2 May 2009

Best Quotes of April 2009 ~ collected by John Rubino

Doug Casey, Casey Research
People believe they have little to lose, they’re eager to hang those they believe responsible for their problems, and they’ll listen to radical or violent proposals. We’re now just entering what will likely be the worst economic trough since the Industrial Revolution. A rioter is typically an angry person looking for vengeance because he blames someone else for his problem. So far, rioters seem to be directing their attention at governments. Correct target, of course, but they don’t have the rationale quite right. They’re not angry because governments inflated the currency, promoted fractional reserve banking, and nurtured all the cockamamie socialist programs that caused this crisis. Not at all; they rather liked all that. They’re angry only because their governments haven’t adequately protected them from the consequences of what they did. So as conditions worsen, we can expect governments worldwide to pull out absolutely all the stops to show they’re “doing something.” And round up scapegoats to satisfy the mob and divert anger from themselves. I fully expect civil unrest to spread everywhere, simply because the depression will spread everywhere. It will be worst in places that have been most overextended, most debt leveraged, most urban, and have the largest numbers of unemployed workers -- the U.S., Europe, and China.

Terry Cox, Casey Research
It’s possible to train people to be crazy. If you’re acquainted with a psychotherapist (socially, of course), ask him to explain how it’s done. Training people to be crazy wasn’t what the U.S. government set out to do when it ended the dollar’s convertibility to gold in 1973. But it turned out to be one of the results.

Untethered from the gold standard, the Federal Reserve was free to create new dollars whenever it saw fit. But the policy it drifted into wasn’t steady inflation, day in and day out, it was rescue inflation. The Fed would step up the expansion of the money supply whenever it saw a risk of widespread defaults in credit markets. The unintended effect was to train both lenders and borrowers, by repeatedly rescuing them from damaging defaults, to appraise financial risk unrealistically and to regard what is in fact a source of danger as a manageable nuisance. It made the managers of financial institutions functionally crazy, and the longer rescue inflation continued, the worse they got. (When you read about investment bankers running a business with 30-to-1 leverage and tell yourself, “Those people must be crazy,” you’ve got it about right. But they weren’t born that way. They were trained.)

Donald Luskin, Trend Macrolytics
The U.S. dollar is the world's reserve currency. No other central bank has that status. So when anyone else in the world wants to save, as opposed to invest, you buy Treasury bills. It's just what you and I would do if we wanted riskless balances: we'd buy Treasury bills.

But what does the Treasury buy? How does the Treasury save? That subtle logic paradox: Who cuts the barber's hair? The Treasury has no capacity to save. It lacks the physical mechanism. It could invest, it could go out and buy an S&P 500 index fund, but that's investing, and it's not eager to invest, because at the moment, at least the culture is that the federal government doesn't want to be an equity owner in private enterprise.

So with all this money being thrown at the Treasury from around the world, there's really no choice but to spend it, so an $800 billion stimulus bill like we just rammed through in a rush to judgment a couple months ago is entirely feasible. In fact it was kind of a rational response to the world just throwing money at us, and so that's the setup.

But here's the thing. If this were a rational thing for the Treasury to do, then you could say it was rational for unqualified homeowners to accept subprime mortgages three years ago to buy inflated tract homes in Stockton, California, on the theory that three years from now when the mortgage reset, they could just walk away. So what the U.S. is doing with its Treasury debt is in essence the world's largest teaser mortgage.

We're funding most of this with debt that's with an average maturity of around three years. So three years from now, if the world credit crisis is healed and you don't have the world throwing money at you anymore, then this is going to reset and we're going to have to roll this debt. We're going to have to refinance. These three-year notes are going to mature, and what will interest rates be then, when people aren't desperate to own Treasury bills because they're afraid of owning anything else?

So this long detour to tell this story has really been about inflation. There's going to be a run-up to this; it won't wait until three years, it will be anticipated. So at the year-and-a-half point, when people start talking about it and it starts to be part of the dominant narrative, rates will start to go up, and the Fed's going to say, "Oh hell, just when recovery started to set in!" And the fact that recovery is setting in is what's causing these rates to go up.

So just when things are starting to look good, these rates will start looking a little scary, and the dollar will be falling in value, things will get kind of crazy again. But the Fed will say, "We can't let this nascent recovery be killed by a 5% 10-year rate! That was the kind of rate we had just when the wheels came off starting in 2007. We can't let that happen again!" So it's going to be time for the Fed to buy another $300 billion worth of Treasuries and another $600 billion and another $900 billion.

Darryl Robert Schoon
Every experiment with paper money begins well and ends badly. In the beginning, excessive issuance of paper money gives a sense of economic security and expansion, albeit a security and expansion as false as the value of paper money itself. That this experiment lasted three hundred years did not mean it would last forever.

Eventually over time, the issuance of more and more paper money sets in motion a final reckoning, a collective summation of previous monetary excesses, and the longer and more “successful” the issuance of paper money has been, the greater and more destructive the subsequent and inevitable final collapse will be.

This is where we are today. The central bank model based on the Bank of England spread not only to the US but to the rest of the world; and, as central banking spread, so, too, did its credit-based paper money which turns into debt.

Today, trillions of credit-based paper dollars have now replaced the billions which before had replaced millions. The issuance of paper money is infinite because its issuance is not constrained by anything of value; and, because infinitely expanding credit turns into infinitely compounding debt, trillions of dollars of debt are now defaulting and collapsing upon us as the global economy slows.


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