the money changer august 2009

8/9/2019 The Money Changer August 2009

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F. SANDERS, MONEYCHANGER, P. O. BOX 178, WESTPOINT, TN. 38486 888-218-9226 AUGUST 2009 1

THE

MONEYCHANGERVOL. 27, NO. 11, AUGUST, 2009 INFORMATION DEADLINE, AUGUST 26, 2009 a.d.

ALSO ON THE INSIDE

see DIVIDING page 2

INFLATION OR DEFLATION– AGAIN

In the last two weeks I’ve been exchanging views with an long-time acquaintance who has been taking me to task for ignoring the threat of de fl ation. His questions are excellent, and challenge my fundamental views, so I want to share our exchange with you readers. The charts shows are reprinted with permission of Shadow Government Statistics, www.shadowstats.com . – F. Sanders

Dear Franklin:I always enjoy your daily e-mail commentaries and

I thank you for sending them. I’ve been meaning tocomment for a while, but today’s email had the signalI couldn’t ignore.

I believe you are overlooking some strong technicalindicators concerning gold and misinterpreting othersbecause of your entirely understandable abhorrence forphony money. It is an abhorrence I share. However,there are some clear technical indications that thedollar is forming a major bottom. Dollar sentiment isalso way too bearish for much more of a decline.

Deflation has the upper hand. The Fed can’t stopit. Credit money is disappearing faster than the NiceGovernment Men (NGM) can print up.

Although your recommendation to have a goodstash of metal in a safe place is sound, your customersare giving you a hollering, stomping sell signal if Iever heard one. People who don’t know anything aboutprecious metals making big commitments? Why doesit remind me of people who knew nothing about real

estate mortgaging their homes to buy vacation condosin Miami? The only stronger sell signal I can think of would be the NGM themselves telling us to buy gold.

I too believe we will see gold at $2500 or more,but not before we see it below $700. This deflation hasto run its course before dollars can be re-inflated withcredit again. Your own customers are telling you that.

Cordially, Hal

--888--Dear Hal,

“Deflation” is a decrease in the moneysupply. It is one possible cause of fallingprices, among many. Others are bursting

financial bubbles, or bumper harvests or newtechnology.

“Inflation” is an increase in the moneysupply. Generally it causes rising prices, butprices may also be driven up by other causes

such as poor harvests.Rising prices are not inflation, though,any more than falling prices are deflation.Wet streets don’t cause rain, rain causes wetstreets.

Look at what the Fed has done to themoney supply in the last ten months -- addedor promised to add at least $8 trillion to a$14.5 trillion M3 money supply.

This is not 1934, and the money supplyis not being deflated. Certainly fallingconsumer demand and a bursting real estatebubble are causing some prices to fall, butnot all . And as the inflation already injectedinto the money supply works its way throughand expresses itself in prices, there will be

price rises aplenty.Sometimes new people

pouring into markets is asign of tops, but sometimesnot. If it were late in a bullmarket that might be thecase, but it is only eight years into what promises tobe at least a fifteen year bullmarket. Therefore I wouldsay my new customers are

What is the fundamental made by those who are forecasting de fl ation? I believe they have not taken into account one fact: this is not 1934.

2009 is not 1934. In thelast seventy-five years, theentirefinancial, monetary, andbanking system in the UnitedStates has been restructured.We now have a commandeconomy, controlled by the USgovernment and the FederalReserve and an unbacked USdollar and global fi at moneysystem, with a structure thatautomatically inflates.

DEFLATION WAS THEISSUE, & IT SCARED

THEM SILLYI never understood the

THISIS NOT1934!

THE MONEYCHANGER WILL BE ON VACATION DURING

SEPTEMBER, THEREFORE THERE WILL NOT

BE A SEPTEMBER ISSUE . FROM SEPT. 14-18 ONLY A

SKELETON STAFF WILL BE AVAILABLE AT THE OFFICE.

see 1934 on page 2

see INFLAT/DEFLAT page 2

****

Current Market Projections . . . . . . . . . . . . . . 6

Dear Readers . . . . . . . . . . . . . . . . . . . . . . . . 8

The Broad View . . . . . . . . . . . . . . . . . . . . . . 11

The Fat Lady Sings . . . . . . . . . . . . . . . . . . . . 11



2 F. SANDERS, MONEYCHANGER, POST OFFICE BOX 178, WESTPOINT, TN. 38486 888-218-9226 AUGUST 2009

THE MONEYCHANGER, is owned by Little Mountain Corporation. The Moneychanger is privately circulated newspaper published monthly. ISSN 0899-

1391. Our goal is to help Christians prosper with their principles intact in an age of monetary & moral chaos. We derive information from sources we believe to be

accurate, but cannot guarantee accuracy. We may have positions in investments we recommend. We cannot and do not guarantee the pro fitability of any investment.

All recommendations are made subject to the reader’s own prudence, research, and judgment. Permission to reprint granted provided quotations are not used out of

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US 90% silver coin, or other gold or silver equivalent; F$149 if you have nothing but paper “money”. Single copies, $3 in silver, F$10 in paper.Franklin Sanders,

S.P., P.O. Box 178, Westpoint,TN. 38486, phone (931) 766-6066 or 888-218-9226; fax # (931) 766-1128; e-mail <[email protected] & web site <http://

www.the-moneychanger.com>

see DIVIDING page 3

DIVIDING from page 11934 from page 1

not know-nothing trendfollowers, but realizers at themargin who are desertingthe dollar.

I always recognizethat my interpretationof events could be 100%

wrong, but the inflation hasbeen so overwhelming, sooutrageously colossal froman historical perspective,that I cannot imagine howdeflation could emerge. Itsimply is not there.

Add to that a federaldeficit last year of $1.9trillion, and this year of $5.1trillion, and next year of $9.1trillion. How will theyfinancethat? With deflation? That’s just not possible. They willinflate, as they have alwaysdone. They will create the

money, much of it by theFed directly monetizinggovernment debt.

I simply cannot see any of this offering the least entryfor deflation, but if you canexplain to me how, I wouldbe glad to hear.Best wishes,Franklin Sanders

--888--

Dear Franklin,Thanks for the review of terms.

We agree completely. I think it wasFriedman who said, correctly, thatinflation (and thus deflation) iseverywhere and always a monetaryphenomenon.

There is no question the Fedhas been as busy as a one armedpaperhanger trying to bolster thecontracting money supply, but thechart below shows that although,as you pointed out, they haveadded $8T to M3, M3 has notchanged much. An addition of $8T to a stock of $14.5T wouldnormally give us $22.5T. But thathasn’t happened. All that new cashis just holding the line, while the

rate of increase is plunging despitethe Fed’s efforts.This chart [ Annual US Money

Supply Growth – SGS M-3Continuation] shows the surgein M1 to which I think you were

referring in your email. But noticethat the rate of growth of M3 iscrashing never the less. It’s notyet negative, but give it time. Allit took was a reduction in the rateof growth in M3 since 2008 tocause commodity and real estateprices to plunge. When that rateturns negative, as I believe it must,the deflationary death spiral will

become apparent.

I wouldcompare theFed’s situationto that of a boywho was givena cuddly bearcub to raisefrom birth. Thisbear is unique,however, in thatit has no fulladult size. Itkeeps growingas long as youfeed it. As it gets

bigger, it needsever larger portions to support it. Itlives on credit, not cash.

Since 1913 the cub has grownto a size that puts it beyond KingKong’s weight class. The Fed’sproblem now is that a reduction inthe rate of growth alone feels likestarvation to the bear, and he getstesty. When the supply of creditmoney actually shrinks, the bear isgoing to start tossing the furniturearound.

M3 at $15T is a small fractionof total credit money. And much of it is not money at all, but simply

debt backed checking accountbalances. That money will vanishwith the banks that hold it. Privateand public debt world wide is over$250T if you count derivatives,unfunded government liabilities,

mortgages, and private debt. Thisis the money that is disappearing.Credit money has only two fates,it is repaid or it is repudiated. Thenet effect is the same, a reductionin the supply of credit money. Ashrinking money supply is deflationby definition.

