The normally calm and transparent waters of the Gold sphere are still rippling from the impact of Cryptos.  While most understand that Cryptos are not money – not a replacement for Gold and/or silver – there remains a lingering sense that the two spheres do meet at some point.

Comparisons are tenuous.  Gold, with its unique properties, is money, and Cryptos are a speculation – giddily exhilarating while they last but potentially ruinous when they come to a stop and turn to Crashtos.

Below’s article is from stalwart contributor Rudy Fritsch who is a Crypto enthusiast.  I have received phone calls seeking an opinion on the subject from long-term monetary metals holders, so I know that interest is strong.

In the links below are two additional pieces on Cryptos from Monetary Metals.  I suggest that if one reads one, then one should read all.

http://monetary-metals.com/bitcoin-has-no-yield-but-gold-does-report-13-august-2017/

http://monetary-metals.com/bad-ideas-about-money-bitcoin-and-gold-report-20-aug-2017/

I remain uninterested, disinterested and disinclined to publish any further articles on the subject of Cryptos.

Philip Barton August 2017

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Bitcoin has risen to historic Dollar highs, but some pundits are claiming that this is just the ‘Madness of Crowds’… that Bitcoin is just another bubble, and that soon Bitcoin and other crypto’s will assume their intrinsic value, that is zero.

Indeed, some pundits… or are they perhaps trolls? Claim that ALL crypto currencies are but Ponzi schemes, nothing more. Well, I have recommended the purchase of crypto’s; have I led you astray?

Let’s make sure we are on the same page; exactly what is a Ponzi (scheme)? Wikipedia defines Ponzi scheme as follows. “A Ponzi scheme; (also a Ponzi game) is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities.”

So, do crypto’s belong in this category? Surely some do! There are over a thousand newly minted ‘flavors’ of ‘alt coins’ and no way can they all represent ‘legitimate business activities’… but perhaps some do? Remember, even tulip bulbs had a ‘legitimate business activity’… namely growing tulips.

Furthermore, all investments have the feature that early investors (in on the ground floor) make more profits than later ones. This is not a feature unique to Ponzi. Early investors in Amazon, or Intel, or any (successful) legit business made far more profits than later ones.

Major Banks, including the Russian Sherbank (now now, let’s not get into Russo-phobia ;-) are investigating block chain, the technology behind most crypto’s. The reason is simple; cost and time saving through a virtually impossible to hack method of conducting financial transactions.

If you consider financial transactions as legitimate business activity (and surely some are!) then you cannot say ‘all crypto’s are just Ponzi schemes’, any more than you can say that Intel or Amazon are Ponzi, just because the early birds make out like bandits.

Indeed, the second part of the Wiki definition is key; profits ‘from legitimate business activity’ define what is NOT Ponzi. Notice that many ‘legit’ businesses go bankrupt, total loss to investors; yet are not considered Ponzi because of the intent to make a legit business rather than an empty scheme or game that serves only to separate investors from their money.

Legit uses of crypto currencies are to ensure security in internet devices, to secure cloud data storage, to bypass greedy central banks… oops, this is controversial, yes? But think about the Central Bank of Zimbabwe and the trillion dollar Zimbabwe note… greed and insanity, and surely Ponzi?

How about the hundreds of other Fiat currencies that have been debased to zero value? Greenbacks, Reichmarks, Continentals, Lira, Forint, Peso… Fiat without end. Bitcoin and other crypto’s get around this. Indeed, in Africa (and now Venezuela) crypto’s are literally a life saver. Perhaps the pundits should be claiming that all Fiat currencies are Ponzi!

So, if the key is to find ‘legit business activity’ then that is what we need to do; find crypto’s that represent legit business. Now that may not be easy, no easier than distinguishing Intel or Amazon from Enron… early in the game that is. Much due diligence is needed… but the claim that ALL cryptos are Ponzi is no truer than the claim that all dot coms are Ponzi.

One thing is crystal clear; while there are thousands of crypto’s, there is only one Gold… and only one Silver. Owning either one avoids any possibility of Ponzi… and any possibility of bankruptcy. Neither monetary metal is about to lose all its value; on the other hand, neither one offers the spectacular returns possible in crypto speculation.

Finally, there is one more vital issue that is usually missed; the very word asset in English is ambiguous. A real asset is not the same as a ‘paper’ asset. A Gold coin and a Silver bar are real assets. The difference is crucial; a real asset has no counterparty holding the same asset as a liability, thus no counter party risk.

