The Miles Franklin Newsletter
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Gary Christenson-Contributing Writer For Miles Franklin
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Gold and The Lender of Last Resort
Breaking news: The S&P500 Index hit another all-time high at 3,067 on November 1, 2019. The NASDAQ confirmed new highs while other indexes did not.
Investopedia says
,
“In the United States, the Federal Reserve acts as the
lender of last resort
to institutions that do not have any other means of borrowing, and whose failure to obtain credit would dramatically affect the economy.”
The Fed has created $billions in the past six weeks (more on the way) and fed those billions into troubled banks, hedge funds, foreign banks and others. Lack of Fed transparency forces us to guess which institutions the Fed helped with $billions of nearly free currency units.
The Fed “Party Line
:” We don’t disclose the recipients because it might cause a run on that institution. The Fed is important because it protects the economy from massive and destabilizing failures.
This is like announcing that we ignore graft and corruption in congress because telling the truth about our “leaders” could destabilize trust in congress.
BUT THERE IS MORE:
The Fed is the lender of last resort, and more.
- Wealth Transfer: The Fed enables the transfer of wealth from the bottom 90% to the upper 1%.
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- Hard Asset Suppression: The Fed enables the suppression of hard money to support the illusion of value in paper and digital currency units. (Bad for gold prices.)
- Banker Bailouts: The Fed enabled the bailout of banks during the 2008 crisis. The audit disclosed over $16 trillion in bailouts, low-interest loans, and guarantees. Bankers prospered, debts increased, stocks and bonds levitated, and dollars purchased less every year. (Gold prices rise.)
- Counterfeiter: The Fed is the counterfeiter of last resort. Individuals are not allowed to print $20 bills in their basement, but The Fed legally “prints” billion-dollar credits and transfers them to banks that partially own The Fed. This works well for the political and financial elite. It’s not good for the lower 90% who are damaged by higher prices. (Gold prices rise.)
- Bubbles: The Fed enables serial bubbles by creating excess credit as they direct their liquidity firehose toward selected asset classes, such as Internet stocks, houses, bonds, FAANG stocks, and sovereign debt. (Good for long term gold prices.)
- Liquidity Firehose: The Fed enables a vast liquidity machine that makes inexpensive credit available to a select few while the lower 90% pay 10% - 20% for credit card debt. The excess liquidity flows into the stock markets and boosts the wealth of the elite who own most of the stocks.
- Buybacks: The Fed enables stock buybacks by creating liquidity for stock purchases. This boosts stock prices and enriches corporate officers and Wall Street.
- Inflation: The Fed enables the rapid expansion of credit. Many more dollars chase the same goods, so prices rise. Fifty years ago, gold sold for $35 while the S&P 500 Index was 100. Today the price of gold is about $1,500 and the S&P 500 Index is 3,067. The dollar devalued as too many dollars were created. The Fed enables consumer price inflation. (Good for gold prices, bad for workers.)
- Arsonist: The Fed is not a “firefighter.” Instead, as James Grant observed, The Fed is an arsonist. The Fed lights the fires of inflation and creates the hot air that fills the bubbles that expand, burst and implode. You can bet on human nature, congressional greed, political lies and that bubbles will crash and burn.
- War: The Fed enables war. Dr. Ron Paul stated:
“It is no coincidence that the century of total war coincided with the century of central banking.
“The problem is that the government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes." (Good for gold prices.)
SO WHAT?
- The Fed has manipulated interest rates, purchasing power and the economy since 1913. They own or control most congresspersons, and influence academia, the media and the financial cartel. The Fed is dangerous and destructive, and it will not fade into the night. Work around it…
- The Fed will persist as lender of last resort; it’s a bailout machine.
- The Fed will create dollars and credit, devaluing existing dollars, and assuring consumer price inflation. Fractional reserve banking is profitable for bankers who sometimes become too greedy. The Fed exists to help bankers, not the lower 90%.
- The Fed enables the U.S. government to spend more than its revenues. Don’t expect government spenders to curtail Fed actions.
- Increasing debt enables more profits for the banking cartel and continues the transfer of wealth from the lower 90% to the political and financial elite. Few credible reasons indicate this transfer will slow or reverse.
THE ROLE OF GOLD AND SILVER:
Gold and silver are real money. If you paid for groceries with silver coins, or silver backed paper certificates, the banking cartel would not extract their slice from the transaction. Hence gold and silver backing for the currency were eliminated.
When gold and silver back the money supply, government must responsibly manage expenses and minimize debt. Big spenders avoid responsibility and detest the discipline of gold.