If it were simply a matter of printing currency and giving money

to banks the Fed could control themonster. Butas confidencewanes thereal engineof inflation,credit, willseize up solid.The Fed ispushing likemad on thep r o v e r b i a lstring rightnow. They canmake credit

available but they can’t force banksto lend or borrowers to borrow.

And even if they could producecurrency and run up the nationaldebt fast enough to cover thevanishing credit, they would stillonly break even. The explosion inthe money supply that inflationistscall for is simply out of reach in aworld scared of credit.

Credit default is the mechanismby which the vast ocean of moneythe Fed has created will dry up.

The NGM have been handingout great gobs of fresh taxpayer debt

so that bankers and the raveningscum at Goldman Sachs won’t haveto admit their mountain of IOUs isreally an empty hole. When the debt

horror that deflation strikesinto Establishment heartsuntil I was talking with JohnExter once on the telephone.Mr. Exter had been a centralbanker, founded the Bankof Ceylon after World War

II, and served as VP for goldoperations at the New YorkFed. He studied economicsat Harvard in the late 1930sin a class with the notoriousKeynesian, Paul Samuelson.He was trained in the depthof the Great Depression.

In the late-1950s orearly-1960s, however, Mr.Exter saw dollar inflationrising, quit his position withCitibank, and became aprivate consultant, shouting“GOLD!” to anyone who would listen.

Mr. Exter was also verykind to me during all mylegal battles, testifying as anexpert witness on monetarylaw in two different cases. Inthis phone conversation thesubject of deflation arose,and I can never forget howhis voice changed, droppingvery soft and low as he said,“Oh, deflation! When thatdeflation takes hold, there’snothing anybody can doabout it!”

I understood that I hadheard something of primalimportance, but it took along time for me to digest it.As I heard Mr. Exter speak, Igrasped that he spoke fromhis training and experience,as all of us do, and the full weight, the great dangerof deflation to a monetarysystem like ours, beganto dawn on me. Once itstarted, deflation couldn’tbe stopped.

At least, not in the1930s.

But like a whipped dog,

the Establishment learnedfrom its mistakes. From theNew Deal forward various

see 1934 on page 10




INFLA/DEFLAT from page 2

see INFLA/DEFLAT page 4

is inevitably marked to market, there will be a greatdeal less money in the world. They can’t keep feedingants to the grasshoppers forever. The ants are gettingrestless.

There are also powerful contrarian sentimentindicators for deflation. Among them are nearly

universal calls for hyperinflation. When everyone isthinking the same, no one is thinking. Last month therewas a 91% bullish consensus among gold traders. Goldmay be in a long term bull market, but it doesn’t havefar to go right now if 9 out of 10 traders are already long.Only a break above the 2008 highs would convince meotherwise. It seems unlikely that the 1 in 10 still on thesidelines can lift gold even to there, let alone to loftyheights of 1980.

There is also a 97% bearish consensus for the dollar.The last time bearish consensus got over 90% wasMarch of 2008, the beginning of a one year rally from70 to near 90. Sentiment numbers for the other majorcurrencies are similarly lop-sided on the bullish side.96% bulls for the Euro, 98% for the Canadian dollar.These numbers indicate near certainty for a long, strong

dollar rally against other world currencies, includinggold, and against goods and services generally. Thiswould be a symptom of deflation.

Fortunately, not everyone suffers equally in adeflation. As you well know, people who are debt free,with a reliable source of income, even if reduced fromprevious levels, and who manage to preserve what cashthey have by avoiding collapsing banks should enjoya reasonable prosperity, and will be in a position toacquire bargain assets at the bottom.

The real danger, of course, is of backlash fromthe hoards of sheep who were lured into the swamp of debt in the previous boom, and from politicians whodepend on their votes. It’s hard to say which will bemore dangerous.

If I don’t misread you, although you are aninflationist, you offer the sensible advice of adeflationist: shun debt, have a business, become self-reliant, don’t trust banks, live within your means, saveyour money, use precious metals to preserve wealth.These are habits that pay off during deflation muchmore so than during a hyperinflation. Savers aresuckers during inflation. It’s the grasshoppers whoprosper then, borrowing to the hilt and paying back cheaper coin than they borrowed.

Although I believe you are incorrect in yourassessment of the inflation vs. deflation question, Idon’t think your clients will suffer much for it, unless,of course, they borrow money to buy gold. There maybe some resentment from those who buy coins and seetheir value in Federal Reserve notes (“dollars”) decline

for a while, but ultimately, as we both know, honestmoney preserves buying power regardless of its pricein the Fed’s chits.

I hope I haven’t gone on at too great a length, and Ihope I have explained how deflation is at least possible.

Keep the faith, Hal O’Boyle

---888---

Dear Hal:Good arguments, and I am glad to get

them.However, a slowdown in money supply

growth from last year’shistorical maximumincreases isn’t much of a surprise. Moreover, it was predictable from thebeginning. Bernanke knew when he created the moneythat he would have to un-create it. Does all this make

it “deflation”? How can thatbe in the context of M3 money

supply’s ongoing growth [at4.5%] even though the rate of growth is slowing?

I don’t agree with yourcomments about credit.When a debtor bankrupts,the money he borroweddoesn’t disappear: it hasalready been spent. It’s outthere, somewhere.

However, the supply of credit is pertinent. All of our money is borrowed intoexistence, most through

the banking system bybusinesses and consumers,not through governments.Credit is a part of themonetary system, along withFederal Reserve notes. Whencredit stops growing, that hasa monetary effect. If money isnot continually borrowed intoexistence, the bankruptcies will rapidly grow, since notenough new money is beingcreated to pay interest on thepreviously created debt.

But collapse of the debtpyramid is precisely what

Bernanke & the governmentare fighting. They will keepfighting it, and they have onlyone weapon: inflation. Whatthey’ve done already arguesto me that they will destroythe dollar inflating.

I agree with you aboutthe bullish consensusnumbers. They alone arguefor a dollar rally. The chart,too, is beginning to look morepositive. But for gold to dropto the 700s, it would haveto violate its last 200-300day crossover-to-the-upside

(July 5 at $909) which it hasnever before done in this bullmarket. Possible, but . . .

The biggest cloud onsilver & gold’s horizon is without question a US dollarrally. But the inflation willkeep on coming, and even if metals take a huge blow likethey did last year, they willrecover and the end result formetals holders will be safetyand even profit.

This remains for me a

better option than selling out a bull-marketposition with the plan of buying back. Thatleads too easily to losing your positionaltogether, or taking a big loss to re-establisha position.

I enjoy your arguments. Thank you.Best wishes,Franklin

---888---

Dear Franklin,A remark you made in paragraph three indicateswhat I think is a misunderstanding of an importantfeature of credit money. When a company goes bankruptor a mortgage is foreclosed and can’t be liquidated bythe underlying asset, spent or not, the credit money hasindeed vanished.

The loans that existed on the bank’s books as assetswere the backing for checking account money, as a bank failure will quickly reveal. In a business bankruptcy,credit assets also vanished from the books of thevictims of the bankruptcy, in the form of negotiablereceivables. Receivables are as much a part of the creditmoney supply as are a bank’s loan assets. Bankruptcydestroys or severely discounts those assets and shrinksthe credit money supply.

Unlike lawful gold and silver money, credit moneyhas a lifespan. At the end of its life, it is either repaidor repudiated. Until then it can circulate as negotiabledebt currency. But once the debt is gone, the currency isgone, too. Unlike gold, credit money that has been spentis not ‘out there somewhere’ indefinitely. It ultimatelyvanishes as it was created, and indeed, is vanishing atthis very moment in vast quantities around the globe.

Imagine the Moneychanger lost his wits andsent the Extremist 100 gold Sovereigns on credit.The Extremist’s promissory note would representa negotiable asset that would be ‘currency’ worththousands of dollars to the Moneychanger. When theExtremist absconds to Costa Rica with the gold, stif fingthe Moneychanger, the Moneychanger would becomekeenly aware of a drop in the money supply. Should the

Moneychanger have been clever enough to have spentthe note before the Extremist’s departure, he wouldnever have noticed the contraction of the money supply.But eventually someone would.

