October 2011 issue of Freedom's Phoenix magazine - fr33aid

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IF a temporary
set of conditions
lasts long enough
it is human nature
to see it as permanent.
For over
75 years the U.S.
banking system has
pyramided, via the
magic of fractional
reserve, a vast amount of credit which was
turned into debt (IOU’s) allowing people to bid
up the nominal values of all sorts of things.
Sometimes during that lifetime of credit inflation
it was food, wages, and energy whose
prices rose rapidly and the ignorant called this
inflation (when in fact it’s simply a symptom
thereof.) Other times that credit flowed into
stocks, bonds, land, homes, etc., and people
called this phenomenon growing wealth when,
in fact, it was just another symptom of credit
inflation.
In fits and starts, however, we know that the
valuation of stocks (and homes and other stuff)
rose mightily during those credit-inflation years.
This could not occur without a near universal
shared belief in the “good as gold” reality of
all those IOUs being created. In the context of
Robert Prechter’s work, this was born of unconscious
shared optimism that rose to unprecedented
heights during our lifetimes.
At the peak of that optimism we witnessed the
“We Are the World” phenomenon, where peace
was breaking out all over and a pundit even
boldly declared social democracy’s Utopian triumph
in “The End of History.”
It was a top.
The embedded trust in IOUs remained so great
that it was even widely seen as normal when
new credit was flowing madly into houses via
mortgages originated between firms that packaged
their wares for resale and home buyers
who clearly lacked the financial wherewithal to
service their debts.
Such insanity reigned everywhere, from banker
and financier, throughout the “regulatory apparatus”
of the Federal Reserve Bank and SEC,
and on to the shoeshine boy on the corner planning
to flip condos.
This is an illustration of just how big the top
really is. The bust ensuing bust should be long
and deep. Don’t let it seem personal (but it will
feel that way, trust me.)
Collectively, we have yet to see the tiniest bit of
resolution to this historically over-the-top period.
We cannot forecast with certainty when the
real crisis will begin to bite nor can we say with
certainty what effects will echo in our social milieu.
Flexibility and open-mindedness are probably
wise attributes to cultivate.
As a natural contrarian, I concur with those few
who see the existence of a vast ocean of dollarbased
IOUs as a “synthetic short of the dollar.”
Imagine if some entity (a nation-state’s political
government, even) began crediting people with
electronic balances of IBM stock. Those rulers
The Dollar Paradox
By David Calderwood
45
arrogate the power to give an endless number of
electronic units of IBM stock to every political
supporter, every member of the Military-Industrial-Complex
(and its employees), and nearly
all comers.
That political entity cannot make more IBM.
It can’t make more mainframes. It can’t write
more software. All it does is distribute electronic
copies of IBM’s common stock. As long as everyone
goes along with the con, it has the effect
of diluting all owners’ value of IBM. Each unit
of stock (both the electronic forms and the tiny
few actual printed stock certificates) is worth
less and less “share” of the company’s underlying
value. But for a time, everyone who gets
more IBM shares feels wealthier.
This works until one day the unconscious willingness
to believe in the con game begins to
erode. As with the housing bubble, once the
herd smells rotten fish, every member of the
herd becomes nervous. First they may distrust
electronic forms of IBM held at certain banks
or other firms. As this wave of distrust travels,
it works its way from the perceived least
trustworthy electronic accounts of IBM shares
to slightly more trustworthy, and slightly more,
until a huge pile of previously fully-valued IBM
electronic shares are deemed worthless.
This evaporation of electronic IOU’s of IBM
shares makes each surviving share (electronic
and the few paper stock certificates) worth more
and more. In a full meltdown of public trust, it
becomes possible that the ONLY shares deemed
trustworthy are the physically printed ones. Given
the small number of these that actually exist
in the physical realm, by the time public confidence
reaches its nadir those paper shares could
be worth vastly more than at the peak of trust.
This same dynamic could apply to U.S. dollars.
While the dominant
view is that the Fed
can collude with the
Treasury to create an
endless amount of
“money,” in fact all
they do is create credit
in the form of U.S.
treasury debt, which
is no more than an
electronic IOU. The value of that debt is a function
of mass psychology because it only exists
to the extent people believe in its “good as goldness.”
For 75 years we’ve experienced a one-way flow
in the direction of this trust. The experience of
the past eleven years informs me that the old
trend is giving way to a new one. It’s past time,
in my opinion, to recognize how such a trend
change may play out.
Paradoxes are everywhere in life, if one looks
for them. The great paradox of the next few
years may be that the most worthless thing on
the planet, a medium of value even sellers of illegal
drugs seek to divest at every opportunity,
may be among the safest things to own while
the financial firestorm plays out on the stage of
our lives.
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