Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Ian Gordon and Christopher Funston’s (www.longwavegroup.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. They go on to say:

The entire world is now in an economic depression which always occurs at this point in the 60 to 70 year long cycle we refer to as the Longwave Cycle.

The Longwave Cycle
An understanding of the Longwave Cycle enables us to identify where we are in the cycle, to recognize each season in the cycle and, critically, to determine the move from one season to the next. That determination enables us to make correct investment decisions. There are good and bad investment mediums appropriate to each of the seasons. Typically, investments that perform well in one season do poorly in the following season.

The Longwave Winter
In the Longwave Cycle there is always a deflationary depression and this occurs in the winter of the cycle. The onset of winter is signaled by the peak in stock prices which ends the biggest stock bull market of the cycle. During the Longwave winter, debt is purged, which causes huge stress and significant bankruptcies to creditors and debtors alike. In order to protect ourselves from the financial and economic onslaught that ensues, we buy precious metals, particularly gold and the gold equities of producers and explorers.

Deflation Coming
During this recent surge in gold activity, there appear to be many investors getting aboard because they fear a return of the demon inflation. They perceive that many economies are on the road to recovery from the recent economic downturn and credit crunch, thus they are looking for an insurance policy as a hedge against an inflationary outbreak. As previously mentioned, gold can also appreciate in value within a deflationary economic environment. While inflation may rear its ugly head at some juncture well down the road, it is a deflationary outlook that Long Wave Analytics is embracing as the most realistic probability to unfold over the near to mid-term time horizon. Witness the Japanese deflationary experience which is still unfolding.

Understanding Inflation and Deflation
Understanding inflation and deflation is critical to making the right investment decisions. Strictly speaking, inflation is simply an increase in the supply of money and deflation is a decrease in the money supply. Most financial advisors are now calling for inflation to resume and even hyper-inflation to run rampant in the United States, because of the Federal Reserve’s current effort to circumvent deflation by excessive money printing. We are of the opposite, and certainly the minority, view.

We believe that central banks will be unable to forestall deflation and that when it arrives, it will be unprecedented in magnitude. This conclusion is based upon three factors:

1. Once the debt bubble is unwound, it is deflationary in nature because it is painful and results in bankruptcies on both side of the ledger. Actually, it takes money out of the system and during our Kondratieff winter, trillions of dollars of debt will be expunged.

2. Under these circumstances, banks won’t lend money because those banks that survive bankruptcies, and most won’t, will conserve it. Consumers and corporations won’t be able to borrow money, even if they so desire.

3. The velocity of money will essentially come to a standstill, since there will be none to spend. Money will be hoarded, either under the mattress, or in banks that consumers believe will survive the debt deflationary onslaught. During inflation, as in the 1970s, the velocity of money increases as people spend their money today, rather than pay higher prices tomorrow. In deflation, as in the 1930s, those few people with money curtail their spending in the knowledge that prices will be lower tomorrow, next month and next year. As the early 19th Century saying goes ‘money like manure, does no good till it is spread’.

Between October 1929 and April 1933, despite the desperate efforts of the Federal Reserve to reflate the economy, money supply contracted by 28%. The argument today – supported by Ben Bernanke, the current Federal Reserve chairman – is that the Fed didn’t do enough at that time… This interpretation is at best false and at worst dishonest. All strenuous efforts by the Federal Reserve to overcome deflation failed back then because the amount of money coming out of the economy, through bankruptcy and bank failure, overwhelmed the Federal Re¬serve’s attempts to reflate.

We are gold bulls and deflationist but most gold bulls are inflationist. How do we explain this dichotomy? During inflation, the price of gold rises along with all other ‘things’, such as out-of-print comic books, art, antiques, etc. Why? Because as we have just explained, during inflation the price of everything rises and people buy today because prices are cheaper than they will be tomorrow. In these times, gold is viewed primarily as a commodity, although it does still perform a minor monetary role versus the dollar, which is being debased through monetary inflation. In the inflationary summer there is absolutely no threat to the banking system because debt is not that high and there is no threat to the economy because money is plentiful and easy to access. So, when the threat of inflation passes, as in 1980, the prices of gold, commodities, comic books and antiques fall.