The reason the NGM step in to save outfits likeFannie, AIG, and GM from bankruptcy is practicallybecause defaults of that magnitude destroy enormouschunks of the credit money supply. Luckless creditorsare forced in turn to stiff their own creditors in a cascadeof debt-driven ruin. By stepping in the feds are not onlysaving their pals, they are saving the system from whichthey benefit so handsomely. The system would havecollapsed by now if left unmolested, and must collapseeventually no matter what.

You are correct when you say the present monetaryscheme requires a constant flow of new credit. But

it’s more than that. The scheme can’t just find anequilibrium. It needs ever increasing, and eventuallygeometrically increasing amounts of new credit tosustain the illusion of growth. That’s why a contractionin the rate of monetary growth alone elicits deflationarysymptoms, falling prices across broad portions of theeconomy, most notably in those markets that are theleast regulated.

In a world where all money is debt, contractingdebt causes deflation by definition.





see INFLA/DEFLAT page 5

You are absolutely correct that this is exactly whatHelicopter Ben is fighting. Unfortunately, his onlyweapon involves pushing on a rope. The Fed cannotstop the contraction of credit because ultimately itcannot force banks to lend or people to borrow.

The Fed only lends to the government and the banks.

We can count on politicians to act moronically and totry to keep the game going, but the rest of the economywill behave more rationally. Banks will stop lending.Consumers and businesses will stop borrowing. Thecredit money supply will shrink. The Fed can’t makeup the difference without the public’s participation.Money will simply be disappearing faster then the Fedcan replace it.

The NGM can delay the inevitable. They canredistribute the pain from the profligate to the prudentby ‘rescuing’ ever larger parts of the economy. But theycannot stop the return of credit money whence it came.

Ultimately I believe we differ in that you seem tothink that Bernanke and his accomplices can overcomedeflationary forces with inflationary policy. I believethey will try and fail. It is only after their failure, whenwe may hope for a return to honest money, that theywill be able to re-inflate if we continue to grant themthe power to do so.

As to the technical indicators, we agree that thesentiment indicators are reliable, but I defer to yourmore professional assessment, particularly as regardsthe bull market in gold. I agree that a drop to below700 for gold would be an extraordinary event from atechnical standpoint. I also agree that trying to buck the trend to maximize your gain in a bull market is asucker’s game. The traditional advice to go with thetrend is well taken.

That said, however, I believe the next leg downin this depression will itself be extraordinary, sendingmany technical signals where they’ve never gone

before. It may make you happy you live on a farm andme happy I live in a small peaceful country outside theUnited States.

Although I disagree with your thinking on inflation,I believe you are serving your clients well with youradvice on how to prepare for the near future. A solidholding of gold and silver is part of that plan regardlessof which of us is right about inflation.

Pura Vida, Hal

---888---

Dear Hal:Concerning credit: When a debtor borrows

money, the bank creates money to lend him. Then the debtor spends the money.

Debtor later goes belly-up.Bank writes off the debt as a loss, but the money spent into circulation remains.Only when debt is paid off is credit moneyextinguished.

Now, while it is probably true thatthe bank’s loss will diminish the bank’s willingness to lend in future and thus restrictcredit supply, there is nothing in the defaultdirectly that diminishes the entire moneysupply.

So the defaults themselves do not reducethe money supply, but they certainly mayreduce the willingness of credit creators to

create more credit, sincethey fear “loss” (although weboth know in truth that thecredit they loan cost them nomore than the administrativetrifles of computers andsecretaries, and beyond thatnothing). As you and I notedbefore, because all money is

borrowed into existence andcarries from birth an interestburden, the money supplymust always grow at leastby the amount of the newinterest burden, or it willshrink due to ever-growinginterest payments.

THEREFORE, if debtdefaults (cascading orotherwise) cause lenders tostop lending, i.e., to fail tocreate more credit moneynecessary to pay the interest,the practical effect will be adecrease in money supply,

and that might happen evenif it were nominally growing,provided it is not growing asfast as the interest burden isincreasing.

However, it is preciselythis reluctance-of-lenders-to-lend that Bernanke isdetermined to conquer. Hisseveral new “Facilities” aimat exactly that, going aroundthe banks to pump out moneyif the banks refuse to lend. The dog knows how to hunt.Only question is, can he keepup the pace?

I think the feds will pukeout money if they haveto hire taxicabs to throwhundred dollar bills out the windows to winos. They willpuke out money and thenmore money and yet morestill, they will force it into your bank account, wedgeit into your pockets, stick itin your children’s jackets,do whatever is necessary topush money into circulation.And in doing so, I think they will kindle hyperinflation,and deadliest of all, thecycle of accelerating issueand depreciation, where thepublic is discounting themoney even faster than it isbeing inflated. With today’smuch vaunted technologicalexcellence and speed, thehyperinflation might take notthree years, not two years,but 10 months.

If I am wrong, I hope you will graciously point out where, and will most gladly

listen.Best wishes,Franklin Sanders

---888---

Dear Franklin,So, if I’m reading you correctly, you believe that

because credit money has been spent, defaults on theloans that created the credit money do not affect the

money supply.I don’t think that is correct.If debt is money, and we know it is, vanishing debt

is the opposite of expanding debt and must have theopposite effect.

On the evidence, that’s exactly how it works.The deflating real estate bubble is a perfect example.

In the go-go years I was selling real estate in the FloridaKeys. You could see the waves of new money flushinginto the system like the tide coming up in the Bay of Fundy. New larger loans paid off smaller ones everyweek. Every boat in town was floating higher on therising tide. It was a classic credit inflation. The moneysupply supporting the housing market grew dramaticallywhile the market of actual houses stayed the same size.Prices ran up proportionally.

When the loans stopped happening it got realquiet for a while. Then the defaults started. It was likesomeone had hit the flush handle. The money startedvanishing as quickly as it had arrived. The total housingstock never changed much, but the amount of moneypricing it started going back whence it came, into thinair. Prices fell as the credit money vanished. It matterednot a bit that all the money had been ‘spent’. It vanishednever the less. It was a monetary phenomenon fromstart to finish. (a finish we have yet to see, by the way.)

I just can’t wrap my head around the idea thatcredit money lasts forever, and that defaults don’t makeit disappear. A default or repayment is the reverse of the action that brought the money into existence. Thatcredit money has a limited lifespan is the thumpingheart of Austrian monetary theory. If credit inflations

could continue forever, they most certainly would. If thedeflationary busts that follow them could be avoided,you can be assured the people who created the boomwould avoid them.

In our unfortunate current situation, thoseresponsible for the boom are passing the pain of the bustalong to those who should be benefiting from deflation,savers and wage earners. But they are utterly incapableof avoiding the bust altogether.

I know Ben and the boys are trying to stop thecollapse of credit. I just don’t think they can, evenif they are dumping Benjamins from aircraft andshoveling FRNs off the backs of trucks. This is notthe rudimentary paper inflation of 1920s Germany orrecent Zimbabwe. It’s a more advanced animal, beyondthe control of the printing press.

Obama bashing should be a growth industry till theday he leaves of fice, which I venture to say will not belater than 1-20-2013. He thought he was going to be thenext FDR, but his timing was off. He’ll be rememberedwith little more reverence than we give Herbert Hoover.History is never kind to bear market presidents.

Best, Hal

---888---Dear Hal:

Let me follow your analogy.




Builders built houses, speculatorscontracted for them, buyers bought them.

When the boom went bust, did anybodygo take that money back from the buildersor speculators who had sold the house? No. That money stayed in circulation, because ithad already been spent. Credit money keepscirculating until somebody uses it to pay off debt.

[You have confused different things asidentical. You wrote, “A default or repaymentis the reverse of the action that brought themoney into existence.” No, a repayment only is the reverse of the money-creating act. Itextinguishes the debt, and with it the moneycreated by the debt. A default, on the otherhand, extinguishes (for the holder) an asset,because in a creditor’s hand a note (debt) isnot money or even credit, it is only an asset.What changes is his balance sheet , not his bank balance . The credit money itself is not

debt; it is only the evidence of debt, a derivative of debt .Debt itself is not money; it isthe “backing” of the money. They issue credit moneyagainst debt the way bankersonce issued paper notesagainst gold.]

What effect does the realestate crash work? It restrictsthe supply of future creditby scaring lenders who areleft holding worthless assets.Also, it may drive someparticipants into bankruptcy,causing credit offered to

shrink further.On the other hand, if the money borrowedfor the condos had been repaid , then themoney supply would have shrunk by thatamount.

