Currency Debasement: How to Protect Your ASSets

1. Currency Debasement: How to Protect Your ASSets Richard Karn Managing Editor The Emerging Trends Report http://www.emergingtrendsreport.com

2. In order to survive under a fiat currency regime, you have to understand the mechanics of what is being done to you • Myths about dollar hegemony, the international monetary environment, and policy repercussions • How the US Household situation will impact the US Govt’s reflation efforts • Why interventionist policies will ultimately fail • Protecting What Is Yours www.emergingtrendsreport.com

3. Ignore what politicians are saying and watch what they are doing • US Treasury inflows in the most recent 4-month period ending in Sept = $204 b; average for 2000-2008 = $195 b per year • IMF: globally, as much as 50% of losses are still hidden in banks’ books • More prevalent in Europe than the US because the US has written down more bad loans and has less emerging market exposure www.emergingtrendsreport.com

4. The US Dollar’s Reserve Currency Status • Reserve currency status and dollar hegemony • Dollar derivatives and fiat currency franchises • Fiat currency regimes weaken from the periphery toward the center • Central bankers and politicians squabbling like crows but printing like Greenspan • China, China, China • Capital controls • Threats • Implications, investment and otherwise www.emergingtrendsreport.com

5. Source: Societe Generale Global Strategy/Bloomberg/US Federal Reserve Source: FRB/Wattenberg-Morgan Stanley www.emergingtrendsreport.com

6. Identical Data,Different Scales, Different Perspectives 1914-2008 Growth Statistics Population: 2.2% per annum GDP : 6.48% CAGR M2/M3 : 7.04% CAGR Public Debt: 9.03% CAGR Source: US Census, BLS, FRB www.emergingtrendsreport.com

7. “…the whole point of having a fiat currency is to be able to debase it when the economic conditions require it” Judging from this chart, when have conditions not warranted debasing the dollar? • Note the “elasticity” cited by interventionists to justify use of the fiat dollar • Since 1984, > 30 changes to the computer models used to calculate CPI, each serving to reduce it • SGS figures reflect data unadulterated by tweaked computer models and paint an uglier picture www.emergingtrendsreport.com

8. The purchasing power of the fiat dollar has lost either 95.5% or 98.4% of its purchasing power, a compounded annual decline rate of either -3.21% or -4.25%, depending on whose CPI values you assign the most credence • Note the acceleration in the decline in purchasing power in SGS figures after 1984 • We submit the Productivity Miracle Greenspan attributed to computer and information technology existed largely within the confines of the gov’t’s computers and the information technology of the financial media that promoted it www.emergingtrendsreport.com

9. Because this is the most immediately threatened demographic, we are going to discuss US household debt within this context and segue into the US gov’t situation • The statistically fastest growing data set is public debt • Though slowing from 9.03% to 8.30%, the sheer dollar volume of debt has continued to accelerate—as has the amount needed to service the accumulated debt each month www.emergingtrendsreport.com

10. Baseline layering: please note the shift to linear scale for comparison purposes on the following charts • Over the last 44 years the dollar has lost either 85.5% or 95.2% of its value as measured by purchasing power—either a - 4.30% or a -6.67% compound decline rate—depending on which reckoning you choose to believe is most accurate www.emergingtrendsreport.com

11. Average American wages have grown from $4659 to $41,335 per year during this period-- a respectable 5.09% CAGR • However, adjusted for the loss of purchasing power during this period, Americans have seen either only a slight net gain in real wages (0.79% CAGR) or a significant net loss (-1.58% CADR) • Earning more money of less value disguises the real loss of purchasing power www.emergingtrendsreport.com

12. Simultaneously, prolonged access to E-Z credit has seen debt loads grow at an 8.30% CAGR • Salary plus debt assumption determines spending power • Over time, as debt accumulates, a larger percentage of salary must be directed to debt service, but unless wage growth exceeds the purchasing power decline of the dollar… www.emergingtrendsreport.com

13. …savings are drawn down to meet shortfall, as they have been for nearly 40 years • The promotion of earning a return from your fiat dollars is exposed as a fraud during periods of negative real interest rates such as those we have experienced over the last decade, which direct profits owed to savers to banks, who charge people for saving while the gov’t taxes them on the ‘income’ from saving • Income and purchasing power shortfalls have been supplemented with debt • Unchecked, at some point debt overpowers the ability to service it, and deleveraging follows www.emergingtrendsreport.com

14. The Great Moderation and Productivity Miracle were computer-model enabled, debt-fuelled Mirages: • Purchasing power loss of -4.30% or -6.67% CADR combined with debt assumption of 8.30% CAGR eventually overpowers 5.09% CAGR wage growth and drains national savings, making us poorer over time • Loss of purchasing power is the fundamental agent behind disequilibria that develop over time. • This is engineered by the financial sector via unrestrained credit (money) creation for profit and is administered by the federal gov’t to tighten its grasp on power. www.emergingtrendsreport.com

15. Debt overhang suggests substantial period of debt reduction • Consumption is a one-time expenditure; Capital investment pays dividends • How valid is the “Big Bust-Big Recovery” Theory in the current environment? www.emergingtrendsreport.com

16. Increasing under- and unemployment makes debt service increasingly onerous, suggesting a further drawdown of savings and continued defaults • Implies more stimulus, more corruption and cronyism, and more bureaucratic intrusion in our lives as the welfare state grows www.emergingtrendsreport.com

