Discount Gold and Silver Trading
A Weekly Newsletter for Sunday, February 12th, A.D. 2012
  Between Friday, February 3rd, and Friday, February 10th, the bid prices for:

Gold fell 0.2 % from $1,725.90 to $1,722.10
Silver fell 0.2 % from $33.67 to $33.59
Platinum rose 1.9 % from $1,621 to $1,652
Palladium fell 0.9 % from $706 to $699
DJIA fell 0.4 % from 12,862.23 to 12,801.23
NASDAQ fell 0.0 % from 2,905.66 to 2,903.88
NYSE fell 0.8 % from 8,060.43 to 7,992.05
US Dollar Index fell 0.8 % from 79.34 to 78.71
Crude Oil rose 2.4 % from $97.19 to $99.49

16 - AU $5 Liberty Gold Coin - $5 Liberty coins (with motto) were produced by the millions but almost all were heavily used as currency or melted down during the gold confiscation of the 1930s. Precious few remain in AU condition. This fundamental scarcity can drive premiums higher during periods of peak demand.

$50 Face Value -90% Silver Dimes or Quarters - One of the most popular ways to invest in silver bullion is with the 90% U.S. Silver Coins. Commonly referred to as junk silver bags, this name developed in the 1970s and was used to describe a bag of average circulated silver coins, meaning no rare coins were included.?All silver coins are struck in 1964 or earlier with 90% purity. Each bag contains either all dimes, quarters.


Debtors Rule?

Edited by Alfred Adask

“The rich rule over the poor, and the borrower is servant [or slave] to the lender.”  Proverbs 22:7

The principle is ancient.  Whoever borrows money becomes a servant or slave to his creditor.   Conversely, whoever lends money becomes the master or sovereign over his debtors. 

Lenders rule.  Borrowers have little or no rights and may be as nearly helpless as slaves.  Or so it’s seemed for several thousand years.

But there’s evidence that, today, that ancient proverb may be mistaken.  Today, debtors seem far more powerful than slaves.

For example, if Proverbs 22:7 is true, how do we explain the fact that the world’s most powerful nation (the US) is also the world’s biggest debtor?  If Proverbs 22:7 is true, shouldn’t the world’s biggest debtor also be the world’s biggest servant/slave? 

More, in today’s debt-based monetary system, virtually everyone relies directly or indirectly on credit (debt).  We borrow credit from the banks to build our homes or purchase our cars.  We use credit cards to get our groceries.  We’re almost all debtors.  And yet, virtually no modern debtor regards himself as “servant” or “slave” to his creditors.

Is this evidence that Proverbs 22:7 is mistaken?  Or is there some other explanation for America’s love for debt?

•  Consider:

In A.D. 2008 “subprime” debtors stopped paying their mortgages and nearly toppled the US and global economies.  Individually, these subprime debtors were certainly not “too big [too indebted] to fail”.  But, acting simultaneously, they became “too numerous to fail”.  The world began to see that lenders were no longer the complete “master” over debtors.  If debtors could collapse the global economy, debtors had power.

Major financial institutions that were overly-indebted threatened to stop paying their debts.  Our government declared them “too big [too indebted] to fail” and supplied these debtors with billions of fiat dollars taken from creditors (taxpayers). 

Americans complained of being compelled to “bail out” our biggest debtors.  Commentators advised that bankruptcy was a natural part of capitalism and that the big, overly-indebted institutions must not be protected, but must, instead, be allowed to fail.

Nevertheless, our government protected the “too big to fail” debtors at the expense of American creditors

Most people interpreted government’s support for debtors as evidence of corruption.  But I’m beginning to see that what we witnessed was the bizarre manifestation of a new debtor-creditor relationship where, contrary to Proverbs 22:7, the lender may have become servant/slave to the debtor.

It may not be true that debtors rule.  But it is true that debtors have gained so much power that they can no longer be treated as slaves or even servants.

•  More evidence?  Here in the US, there are 6 million delinquent mortgages.  Although the bankers aren’t being repaid by these mortgagors, they appear surprisingly reluctant to foreclose.   People are being foreclosed, but slowly.

For example, I have a friend who’s retired and living on So-So Security in a modest, mortgaged home.  He hasn’t paid a dime in mortgage payments for over three years.  He doesn’t expect to get to court until next year.  By the time his home is foreclosed, he will have lived “rent free” for at least four years.  Suppose his mortgage payment was $1,000/month for a home worth roughly $100,000.  He may ultimately lose his house, but before he does, he will have saved almost half the market price of his home in unpaid mortgage payments.  His story is not unique.   Creditors are allowing debtors to live “rent free”.

President Obama has supported laws to “save the debtors” by subsidizing delinquent mortgagors. 

Major banks reached a settlement with state attorneys general to spend $26 billion to “save the debtors” by lowering the amounts due on mortgages.  In theory, two million debtors may receive subsidies that average $13,000 per mortgage.  

Creditors giving $26 billion to debtors suggests that debtors are far from being helpless servants or slaves.  Contrary to Proverbs 22:7, an argument might be made that, today, debtors rule.