However, deflation is another kettle of fish, since it comes about through the destruction of the financial system and the economy, because of the bursting of the debt bubble. When that occurs as in 1873, 1929, and now, there is fear and panic.

In all panics, there exists an instinctive will in all of us to survive. We instinctively turn to the people and things we trust. When it comes to money, people always go to gold – or gold equities.

*http://www.longwavegroup.com/publications/winter_warning/2009/_pdf/2009_Winter_Warning_Volume_10_Issue_1.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.
- 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.

See larger image The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (Hardcover) By (author) William Bonner, Addison Wiggin, Agora List Price: $27.95 USD New From: $8.09 In Stock Used from: $5.92 In Stock

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited excerpts from Robert Morley’s (www.The Trumphet.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Morley goes on to say:

27% Have Savings of Less Than $1,000
According to Jack VanDerhei, research director for the Employee Benefit Research Institute (EBRI), the percentage of American workers with virtually no retirement savings grew for the third straight year. Of the over 1,000 workers and retirees surveyed who were over the age of 25, a whopping 27 percent said they had less than $1,000 in savings. That’s up by over 7 percent from last year.

43% Have Savings of Less Than $10,000
The percentage of workers who said they have less than $10,000 in savings (the equivalent of 3 months’ worth of average yearly salary) jumped to 43 percent, up 4 percent from 2009.

Average American Goes $300 Further into Debt Each Month
The great American recession is already taking its toll, despite still being in its early stages. On average, U.S. consumers are going $300 in the hole per month after all expenses are met, says John Lekas, senior portfolio manager for Leader Short-Term Bond Fund.

Lekas says conditions are only going to get worse, as real unemployment (as measured by the government U6 number) heads toward 25 percent over the next couple of years. Indeed, for many families, conditions would already have been much worse had governments not borrowed billions to pay out extended unemployment benefits, food stamps and other welfare.

Only 16% Think They Will Have Enough Savings for Retirement
It is no wonder that the EBRI report found that only 16 percent of respondents were confident in their ability to save enough for retirement. The finding was the second lowest in 20 years and is especially ominous because many of these workers are probably expecting to rely heavily upon Social Security and Medicare benefits—two massive and currently unfunded government liabilities. Social Security is already bankrupt (the government is borrowing money to make payments) and Medicare is projected to have a $38 trillion deficit over the course of the baby boom generation.

Politicians Also Have Their Heads in the Sand
The nation’s retirement safety net is looking more precarious than ever. With national health care, the wars in Afghanistan and Iraq, Iran seeking nuclear weapons, pirates preying on American shipping, and jobs being offshored to Asia, don’t expect much political action because it is far easier for politicians to bury their heads in the sand.

Public Pension Plans Gambling on Outsized Future Returns
Even among those who recognize the debt problem facing America, the desperation is akin to chickens running around with their heads cut off. Public pension plans are facing a massive crisis too, the New York Times reports. All across the country, state and local pension plans are chronically underfunded.

Governments have promised big, but put aside little. Instead of admitting they had been lying to their workers (basing predictions on ridiculously high estimates of future investment returns), and telling voters that they need to start paying higher taxes to fund civil servant retirement plans, states and other government bodies are trying to get back into the money by heading to the casino.

The Times reveals that most government pension plans have based their pension plan funding on the assumption that stocks will return an astounding 9.5 percent yearly growth on average, and that bonds will pay about 5.75 percent. Both suppositions have been shown to be ridiculously high. Even considering the current stock market rally, the Dow Jones Industrial Average is still below levels seen 10 years ago. The Nasdaq is much further underwater. As for government bonds, even the longest dated ones pay only 4.68 percent. A one-year bond pays only 0.37 percent.

Commodity futures, junk bonds, foreign stocks, mortgage-backed securities, leveraged investing, credit default swaps, exotic derivatives—are now all on the table for many desperate pension funds. As any casino patron knows, however, for every winner, there are many losers.

It is time Americans pull their heads out of the sand. The current relatively light economic crisis is only the beginning. A stampede is headed in this direction, and when the money is gone, many are going to get trampled.

