Bank of America Gold Option by qel42402

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Edited by Alfred Adask.


Sunday, October 12th, A.D. 2008




Markets:
During the week of October 3rd thru October 10th, the “bid” prices for:

Gold rose 1.8 % from $834.80 to $849.90

Silver fell 17.8 % from $11.16 to $10.17

Platinum rose 2.6 % from $962 to $987

Palladium fell 3.1 % from $195 to $189

DJIA fell 18.1 % from 10,325.40 to 8,451.20

NASDAQ fell 15.2 % from 1,947.39 to 1,649.51

NYSE fell 19.5 % from 7,088.94 to 5,704.13

US Dollar Index rose 1.58 from 80.83 to 82.41

Crude Oil fell 14.3 % from $93.22 to $79.84
       Prepare to Celebrate!
       There’s a Bank Holiday in your Future
       About four months ago, I realized that the total American debt (owed by
federal, state & local governments, plus that privately owed in the form of
mortgages, auto loans and credit cards, etc.) was at least $75 trillion. As I’ve written
repeatedly, I divided that $75 trillion debt by the total U.S. population (300 million)
and thereby calculated that each American man, woman and child’s “fair share” of
the American debt was $250,000 each. (I.e, the “fair share” of the total American
debt for a family of four would be $1 million.)

       I knew instantly that such an enormous debt could not be paid. I guessed that
no more than $50,000 of each $250,000 “fair share” could be paid and concluded
that at least 80% of the existing American debt could not ever be paid. I pointed out
“what can’t be paid, won’t be paid” and concluded that therefore the value of all
paper debt instruments (like stocks, bonds, bank accounts, retirement funds, so-so
security accounts, etc.) would have to be repudiated by at least 80%.

       Four months ago, that conclusion seemed impossible and even absurd. Today,
it still seems inconceivable that 80% of the value of existing debt instruments would
have to be repudiated. Even so, I now think the number will be closer to 90%.

       In other words, if you’re holding a paper promise to pay (a debt instrument like
a stock or bond or retirement fund statement) with a face value of, say, $100,000, I
am convinced that the time must come when the value of that debt instrument must
be reduced by 80% (or even 90%). The purchasing power of your $100,000 debt
instrument will, on average, fall to $20,000—at most. If I’m right, those who are
holding their wealth in the form of paper debt instruments are going to suffer a
terrible loss.
      Convinced that at least 80% of the debt couldn’t be paid and that at least 80%
of the total debt had to be repudiated, I begin to consider how this repudiation might
be achieved. I concluded there were three possibilities:

      1). National Bankruptcy.

      2) Hyper-inflation.

      3) Kill the creditors.

      If you think my “80% repudiation” theory is hard to believe, you’d have to
agree that theory is a lot easier to believe than the possibility that the almighty
federal Government will ever admit that it (or this nation) is bankrupt. Even though
both the gov-co and the nation are bankrupt, that express admission could only be
made under the most dire circumstance. I.e, the unpayable debt will not be
repudiated by an overt national bankruptcy.

      Similarly, “killing the creditors” (that’s you and me, folks) also seems like a
nearly impossible option since it could only be achieved with thermonuclear war or,
at least, with American concentration camps—complete with a “final solution”. That
possibility is too remote and bizarre to be given much credence.

      I therefore concluded that hyper-inflation would be gov-co’s first choice for
repudiating the majority of the unpayable debt. As I’ve explained repeatedly, if I
borrowed $100,000 from you a year ago, and we had 15% inflation in the meantime, if
I repaid the $100,000 today, I would beat you out of 15% of the purchasing power of
the loan. Why? Because after a year’s worth of 15% inflation, $100,000 today would
only have a purchasing power of $85,000 as compared to when the loan was made last
year. Yes—I’d repay the $100,000 in full—but after a year’s 15% inflation, you’d only
receive $85,000 in purchasing power. Inflation repudiates debt.

      Therefore, if gov-co could cause 15% inflation for four years, at least half of
the existing, unpayable debt could be repudiated—wiped out. The nominal debt
would remain, but the purchasing power of that debt would be repudiated. That
repudiation process would be relatively slow and unseen by the majority of
Americans. Compared to the other two options (bankruptcy and mass murder),
hyper-inflation would be fairly painless.

      Consistent with my analysis, for most of the past year gov-co has been hyper-
inflating by dramatically increasing the supply of currency in circulation.