Paper assets, on the other hand, all have just that; a risk that the counter party fails to keep their promise. Bonds, stocks, certificates etc. all have counterparty risk; that is, they are but promises. A bond is an asset in one hand, but a liability in the other hand. Once netted out, the resulting value of such paper assets is zero.

By contrast, Gold and Silver have no offsetting liability; they are real assets, and netting out Gold debt will leave the Gold untouched… real assets cannot disappear like paper assets can and regularly do. The real asset merely changes ownership. We need to keep in mind that under our Fiat system, bank notes (Dollars, Euros, etc.) are paper assets; they are assets in our hands, but they are liabilities on the books of the Banks of Issue (Central banks).

All Fiat currency is borrowed into existence. The Fiat notes (liabilities) issued by banks are balanced by the debt notes (assets) on their balance sheets. Thus, Fiat can and does disappear regularly. Treasury debt is funded by Fiat borrowed from the CB; the CB creates Fiat notes from thin air to buy treasury debt. Paying back the debt pushes the Fiat notes back into thin air.

So how about crypto’s? Are they also ‘paper assets’ by this definition? NO! Bitcoin does not have a counterparty.  Bitcoin simply exists on its own. There is no liability balancing the asset; Bitcoins are not borrowed into existence.

This is a seldom heard aspect of the crypto story… and one reason some people compare crypto’s to precious metals; no liability to balance the asset… just a real asset, like Gold or Silver. Of course, value (purchasing power) is another issue; the value of Gold and Silver are historically proven and have held steady for thousands of years, while the value of Bit coin is subject to wild swings on a daily basis… but this is what makes Bitcoin a great speculation. It is by no means an indication that Bitcoin will disappear like all Fiat currencies do disappear in their own good time.

At the end of the day, I do recommend buying some crypto’s. On the other hand, crypto’s are no substitute for holding Gold and Silver; at best crypto currencies complement the strengths of the monetary metals.

Rudy J. Fritsch

 

By Rudy Fritsch

There is a lot of talk about crypto currencies these days; and a lot of action in the field. Bitcoin has risen to historic highs vs the USD, other crypto currencies are soaring, and it seems like a new crypto is being introduced every day. Does all this remind you of something?

Sure reminds me of something; I hear the sound of a giant bubble being inflated. Just like the sound of the dotcom bubble a few years ago or the sound of the tulip bubble a few centuries ago. Indeed, as I wrote in ‘Bitcoin… Gold with Wings’, there is a sense that Bitcoin is somehow the new Gold; and this sense contributes to the relentlessly rising value of Bitcoin.

Now mind you, Bitcoin is not a tulip bulb; Bitcoin is a medium of exchange, a digital currency, and a gateway to new technology in the form of blockchain; far more than a simple tulip bulb. Nevertheless, it is perfectly clear that Bitcoin is not Gold; Bitcoin has no history of storing value, indeed it is a vehicle of speculation like tulip bulbs were. Still, Bitcoin does take on some of the aspects of Gold.

Mainly, Bitcoin is not manipulated by governments, Bitcoin is not subject to relentless printing, Bitcoin is not bound to a geographic area, and Bitcoin or more precisely cryptos in general offer privacy… nevertheless, no crypro is Gold; any more than any paper promise, certificate, bond, or other IOU even if denominated in Gold units is Gold.

Only physical Gold in the owner’s hand is Gold… period. So, while I suggest that owning Bitcoin and some other cryptos is a great idea, especially as the digital bubble is blowing ever larger, no crypto is a substitute for Gold… or Silver… in hand. This is ancient wisdom; Gold and Silver have been money for thousands of years. Gold and Silver have held value for eons, long before the invention of money in the form of Gold and Silver coins.

Cryptos have only existed for a few years, decades at most. Cryptos have no history of holding value, not even short term… (months; never mind years, decades, centuries). Holding value over the long term is the sine qua non of MONEY! This is the very reason I keep pounding the table on why every sane person should hold Gold and Silver, as insurance against Fiat collapse.

But while Fiat collapse is inevitable, indeed ongoing, nevertheless Fiat is an asset; a diminishing asset, but an asset nevertheless. Mind you, Fiat depreciation is picking up speed; thus ‘Gold Now’. However, we still need Fiat to pay our rent or mortgage, to buy food and fuel, to pay taxes (Grrr…) and so forth. Bitcoin and other cryptos are on the way to becoming usable in daily trade, but they are not there yet.

Therefore Fiat is necessary, and any method that leads to Fiat income is welcome. Indeed, the only way we can afford to trade Fiat for Money is by earning more Fiat than we need for essentials.