*http://www.theTrumpet.com/index.php?q=7035.5570.0.0

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. (If you enter Amazon through my site, and you buy anything, I get a small commission. This is my main source of blog revenue. Whether you buy at Amazon directly or enter via my site, your prices don’t change.)

See larger image The Age Curve: How to Profit from the Coming Demographic Storm (Hardcover) By (author) Kenneth W. Gronbach List Price: $24.95 USD New From: $6.59 In Stock Used from: $5.99 In Stock

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

A Recap of the Risk Trade
When risk-aversion is king, the dollar wins and practically everything else loses and, conversely, when risk-appetite improves, that trade reverses. If to date is any indication, it looks like risk will remain central to global markets in 2010 as exemplified by the elevation in the sovereign debt crisis.

Now, with the perception that the U.S. recovery is on track, market focus is beginning to shift back to the traditional drivers of capital flow i.e. interest rate differentials and economic growth differentials. That is why we’ve seen the U.S. dollar recover, even while stocks and commodities move higher.

Economic Recovery: Sustainable or Unsustainable?
World economies were sitting on the edge of the cliff back [in the fall of 2008/winter 2009] and have now stepped back a bit. We’ve seen the positive GDP numbers that have technically ended most recessions but now the forces pulling and pushing between risk-aversion and risk-taking are about the sustainability of the recovery.

If the recovery proves sustainable, then the market focus should ultimately transition back toward relative growth and relative interest rate prospects between countries. The growth argument has a lot of detractors, however. Some very serious problems remain and risks that make sustainable growth a low probability.

3 Key Threats
Here are three key threats that could derail the notion of a return to normalcy and swing the international environment squarely back into the risk-aversion court:

Threat #1: Rising Prospects of a Sovereign Debt Crisis
First it was Dubai that stoked fear in the financial markets. Now, Greece has been called on the carpet over concerns that the nation will struggle to meet debt commitments. In addition, Spain, Italy, Ireland and Portugal are all coming under scrutiny for similar reasons.

Debt problems in a global crisis have the ability to be contagious and that can destroy investor confidence in the capital markets of such countries, and in the global economy. When confidence wanes, capital flees … a surefire recipe for falling dominoes.

Threat #2: Asset Bubbles
While ground zero for the credit crisis was the U.S. housing market, new bubbles in real estate are popping up in the areas that were relative outperformers in the downturn (such as China, India and Canada).

When you answer a liquidity crisis with more liquidity, you’re bound to create more bubbles. Central banks and governments have flooded the system with liquidity and money has leaked into assets like commodities, stocks and real estate around the world.

Threat #3: Protectionism
We’ve already seen evidence of restrictions on global trade and capital flows. Considering protectionism was a key accomplice in fueling the Great Depression, this activity represents a major threat to global economic recovery.

After the lessons from the Great Depression, the leaders from the top 20 countries of the world vowed to avoid protectionist activity but actions from the G-20 countries are speaking louder than words. In fact, new trade restrictions have been erected by most of them since the pledge was made. For example, Chinese officials claim that the U.S. duty on Chinese-made tires sends a dangerous protectionist signal.

Perhaps the biggest factor in the protectionism threat is China’s currency policy with the Chinese remaining steadfast on keeping their currency weak. As this issue with China’s currency gains in intensity, expect protectionist acts to rise in retaliation and expect collateral economic and political damage.

Conclusion
All of these threats point to the rising probability of a “double dip” recession and another round of recession that would send global investors back into their shell.

This would swing the risk pendulum back toward risk-aversion and such a scenario would drive the dollar higher and global financial markets lower.

*http://www.moneyandmarkets.com/risk-aversion-vs-risk-taking-whats-in-store-for-2010-6-37069 (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.

