Monday, November 29, 2010

Default, Ireland! Please Default!

Ireland, Please Do the World a Favor and Default

Of Two Minds, Charles Hugh Smith

Ireland would save the world from much misery by defaulting now and driving the vampire banks into liquidation.

The alternative title for today's entry is: Ireland, please drive a stake through the heart of the vampire banks which have the world by the throat. The entire controlled demolition of the Eurozone's finances can be summed up in one phrase: privatize leverage and profits, socialize losses and risk.

The basic deal is this: protect the bank's managers, shareholders and bondholders from any losses, while heaping the socialized losses and risks on the taxpayers and citizens.

While there are murmurings of "forcing bondholders to share the pain," any future haircut will undoubtedly be just for show, while the Irish pension funds are gutted to bail out the banks.

EU Outlines Bond Restructuring Plan (

Europe Goes "Completely Mad" At Suggestion Of Irish Default Demanded By 57% Of Irish Population (Zero Hedge)

Here is a chart which illustrates the dynamic at play in Greece, Ireland and indeed, the rest of the world as well: leveraged speculation and mal-investment lead to asset deflation and collapse.

Here is a chart which illustrates how asset deflation leads to taxpayer-funded bank bailouts and then sovereign default. It's fairly self-explanatory:

It's rather straightforward: as asset bubbles rise, they enable vast leveraging of credit and debt. Once mal-invested assets collapse in value, then the debt remains, unsupported by equity or capital.

As the Financial/Political Elites transfer these catastrophic losses onto the citizenry, they set off a positive (runaway) feedback loop: the Central State austerity required to pay the borrowing costs of the bailout sends the economy into recession, which reduces borrowers' incomes, triggering more defaults which further sink housing prices. As prices continue falling, bank capital declines, requiring ever-larger bailouts to provide the banks with a simulacrum of solvency.

Austerity measures must be tightened to channel more of the citizens' incomes to the banks, which further suppresses the economy, lowering tax revenues and incomes, which leads to more austerity to fund more bailouts, and so on, until the haggard remnants of a once-wealthy citizenry finally rebel against their Financial/Political Overlords and topple the government which arranged the bailout.

A new populist government announces a sovereign default, to widespread huzzahs from the unyoked citizenry.

The EU's bailout of Greece and Ireland will only hasten this dynamic. The Power Elites are rapidly losing their credibility; just compare the market's euphoric reaction to the Greek bailout in May and the openly negative response to the Irish bailout.

The money is lost, and Capitalism requires those who took on the risk to earn outsized returns must take the loss, come what may. When a nation such as Ireland is running a State deficit equal to 32% of GDP, austerity cannot generate the stupendous surpluses needed to make good the vast sums which are already lost.

And even if they could, why should the citizens save the banks and bondholders from the losses Capitalism requires? Mal-investments should be sold, for pennies on the dollar if need be, insolvent banks liquidated and bondholders handed 95% losses. Managers would be sacked, bonuses cancelled and shareholders wiped out.

It's a little late to decide Capitalism is only fun when reaping gargantuan profits from highly leveraged mal-investment and fraud. Ireland, and indeed the world, will survive if all the vampire banks are liquidated. That is the end-state, and "buying time" just increases the misery of the citizens who have been yoked to save their "betters."

Ireland, please drive a stake through the heart of the vampire banks which have the world by the throat. By defaulting, you would be doing the world (and your own nation) an immense favor.

Saturday, November 20, 2010


JP Morgan has 1,5 trillion US$ exposure in derivatives against a rising silver price.
JP Morgans life is on the line and Max Keiser is leading this great viral campaign.

Please read below the "must-read" article of Jason Hommel in which he explains the manipulation of JP Morgan's silver exposure.

Key problem: How can the world's leading banks, (probably mostly JP Morgan) sell $100 billion worth of silver in 6 months, which is 6.66 times the entire world's annual production of only $15 billion worth of silver, and about 50 times the actual physical silver investment market, and it not be fraudulent silver, not real silver, which creates this problem?

To the Top Shareholders of JP Morgan:(Your company is bankrupt in terms of silver!)

