Related Articles:

1. 2012: More Money-printing Leading to Accelerating Inflation, Rising Interest Rates & Then U.S. Debt Crisis! Got Gold?

Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660

2. Alf Field’s 7 “D’s” of the Developing Disaster Revisited

When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 - devolution.] Words: 1520

3. Why Hyperinflation is Not Likely – Let Alone Imminent

The National Inflation Association (NIA) has just posted an article* which makes a number of interesting arguments for the advent of hyperinflation and, while I agree with the conclusion that we could potentially face such an event, I see it as just one of a few possible outcomes. Let me comment on the specific points in the NIA article. Words: 1666

4. Continuing High Unemployment = More Money Printing = Higher Gold & Silver Prices

The Federal Reserve has a dual mandate set by Congress of maximum employment and stable prices. During Chairman Bernanke’s most recent press conference he indicated that the Federal Reserve has done a better job of maintaining price stability while falling short of fostering maximum employment. [As such,] we believe the Federal Reserve will continue to increase the monetary base and weaken the dollar as long as unemployment remains elevated. While the economy (measured by real GDP) and the unemployment rate have not benefited from a substantial increase in the monetary base, the price of gold and silver have benefited from money printing. We believe this statement is quite important for monetary policy and for investors. [Let us explain further.] Words: 388

5. Where Is This Unprecedented Global Financial Crisis Headed? A Retrospective from Alf Field

 

Everyone must be wondering where this “unprecedented global financial crisis”, (the World Bank’s words), is heading. What follows, for what they are worth, are my cogitations on this crisis. Words: 1641

 

6. Egon von Greyerz Interview on Future QE, Hyperinflation and the Price of Gold

 

 

A final or total catastrophe of the currency system will occur as a result of unlimited money printing that will lead to hyperinflation. Stock markets will benefit temporarily from this QE [but we expect that the] markets will fall 90% against gold in the next few years. The correction in the precious metals [will] likely [soon] be over and we should see the metals going to new highs in 2012. Words: 450

 

7. Why Negative Real Interest Rates + Stimulative Money Supply = $10,000/ozt. Gold

 

 

 

 

Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.] Words: 1049

The past several quarters of improving real GDP may be nothing more than an interlude in a more sustained economic downturn with further negative quarters still ahead. Such an outcome will suppress inflation further and quite possibly lead to deflation. Words: 1986

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Van R. Hoisington and Lacy H. Hunt’s (www.hoisingtonmgt.com) quarterly report* for the sake of clarity and brevity to ensure a fast and easy read. They go on to say:

The Four Major Impediments to Economic Normalcy

1. Deficit Spending
Deficit spending is not conducive to sustained economic growth. Substantial scientific research from both U.S. and foreign countries indicates that the government expenditure multiplier is considerably less than one and quite possibly close to zero. This means that if an economy starts with real GDP of $14.3 trillion (i.e. the level for 2009), and it is shocked by a surge in deficit spending, such as has been the case in the U.S., GDP will grow, but the economy will then eventually return to essentially where it began. However, the deficit spending shock leaves the economy in a more precarious overall condition because the same sized economy must now support a higher level of debt. Additionally, the private sector’s share (which was 79.4% in 2009) will be reduced in favor of a larger governmental share (which was 20.6% in 2009).

The Office of Management and Budget (OMB) projects that the ratio of government debt to GDP will jump from 53% currently to 77.2% in 2020. Based on this substantially elevated level of debt, the government share of total GDP could exceed 25% of GDP within five years followed by even higher levels thereafter, a dramatic difference from the share in 2009. At the same time that the government share of GDP has risen, the private sector share of GDP has fallen. This period of extreme underperformance of the private sector since 2001 combined with higher relative levels of government debt constitutes a clear sign that the U.S. is following the path toward economic stagnation and a lower standard of living.

Going forward, the diminished private sector must generate the resources (i.e. the funds) to service and/or repay the increased level of debt. If the private sector is not successful in generating the additional resources needed, the government sector must either go deeper into debt or impose additional taxes on the already stressed private sector. [Indeed,] considerable evidence suggests that this self-defeating process has already resulted in transfers of resources from the private sector to the government sector.

