All Is Well , Madame la Marquise

The question never was whether Fannie (FNM) and Freddie (FRE) would be allowed to go bankrupt. It was whether the Fed would nationalize or bail them out. In the end, we see just the same subtle difference as there is between taxation and inflation.  Both inflation and taxation takes the money out of our pockets and nationalization and/or a bailout of the Banks and Financials brings more billions of fiat money created out of nowhere into the system. Or how to keep the flames of (hyper)inflation alive. 

The markets seem to have forgotten that Bear Stearns (BSC) was (bailed out) taken over by JPMorgan (JPM). As of June 1, total borrowings from the Fed have increased to $ 170 billion from $150 billion. Not only were Fannie and Freddie bailed out, but the failed IndyMac has been taken over by Federal Deposit Insurance Corp. and we have probably not seen the end story at Lehman Bros. (LEH). Earlier this month a financial report by Fortis issued a warning that about 6,000 mid sized American banks were also in trouble. 

Banking has traditionally been built and was able to survive because the depositor trusted these institutions. However, today because of Fractional Reserve Banking, both the depositor and the borrower think they own the same money. The least one can say, is that this is rather a dangerous situation. Borrowers are going belly up (CDO subprime, Credit Cards, Mortgages, etc.) taking the money with them. As depositors start to claim the same money because they also need it in order to survive in this bad economy, the Federal Reserve has decided to print more Fiat Money. 

The same is unfolding in the UK and in the EU in a more secretive way. Strange things happened or are happening with Fortis, Soc. Generale, UBS, Crėdit Suisse and Crėdit Agricole just to name some of them. We must admit, the leaders of the European countries have a lot more experience. History has seen plenty of similar problems (Weimar, Law, and Gresham). However the day is coming close where ‘we the people’ will again ‘realize’ the emperor has no clothes.  

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which  will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services.

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

- Ludwig von Mises

This is where Gresham’s law comes into action: "bad money drives good money out of circulation." In other words, people keep the good money and spent the paper money. In Zimbabwe this law was translated in a stock market explosion of + 76,000%. The advance stalled after Mugabe imposed price controls. But owning stocks was still better than loosing 9,000.000% per annum because of inflation. A lot better would have been to keep the savings in Real Money. 

We have a paradigm shift. Few see and even understand what is happening. We don’t want to find out how it is to be a billionaire in a country like Zimbabwe where baked beans cost Zim$ 30 billion.

Disclosure: Long Gold