Silver Stock Report
by Jason Hommel, November 13th, 2010

To the Top Ten Institutional Shareholders and Top Ten Mutual Fund Shareholders of JP Morgan:

It's news that JP Morgan is being sued for manipulating the silver market by maintaining a large concentrated naked short position in futures contracts on the CME's COMEX metals exchange.

The lawsuits were announced just days after a brave man in government, Bart Chilton, Commissioner of the CFTC (, the Commodities Futures Trading Commission, made a statement that acknowledged silver price manipulation.

The lawsuits mean that very intelligent lawyers believe that JP Morgan's short position is so obvious and provable that there is a case to be made, and money to be won from JP Morgan, and they feel that perhaps they will get help even from those in government, such as Judges. Blood is in the water, and JP Morgan is the one bleeding.

The news articles of the lawsuits don't tell the full story. See, I know the men who helped expose JP Morgan as the silver short, and I help to inform those men, and promote their work. I was the first to file an antitrust complaint to the US Justice Department against JP Morgan for silver manipulation in April of 2010.

JP Morgan is also the custodian of the silver ETF, SLV, which also does not likely have all the silver, which would be another short position.

JP Morgan's third short position in silver is likely a much larger naked short position in silver than the other two combined, and it's through the "over the counter" silver market, which has been up to $200 billion in size according to the BIS, the Bank of International Settlements.

See the second link, above, the pdf file, the second table, Table 22A:, under the category "other precious metals". The "Notional Amounts Outstanding" in June 2009, were $203 billion.

Jeffrey Christian, bullion bank apologist, at the CFTC hearing on silver on March, 25th, 2010, admitted that silver was traded and leveraged "over 100 to 1" in the London market.

JP Morgan also holds the largest derivatives positions of any banks, at $69 Trillion, according to the US OCC. Thus, it is likely that JP Morgan also holds the largest short position in silver derivatives, too, as a matter of course, since they dominate derivatives trading in general. So, to them, a $100 billion short position in silver would be "chump change" compared to their other derivatives positions, and may, in actual fact, be a part of a larger overall strategy to maintain the value of their other derivatives, (including the US dollar) to keep interest rates low.

See the last page of the second link, the pdf link, above. The OCC sometimes changes the location of these links, so if the link breaks, you might want to ask one of your junior researchers to locate them for you, or look around the page for a few minutes to find it yourself, or simply contact the OCC as ask them for a copy of their "Quarterly Report on Bank Trading and Derivatives Activities" Second Quarter 2010

So, the problem is simple to understand, but complex to solve, because JP Morgan's market influencing positions cannot be closed without massive losses that will bankrupt JP Morgan, and perhaps also significantly devalue the US dollar.

The world's annual silver production is estimated at between about 550 million ounces of silver to about 650 million ounces. At 600 million oz., at $25/oz., that's a tiny $15 billion market. The investment side of the silver market is even smaller, at only 100 million oz annually, which, at today's silver prices, is a much smaller $2.5 billion market.

Key problem: How can the world's leading banks, (probably mostly JP Morgan) sell $100 billion worth of silver in 6 months, which is 6.66 times the entire world's annual production of only $15 billion worth of silver, and about 50 times the actual physical silver investment market, and it not be fraudulent silver, not real silver, which creates this problem?

But the problem is much bigger than how it might appear from just that. See, in 1980, silver prices hit $50/oz. That was when M3, the money supply in the US, was a tiny $1.8 trillion. Today, it's $18 trillion, and growing at a rate of about $2 trillion per year, which is the what the US government must print to pay their bills. So, the inflation-adjusted price of silver could be ten times higher, or up to $500/oz., if only 1% of the population of the USA began to buy silver.

See, 1% of $18 trillion is $180 billion. How can $180 billion pour into the real and actual physical tiny silver market of $15 billion (or the tinier silver investment market of $2.5 billion) without driving the silver price to $500/oz.?

See, the problem is that the silver price will hit $500/oz. just for starters, by the time only 1% of people in the USA alone try to protect their wealth from inflation by buying silver and gold, and the way things are going in government, that's nearly a given by now.

If my reading of the OCC report is any indication, then JP Morgan's short position in silver could be as high as 25% to 50% of the entire world banking system's short position of $200 billion in silver (and that was when silver was $15/oz.)!