See larger image The Visual Investor: How to Spot Market Trends (Wiley Trading) (Hardcover) By (author) John J. Murphy List Price: $39.95 USD New From: $22.23 In Stock Used from: $21.00 In Stock

In further edited excerpts from his testimony* submitted to the Senate Budget Committee hearing on “Crisis and Aftermath: The Economic Outlook and Risks for the Federal Budget and Debt” Simon Johnson, senior fellow at the Peterson Institute for International Economics (www.piie.com) and a professor at MIT, went on to say:

In 2008–09 we were lucky that major countries had the fiscal space available to engage in stimulus and that monetary policy could use quantitative easing effectively. In the future, there are no guarantees that the size of the available policy response will match the magnitude of the shock to the credit system.

A. Expectations
1. A major sovereign debt crisis is gathering steam in Europe, focused for now on the weaker countries in the eurozone but with the potential to spill over also to the United Kingdom. These further financial market disruptions will not only slow the European economies but will also cause the euro to weaken and lower growth around the world.

2. There are some European efforts underway to limit debt crisis to Greece and to prevent the further spread of damage but these efforts are too little and too late. Portugal, Ireland, Italy, Greece, and Spain (PIIGS) will all come under severe pressure from speculative attacks on their credit.

3. Another Lehman/AIG-type situation lurks somewhere on the European continent, and again G-7 (and G-20) leaders are slow to see the risk. This time, given that they already used almost all their scope for fiscal stimulus, it will be considerably more difficult for governments to respond effectively if the crisis comes.

4. Investors will scramble in such a situation for the safest assets available i.e. “cash,” which means short-term US government securities. It is not that the United States has anything approaching a credible medium-term fiscal framework, but everyone else is in much worse shape.

5. Net exports have been a relative strength for the US economy over the past 12 months but this is unlikely to be the case during 2010.

6. The US consumer is beset by problems including a debt overhang for lower income households, a soft housing market, and volatile asset prices. The saving rate is likely to fall from 2009 levels but remain relatively high. Residential investment is hardly likely to recover in 2010, and business investment is too small to drive a recovery.

7. On a Q4-on-Q4 basis, the United States will struggle to grow faster than 2 percent. This within-year pattern will likely involve a significant slowdown in the second half although probably not an outright decline in output. The effects of fiscal stimulus will begin to wear off by the middle of the year, and without a viable medium-term fiscal framework, there is not much room for further stimulus other than cosmetic “job creation” measures.

8. The Federal Reserve will start to wind down its extraordinary support programs for mortgage-backed securities, starting in the spring although this may be delayed to some degree by international developments. The precise impact is hard to gauge, but this will not help prevent a slowdown in the second quarter.

9. On top of these issues, there is concern about the levels of capital in our banking system. The “too big to fail” banks are implicitly backed by the US government, and for them the stress test of early 2009 played down the amount of capital they would need if the economy headed towards a “double-dip” type of slowdown. In addition, small- and medium-sized banks have considerable exposure to commercial real estate, which continues to go bad.

10. Undercapitalized banks tend to be fearful and curtail lending to creditworthy potential borrowers. This may increasingly be the situation we face in 2010.

11. Emerging markets are likely to slow in the second half of the year.

12. Global growth, Q4-on-Q4 within 2010, should be approximately 3%.

13. Over a longer time horizon, we will probably experience a global economic boom, based on prospects in emerging markets. However, with our current global financial structure, this brings with it substantial systemic risks.

B. From Greece to the United States: The Problems Spread
The problems now spreading from Greece to Spain, Portugal, Ireland, and even Italy portend major trouble ahead for the United States in the second half of this year particularly because our banks remain in such weak shape.

Greece, as a member of the eurozone, the elite club of European nations that share the euro and are supposed to maintain strong economic policies, does not control its own currency. This is in the hands of the European Central Bank (ECB) in Frankfurt. In good times, over the past decade, this helped keep Greek interest rates low and growth relatively strong. Under the economic pressures of the past year, however, the Greek government budget has slipped into ever greater deficit, and investors have increasingly become uncomfortable about the possibility of future default. This impending doom was postponed for a while by the ability of banks, mostly Greek, to use these bonds as collateral for loans from the European Central Bank (so-called “repos”). From the end of this year, however, the ECB will not accept bonds rated below ‘A’ by major ratings agencies and Greek government debt no longer falls into this category.

