March 15th. The Ides of March. Day of the Debt.
Greg Hunter (USAWatchdog.com) recently interviewed Mexican billionaire and retail magnate Hugo Salinas Price.
Salinas Price advocated using silver as money in Mexico:
“The idea is not to go back to a silver standard, but to create a parallel currency which would be a monetized silver coin. It would not bear a stamped value. It would be a plain silver coin with a quoted [periodically adjustable] value given to it. This value would be adjusted upward with a fall in the value of the peso or a rise with the price of silver.”
“Adjusted” by whom? The Mexican government? And that government would promise (cross-their-hearts-and-hope-to-die) that they would never, ever try to manipulate the silver coin’s value for political gain—right? And the people of Mexico and of the world would believe that the Mexican government would never try to manipulate the value of the silver coins for political purposes—right?
I don’t think so.
Who’d be dumb enough to trust the government of Mexico (or of any other country) to control their nation’s fiat currency in a way that serves the people rather than the government?
Plus, the idea of establishing a “parallel currency” would only invite competition between the two currencies to discover which is gaining or losing value. Two “parallel” currencies would guarantee that there was little or no monetary stability until one of those two currencies died. I doubt that “parallel” currencies is a workable concept.
I’m also amazed that Salinas Price would advocate silver coins that have a variable value (denominated in pesos) that could be “adjusted” by the Mexican government. To me, the fundamental idea behind a gold or silver coin is to fix the value of a paper currency in terms of a specified mass of precious metal.
What Salinas Price proposes is declaring physical silver to have a variable value measured in terms of fixed, fiat pesos. Thus, he recommends reducing physical silver to the same status as fiat pesos—both of which values would be subject to government manipulation rather than fixed and reliable.
• “Why silver coins for the Mexican people?
“Salinas Price says, ‘All material progress comes from saving—not from spending. You have to save first—from savings comes investment, and from investment comes jobs and income for a better way of life. Savings are the primary source of prosperity.’”
I agree. The key to wealth and prosperity is savings. Not spending. And, certainly not debt. In fact, if that principle is correct, a monetary system (like ours) that’s based on debt rather than assets/savings, is bound to lead to poverty and financial calamity.
“It may soon be impossible to save in paper currency. Salinas Price reminds us that there are trillions and trillions of dollars in bonds hanging over the head of everyone on the planet.”
The idea of debts over-hanging the heads of all the people implies that Salinas Price presumes that huge debts owed by governments around the planet will somehow be paid by the average people. I disagree.
The existing debts/bonds are already too great to ever be paid in full. What can’t be paid, won’t be paid—not by anyone. The “trillions and trillions of dollars in bonds” are not “hanging over the heads of everyone on the planet.” It might be nice to suppose that all of the billions of ordinary people are going to somehow pay those bond debts, but that won’t happen. The people are broke. They couldn’t repay the debt if they wanted to—and they don’t want to.
When the debt hits the fan, the world will see that those bonds/debts are “hanging over the heads” of all of the investors who exchanged their wealth for paper bonds that can’t and won’t be paid. The ordinary people won’t be made to pay the debts due to the rich bond investors. The rich bond investors will be made to pay the government’s debts when their bonds can’t be redeemed. The rich bond investors will lose their assets when the fundamental truth about paper bonds is recognized: those paper debt-instruments are fundamentally worthless.
• Hugo Salinas Price is a billionaire and a student of money. He correctly observes that, “All material progress comes from saving, not from spending.” I agree 100%.
Still, in Greg Hunter’s interview, Salinas Price shows no sign of clearly understanding that it’s not only important to save, it’s important to save in a medium like physical gold which (unlike paper bonds and digital currencies) can’t be defaulted and destroyed by government incompetence or edict.
If Salinas Price really understood savings he wouldn’t imply that the world’s people will pay the government’s debts. He’d argue that a moment is coming when bond investors will try to sell their bond as quickly as possible and move their wealth into physical gold. However, most investors will fail to sell their bonds at near face value and then realize that they have been stuck with paying the government’s debts.
Get that? When the investors bought the bonds, they assumed the day would come when they’d be able to redeem the bonds for principal paid plus interest. When redeemed, the government’s debt would ultimately be repaid by taxes imposed on and paid by the people.
Well, surprise, surprise! That ain’t gonna happen!
The bonds will not be redeemed by the government or by the people. They can’t be redeemed in full because they’re too big. That means the rich bond investors will be left holding the bag, won’t be repaid, and find that they have unwittingly volunteered to pay the government’s debt.
The bond debt can’t be paid in full or even by half. The day must come when governments around the world (especially that of the U.S.) will default on their bond debts. When that Day of Default arrives, whoever is holding those paper bonds will lose most of whatever wealth is “saved” in the unreliable medium of paper debt-instruments. There’ll be a panic and the price of bonds will drop like stones.