17. FDIC: Q309 lending down record 3%: banks aren’t lending—they’re hoarding because delinquencies continue to outpace loan loss reserves • The lack of credit hits small businesses, the largest employer in the nation, especially hard and curtails small business formation • The decline in revolving credit, which both small business and consumers use for bridge loans, means both are being forced cut back and to save money • Money saved subtracts as much from GDP as consumption adds www.emergingtrendsreport.com

18. WHY YOU SHOULD BE CONCERNED • Over the last three cycles, credit expansion and contraction in the private sector has been a leading indicator for unemployment; from 1990 onward, the correlation has been 81%. • Empirical evidence demonstrates credit expansion precedes base money supply by roughly 1 year—not vice-versa as commonly believed—and banks aren’t lending www.emergingtrendsreport.com

19. 1966: $1 of debt produced $.93 of GDP Growth • 2007: $1 of debt produced $.18 of GDP Growth • Why? Borrowing went to fund consumption, not capital expenditures • Who benefits from originating debt? From 1980 to 2007, the financial sector’s share of total US corporate profits rose from 10% to 35% www.emergingtrendsreport.com

20. The Pursuit of Failed Policies“We are spending more money than we have ever spent before, and it does not work. After eight years we have just as much unemployment as when we started, and an enormous debt to boot.”(US Treasury Secretary Henry Morgenthau, 1939) • Gov’t stimulus rewards sycophants and lobbies, and encourages corruption, cronyism and consumption, not job growth in the real economy • Loans for consumption are one-time contributions to the economy secured by collateral seizure; in contrast, loans to business are what Robert Prechter terms “self-liquidating” in that such loans generate the cash flow to repay themselves • “Money Multiplier”: gov’t spending = at best 1; business capital investment = +/- 3: until gov’t gets out of the way and gets money into the hands of business, any recovery will be uneven at best • Gov’t produces little of value and consumes capital that otherwise would go into the economy; businesses, especially manufacturing, build economies in that they produce real goods to sell at home and abroad and provide real jobs that help grow and sustain an economy • The ratio of civilian to gov’t employees is roughly 5:1 • Excluding benefits packages, average gov’t salary = $73k vs average civilian salary = $41k • Using a single, unmarried civilian worker as an example, it requires the tax receipts from roughly 14 civilian workers to support each gov’t worker • Who is working for whom? • Policies promoting consumption = encouraging over-extended people to take on more debt • Despite the trillions given to banks, defaults are still outpacing loan loss requirements, and they are not lending. www.emergingtrendsreport.com

21. Boondoggles ‘R’ Us • Gov’t promoting the equivalent of sub-prime home loans with a default rate sufficient to bankrupt most commercial banks • FHA loans, First Home Buyers grants, and Cash for Clunkers were all rife with corruption– and brought tomorrow’s buyers into the market today • The expansion now to Cash for Appliances and new grants for homebuyers amount to doing more of what is not working, only harder • Is it an example of the ‘other people’s money’ mentality, and bodes ill for the future. www.emergingtrendsreport.com

22. Protecting your ASSets • Keep your job, pay down your debts, watch interest rates, commodity prices, pending US legislation and the mid-term Congressional elections • Corruption today in politics, business and science is a global pandemic and will come to a head in the next few years: hope for the best, prepare for the worst • Buy physical gold, silver and platinum, not ETFs, as the means to ‘save’ in the traditional sense • Keep cash in short term Treasuries • A negative real interest rate environment means you cannot NOT speculate, but do it furtively: reduce your exposure, limit trade duration, and focus on the sectors that might actually lead to a real economic recovery should American business be given half a chance • Australian and Canadian resources and respect for contractual law make them good proxies for emerging market growth, which is real and will continue—albeit at a slower, more sustainable rate than promoted by Wall Street and the financial media • The makings of an American Renaissance originating in the Mississippi River Valley and American mid-west is currently on hold, frozen in the headlights of pending legislation that is clearly antagonistic to America’s economic interests; best outcome of mid-term elections may be to divide the houses and hamstring Obama • Get involved: taxpayer de facto commission by omission contributed significantly to the sorry state of affairs we find ourselves in today—and if we don’t fix it, clearly things will get considerably worse. www.emergingtrendsreport.com

23. Conclusions • The US dollar is not going to fail; but the controlled devaluation the Fed is trying to engineer is unlikely as well because things have gone too far, and there is too much corruption and malfeasance present in today’s financial markets. An exogenous event is likely to drive demand for dollars in a fresh wave of panic and undermine their efforts. • People are starting to understand how a fiat currency is used to defraud them of their wealth and a backlash is growing. • Deflation is entirely possible despite the Fed’s clear intentions to reflate the markets because credit (money) creation precedes employment growth—and banks aren’t lending, they’re hoarding; further, consumers aren’t spending, they are reducing their debt loads. • Until gov’t gets capital into the hands of businesses that drive the real economy and provide real employment, little of lasting value can be accomplished. • An alternative to the dollar is at best years away, and in the meantime, when push comes to shove all of the world’s governments will support the dollar, for its failure would mean theirs as well. • Physical precious metals and short term treasury instruments constitute the best ways to preserve your wealth and to save money; furtive trading is the only reasonably safe investment strategy because the simple truth is that in a negative real interest rate environment, you cannot NOT speculate. www.emergingtrendsreport.com

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