If the ECB will not, indirectly, lend to the Greek government, then interest rates will go up in the future. In anticipation of this, interest rates should rise now. This spells trouble for an economy like Greece or any of the weaker eurozone countries. Paying higher interest rates on government debt also implies a worsening of the budget. These are exactly the sort of debt dynamics that used to get countries like Brazil into big trouble. The right approach for Greece would be to promise credible budget tightening over 3–5 years and to obtain sufficient resources from within the eurozone to tide the country over in the interim.

The Germans, however, have decided to play hardball with their weaker neighbors, in part, because those countries have not lived up to previous commitments. The Germans strongly dislike bailout other than for their own banks and auto companies and the Europeans policy elite loves rules. In this kind of situation, their political process will move at a relatively slow late 20th century pace. In contrast, markets now move in a 21st century global network pace. We are moving towards a full-scale speculative attack on sovereign credits in the eurozone. The equity prices of weaker European banks will come under pressure. Fears about their solvency may also be reflected in higher credit default swap spreads, i.e., a higher cost of insuring against their default.

Brought on by weak fundamentals — worries about the budget deficit and whether government debt is on an explosive path — such attacks take on a life of their own. We should remember, and prepare for, a spread of pressure between countries along the lines of the panic that moved from Thailand to Malaysia and Indonesia, and then jumped to Korea all in the space of two months during 1997.

The US Treasury and the White House apparently take the view that they must stand aloof, waiting for the Europeans to get their act together. This is a mistake. The need for US leadership has never been greater, particularly as our banks are really not in good enough shape to withstand a major international adverse event (e.g., Greece defaults, Greece leaves the eurozone, Germany leaves the eurozone, etc). We subjected our banks to a stress test in spring 2009 but the stress scenario was mild and more appropriate as a baseline. Many of our banks, big, medium, and small, simply do not have enough capital to withstand further losses. As the international situation deteriorates, or even if it remains at this level of volatility, undercapitalized banks will be reluctant to lend and credit conditions will tighten around the United States.

If the European situation spins seriously out of control, as it may well do in coming weeks, the likelihood of a double-dip recession or significant slowdown in the second half of 2010 increases dramatically.

C. Longer-Run Baseline Scenario
1. Financial Systems
We have built a dangerous financial system in Europe and the United States, and 2009 made it more dangerous. There are three main lessons to be learned from the past 18 months.
a) The fiscal impact of the financial crisis was to increase our federal government debt held by the private sector by around 30–40 percentage points. The extent of our current contingent liability, arising from the failure to deal with “too big to fail” financial institutions, is of the same order of magnitude.
b) Our financial leaders have learned that they can bet the bank, and, when the gamble fails, they can keep their jobs and most of their wealth. Not only have the remaining major financial institutions asserted and proved that they are too big to fail, but they have also demonstrated that no one in the executive or legislative branches is currently willing to take on their economic and political power.
c) The take-away for the survivors at big banks is clear: we do well in the upturn and even better after financial crises, so why fear a new cycle of excessive risk-taking?

2. Emerging Markets
Emerging markets were star performers during this crisis. Most global growth forecasts made at the end of 2008 exaggerated the slowdown in middle-income countries. To be sure, issues remain in places such as China, Brazil, India and Russia, but their economic policies and financial structures proved surprisingly resilient and their growth prospects now look good.

3. Cracks Showing
The crisis has exposed serious cracks within the eurozone, but also between the eurozone and the United Kingdom on one side and Eastern Europe on the other. Core European nations will spend a good part of the next decade bailing out the troubled periphery to avoid a collapse. For many years this will press the European Central Bank to keep policies looser than the Germanic center would prefer.

4. Finance Led Boom
Over the past 30 years, successive crises have become more dangerous and harder to sort out. This time not only did we need to bring the fed funds rate near to zero for “an extended period,” but we also required a massive global fiscal expansion that has put many nations on debt paths that, unless rectified soon, will lead to their economic collapse. For now, however, it looks like the course for 2010 is economic recovery and the beginning of a major finance-led boom, centered on the emerging world.

