A scary prediction for the collapse of paper money

NEIL REYNOLDS | Columnist profile

What should U.S. Federal Reserve chairman Ben Bernanke do next? London-based economist Detlev Schlichter says, succinctly: “Abdicate.” What should U.S. President Barack Obama do next? Mr. Schlichter says, succinctly: “Abdicate.” With Mr. Schlichter, you aren’t left with much doubt about his position. He says the world’s major currencies are destined to crash. “The dollar, the euro and the yen are locked in a race to the bottom,” he writes on his website, papermoneycollapse.com. The only question is which one crashes first.

Mr. Schlichter argues that we are only part of the way through the market meltdown – and that the worst is still to come. How much worse? Considerably worse, he says, than the Great Depression.
U.S. industrial production is 12 times higher now than it was in 1929, he says; but the amount of U.S. dollars in circulation is 200 times higher.

The U.S. net debt was 150 per cent of GDP in 1973, when then-president Richard Nixon took the country off the gold standard; yet its net debt reached a record high in 2010: 370 per cent. The United States will fall further, Mr. Schlichter insists, because it has further to fall.

Mr. Schlichter is the German-born, British-based author of a provocative and disturbing new book, Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown. An investment manager with JPMorgan, Merrill Lynch and Western Asset Management for 20 years, he quit to write his stern warning of an impending dollar doom.

From his own melancholy perspective, he thinks the crisis will come a little later on – because, he says, the central banks still imagine that they can keep the printing presses running indefinitely. The longer the presses run, Mr. Schlichter says, the more calamitous the crash. And Mr. Bernanke has hardly begun.

Mr. Schlichter recalls Mr. Bernanke’s famous assertion in 2002 that, with the world’s largest printing press, the Federal Reserve can produce “as many dollars as it wishes at essentially no cost.” Mr. Schlichter says: “Within the logic of the present system, the next step [by central banks] must involve the use of the printing press to fund further state expenditures, to fund corporate spending and, ultimately, to fund consumer spending.” In other words, the central banks won’t stop printing money until they’ve quantitatively eased people’s car loans and people’s credit cards.

Mr. Schlichter’s analysis rests on an Austrian-school interpretation of things. (“There is no means of avoiding the final collapse of a boom brought about by credit expansion,” Ludwig von Mises wrote in 1949 in Human Action. “The alternative is only whether the crisis should come sooner ... or later as a final and total catastrophe of the currency system involved.”) The essential premise of the Austrians is that paper dollars get depreciated, sooner or later, “to a dime a dozen.”

Paper Money Collapse traces the history of paper currencies that weren’t at least partly guaranteed by a fixed-quantity commodity (which, for all practical purposes, means silver or gold). The Chinese invented paper and ink in the year 1000, Mr. Schlichter notes – discoveries that led quickly to paper money. He tracks China’s paper money through a number of dynasties. His conclusion: All of these experiments ended with worthless currencies. The Chinese abandoned paper money in 1500 (returning to it, under Western influence, in the 1800s).

Paper currency, he says, hasn’t fared any better in the West. He defines hyperinflation as a monthly rise in consumer prices of 50 per cent or more; the 20th century, he says, witnessed 29 such hyperinflations involving “elastic money.” Mr. Schlichter thinks that the collapse of U.S., European and Japanese currencies will be the worst in history. It will be a collapse “of epic proportions.”

Mr. Schlichter does not recommend an investment strategy for “the coming monetary breakdown.” And gold, he insists, should not be regarded as an investment. Gold, rather, is simply money, a medium of exchange – and the most successful form of it in history. But the cash in your pocket doesn’t pay interest or dividends and the gold in your pocket doesn’t, either.

“A collapse of paper money will be a momentous event,” he writes. “It will produce a transfer of wealth of historic proportions.” But it does not mean the end of civilization. All wealth is not illusion. And real wealth will survive.

Obama Mistakenly Refers to Hawaii as 'Asia' During Summit

It's hard to mistake that Hawaiian scenery.