Repaying debts decreases the moneysupply. Debtor default does not, at leastnot directly. When a debtor defaults, whathappens? An asset in the hands of thecreditor becomes worthless, but how doesthat affect the money supply? Not at all, asI can tell.

Best wishes,Franklin Sanders

---888---

Dear Franklin,I want to be sure as well that I understand what you

told me in your last email. I’d never considered thatit mattered how a loan disappeared and it’s kept methinking about it off and on for the last few days.

What I think you’re saying is this: when a loan isrepaid the digital ‘money’ that was created is returnedto the bank that created it, thus removing money fromcirculation with deflationary effect. When a loan isrepudiated, however, the ‘money’ remains in circulationwith no effect on the overall credit money supply.

I’ve been trying to get a handle on that idea, but justcan’t get a grip on it. I think the problem is that you aredistinguishing the note from the money. In reality, the

note IS the money.When the note is gone,

regardless how it was eliminated,the money is gone. In a creditmoney system, vanishing credit isdeflationary by definition. It mattersnot at all how the note disappeared.If the vanished loan is not replacedby another loan, the supply of credit

money shrinks. And as I mentionedbefore, there can be no simpleequilibrium, new loans replacingold one for one. The amount of newloans must increase, and in the latestages of the boom, must increasegeometrically to keep the gamegoing. That stage is behind us. Theballoon is coming down like theHindenburg.

We’re now on the slope of hope, as it were. No amount of Fed

pump priming will created a desireon the part of people to borrow,and a complimentary desire to lendon the part of banks. The Fed andUncle Sugar can’t do the heavylifting on their own. Without privatecredit flooding into the system, thefeds are trying to balance hundredsof trillions of derivatives and otherwhacky debt on the pinhead of

just a few trillion in governmentborrowing. It will redistribute thepain somewhat, from the guilty tothe innocent, but it won’t be enoughto stem the tide of deflation.

I’m not saying that your call for

a future hyperinflation won’t comeabout. What I’m saying is that itwon’t come about before this roundof credit deflation has run its course.I’m in complete agreement with youthat the bottom of the market, andthus the depression, should be aboutwhen a Double Eagle will buy youthe Dow. Happily, gold will holdits buying power just as well in adeflation as in an inflation. Only thenumbers will change.

Best, Hal

---888---Dear Hal:

Sorry I couldn’t put this into a letter for you to answer, but my deadline intervened.

Here’s the answer: the note is NOT the money. The note does not circulate, only thecredit money created by the note does.

When the borrower defaults, the note dies.

The money it created did not die, because allcredit money is fungible – exchangeable withevery other unit of credit money – throughoutthe banking system. Units of bank creditare not created as “Joe Blow units of bankcredit against Joe Blow’s note”, but merely as“units of bank credit” which the lending bankdeposits in Joe Blow’s checking account. Hecan then spend all over the banking system,passing them on without limit.

When Joe defaults on the note, the bankdoesn’t go fetch its units of credit money

back from him. It can’t,because he’s defaulted, andthat means precisely that hehas no credit money to pay

back. The bank can’t callthat credit money back, sothey are left with a worthlessasset, their loan to Joe Blow.

So defaulting loans donot shrink the money supply directly , but only indirectly as their example freezes thehearts of other lenders whothen stop lending, and thatshrinks the supply of creditavailable.

Banks may not lend, andconsumers may not borrow,but the system we sufferunder still has lenders and

spenders. Government is the spender of last resort and the Fed is the lender of last resort. They may not be able to stem the tideof defaults, but they can surely spend andlend. Obama intends to spend whateveramount is necessary to overcome deflation,and Bernanke intends to lend it to him.

Who knows, before this depression ends,the Federal government may even expandfurther into the credit business, as they did with numerous New Deal agencies whichstill exist today, along with later progenylike Fannie Mae and Freddie Mac. Thengovernment can lend to borrowers directly,instead of banks.

I hope I am wrong, and that no

hyperinflation occurs. It will devastate thecountry. Still, as I understand it, eitherhyperinflation or a terrible inflationaryprice-rise seems the likeliest outcome,and not deflation, along with the worsteconomic depression in American history, ahyperinflationary depression.

Best wishes,Franklin





CURRENT MARKET PROJECTIONS

WAITING FOR THEBREAKOUT!

The Dow in Gold Dollars(the value of the Dow mea-sured in dollars of gold) hasstruggled through resistancearound G$194 (9.385 ounces)& crossed above its 200 DMA. This is a normal bear marketcorrection, reaching up to the200 DMA and even climbingover it a bit before it resumesits earthward course.

This foray into the strato-sphere can turnout two ways. The DiG$ could keep on rising(stocks continue to gain valueagainst gold) as high at G$240(11.610 oz) before it collapses,

or it could collapse from here(stocks resume losing valueagainst gold, as they have forten years this month). Either way, I have no dog in that fight,because I’ve been recommend-ing that you sell stocks & putthe proceeds into silver & goldso long y’all are tired of hearingme. Also, I am right positivethat before stocks’ bear marketagainst gold ends, the Dow willsell for less than two ounces of gold (G$41.34) or as low as oneounce (G$20.67). Why would I want to hold stocks from here

(G$208.78) since they have an-other 80% to fall?

Once again I bring to yourattention the imperative tomeasure with a truthful yard-stick. If the yardstick lies, themeasurements lie. In theseinflationary times, judge invest-ments not by nominal dollarreturns, but by purchasingpower returns. These are bestmeasured by gold or silver. AsUS inflation really cranks intohigh gear, I expect folks desper-ate for anything of real value will send stocks much higher innominal terms, but not againstgold. Against gold, stocks willslowly grind out their bear mar-ket doom until the Dow reachestwo ounces or less. Be warned.

STOCKSLet us philosophically

ponder the stock market’s recentrise, as represented by the Dow Jones Industrial Average. Letus ponder it, viewing eventsfrom its fall from the 9 October

2007 all time high at 14,167to 6,547.05 on 9 March 2009,a loss of 7,617.48 points or53.8%.

To date, the Dow’s presentrally has regained 2,992.24points of that loss, or 39.3%.Mmmm . A common reboundrally even in a bear marketregains 50%, which would takethe Dow to 10,356.

A 62% rally would bemagnanimous, magnificent,and highly unlikely, carrying to11,270. Count on it not.

After bear market crashes,rebounds always occur,because the old bulls’ hope hasnot yet been crushed. Havingmade money with stocks inthe now-dead bull market, andthey still believe they will comeback, so they jump back in.

Stocks will not come back,not for a long, long time – certainly not in purchasingpower terms, or in silver orgold terms. Heed not the sirensongs from Wall Street. Stocksmay run a while longer, but this will end badly. Stocks remainin a primary downtrend, andmost likely outcome will shortly

fall again . GOLDGold is fidgeting around

on its uptrend line (fromNov. 2008), and that’snot mannerly behavior.However, so far gold hasfought back every attempt tobreak it, and is fast comingto the end of its season for yearly lows. Momentum isup : gold stands above all itsmoving averages, and exceptfor the 200 DMA they are allpointing up.

Technically gold has

formed an even-sidedtriangle, which is a coilingformation, coiling for abreakout one way or theother. Lately it has been rangebound between 955 & 930.(Note before we move furtherthat gold’s US$909 mark I wrote about last month, itsprice on the 8 July crossing of the 200 above the 300 DMA,has not been neared, andUS$930-928 support caughtthe last fall.) This triangle will

resolve soon, and gold, mostlikely very much skyward.Gold is targeting $1,000 inSeptember or October, andonce past that point shouldcarry to $1,300 quickly. Afterthat, you will never see goldbeneath $1,000 again.

Unless, of course, the USDollar stages a surprise rally. That remains a possibilityuntil the dollar index closes

below 77.5. It’s edging towardthat point, but only slowly, so we have to keep on watchingover our shoulders. A dollarrally would greatly slow downgold’s progress, and add asmuch as five months to whatis already a seventeen monthcorrection.