•  This madness is not confined to the US.

Greece is so deeply indebted ($500 billion) that it’s now “too big (too indebted) to fail”.  Greece knows it and is exploiting its advantage.  Greece’s private creditors have “agreed” to take a 70% “haircut” (loss) on Greek government bonds.  The EU has agreed to subsidize the Greek debtor with of $173 billion.  Creditors have “voluntarily forgiven” or at least postponed the majority of the debt owed the Greek debtor.   

And—surprise, surprise—Greece recently “discovered” another $20 billion in debt that must paid by EU or bankers or somebody—to allow the Greek sovereign debtor to avoid default.  I’ll bet that if you wait for another month or two, the Greek debtor will “discover” another $20 billion (and then, perhaps, another) that its creditors must pay to allow Greece to avoid a default.

The Greek debtor is bleeding its creditors.  Creditors are cooperating in their own bleeding.  Clearly, the debtor is no longer servant/slave to the lender.

•  Has the world gone mad? 

Yes.  But it’s not a recent phenomenon.  The insanity began in A.D. 1944 when the Bretton=Woods agreement established a new, world monetary system based on the U.S. dollar. The dollar became the world reserve currency because it was “good as gold” (redeemable in gold).  The agreement to create a world reserve currency (other than gold) was idiotic.

But the madness began in A.D. 1971, when the Nixon administration stopped redeeming foreign-held dollars with gold.  The dollar became a pure fiat currency that was no longer “good as gold”.  Nevertheless, the world continued to use fiat dollars (debt instruments) as the world reserve currency. 

That was crazy. 

Once the world accepted a monetary system composed of debt-based, fiat dollars, the world became more dependent on debts than assets, more dependent on debtors (consumers) than producers, more dependent on debtors (those who had nothing but promises) than on lenders (those who had actual savings)—and Proverbs 22:7 (which applies to lending money rather than fiat currency) became irrelevant.

•  Today, the world is slowly recognizing the power of debtors in a debt-based monetary systems. 

This recognition is dangerous because the fiat dollar can only function so long as debtors still tend to operate in accord with Proverbs 22:7.  I.e., so long as the debtors feel obligated to pay their debts, our brave, new monetary system can work.  But once the debtors begin to sense their power . . . once they see that they’re no longer servants, but contenders for control of the system . . . the system will collapse.  Previously, debtors had no choice but to pay or be ruined.  Today, they have power to negotiate.

Q:  Why do today’s debtors have power over lenders? 
A:  Fractional reserve banking.

In the past, when we had money rather than fiat currency, if a man wanted to build a $100,000 house, the bank might lend him $80,000 if the man had $20,000 of his own money to invest in the house.  The bank knew that if the borrower invested $20,000 of his own money in his house, he’d do everything he could to make his payments, avoid foreclosure, and avoid losing his own $20,000.

But for most of the past 20 years, banks have made substantial loans to borrowers without compelling borrowers to provide significant “collateral” for the loan.   If the borrower needed $100,000, the bank might require him to put up just $5,000 of his own currency—and for a while, might not require the borrower to invest anything.

How can this be?  Did the world’s bankers have a religious experience and suddenly become a generation of “kinder, gentler” lenders?

Hardly.  Bidness is still bidness.

What happened is that, under fractional reserve banking, the Note—the mere piece of paper—signed by the debtor became more valuable that than the physical house that was built with the loan.  And therein lies the key to the madness.  A piece of paper—a mere promise to repay a loan—became more valuable than the actual house that was built with the loan. 

How?  The banking system devised procedures to use the borrower’s Note as collateral for other, secondary loans.  Under fractional reserve banking, a bank holding the Note might be able to lend out ten times the Note’s face value. 

For example, if you borrowed $100,000, your $100,000 Note might ultimately be used as collateral to lend another $1 million in secondary loans to new borrowers.   If the bank could charge 10% interest on the $1 million they’d loaned, the bank stood to earn $100,000 a year in interest.  For every $100,000 note the bank purchased, it might earn $100,000 per year.  That’s a potential 100% Return on Investment (ROI).  In theory, over the life of a 30-year mortgage, the debtor might pay 3 times ($300,000) for his $100,000 house, while the bankers might net $100,000 a year ($3 million) off the debtor’s Note. 

But there was one itsy-bitsy problem.  This highly profitable house of cards could collapse if the original debtor failed (or refused) to make good on his promise to repay the original debt.  If the man who originally borrowed $100,000 defaulted on his loan, his $100,000 Note would no longer be deemed collateral to justify lending another $1 million.  Once the $100,000 Note became non-performing, the bank might have to call in $1 million in secondary loans. 

And who controlled whether the Note was, or was not, non-performing? 

The debtor.  

If the debtor chose to refuse to repay $100,000, the bank might be forced to call in $1 million in loans.   If enough debtors refused to repay their $100,000 notes at the same time, the banks might be forced to call in so many secondary loans that the economy could collapse.

That’s when the debtor’s escaped the status of slaves and began to rule over—or at least compete with—the lenders.

