Investing in precious metals 101

Why is having debt going into a major reset such a bad idea?

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  • Tue, Sep 20, 2016 - 10:42pm



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    Why is having debt going into a major reset such a bad idea?

So here’s a situation.  Like most readers here I’m strongly biased towards PMs and miners because in general most everything else looks bad.  I’ve got no interest in stocks, bonds, commodities, or GSE/MBS-driven single family housing.  

However, I’ve got a chance to get some very nicely zoned commercial land on which I could really use to move move all my construction equipment and hold the land productively until a better use comes along.  The zoning is very very good, allowing extremely dense use, blocks to light rail, college campus and a major hospital, etc.  

Owner will take a contract at decent terms in Federal Reserve Notes.  My plan is to move on my shipping containers and put up a modest metal building.  If I put up a little more building, I can sublet it and I’ll be saving over renting.

So why not take on more debt, be like the government?  I’ve Googled around and can’t really find the case in an inflationary collapse where being in debt was bad.  Has any government anywhere ever re-wrote the rules so that the inflation only benefitted the indebted government but not the other debtors?  I understand in a deflationary situation like the depression how people lost their farms, but I just think a little diversification outside of PMs might be a good idea in this case.

Why is “getting out of debt” emphasized so much if we’re approaching some sort of reset?   Especially if the debt looks like it could really benefit me because it went to cover a productive tangible investment – and may be quite easily extinguished for a few precious metal coins.  Kind of like the story of the waiter who bought his restaurant in Weimar.  I hate “owing” others anything but I also hate renting overpriced yard space.  

I’m really looking for specific reasons and not generalizations that “debt-is-bad . . .”

Thanks in advance for any insights. 

  • Wed, Sep 21, 2016 - 11:29am



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    reset = deflation

To me, a reset is a natural deflationary event.  That's why being in debt is bad.  When excess claims get extinguished, prices of everything fall, since it was really just a whole lot of debt that underpinned the prices of everything and the process of claims extinguishment is really all about debt default.  (One man's "excess claim" is another man's liability).

There is also the issue of emotional stress.  Debt provides an invisible pressure to meet that monthly payment or lose the underlying asset.  If the times are really turbulent, you will have a lot more stress on you if you are in debt, than if you are debt-free.

I think when things finally break loose, the amount of psychic trauma that will be inflicted on the economy and the world will be immense, and the very last thing I want to have on my mind is figuring out how I'm going to make that mortgage payment.  The ever-increasing property taxes (to pay for all those city & state government worker pensions & salaries) will be bad enough!

As a part-owner of some rental property, I'm already envisioning a period of time where our renters simply can't pay, while the water, sewer, and tax bills keep rolling in.  Falling rents with increasing costs.  It all sounds less than ideal.  Of course I've seen several years of 5-7% per year rent increases.  We are perennially under market price.  Right now, its easy street, or more less.  That can't possibly last.

Things also go in cycles; they have done this for millennia.  I'm not a huge bible-quoter, but the whole setup reminds me of an old bible story I remember from childhood.  "The seven lean ugly cows ate up the seven fat cows that came up first, but even after they ate them, no one could tell that they had done so; they looked just as ugly as before."  So whenever I have 4 years of "rental fat", some part of me is emotionally preparing for the years of "rental lean" that is already on the way.

I think now is the time to save, rather than take on risk.  Those lean ugly cows could appear any moment, and they will be hungry!!

I do think some part of the experience to come will be inflationary, and for that period levering up will look like a great idea.  But its quite possible that will only be a limited time, either followed (or preceded) by some severe deflation.

I read somewhere that in the 1930s reset, the process of the reset destroyed each and every asset class in turn, leaving no asset class untouched.  Even cash was hosed in 1933 by FDR.  Since gold was money at the time, it did all right.  But they slammed the door on that by making it illegal to own.

Oh, and as to why you might not want to act "just like the government" – unless you have a monopoly on force, and the power to tax and/or print money, which is the equivalent of a guaranteed job – your risk is substantially higher.

Just my two cents.

  • Wed, Sep 21, 2016 - 01:30pm



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    Re: Why Debt = Bad during reset

I fully support Dave's views above.