Don’t let my concern confuse you. Whatever rallythe dollar might stage will




BULLION PRICE UPDATE

Moneychanger Gold & SilverFor those outside Tennessee we make a very

compettve market in gold & silver investments

For quotatons call 1 888 218 9226

be temporary, and will by no means kill gold’s bull market, which has several more yearsto run, perhaps until 2015.However, a sizeable dollarrally might at the outset

drive gold as low as US$865.Surely I don’t need to tell y’allthat at that point you shouldback up your pick-up to thegold dock and load her up,but I doubt you’ll get thatchance.

As things now stand withthe dollar and with gold, thatdollar rally isn’t very likely. Agold upside breakout aboveUS$961, rising to $1,000quickly and piercing thatmark, is what I expect in thenext eight weeks.

Physical gold supply

has been very easy, nothinglike the shortages last fall.We can occasionally findexceptionally good buys insmall coins -- Mexican 20and 10 pesos come to mind,and Austrian 20 coronas,available at the same priceper ounce as their largerbrothers. Otherwise in theone ounce range the Austrian100 Coronas & Mexican 50pesos continue to offer aUS$24 to US$34 per ouncesavings against Krugerrands,Maple Leaves, and American

Eagles. In a bull market, premium always disappea rs.Logic prefers investing inounces rather than premium ,since you won’t recapturethose premium dollars when you sell at market peak.

Buy gold on any retreat toUS$930. If gold falls, HOLD what you have. Buy goldon any breakout above 961.Buy a lot more on the secondday it closes over $1,000.

SILVER Silver’s 200 day moving

average (red line) oughtto cross above its 300DMA (broken brown line)sometime before 5 October

2009. Since silver’s bullmarket began 2001, the 200DMA has kissed (touchedor neared) or crossed abovethe 300 DMA three times.Rallies from 66 days to 451days have followed, averaging251 days (36 weeks). Gainsin those rallies ranged from

56% to 76%, and averaged64%.

Silver’s monthly highaverage price during thisbull market was posted forMarch of 2008 at 1925.7¢. The monthly average since January 2007 has been1397.8¢. Silver needs to get

its monthly average abovethat 1397.8¢. The Augustaverage will come in about1438¢.

Silver stands above its20, 50, 200, & 300 DMAs.Momentum is rising.

Given all that, silver’snext big hurdle remains1600¢. A close below 1387¢ would probably send silver to1200¢ before it recovers. If you see a drop like that, buy! Or buy any two day breakoutover 1500¢.

Silver is now approaching

the down trend line fromthe March 2008 high. Thisupper line forms an even-sided triangle with a linerising from the November2008 low. Something willhappen, soon , and it won’tbe small either way. After aseventeen month correction

a bull market certainly ought to break out to the upside,but markets tell us, we don’ttell them.

The lowest cost buyin silver remains US 90%silver coin. After the waythat coin acted last fallduring the physical silver

backwardation – adding 40%in premium overnight – Ican’t imagine why anyone would buy anything else.

GOLD/SILVER RATIO The gold silver ratio has

been headed down sincelast fall’s silver bottom, which sent the ratio to 84.5.Resistance/support lies at67.5, 57.5, and 51.3.

In July the ratio roseto meet its 200 DM, thenstopped, a normal correctivemove for a bear market. The200 DMA has now rolled over

to the downside. Rememberthat the ratio drops (a bearmarket) when silver and goldare rising (a bull market).If silver and gold rally intoSeptember - October, thenthe ratio ought to drop to57.5 or lower. My provisional

see CURRENT MKT. page 12

AftMkt Wednesday 26-Aug-09 DiG$

Gold: 944.90 DJIA 9,543.52 4.23 $208.8

Silver: 14.29 S&P 1,025.90 (2.10)

Ratio: 66.15 DJIA/GOLD: 10.100 oz.Plat 1,233.20 FINE WHOLE- WHOLE- PREMIUM Palldm 283.50 METAL SALE SALE OVER DJIA Ag: CONTENT BUY SELL CONTENT

AUSTRIA 100 cor. 0.9802 921.50 930.50 0.5%

20 corona 0.1958 182.70 185.95 0.4%

4 ducat 0.4438 415.15 425.25 1.4%1 ducat 0.1106 103.45 109.21 4.5%

BRITAIN sov'rn 0.2354 229.45 239.43 7.6%

CANADA Mpl Leaf 1 961.90 979.90 3.7%1/10 ML 0.1 99.70 102.05 8.0%

FRANCE 20 francs 0.1867 183.40 193.41 9.6%SWITZ 20 francs 0.1867 183.40 193.41 9.6%

MEXICO 50 peso 1.2057 1,133.50 1,143.48 0.4%20 peso 0.4823 450.05 458.00 0.5%10 peso 0.2411 224.95 246.04 8.0%5 peso 0.1206 112.55 120.79 6.0%

2.5 peso 0.0603 56.40 61.54 8.0%2 peso 0.0482 45.10 49.19 8.0%

S.AFRICA K'rand 1 959.00 969.07 2.6%1/2 Krugerrand 0.5 467.75 486.62 3.0%

1/4 Krugerrand 0.25 233.85 243.31 3.0%1/10 Krugerrand 0.1 93.55 99.21 5.0%Two Rand 0.2354 220.20 229.10 3.0%

USA $20 gold pieces, pre-1935:

St. Gaudens MS62 0.9676 1,400.00 1,450.00 58.6%Liberty MS62 0.9675 1,445.00 1,495.00 63.5%

St. Gaudens MS61 0.9675 1,385.00 1,435.00 57.0%Liberty MS61 0.9675 1,425.00 1,475.00 61.3%

rawSt. G. MS60 0.9676 1,232.00 1,277.00 39.7%rawLib. MS60 0.9675 1,182.00 1,237.00 35.3%

St.G XF 0.9675 1,200.00 1,245.00 36.2%Liberty XF 0.9675 1,150.00 1,205.00 31.8%

USA Buffalo 1 965 N/A USA American Eagle, post-1985:

Amer. Eagle 1 971.00 980.88 3.8%1/2 Amer. Eagle 0.5 496.05 506.07 7.1%

1/4 Amer. Eagle 0.25 250.40 259.85 10.0%1/10 Amer. Eagle 0.1 102.05 113.39 20.0%

GOLD BULLION 1 952.50 961.40 1.7%

FINE WHOLE- WHOLE- PREMIUM

METAL SALE SALE OVER

CONTENT BUY SELL CONTENT

PLATINUM Englhard 1 1,238 1,263 2.4%Noble 1 1,233 N/A Koala 1 1,233 N/A Maple Leaf 1 1,258 1,293 4.9%Amer. Eagle 1 1,233 1,333 8.1%

***************************************************SILVER, US COIN:

90% coin,$1000bag 715 9,892 10,357 1.4%40% 1/2s,$1000bag 295 4,037 4,212 0.0%Dollars,$1000 bag 765 14,000 15,500 41.8% Am.Eg.B4 2008 1 15.54 16.54 15.8%SILVER BARS & COINS, .999 FINE:Engelhard/plastic 100 1,429 1,479 3.5% Miscellaneous 100 1,389 1,514 6.0%Eng. or JM 10 140.85 151.85 6.3% Misc. rounds 1 14.29 15.39 7.7%Can. Maple Leaf 1 14.95 16.20 18.3%***************************************************PLEASE READ THIS FIRST!

. pr ces are w o e sa e . . - .commission plus shipping when applicable.2. Not all the gold coins listed are always

available, e.g., Austrians, fractional Kruger-rands, Mexicans.

3. Fractional gold Maple Leaves are available &priced as American Eagle fractionals.

4. Small quantities subject to surcharge.5.US$20s MS-61or better are PCGSorNGC (our choice)




Dear Readers,

On – July 2009 Everett Charles Sanders was born,Wright and Jena’s thirdchild andthird son. Their oldest,Will, is three.He talksvery well,but verya b r u p t l y , w i t h o u thesitation.

J u s tafter Rett was bornSusan and I

went to see Jena at them i d w i f e r ycenter in Waynesboro. While we were visitingStan and Janet Poston, Jena’s parents,brought Will and his brother Jack. Will strutsinto the room and climbs up on the bed withhis mama and Rett. He examines the brand-new baby, tightly wrapped in a blanket, andbegins spitting out questions:

“How did he get out?”“Can he talk?”“Does he have feet?”

