1. EXTEND & PRETEND: A Matter of National Security
There is something seriously wrong in America. We all sense it, but few in the
mainstream media are willing to touch it or can effectively articulate it within
the public’s sound-bite oriented attention span.
It isn’t just about the remnants of the financial crisis; it isn’t the protracted
jobs recession and slow recovery; it isn’t the trillions of dollars in deficit
spending; it isn’t the degree of rampant financial malfeasants. It is something
deeper which reaches into the soul of who we are as a people and society. It
will soon be the central theme to your investment strategy and financial
security.
On the surface it might appear we have lost our optimism about the future
and our confidence that America is still the ‘beacon on the hill’ that countries around the world admire and look to
for leadership. Though our children mouth the platitudes taught by older generations, they ring hollow in the
hallways with video surveillance, motion sensors and metal detectors when recited by them. The high minded
ideals seem misplaced in unemployment lines where they stand with freshly minted advanced degrees in hand,
huge education debts and little hope other than the faint possibility of a non-paying internship position.
It isn’t that the American people have changed. Our government has changed.
Before I specifically address what this means to your
investment strategy and lay out a plan to protect your
wealth, we need to delve into the unvarnished facts of
what is happening to our quickly shifting cultural
norms and our elected representative government.
The USA was a country that was based on a true
moral compass and a belief system. Today, whether in
Detroit, Cleveland or Los Angeles, we see decay and
people who have lost their faith in America as the
place where possibilities abound and everyone can
have the American dream if he or she is willing to
work for it. Today many in pursuit of that dream are
working three jobs with no benefits and no longer
getting by as they fall further into the grips of the
lending shylocks. People, who perceive themselves as
middle class, no longer have retirement plans like
their parents, they are working longer hours to assist
with their children’s horrendous college costs and are
forced out of necessity to support their gown-up
children long past ages which previous generations
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2. experienced. Political slogans of “hope” and “change” touch cords with everyone but are hastily forgotten the
moment the ballot is cast. Voters feel abandoned, betrayed and isolated from the political apparatus. Barrack
Obama’s election evidenced both the desperation people have for anyone who is perceived to offer change and how
quickly we are subsequently disappointed in their obvious empty political rhetoric. It seems it is all just great
theater aimed at making us feel we actually have some choice in a carefully crafted choreography.
Unknowingly we are steadily marching towards a political crisis that will embody a currency crisis across the entire
global fiat based money system. This crisis will force us as citizens to make choices about our personal freedoms
that we would be startled to even contemplate today and ten years ago would have been viewed as heresy.
We are steadily marching towards a political crisis that will embody a currency crisis across
the entire global fiat based money system.
This article will bridge the Economic to Political Transition Shown Above
Our leaders have become propaganda machines promising change but delivering the lobbyists’ agenda which
appears to make matters only worse. Every election, waves of our well intentioned fellow citizens go to Washington
with high hopes of making a difference, but are quickly ground into submission by an unscrupulous culture of
power, influence and compromise. The few who maintain their convictions are quickly neutralized and removed like
an ugly infection by the party apparatus. So what is to be done?
First we need to recognize the real problem, not what the media spin machine purports the problems to be. We
need to realize that we are in an era of trading personal freedom for what is economic freedom or touted as
national security. Like slavery we are succumbing to a sacrifice of our liberty for the basic primeval needs of safety
and survival. Few recognize the insidious cancer other than possible slave masters behind the curtain.
We are in an era of trading personal freedom for what is economic freedom or
touted as national security.
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3. Many of you will no doubt think this harsh. Consider
the personal freedoms we have surrendered in the last
decade, for what we are sold with high pressure tactics,
as increased personal security and labeled a matter of
national security on our war on terror:
• Personal surveillance has become ubiquitous
due to the fear of terrorism as represented by:
surveillance cameras, metal detectors,
security guards in every public and even
private gathering place.
• Borders are tighter, money movement is
tighter and government reporting
requirements on movement has increased.
• Regulations, fees and taxes have exploded
at all levels of government while basic
public services are reduced.
• Personal Information under the Patriot Act
has made available unlimited amounts of
personal information to the government’s
watchful eye. There is no longer any
privacy from the government.
• A more than one $T annual military budget
(including an off-budget sheet war) is spent
to enforce police activities in over 130
countries yet we can’t implement a ‘half
baked’ response to an oil spill on our own
shores or assist our own citizens in the wake
of a devastating hurricane. These are
complete government failures to actually
deliver the national security we have
entrusted to them.
GOVERNMENT EXPANSION
This is not meant to be a political tirade or a
commentary on the war on terror. I am not passing
judgment on the need for any of the above. I am only
stating the facts so we recognize the insidious change
that is occurring around us.