      But there’s a problem. The forces of deflation (falling prices) have suddenly
and dramatically increased—not only here in the U.S., but globally. The problem is
not simply mathematical. Just as inflation decreases and repudiates existing debt,
deflation has an exactly opposite effect. I.e., deflation increases existing debt.

      To illustrate, again suppose I borrowed $100,000 from you last year and agreed
to repay in full today. But suppose there was 15% deflation during the year. When I
repaid the $100,000 today, you would receive the equivalent purchasing power of
$115,000 as compared to the purchasing power of the $100,000 you loaned me last
year. You—the creditor—would be enriched by deflation. I—the debtor—would be
seriously diminished.

      Inflation serves the debtor by repudiating debt. Deflation serves the creditor
by increasing debt.

      Our national government is the world’s biggest debtor. Do you think our gov-co
wants to pass laws that favor creditors or debtors? Clearly, being the world’s biggest
debtor, government laws are pro-debtor. Government wants inflation. Always.

      However, it’s becoming increasingly doubtful that gov-co can create enough
monetary inflation to even match the growing forces of deflation, let alone repudiate
any significant portion of the existing and unpayable debt. That leads me to suspect
that of the three means (bankruptcy, inflation, or mass murder) I’d previously
identified as mechanisms for repudiating the debt, not one will now work.
      And that leads me to suspect there may be a fourth way: devaluation.

      If gov-co won’t declare bankruptcy, can’t kill us, and is unable to “slowly”
hyper-inflate us out of our debts, gov-co can still repudiate the existing debt by
suddenly and painfully devaluing the currency.

      It’s been done before. In the 1930s, the dollar was officially devalued when
gov-co first seized all of our gold (priced at $20 per ounce), and then declared that
the dollar would only be worth $35 per ounce. With that devaluation, the dollar’s
value fell by 57%—and the value of existing debt instruments denominated in dollars
also fell by 57%. Thus, in “one fell swoop,” gov-co repudiated over half of existing
U.S. debt.

      Unfortunately, today we can’t devalue our current “dollars” (Federal Reserve
Notes) because our “dollars” have no intrinsic value. If our dollars were still backed
by gold—say, $1,000 per ounce of gold—then, gov-co could suddenly declare that an
ounce of gold would be priced at $2,000 per ounce. If they did, the value of the
dollar would be “devalued” by 50%. But, because our “dollar” has no intrinsic
“value,” our dollar can’t be “devalued”.

      So how can “devaluation” take place?

      Simple. Government could announce the imposition of a brand new currency
(say, the Amero, or maybe United States Notes or some kind of “pink” or “brown”
currency) each one of which would be declared to be worth, say, five (or maybe, ten)
of our current Federal Reserve Notes. If the gov-co suddenly imposed a new currency
(say, U.S. Notes) with a value of five FRNs to one unit of the new currency, the new
price of gold in terms of the new currency would be one-fifth the current price of
gold as denominated in Federal Reserve Notes.

      Likewise, the existing value of public and private debts denominated in FRNs
would be reduced by 80% when denominated in the new currency. Creditors would be
ruined, driven in some cases to suicide, and in others to starvation. But 80% of our
existing, largely unpayable debt would be repudiated. The economic game would be
zeroed out, and the game could start anew.

      Of course, the transition from the existing currency (FRNs) to the new currency
would not be easy. The transition could not be achieved by mere voluntary
compliance of the people. Most wouldn’t understand, many wouldn’t cooperate. For
some period of time, both the “old” FRNs and the new currency would be circulation.
The people might value the two currencies at a rate different from that which gov-co
desired.

      The only way I can see that such a transition (and thus devaluation) could be
achieved would be by means of a “bank holiday”. The gov-co would order that all
banks (and probably the Federal Reserve) be shut down for three days to a week. You
couldn’t deposit your checks, you couldn’t use checks to pay your bills. Your
MasterCard and Visa wouldn’t work, and you couldn’t get a nickel out of an ATM. The
whole country would function only on cash (FRNs), and most of the cash would
thereby be sucked out of the economy.

      During a “bank holiday,” the government would announce that a new currency
was suddenly in effect. When gov-co turned the banks back on, they’d function only
in terms of the new currency. The people might have a week or even several months
to trade the FRNs they still had hidden in their mattresses for the new currency. But
at some point the remaining FRNs would become as worthless as Confederate dollars.

