Cash is Crack, Get Gold

What will be the straw that breaks the dollar’s back? The answer to that question is rarely known without the benefit of hindsight, after which it is usually as obvious as it is useless. Currency collapses have historically been severe overnight events precipitated by intense inflationary pressure over time. The latter it is always a dunk shot for predicting the former, but plucking out that particular night can be tricky.

Last week, the FED cried that the crisis is upon us, an obvious observation that can be as useful as it is profitable if you buy as much gold or silver as possible without selling your kids into slavery. Most people now realize that the crisis has actually been upon us for quite some time, so the FED’s admission only serves to tug on the inflationary chains that will bring it down on you.

So, this is the message to those of you who care about your prosperity and keeping the fruits of your labor: abandon the sinking ship called the Federal Reserve Note. If you desperately cling to hope, abandon that as well. Sell everything you can – even things you don’t want to let go, and use all of the proceeds to buy as much gold and silver as you can get your hands on. The US dollar collapse is imminent.

How long do you think the Federal Reserve can sit back and create this kind of money out of thin air without destroying the currency?  Furthermore, can anybody show me an example of a paper currency that has actually lasted throughout history? Nope, didn’t think so. Witness:

The Fed announced it will print more money to finance runaway budget deficits and to keep mortgage rates artificially low. WSJ

The Fed will buy up to $300 billion in long-term Treasurys over the next six months…[Also an] additional [$750 billion of] mortgage-backed securities purchases will push mortgage-related facilities to as much as $1.25 trillion.

I mentioned the likelihood that the Fed would begin buying Treasurys in today’s first link. I didn’t anticipate the huge expansion in its purchase of MBS.

The Fed will be creating money electronically out of thin air to finance these purchases. When you buy a bond, its price rises and its yield drops. Buying another $750 billion of MBS along with $300 billion worth of Treasurys with printed money is a simple trade-off, debasing the currency so we can put a lid on the public’s and home buyer’s cost of debt finance.

This is terrible monetary policy. Keeping interest rates artificially low will encourage credit expansion when what’s needed to actually heal the economy is credit contraction. This sounds counter-intuitive, isn’t more lending what’s needed to “get the economy going?” No, too much credit is what got us into this economic mess in the first place. Asset values of all kinds are still over-inflated relative to their intrinsic value, the value of their discounted cash flows.

Credit is a drug. And the Fed is America’s dealer. We know we need to quit the stuff, but we’ll worry about that tomorrow. What we need right now is another fix in order to get through today. Our dealer, of course, is happy to oblige.

This is just a recipe for deeper and more destructive addiction and, eventually, far more painful withdrawal.

Unfortunately it’s precisely that bad-tasting remedy that most Americans fear more than the ailment.

Americans fear home prices will drop more sharply in the coming year, despite government efforts to resuscitate the battered real estate sector, according to a poll released on Friday.

U.S. homeowners surveyed by Reuters and University of Michigan predicted their home values would fall by 2.2 percent in the year ahead, the biggest anticipated decline in the past few years.

This predicted decline in March was steeper than the expected average fall of 1.9 percent in February.

Concerns that home value depreciation will intensify underscored the severe damage to consumer psychology stemming from the bursting of the housing bubble, heavy losses in the stock market and massive job losses.

If consumers, who account for more than two-thirds of U.S. economic activity, stay jittery about home prices, it will diminish the chance of the recession, the worst in decades, ending this year.

“Diminish the chance of the recession, the worst in decades, ending this year.” Yeah, the recession has a chance of ending this year, but only in depression.

You’ve got to love these guys. They provide so much fodder for those of us who actually understand economics. Anyhow, the point is that house and asset prices in general have to decline even more, andthey must bottom before the recession can end in anything but a depression.

Don’t believe it? Then simply look to the east where Japan’s governmentally micro-managed economy has drifted in and out of recession for more than 20 years and has just now entered into depression. The piper will be paid.

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