Curried Wealth Building
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February 19, 2012
Issue 187  -  The Dirty Little
Secret of Debt 
I've touched on this before, but it does merit a repeat.  Our whole system is based on a smoke and mirrors type illusion called debt.  If I lend you money, I must withdraw it from my wallet or bank account and hand it to you.  If a bank lends you money, they do no such thing.  They merely make two entries on their balance sheet.  One in the liabilities column for the "money" deposited in the borrowers account and then an entry in the assets column for the "money" they are "owed." 
This is really all there is to it.  Make believe money "coming" into existence.  Once the loan is paid off, the "money" disappears.  Literally.  It no longer exists on any balance sheet, or any account, it is just gone.  And that's how our "system" works. 
The best book on this whole farce is The Creature From Jekyll Island by G Edward Griffin.  In it he chronicles the secret meetings prior to the forming of the Federal Reserve.  He has many nice passages about how even those who are "in the know" are clueless about how our system works:

Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s. Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933. This is the exchange that followed.

ECCLES: We created it.

PATMAN: Out of what?

ECCLES: Out of the right to issue credit money.

PATMAN: And there is nothing behind it, is there, except our government's credit?

ECCLES: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.[

So it truly boggles the mind that so few of the congressmen understand this right?  It should be known, but for some reason it's not.  Of course I believe the reason is obvious.  The elites suppress this topic at all costs.  Here's another snippet from Griffin's book, this one from Robert Hemphill, a credit manager with the Federal Reserve: (written in 1936)
If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible — but there it is.
No debt, no money.  ZERO money!  Not a just a little, but none.  Does that make sense to you?  How can the whole system be based on a "right" to issue money?  Isn't that counterfeiting?  Don't people go to jail for that?  Now check out this graph and think about what I just wrote:
These "balance sheets" which are almost climbing straight up, would be ZERO without debt!  They would have nothing.  This is so hard to wrap ones head around that some people just dismiss it and say, "there's no way that could be!"  But alas, it is and we are going to bear the brunt of it at the end of the saga.  Until then, the band plays on, here's Obama's 2012 budget:
Let's play a game.  What's wrong with that picture?  It seems to me, and I might be wrong, those two circles aren't the same size.  Now basic budgeting dictates that outflows equal inflows so this is a problem.  Since outflows looks double the inflows, it's a BIG problem.  How in the world can this continue?  Is there an end game here?  I personally don't see a glide path down from the top of this cliff.  To camouflage this, the gamesmanship from government continues to get more and more inane.  The latest nonsense is the use of "% of GDP" as the yardstick for measuring the budget.  Here is the 2012 projections from the White House:
A couple of things strike you when looking at this chart.  First, we are instantly going to start bringing in more money.  Second, we are instantly going to start spending less money.  REALLLLLYYYYYY???!???  Does anyone believe this.  This is a constant in government's projections.  "We are going to start improving next year!"  The only problem is this:
Now this is actual dollars, not some % of whatever.  This is what is actually happening.  What this says is there no reason in the WORLD to expect spending to go down.  NONE.  In fact, it will rise as fewer and fewer people are pushing the wagon while more and more people ride in the wagon:
This chart shows that more people are getting a free ride.  Once this passes 50%, and it may already have since this chart stops at 2009, the future will be bleak.  Here's another chart of the increasing government reach into people's very existence:
This image wouldn't load correctly but you can still make out the key data.  Housing assistance is skyrocketing.  Do you think that might be slowing the drop in housing prices?  I do.  Any help to people in making payments on housing serves as an artificial buffer to home prices.  Take it away and home prices fall.
Another big problem for government is the drop in inflows.  Of course inflows are not going to go up very fast either, now that the payroll tax extension is now assured: 

Senate Passes Payroll Tax Extension, Gas Price Increase Has Already Offset Benefits

In a 60-36 vote, Senate just passed the payroll tax extension, previously voted through by Congress. From Reuters: "The U.S. Senate on Friday passed legislation extending a tax cut for 160 million workers and long-term jobless benefits through December, clearing the way for President Barack Obama to sign the measure into law. The Senate approval by a simple majority vote followed the House of Representatives' approval earlier on Friday. The legislation, which also extends current payment rates to doctors through the Medicare health care program for older Americans, will add $100 billion to the U.S. deficit and is aimed at further stimulating the economy." As a reminder, all this means is that a repeat of the debt ceiling fiasco is now virtually assured before the presidential election as discussed here, which explains the GOP's willingness to pass this through as fast as possible with no offsetting spending cuts. As for the benefits of $1000/taxpaying household, the recent rise in gasoline prices has already offset those. One can only hope that crude prices are as susceptible to successful central planning intervention as all other assets, or else many more extensions will be needed before the year is over.
That's right, with gas shooting higher, the payroll extension is MANDATORY, just so consumers can tread water.  That doesn't sound like the recipe for zooming revenue inflow.  In fact the world is having a problem with declining revenues.  The main culprit?
A quickly rising unemployment is an absolute killer to a government's inflows.  This is a chart for the Eurozone and it shows that European youth are having a very difficult time finding gainful employment.  Without a job, there is no increase in government revenues.  In fact, they will extract money OUT of the system.  The rate in the U.S. is over 20%, if you believe the government's numbers.  The true number is probably closer to 33% from my personal observations.  There is no future without jobs for the youth.  This is the foundation for the future.  People need work experience to grow and build their worth to employers.  This ensures a poor economy in the future no matter what other tax legislation is passed. 
Adding this all up we have a system which is based on debt, now paying out more and more to the populace just to survive, and it becomes rather easy to see a judgment day in the not so distant future.
Gold (closed $1724, up $13, recommended at $395)
Silver ($33.28, down $.27, recommended at $5.30)
GORO (closed $25.49, down $.48, recommended at $6)
Mexus Gold (closed $.094, up $.02, recommended at $.15)
Mexus has caught a bid here and the price looks to move higher.  It seems that the company has a nice supply of high grade rocks and they intend to spin up the mining operation in April.  If the they have any where near that rich of ore, and we can't be sure they do, this company can make a ton of money.  I'm expecting a run up in the price and I will be exiting some of my position if it hits $.60. 
AXU (closed $7.70, up $.52, recommended at $7.90)
MBI (closed $11.41, down $.51, recommended at $10.58)
MBI has fallen back and I think a lot of it had to do with options expiration.  The option writers benefited by having the price closer to $11.  This pressure should ease next week.
Stock Market (still out)
Last year I had the world's worst rapper so I thought I'd go in the opposite direction.  I present the worst church singer in the world.  Not sure if it's real, (I truly hope no one actually had to listen to this) but it IS funny.  Have a great week!