Official national debt reached $1 trillion in 1981. Today it's $23 trillion. That shows irresponsible management… except it benefitted the banking cartel, The Fed, lobbyists, Big Pharma, Military-Industrial-Security complex, Wall Street and many others. Don’t expect this corporate spending gravy train to stop unless it's derailed by exogenous events.
Gold and silver are real wealth. Piles of debt paper represent the transfer of assets from future generations to current corporations. When debt reaches a tipping point, much of it will be devalued to near zero. The inevitable default will be traumatic. Gold and silver will not default, and their prices will soar as unpayable debt is distrusted.
Inflate or die!
Gold and silver will preserve purchasing power as debt-based currencies devalue. Central banks, excluding the Fed, bought gold for years. Russia and China mined and imported gold for decades. The U.S. issued huge quantities of unpayable debt while ignoring gold bullion.
Refusing to audit Fort Knox gold is sensible for the government. If the gold has mostly disappeared (likely) nothing good happens for The Treasury by admitting the theft. If the gold exists, the 147 million ounces are worth around $220 billion, which covers the deficit for only a few months.
Performing an audit might encourage people to think the price of gold should be much higher –
$10,000 to $20,000 per ounce. Central bankers would be upset as gold at $10,000 shows the near zero value of their debt-based currency units.
Decades of experience demonstrate that central banks and commercial banks will devalue fiat currencies, sovereign governments will increase debt, while stocks, gold and silver will rise in price
. The 3,067 S&P500 Index will eventually rise to 5,000 or 10,000 and gold will sell over $10,000 during the next decade.
TIMING?
The S&P 500 Index has risen over 10 years, is selling at all-time highs and looks toppy. Yes, it can rise further, but what is the risk?
Gold reached an all-time high 8 years ago and remains well below that high. Silver is even more undervalued. From a risk versus reward perspective, gold and silver appear less dangerous and have more upside potential. Wall Street will not agree—another point in gold’s favor.
“The Fed WANTED a crash, and now they have it. The reason why is perfectly logical: The central bank, under the control of globalists at the BIS, needs economic chaos to provide cover for what they call the global economic reset.”
“No government has ever said, ‘Because we want to go to war, we must abandon central banking,’ or ‘Because we want to go to war, we must abandon inflation and the fiat money system.’”
“There must be no doubt that central bankers create the conditions for their own downfall. They are entirely responsible for a cycle of credit expansion and contraction that leads to what is generally referred to as the business cycle…”
QUESTION: If interest rates rise and central banks become insolvent, what are their debts (dollars, euros, yen, pounds) worth?
CONCLUSIONS:
- The Fed enables the transfer of wealth, suppression of hard assets, banker bailouts, inflating the “everything bubble,” legal counterfeiting, serial bubble blowing, liquidity injections and stock buybacks. The powers-that-be, congress, Deep State, the media and academia support the status quo and Fed interventions in markets. Those interventions will continue to the detriment of many.
- Gold, silver and the S&P 500 Index will rise. Focus on undervalued and unloved assets—gold and silver.
- China and Russia understand gold. They are not required to promote the Fed's party line.
Miles Franklin
will recycle paper and digital debts of the Fed into real money—gold and silver. Bullion is still available at reasonable prices.
Gary Christenson
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What if rates go up?
The world is awash in debt while interest rates are extremely low and at unprecedented levels. Interest rates have been engineered lower by central banks out of necessity. This "necessity" is not so much to spur the real economies on (as they say), rather, rates have been crushed to facilitate the payment of debt service. Bluntly, there would be no financial markets left if rates were at a historical norm of say 7%. The danger of course is that rates do go higher ...! What if interest rates do go up? This is a question no one even asks anymore.
This is not to say central banks will ever willingly raise rates around the world. They will not, they cannot! However, there are scenarios where market rates go up all over the world in the face of and in spite of central banks. This could occur for a myriad of reasons but I believe the prime possibilities to be a currency crisis where a major currency or currencies begin to lose purchasing power rapidly, or a major default or a domino of defaults.
Thinking this through, were a major currency to collapse versus other fiats, interest rates would need to rise in that particular region to "risk adjust". Additionally, were ALL currencies collectively lose purchasing power (think versus gold/silver "going up"), interest rates would also need to rise to risk adjust. You might want to read the previous sentence a couple of times because THIS is exactly why gold and silver have been sat on all these years, to prevent the perceived need for rates to go higher to adjust for currency risk.