So we come down to it; after all, Aristotle himself said ‘Gold does not beget Gold’… and the enemies of Gold constantly remind us that ‘Gold brings no interest’… so while Gold is fine to maintain wealth, it’s not so fine to create it… right? If you have wealth, it’s OK to own Gold, but if you want to attain wealth, not so much. Hmm, I wonder.

Some simple arithmetic should resolve this question; does Gold create wealth, or not? For arguments sake, let’s assume you have a Gold coin in your pocket or purse; and you take no risk with the coin but simply keep it there. Clearly no interest is earned… but the purchase power or relative value of the Gold coin holds up.

Contrariwise, assume you have Fiat paper in your pocket or purse; and you take no risk with the paper but simply keep it there. Clearly no interest is earned… but the purchase power or relative value of the paper falls with monetary debasement. If ‘inflation’ is 5% yearly, then Gold coin gains 5% in PP vs. Fiat.

The Gold coin wins.

Now assume you take a risk, and place the paper into a bank account to earn interest (risk of bail in, confiscation, account freeze, wealth tax, income tax and so forth). Now your paper does earn interest; or does it? It did in the past, but today we have Zirp (zero interest policy) and Nirp (negative interest policy). Any interest earned is strictly nominal.

At best you receive a pittance from your savings account; most important, any interest you earn is less than the rate of inflation. Your paper even though exposed to risk loses value, just a bit slower than if it simply sat in your pocket. If you get 2% return in your savings account, and inflation is 5%, you still lose 3% yearly.

The Gold coin wins again.

But suppose you are not happy with the return on simply holding Gold; after all, inflation is only a few percent a year (for now!) and suppose you are willing to take some risk with your Gold in order to work for higher returns; surely then you must turn to Fiat vehicles… no?

Actually, no; Gold opens the door to higher return plays, no need to go ‘Fiat’. For example, there are Gold futures, Gold options, and Gold mining shares, all vehicles that increase leverage vs physical Gold. Futures and options provide as much leverage as you can bear… and as much risk as you can bear.

Shares of Gold miners also offer leverage on the Fiat price of Gold; a miner has expenses in Fiat, but earnings in Gold. Any increase in the Fiat price of Gold flows directly to the bottom line of the miner, and the market price of the shares will reflect this; historically, shares of gold miners have provided a three to one leverage vs Gold price.

Now far be it for me to suggest that you speculate in Gold futures, or in Gold shares; I am simply pointing out that Gold does provide vehicles for speculation if you are so inclined. Nevertheless, at the end of the day there is no substitute for owning Gold and Silver. As the old adage on surviving hard times says; ‘it’s not how much money you make, it’s how little you lose’. Substitute wealth for ‘money’ and you are dead center on the track of understanding the value of Gold… and Silver.

Rudy J. Fritsch

Two points to make re the following article.  One, is that neither the author, Rudy Fritsch, nor the Gold Standard Institute International, offer it as investment advice.  We are NOT investment advisors.  All the usual precautions should be taken when investing – in anything.

Gold is different; Gold is what you hold when you are not investing; especially when you are not investing in dodgy investments like government debt paper.

Two, is that though the Blockchain technology that underpins Bitcoin is a quantum leap with diverse and far-ranging applications, the Institute reserves judgement on Bitcoin.

I have published the article because, though it is not about money, it is an interesting article in a related area.

PB May ‘17

There is a lot of talk about crypto currencies these days; especially as the insane Nirp and its bedmate the War on Cash gains traction. To get a handle on all this, and to see where cryptos may be heading, we need to take a close look at the whole Bitcoin ‘bubble’… and what if anything is behind it.

Is Bitcoin simply a twenty-first century ‘Tulip Mania’… or is it something more? In simple terms what, if anything, is behind or ‘backing’ Bitcoin? More generally, what is behind the whole Crypto currency phenomenon?

The history of Bitcoin is telling; from humble beginnings and a very low valuation (price in USD) of less than $0.10 per Bitcoin in 2010… Bitcoin then rose to around $12.00 by 2012. Early holders made a USD fortune. But things did not stop there; by 2013, Bitcoin valuation soared to over $100.00… Today Bitcoin trades near $1,500.00.

So what’s the deal? Is it simply hype, hysteria, madness of crowds… or is it something more? After all, even tulip bulbs have some (reasonable) market value; the tulip mania was built on this residual value. So, what value does Bitcoin have? To understand this, we need to understand the fundamental principle that underlies Bitcoin… and indeed underlies the whole crypto phenomenon.