5. Commodities
The heart of any economic recovery is, of course, the United States and European banking systems which are central to the global economy. As emerging markets pick up speed, demand for investment goods and commodities increases. As such, countries producing energy, raw materials, all kinds of industrial inputs, machinery, equipment, and some basic consumer goods will do well and there will be investment opportunities in those same emerging markets, be it commodities in Africa, infrastructure in India, or domestic champions in China.

6. Chinese Exchange Rate
The Chinese exchange rate will remain undervalued. Our reliance on Chinese purchases of US government and agency debt puts us at a significant strategic disadvantage and makes it hard for the administration to push for revaluation. The existing multilateral mechanisms for addressing this issue — through the IMF — are dysfunctional and will not help. There is a growing consensus to move exchange issues within the remit of the World Trade Organization (WTO), but without US leadership, this will take many years to come to fruition.

7. Savings and Capital Flows
Good times will bring surplus savings in many emerging markets but rather than intermediating their own savings internally through fragmented financial systems, we will see a large flow of capital out of those countries as the state entities and private entrepreneurs making money choose to hold their funds somewhere safe such as major international banks that are implicitly backed by US and European taxpayers. These banks will in turn facilitate the flow of capital back into emerging markets because they have the best perceived investment opportunities. This is the scenario that we are now facing. For example, savers in Brazil and Russia will deposit funds in American and European banks, and these will then be lent to borrowers around the world (including in Brazil and Russia).

8. Soft Landing?
If this capital flow is well-managed, learning from the lessons of the past 30 years, we have little to fear. A soft landing seems unlikely, however, because the underlying incentives, for both lenders and borrowers, are structurally flawed. The big banks will initially be careful — although Citigroup is already bragging about the additional risks it is taking on in India and China – but as the boom progresses, the competition between the megabanks will push toward more risk-taking in part because their compensation systems remain inherently procyclical, and as times get better, they will load up on risk.

We are steadily becoming more vulnerable to economic disaster on an epic scale.

*Source: http://www.piie.com/publications/papers/paper.cfm?ResearchID=1490

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.

See larger image 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Hardcover) By (author) Simon Johnson, James Kwak List Price: $26.95 USD New From: $15.50 In Stock Used from: $15.50 In Stock Release date March 30, 2010.

In further edited excerpts from Antal E. Fekete’s (www.professorfekete.com) address to the CARA Bahamas Conference in Freeport, Grand Bahama that he sent to me directly he goes on to say:

Why There Can be No Resolution of the Current Financial Crisis Without Gold
The reasons are two-fold:
1. Gold is the only form of capital that is immune to destruction under any circumstances
2. Gold is the only ultimate extinguisher of debt.

I shall deal with the first reason in a moment. Here I just point out that when a debtor repays his debt by handing over Federal Reserve notes to his creditor, the debt is not extinguished. It is merely transferred to the Federal Reserve bank that issued the note. Transferring debt is not the same as extinguishing it.

One reason for the present plight of the world is that for the past forty years gold, the only ultimate extinguisher of debt, has been forcibly prevented by the U.S. government to discharge its debt-extinguishing function. As a consequence the debt-tower has kept growing, rain or shine. Conversely, until policy-makers at the Fed and the Treasury will understand that there is no substitute for gold in taming the debt-monster, their tinkering at the edges will keep making the global debt crisis worse.

Unfortunately, Bernanke is a dyed-in-the-wool chrysophobe who is hardly competent to make the necessary changes that would restore gold as the ultimate extinguisher of debt in the international monetary system.

What’s an Individual Investor to Do?
What’s an individual investor to do to make sure that his investments will not be completely wiped out in the coming financial Armageddon? Gold is the answer. Gold as the only form of capital that cannot be destroyed. In wartime capital destruction normally presents itself as physical destruction of plant, equipment, and products at various stages of production. By contrast, in peacetime, capital destruction takes place on paper, through the consolidation of balance sheets. Take the simplest case when a bankrupt economic entity is overtaken by another in order to save whatever can be saved. Clearly, that part of the assets of the latter that have a counterpart in the liabilities of the former cannot be saved. It will be wiped out.