2. Higher Taxes
The other side of fiscal policy – taxes – also poses another major obstacle to a return to sustained economic growth. The scientific work indicates that the government tax multiplier has a negative impact on economic growth. Academicians estimate that the drag on the overall economy from a $1 increase in taxes is between $1 to $3 over time. Thus the multiplier is -1 to -3. According to the administration’s figures, the sunsetting tax cuts of 2001 and 2003 will result in a $1.5 trillion increase in taxes over the ten year period beginning in January 2011. Some have estimated that the health care reform legislation will raise taxes another $0.5 trillion, while adding to the budget deficit at the same time. Using a mid-range tax multiplier of -2, the contractionary force on the U.S. economy over the upcoming ten years would be $4 trillion, or approximately an average of $400 billion a year. This amount happens to be almost as much as the entire gain in GDP in the past four quarters. Clearly, a very vulnerable economy will not be able to absorb such higher taxes easily and the response may well be a renewed business contraction.

3. Massive Over-Indebtedness
The U.S. economy remains extremely over-indebted. In the first quarter, the total debt to GDP ratio was 357%, 100 percentage points higher than in 1998 [and] the best scholarly work indicates that the process of over indulging on debt ends badly:
- economic deterioration,
- systematic risk and, in the normative case,
- deflation.

Another aspect of the debt problem must be considered. The debt was used to acquire a large number of things that are no longer needed in the sense that they are not viable in view of current economic circumstances. [As such:]
- individual private sector borrowers will not have the resources to make timely payments for debt service and amortization,
- vast amounts of factory capacity, office space, warehouses, retail space, and other facilities [will remain unused],
- the housing industry is no healthier now than it was before the two costly home buyer tax credits producing the same outcome as the cash for clunkers program, which added to the deficit without providing a sustained lift to vehicle sales.
This long list of excess capacity serves to undermine the demand for labor. The U.S. must work through this redundant capital stock before longer working hours will be made available to the existing work force. Even more time will be needed before longer working hours lead to increasing demand for new hires.

It is estimated that 125,000 new hires per month are required to provide jobs for our growing labor force. If the economy is to re-employ the 8 million plus individuals thrown out of work over the past year and a half, another 240,000 new jobs per month will be required. If we are to reach full employment status over the next three years our monthly payroll gains should be about 365,000 per month. This prospect seems quite unlikely.

4. An Impotent Fed
Monetary policy is not working in spite of the widespread contention that the Fed is wildly printing money. The line of reasoning by many observers is that the Fed’s actions will soon lead to faster economic activity but with rapid inflation. The rationale seems to rely on the work of Nobel Laureate Milton Friedman, the world’s leading researcher on money and its role in the determination of economic activity, inflation, interest rates and employment. Friedman’s transition mechanism from money to either inflation or deflation appears to be poorly understood by those who assume that increases in the Federal Reserve’s balance sheet are tantamount to inflation.

To understand the fallacy of the above arguments, first consider what constitutes money. Money has three principal functions:
1. Money is a medium of exchange
Money can be a tangible item, such as a dollar bill, that is accepted as payment for other tangible items or for services rendered. In this way, it serves as a medium of exchange in transactions. When an asset serves as a medium of exchange, it is completely liquid, as when the dollar bill is exchanged, without delays, for a hamburger.

2. Money is a unit of account or standard of value
Money can be fashioned to define very precisely the value of particular goods or services. For example, U.S. gross domestic product (GDP) is reported in dollars, just as firms report their sales and profits.

3. Money is a store for future use
According to Friedman, money, in this capacity, serves as “a temporary abode of purchasing power.” You may store your wealth in a variety of places:
a) Although gold coins were once used, gold is so illiquid that it is not even considered to be a form of near money–though it is still widely thought of as a store of value [and] since its price can fluctuate widely and unpredictably, it no longer serves well as a medium of exchange or as a unit of account. Also, storage, insurance and conversion costs for gold may arise.
b) The monetary base, bank reserves plus currency, does not fulfill these functions and hence does not constitute money. To paraphrase Friedman and Schwartz, the base, which is also known as highpowered money (currency in the hands of the public and assets of banks held in the form of vault cash or deposits at Federal Reserve Banks) cannot meet these criteria. The nonbank public – nonfinancial corporations, state and local governments and households – cannot use deposits at the Federal Reserve Bank to effectuate transactions. Moreover, currency is not sufficiently broad to be considered a temporary abode of purchasing power.

