for an $8.55 Canadian bill because we did not have the accepted medium of exchange to use.

This exchange problem is encountered by everyone, in both directions, who travels in foreign countries. I have usually found that when the foreign currency is of lesser value than American, the American face value will be accepted. However when the American dollar is the lesser value there will be a sign posted explaining how much additional American currency will be required in payment.

This is the problem gold bullion will face in the currency collapse you are preparing for. If you will be able to find anyone who will accept gold and then face the same problem themselves that you have.

Oh, and by the way, try going into a store today and offer to pay for a 1 USD dollar item with a silver USD quarter and ask the merchant for the change he owes you.

good luck,
Tom

tom-g's picture

Mark,

I should have referred you to the economic law that governs these types of market transactions. "Bad money drives good money out of the market."

Tom

coop's picture

Tom,
It is a problem but I'll strike a deal. If the deal is 1/2 oz for whatever I'm buying I'll take a 1 oz coin and cut it in half with a chisel. Tear a reserve note in half and it becomes worthless, you must have sixty percent to get a new one. Have you never seen those chisels used to cut a silver dollar into eight pieces. Hence the cheer, two bits,four bits ... a dollar - all for the gold standard stand up and holler. Before the fed destroyed our money, a two bit haircut was a good thing. Now that our money has lost 95% of it's value, a two bit anything is considered cheap.
I don't know exactly how this will play out and as I have stated, I don't think I'll ever have to find out. I hope not! If the Canadian currency survives, maybe I'll drive up there and convert it to Canadian dollars to buy what I need. Who knows? Maybe euros. Maybe I'll flee to Brazil. The point is , it is a store of value that is practical. Oil is messy, wheat spoils and presents a storage problem, and most home owner's associations won't allow cattle.
In a currency collapse, the only thing of value the average person will have is debt free real estate and commodities like gold and silver.

Sincerely,
Mark

EWMI's picture

Hmmmm,

Bad money - fiat fed notes

drives good money - gold and silver

Out of the market :)

Tom,

When US fighter pilots are sent on missions they are given British Sovereigns - they can get the pilot out of trouble because of its gold value not its face value.

There is always someone willing to take gold or silver, during a collapse it will be possible to trade it. In Weimar Germany at the end of the inflation a man bought an entire city block in Berlin ( I think) for $250 US dollars.

Today the central banks are the gold bugs, that should tell us something. Russia is swimming in cash and wealth and is looking to establish a gold pegging to the ruble. Other nations now are looking at using gold to trade oil as no other currency can be trusted.

if only I had bought it

Oh well, my wife and I have found a nice park to live in ....

tom-g's picture

Al,

I was attempting to point out the extreme disaster a complete currency collapse would create for the individual citizen caught in the collapse.

Food supplies, energy, transportation, clothing and all essential commodities would be in chaos. There would be no banks operating as clearing houses for exchange, no stock markets operating.

Mark was advising persons to put 5%-10% of assets in bullion as an insurance policy. In the event of a catastrophic currency collapse, the important and all consuming goal is survival not profit.

A real fact of life is that the vast majority of the population without the means available to survive will not tolerate or permit a very small minority, such as Mark is advising, to succeed. Violence and theft will quickly do away with any advantage that gold might permit, just as those who are hoarding will be attacked and their commodities stolen the operant order will be mob rule.

One side of an indirect or market exchange is always money, with money non existent all indirect or market economic activity will cease. Production will cease, food will rot in the fields with no purchaser or means to transport it to the retail market or consumers with money to consume it.

your examples did not speak to this argument. But I might ask if one of our pilots were to be shot down in the middle of the Iraqi desert, how many of those British sovereigns will he pay to wandering Bedouin tribes for enough water to get him safely and alive into allied occupied areas? How many will he pay to Afghani warriors for the same thing if shot down in the mountains of Afghanistan?

Unlike Dr. Evans, I strongly believe in conspiracies. I agree with "if it happens in government it was planned that way." We are told that today we owe China 3 trillion dollars. That's THREE TRILLION!!! I would ask the philosophers masquerading as economists (Professionals and the wannabes) to explain in economic terms how the richest nation on the earth could be in debt to the poorest, communistic, centrally planned economy in the world? And how is it the U.S. as a nation that owes this money? Let's not get bogged down in whether it is actually 3 trillion. Use any figure from 1 dollar to 3 trillion, how do we owe them this money?

You already know the answer Al, so you're not allowed to answer.
Tom

JL's picture

Yes Tom,

In a complete collapse, the best defense is your earth-quake supplies, a couple of burned-out cars blocking the bridge, a well-protected view, cooperation with like-minded neighbors, and prayer.