It follows that no asset that also occurs as liability in the balance sheet of a counter-party is safe against destruction through consolidation ― even if that counter-party is the government. We must remember that every government experiment with irredeemable currency in history has been an abysmal failure.

In the extreme case, when the balance sheets of all economic entities are consolidated in a holocaust, and all paper assets are wiped out, gold is always a survivor: the only asset that cannot be destroyed through inflation, through deflation, or through any other malady of the monetary system. This means that gold, and only gold, qualifies as an instrument of hedging paper assets.

Every investor owes it to himself to provide an adequate level of insurance against risks that prey upon the value of paper investments but unless this insurance consists of physical gold held by the investor himself on his own premises, it will be ineffective.

Trading Gold Makes No Sense
The attitude of most investors with regard to gold is faulty, not to say foolish. They keep talking about the “performance” of gold. They trade gold: buy it when they expect the gold price to rise; they sell it when they expect the gold price to fall. Many of them are finished with gold saying that “the bloom is off the roses”. This attitude is akin to that of the property-owner who thinks that he is saving money by cancelling his insurance coverage hoping to reinstate it later. It never occurs to him that it may not be possible to reinstate, if the external conditions change drastically.

The best policy concerning insurance is to buy it and “forget about it”. No regrets if the occasion to collect insurance compensation never arises. It is not a loss: it should be looked at as a gain.

A simple gold-accumulation plan, aiming at a gold hedge equivalent to 10-15 percent of net worth, with monthly additions will suffice, with the proviso that it is preferable to increase the hedge when the gold price is down.

Gold investors typically get nervous as they listen to rumors that the volatility in the price of gold indicates that the value of gold has become unstable. They forget that it is not gold that is unstable, but the dollar in which the gold price is quoted. Gold has been, is, and will be the paragon of stability. Ultimately, the price at which you have purchased your hedges is unimportant.

Tips for Hedging
Buy anonymously and don’t talk about it. Don’t worry that you can’t sell anonymously: you are not going to sell, just like you are not going to cancel your fire insurance policy as long as you own the house. Don’t worry about capital gains taxes on your gold that you hold as hedges against paper assets. Since you never sell, you never incur a tax liability. There is no way the government can impose or collect taxes on paper profits.

At any rate, those so called profits on your gold hedges should never be considered as profits. They should be looked at as advances on payments of insurance compensation for anticipated losses. It would be foolish to take these “profits” and spend them. Those losses may disappear, together with the gold profits, creating the impression that your hedges don’t work. They do, but the results have to be interpreted correctly. Spending gold profits is tantamount to cancelling the insurance policy prematurely. The big test is still ahead. The crisis is not over, not by a long shot.

The Shape of Things to Come
The world lives in a delusion. It sets great stores on Keynesian nostrums, hoping that public debt-financed government spending, or inflating the money supply will resolve the crisis. They won’t.

1. The first-mentioned Keynesian remedy will fail because replacing private debt with public debt means jumping from the frying pan into the fire. A true solution must reduce total debt.

2. The second-mentioned Keynesian remedy will fail to induce the intended inflation because the newly created money just won’t go where the Fed would like it to go: to the commodity, real estate, and stock markets. Instead it will go to the bond market to facilitate bond speculation: borrowing short and lending long, putting a downward pressure on the yield curve. Alternatively, it will be used to retire private debt. In either case, the result will be deflationary, not inflationary.

As the decrease in debt reaches a threshold, it will have two immediate consequences:
1. unemployment will skyrocket.
2. the financial system will self-destruct in a spectacular fire-work that will make the fact obvious to one and all.

Concerning the first consequence, the U.S. must face the situation squarely that during the boom years it has dismantled much of its industrial park producing consumer goods for the mass market. It no longer has the factories needed to employ the armies of unemployed people that will be laid off in the financial sector: at brokerages, real estate agencies, insurance companies, not to mention banks.

