The Biggest Debt Write-Down In Human History

Michael Victory's picture

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In case they didn’t cover it in your weekly programming, the biggest debt write-down in human history occured on 3.9.12.

SDA Announces a Credit Event Has Occurred

No need to worry, the ISDA, IMF, ECB, US Fed, Euro Zone Leaders and every other Frankenstein group have everything under control. Don’t worry that they changed their minds more times than your wife changes shoes before coming to this “solution.” This time they’re sure. Sure this is going to be a huge benefit to the Greek people. Sure the triggering of CDS’ in no threat to financial institutions and sure overall payouts will be around the $3.2B in net outstanding CDS contracts linked to Greece. And sure the exact level of payouts will be determined on March 19. I am sure not one of these sureties is accurate.

The biggest debt writedown in history, will be followed-up with additional bailout funds being given to the money masters, I mean the poor people of Greece. It’s for the children. IMF head, Christine Lagarde wants to contribute $36.4B from the IMF to the $169B upcoming bailout. Ms. Lagarde says this will be needed to avoid a disorderly default that could be destabilizing. I guess skyrocketing suicide rates and pleas from Greek parents to give their children up for adoption is considered stable. Their oppression reeks of their greed and disgrace.

The restructuring will shave $138B off Greece’s $487B debt. Non-elected Minister Lucas Papademos called the deal a “historic success”. He continued, “For the first time, Greece is not adding debt but taking debt off the backs of its citizens.” You’ll have to forgive Papademon, like his friends, he often confuses the words debt and money. I’m sure he meant that they would be taking money off the backs of its citizens. Forget about the upcoming madness with Spain, Portugal, France and finally the US. Do you really think the “net” 3.2B CDS Greek exposure is the true liability? I’ll help you with the answer. If they sold a couple hundred billion in fictitious insurance and immediately took the proceeds and levered them, say a 100x and dumped it on themselves, proclaiming, “It’s raining!”, do you think they will be able to cover the insurance claims now? I guess we’ll find out if chopping off the head of a zombie bank can really kill them.

Institutions Will Not Enter the Gold Market in Force

Worth their weight in paper – It is my belief that financial institutions will not play a large role in this gold bull market until it is too late. I want to clarify that I am not referring to central banks or Sovereign Wealth Funds that are already some of the biggest players in this bull market, especially those in the East, like China. Rather, I am referring to the investment banks, securities firms, mutual fund and insurance companies.

Comments like those made by Warren Buffet in this year’s annual letter to Berkshire Hathaway shareholders are indicative of the feelings of many money managers and executives in the financial sector. Warren stated gold is an asset that is “forever unproductive” and that “it [gold] will never produce anything.” The common belief is that gold is not an investment, but a speculation. This is because money managers don’t understand gold or how to value it. More on how to value gold later.

Gold doesn’t pay a dividend and doesn’t generate easy transaction or administrative costs. Many investment managers I work with don’t even consider gold an asset. The whole system is built so that each component works together – they facilitate deals, offer services and issue and sell paper for profit. It’s a symbiotic relationship between all groups that will not be broken. Gold is not part of their business model. It is for this reason that I believe institutions will not be large players in the gold market and will ultimately be severely impacted by the dollar collapse. The coming currency collapse will destroy the entire financial system. They are a ship of fools sailing off a cliff.

The Manipulation of Markets Will Only Increase Until They Don’t

We have reached the point where manipulation (aka policies) by governments and government sponsored entities need to continuously increase to keep the debt-based monetary system from collapsing. Similar to the fictitious interest rates in the US Bond Markets, the gold and silver manipulations must continue until the last. No matter how you choose to store savings, you should understand the manipulations will continue until they cannot any longer. If you can understand how this will end, you will not only be able to handle the short-term volatility, but will see it as a gift.

Like a thief in the night, the financial system’s ship of fools will find their gold has been removed and they’ve thrown their silver away.

How to Value Gold 

I believe James Turk has the best way to value gold. Keep in mind using this formula assumes that 5,000 years of history is not wrong and in fact gold is still money. I tend to put more faith in 5,000 years of human behavior than digits on my computer. James determines “fair value” by dividing Central Bank Foreign Exchange Reserves by Central Bank Gold Reserves. Using this calculation, the “fair value” of gold is over $11,000/oz and rising. How high’s the water Mama? $1,700 and rising.