The principle is called Block Chain.  What on Earth is the meaning of Block Chain, you may ask? The answer shows simplicity and genius. Just like the Internet itself is a phenomenon of distributed computing and distributed responsibility/authority, so is block chain. Just as the Internet was designed to resist shutdown and was designed without controlling authority, so is block chain designed.

Compare the interned with its distributed nodes to broadcast stations; a broadcast station is run by one owner, one authority… and the owner has control of what is broadcast, and what is not. Indeed, one owner may control all of the few existent broadcast stations; thus controlling all broadcasts. This is close to the situation of mainstream media today.

By contrast, the Interned has millions of ‘broadcasters’, each individually owned, with each owner having the choice of what to broadcast or not. Thus the internet is a wonderful tool for overcoming information tyranny.

Think of any Fiat currency; like Dollar, or Euro, whatever; all these currencies are controlled by Banks of Issue; that is, by central banks. So authority, control over the currency, resides with the central banks. Think of your bank account; your bank has a book of accounts, with various ledgers, and if you have any deposits with your bank, the details reside in that ledger.

If you have a loan, same deal; the details are recorded on the bank’s ledger. So with all Fiat transactions; the details lie on some bank’s ledger, in one spot under one authority. This system is at the very heart of tyranny; he who controls the world’s money controls the world’s economy.

The Fiat system is authoritarian, top-down, subject to abuse and to hacking. When outlaw Jessie James was interviewed and was asked ‘why do you rob banks’ he answered ‘because that’s where the money is’. But what if instead of money being held in a few banks… like information is centralized in a few broadcast stations… it was distributed over thousands, no millions of tiny ‘safes’?

Suddenly, there is no bank worth robbing. There is no means of central control, no opportunity for one owner to control a few banks. Money is no longer concentrated, but is highly distributed; just as information on the block chain is no longer concentrated, is no longer subject to central control. Information Nirvana!

This is what lies behind Bitcoin and cryptos in general; the block chain that substitutes for the bank’s ledger. Instead of one central ledger, each ‘node’ on the block chain network carries a copy; the monopolistic bank ledger is replace by thousands of distributed ledgers, on thousands of independent computers… and information about deposits, loans, transactions is duplicated thousands of times.

The term ‘block’ refers to one ‘chunk’ of data; for example, if you deposit some money into Bitcoin (buy Bitcoin), a bit of data is generated; if you transfer Bitcoin to someone else, another bit of data is generated; and so on for all trades. Then, every few minutes, all the data is back referenced to existing data; from which account the coin was transferred, to which account it was transferred, etc. All data in the new ‘block’ is verified, referenced to previous data, the existent data; and this is done simultaneously by ALL the computers in the network… thus the new data block is ‘chained’ to the old.

The block chain system is essentially un-hackable; 51% of all the thousands of duplicate databases would have to be modified in the same way at the same time, before the next ‘block’ of data is processed. By contrast, hacking a central database is possible, and lucrative; like breaking into a bank with mucho money is possible and profitable. Trying to break into millions of tiny safes is a losing proposition.

This is the true value behind Bitcoin, the block chain technology. Block chain, the distributed, un-hackable, uncontrollable method of handling information. It matters not whether the information is ‘monetary’ like Bitcoin, or not. In the crypto world, there is a broad division between ‘crypto currencies’ that are intended to be digital, un-hackable techniques of transferring and storing value (monetary coins)… and what are called App coins…  tokens that represent applications, rather than currency units.

An app coin is not a crypto currency; rather it is a crypto ‘share’ of the company issuing it. It is in effect a way to own some of the value of a company, just like a conventional equity share… but without the broker, the exchange, without the middlemen. Like crypto currencies are monetary tokens without middlemen.

The companies issuing app coins today are like early internet companies; many will fail, but some will become the new Intel, the new Microsoft, the new Apple. All these new companies build their apps (application software) around block chain technology.

Some are concerned with security; a US Dept. of Defense drone is subject to hacking… but not if the software it runs uses block chain technology. The millions of ‘Internet of Things’ devices are subject to hacking; but not if they use block chain technology. This is a blue sky opportunity; think of just the US security budget.

Others app coin companies are using block chain to revamp international trade transactions; current methods take weeks to clear, and involve buckets full of paperwork. A block chain solution will do the ‘heavy hauling’ of clearing international trade at a small fraction of the cost… with absolute security… and in a matter of minutes. This is truly awesome; we have here an echo of Real Bills circulation; a cyber coin whose value reflects the volume and value of international trade.