Looking at the default issue, as bonds go through the process of defaulting, their prices drop. Lower bond prices mean higher yields, simple related math. If a sector or even sovereign region threaten to or actually default, rates associated will go higher. Should a default begin and turn into a global domino series, rates everywhere will go higher unless central banks buy everything sold and hold in their portfolio defaulted credits (as they did in 2008). In reality, this is exactly what caused the problem in the first place, central banks buying up everything in sight ...including stocks!
Now, let's look at what higher rates would mean? Obviously higher rates would slow business/commerce/trade but more importantly will hit the financial sector like a sledgehammer. I used the term "sledgehammer" for a reason. Were rates to rise from 7%to 9%, yes financial assets suffer but it is not disastrous. But what if rates went from 2% to 4%? Or in the case of $17 trillion of negative yielding global debt, what if rates go from negative to a positive 2%? I haven't done the math but 30 year bonds going from negative to 2% would mean a loss of value of over 50% in these "safe haven" investments!
Also, "who" gets killed if rates were to rise? The simple answer is anyone holding bonds... and in reality EVERYONE. Drilling down on a few examples, pension plans, banks, mortgage holders and yes, even central banks! Pension plans on average probably allocate 30-40% of their portfolios to bonds. Banks have huge debt holdings on their balance sheets and would be drastically impaired/insolvent from portfolio holdings. And the worst case of all are the central banks, they would be collectively rendered insolvent were rates to go higher. I don't know what the exact number is but I would guess a full 2% rise would certainly kill the BOJ and ECB because they have loaded their portfolios with zero or near zero interest rate debt over the last 10 years.
About two years ago I and others were talking about the Federal Reserve having a negative net worth because the drop in value of their portfolio holdings had wiped out equity on a mark to market basis. It didn't matter many said because the Fed would hold all their securities to maturity. This is true but 10 years or even 30 years is a long time to hold something. Besides, rates were only 1% or so higher at the time, what woud 2% higher from here mean other than "more insolvent" and deeper negative equity? Or God forbid, what if interest rates were actually made by Mother Nature and reverted to a historical 7% mean?
We could go through all sorts of examples but the bottom line to higher rates will basically mean "everything is worth nothing"! A very big statement for sure but is it really off the mark? If central banks are insolvent ...and they are the ones who issue the "money" (the currency), what is the money worth? Fiat currencies are "chits" or IOU's, would you willingly lend your next door neighbor funds if you knew him to be insolvent? Would you invest in any corporate, state/local, or even sovereign debt if you knew the issuer to be insolvent? And the biggest question of all, would you accept in exchange for goods or your labor, a currency issued by a central bank fully known to be insolvent?
These are all hypothetical questions to this point but I believe very valid today but 100% real in the long term. As I have harped on for several years, there is not enough "money" in the world to service and pay off the amount of debt outstanding. In order to create enough money to actually pay off current debt, central banks will need to create more money? One might ask, how do they create more money? Simple, via new debt which is how central banks increase money supply. But then even though there is more money to pay off the debt, the amount of debt outstanding has also increased... not to mention there would then be more money stock versus real assets and the money itself is diluted.
My hope is that by reading this you will go through the thinking process of what it all means. Without saying it, you just read "why" interest rates can never in your lifetime (even if you were born yesterday) go up 2 or 3% much less normalize to 7% without something very real and very important breaking. Another way of saying this is that life as we know it will change drastically (and not for the better) if rates actually begin to rise. Markets today are priced all over the world in a fashion or belief that rates will never ever rise. I assure you this is incorrect thinking and logic. No, central banks will not willingly raise rates but the grand policy error of global over indebtedness will open the door for Mother Nature to step in.
To conclude, the above in its entirety is a description of why the central banks will need to accelerate QE to infinity. It is the "how" asset prices (except gold and silver) have risen to levels never seen or even imagined before. It is why central banks have crushed rates essentially to zero and why sovereign treasuries have ruined their collective balance sheets since 2008. It is why ...the shit is guaranteed to hit the fan!
Standing watch,
Bill Holter
Holter-Sinclair collaboration
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Unencumbered / Segregated Storage
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About Miles Franklin
Miles Franklin was founded in January, 1990 by David MILES Schectman. David's son, Andy Schectman, our CEO, joined Miles Franklin in 1991. Miles Franklin's primary focus from 1990 through 1998 was the Swiss Annuity and we were one of the two top firms in the industry. In November, 2000, we decided to de-emphasize our focus on off-shore investing and moved primarily into gold and silver, which we felt were about to enter into a long-term bull market cycle. Our timing and our new direction proved to be the right thing to do.
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