Gold Oil Ratio (GOR)

Last week I mentioned that the price of oil was dropping versus gold, as I would expect in either a hyperinflationary or hyperdeflationary depression that coincides with a financial collapse. In 2005, the GOR was 6.6 barrels of oil/oz of gold. Today, the price of oil has dropped to about 16 barrels/oz. That means I can buy almost 2 ½ times the amount of oil for the same amount of gold. The historical norm is between 15-20 barrels/oz – so we are around the historical average now. I know about peak oil and peak everything theories. Whether peak oil is true or not, it’s going to feel like peak oil if your savings is in USDs.

Rising Taxes

With budget deficits running completely out of control, new and existing taxes are going to be levied on the public. We have new taxes for ObamaCare and the potential for the Bush tax cuts to expire in 2013. All told, 41 separate tax provisions are set to expire this year, ranging from personal to estate taxes. In addition, there has been a 2013 proposal that could reduce the tax benefit of employee deferrals into a qualified retirement plan for certain high income individuals. We’re talking 401Ks and the like. The proposal would tax deferrals at a rate that is the difference between the employee’s tax rate for ordinary income and 28%. It is unclear whether this proposal will gain traction, but what is clear is the direction of future taxation to support ever growing debts.

No matter how high existing taxes go or how many new taxes are implemented; there is no way to cover the shortfalls. John Williams of SGS noted that even if the US were to tax 100% of all wages and corporate profits, they could still not cover the bill. Unfortunately, this won’t stop them from trying. The whole debate about who should pay what, is a perfect example of how the conversation is being directed. We are following their script without ever questioning why. How in the world are we ever going to pay them what they demand if they keep taking it out at a faster rate? Catherine Austin Fitts put it best by saying, “A negative economy is like having a hole in the milk bucket; it’s time we fixed the hole and filled up the bucket!” I’m not just talking about a little waste. I’m referring to the outright theft by those with access and power.

There’s a Hole in the Bucket

There are many holes in the bucket. A few examples include:

1) Federal housing programs like the FHA and HUD – Time Magazine exposed a scandal at the FHA where real estate speculators used the program to make huge profits at the expense of the poor. Builders pocket millions of profits from mortgage loans that far exceeded the cost of construction. These programs allow the government to write bank checks to those involved in the contracts. In the 1980’s it was disclosed that senior HUD staff used their positions for personal gain and when they left their positions they used inside contacts to win subsidies and new contracts. In 1981 Sam Pierce became Secretary of HUD under Ronald Reagan. After leaving his office, the US Office of the Independent Counsel and US Congress investigated mismanagement and abuse stemming from political favoritism. Through the 1990s many of Pierce’s closest aides were charged and convicted of felonies for inappropriate expenditures, but Pierce himself was not charged. HUD provides about $8B a year to public housing authorities (PHAs).

In 2006, The Miami Herald ran a series exposing the following examples of fraud and corruption:

• The PHA gave developers and nonprofit groups with political connections millions of dollars to build affordable housing, but they ended up building shoddy houses or no houses at all.

• HUD gave the PHA $35 million to tear down dilapidated public housing and replace it with new affordable housing. Six years later, half the money was gone and only three houses had been built.

• Instead of selling new houses to low-income buyers, the PHA allowed developers to make sales to wealthy investors who then “flipped” them for a profit.

2) Medicare and Medicaid – Theft in these two federal health programs range well into the 100’s of billions annually. Malcolm Sparrow of Harvard University, a top specialist in health care fraud thinks it’s likely that between $200-500B/year is lost to fraud (theft) between these two programs.

3) Food Stamps – $1.7B/year lost to fraud

4) School Lunches – $1.4B/year lost to fraud

5) Supplemental Social Security – $4.6B/year lost to fraud

6) Unemployment Insurance – $4B/year lost to fraud

7) Temporary Assistance for Needy Families – $1.7B/year lost to fraud

And if we wanted to get belligerent, we could mention the Wachovia money laundering scam using funds from the Mexican (CIA) drug cartel. To be fair to Wachovia, they were fined 1/3rd of a cent for each dollar laundered.