Many other cyber apps are being created; un-hackable online (Cloud) data storage, un-hackable social networks, and on and on. Human creativity is being unleashed here… and the potential rewards are humongous.

As for Bitcoin itself, it is the original digital currency; the power of being first is enormous. Bitcoin is in the number one crypto position, although many are gunning for ’Number One’. In a way, Bitcoin is the reserve currency of the Crypto world… to purchase most cryptos, one must first exchange Fiat currency for Bitcoin, then use Bitcoin to exchange for other cryptos… same in reverse.

This brings us back to the title of this article; is Bitcoin really Gold with wings? Well, clearly Bitcoin is not Gold… far from being Gold, it is not even a promise of Gold… although some cryptos are working on digital Gold. But does Bitcoin have wings? Well, yes, in a way. The wings of Bitcoin are the Internet; Bitcoin and other cryptos will continue to ‘fly’ as long as the Internet stays up.

All in all, the future of Bitcoin and other cryptos looks amazingly bright; today, all cryptos taken together represent a market cap value of 40-50 Billion Dollars… and growing fast. But this is not even a rounding error in the world of Fiat currency. Physical Gold in existence is valued near $7 Trillion. Global equity markets are valued at about $70 Trillion, bond markets valued at over $100 Trillion; Forex markets are even larger.

A few years ago, cryptos did not even exist; a few years from now, cryptos will be valued at least a hundred times higher than today; seemingly the sky is the limit. Maybe Bitcoin is not ‘Gold with Wings’; but it certainly is ‘Cash with Wings’. Bitcoin is cash without borders. As more retailers accept Bitcoin payments, and as more investors buy and hold Bitcoin, the Fiat value of Bitcoin and other cryptos is bound to increase radically.

My usual advise for all readers is to own Gold, Silver, and small denomination Fiat bills. I now expand my advice; I strongly suggest that you add Bitcoin and other appropriate cryptos to your holdings.

Rudy J. Fritsch

By Rudy Fritsch

There is a lot of talk about ‘Fake News’ going around; indeed, there is even talk about legislation outlawing and punishing the practice of publishing ‘fake news’. Now this is really a blast, like what a parent tells the kids; ‘tell the truth or you are in trouble’. Makes our ‘culture’ seem childish, doesn’t it?

But childish behavior in kids is one thing; childish behavior in supposed adults in positions of real power is something altogether different. There is also the big question of exactly who decides what is ‘true’ news and what is ‘fake’ news. Is it wise to let the fox guard the hen house?

The reality, if you are willing to open your eyes and are willing to see, is that the mainstream media is full of ‘fake news’; that is, full of blatant lies.  In this regard, maybe laws against ‘fake news’ would backfire on the mainstream; CNN, NBC, NYT et al could be hauled into court, to be hoisted on their own petard.

That there are lies being promoted as ‘news’ is beyond doubt; and the lies become more egregious as time moves on. Refer to my previous article “Trinity of Truth; the Truth, the Whole Truth, and Nothing but the Truth” for more on the concept of lies, but lies can be ‘little and white’… can be ‘just spin’… or can be big and incredible and highly destructive.

We are well past the ‘little white lie’ and ‘spin’ states, and are deeply into what Goebbels notoriously called ‘the big lie’; tell a lie big enough often enough, and people will start to believe it… that is until the truth breaks through, generally with catastrophic consequences. Perhaps we are approaching the break through stage?

Not only are the mainstream propaganda outlets holding back important ‘whole truth’ like the Saudi mass bombing of Yemeni civilians, using US and UK supplied weapons… but are spreading outright lies, lies like Russian ‘aggression’ in the Ukraine, lies like the Russian ‘annexation’ of Crimea; lies like the ‘monster Assad in Syria’… lies ad infinitum. My father used to say ‘only believe every third word coming from the mouth of the g’man’. It seems he was too generous.

But fake news is far from all that’s fake in Western society. We have fake history, like the story that the Western allies won WWII… while the truth is that the USSR won the war on the Eastern front, with the Western allies contributing but minor assistance. The death of twenty five million Russian soldiers is testimony to the truth.

We have a fake education systems, a system designed not to educate our children but to indoctrinate them. We have a fake health care system, a system designed not to keep people healthy but to profit the pharmaceutical industry. We have fake finances, fake religions, and fake culture.