Let’s be clear on this subject. In 2008, when the fed purchased all manner of securities, to the tune of about $1.2 trillion, the fed was not “printing money”. Bank deposits at the fed exploded to the upside, the monetary base rose from $800 billion to $2.1 trillion, yet no money was “printed”. Deposits did not rise, loans were not made, income was not lifted, and output did not surge. The fed could further “quantative ease” and purchase another $1 trillion in securities and lift the monetary base by a similar amount yet money would still not be “printed”. It is obvious the fed authorities would like to see money, income, and output rise, but they cannot control private sector borrowing. If banks were forced to recognize bad loans and get the depreciated assets into stronger more liquid hands, it could be debated on how much reserves should be in the banking system. Until that cleansing process is completed it will be a slow grind to cure the one factor which makes the fed “impotent” and unable to “print money”….overindebtedness.

Excess Money equals Inflation; Insufficient Money equals Deflation
According to Friedman, the inflation/deflation outcomes hinged on whether money increases are excessive or insufficient. Due to repeated Federal Reserve policy error, the nominal quantity of money has intermittently fluctuated wildly, forcing the nonbank sector to realign spending with the optimum level of desired money balances. By such policy actions, the Fed accentuated the volatility of the business cycle … The evidence unambiguously indicates that current growth in the quantity of money is exhibiting a strongly deficient trend. In the latest twelve months, M2 has inched ahead by just 1.7%, the slowest pace in fifteen years, less than one-third the average annual gain in M2 of the past 110 years. Although the Fed no longer calculates M3, economist John Williams does, with his numbers registering the most severe contraction since the end of World War II. Hence, Friedman’s monetary analysis is consistent with deflation not inflation.

Prelude to Deflation?
Under a neutral velocity assumption, nominal GDP might be expected to improve a mere 1.7% in the next four quarters, the same as the previous four quarter rise in M2. If this were split between inflation and growth, this would result in sub 1% numbers for both real GDP and inflation. Velocity (V2), however, is more likely to fall and this is a bad sign because V2 is mean reverting and it has been above the mean since the early 1980s. Moreover, velocity historically has declined when the private nonbank sector is deleveraging, as is the case currently. This condition is partially the result of the heavier government absorption of the pool of available credit. Also, there is a reduced incentive to take risks in an environment of substantially higher taxes. Thus, inflation and real GDP could both post surprisingly meager readings. With the GDP deflator up less than 1% in the past four quarters and the core CPI in a similar range, the trend in inflation remains down. The risk, if not the probability, is that deflation lies ahead.

Where to Invest?
Long term Treasury bond and zero coupon bonds will perform well in this environment. Collapsing inflationary expectations (or should we say rising deflationary expectations) will drive the bond yields lower; perhaps even into the range of prior historical lows.

In this environment, holdings of long Treasury paper will serve not only as a safe haven but an asset whose value will appreciate significantly.

*http://www.hoisingtonmgt.com/pdf/HIM2010Q2NP.pdf

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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There is no shortage of debate these days regarding the future purchasing power of the dollar—and understandably so. With the recent explosion of the Federal Reserve’s balance sheet, it is easy to understand why many are terrified of the possibility of the kind of rampant inflation often found in banana republics. After all, prices are more or less a product of the money supply and its velocity and the Fed has more than doubled the monetary base since September 2008. Words: 1142

In further edited excerpts from the original article* Nathan Kawaguchi (www.IgnoreTheMarket.com) goes on to say:

Be that as it may, we have not yet seen high inflation because the velocity, or multiplier, of money has gone down by roughly half over the same period. The potential for high inflation is there, however, and this is what folks are rightfully worried about.

To make matters worse, the U.S. was already heading down a dangerous path in regards to budget deficits and an unmanageable mountain of unfunded Social Security, Medicare, and Medicaid liabilities. The stimulus response to the financial crisis only added fuel to an already blazing fiscal fire.