Blessings,

JL Vaughn
Beyond Creation Science

tom-g's picture

Hey JL,

Nice to hear from you. I have always wondered why our Lord did not follow good free market economic policies in his commands to his followers.

How could he possibly have expected his disciples to be effective by sending them out two by two without a dime in their pockets and without any food? When his representatives, who were preaching about the Kingdom of God, were seen to be nothing but dirty, penniless, wandering bums, who would want to be part of that kingdom?

And of course, free market economic philosophers have been snickering up their sleeves for almost 2000 years at the stupid warnings he gave his disciples when they saw the great collapse of Jerusalem about to occur. Any free marketer worth his salt would have immediately known this was some kind of kook that was telling them to get out without first taking the time to go down into the basement and get all of their gold and silver bullion to take with them. How irresponsible would it be of a family man to flee without making certain that he at least knew where his family's next meal was coming from?

We should all realize how thankful we should be for our free market teachers who have shown us the stupidity of such human action and warned us to beware of those wolves in sheep's clothing who would preach about an idiotic Kingdom of God instead of relying on the good old common sense and planning of numero uno to insure they wouldn't starve.

Tom

tom-g's picture

And one other thing JL,

The free market advocates have pointed out how foolish it was for anyone to get duped into the preaching of this ignorant uneducated carpenter's son by showing that if He was really sent by God he would be preaching the same message Moses preached when he told the Israelites to get out of Egypt. After all isn't God the same yesterday, today and tomorrow?

Moses did not tell the Israelites to get out without properly being prepared to buy whatever they needed from the Moabites and Ammonites as they passed through their lands. Moses made certain they had all the gold and silver and whatever else was of value before they took off out of Egypt. Thus the free marketers advise: "Go thou and do likewise!"

Tom

Ed's picture

Tom, I don't get it. Mark said that we should get gold, and you differed with him. Now, you cite Moses and the Israelites leaving Egypt with gold and tell us to do likewise. What is it, Tom? Do we do "likewise" as Mark suggests, or what?

ed

Papa is especially fond of us

MiddleKnowledge's picture

Ohhh boyyyy...

That is a good one, Ed!

Makes you wonder where the Bible first mentions gold, anyway. Oh yes, that is what Adam had access to in Genesis 2. And next mention of it was Abraham who was well-endowed with gold. (Note the Adam-Abraham link...)

Tim Martin
www.beyondcreationscience.com

Ed's picture

Abraham was quite a consumerist I guess.

In spite of what some folks think, gold has been a standard of value since recorded history. When you consider that, in spite of the House defeating the bailout, the Fed still infused about $600B into the economy through providing money for loans to banks. Hyperinflation anyone?

"Criminals" (what Marcy Kaptur called them) is too nice a word for the likes of Pelosi, Reid, Frank, Obama, Dodd, and Frank Raines; along with their accomplices Bush and Paulsen (trust me, this list is not exhaustive).

ed

Papa is especially fond of us

EWMI's picture

Hi Tom,

Precious metals don't earn interest so would not fall into the investment class. One reason it may be good to hold some is that during a currency collapse you may need a professional service - medical dental etc that your money can't buy. Lots of people will take gold.

At this time though precious metals can work a bit like an investment. I have no doubt that gold will double in price and silver will likely increase by a factor of 5. This is the flight to quality effect.

From what I can see there has been global gold price manipulation for at least 10 years. This is due mostly to the super banks trying to keep the carry trade afloat.

Historically one ounce of silver would buy one barrel of crude, this could be good for silver holders. At least in the short term. - just a bit late for me though :(

EWMI's picture

Keynes

Hello John, Sounds like you knew him.

You are right, gold bears no interest and will only be a money spinner if there is a flight to safety.

In a crash or a time of anarchy it may work as emergency currency. - a bit late for me though

al

Islamaphobe's picture

No, he died a little too soon for me to know him. I did meet Ludwig von Mises, whom I had the pleasure of introducing to the graduate economics students at Wisconsin. Von Mises was a very nice old man, but also an intense ideologue who was convinced that the Soviets could never advance very far with space technology because they had to rely upon espionage and were incapable of developing the necessary technology on their own. By the way, Keynes wrote the preface for Hayek's "Road to Serfdom."

EWMI's picture

Interesting that you knew von Mises. I have been meaning to read Road to Serfdom - or at least skim it at the local library. I was not aware that Keynes and Hayek had that close a relationship.

davo's picture

It is likely this will cost the US taxpayer about a Trillion dollars. This is socialism in action. God Help Us AllThis does seem just a tad ironic – a capitalism so keen to privatise profit, but more keen to socialise debt… ???

davo

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