But President Obama apparently forgot where he was during his press conference Sunday on the outskirts of Honolulu -- despite being born there.

The president mistakenly described his location as "Asia" while answering a question about budget cuts.

"When I meet with world leaders, what's striking -- whether it's in Europe or here in Asia -- the kinds of fundamental reforms and changes, both on the revenue side and the public pension side, that other countries are having to make are so much more significant than what we need to do in order to get our books in order," Obama said.

Obama understandably had Asia on the mind, as his press conference came in the middle of the U.S. hosting the Asia-Pacific Economic Cooperation summit, where representatives from many Asian countries were in attendance.

And, hey, Hawaii is a latecomer, having only been a state since 1959.

Technically, Hawaii isn't in Asia, but neither is it geographically fixed to North America. Because it's a chain of islands, belonging to Polynesia, it is not part of any continent. Politically, however, Congress made sure the 50th state had its own star on the blue field of the U.S. flag representing the Union.

Hawaii is also Obama's birthplace, a fact the president has hammered since the campaign in the face of debunked claims that he wasn't actually born on U.S. soil. The president even referenced Hawaii as his birthplace the day before, reportedly making a crack about those conspiracy theories.

Obama set out Tuesday from Hawaii to Australia. After that, he'll land in Indonesia, which unlike Hawaii is part of Asia proper.

But Obama said Monday he'll try to return to Asia -- er, Hawaii -- for his Christmas and New Year's holiday, according to the Hawaii Reporter.

Iran will have five nukes by April 2012. Only 2-3 months left for military option

DEBKAfile Exclusive Report

According to the briefing given to a closed meeting of Jewish leaders in New York Sunday, Nov. 13, the window of opportunity for stopping Iran attaining a nuclear weapon is closing fast, debkafile's sources report. It will shut down altogether after late March 2012. The intelligence reaching US President Barak Obama is that by April, Iran will already have five nuclear bombs or warheads and military action then would generate a dangerous level of radioactive contamination across the Gulf region, the main source of the world's energy.

Sunday, too, President Barack Obama said the sanctions against Iran had taken an "enormous bite" out of its economy. He also said that the "US is united with Russian and Chinese leaders in ensuring Iran does not develop an atomic weapon and unleash an arms race across the Middle East."

He spoke after talking to Russian President Dmitry Medvedev and Chinese President Hu Jintao at the Asian Pacific Economic Cooperation summit in Hawaii about the new evidence submitted by the International Atomic Energy Agency that Iran was engaged in clandestine efforts to build a bomb.

He said both shared the goal of keeping a bomb out of Iran's hands.

As to sanctions, Russian Foreign Minister Sergey Lavrov told a news conference that sanctions against Iran had been exhausted and "now the problem should be solved though diplomatic channels."

debkafile's analysts note that tough sanctions are pretty much off the table now. In any case, it is obvious that they failed to slow down Iran's work on a bomb as confirmed by the latest IAEA report.
The road of diplomacy, favored by Moscow, has proved worse than ineffectual. Its only result was to buy time for Tehran to carry on with its military atomic project free of international pressure.

Obama went on to say Sunday that, while his strong preference was to resolve the Iran issue diplomatically, "We are not taking any options off the table. Iran with nuclear weapons would pose a threat not only to the region but also to the United States."

This was the first time the US president had called a nuclear-armed Iran a threat to the United States. Until now, official statements limited the threat to "America's regional interests and influence."

The Jewish leaders meeting Sunday were informed that the Obama administration had intelligence data that the US and Israel have no more than a couple of months left for striking down Iran's military weapons development by force. This will not longer be viable after Iran is armed with five nuclear bombs or warheads.

debkafile's military and intelligence sources refute the wild rumors alleging that the American CIA or Israeli Mossad was responsible for the massive explosion Saturday at a Revolutionary Guards base west of Tehran in which Iran's missile chief Brig. Hassan Moghadam was killed.