•   So long as the number of debtors who defaulted on their loans remained fairly small, the banking system could absorb their occasional defaults and still earn a substantial ROI on the original Notes. 

But if the economy slipped into recession and the number of delinquent mortgages rose, the debtors (while not “too big to fail” individually) could become “too numerous to fail”.  In a depressed economy, the leverage of fractional reserve banking shifted huge power to the debtors.

I.e., suppose 6 million Americans each took out a $100,000 mortgage ($600 billion total).  Suppose the banks used those 6 million Notes as collateral to lend ten times as much currency ($6 trillion).  Suppose those 6 million original borrowers simultaneously defaulted on their $100,000 Notes.  The banks might be compelled to call in $6 trillion in secondary loans.  The U.S. and global economies could collapse. 

The bankers’ only defense to this catastrophe is to deny their debtor’s default.  Get that?  The lenders are denying or concealing their debtor’s failure to repay their loans.  Under Proverbs 22:7, such denial was inconceivable.  But Proverbs was based on the loan of real money—not on fiat currency and Proverbs certainly did not contemplate the 10X multiplier effect of fractional reserve banking.

So long as the homes are not officially foreclosed (my friend will live “rent free” for at least 4 years), the $100,000 home mortgage may still be deemed to be “performing” and the $1 million loaned out based on that mortgage might not have to be called in. 

The same principle applies to Greece.  So long as private creditors accept a 70% “haircut,” Greece will play along with the lie that Greece has not defaulted.  The creditors must cooperate because, if the Greek debtor expressly defaults—or if the creditors expressly declare that Greece has defaulted—on their $500 billion debt, the world economy might have to call in $5 trillion in secondary loans—thereby collapsing the EU and global economies. 

That means Zorba the Debtor has enormous potential power.  In fact, Zorba’s power may be roughly equal, perhaps superior, to that of its creditors.

Unfortunately (for bankers), the Greeks recognize their new-found power.  They understand that, as a major debtor, Greece is “too big (too indebted) to fail” and therefore Zorba the Debtor rules—or at least wields disproportionate influence over—its creditors.

•  Can Zorba the debtor escape all liability for failing to repay its debts? 

No.  Greece will suffer “austerity”.  The Greek economy will see lower wages, higher taxes, and rising unemployment as it slides into depression.  But these disabilities should be survivable.  They will be less than might otherwise be expected.  The bankers still have power to collapse the Greek economy—but they don’t dare do so since the Greeks now also have power to collapse the EU and global economies on which the bankers depend.

Thanks to fiat currency, a debt-based monetary system and fractional reserve banking, debt collection has entered an era of Mutually Assured Destruction.  The lenders can’t ruin the debtors without the debtors retaliating and ruining the lenders. 

Debtors are learning that they hold significant power over their creditors.  But it’s not a free ride.  Debtors who refuse to pay their debts will pay a price in terms of falling income and standard of living.  But so will their creditors.  

As awareness grows that debtors are no longer helpless “slaves,” many debtors will threaten to default, all debts will be renegotiated (creditors will be forced to take “haircuts”), many or most debts will never be paid in full, most creditors will lose their assets, and the entire debt-based monetary system should eventually collapse.  

•  In a debt-based monetary system, the world’s debtors hold a gun pointed directly at their creditors’ heads.  Delinquent mortgagors, “too big to fail” banks, the Greek “sovereign” and even the US government are debtors which can “pull the trigger” by expressly refusing to pay their debts.  If creditors push too hard to recover their capital, any one of these debtors could crash the US, EU and global economies.   

From the lenders’ perspective, in order to maintain the illusion that the debtors’ Notes and bonds are still valuable, “voluntarily forgiving” billions of Greek debt, refusing to aggressively foreclose on delinquent mortgages, subsidizing “too big to fail” banks, and allowing the US national debt to grow larger and larger, is simply good and necessary business. 

All debt is increasingly negotiable.  Conversely, all promises to pay are increasingly unreliable and risky.  Credit ratings must necessarily fall.

Sooner or later, any system wherein the debtor is no longer servant to the lender must collapse.

Why?  Because, under fractional reserve banking, one man’s debt is not merely another man’s asset—it can be ten other men’s assets.  If one debtor fails to pay, ten other men may go broke.  Therefore, we can’t forgive any debt without also destroying a 10X correlative asset.  As assets disappear, investing becomes increasingly difficult and the economy slides into a depression.

Proverbs 22:7 must be true.   Creditor—not debtors—must rule.  A capitalist society might survive without debtors (consumers without savings), but it can’t survive without creditors (those who have savings to invest). 

Since the dollar completely abandoned the gold standard, we’ve lived through 40 years of a fiat monetary/fractional reserve banking system wherein debtors have seemed to rule.  But sooner or later the truth will out and the debtors (like Greece or the US government) will have to expressly default on their debt obligations.  When that happens, we might expect to see a 10X loss of secondary loans.  The economy will collapse.  The principle behind Proverbs 22:7 will again be ascendant and those who have real money to lend (gold and silver) will rule over the borrowers who have nothing to offer but their promises to pay.

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