      There is only one reason for a “bank holiday”: to replace or devalue an
existing currency.

      In the past month, the internet has carried a small but increasing number of
emailed rumors of approaching bank holidays. So far, those rumors have been false.
For example, according to one source:

             “A rumor has begun to circulate that Bank of America has sent a memo to top tier
      clients warning them to anticipate a one-week shutdown of banks. . . . Keep in mind that
      while we trust our source on this, he had not received the memo himself. Instead, he had
      been informed about the memo by a friend who claimed to have received it. We’re rating
      this: highly speculative and probably false. Even if Bank of America had sent the memo,
      we’re not sure how they would know in advance to expect a bank holiday. One
      possibility might be that Bank of America has merely outlined some worst case scenarios
      for clients, and included a one week bank holiday among them. Bank of America called
      the story “completely unfounded.””

      It’s almost certainly true that the previous rumor was false.

      Similarly, an acquaintance informed me that on Sunday, October 12th, he’d
heard from a “high ranking officer” in the Coast Guard that the U.S. military had been
placed on some enhanced “DEFCON” alert by Homeland Security. This enhanced alert
was allegedly in anticipation of public riots on Tuesday, October 14th when the
Federal Reserve and the nation’s banks are allegedly scheduled to be all shut down in
a “bank holiday”. Odds are, that information is also false.

      Still, if the system can’t admit bankruptcy, can’t afford WWIII, and can’t
hyper-inflate, there’d seem to be only one other “fourth way” to repudiate much of
the existing, unpayable debt: a major currency devaluation—probably by means of
replacing our existing FRNs with some “new and improved” currency.

      If so, the devaluation and/or replacement or our existing FRNs will almost
certainly take place only in conjunction with a “bank holiday”.

      Therefore, if my original observation (“what can’t be paid won’t be paid”) and
my conclusion (“80% of existing debt and debt instruments must be repudiated”) are
roughly correct, then it’s starting to look like there’s a “bank holiday” in your future.
Perhaps within a few weeks or months.        Better stock up on party supplies for the big
“holiday celebration”.

      If there is a bank holiday, you’d better start thinking about liquidating every
paper dollar you have in trade for anything tangible from toilet paper, to hamburger,
to gold and silver coins. IF gov-co declares a bank holiday, when that “holiday” is
over the dollar may be dead and useful only for making confetti.




Moscow Times Misc.

             “Prime Minister Vladimir Putin announced Friday that the state-owned
      Development Bank would this week start pumping 175 billion rubles ($6.7
      billion) into Russian stock markets, which have plummeted more than 60
      percent since their highs in May.

      Remember me writing about an 80 to 90% repudiation of existing debt
instruments? 60% is getting close.

              “.....The United States' financing needs will be far greater than
      anything imagined. Until now, the rest of the world needed to purchase almost
      $2 billion of U.S. treasuries on a net basis every working day. What about more
      than $4 billion though?

             “In the case of Russia, especially with higher interest rates, [Russian]
      savings could be efficiently deployed to finance truly huge domestic investment
      needs. In any case, there is now a preference to develop further the local
      market and the use of the ruble so as to be less vulnerable to contagion the
      next time a hegemonic financial power destabilizes global markets.”

      The Moscow Times is warning that self-interest will soon prevent Russia
from purchasing any of the, now, $4 billion in daily bonds needed to keep the U.S.
economy afloat. If other nations follow suit—and you can bet self-interest will
compel them to do so—the $2 to $4 billion daily “fix” now required to animate the
debt-addicted U.S. economy is about to dry up. Then what? Can we quit our
addiction to debt, cold-turkey? I doubt it.

               “So, the U.S. Treasury will face the unpalatable option of selling its
      bonds at much lower prices (another bubble waiting to burst) with much higher
      yields to entice the rest of the world to fork over that $4 billion to $5 billion
      each day -- but then it's back to the problem that U.S. households and
      companies would face sharply higher interest rates in the midst of a recession -
      - or the dollar must drop to make U.S. assets attractive to foreigners.

               “There really may not be too much choice. Russia should use the
      breathing room before this happens to pursue and implement the pro-private
      business policies supporting diversification and higher productivity.”

      Russia knows , our government knows, you should know: the clock is
ticking.


Until next week,



      Alfred Adask
      alfredadask@yahoo.com
      http://adask.wordpress.com




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