So What if Silver and Gold Prices Are Rigged?

They will never admit they are the problem, whether enabled the regulator, the enforcer, or one of the large public financial institutions. Weimar central bankers would not accept that their policies were the overriding problem. Rather, they believed they were responding to outside forces. Their responses only got bigger.

- from Adam Ferguson’s When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany

If people bring so much courage to this world the world has to kill them to break them, so of course it kills them. The world breaks everyone and afterward many are strong in the broken places. But those that will not break it kills. It kills the very good and the very gentle and the very brave impartially. If you are none of these you can be sure it will kill you too but there will be no special hurry.

- Ernest Hemingway, A Farewell to Arms

The dominant school of thought rests it case on the premise that no matter how direct or egregious, out in the open, or surreptitious the intervention actually is- ultimately, ‘the markets’ will prevail. This common view also emanates from the world of alternative investing, including the thought leaders in sound money.

True market value will always be expressed eventually. Fair value will and must exert itself from ‘digits on high’ all the way to the farmers’ market and the retail store.

It will not be a smooth return to equilibrium. And no one can predict details of how we arrive. However, ignoring the basic functioning along the way – for the privilege of being right is a flattery without substance.

There remains, even in the world of sound money, a willful blindness when it comes price manipulation that is summed up best with the following statement: “So what if the price is rigged?”

There are many problems with this meme.

One is that without factoring in this core intervention, a fundamental dynamic that is occurring across all markets and asset classes (but gold and silver more so), we have no way to frame or contemplate the depth of the crisis when once these mismatches beginning correcting themselves.

I know it’s a threat to the concept of a sacred universal market - a collective expression of the human consciousness, a civilized commerce that has existed for thousand of years.

But it is the cheating that veils its ultimate expression. Awareness of this allows for proper perspective and fundamental focus. It stirs the grassroots rather than fuel the sprint toward yield of any kind.

Sure, we return to the market eventually, but the journey to equilibrium will not look as pretty as these polished words.

The price disconnect very likely means a much more shocking revaluation - more panic and deeper loss. And this is paralyzing.

Most of you reading these words will eventually experience much of what is described in the following piece, by Bill Bonner.

Bonner is a true craftsman. His words are easy on the brain. He is not always polite. But too polite regarding the elephant in the room. Without acknowledging intervention on the most basic level, we are orders of magnitude off in the reality of how this will play out.

There Will Be No 25-Year Depression, by Bill Bonner

“A long depression” has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.

Good and Bad News

Today, we have bad news and good news. The good news is that there will be no 25-year recession. Nor will there be a depression that will last the rest of our lifetimes.

The bad news: It will be much worse than that.

“A long depression” has been much discussed in the financial press. Several economists are predicting many years of sluggish or negative growth. It is the obvious consequence of several overlapping trends and existing conditions.

Old People Are Dead Wood

First, people are getting older. Especially in Europe and Japan, but also in China, Russia and the U.S. As we’ve described many times, as people get older, they change.

They stop producing and begin consuming. They are no longer the dynamic innovators and eager early adopters of their youth; they become the old dogs who won’t learn new tricks.

Nor are they the green and growing timber of a healthy economy. Instead, they become dead wood. There’s nothing wrong with growing old. There’s nothing wrong with dying either, at least from a philosophical point of view. But it’s not going to increase auto sales or boost incomes – except for the undertakers.

The Cure for Debt? More Debt!

Second, most large economies are deeply in debt. The increase in debt levels began after World War II and sped up after the money system changed in 1968-71.

By 2007, U.S. consumers reached what was probably “peak debt.” That is, they couldn’t continue to borrow and spend as they had for the previous half a century.

Most of their debt was mortgage debt, and the price of housing was falling.

The Feds reacted, as they always do, inappropriately. They tried to cure a debt problem with more debt. But consumers were both unwilling and unable to borrow. Their incomes and their collateral were going down. This left corporations and government to aim only for their own toes.

Central banks created more money and credit – trillions of dollars of it. But since the household sector wasn’t borrowing, the money went into financial assets and zombie government spending.

Neither provided any significant support for wages or output. So, the real economy went soft, even as the cost of credit fell to its lowest levels in history.

In order to revive the credit creation machinery, the Fed has monetized incredible amounts of debt, via Saint Louis Federal Reserve Research. With the end of QE 3, its balance sheet has begun to subtly decline … click to enlarge.

The Cronies Are in Control

Third, the developed economies have been zombified. The U.S., for example, is way down at No. 46 on the World Bank’s list of places where it is easiest to start a new business. And only one G8 country – Canada – even makes the top 10.

Paperwork. Expenses. Regulation. High taxes. High labor rates. Entrenched competition with aging, loyal customers. All are endemic from Boston to Berlin to Beijing.

Leading industries – heavily controlled and regulated, including defense, education, health and finance – are practically arms of the government. All are protected with high barriers to entry and low expectations. Competition is barely tolerated. Innovation is discouraged. Mistakes are forgiven and reimbursed.

Meanwhile, the masses are encouraged to become zombies too, with generous rewards for those who 1) do nothing, 2) pretend to work, or 3) prevent other people from doing anything. After all the zombies, cronies and connivers get their money, there is little left for the productive economy.

The Solution Begins When Markets Crack

Typically, these problems – too much debt, too many zombies, and too many old people – lead to financial crises. Then, they are “solved” by either inflation or depression. And the solution begins when markets crack.

Markets never go up forever. Instead, they go up, down and even sideways. They breathe in and out. And after sucking in air for the last 30 years, U.S. financial assets are ready to exhale. Legendary asset manager Bill Gross comments:

“When does our credit-based financial system sputter/break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.”

When that happens, problems begin to take care of themselves in one of two ways:

A quick, sharp depression wipes out the value of credit claims. Borrowers go broke. Bonds expire worthless. Companies declare bankruptcy. The whole capital structure tends to get marked down as debts are written off and financial assets of all kinds lose their value.

Or, under pressure, the Feds print money. Debts are diminished as the currency loses its value. The zombies still get money, but it is worth less. Inflation adjustments cannot keep up with high rates of inflation. Pensions, prices and promises fade. Either way, the slate is wiped clean and a new cycle can begin. But what rag will clean the slate now? Stay tuned…

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