The hole gets bigger yet. We’ve got to pay for their military. And I mean “their” military. The American people are not asking to drop more bombs, they are being told. It’s a complicated agenda that we wouldn’t understand, so they have to choose for us. It’s for our own good of course. If it wasn’t already clear, they like to give you a second serving. In June 2011, The White House told Congress and America why it didn’t need their approval for military action in Libya. It was because it wasn’t a war – they should just say it’s because “we say so”.

General Smedley Butler, two-time recipient of the Congressional Medal of Honor put it best: “War is just a racket. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small inside group knows what it is about. It is conducted for the benefit of the very few at the expense of the masses.”

The US taxpayer is funding global military operations in a big way. We have over 700 military bases in 130 different countries. The reported military budget for the US is $700B/year. More than the top 14 countries (excluding the US) combined. Including off-the-books war costs, the annual US military spending is estimated to be about $1.25T. To add insult to injury, Secretary of Defense Donald Rumsfeld publicly stated on September 10, 2001 that “According to some estimates we cannot track $2.3 trillion in transactions.”

There’s a hole in the bucket and it’s getting bigger. It’s a massive gaping hole of fraud and abuse, waste of hard-earned tax dollars, corporate exploitation, criminal-predatory lending and governmental tyranny. Deceit masked in thousand page bills. There’s a hole in the bucket and we need to fix it.


Market Thoughts 

Walking a Tightrope

Think of the market as a man walking on a tightrope with each arm tied to a team of horses. On one arm are the natural forces of deflation, on the other are the unholy forces of central bank intervention. The horses pull harder with each passing day, making it ever more difficult for the man to balance himself. As he wobbles with volatility, the crowd wonders which team of horses will succumb. Some betting on hyperinflation, others on hyperdeflation. All seeming to understand the man must fall eventually. Given the collapse in inevitable, CBs will ensure it’s not a deflationary collapse. They’ve already stated this and back-stopping banking deposits alone will require full-speed printing (FDIC is broke too). Collapse due to a deflationary spiral is a certainty, while printing is more profitable for those in control and postpones the day of reckoning the longest, if they can just keep their team of horses in equilibrium with the
deflationary horses. In the meantime, holding a portion of your portfolio in cash is a prudent option. Of course the amount you hold in cash depends on your situation. I am extremely bearish on the U$D and still hold over 20% in cash. I accept the 10% annual hit from inflation – it is the cost of protecting my PMs and it may allow me to take advantage of buying opportunities should the man, I mean market, wobble violently.

Unlimited Dollar Swaps

On the interventionist team, the US Fed is supplying an unlimited amount of dollars to the world via the dollar swap agreements. On Nov. 30, 2011, the world’s G6 central banks (the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank [ECB], the Swiss National Bank, and the Bank of Canada) announced “coordinated actions to enhance their capacity to provide liquidity support to the global financial system”. Under this agreement, The US Fed will offer unlimited amounts of US dollars to other central banks at the US dollar overnight index swap rate (OIS) plus 50 basis points (about 1%). These freshly printed dollars are being lent to the CBs respective banks, so that withdrawals and debt payments can be met. These swaps are, and will continue to be offered with no limitation until at least Feb 1, 2013.

Near-Term Market Movements

The US trade gap for December widened to a record $52.5B. More importantly, we have the Greek CDS’ and incredible debt financing to deal with this month. You know what we need to solve this nagging issue of insolvency? More credit! Or debt, or money, or whatever they call that digital and paper shit they are so good at creating. The “pushers” will probably make you ask nicely, but not too worry, the doctor’s here and he’s got his syringe ready. The new injection will have its desired affect – junky affect. I’m expecting a continued downward movement in the world’s stock markets through the end of March and into early April. Any attempts at rallying will be met with new fears over the expanding debt tsunami. It’ll be plenty choppy – the risk is on the downside. I wouldn’t be caught shorting stocks, but I consider any allocation risky. PMs and commodities will move much higher beginning in April. $2000 gold and $50 silver by July.


God Bless,

~David Freedom

Click for the supplemental editorial audio.