More Monopoly Money ...
by
Larry Edelson
If
you think the biggest cost of the $700-billion bailout
package is going to be higher taxes down the road, you're
wrong.
The
biggest cost is going to be the sheer destruction of the
purchasing power of your money, an outright devaluation of
the dollar that's going to occur, no matter what.
Don't get me wrong. I am not against the bailout package.
It had to be done. We can debate free market philosophy
for the next 100 years. We can debate the details of the
package, too. But in the end none of that matters.
Because if Washington didn't act on this crisis, if they
let AIG, WaMu, and others fail, the alternative — a
deflationary depression several times worse than the Great
Depression — would be a lot more painful, destroy a lot
more lives and families, and take many more years to
recover from.
So
for now let's put all the philosophical debate aside and
discuss this crisis in practical terms.
Where's the money going to come from?
Washington doesn't have $700 billion. Nor did it have the
$592 billion it's already shelled out since August of last
year, when the crisis began.
In
fact, the U.S. government was broke before this bailout
package. Now, it's even more broke.
So
the money has to be borrowed from the public. Yet again.
From investors in this country and from other countries.
By issuing loads more government notes and bonds.
Loads more IOUs.
Right now, it seems like investors around the world still
have enough faith in the U.S. government to lend it most
of the $700 billion. But it remains to be seen what
interest rates they'll want to receive.
So
we should be able to borrow most of the money for the
bailout package.
And
what about the amount that the public isn't willing to
lend to the Treasury? No problem there either. The
Federal Reserve will just print up the balance.
You
see, the ultimate source of all money in the U.S. is
either debt, or monopoly money created by the Federal
Reserve. Or some combination of the two.
Either way, it's not real money. It's fictitious money.
It's nothing but a bunch of IOUs and electronic credits
and debits.
It's
nothing more than a promise to pay you something of value.
If you wait around long enough to get paid.
So
we have that settled. We'll be able to borrow the money,
or print it up. Either way, it's clear: The U.S.
government, already in hock past its eyeballs, has to go
even deeper in debt. A lot deeper.
So
the next question is ...
What's the $700 billion really going to cost us?
No
one knows for sure. But I'm going to take some guesses
here.
First, if you buy the line that the Treasury is aiming to
make money on the bailout, on behalf of the taxpayers
— you and me — think again.
Since real estate prices were the trigger behind the
losses, it's safe to assume that if the Treasury is going
to make us any money on this deal then the assets
underlying all the losses to begin with will need to
somehow rise in value for us to make a profit.
That
means property prices are going to have to regain all
they've lost, and then some, for there to be a profit on
that $700-billion investment.
I repeat: Property prices are going to have to regain all
the value they've lost, and then some, for the Treasury to
show us a profit on this $700-billion investment.
That's simply not going to happen. Not in my lifetime.
Property prices might bottom out and start moving back up.
But property values are not going to exceed their previous
peak in my lifetime or likely yours.
Oh,
and keep in mind, it's not really $700 billion. You have
to add in the $592 billion the Fed and the Treasury
already pumped into the economy prior to this bailout
package. So the total so far is $1.29 trillion.
Second, there's the interest expense on all the IOUs that
will have to be issued.
Let's take the total so far, the $1.29 trillion. Apply a
conservative 5% interest rate the government is going to
have to pay to borrow the money.
That's another $64 billion per year in interest expense
costs. Compounded over 5 years, that's over $350 billion.
10 years, $807 billion.
Where's that money going to come from?
And
if we're to profit from the bailout, that just means real
estate prices not only have to get back to their previous
peak, they have to exceed that peak by the amount of the
interest expense that has to be paid to show a profit.
More
proof we're not going to profit.
Third, raising taxes isn't going to help, either.
There's no way the economy can handle higher tax burdens
right now. And even if it could ...
Recouping part of the $1.29 trillion (ignoring the
interest expense cost) through taxes is not a profit for
the taxpayer. It's a burden. A cost.
So I
ask you again, where's the profit potential for the U.S.
taxpayer?
Answer: There will not be any profits. Period.
So the real cost of this bailout will be at least $1.29
trillion. And if real estate prices don't stabilize soon,
the cost could easily mushroom to $1.5 trillion. Or $2
trillion. Perhaps even more. Not counting the interest
expense!
And
again, how's it going to be paid for?
The
one and only answer: By a substantial devaluation of the
U.S. dollar. By inflating it away. By eventually raising
asset prices fictitiously through inflation, through more
smoke and mirrors, via an eventual massive dollar
devaluation.
In
fact, there's precedent for it: The Great Depression only
ended after Roosevelt devalued the U.S. dollar in January
1934 by raising its exchange rate with gold from $20.67 to
$35.00. That was a de facto 69% devaluation of the dollar.
The
same thing is going to have to happen this time around.
Only you won't see any President, or anyone in Congress or
the Fed actually coming out and saying the dollar needs to
be devalued.
They
won't have to. The markets will do it themselves.
Notwithstanding an occasional knee-jerk rally in the buck,
the dollar is toast. No ifs, ands, or buts about it.
Already, some measures of money supply, the ultimate
source of devaluation of a currency and inflation in the
economy, show money growth running at an annual rate of
more than 14%.
And
in the last two weeks, that rate has exploded even higher,
to an annualized growth rate of, get this — over 200%!
There is no way that kind of monetary growth can be
anything but inflationary.
So What Can You Do To Protect Your Wealth?
Now,
more than ever before, you must keep in focus my
two-pronged approach to protecting — and increasing — your
net worth:
First, no matter what, keep the majority of your
money LIQUID!
Don't get stuck in illiquid investments right now,
especially real estate.
Also, continue to steer clear of long-term government,
municipal, and corporate bonds.
Ignore the talk that interest rates on these instruments
will decline. They may do so in the short-term, but with
the Fed pumping out money like crazy, it's only a matter
of time before bonds get hit hard again, and long-term
rates start climbing.
In
my opinion, as well as Martin's, treasury-only money
markets are the best place to hold the majority of your
keep-safe funds. Forget about the yield. The most
important thing right now is making sure you get back your
money.
It
may seem like a contradiction to invest in Treasury bills
with the government so dead broke and having to borrow so
much more money. But lending your money to the government
for a year or less is a heck of a lot safer than lending
it to them for 10, 20 or 30 years, where you're sure to
lose out to inflation.
Second, hedge the value of your money and
simultaneously position yourself for profits.
The
best way to do both: Seek out tangible assets that thrive
when the dollar is sinking and inflation is rising,
especially gold.
Gold
is the ultimate safe haven, the world's only true form of
money.
If
you've been following my recommendations here, especially
my flash alert of September 16, then you're all set, with
up to 25% of your liquid net worth in various gold
investments.
Gold
is up 17% since I issued that flash alert, just two weeks
ago. What's more, the precious yellow metal is up more
than 131% since I first recommended it in my Real
Wealth Report. And more than 250% since I started
recommending it at Weiss Research.
Hold
that gold, or you'll be sorry.
Also
consider other hard, tangible assets with intrinsic value.
Such as oil ... food ... and other natural resources.
Some
of these markets have taken hits recently. But long term,
they remain in strong, enduring bull markets.
Best
wishes,
Larry
P.S.
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