• “When those bonds start liquidating, it’s going to rain inflationary money.”
That could be true—provided that the government already had enough currency saved and on hand to “liquidate” (pay) those bond obligations to all of the bond investors before the bonds are submitted to government for repayment.
I.e., suppose government is called on to redeem $20 trillion in U.S. bonds. Suppose the government already has $20 trillion in cash, saved up and sitting in a vault somewhere, waiting to be used to pay the National Debt. Then, just as Salinas-Price predicts, when all that cash is pulled out of the vault and paid to bond-holders, the bond-holders will spend that cash, and the economy would be deluged by a “rain” of “inflationary money”.
However, the idea that the U.S. government might already have $20 trillion in cash reserves to redeem the $20 trillion in existing U.S. bonds is absurd.
It’s axiomatic that government’s need to borrow $20 trillion is evidence that government doesn’t have another $20 trillion in cash that’s already saved and ready to redeem the new debt. Government borrowed $20 trillion (at least) because government didn’t have $20 trillion in saved-up cash.
Point: If all or even just some relatively small percentage of the $20 trillion National Debt was submitted to government for redemption, government couldn’t pay. By being forced to admit it’s insolvent, government would cause the bonds memorializing the National Debt to be hugely devalued and possibly destroyed.
• I’ve recently seen reports that the U.S. government currently holds about $250 billion in cash for day-to-day operations. According to that report, government usually spends about $75 billion a month.
$250 billion cash on hand would be about 1.25% of the $20 trillion National Debt. That percentage makes clear that there’s no way for the U.S. government to redeem a “bond rush”.
More, I’d bet there’s no combination of governments, central banks and/or private lenders who have access to an existing (saved) pile of $20 trillion in liquid cash that they could use to redeem all of those paper bonds.
These circumstances suggest that if even a small but significant percentage (5%?) of all current U.S. bond-holders decided to redeem their bonds by selling them, there’s not enough cash in the U.S. or even the world to accommodate their sale.
• Q: What if 20% of bondholders tried to sell their bonds and only 10% could be sold?
A: The inability to sell U.S. bonds at something close to full face value would be instantly seen as evidence that U.S. bonds were no longer redeemable. People holding bonds would panic and seek to sell at any price. The price of bonds would plummet.
The obligation to make good on those U.S. bonds would not fall on the backs of common people. Instead, trillions of dollars worth of paper wealth and government debt would be almost instantly destroyed leaving little or no debt to ever be repaid. People who had invested in U.S. bonds (believing them to be a “safe haven”) would be ruined. The evidence of income inequality would be dramatically reduced as the (formerly) rich bond investors were pushed suddenly closer to middle class or even poverty.
• Q: But, what if government is already insolvent (or nearly so) and has virtually no savings and a mass of U.S. bonds are submitted to be redeemed by government? In other words, what if (as is certainly true) government does not have a secret hoard of savings on hand sufficient to repay most of the U.S. bonds submitted for redemption?
A: The government will have two choices:
1) Admit it’s insolvent, openly default on the U.S. bond debt and risk being destroyed; or,
2) Create and print however much new, fiat currency is required to nominally “pay” the National Debt with hyperinflated dollars.
If government takes the first choice, admits it’s insolvent and openly defaults on the U.S. bond obligations, $20 trillion in paper wealth currently held in pension funds and bank vaults will be vaporized. Without that $20 trillion, retirees could starve and the economy could collapse. In the face of massive devaluation of paper-debt instruments (U.S. bonds), the purchasing power of whatever other media that remain and are still recognized as valuable (like fiat dollars and/or other forms of liquid wealth like gold and silver coins) would increase dramatically. That’s deflation
Deflation destroys debtors by making them repay their debts with “more expensive dollars”. The U.S. government is the world’s biggest debtor. If the government admits it’s insolvent and openly defaults on its debts, the government might destroyed by the resulting deflation
If government followed the second choice and created another $20 trillion in fiat dollars to redeem the U.S. bonds, the global supply of paper dollars could theoretically increase from the current $745 billion to over $20 trillion—about 2,700%. That’s hyperinflation and sounds the death knell for the fiat dollar.
Behind door #1: deflation and government demise.
Behind door #2: hyperinflation and dollar demise.
We’re in the land of the rock and the hard place. No easy exit.
• I’m not arguing that government could or should suddenly print $20 trillion in fiat dollars. Maybe they’d only print $1 trillion, or $5 trillion or $10 trillion. But the only way I can see for government to survive and reduce its debt is to cause hyperinflation.
