The Currency Pyramid Scheme

–First off, what’s the price action in the market telling you right now? Murray’s just posted a new YouTube update. He says that, “Tonight’s price action in the States is quite important for giving us short term direction. Intermediate and long term trends are still firmly down, but the risk is increasing that we may see a short term rally leading in to Bernanke’s meeting next week.”

–But wait. There’s more.

–“A rally tonight to close above the 10 day moving average confirms a short term uptrend is in place and could lead to a squeeze. Any rally will be capped by the 200 day moving average and will be a great selling opportunity if it occurs. A weak night tonight could spell trouble though. A failure back under 1140 gives immediate targets to 1100 in the S+P500.”

–To watch the update, go here.

–Now for the good news: with each day that passes, we are one day closer to the destruction of the world’s monetary system. Yes, that may not sound like good news. But it is. In today’s Markets and Money, we’ll look at Italy, China, and skee ball and leave you with an important choice to make.

–But yes, we are delighted to finally move into a genuine crisis stage for the Welfare State. It’s not because we wish anyone misery or failure – a lot of people are going to see their savings wiped out. But it’s what has to happen before anything good (wealth creation) can happen again.

–Once the debts of the old system are liquidated and a new, sounder currency becomes the backbone of global trade, we can go back to writing about creating wealth and investing in good businesses. That will be a welcome relief from chronicling the errors, lies, and threats of the custodians who benefit the most from a system based on fiat money and inflation.

–Every day that passes brings us closer to the day of reckoning. And that indeed is good news. But in the meantime, every day that passes also brings us one day to closer to the final failure of the current system. That’s very dangerous. And not even China can save us from that.

— The markets rallied overnight in America on a rumour that the China Investment Corporation (CIC) would somehow magically solve Italy’s debt problem. Italy has a big debt problem, by the way. Italy has €1.9 trillion in debt. Government debt is 119% of Italian GDP. And Italy is the third-largest economy in Europe.

–CIC has $409 billion in assets, about 4% of which are in cash, according to the Financial Times. That means CIC could have taken out about $16.3 billion of the $88 billion in 10-year debt Italy auctioned yesterday. By the way, you can see below that yields are rising again as Italy flails around for partners to finance its $113 billion in financing needs between now and the end of the year.

Italian Borrowing Costs Rise

Italian Borrowing Costs Rise

–In any event, China did not take out a portion of the Italian bond auction. The conventional wisdom is that China will finance Europe’s sovereign debts because it wouldn’t want its customers to fail. Europe is a large trading partner. If the vendor has to finance the customer, so be it.

–But perhaps China’s money managers are not interested in subsidising the European Welfare State. It’s just a thought. Perhaps they are more interested in the safety of their $3.2 trillion in foreign exchange reserves, or purchasing real assets instead of government bonds.

–It’s not like China holds the whip hand, either. China’s US$3.2 trillion in foreign currency reserves are a product of the globalised credit boom. Let’s put it this way: by making itself the workshop of the world, China’s export-led forex war chest is a little like a bundle of tickets accumulated playing skee ball at the carnival. You might have a lot of them, but you can only spend them on different kinds of colourful stuffed animals.

–We’ll get back to China making its own currency fully exchangeable internationally in just a minute. But here’s an important point: if you are expecting Europe’s leaders to “do something” at the last minute, you will be disappointed. Waiting for the politicians and bankers to come up with something is like waiting for a train that will never arrive at the platform. The longer you wait on the platform, the more time you waste.

–Do not wait for the right public policy. Make your own policy. The right question to ask now is not, “What will Europe do to prevent a sovereign default?” The right question is, “What are YOU going to do to prepare for when that default happens?”

–The idea that central planners can come up with the right “one size fits all” solution is exactly the idea that’s being discredited right now. Investors who understand this first will be able to figure out who the winners and losers are first as well.

–The losers are obvious: any business or institution that depends on credit expansion and inflation to generate power and profits won’t like the post-destruction monetary world. For that matter, any economy or share market that’s prosperity is derived from credit expansion and inflation would be worried too. Which brings us to today’s quiz. Please carefully examine the image below.


–The pyramid scheme above shows seven currencies and a one ounce silver bullion coin. Your editor dug them out of his office desk drawer. You’ll note each currency unit has the same number on it, a “5”. The bottom two currencies are from North America, the middle two are antipodean, the next row is Europe and Great Britain, then you have Singapore, and finally silver.

–The question is, if you could have all of your wealth denominated in one of the media of exchange above, which would it be and why? Send your answers to We’ll summarise results and report back next week with our answer too. Until then…

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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At a certain point in time if inflation and foreclosure has taken its early toll, it will go back to being land. Broad acre arable land, and high density low rent residential land. Farms and slums.

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