Deflationary Destruction of The US Dollar?

Before I begin this post, let me preface it by saying that I am not a gold bug. I am also not a tinfoil type "moonbat". We are facing extraordinary times that now call for extraordinary measures in order to ensure our survival. What I am about to type below is something that I would have considered to be "crazy" 5 years ago.

Unfortunately, as this crisis unfolds, I believe the measures discussed below should now be considered to be prudent.

I want to survive this financial catastrophe, and I am constantly looking for different solutions that will ensure my survival.

Ok, lets get to it:

As I sit here and watch the US dollar drop on an almost daily basis(btw the way we hit our lowest levels today since Jan.), I have begun to search for alternatives by which I can protect the wealth that I have accumulated. Many believe that inflation or hyper-inflation will destroy the US dollar. Whats proposed below is the exact opposite. Some believe that it will actually be DEFLATION that eventually takes down the dollar.

I read a brilliant interview today in The Daily Bell of Dr. Antal Fekete who is an esteemed author, mathematician, monetary scientist and educator. His insights in this interview were absolutely brilliant in my opinion. This is a long read but well worth it in my view so please take some time to read it.

Dr. Fekete's thesis is very different from your basic Keynesian economist. Any of you that have read me for awhile know that I love thinking thats "outside the box". There are many great thoughts in this interview around monetary policy and why the Fed's monetary approach will eventually result in an epic failure.

I wanted to focus on just a few points here that are most relevant to all of us. Let me highlight a few excerpts from Dr. Fekete and then I will then post some thoughts below:

"Dr. Fekete on why deflation not hyper-inflation will destroy the dollar:

"Daily Bell: Can the current paper money system stand, or is it on its last legs?

Prof. Fekete: Since the eruption of the financial and economic crisis in 2007 we may take it for granted that the regime of irredeemable paper money is on its last legs. However, it may take several more years of agony, because of the colossal ignorance of people concerning money. For example, most people with a better than average grasp of the theory of money expect that the dollar will succumb to hyperinflation. They will be disappointed. The dollar will put up a tough fight and in the end it will self-destruct, not through inflation but through deflation.

Daily Bell: Can you expand on this issue? What makes you suggest that hyper-inflation is not in the cards?

Prof. Fekete: Producers will, of course, try to raise prices as the dollar is weakening further. However, people are not in the mood to spend. If they come into possession of money, they will use it to repay their debts. They have no savings to fall back on in case they lose their jobs. In the absence of buying, price increases will have to be rescinded (as they have been in the case of crude oil, for example) causing many a producer to go bankrupt.

There is a new factor that plays an important role, not present in previous episodes: the parallel existence of electronic dollars and Federal Reserve notes. Only a small portion, less than ten percent, is in the form of the latter; the rest is electronic money. People at home and abroad hoard only dollars that they can fold. It is physically impossible to print them fast enough to replace electronic dollars that the people, firms, institutions and foreign governments may decide to reject. The velocity of circulation of paper dollars is falling to zero while that of electronic dollars is rising beyond any limit. This splitting of the money supply into two components of divergent velocities spells deflation. The component with increasing velocity will have to be written off. The Fed is helpless as the hoarding of its notes assumes unheard of proportions.

Daily Bell: Can the Fed really sterilize the monetary system as Ben Bernanke and others contend?

Prof. Fekete: If by "sterilization" you mean isolating the exploding money supply from exploding prices, my answer is that Bernanke does not want to do that. In fact he is desperately but unsuccessfully trying to induce a rise in the price level, even at the risk of a price explosion. But to no avail: all the new electronic money he is creating goes into debt liquidation and speculation on the long side of the bond market. None of it goes to bid up commodity prices, or the prices of industrial shares, or the price of real estate.

There is a vicious spiral: the more money Bernanke creates, the more rampant bond speculation becomes, the higher bond prices go, the lower interest rates fall, the lower price-level falls, prompting more money-creation by Bernanke, etc.

Why do falling interest rates necessarily induce lower prices? Now here is the rub: because falling interest rates destroy capital through increasing the liquidation value of debt. I have a whole new theory on that: The Revisionist Theory of Depressions. My main thesis is that a falling interest-rate structure increases the burden of debt (just the opposite that you would intuitively expect!) thereby causing producers to go bankrupt in droves. You can read this special report, now available at the Daily Bell, click here."

Dr. Fekete on the gold's transformation from contango to backwardation:

Daily Bell: Is there any evidence that hoarders of gold and silver behave as you suggest, and not as common sense would dictate? After all, it is a universal feature of the commodity markets that the longs take profits periodically as prices keep rising.