JP Morgan's short position in silver could thus be as high as 3.3 billion ounces if we are conservative, and estimate their position at only 25% of the BIS report numbers. By $500/oz., JP Morgan's short position could be worth a negative $1.5 trillion, and that's just for starters. It could grow worse if they add to their short position, in a misguided attempt to manipulate a market that is clearly moving against them.

That kind of activity by a rogue trader brought down Barrings Bank, as showcased by the 1999 movie, "Rogue Trader".

The other problem is that silver is mostly consumed by industry, as it's the greatest conductor of electricity in the world, and is used up in 10,000 applications. Only oil has more applications, but oil can't be used as money. It's just way too hard for the average person to store $8000 worth of oil in 100 barrels on their front lawn, and apartment dwellers never could. Gold is also unsuitable as money for most people, because a tiny tenth ounce piece is just too valuable if it became worth about a month's salary, a historic norm.

I submit the problem is bigger than what your brightest minds, your brightest economists, and brightest students in today's world can solve.

See, there is no central bank of silver. There is no lender of last resort for silver. And you can't print silver to solve this problem, because at the end of the day, real silver is needed by industry.

Developed nations, such as the USA, consume, in industry, about 6/10ths of an oz. of silver per year, per person. As the world economy grows, that will increase.

Silver also has the smallest number of years of resources in the ground of nearly any major metal. It's about a 14 year supply. (This is substantially smaller than the world's 40 year supply of oil.)

But the solution is simple if you can trust in God.

Be honest. Be honest first. Trust that honesty brings rewards and blessings from God.

May I humbly suggest a few simple solutions to your problems concerning your positions in JP Morgan, given JP Morgan's major financial problems with their short position and shortage of physical silver?

1. Buy silver.

2. Sell JP Morgan shares.

Or, well, scratch that, or you can reverse it. You could sell JP Morgan shares and use the proceeds to buy physical silver.

Most of all 20 of your institutions own about $2.5 billion worth of shares, on average, of JP Morgan.

I can guarantee you that the facts dictate that your shares of JP Morgan will not retain their value nearly as well as will silver.

I can also guarantee you that it's a race to get silver, and you are all probably not even in the race, given the tiny size of the silver market.

If even one out of 20 of you decided to act, I can guarantee you that silver prices would double and exceed $50/oz, before any one of you were able to buy even $1 billion worth of physical silver.

On September 2nd 2010, at the start of this rally in silver prices, I wrote a simple letter to the top 25 billionaires of the world, declaring that none of them would be able to buy much silver below $20/oz. Based on recent silver prices rising to over $29/oz., and holding at $26, it appears I was right.

Dear Billionaires of the World

I gave specific advice on how to accumulate large positions in silver, and who to contact to get it. Of course, you, or anyone else, can also simply call me or my associates at the JH MINT.

It is actually against my best interests to write to you, for several reasons. See, since I know silver is money, I therefore use silver as my "unit of accounting" internally as a bullion dealer at the JH MINT. I count all my assets in terms of dollars, and also in terms of silver. During the recent rise in silver prices, our assets are increasing in terms of dollars, of course. But not in terms of silver. Why not? Because we lose "silver value" on our small cash positions, and we lose "silver value" on our larger gold positions. So, even though over 65% of our assets are in the form of silver, and even though we are having record sales volumes, we are not able to "accumulate silver value" from operations during this bull market in silver, because silver prices are simply rising too fast.

Furthermore, by sharing with you this information, I risk creating a silver shortage at many of my own suppliers, which could literally put my successful silver dealing business out of business.

I can therefore state with near absolute certainty that if you tried to value the wealth of your institutions in terms of ounces of silver, you would do nothing but "lose money" in terms of ounces of silver, no matter what you do, no matter how great you think your investment decisions will be, no matter how much silver you accumulate, during the next ten to twenty years of the continuing bull market in silver.

This is your first and only warning about the facts of silver that I will ever give you. I will not contact you again, just as we never pester any of our clients by phone.

God bless.


Jason Hommel

Saturday, November 13, 2010

How The System Works: Cartoon

OK, let me get this right.