WHITE SAUCEOn 28 July evening Susan and I drove

down to Madison, Alabama, about an hourand a half from the Top of the World Farm, soI could speak to a local group about silver andgold. We arrived almost at supper time, so westopped at Thomas BBQ, 7829 Highway 72West. Remember that address if you are everin Madison, because it is a classic barbeque joint.

Inside we stepped up to a service windowand ordered from a wonderfully cheery black woman, one of those rare people who lightup a whole room. Susan and I went andsat down, basking beneath the mountedlonghorns, unidentifiable old implements,framed newspaper articles and pictures, waiting for our food. On the table I noticed

with approval a squeeze bottle containingthe correct old-fashioned barbeque sauce. This never under any circumstances harborsanything made from or related to tomatoes.Nothing more than spices, vinegar, and lots of black pepper mingle in its pristine ingredients.Anything claiming to be barbecue sauce thatcontains tomato parts or products is fit forconsumption only north of the Ohio River. The only exception to this Cosmic BarbequeSauce Rule appears in South Carolina, wherethey make a mustard-based but non-tomato-bearing barbeque sauce that is acceptablytasty.

But you never know what you’ll find in

Alabama. In Jasper at theSlick Lizard I was once fed abarbeque sandwich slathered with ketchup. When ournumber was called, I wentto the window and picked upour food. There on the traystood a squeeze bottle filled

with some white sauce.What’s that?I wondered.Back at thetable, I trieda spoonful.It wasd e l e c t a b l e ,p i q u a n t ,m o u t h -g r a b b i n g ,slightly sour,certainly amayonnaisebase butincorporatingvinegar, blackpepper, andmaybe a little

dill.Susan and I both liked

it, so she ordered me toinvestigate. “Ask what it’scalled,” she commanded.

Obediently I marchedto the counter and asked,“What’s that white saucecalled?”

The nice lady at thecounter looked at me. “Oh, we call that – white sauce.”

Oh .

Later Susan tried to prythe recipe from her, butfailed. That’s all right. Shebought some to take home.She’ll taste and taste untilshe figures out what’s in it,and when she makes it she’llcall it --- Susan’s white sauce.

VITAMIN B3Not long ago I read in

Dr. Robert Rowen’s Second Opinion that lab tests hadproven Vitamin B3 (asniacinamide ) helpful againstmemory deterioration. He

recommended 500 mg dosesthree times a day.

This sounded like agood idea to me, althoughI couldn’t remember why. Iordered some and begantaking it. Within about amonth I noticed that I wasn’tsearching for words muchany more and only seldom woke up in the pantry wondering, “Now, why did Icome in here?” Vitamin B3

seems to be helping my memory and mentalfunction.

But do NOT do what Susan did. I askedLiberty to re-order 500 mg B3 – niacinamidebut somehow she ordered 1,000 mg B3 – niacin

instead. Niacin, you may know, causes yourblood vessels to dilate with a flushing reactionthat reddens your skin and itches like antscreeping all over your body, especially on yourhead, neck, face, and joints. It’s harmless, buttorture still. Since I take 300 mg of niacin everymorning, I am accustomed to the reaction andit doesn’t bother me. Susan can’t stand it.

So one morning Susan rolls into thekitchen, grabs her vitamins & supplements,along with the jug of 1000 mg niacin , andswallows them all down. Four of them. I keeptelling her to break her supplements up intothree doses a day, but she likes to take themall in the morning.

Within about fifteen minutes, her colorbegan to brighten noticeably. In 30 minutes,her face was throwing off about 400 watts of bright red light. She was itching mercilessly,and throwing glances at me as if I were theappropriate candidate for blame. I ducked,as I had anticipated misunderstanding andfive-fold repeated “niacinamide” when I askedSusan or Liberty to order it.

About four o’clock in the afternoon I checked with Susan again. How are you doing? Sheflashed a still glowing face at me and throughclenched teeth said, “Still itching.”

She hasn’t touched that niacin since, but abottle of B3-niacinamide has appeared in thecabinet.

KEFIR TO EXCESSLiberty and my son-in-law, Johnny Bain,

never rest from making kefir. Think of kefiras nuclear buttermilk. It contains five or sixtimes as many beneficial probiotic bacteriastrains as yogurt. To start a batch, you needkefir seeds. These are round lumps of whatlooks like wax, from the size of a pencil eraserto a small ball bearing. They have no moreflavor than wax, either.

Put the seeds into whole milk and leave itout at room temperature. It bubbles, seethes,hisses, and ferments until ready, assuming

Franklin & Susan testing out “BUBBA”

Will, age 2.5, Jack, age 1.75 and newborn Everett




the lumpy consistency of buttermilk, withthe same tendency to separate.

The sour final product is simply toodelicious to describe, but its benefits don’tstop there. Johnny Bain was taking Prilosec®

for chronic indigestion and reflux, but aftersix weeks on kefir his indigestion vanished.About a year ago I visited Dr. Jonathan

Wright in Seattle and learned I had becomeallergic to gluten. As a gratuity, this comes with chronic indigestion, bloating, andmisery. Jonathan prescribed a numberof supplements that helped greatly, as didavoiding gluten-bearing foods.

But, O, that ke fi r ! I started drinking thattwice a day, just a glass full and indigestionand discomfort completely disappeared.

But I may have gone too far. I suspectthat because a few days ago I went down tothe kitchen in the morning and opened therefrigerator door. My eyes lit on a jar of kefir.

All unbidden, my salivary glands sprang intoaction. Yes, at the mere sight of the jar mymouth was watering.

“This,” I thought, “may be kefir to excess.”

OUTSMARTING CHIGGERSClever, I thought to myself as I dusted my

socks, backs of my knees, and other spots with Tick-Away. Chiggers can’t stand thesulfur in it. Works like a champ, and we

had a work day at church, where chiggers abound.

Thus armoured againstbloodsuckers, I went to work. Most of the day Ispent in flower beds, pulling weeds and planting things.

Saturday night I wascongratulating myself

on having defeated thechiggers. Sunday morningI noticed that I was itchingunder my watchband. Buy Tuesday my forearms weredotted with 30 or 40 chiggerbites.

Nature will find a way.

FAMILY VACATION That’s also the name

of a famous Chevy Chasemovie, the plot of whichmight fairly describe any of our family vacations. From13 September through 19

September, for the first timesince 1994, we are all goingto take a vacation – together.

The logistics andscheduling for this vacationrequire a little more effort andplanning than Napoleon’sGrand Army needed toretreat from Moscow, but alittle less than the Normandyinvasion. Through the kindof fices of a friend, we will bestaying in a beach house off the South Carolina coast. Allkidding aside, I am lookingforward to it. There’s no

company I would rather havethan my wife, children, andgrandchildren.

Wednesday after ourvacation I have to be inLynchburg, Virginia for our yearly diocesan synod. Nopoint in driving fourteenhours from South Carolinato Tennessee only to turnaround two days laterand drive twelve hours toLynchburg when I can drivefrom South Carolina toLynchburg in ten hours, soSusan and I will sightsee our way from Charleston northto Lynchburg. On Monday Ihave been asked to speak inColumbia, South Carolina.

SEE YOU IN COLUMBIA?On Monday, 21 September

2009 at 6:00 p.m. I’ll bespeaking in Columbia, SouthCarolina at the ColumbiaConference Center nearthe junctions of I-20, I-26,and I-77. Call (803) 772

9811 or go to www.columbiameetings.com/directions.php for directions.

I’ll be speaking about the presenteconomic crisis, gold and silver, and the onlysolution for our economic woes: rebuildinglocal economies and re-circulating silver andgold. If you attend, be sure to come up to meand introduce yourself. I’m always delightedto meet my subscribers.

BOBBLED CHANGEOVER We have been trying to change over most

of our readers from the paper version of The Moneychanger to the electronic version, but we have grievously mishandled the transition.

Please forgive us .If you were one of those people who failed

to receive last month’s Moneychanger , dropme a note alerting me to that oversight and I will add two months to your subscription.

If you do want us to mail you a physicalpaper copy every month, and you have not yet notified us, please drop us a note or callus at (888) 218-9226 and tell us, “I want hardcopy.”