Arguments for Inflation
The strongest risk of inflation comes from rapidly increasing government debt that currently carries a low average interest rate and low average maturity. This is the economic equivalent of an adjustable rate loan because we don’t have the resources to repay principal. Recent data from the U.S. Treasury show an average maturity of about 4.5 years at an average interest rate of 2.5%. This equates to about $165 billion in annual debt service (interest only), which is about 7% of total estimated 2010 receipts of $2.381 trillion. There are three specific factors that could exacerbate this problem and push interest rates higher:
1) Investor fear of dollar devaluation;
2) Rising fear of technical default;
3) Simple supply and demand forces from ever-increasing debt issuance due to the $1 trillion annual budget deficit that is estimated to persist for at least the next decade and the government is notorious for making overly optimistic budget predictions.

Arguments for Deflation
On the other end of the spectrum, we find another large camp of people who believe that massive deleveraging will lead to a second Great Depression. This makes sense because we have a debt-based monetary system in which money is born into existence from debt and, of course, all debt needs not only to be repaid, but repaid with interest. As debt is destroyed through repayments and defaults, the money supply is also destroyed. Lower money supply leads to more defaults and more debt destruction, and the vicious cycle continues. This was at the heart of the Great Depression. It is easy to understand why Ben Bernanke, a student of the Great Depression, made the decision to flood the market with liquidity in response to the financial crisis.

Other strong arguments for deflation are the rising unemployment rate and potentially higher tax rates to pay down ballooning debts at federal, state and local levels. Both of these would have the effect of lower total discretionary income, which would decrease demand for goods and services.

So Which Will It Be?
In a world of self-proclaimed experts, almost everyone with an opinion is firmly in one camp or the other. In fear of appearing indecisive or incompetent, many overlook the most rational answer: I don’t know. Since when did it become so shameful to admit that we don’t know what the future holds?

There are very compelling arguments for both inflation and deflation. The answer will eventually depend on decisions made in Washington and how people react to those decisions. For now, let’s stop fooling ourselves and admit that we don’t know. It is a problem that has to be dealt with and there is no easy medicine. Either path will be painful, but that’s what we get for our two and a half decade debt binge.

How Can We Protect Ourselves?
Once we admit that we don’t know what the end result will be, we can focus on how to protect ourselves based on a range of different outcomes. Investors and savers should focus on the likelihood that different outcomes will materialize and also look at the resulting consequences if they don’t and the more uncertainty there is, the more they should diversify.

Because there are such strong arguments on both sides, it may be wise to diversify your risks and build a portfolio with exposure to both outcomes. One word of caution here: even if we did know the end result, the ability to profit from it is diminished because we don’t know the timing of the end result. If we are, indeed, heading down the path of a banana republic, it may not come to fruition for another decade or longer. Conversely, the deflation scenario may be long and drawn out, much like in Japan.

If you are concerned more about inflation, you may want to favor things such as:
1. commodities and other hard assets
2. real estate
3. foreign denominated assets
4. businesses that are paid in foreign currencies
5. floating rate debt.

If you are concerned about hyperinflation, you may even consider:
1. gold and silver coins. However, the problem with these and other commodities is that they produce no cash flows and so value investors cannot estimate their intrinsic value. The return is completely dependent upon the resale price. In other words, this would be a form of speculation. It is a speculation on a bad outcome and a further speculation that these assets will protect you from the bad outcome.

If you find yourself more concerned about deflation, then the choice is easy:
1. You will want to hold a lot of cash and invest in U.S. denominated assets.

Conclusion
There is no better way to protect against both inflation and deflation than to be a value investor. Buying cheap assets and cheap cash flows can build and protect wealth in any environment – it protects on the downside and amplifies the upside.

When no opportunities exist with a sufficient margin of safety, value investors are content to hold cash—and perhaps a little hard cash (gold and silver) as speculative insurance against the unknown.

