Falling Dominoes Rising Gold
Gold is the leading indicator
of systemic collapse
Darryl Robert Schoon
Mar 17, 2008
The failure of Windows Vista
to improve upon Microsoft's accepted standard is an indication
that an era is ending. Another indication - just as obvious and
far more significant - US central bank credit is no longer automatically
able to create economic expansion. Suddenly, cheap credit does
not produce growth. An era is over.
THE ECONOMISTS' GREAT CONUNDRUM
CREDIT, GROWTH & THE GREAT DEPRESSION
Putting more gas
in a stalled engine doesn't work
...since August, when the
real estate sector began to turn ugly, the Federal government
i.e., Joe Taxpayer -- has doled out nearly $1 trillion
in direct and indirect support to the credit markets in a so-far
failed attempt to unfreeze them
Rick's Picks, March 16, 2008
Credit, like steroids, can
be classified as a performance enhancing drug. When introduced
into an economic system, its effects are obvious and, in the
beginning, positive. Like steroids, however, over time its effects
become less positive and underlying problems more apparent and,
in the end, are often fatal, e.g. deflation and the Great Depression.
THE END OF AN ERA
In 2008, we are at the end
of an extraordinary era of credit set in motion by the Bank of
England in 1694. Debt-based money, sic capital, issued
by the Bank of England allowed England to tax its present and
future citizenry ad infinitum in order to embark on its
highly successful quest of global dominion known as imperialism.
As long as the captured wealth
of conquered nations offset the costs of war, England's treasury
and empire expanded. But by the end of the 19th Century, England's
expansion ended and the keys to its kingdom were transferred
to its surrogate successor, the US.
In 1913, banking and business
interests transferred the English model of debt-based central
banking to America. That year the US Federal income tax and the
US Federal Reserve Bank became law and life in the US has never
been the same.
Prior to the introduction of
the Federal income tax and the Federal Reserve Bank, the lives
of Americans were generally free from individual and collective
debt. After 1913, everything changed
Seventy years later, in 1983,
Nobel Laureate Buckminster Fuller made the following observations
on the growth of US indebtedness:
Throughout its first 127
pre-World War I years, the U.S. government often had no national
debt. World War I left the U.S.A. with a national indebtedness
of $33 billion. The U.S.A. banking system went truly bankrupt
in 1929, but the New Deal's 1933 Bank Moratorium postponed recognition
of that fact
Since then the moment of
acknowledgment that the U.S. government itself is financially
bankrupt has been postponed first by further- and further-ahead
postponements of the payoff dates for U.S. notes and bonds and
by successive votes of the U.S. Congress to increase the national
debt limit. By "money accounting" (in contradistinction
to real-wealth accounting), the U.S.A. is now realistically bankrupt.
Since Nixon became president,
the U.S.A. has been unable to pay even the interest on its national
debt, let alone reduce the principal. Before Nixon, Congress
assumed tax underwriting of ever greater interest-bearing on
ever more postponed and greater national debt limits. For all
the Nixon years and all the years of his successors the president
has had annually to file a negative budget, meaning the U.S.
cannot even pretend to be able to pay the interest on its indebtedness.
The implications of US debt cannot be underestimated; for just
as global investors were once blind to the underlying credit
worthiness of subprime securities, today, they are just as blind
to the actual creditworthiness of US debt, sic US Treasuries.
BACKED BY THE FULL FAITH AND CREDIT OF THE US
WHAT'S THE COST OF INK?
(Not much unless you're buying it in cartridges
from Lexmark, Hewlett-Packard, Epson or Canon)
If, as Buckminster Fuller wrote,
the U.S.A. has been unable to pay even the interest on its national
debt, let alone reduce the principal and therefore is realistically
bankrupt, its credit rating should reflect that unfortunate
But as long as US debt is rated
AAA by the same agencies that gave AAA ratings to subprime mortgage-backed
CDOs, US treasuries will continue to enjoy the same demand highly
rated subprime securities once received. However, nothing lasts
forever, not even collective denial.
What happened to AAA rated
subprime CDOs will happen eventually to AAA rated US Treasuries.
Values vanish overnight when risk is repriced and its effects
are swift and draconian. This is what is happened to banks and
hedge funds now invested in AAA mortgage backed securities.
Peloton Partners'ABS hedge
fund achieved an 87 % return on equity in 2007 and on January
24, it was named the best Euro Hedge fund for 2007; but in February
2008, only one month later, the fund was declared insolvent and
its assets seized. The same quick deleveraging will likewise
happen someday to those now invested in US Treasuries.