In my own words,I think that the deflationary forces will win out before the central banks can get their act together on helicopter money.

Now, if I am wrong, and helicopter money comes along first, you should definitely be the full ‘owner’ of that property right now, before those rotor blades can be heard thumping over the horizon.

But until or unless those helicopters arrive, all of the data suggests that the first thing to arrive will be a massive and terrible debt deflation.

Jobs will be lost, the economy will slow down (hard) and retreat (possibly a lot), business will dry up and many businesses will struggle to survive.

Right now it costs $180 billion a month just to keep the deflationary forces at bay. This is up from prior amounts and is now at all-time highs. This is simply what’s required to keep the monster at bay.

Once the deflation monster puts some effort into its approach, the costs will skyrocket…and here’s where we get into the reason why I think the monster wins.

Helicopter money requires near perfect coordination among the central banks. You can’t have helicopter money in the EU but not the US. That doesn’t work in a system as already strained as ours.

The BoJ, Fed, ECB, BoE and PBoC all need to be in tight coordination. In this political environment? Good luck with that. Ain’t gonna happen…at least quickly…and we have an increasingly agile and quick moving deflation monster out there.

So I am personally waiting with cash and a buy list. There will be a better, more perfect (cheaper) time to get that plot of land you have your eye on.

Of course, I could be wrong and we’ll move directly to helicopter money in a surprisingly quick fashion…but I really doubt it.


  • Wed, Sep 21, 2016 - 02:06pm


    Jim H

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    Another wildcard is Gold…

I am guessing that Dave thinks Gold will be caught up in this deflationary impulse.  I would argue that, while there may be some attempt to paint a sympathetic, "price deflation" in the paper PM markets.. that a drop in the Gold price, at least one coupled with (continued) availability of real Gold, probably will not happen for anything other than a fleeting moment.  

My view is very much in line with that of David Jensen; 

….Although the introduction of irredeemable debt-based fiat (paper) currency is predicated on an ultimate currency collapse when the required exponential debt growth to support expansion of the money supply becomes asymptotic, short-circuiting the gold and silver markets over decades has shut down cautionary warning signals in the global gold and debt markets that would force monetary system reform.

The distortionary effect of LBMA unallocated gold contracts and surreptitious central bank leasing of their physical sovereign gold holdings into the market have increasingly shown signs of coming undone in recent years and now months. While increasing daily volatility in the LBMA gold market has previously registered merely as increased cooling fan rpm's in the LBMA's bullion bank mainframes where their digital gold is created, exchanged, and held, the real gold market is awakening. This awakening is, again, only at the margins but has already had a material effect on the gold market but not yet on the LBMA paper gold price.

  • Wed, Sep 21, 2016 - 03:57pm



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    Question: When a loan cannot be repaid …

… does this decrease the money supply?

When we have lots of loans in default, is the money supply shrinking?  Is this where the deflationary forces come from–lot of people not being able to pay off their loans?

  • Wed, Sep 21, 2016 - 04:06pm


    Adam Taggart

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    “Money Heaven”

Sand Puppy –

The short answer is: yes, the money supply shrinks when the bad loans are written off. Economists refer to this as 'going to Money Heaven'.

As we explain in the Crash Course, Our fiat currency is loaned into existence in our fractional reserve banking system. When I deposit $100k in the bank, you can take a loan for $90k made out of my savings to start a new business. The money supply just nearly doubled.

But if you quickly run your business into the ground and can't pay back the loan, when you default on the debt you owe the bank, the bank's $90k they lent you goes to "Money Heaven". The money supply has just shrunk back down to where it was at the start of this example.

This is why we keep asking the question: Who is going to take the losses?

It's the refusal of ANYONE right now to write-off the bad debts that underlie today's sky-high asset prices that is keeping deflation at bay. The $180 Billion the central banks are pumping into the system each month is what allows this deception to continue for the time being.

But once debt holders give-up on ever getting their money back from their malinvested debts, the realized losses will ripple through the financial system, dropping asset prices like a rock and sending a whole bunch of debt-backed currency to Money Heaven.

  • Wed, Sep 21, 2016 - 04:47pm



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    “Money Heaven” with a caveat


… does this decrease the money supply?