However, I am saying that it’s only in the context of government printing trillions of “new” fiat dollars that we could expect to see the Salinas Price prediction (“it’s going to rain inflationary money”) come true. The trillions of freshly-printed fiat dollars would be quickly spent by former bond-holders. Hyperinflation would run wild.
Since A.D. 1971, the fiat dollar has lost 97% of its former purchasing power. If the government printed even $1 trillion in new, fiat dollars, the fiat dollar’s current purchasing power would fall by half to just over a cent as compared to A.D. 1971. If government had to print $10 trillion, the dollar’s value could fall to just a part of a penny. The public would lose confidence in the fiat dollar as a medium for paying debt and storing wealth. Without that confidence, the fiat dollar dies.
• Thus, from my perspective, on the Day of the Debt we’ll see either: 1) overt debt default, massive deflation, and likely government destruction; or, 2) stealthy debt default as government tries to “pay” the National Debt with massive printing of fiat dollars. The resulting hyperinflation will push the fiat dollar that much closer to worthlessness and destruction.
Heads, we lose the government; tails, we lose the fiat dollar.
It’s a no-win situation—and, rightfully so. We’ve played the fool by allowing government to: 1) violate the constitutional mandate for gold and silver money; and, 2) subject us to a pure fiat, debt-based currency.
We thought we’d get something for nothing and many of the people in my parents’ generation did. But all we really did was postpone the day of reckoning when our debts would either have to paid or repudiated. That day of reckoning is close. When it comes, we’ll see evidence of the truth of the old idiom that “a fool and his money are soon parted”. Those who foolishly store their wealth in the media of paper or digital debt-instruments will soon be “parted” from their assets.
• “Salinas Price goes on to say, ‘All those clouds overhead are denominated in hundreds of trillions of dollars of debt. It’s like a dark cloud. There comes a point when that [debt] wants to be liquidated. Bonds are presented for liquidation and turned into cash. That’s when the trouble is going to start. When they are liquidated, we are going to have a Noah’s Flood of cash. With all this debt turned into cash, we are going to be wading in money”
“When they are liquidated”?
Salinas Price writes like a billionaire who’s invested many of his billions in bonds. He can’t bring himself to face the truth. If he’s holding bonds, he’s going to lose a lot of assets. He insists on presuming that all the bonds will be liquidated/paid by the people.
That’s bunk.
Sure, some of the bonds (maybe 10% to 20%) could be liquidated/ redeemed in full. But for the most part, the bonds can’t and won’t be liquidated/redeemed. Salinas-Price’s hope that U.S. bonds will be liquidated/redeemed by the people is vain.
When the Day of the Debt arrives, there won’t be enough currency available to pay the bond debts. Government will have two choices: 1) default; 2) hyperinflation. I’m betting on hyperinflation, but either way, we’re heading for chaos.
• But here’s another interesting question and answer from Salinas-Price:
Q: “Could an upcoming Fed interest rate hike start the bond market to liquidate?”
A: Salinas Price answered, “Apocalypse is upon us . . . this boom in stocks is about to collapse. The total debt when Reagan came into office was $391 billion. Now, it’s $20 trillion. Something has got to give. People are going to say bonds are falling in value because interest rates are going up, [therefore] I think I want to sell my bonds. When interest rates start to go up, as they might on March 15th, we are going to see liquidation.”
I doubt that another 0.25% increase in interest rates will be enough to trigger widespread liquidation of U.S. bonds.
Still, Salinas-Price could be right. Any interest rate hike by the Federal Reserve on March 15th might be enough to start a bond liquidation movement. That movement might eventually (but not instantly) lead to chaos.
“I also think the stock market is going to collapse, a big collapse is coming.
No doubt. But when? That’s the big question: When?
“I also think gold is being hammered in preparation for what’s going to happen. I think it has been taken down, so, when it starts to go up, it will go up from a lower level.”
Probably so.
Implication: If and when a bond-liquidation movement begins, the price of gold may springboard up into the stratosphere.
• Q: “So, will we get hyperinflation?
A: Salinas Price: “I don’t know if it’s going to happen right now, but something is going to happen with this huge amount of debt. It just can’t go on, and how is it going to end? It’s going to end badly. A lot of wealth is going to disappear
“I think, in the U.S. on March 15th, all hell is going to break loose because the U.S. will reach its debt limit.”
As I’ve written for the past five or six years, I agree that our huge National Debt will eventually cause “all hell to break loose”. However, I doubt that that “hell” will break loose on March 15th. It could happen. But I’d guess we’ll have a few more months—perhaps, even another year—before the debt really hits the fan.
Nevertheless, those who are caught holding paper debt-instruments on the Day of the Debt will lose their assets.
Those who are holding physical gold or silver will have savings—real savings. In a debt-based world where almost everyone is suddenly insolvent, those who have real savings will be protected. They could even prosper.
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