That day will come sooner rather
than later. The end of the credit era is near. The citadel of
credit itself is under attack. The prime banks, the primary dealers
used by the Fed to feed credit into the system are themselves
now in trouble.
THE DOMINO THEORY REDUX
BAILING OUT BEAR STEARNS
The decision by the Fed
to bail out Bear Stearns is tantamount to Britney Spears bolting
from rehab - it is now clear the Fed has no intention of cleaning
up the mess. Instead, it's aiding the perpetrators.
Matthew Lee, Executive Director
of Inner City Press, regarding the Fed bailout of Bear Stearns
The Fed has hit a new low
with this, they did nothing to protect consumers from predatory lending and now their
response is to bail out one of the most notorious enablers of
Investment banks such as Bear
Stearns were the alchemists who invented the now toxic brew of
subprime mortgage backed securities that investors will no longer
buy. What the banks didn't expect is that they would get caught
holding the bad debt. They assumed the AAA rated debt they kept
was better than what they sold to others. It was - but it still
To their collective surprise,
banks holding billions of dollars of illiquid AAA rated mortgage
backed securities are exposed to billions in losses. But, now,
the US Federal Reserve has come to their rescue. This is because
investment banks, sic prime banks, such as Bear Stearns
are the very center of the mechanism by which the Fed feeds credit
into the system. The citadel of credit is in danger.
The collapse of Bear Stearns
is only the tip of the iceberg. Banks such as Morgan Stanley,
Citicorp, Lehman Brothers, UBS, Bank of America, Wells Fargo
etc. are all exposed to this rapidly imploding pool of mortgage-backed
THE BANKERS' BEGGING BOWL
Bankers from Morgan Stanley,
Citicorp, and UBS along with Bear Stearns have already made the
rounds of sovereign wealth funds in Asia and the Middle East,
asking for sufficient capital to remain solvent. All received
promised infusions of billions in capital albeit at very high
rates; e.g. 9 % - 11% but now one of them, Bear Stearns, involved
in a now questionable $1 billion investment by China's CITIC,
has fallen. Which bank will be next?
Bear Stearns was temporarily
rescued by the US Fed via a loan through JP Morgan Chase. This
is because the US doesn't have a sovereign wealth fund of its
own. Fifty years ago the wealthiest nation in the world, today
the US is the world's largest debtor - its wealth now composed
primarily of liquid pools of debt fed by a printing press.
GOLD - THE LEADING INDICATOR
OF SYSTEMIC COLLAPSE
Against this background, gold
again broke the $1,000 per ounce price level. One year ago, gold
was in the mid-$600 range. Now, it's 50 % higher, a remarkably
accurate measure of the rise in systemic stress in global financial
Today's era of credit is built
on a foundation of debt. The longer credit-based systems exist,
the more debt is created, debt which must be serviced and retired
(or rolled-over ad infinitum as the US hopes). The cycle
of credit begun in England in 1694 has almost run its course;
the mountains of debt created in its wake are increasingly unstable
and are about to collapse.
The rising price of gold is
the market's bet credit markets are in deep trouble. They are.
You can bet on it - and should (and soon)!
Darryl Robert Schoon
About Darryl Robert
I majored in political science with a focus on East Asia (B.A.
University of California at Davis, 1966). My in-depth study of
economics did not occur until much later.
In the 1990s,
I became curious about the Great Depression and in the course
of my study, I realized that most of my preconceptions about
money and the economy were just that - preconceptions. I, like
most others, did not really understand the nature of money and
the economy. Now, I have some insights and answers about these
2005, Marshall Thurber, a close friend from law school convened
The Positive Deviant Network (the PDN), a group of individuals
whom Marshall believed to be "out-of-the-box" thinkers
and I was asked to join. The PDN became a major catalyst in my
writings on economic issues.
When I discovered
others in the PDN shared my concerns about the US economy, I
began writing down my thoughts. In March 2007 I presented my
findings to the Positive Deviant Network in the form of an in-depth
148-page analysis, "How
to Survive the Crisis and Prosper In The Process."
to my presentation, though controversial, generated a significant
amount of interest; and in May 2007, "How To Survive The
Crisis And Prosper In The Process" was made available at
www.survivethecrisis.com and I began writing
articles on economic issues.
in the book and my writings has been gratifying. During its first
two months, www.survivethecrisis.com was accessed by over 10,000
viewers from 93 countries. Clearly, we had struck a chord and
www.drschoon.com, has been created
to address this interest.