But there is an over-arching fakery that enables all this; fakery that empowers the military-industrial-financial complex; fakery that lubricates the slide to civilizational destruction. The over-arching fakery is fake money, debt notes masquerading as money to be more precise. As Austrian economist Hans Sennholz so aptly put it;

“Sound money and free banking are not impossible, they are merely illegal. That is why money must be deregulated. The Gold standard will return as soon as people realize that honesty is the best policy.As hope of ill gain is the beginning of the fiat standard, so is honesty the mother of the Gold standard. The Gold standard is as old as civilization. Throughout the ages, the Gold standard has emerged again and again because man needed a dependable medium of exchange.”

And man needed a dependable store of value.

A system of sound, honest money reflects a sound, honest society; indeed, the question is one of cause and effect… does honest money bring about an honest society, or does an honest society bring about honest money? This is a classic ‘what came first, the chicken or the egg’ paradox; but not a paradox in reality. The two go together; you cannot have one without the other. Indeed, the best hope for humanity is that the coming collapse of the Fiat money scam will be accompanied by the collapse of the immoral, unethical, murderous society that accompanies it.

To be clear, the apotheosis of Fiat came about as the war clouds gathered for WWI; indeed, Fiat enabled the mass murder of millions, and Fiat kick started the ongoing decline of Western culture. Without printed paper ‘money’ the WWI combatants would have run out of funds (Gold) for weaponry in a few months, and the war would have ground to a halt… ground to a halt before the deaths of millions, before the destruction of morality and right thinking that accompanied the bloodshed.

To this very day the bloodshed and immorality continues; WWII, Korea, Vietnam, Lybia, Iraq, Yugoslavia, Syria, Yemen, on and on… all funded by Fiat paper. The only possible good thing in all this mayhem is ‘that which cannot continue forever will come to an end’. I suspect we are getting close to the end. The USD, the main culprit in funding worldwide mayhem, is in big trouble… as is the Euro, as is every form of Fiat paper.

Now economics is a vital factor in human society… but is not to be divorced from other equally important aspects of human behavior. We have isolated economics to simplify the study of economics; but as Einstein so aptly put it, for a model of reality to be useful it must be as simple as possible, no simpler. Divorcing economics from the rest of human motivation results in a model that is far too simple. Economics cannot explain why credit is used to wage war, rather than used to construct a better world.

This is where the rubber meets the road. A society that invents builds and deploys ever more deadly weapons then uses these weapons to destroy itself… must be sick! But wait; saying that society is sick is like saying that the forest is sick. This implies that the forest has sick trees; after all, a sick forest is but a collection of sick trees, like a sick society is but a collection of sick humans.

If humans are sick… and statistics show that at least five percent of humanity suffers from the serious illness of psychopathy, ie five percent of us are very sick people indeed… then perhaps there are means to treat, and even to cure the sickness. Perhaps this sickness is not simply ‘genetic’, not simply something we have to accept and put up with… not simply a part of ‘human nature’… but something that is curable.

Any cure or treatment of a disease must begin with the recognition that there is a disease… followed by the determination to study and understand the disease and the determination to then find a cure. This is not the time or place to go into more detail, but for your own interest you may want to do an internet search for “toxoplasma gondii” for insight into the concept of a ‘mind parasite’, that is a sickness that effects human cognition, thus human actions, thus the kind of society sick humans create.

In the meantime, we can mitigate the effects of any sickness that afflicts us and our society… whether its caused by ‘toxo’ or something else… by recognizing the pervasive lies we are fed, by actively searching for truth, and by preparing for the consequences of the folly that pervades society. We all have a chance to prepare for the collapse; the only question is will we prepare, or will we not.

Rudy J. Fritsch

In my last article ‘The Crisis Heats Up’, I wrote about a best-selling book by Strauss and Howe; ‘The Fourth Turning’… and how the authors studied history and drew some interesting conclusions. Namely, they drew the conclusion that we are in a Fourth Turning, a Crisis.

As a total readaholic, I confess that I just finished another ‘interesting’ book; this one by James Rickards, ‘The Road to Ruin’. Even though Rickards is hip to history, he does not take a traditional historian’s role.

Instead, he writes as an insider, a witness to the fatal errors and misconceptions held by the PTB; the trillionaire hedge funds, the ’too big to fail’ banks, the FED, the Treasury; in other words the controllers of the Fiat economy.