Concerning the second consequence, it must be stated that the U.S. financial system is bankrupt already: it self-destructed during the long-drawn-out decline of interest rates to zero. This bankruptcy is camouflaged by the wholly misconceived measure of allowing the banks, pension funds and insurance companies to cook their books. They can only balance their books through the trick of overstating the value of their assets and understating the value of their liabilities. The government and the accounting profession are accomplices. Not only do they fail to prosecute violators of the accounting code, they even cheer them on and encourage others to do the same. Worst of all, they set the example. The Fed carries dead assets such as mortgage-backed bonds with no bid and no market at a positive value.

Revaluation of Gold
The nation is lulled into a false sense of security. When the truth dawns on the nation that the American financial system is working without capital (following in the footsteps of the Japanese banks that have been brain-dead for over a decade), the shock will greatly aggravate the crisis. It would be better to let the truth come out now, so that the process of re-industrializing the country and recapitalizing the financial system by an appropriate revaluation of gold could start without delay.

The alternative to the revaluation of gold, seriously suggested by some respectable economists, is a complete debt-jubilee, that is, forgiving any and all dollar-denominated debt, starting with the government debt through mortgages and corporate debt, all the way down to the short-term liabilities of banks, including bank deposits. This is, of course, the ultimate shock-therapy with all the unknown consequences that it may bring with it in its train. Nobody knows how the unfairly dispossessed creditors, including all the pensioners and holders of life insurance policies will react. Nobody knows what the unjustly enriched debtors will do with their godsend, the transfer of unencumbered assets to their possession. Maybe bloodshed in the streets can be avoided. Maybe not. The still unsolved problem of unemployment strongly suggests the latter.

At any rate, why take the risk, when this dormant asset, gold, has been lying around fallow for some forty years and is waiting for rehabilitation. It has the two prerequisite properties that fit the need just like the glove fits the hand: the ultimate extinguisher of debt, and capital indestructible par excellence. With a proper revaluation of monetary gold, much of the existing debt-burden could be alleviated and new productive capital could be accumulated.

I am not suggesting that sufficient wisdom presently resides in the leadership of the world to see this but as their false remedies are tried, and one after the other backfire, the ultimate solution to the crisis, gold-revaluation, will eventually dawn on the world.

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.

See larger image Profiting from the World's Economic Crisis: Finding Investment Opportunities by Tracking Global Market Trends (Hardcover) By (author) Bud Conrad List Price: $27.95 USD New From: $16.23 In Stock Used from: $17.93 In Stock

In further edited excerpts from the original article* Lorimer Wilson goes on to say:

Suddenly a rich tourist comes into town – the first of the season. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes upstairs to inspect the rooms.

Seeing the 100 dollar bill laying there the hotel proprietor scoops it up and runs down the street to the butcher to pay his outstanding debt.

The butcher, in debt up to his eyeballs, takes the 100 dollar bill and runs to the local cattle rancher to pay off his debt.

The cattle rancher takes the 100 dollar bill and runs to his feed supplier to pay his long overdue debt.

The relieved feed supplier uses the 100 dollar bill to pay the balance owing on his debt to the fuel salesman.

The fuel salesman returns to the hotel with the 100 dollar bill and pays his 2-night hotel bill that he would otherwise have not been able to pay.

The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything.

A few minutes later the rich tourist comes down from inspecting the rooms and, saying that he found nothing to his liking, takes back his 100 dollar bill and promptly leaves town.

It has been a day to remember thanks to that rich tourist. While no one actually earned anything the whole town is now without debt and is looking to the future with a great deal more optimism than when the day began.

And that, to the average Joe, is how the United States Government is doing business today.

My Take on the Situation

This scheme of revolving credit will end badly when the pigeons come home to roost; when the piper has to be paid; when we find out that there is no such thing as a free lunch. It is just a matter of time before we become the last of society’s ‘greater fools’ and, as such, are the ones required to pay the inevitable price of achieving future economic and financial stability.

*http://www.resourceinvestor.com/News/2009/7/Pages/The-average-Joes-take-on-government-bailouts–and-more.aspx

Editor’s Note:
- 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.

See larger image Ending Government Bailouts as We Know Them (HOOVER INST PRESS PUBLICATION) (Hardcover) List Price: $19.95 USD New From: $8.80 In Stock Used from: $7.50 In Stock Release date March 15, 2010.