*http://seekingalpha.com/author/nathan-kawaguchi/instablog (Nathan Kawaguchi is a Research Analyst for IgnoreTheMarket.com which provides independent, value-based stock and mutual fund research, a blog, and acts as a hub for value investing information and research.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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Within the recent retracement of the U.S. currency there has been endless speculation about the future role of the dollar as the world’s reserve currency. There has even been conjecture that the dollar will no longer exist at some point in the near future but the case made for the vulnerability of the dollar falls short when it comes to naming alternatives. Words: 631

In further edited excerpts from the original article* Bryan Rich (www.moneyandmarkets.com) goes on to say:

If you believe inflation will be a problem at some point in the future, the purchasing power of the dollar will fall but against what other major currencies? If the Fed and other central banks around the world fail to remove the emergency stimulus before those measures translate into inflation, then ALL currencies will fall in value relative to hard, tangible assets like gold, real estate and other commodities … even financial assets like stocks and bonds. That’s global inflation.

Let’s take a look at three of the often-suggested dollar alternatives:

Dollar Alternative #1: The Japanese yen
The economic problems of the U.S. pale in comparison to those of Japan and that’s why the demand for gold, as a hard currency, has been rising. Japan has one of the highest debt loads in the world, approaching nearly 200 percent of GDP, which is more than twice what is projected in the U.S. Japan‘s economy has also suffered the sharpest contraction of any major economy in 2009 and is expected, again, to underperform the U.S. economy in 2010.

Conclusion: If you don’t like the dollar for its fundamental economic challenges, you surely can’t like the yen.

Dollar Alternative #2: The British pound
The Brits are flooding their economy with billions of pounds. The UK economy is the most troubled and most volatile major, developed market economy. The money-printing program in the UK has been the most aggressive in the world. In fact, The Bank of England is still expanding its money printing program, as other major economies are winding down and while the UK central bank continues injecting billions of pounds into zombie banks, the economy continues contracting. At the same time, other major economies have technically emerged from recession.

Conclusion: This makes the British pound perhaps the least desirable currency for global investors.

Dollar Alternative #3: The euro
The Eurozone is expected to underperform the U.S. in 2010 and the interest rate outlook for the Eurozone, as projected this week by the Organization of Economic Cooperation and Development (OECD), is for rates to move from 1 percent to 2 percent by 2011. That’s lower, both on an absolute and on a rate-of-change basis, when compared to the United States. In the U.S., the OECD expects rates to normalize to 2.25 percent to 2.5 percent by 2011.

Conclusion: The Eurozone has weaker growth and lower interest rate prospects than the U.S. so the euro falls short of the dollar on both comparisons. Indeed, in terms of purchasing power parity, the dollar should be 26 percent stronger against the euro based on fundamentals. Clearly the dollar wins over the euro … the second most widely-held global currency.

In this era of globalization, economies around the world have proven to be highly correlated and highly interdependent so while the global economy is piecing together a tepid recovery, when looking for viable dollar alternatives among other major liquid currencies … there simply aren’t any.

*http://www.moneyandmarkets.com/weighing-the-dollar-alternatives-5-36521 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

Many people the world over lived in a Ponzi bubble economy for more than a decade. They applied the Greater Fool Theory in the false belief that they would always be able to sell their house or their stocks or bonds or other highly leveraged assets to “bigger fools” than they were for buying them in the first place. Words: 1230; By: Lorimer Wilson

Bernie Madoff Ponzi Schemer

Who was Ponzi?
Charles Ponzi, a Bostonian with an eye for get-rich quick schemes back in 1918, identified an arbitrage situation which he promoted as being able to generate sizeable returns for those who invested with him. He delivered on his promise by making his close friends and a small circle of investors very rich, very quickly, and, as word spread among the wealthier citizens of Boston, they began lining up to invest. Regretfully, when anything looks too good to be true, it probably is and it was.

As a result of Ponzi’s infamy his name has been immortalized to describe any fraudulent investment scheme where the money from later investors is used to pay the early investors and so on right up until the moment the whole thing collapses on itself. Sound familiar? Yes, 90 years later the 50 billion dollar Madoff pyramid collapsed – a Ponzi scheme if ever there was one! Now may well be the time to lay the Ponzi name to rest and replace it with the infamous word ‘Madoff.’ Time will tell. 

But Ponzi and Madoff were not the only ‘investors’ who were conning those around them. We must not forget the tens of millions of Americans and others worldwide who were deploying their own ‘greater fool theory” that there was really nothing to worry about because there always would be a ‘greater fool’ than them out there somewhere who would still lend them money, buy their over-priced house, over-valued stocks, etc. to keep their financial house of cards from collapsing.