"There are winners and there are losers, but the winner is certainly not you"

Thursday, November 11, 2010

The Power Of Pricing Money: By Shady Men or The Invisible Hand

This discussion goes to the heart of the financial problems and the power of bankers and politicians.

Will they let their power go and use a measurement tape, the gold standard?

This, nobody knows. I guess it will depend on the severity of the crisis.

Roubini: Here's Why a Gold Standard Won't Work ... A gold standard would just make business cycles more extreme, according to economist Nouriel Roubini (left). ...What's more, a gold standard would make central banks unable to fight inflation or deflation, much less do anything to combat persistent unemployment, Roubini said in an interview with NetNet yesterday. "A fixed exchange regime, even if it is not a gold standard... that world just doesn't work. Because in that world, monetary policy by definition instead of being countercyclical becomes procyclical," Roubini told NetNet. Nouriel Roubini "Suppose you have a fixed exchange rate regime... it just exacerbates the business cycle." – NetNet/

The Daily Bell

Dominant Social Theme: Get this idea out of your heads! Gold is finished. It's nonsense. Only more fiat money can save us.

Free-Market Analysis: This is an important article from our standpoint because Nouriel Roubini has always been positioned (or positioned himself) as a practical thinker and "hawk" when it comes to monetary policy. This means that unlike many other economists, Roubini is always criticizing the Federal Reserve for being too soft on inflation. He wants higher interest rates and presumably less money printing in order to retain the value of the dollar. He is in other words a friend to those who are generally critical of the Fed and a protector as well of people's wealth. Or that is what we have been led to think.

But this article seems to reveal that much of Roubini's reputation is based on a kind of posturing. He is happy to pose as a protector of sound money, but as gold rises and the battered fiat dollar continues to unwind, Roubini is willing to come strongly to the defense of the current system. In our view (as we regularly state) central banking is a basic dominant social theme that the Western elite has promoted vigorously as a way to make sure that its efforts to set up world government are well funded. Roubini in this article supports that theme.

The article ends with the words, "Over to you Ron Paul and the Mises Institute!" While this is a surprising conclusion to find within a mainstream article, from our perspective, it is certainly appropriate. The von Mises Institute has in many ways provided us with the initial frame of reference to judge Roubini's statements. What Austrian hard-money economics gives us is a fully formed knowledge-base of how free-market money SHOULD work, and this is precious knowledge indeed, given it almost went extinct in the 20th century.

What Austrian economics shows us is that gold and silver are marketplace money and that only the marketplace itself can determine the volume of money and its value. There are differences, of course, between various hard money schools and the Mises Institute has always made a principled case for full-reserve banking. Here at the Bell we have explored private fractional reserve banking and have presented the Antal Fekete's rediscovery of Real Bills and their role within a private banking system. .

But the important point re-pioneered by the Mises Institute is that the MARKET decides on money; the state cannot. In fact the market might well decide on full-reserve banking. And in a crisis people's real views begin to emerge. This happened during the Bush years in America when the Republican party showed itself not as a Reaganesque-oriented party of the free-market and the entrepreneur but as a big-spending, big-war, big-state adjunct of the Democratic machine it supposedly opposed. Because of the financial crisis we are learning Roubini's real views. Here's a little more about him:

Nouriel Roubini (born 29 March 1959) is an American professor of economics at New York University's Stern School of Business and chairman of Roubini Global Economics, an economic consultancy firm. After receiving a BA in political economics at Bocconi University, Milan, Italy and a doctorate in international economics at Harvard University, Cambridge, Massachusetts, he began academic research and policy making by teaching at Yale while also spending time at the International Monetary Fund (IMF), the Federal Reserve, World Bank, and Bank of Israel.

Much of his early studies focused on emerging markets. During the administration of President Bill Clinton, he was a senior economist for the Council of Economic Advisers, later moving to the United States Treasury Department as a senior adviser to Timothy Geithner, who is now Treasury Secretary.

Roubini is today a major figure in the U.S. and international debate about the economy, and spends much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Although he is ranked only 410th in terms of lifetime academic citations; he was #4 on Foreign Policy magazine's list of the "top 100 global thinkers." He has appeared before Congress, the Council on Foreign Relations, and the World Economic Forum at Davos.