My interest in politics in this discussion is limited to
what it means to our investment strategy. I therefore
have no political agenda in how I see things unfolding
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4. nor am I a conspiracy buff. I am a realist without a political agenda to sell. I simply want to survive and give to the
next generation a better, safer and freer world than I was born into. Shorter term I want to accumulate and protect
my wealth.
I need to spell this out so you understand that I am not trying to favor a Democrat, Republican or Libertarian
agenda. To me they are all guilty of ‘political fiddling while Rome burns’. Soon politics as usual for Washington and
them will be over as the blunt force of reality hits home in America.
Fuzzy words and happy face economics will soon be wasted on the public wanting real solutions to real problems,
not idealistic philosophies on how to fix the problems in some far off land they watch on the evening news. The
public wants ‘meat and potato’ solutions to problems of retirement, healthcare, education, taxation, housing etc.
These demands expectantly escalate when standards of living fall and unrealistic expectations and senses of
entitlement are crushed. This is part of the transitioning America is in the process of presently.
Demands expectantly escalate when standards of living fall and unrealistic expectations and
senses of entitlement are crushed.
I want to give you a detailed framework with which to measure what is happening. Armed with this framework, I
then want to show you what it means to your future financial strategy and planning.
COLLECTIVISM
In The Road to Serfdom, F.A. Hayek showed how governments, supported by a collectivist mindset, always tend
towards totalitarianism. Even the most libertarian government thus far created, the government of the United
States, has slipped incrementally towards totalitarianism over the past two centuries. This is because it is an
inherent trait of a government. (1)
The degree of socialism in the United States increased substantially after the establishment of the Federal Reserve
System (1913) and the measures taken during the Great Depression (1929-46) which it created. Ever since the
early 1900's the United States has had a two-party system dominated by ‘socialists’. The Republican Party has
always advocated conservative socialism. The Democratic Party, which in the 19th century favored libertarianism,
advocates social-democratic socialism. So long as people are divided by Left and Right, Democratic and
Republican, the US is prone to being influenced by factions who transcend party politics and from behind the
scenes could possible exert strong control over the United States. They could do this by maintaining power over
public opinion and hence over the course of government. Steadily, the United States has been traveling down the
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5. road to totalitarianism, and many people have
not noticed, possibly because they are only
looking at the position on the Left-Right
paradigm.
Upon further analysis, it is clear that Left,
Right, and Centre, are all forms of
socialism.(1) In particular, we may call them
“social-democratic socialism” (the Left) and
“conservative socialism” (the Right). They are
both socialism because they both share the
principle that the government should “run” and
“mould” society, by using legal force and
intervention to transfer property and personal
wealth as part of the political scientists’
process of ‘redistribution of wealth’.
The differences are only in the particular ways
the government should run society – the
methods it should use, and who, exactly,
should be the recipients of government wealth
transfers and who should pay. In particular:
• Social democrats tend to prefer heavy taxation, large wealth transfers to the poor, and nationalized
industries, and oppose price controls, regulations and behavioral controls.
• Conservatives tend to prefer lower taxation, a smaller welfare state, regulated (cartelized) industries,
price controls, product controls and behavioral controls.
The modern Republican Party is Center-Right on the Left-Right paradigm. As with the Democratic Party, this
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6. obscures the huge range of views
Republicans hold on how powerful and
how much control the State should be
allowed. Their 2008 presidential
nominee John McCain, like Barack
Obama, strongly favored socialism,
though with a Right-wing flavors.
Barack Obama (blue circle) and John
McCain (red circle) are positioned in
the accompanying graphic. Thus, the
two main candidates at the 2008
Presidential election represented a
false choice - really no choice at all.
One candidate, Ron Paul (yellow
circle), stood in stark contrast to the
candidates favored by the mainstream media and political establishment. As would be expected he was neutralized
by the mainstream media outlets as a zealot with an unsound political view of America.
WHAT IT MEANS TO YOUR FINANCIAL STRATEGY & PLANNING
It is almost indisputable that as future events unfold, the US government will become larger, more controlling and
more interventionist. It will exert more power over ever increasing levels of our personal decision making. This will
include our investment choices, which will be increasingly represented and framed as what is in the best interest of
the state and national security. They will increasingly be policed by taxation, regulatory reporting and predatory
restrictions on available options that were previously available.
The following graphic from the Sultans of Swap and Extend & Pretend series of articles is an exploded view of the
short term transitional process we are presently within. I have labeled the transition into three states: A, B and C.