His thesis is that the tools used by funds, by the fed, and the treasury to ‘manage’ the economy are not only obsolete, but are fatally flawed. These tools are based on false assumptions; assumptions such as the ‘efficient market’ hypothesis, the ‘random walk’, ‘Monte Carlo’ analysis, etc. Rickards believes that the assumptions underlying the most sophisticated computer programs the Fed uses to ‘fine tune’ the economy are wrong from the get go.

Now this is not a great new insight; New Austrian economists have been pounding the table on these gross errors seemingly forever. We have insisted that the economy is highly non-linear, whereas the conclusions of traditional mainstream economics… projections and policy… are based on the assumption that the economy is linear… and that markets are random; unpredictable with no memory. Nonsense; markets are results of action taken by people, and people do have memory.

Today these flaws are becoming blatantly obvious; the failure of monetary policy, of demand/supply curves, of Keynesian intervention can no longer be papered over. Rickards draws similar conclusions, while coming from a different point of view.

To understand the economy, we have to let go of linear assumptions… and also of assumptions that markets are random. Markets and economies are neither random, nor deterministic. Markets are complex. But be careful; complex is NOT the same as complicated. For example, a Swiss watch is highly complicated, but is fully deterministic. Indeed, it is built for that specific purpose; wind it up, and it will run as predictably (deterministically) as technology can make it.

The opposite of deterministic is random; like a series of coin tosses is random. The odds of a coin toss coming up heads or tails is 50/50. It is quite impossible to predict the outcome of the next toss, and the next toss does not depend on the previous… coins have no memory. However, the more tosses, the more closely the mean approaches a 50/50 distribution.

By definition, complex phenomena lie somewhere between deterministic and random; and any hypotheses based on the assumption that markets and economies are random or deterministic are bound to be wrong.

Furthermore, a deductive study of economic data is also wrong; statistics (data mining) cannot predict the behavior of complex systems… and the Fed clearly states that its decisions are ‘data driven’. Data is ‘mined’ to determine trends, trends that are then extrapolated into the future… but this methodology leads to huge problems.

False extrapolation and the unanticipated breaking of trends are why we hear about ‘black swan’ events, why CEO’s complain about being ‘blindsided’ by ‘unexpected’ market changes. Markets are complex in the sense of being subject to periods of relative stability interrupted by moments of wild, trend breaking, causality breaking crises.

Complex systems behave like the proverbial ‘flutter of a butterfly wing in Tokyo causes a hurricane in Miami’. The question is which butterfly; there are thousands, and they all flutter their wings; so which butterfly starts the hurricane… and when?

Earthquakes are another example of complex systems; we all know that the stress in the Saint Andreas fault is rising, and one day the ‘Big One’ will hit… but when, and exactly how big? Conventional studies are helpless in predicting these non-linear effects.

Although the stress builds steadily enough, and is studied extensively, no one knows when the trend will end, the built-up stress released, and a new trend started. At least, no one using traditional methods knows…

Interestingly, some (fringe) scientists do make earthquake predictions that are significant. They use out of the mainstream methods and data… like electrical effects, releases of various gases, and even the unusual behavior of animals! Plus, the proliferation of fore shocks.

Rickards also uses out of the mainstream methods; his methods are based on complexity theory. His methods use inductive logic, rather than deductive. Methods like Bayesian probability; a method used by the intelligence community to predict behavior when there is no extensive data set to analyze; there was only one Great Depression (so far) so there is no data base of why depressions occur.

Rather, the Bayesian method looks closely at the single occurrence, hypothesizes the most likely cause, and makes predictions based on the hypothesis… then studies the aftermath, and if the predictions turn out correct, the hypothesis is strengthened.

To make a long story short, Rickards considers the 1998 failure of Long Term Capital Management to be a foreshock, predicting greater shocks… and the Big One… to come. He was intimately involved in the LTCM debacle, and reports clearly how the underlying assumptions of the quants and Nobel Prize winners running LTCM were wrong; and how their fundamental error led to the loss of hundreds of billions of dollars.

In broad terms, LTCM made bets on the ‘return to the mean’ hypothesis; a belief in economic linearity, a belief based on projections of trends into the future. LTCM found distortions in the markets, and bet heavily that the distortions would be corrected in time; that the markets would ‘return to the mean’. Then they leveraged the heck out of their bets, using 100 and even 200 to one leverage.

This worked rather well… for a while… as long as the current period of relative stability held. Indeed, they made hundreds of billions of Dollars for themselves. Unfortunately, greed overcame common sense; a few hundred billion seemingly was not enough. They kept on pushing their method… perhaps aiming for a trillion?