When we have lots of loans in default, is the money supply shrinking?  Is this where the deflationary forces come from–lot of people not being able to pay off their loans?


If the loan originated and died within a commercial bank, the answer is yes, the money supply shrinks.

The bank has to recapitalize that missing loan from within its operations, and  that removes those funds from doing other things, like going to stockholders or paying bank workers.

Before:  You have a $100k loan, the bank has $100k in 'assets' and $100 k in capital reserve.

After:  You have defaulted, the bank's 'asset' goes to $0 (+ any recovery if a secured loan), and the bank has to move $XX from its capital reserves to fill up whatever hole was made in its balance sheet.  If the recovery was $0, then the bank has both lost $100k in assets AND had its capital reduced by $100k.

The caveat here is what happens when/if a central bank buys up your soon-to-be-defautled loan.

Here the central banks owns a defaulted piece of paper, say a corporate bond or a MBS mortgage obligation, which has gone bad.

But to get that piece of paper, the central bank had to create cash out of thin air to buy it.  So your $100k note was bought from your bank for $100k.  Your bank now has -$100k in assets BUT $100k more in reserves, which is MONEY.

Your initial $100k loan has now created TWO units of $100k cash, once when the loan was taken out and a second time when the central bank bought it.  One until of activity, and two units of cash.

Now when you default, literally nothing happens because the central bank can just let that piece of paper die on its books.  In theory, and with proper accounting, the central bank's capital takes a hit and they pass that along to the taxpayers in the form of reduced Treasury remittances.  I have no clue what they'd do if their capital and earnings for any period dipped below zero.  

That's a good question to ask someone.

At any rate,when a central bank buys a debt that defaults, there's the possibility that the money supply expands, not contracts.

  • Wed, Sep 21, 2016 - 05:29pm



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    On Reset

Perhaps being a bit simplistic, my assumption going forward is that the parasitic financial grifting, swindling, raping and skimming will continue and increase in amplitude until (a) the financial system implodes to a point that it cannot recover (Deutsch Bank derivative style would be nice), (b) everyone but the 0.01% is living in abject neofeudal poverty (Globalist wet dream), (c) systemic inequality grows to a point where the social fabric violently rips the system apart and/or (d) pushback (populist or otherwise) against (a) thru (c) above. Implicit is that (a), (b), (c) and (d) are not mutually exclusive. The idea that "money", "debt" and "economics" in their current forms survive this process…maybe. Maybe not.

I see these as less of a "reset" than of transition states to different types of societies and a different kind of planet. Passing through the event horizon one cannot predict the outcome state.

  • Wed, Sep 21, 2016 - 05:31pm



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    Money Heaven – Perhaps Loony Bin

I find the whole concept odd.  Digital "money" is just a digest on a computer screen which is generated at the telecommunication level by "1's and 0's". Money is a store of value and we only believe the squiggley characters are worth something because some schmuck says so.  It's all digital deception but we believe the game hook, line and sinker.  Perhaps it's collective insanity?  Kinda pathetic really, I think.  The wizard of Oz was prophetic.


  • Wed, Sep 21, 2016 - 05:36pm



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    central bank losses


Right now the Fed is taking continuous "hits" due to bonds they bought "above par" as these bonds mature.  This results in reduced remittances, just as you say.  This effectively sucks money out of the economy – the interest payments were made by taxpayers, but then they vanish into the maw of the Fed, never to be seen again.

If someone actually defaults on a loan the Fed owns, then presumably the Fed would take a loss just as they do for the bonds they bought above par, resulting in more reduced remittances, that sucks money out of the economy in a similar way.

If the Fed at some point has so many losses that it swamps their interest income, then they take a hit to capital – I think its 25 billion right now – and presumably they'd continue to suck down interest income until the capital was rebuilt.

The consequence that Michael Pento said for the Fed taking too many losses is, they would be unable to mop up all the existing bank credit by selling bonds, since they'd have all been defaulted upon.  And at some point if things got too bad, Fed would require recapitalization by the government – bill handed to the taxpayers, of course.

And in the EZ, I believe that the ECB would need to be recapitalized by the various governments.


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