We can see how smart Roubini is from this Wikipedia bio, but as we pointed out yesterday in our previous article on the gold standard, intelligence does not always equal wisdom. What Roubini is claiming in the article/interview excerpted above is that fixing money to a certain gold ratio does not give central banks enough room to maneuver (ie: print more money). This is a standard central banking argument against a formal "gold standard" as it is often presented.

But in our view, the interviewer at NetNet should have asked Roubini about free-market gold and silver. He could even have asked Roubini if he believed the free-market was capable of regulating money on its own and how central bankers know how much money is enough and how much is too much.

In fact, what is illustrated by Roubini's argument about a "gold standard" is that he conceives of it in statist terms (the state will set the ratio of gold to currency). Apparently, he has never contemplated the idea of a privately run full-reserve gold-and-silver system let alone one that utilizes a variant of free-banking as the United States attempted in pre Civil War days. Here's some more from the article on Roubini and gold:

Roubini seems to think a gold standard is a pretty awful idea. "There are many fundamental problems with any variant of a gold standard," he said. A general summary of Roubini's position on the issue would likely begin by saying that, generally speaking, a fixed exchange rate regime or gold standard limits the flexibility and range of actions that central banks can take to improve a nation's economy in fundamental ways. (For example, in a fixed exchange rate regime, central banks have less ability to maximize employment, stimulate growth and manage price stability.) And, as Roubini specifically pointed out to me, fixed rate regimes inhibit the ability of banks to provide lender of last resort support to an economy when necessary.

The point Roubini is making is simple. He believes that a handful of bankers in a room consulting together can set the price of money more effectively than the invisible Hand. This is a form of price fixing; and we would have liked the interviewer to ask Roubini if price-fixing is effective generally. If Roubini were honest he would answer that price fixing is not effective.

The interviewer could then have asked Roubini what was the dividing line between classical and neo-classical economics. If Roubini was honest, he would have had to answer "marginal utility," which changed the nature of economics forever. Marginal utility explains how the consumption of goods and services becomes less satisfying as they are consumed; in doing so, it emphasizes how only the free-market itself can determine the prices of these units. It is, in a sense, an elaboration of Adam Smith's "Invisible Hand" that regulates the marketplace via competition.

These are powerful concepts and yet the central banking ideology of the 21st still maintains that a few individuals can determine how much money an economy needs. It basically denies 300 years of accumulated economic knowledge.

The cognitive dissonance is startling, as is the realization that Roubini is held in such high esteem and has been named a top 100 global thinker. Roubini is supposed to be a hard-nosed proponent of the free-market, sound money and entrepreneurialism. But he is evidently and obviously a statist, a socialist who believes that groups of powerful people can make up prices for the market and then attempt to enforce them successfully. It would seem to be an economically illiterate position.

Not only that but Roubini does not even seem to understand monetary history generally or he would know that gold and silver have been considered money by cultures around the world for thousands of years. He would know that private market money – gold and silver – with or without free-banking has provided the backbone of many successful economies. He would know that these days gold can be digitalized endlessly and that supply is not even an issue when it comes to using gold to drive a free-market economy these days.

Perhaps we are being too hard on Roubini, and if so we apologize. The interviewer did a good job in many ways and a successful interview involves both parties. Roubini doesn't seem to have offered much that is not standard fare, so we are only reacting to what was said (or reported) in this interview. Roubini may well know all about monetary history (being a top-100 world thinker), but if he does, we wish he would have revealed it. As it is, we are left to wonder if he is avoiding mentioning what he knows, or if he doesn't know it.

As we mentioned above, the interviewer did write the following encouraging words at the end of the article: "Roubini's views challenge the Austrian economists where they live: at the intersection of monetary policy and the business cycle ... We eagerly await the response. Over to you Ron Paul and the Mises Institute!"

Conclusion: It would seem to us that the interviewer is aware that there is an alternative view and is eager to solicit it. It is very possible that it is becoming more fashionable for "mainstream" financial journos to acknowledge Austrian economics as a sign of a certain level of sophistication in their craft. We have noticed this elsewhere, mainly in the friendly reception that hard-money proponent Congressman Ron Paul often receives in mainstream financial interviews. Honest money seems to be coming back into vogue after a 100-year hiatus. We dearly hope this is a developing trend.