Below is my enhanced version of how Nouriel Roubini once described it*: 

The ‘Greater Fools’ Amongst Us
1. When you put zero down on the ‘purchase’ of your house and thus had no equity in your house (and re-financed your mortgage each and every time it went up in value) your leverage was literally infinite and you were playing a Ponzi game hoping a ‘greater fool’ than you would be there to buy your house when the time came for you to buy yet another house that you could not afford. 

2. When the bank sold you a mortgage for zero down on the basis of a NINJA (no income, no job or assets) liar loan, with interest only for a while, with negative amortization, and an initial teaser rate, the bank was playing a Ponzi game. They were hoping that you would stay employed; that you would be able to afford the eventual increased mortgage payment; that you would be able to sell the house for more than its original value; that you would always honor the terms of the mortgage. They were even ‘greater fools’ than you were. 

3. When private equity firms engaged in leveraged buy-outs with excessive debt-to-earnings ratios they were Ponzi firms playing Ponzi games – all “greater fools” hoping that future earnings would just grow and grow in future years with no likelihood of declining. 

4. When our government issues trillions of dollars of new debt to pay for a severe recession and to socialize private losses it becomes a Ponzi government hoping that the Chinese and other foreign purchases of their debt will continue doing so regardless of the value of the U.S. dollar vis-à-vis their respective currencies and the level of interest paid. How foolish to expect foreign governments to be ‘greater fools’ than ours. 

5. When our country spends more than it raises in taxes and thus runs an endless string of current account deficits and becomes the largest net foreign debtor in the world it becomes a Ponzi country hoping that foreigners will be even ‘greater fools’ and continue to finance their conspicuous consumption. 

6. When consumers consumed more than their income year after year (i.e. a household with negative savings; a government with a budget deficit; a firm or financial institution with persistent losses; a country with a current account deficit) they were playing the ultimate Ponzi game hoping that some ‘greater fool’ would come along and bail them out. 

These households, firms and banks and the government itself can be characterized as ‘Ponzi borrowers’ who need to borrow more to repay both principal and interest on their previous debt and, such being the case, need ever-increasing prices of the assets they have invested in to keep on refinancing their debt obligations. What fools they all were to expect that some ‘greater fool’ knight in shining armor would come along and wave a magic sword and make it all go away. Instead, they all must recognize that they will be forever poorer but, hopefully, more fiscally responsible in the future. 

With the average house having fallen in price to such an extent that it is no longer feasible to use it as an ATM to finance Ponzi consumption, with equity prices still below their levels in the spring of 2008 and with credit being hard to come by, the party is over for households, banks and non-bank highly leveraged corporations.

Gold Put ‘Foolish’ Investments to Shame in 2009
Most of the ‘wealth’ that supported the massive leveraging and overspending in the economy was nothing more than fake bubble–driven wealth perpetuated by society’s belief in the Greater Fool Theory. Thank goodness for hard assets such as gold bullion and other precious metals which stood up remarkably well during those tumultuous times: gold: + 24% in 2009 and silver: + 49%. 

Were You One of the ‘Greater Fools”?
Now that the bubbles have burst it is clear that the emperor had no clothes and that we were the naked emperor. A rising bubble tide was hiding the fact that millions of Americans (and others worldwide) and their banks were swimming naked and the bursting of the bubble was the low tide that showed just who had been caught with their ‘pants down’ i.e. just who really was the ‘greater fool’. 

As a result, many households, financial and non-financial firms and government, may well spend the next decade in debtor’s prison having to tighten their belts to pay for the losses inflicted by a decade of reckless leverage, over-consumption and risk taking. What fools we have been for living beyond our means all these years and taking no fiscal responsibility for our future well-being in the false hope that there always would be a ‘greater fool’ out there than us. 

Indeed, the American dream of Life, Liberty and the Pursuit of Happiness (and let’s not forget Wealth) has been nothing more than a glorified Ponzi scheme. Let us all look at ourselves in the mirror and finally admit, at least to ourselves, that many of us were the “greatest fools” imaginable!

*http://ftalphaville.ft.com/blog/2009/03/12/53535/nouriel-roubini-is-a-ponzi/

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