Tuesday, October 5, 2010

Scrap Metal and Paper Recyclers

By Peter Souleles:

You may find this difficult to believe, but there are over 300 million scrap metal and paper recyclers in the United States. In Japan there are over 127 million, Europe 730 million and the list goes on. The truth is that just about every human being on the planet is a scrap metal and paper recycler by virtue of his or her usage of fiat currencies.

Despite the billions of recyclers only a small percentage has actually made money in the last 10 years. They are the ones who converted their scrap into hard assets and in particular precious metals. The rest are being played for fools and the evidence is there for all to see. The majority recycled their scrap into other forms of paper called junk bonds, municipal bonds, treasuries, equities and so on. The government on the other hand also recycled the scrap paper they collected as taxes into other metal products such as tanks, jets, bombs and clunkers which inevitably also become scrap in good time.

If the onward and upward march of gold and silver prices for over a decade is not proof enough, then consider the ongoing and relentless efforts of governments the world over to devalue their currencies. What that means is that your dollar is being attacked by your own government so that it can buy less and less. Now, is that a store of value?

If currencies are truly stores of value, it begs the question as to why their owners (i.e. national governments) are intent on devaluing them.

The US is currently successfully devaluing its currency which in any case is worth zilch. The effect though, is a desperate frenzy of US dollar buying by other nations in exchange for their own currencies. So we have more dollars, less value, but an even greater number of greenback tentacles in the world's financial system. Where do they end up? Probably in short term US treasuries so as to fund more US government deficit spending at close to zero rates of interest. This might be great for some form of global monetary easing (liquidity), but of questionable benefit to solvency. Just remember that the US is more interested in the position of its dollar in the world's financial system than its value.

When President Chavez of Venezuela devalued the Bolivar against the dollar in January, the people rushed to the supermarkets and emptied the shelves of televisions and refrigerators in anticipation of inflating prices for imported goods. Once again they were only half smart because since January their refrigerators (eventual scrap metal) have lost major value while the price of gold has rocketed.

Do you want more proof?

Well in Britain the deputy governor of the Bank of England came out in the last few days and urged the country to go on a shopping spree to boost the fragile economy. The governor's name is Mr Bean. Yes that's right, Mr BEAN. This one is not the real Mr Bean, he is just an impostor who believes that the profligate spending by the Brits which got them into trouble in the first place now needs to be repeated.

There is of course some method in his madness (even though it is just madness) because it is estimated that by slamming savers he will be depriving them of £18 billion whilst putting £26 billion in the pockets of consumers. Another misguided effort at injecting an £8 billion stimulus into the economy, for which the taxpayers of Britain pay him £250,000 a year. How much of his pay will he spend? I can assure you that he will be saving more than most of us.

The government of the UK is slashing its spending to bring down its debt but encourages Brits to do the opposite despite being near record levels of mortgage and credit card debt totalling £1.456 trillion.

Dear readers the currency you hold is not a store of value. You are simply holding onto a bucket that has a hole in the bottom. Scrap metal and paper fiat should be used only for necessities, getting a real education for your kids, paying off fiat debt and buying real assets of which gold and silver are presently the safest.

If the savers of Britain want to get their message through to Mr Bean, they only need to march down to their mint and convert the bulk of their savings to gold and silver. That should work wonders in no time at all. Better still they should form their own bullion bank which is open to customer inspection unlike Fort Knox (or should it be called Fort Nix?). In fact that is what savers the world over need to do to reclaim their right to a store of value. A 347% increase in the price of gold in British pounds over the last 10 years says it all.

As reported in the British press, Mr Bean admitted the economic recovery was being hampered by what economists call the "paradox of thrift" where savings may benefit individuals but not help the economy.

What the man does not understand is that periods of idiotic profligacy MUST be followed by painful periods of thrift (i.e. deleveraging) otherwise the subsequent downturn will be a collapse. As I wrote some time ago:

"Unless this deleveraging takes place people will not be able to deleverage their life styles and this is where the crux of the problem lies. This deleveraging will cause further pain and losses, but will stop when that which is left is productive rather than seductive, deserving rather than self-serving and needed rather than wanted. This is the simple formula that should be applied at all levels."

Is Mr Bean telling us that we can lose weight by eating more even though this will lead us to further financial illness and even though an estimated 140,000 Brits become insolvent this year?

In fairness to the man, he is but one of many clueless central bankers that believe that the financial system can be detoxed with the use of more toxins just like BP is doing in the Gulf of Mexico. What do you expect from men that have only two brain cells that spend their day trying to find each other to form a synapse.

Yes, currency is valuable as a medium of exchange, but each time we exchange it for something else, that subsequent purchase or payment for services must be for something that adds value to our existence and future, otherwise we are nothing more than rats on the bankers' treadmill.

The currency attempts at devaluations we are seeing are a zero sum game that will not aid or abet the economic recovery. The only purpose they serve is for a limited number of people to make serious amounts of money as a result of volatility. You just have to remember in May this year when the Euro crisis hit, how the Euro was predicted to hit parity with the dollar. Well we now see the result of that prediction.

We have also seen the result of volatility on the world's stock markets - profit for some and disappointment for most.

For the rest of us who have no great insights into or influence over volatility, I continue to recommend gold, silver and the repayment of debt.

In the meantime, will the real Mr Bean do something about his hapless relative at the Bank of England?

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