While both organizations have formidable capabilities which Iran has experienced in the past, there is no way -  even with a UAV - they could have hit a single missile warhead in the middle of a Guards base at the very moment that IRGC chiefs were gathered around considering how best to improve its precision.

All the evidence garnered in the two days since the attack indicates that a single warhead blew up by accident while it was being handled,  rather than by sabotage.

Nicolas Sarkozy sends letter of condolence to Benjamin Netanyahu following 'liar' dig

Nicolas Sarkozy sent a letter of condolence to Benjamin Netanyahu, the Israeli premier, after having reportedly called him a "liar", according to a senior Israeli official.

Mr Sarkozy, the French president, suffered embarrassment last week when he reportedly made the remarks to US President Barack Obama during the G20 summit in Cannes.

The conversation was overheard by a number of journalists after it was inadvertently transmitted over a system used for translation, media website Arret Sur Images reported.

"I can't stand him anymore, he's a liar," Mr Sarkozy was heard to say in French.

The Israeli official said: "President (Nicolas) Sarkozy sent a personal letter in his and his wife Carla's name in which he expresses his condolences to Prime Minister Benjamin Netanyahu and his spouse Sarah after the death of the latter's father.

"In the letter, Mr Sarkozy reminds the prime minister of his friendship and underlines that their differences over the problems of the Middle East, which the press echoed recently, do not have an impact on this friendship," said the official.

 The Israeli government declined to comment.

In Paris, the Elysee confirmed that a "private" letter had been sent, but refused to disclose its contents.

Meanwhile Israeli Cabinet ministers decided on Monday to hold on to some $100m in taxes owed to the Palestinians, despite warnings from the defence ministry that the measure could threaten the stability of the Palestinian government in the West Bank.

Israel stopped transfer of tax funds as punishment for the Palestinian's successful bid for admission to the United Nations' cultural agency UNESCO, which was part of a larger effort to gain admission as a state in the world body.

Israel believes creation of a Palestinian state must be achieved through negotiations and charges that the UN bid is one of a series of steps to bring unwarranted pressure on the Jewish state.

Israeli defence officials have said funding cutoffs threaten Abbas' moderate Palestinian Authority, which employs tens of thousands of people, including security forces whose work at preventing attacks on Israelis has won praise from Israel and the United States in the past.

In accordance with interim peace deals, Israel collects customs, border and some income taxes on behalf of the Palestinians and relays them monthly to their West Bank government. The transfers were suspended on Nov. 3 in reaction to the UNESCO admission.

The statehood bid has stalled, as the Palestinians have been unable to muster the required support of nine of the Security Council's 15 members. That leaves the Palestinians with an option of seeking a lesser upgrade to non-member observer state.

Israel, backed by the US, opposed the statehood bid and suspended funding for UNESCO after it admitted the Palestinians.

Major world economies 'on course for slowdown'

None of the world's major economies will escape a slowdown, the Organisation for Economic Co-operation and Development has warned.

By Angela Monaghan, Economics correspondent

OECD data designed to anticipate turning points in economic activity suggested that signs of a faltering recovery were increasing across the board.

The OECD's monthly composite leading indicators (CLIs) index fell to 100.4 for the OECD area, from 100.9 in August, where 100 represents the long-term trend of economic activity. Among the G7 countries the index fell to 100.6 from 101.1.

"Compared to last month's assessment, the CLIs point more strongly to slowdowns in all major economies," the OECD said.

The eurozone fell to 99.1 in September from 99.9, and the UK was also worse off, falling to 99 in September from 99.8 in August.

It was the seventh successive monthly fall for the UK, and at below 100, suggested the economy has fallen below long-term trend levels.

"The further deterioration in the OECD leading indictor in September clearly ties in with mounting concern that the UK could be heading back into recession," said Howard Archer, economist at IHS Global Insight.

A poll by ComRes on ITV News showed two thirds of the British public believe the UK is on course for another recession.