If you want the electronic version andhave not been receiving it, please make sure we have your current e-mail address. Sendus an e-mail with “Electronic MC subscriber”in the subject line. Don’t forget to put yourname, address, and city in the e-mail body,so we can verify your subscription.

Yes, you may receive both hard copy andelectronic version, but you must notify us if you want hard copy.

If in this confusion’s midst you failed toreceive the June or July Moneychanger , notifyme and I will send you a copy.

Y’all have been faithful friends over the years, and I am most deeply grateful to serve you.

NO SEPTEMBER MONEYCHANGER

Because we will be vacationing inSeptember, I am taking my month off publishing that month instead of August. Afterthis August issue, the next Moneychanger willbe published on 22 October 2009.

Best wishes,

Franklin

A bank of wild yellow flowers line the gravel roads

on the way to the of fice/farm, just a taste of heaven.

Not many people outside Tennessee have after

seen the “Tennessee Red Leopard Pig”. We have!




laws built up an institutional structurethat would automatically kick in to fightdeflation at trouble’s first whiff. The 1948Full Employment Act, all the welfare laws,unemployment insurance, and a host of other government-spending circuit breakersare supposed to kick in before deflation can

ever take hold, wielding the only weapon theFed and the government have: in fl ation. THAT WAS THEN, THIS IS NOW The banking system alone witnesses

what huge changes have been made since1934. Then the Federal Reserve banks wererequired to keep a forty percent gold reserveagainst the notes they had issued; today,none . Then banks, commercial banks, wererequired to keep (I believe) a 35% reserve ingold and US government bonds; today, about0.75% of their deposit liabilities, but only asdeposits with a Federal Reserve bank.

Think about what that means. Banks caninflate almost without practical limit. Undera 0.75% reserve requirement, off a $100

dollar deposit they can create credit (“money”)through loans amounting to $13,333.33. Inpractice that is no limit at all.

Until 1934 the US government had to payits bonds and interest in gold. Any threatto the dollar’s gold backing, and the bondvigilantes would swoop in and sell truckloadsof bonds, driving up interest rates. But asNew York Fed Chairman Beardsley Ruml hadobserved already in 1945, any governmentthat can issue unlimited unbacked moneythrough a central bank has been freed from“the tyranny of the bond market.”

In 1934 the US government with stateand local governments represented some tinyfraction of employment. Today over half the

people in the United States derive their livingdirectly or indirectly from government. In moststates, more than half the income arises fromUS government spending, overwhelminglydefense spending (in Tennessee, 98%). Inaddition, by laws, rules, regulations, decrees,and subsidies the US government controlsnot only agriculture but nearly every otherbusiness. By controlling the interest rate,the Federal Reserve controls the economy allby itself.

These and hundreds of other changeshave altered the financial and economicinstitutional structure so thoroughly that what remains in 2009 doesn’t remotelyresemble 1934.

The Establishment learned its lesson inthe Great Depression, and while deflationmight somehow overwhelm them, it won’t bebecause they have failed to build in manifoldinflationary firewalls against it. And it won’tbe for lack of inflating.

THEN THERE’S BEN BERNANKEIt’s well known that the Chairman of the

Federal Reserve Board of Governors, BenBernanke, studied the Great Depression asa graduate student. It’s widely touted thathe believes the reason the deflation was aproblem then was the Fed’s insuf ficient will toinflate. That’s my spin on it, but I think that

fairly states the case. Whenhe was newly appointed tothe Board of Governors on 21November 2002 but beforehe replaced Greenspan asChairman, he made a famousspeech in which he said, inessence, the government’sprinting press trumps all

deflationary problems.In that speech entitled,“Deflation: Making Sure‘It’ Doesn’t Happen Here,”Bernanke said,

“[S]ome observers have con-

cluded that when the central

bank’s policy [interest] rate

falls to zero--its practical

minimum--monetary policy

loses its ability to further

stimulate aggregate demand

and the economy. … [T]his

conclusion is clearly mistak-

en. Indeed, under a fiat (that

is, paper) money system, a

government (in practice, the

central bank in cooperation

with other agencies) should

always be able to generate

increased nominal spending

and inflation, even when the

short-term nominal interest

rate is at zero.

“The conclusion that defla-

tion is always reversible

under a fiat money system

follows from basic econom-

ic reasoning. A little parablemay prove useful: Today an

ounce of gold sells for $300,

more or less. Now suppose

that a modern alchemist

solves his subject’s oldest

problem by finding a way to

produce unlimited amounts

of new gold at essentially no

cost. Moreover, his inven-

tion is widely publicized and

scientifically verified, and

he announces his intention

to begin massive production

of gold within days. Whatwould happen to the price

of gold? Presumably, the

potentially unlimited supply

of cheap gold would cause

the market price of gold to

plummet. Indeed, if the mar-

ket for gold is to any degree

ef ficient, the price of gold

would collapse immediately

after the announcement of

the invention, before the

alchemist had produced and marketed a single

ounce of yellow metal.

“What has this got to do with monetary policy?

Like gold, U.S. dollars have value only to the

extent that they are strictly limited in supply.

But the U.S. government has a technology,

called a printing press (or, today, its elec-

tronic equivalent), that allows it to produce

as many U.S. dollars as it wishes at essen-tially no cost. By increasing the number of

U.S. dollars in circulation, or even by credibly

threatening to do so, the U.S. government can

also reduce the value of a dollar in terms of

goods and services, which is equivalent to

raising the prices in dollars of those goods and

services. We conclude that, under a paper-

money system, a determined government

can always generate higher spending and

hence positive inflation. . .

“If we do fall into deflation, however, we can

take comfort that the logic of the printing press

example must assert itself, and suf ficient injec-

tions of money will ultimately always reversea deflation. (Emphases added. Read the whole

speech at www.federalreserve.gov/boarddocs/

speeches/2002/20021121/default.htm.)Before they seized power, people discounted

what Lenin, Stalin, or Hitler promised they would do in writing or speeches. However,after the last 70 years, we no longer doubt the words of rising tyrants. We expect they willbe as good as their word. Therefore we canforecast with little fear of later events, thatBernanke will inflate and keep on inflating,as he has promised.

Nor have the last 24 months lackedproof of Bernanke’s determination. At every

crisis, he had massively inflated, far beyondthe bounds of historical experience. LatelyComrade Obama has nominated Bernankefor another term as Chairman of the FederalReserve. Can anyone believe that Obamaexpects that Bernanke will refuse to monetizefederal debt? Show any independence? Toask the question is to answer it.

And don’t think the banks’ fear of lending will slow Bernanke down. He will end-run thebanks with newly-minted “Facilities” to lenddirectly to borrowers. And he will monetize allthe federal debt necessary to help the federalgovernment take up the spending slack leftby tapped out and over-indebted consumers.

THIS IS NOT 1934Yes, deflation always threatens under our

monetary system, because every dollar mustbe borrowed into existence. That means everydollar is born bearing an interest burden, sothat next year the money supply must grow bythe amount of interest due, or the monetarysystem will begin to shrink (deflate). Thesystem must inflate, or die.

But as the forces of deflationapproach, Obama, Bernanke, the federal

1934 from page 2

see 1934 on page 12




Our modern age is so parochial that folks

fancy themselves taking a very broad view when theythink in terms of decades. In truth, perspective requiresus to think in centuries.

In the broad view, silver and gold are extremelyundervalued. Viewed from the centuries, silver andgold are very, very cheap. In the 1840s, for instance,an income of $400 a year was a good, middle classincome. That amounts to only 20 ounces of gold or 320ounces of silver. Today that gold would amount to only$20,000, not much of an income. Silver is even moreundervalued, since at $14.80 spot, 320 ounces wouldequal only $4,736 today, barely enough to starve on.

WHAT CHANGED?Why the change? What has caused silver & gold to

be devalued so sharply?

In a word, central banking and fiat money.Silver & gold purchasing power remain high through

the centuries, when smoothed out for discontinuitieslike the conquest of the New World that flooded Europewith new stocks of both metals. Then central banks andpaper money appeared.