Prof. Fekete: Yes, indeed, there is: the behavior of the gold basis. Basis is the difference between the nearby futures price and the spot price. Contango is the name for the condition whereby the basis is positive; while backwardation indicates a negative basis: higher spot price and lower futures price. Whenever supplies are adequate, contango obtains and the basis indicates what the carrying charges are such as interest, cost of storage and insurance. Backwardation always and everywhere indicates a shortage of the physical metal. Therefore, normally, gold should never be in backwardation, i.e., the futures price should always be higher than the spot price. The basis may be substituted by a spread, i.e., the difference between the price of a distant and a nearby futures contract.

Right now, the gold basis is at a critical inflection point, suggesting that gold may plunge from permanent contango to permanent backwardation for the first time ever. On April 21 Dan Norcini published charts showing the dramatic collapse of the April 09/June 09 and of the April 09/Dec 09 gold spreads at the Comex. The former went from $6.50 at one point to tiny_mce_marker.60 now. The charts indicate that gold is on its way to backwardation later this year. Backwardation in gold is an extremely rare phenomenon with the most serious implications. It shows that supplies of physical gold are drying up as hoarders and the mines are increasingly withdrawing their offer to sell. It is like a chain reaction, at the end of which gold is not for sale at any price.

Dr. Fekete on protecting yourself:

"Daily Bell: What can people do to protect themselves at this time?

Prof. Fekete: Other than praying and hoping, they could get out of debt and keep accumulating gold and silver coins, buying on every weakness in the price. They could also hoard Federal Reserve notes and the notes of the Swiss National Bank of small denominations, in amounts corresponding to their needs for up to two years. To keep money on deposit in a bank is not advisable under any circumstances. And, let's not forget, they should cash in on their life insurance policies."

My Take:

Very interesting isn't it? I think its pretty hard core but brilliant.

Basically there are a few take home points here:

1. Raising cash in this crazy world no longer means holding money in a bank account or treasuries. Raising cash means holding FRN's( Federal Reserve Notes). In other words: Cold Hard Cash! Look at the top of a dollar in your pocket and see what it reads: Federal Reserve Note! As you can see above, the bailouts are being done in the form of electronic money. Less than 10% is printed in the form of FRN's. FRN's are a great thing to have because they offer a zero interest coupon that has indefinite maturity. I have begun accumulating FRN's over the last several weeks.

There could very well come a time where the world will no longer accept our debt after watching the Fed create trillions of "digital dollars". These "digital dollars" could become worthless down the road if the world begins to decouple from the US dollar and begins to no longer accept it as payment. FRN's have a much better chance of holding value because they make up less than 10% of our money supply.

Think about it. What would you rather own?: FRN's which account for less then 10% of the money supply or one of the trillions of "digital dollars". Thats an easy answer if you ask me.

The problem here is you need a safe place to store it. A properly installed safe is a great place to hold FRN's.

2. Buy some gold and silver coins. Let me emphasize: COINS. Coins are preferred because they are much more easily used as a form of money. I would focus my purchases more on the silver side versus gold. Silver is less expensive and would give you more flexability in terms of using it as a currency.

3. Pray that it never comes to this! However, I am afraid we are now approaching the time in which we all need to begin preparing ourselves for the worst because I believe their is no solution to the mess we have dug ourselves into.

The fact that we are about to see a backwardation in gold is very ominous folks. This means that no one wants to sell and nations like China are buying any gold they can get their hands on. My take on gold here is people are not buying it as an investment. They are buying and hoarding it because they believe that we may see the US dollar self destruct. This is protection versus speculation.

Now let me reiterate that I have never been a big gold fan. I also don't believe we are going to see a "Mad Max" scenario. I will continue to keep the majority of my portfolio in FDIC insured accounts and treasuries.

However, I will begin to rapidly increase my FRN holdings. I will also begin accumulating some silver and gold coins. My first choice of the three options above is FRN's. If the crap hits the fan I believe physical cash will still be usable. It may have to be converted into some other form of currency but it will hold its value nonetheless.

As for the stock market, the more I watch it the more I believe its just the tail of some large dog that's manipulating the crap out of it. Exactly who is this dog? The government? The bond market? The trading desks on Wall St? Perhaps its a combination of all of the above? Who knows, my guess is its a little of all three.

What is becoming increasingly clear is our problems now run far beyond our issues in the stock market. Our way of life is crumbling as the oligarch's power over the people continues to increase.

Socialism looms right around the corner if our country continues down the same path.

In fact, if the government doesn't wise up and change its ways, they run the risk of losing power. Germany's economic collapse was the key driver that allowed Hitler and facsism to rise to power. No government has ever survived following a hyperinflation/economic collapse. The freedoms that our founding fathers worked so hard for are slowly falling apart as this crisis begins to unravel.

Don't think it can happen here? Ask a Chrysler bondholder how they feel about their freedoms after being strong armed by the government to sell their bonds at .10 on the dollar. Bondholders NEVER roll over and accept .10 on the dollar without going to BK court. You can bet that they were threatened with their lives if they didn't accept this deal.

Is this how a free capitalistic country works? Don't think so. In fact, it sounds more like an episode of The Soprano's.