But guess what; the butterfly started to ‘flutter its wings’… but this butterfly was in Moscow, not Tokyo. The USSR economy collapsed, and Russian bonds defaulted. Instead of a return to the mean, the mean also started to collapse… quickly.

Within a matter of days, as highly leveraged bets went sour, the hundreds of billions disappeared like snowflakes in hades.

Due to the interconnectedness of the markets, these losses would have brought down other players… like the Italian Government, for one example. The net exposure of the (hedged, therefore supposedly risk free) bets no longer counted; what suddenly counted was the notional exposure. The counterparty supporting the hedge disappeared. The insurance was gone; the leveraged bet was left naked.

The problem was so serious that the Fed had to take immediate action; they called in several Wall Street players, knocked some head together, and bailed out LTCM… to preserve the financial system. For the story of LTCM, I suggest you read;

When Genius Failed: The Rise and Fall of Long-Term Capital Management’

by Roger Lowenstein

So, there was a lesson here; reversion to the mean can fail… and leveraged bets placed on reversion to the mean can fail big time. Was the lesson learned? Clearly not at all… in ten years, we had another, even heavier ‘foreshock’; this time not just a hedge fund in trouble, but sovereign debt in trouble; the Great Financial Crisis of 2008.

This time, bail outs were not enough; so called bail-ins as well as bail-outs were instigated by TPTB; that is, the money of innocent bystanders was grabbed, to once again paper over the gambling losses. The GFC was the second foreshock, much stronger than the first one; but the lessons still have not been learned.

The ‘too big to fail’ banks are bigger than ever, the quantity of Fiat borrowed into existence (the total Global debt) is larger than ever, leverage is greater, interconnectedness is tighter. The ‘Big One’ is getting closer.

In the last Fourth Turning crisis, Gray Champion Franklin Delano Roosevelt shut down the bank system (bank ‘holidays’) and confiscated American’s gold… to ‘save the system’.

This time around, the problem is much bigger, so it will command much larger, much more drastic measures. Rickards predicts that the whole (digital) financial system will be frozen. Banks closed for sure, along with ATM’s, but also money market funds, stock markets, futures markets, the whole enchilada.

I cannot disagree with his prognosis; what governments are able to do, they are likely to actually do, in a desperate effort to save the system. Look at the situation; war on cash, promotion of digital ‘money’, and full coverage of every financial transaction… when the tsunami hits, all trends will break; no ‘reversion to the mean’ will be possible.

Now Rickards does give some advice on how to ameliorate the coming crisis; his suggestion for the system is to reinstate the Glass-Steagall act. This law was passed by the US Congress in 1933, during the Great Depression. It was a law prohibiting commercial banks from ‘speculative’ (gambling) activities.

It separated commercial banking from ‘investment banking’… it kept the banks from gambling with depositor’s (our) money. The Clinton administration repealed this law in 1999… Just after the LTCM debacle… and the system has run wild ever since.

If the law is reinstated… and Trump has suggested he is in favor of this, and several states as well as congressmen have been pushing the law… then the derivative bomb will be constrained. By Rickard’s reckoning, the separation would reduce risk (instability) by reducing the size… or ‘scale’… of the system. Less at risk, less connectivity leads to more stability of complex systems.

While Glass-Steagall would not reduce the debt problem, it may at least give us more time before the ‘Big One’ hits. Time to change direction, one hopes.

For the individual, Rickards’s advice is to invest your wealth in a ‘1/3, 1/3, 1/3’ pattern; one third non digital money (Gold, Silver and cash under the mattress… assets that cannot be frozen), one third land, and one third art. I certainly agree with part one; own Gold, Silver, and small denomination cash notes… I have been making this very same suggestion for years.

Land is a hedge against financial destruction; but it must be owned free and clear, and preferably offshore; extreme taxation/confiscation are not impossible. Owning farm land in particular is brilliant; farm land, as valued in Fiat, has been appreciating for decades, and I suggest this trend will not only continue but will pick up speed.

Art is also a hedge against inflation and monetary collapse, but there is a learning curve. Unlike bullion or cash, art is subjective and thus a neophyte is at a disadvantage. Nevertheless, 22 carat Gold jewelry (art?) is a great idea, as it is not as likely to be subject to confiscation as bullion coins or bars.

To sum it all up, The Road to Ruin is a very interesting book, and I do recommend it. The only negative is that it is not really complete; it does not come to any final conclusions… indeed, Rickards himself intends to write a sequel. Hopefully the sequel will bring closure. I am looking forward to reading it.

R. J. Fritsch