Inflation, Shortages and Starvation

In the last six months many important events have transpired. The credit crisis intensified with CIT, Dubai and looming sovereign defaults. Commercial real estate is still frozen and about $600B needs to be refinanced during 2010. Massive fraud is being revealed on a grand scale such as with the 2,000+ page report on Lehman brothers. Greece is holding the Euro-zone hostage while Russia, as usual, most likely mass executed their political opposition. The spread between 2 and 10 year Treasuries has been getting omnious at highs not seen since the early 1980’s. Haiti and Chile rocked out. Civil unrest is increasing throughout the world from Bangkok to Paris. And to cap it off the CFTC gold and silver hearings led to some amazing convergence of opinions between Mr. Jeffrey Christian and GATA.

Jeffrey Christian’s Dangerous Idioicy

Zero Hedge did an excellent analysis of Jeffery Christian’s interview on Financial Sense Newshour. Because Whiskey & Gunpowder recently featured my article “Survivalism in the Suburbs” and it stirred up some good discussion I thought I would hone in on some of Christian’s comments that have been lost in the kerfuffle.

Mr. Christian said, “If you look at fishes and loaves of bread, the ratio of derivatives transactions to physical underlying it’s 5 to 1; if you look at aluminum or copper it is about 15 to 1.” During his CFTC testimony he downplayed the implications of shortages, “Another thing is that there are any number of mechanisms allowing for cash settlements”.

Cash Settlements and Empty Bellies

Using Mr. Christian’s logic about always being able to use cash settlements instead of delivery is ludicrous. How helpful is cash settlement of commodities for the people in Haiti and Chile? But then again, Mr. Christian is from Goldman Sachs and their CEO thinks they are ‘doing God’s work’. But last I checked while one can eat cash, like they can eat gold, neither are very nutritious.

Government deficits are generally funded by inflation. Inflation is used as a weak excuse for ineffective price controls. Price controls lead to shortages. These artificial, yet real, shortages lead to rationing. If shortages are too acute and in this case if the Federal Reserve is unable to turn their colored coupons or derivatives into actual physical loaves and fishes, like Jesus did, then the shortages can and will lead to starvation and death.

The attempt by government to disable the chief numeraire to mask the effects of inflation indirectly acts as a price control on all goods and services; particularly raw materials such as commodities which should be viewed as competing currencies. This treasonous policy is fraught with tremendous societal risk. While no one knows precisely how it will play out; my gold chips are on the outcome that it will not end well.

GATA warned about this in the WSJ advertisement:

The objective of this manipulation is to conceal the mismanagement of the U.S. dollar so that it might retain its function as the world’s reserve currency. But to suppress the price of gold is to disable the barometer of the international financial system so that all markets may be more easily manipulated. This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world.

A Life Hedge

As a basic life hedge I recommend a three month supply of food and a 72 hour kit. These will provide protection against the vast majority of probable scenarios. Just to be clear, for the extremely dense ones, I recommend taking physical possession of the food and not relying on another institution who engages in fractional reserve food storage at a 100:1 or even 5:1 ratio. When I am hungry I do not appreciate a waiter’s promise of cash settlement instead of my giant steak.

For the truly risk averse who want to ensure the safety of their family then what is the 72 hour kit for? To get somewhere else; like a cabin…or for the lazy and social: La Estancia De Cafayate. As with everything just weigh the risk and probability, perform your value calculation and implement your decision. We all have different risk preferences; for example some people want meteorite insurance but I do not.


The entire worldwide financial and economic system is a Ponzi scam and will evaporate. No one knows how this will play out but those who are farsighted and understand the Austrian school of economics know this is extremely serious. I was in Chile a few weeks before the massive earthquake. Upon small hinges the wide arc of our lives turn.

The massive imbalances in the gold and silver markets and the entire worldwide economy will not be quickly corrected nor easily played for profit. Too many adhere to the cult of government for that to happen quickly and without too much disruption. But “Daybreakers” is a good primer so simply be prepared with every needful thing. Tell me, what do you think?

Disclosures: Long physical gold, silver and platinum with no interest in the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.

Trace Mayer,
for Whiskey & Gunpowder

April 13, 2010

The Daily Reckoning