Beginning in the mid-1600s the value of silver andgold slowly began declining. That’s about the time thatcentral banks began (Bank of Sweden 1650s, Bank of England 1694) to flood the world with their notes. Astime went on, more banks sprang up, releasing a floodof fiat money throughout the world. That paper floodwatered the money supply, cheapening the value of all units including silver and gold. As banks uttered

more and moreof their money-substitutes, themetals’ valuedeclined fasterand faster.

By far the largest part of today’s money supplyis bank credit. The world’s money supply has beendiluted by the entire value of all central bank banknotes(like Federal Reserve notes, no longer specie-backedand therefore mere bank credit) and commercial bank credit. Silver and gold, at present valuations, have beenmarginalized to a tiny fraction of the whole moneysystem’s value.

Silver and gold are undervalued, then, by the totalvalue of all bank credit and central bank currency in

the world.So today when we hear that long ago a man could

live well on twenty ounces of gold a year, that soundscrazy. Nor does this valuation change arise in any wayfrom the industrial revolution or the modern economy.If anything, the industrial revolution has made all goodscheaper, and thus should have made silver and goldeven more valuable. Today a man ought to able to liveon ten ounces a year.

THE REVALUATION OF ALL VALUESMy suspicion and hope – not the fact, because I

can’t see the future – is that the three and a half centuryreign of central banks, banking, and fiat money isending. The present crisis signifies its dissolution.Necessarily that means that silver an gold will undergoan extreme upward revaluation, reversing the last 350years of devaluation.

You can do the speculative math yourself. If myperception is right, then silver, the more undervaluedmetal, will rise more rapidly, probably returning tothe old 16:1 rate to gold. Pick any crazy number youwant for gold, but at, say, $5,000 an ounce then twentyounces would be worth $100,000, not a bad living fora year. And at $312.50 an ounce, 320 ounces of silverwould be worth $100,000

This is not a prediction, just a broad view.-- F. Sanders

THE BROAD VIEWSILVER & GOLD ARE VASTLYUNDERVALUED

Finally, central banks seizedpower completely in the 1930s,

replacing silver and gold withtheir paper completely. Aroundthe world, legal tender laws drovegold and silver out of the monetarysystem, further marginalizing themand reducing their value to rock bottom.

WHAT’S A MONEY SUPPLY?

Think of the pre-bankingmoney supply. It consisted of gold and silver only, no paper of anykind, no other money, near-money,or money-substitutes.

Then came central banking, and

with it banknotes. Now the moneysupply consisted of gold, silver, andbanknotes. The money supply wasdiluted by the value of all banknotesadded above their gold and silverbacking.

Then came commercialbanking, and bank credit. Today theworld’s money supply consists of gold, silver, banknotes (currency),and bank credit (all bank deposits,whether created by currencydeposits or by loans, and credit cardmoney).

% chg All-time or Date of % change LATEST LATEST 9-Oct-02

4-Jan-00 26-Aug-09 frm 1/00 Last High High From High LOW HIGH 7286.27

DJIA 10,997.93 9,543.52 -13.22% 14,164.53 9-Oct-07 -32.62% 6,547.05 12,986.80 9-Mar-09

DUA 278.51 378.16 35.78% 552.74 20-Feb-08 -31.58% 290.68 552.74 9-Mar-09

DTA 2,862.17 3,723.96 30.11% 5,400.28 15-May-08 -31.04% 2,146.89 5,400.28 9-Mar-09

S&P500 1,471.21 1,025.90 -30.27% 1,559.55 20-Feb-07 -34.22% 676.53 1,559.55 9-Mar-09

NasdaqComp 3,901.69 2,026.36 -48.06% 5,048.62 10-Mar-00 -59.86% 1268.64 2,518.42 9-Mar-09

Nasdaq100 3,755.74 1,635.14 -56.46% 4,704.73 27-Mar-00 -65.24% 1043.87 1,839.13 9-Mar-09

US$ Index 100.41 78.62 -21.70% 121.02 2-Jul-01 -35.04% 70.70 121.02 Low 17 Mar 2008

DiSoz 2,061.47 669.49 -67.52% 2,566.04 7-Jun-01 -73.91% 492.54 2,042.43 Low 23 Feb 2009DiG$ 804.20$ 208.92$ -74.02% 925.42 25-Aug-99 -77.42% 147.24 $ 882.55$ 3/9/09

Gold 282.70 944.30 234.03% 1,003.20 18-Mar-08 -5.87% 704.90 1,003.20 13 Nov. 2008

Silver 5.34 14.255 166.95% 20.680 5-Mar-08 -31.07% 8.800 20.680 13 Nov. 2008

Gld/Slvr 52.94 66.24 25.13% 84.330 17-Oct-08 -21.45% 43.63 84.33 lo 4/19/2006

Platinum 413.70 1,233.20 198.09% 2,167.80 21-Feb-08 -43.11% 416.00 2,167.80 last low 3/12/03, hi

Palladium 441.90 283.50 -35.85% 1,082.80 5-Feb-01 -73.82% 148.50 553.40 last low 4/17/03, hi

* Bold face items in "Latest Low" and "Latest High" are new from last month. NOTE: DJIA last hi 5/15/08 @ 12,986.8

**"Latest" high or low means "last significant," not the very last in time. NOTE: DTA last hi 5/15/08 @ 5,400.28

*** "DiG$" is the DJIA exprest in gold dollars. ****DiSoz is the DJIA valued in silver ounces. Note: Index lows above all posted 3/9/09

LISTEN TO THE FAT LADY SING




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VOL. 27, NO.11, AUGUST, 2009

government and the Federal Reserve, and theentire institutional structure built since 1934are ready, willing, and able to shoot their onlycannon: in fl ation, and plenty of it.

A HYPERINFLATIONARYDEPRESSION

Depressions are usually associated with

deflation because, after an inflation-causedboom, a financial panic bursts the bubble andbrings on a long period of writing down baddebt. In our system, credit is the largest partof the money supply. Money supply shrinksas willingness to extend credit (make loans)shrivels in fear.

But try to wrap your mind around this:every in fl ation actually masks a de fl ation,and a hyperin fl ation most of all. That is, if you understand inflation’s primary effect: itreduces the total purchasing power of themoney supply. It waters the wine. (That’sanother reason that inflation must keepgrowing to sustain a boom.)

Inflation’s secondary effect is misdirecting

capital into projects that in the long term willprove unprofitable and therefore fail. It doesthis by making capital artificially cheap, thusmaking uneconomic projects appear feasible.People don’t actually want to order pet foodor groceries off the Web, but plentiful cheapmoney puts capital in the hands of misguided

visionaries who believe they will. Then the dot-combubble bursts, and truthbecomes plain.

So given the structuralbias toward inflation, andthe expressed and alreadyexhibited will to inflate, theFed will inflate, and keep oninflating, disregarding the

effect on the dollar. They have no other weapon but in fl ation, and they must use it. Vast sums of newmoney will depreciate fasterand faster, real purchasingpower will shrink, andeconomic activity will bedepressed further even asmoney supply is soaring.

Right now we are seeingsome prices fall, an inevitableoutcome of bad debt being written off. The real estatebust offers a ready example.However, these falling pricesdo not result from any realshrinkage in the moneysupply (“deflation”).

Just wait. The inflation will come.

-- F. Sanders

1934 from page 10

target for our next swap from silver togold is 51, but I am waiting to see how themarket moves before I pull that trigger. Thegood thing about our gold/silver swappingstrategy is that we always stay positioned inone metal or the other, and time is on ourside. No hurry, and no reason to take anybut the most favorable trades.

US DOLLAR INDEX Today the US dollar index closed at

78.662, up 35.2 basis points but mostimportantly, above the 78.33 level whichhas acted as support and resistance. Thedollar has whipsawed watchers back andforth, promising to rally and then reneging,breaking down but refusing to followthrough, then (as today) turning around andclimbing back above support.

Above 78.33 , the dollar stands a chanceof rallying. First it would have to beat thelast high (close above 79.51 and the 50 daymoving average (79.30). Most logical upside

target then would be the 200 DMA at 83+.Below 78.33, the dollar stands in constantperil of falling through 77.50 (the last low)and to the netherworld of the low 70s.

-- F. Sanders

CURRENT MKT. PROJECTIONS from pg. 7

the money changer august 2009

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