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7. TIPPING POINTS
Anticipating government policy and legislative initiatives is no longer the sole domain of those playing the
Regulatory Arbitrage game and professional fund managers. It is becoming central to all investors as a more
‘totalitarian’ federal government continues to evolve.
A – EXIT FROM ECONOMIC CRISIS STAGE
• Commercial Real Estate – Finally forced to account properly for mark-to market valuations.
• Housing Real Estate – Option ARMS come due and FHA / FNM / FDE / FDIC are seen as insolvent.
• Corporate Bankruptcies – Unfunded Pension impacts and debt loads (gearing) on reduced revenues.
• State, City & Local Government Financial Implosion – Non Accrued Pension Obligations, falling tax revenue
and years of accounting gimmicks come home to roost.
• Central & Eastern Europe – The ‘sub-prime’ of Europe will soon erupt on the EU banking network as
evidence recently by Hungary and the Baltic States.
TRANSITION:
HIGHER INTEREST RATES
Significantly Increasing Interest Rates – A Major Global News Focus
A $5T Quantitative Easing (QE) Emergency Action Undertaken
It will likely be triggered by a geo-political event or false flag operation.
B – ENTER POLITICAL CRISIS STAGE
• Entitlement Crisis - The unfunded and underfunded Pension charade ends
• Credit Contraction II – Credit Shrinks Violently
• Banking Crisis II – Banking Insolvency no longer able to be hidden through Extend & Pretend.
• Reduced Rating Levels - Falling Asset Values and Collateral Calls on $430T Interest Rate Swaps
• Government Back Stopped Programs - FHA, Fannie Mae, Freddie MA, FDIC go bust
C - HITTING ‘MATURITY WALL’ STAGE
• Lending ‘Roll-Over’ – Game Ends
These and a more detailed list are all rigorously tracked on a daily basis at TIPPING POINTS to ensure
you can adjust your portfolio and asset allocation on a timely fashion.
UNFOLDING EVENTS: Sign Posts and Tell-Tales
You must be alert and carefully watch for these tell-tale signals in the not too distant future.
LEGISLATIVE REGULATION
NEW PUBLIC POLICY INITIATIVES TARGET POLITICAL EXCUSES
Must hold government Debt Instruments (Bonds, Bills, Notes) Banks ‘LIQUIDITY’
Must hold government Debt Instruments (Bonds, Bills, Notes) Pensions ‘SAFETY’
Restrictions on IRA, 401K (Investments & Withdrawal)
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8. Caps on Private Interest Rates – Ceilings Lenders ‘USURY’
Capital and Exchange Controls Investors ‘SPECULATION’ [Escape]
HOW TO PROTECT YOURSELF
In EXTEND & PRETEND: A Guide to the Road Ahead I stated:
“Hard assets such as physical gold and silver have traditionally been the ideal vehicle for an environment
of high inflation coupled with a currency crisis. I fully expect governments will strip these assets from
holders either directly or through predatory taxation, fees or other trading limitations. They will be
classified somewhere in the four categories discussed above. Alternatively, if it is not done in this fashion
it will be controlled through intervention similar to national currencies in the forex arena. I personally
suspect it is already being controlled in some fashion based on the March 25th whistleblower testimony by
Andrew Maguire. It is a matter of national security in a beggar-thy-neighbor environment since gold and
silver are the only real money in a fiat based system. Protect yourself accordingly.”
Let me expand on that further but I would suggest you also consider the following gold / silver discussion as a
model for all of your present investment choices.
GOLD & SILVER
1- I would fully expect to see a ‘black market’ in gold IF the government goes the route of confiscation. This
would therefore favor smaller denominated physical assets such as coins and possibly smaller bars. I am
skeptical that the government will choose this route since there is too much precedence for black markets
appearing.
2- Predatory taxation is the highest probability as the government choice since it already has the
mechanisms in place to police such an approach. Therefore offshore holding such as “Gold Money” where
the physical gold is easily moved and converted seems appropriate. Unfortunately this is as regulations
presently stand. The G20 countries are all in this together and they are very much now focused on ‘tax
haven’ countries that would harbor these and other taxable holdings. Government will make it illegal not
to report these holdings and when you move them you will have a great deal of difficulties, plus possible
felony issues.
3- China is advising its citizens to own gold. In India, owning gold is a way of life. Therefore it is highly
unlikely that all countries will act in a predatory fashion towards gold. The problem here is they still may
make it illegal or difficult for foreigners to actually hold gold in their countries as an appeasement to other
nations. You may be all right until they are forced to make concessions to external pressures.
I could go on with other gold / silver holding options but I find they can all be made extremely difficult if
governments choose to target them.
The answer to me is therefore ‘PLANNED VIGILANCE’ under the auspices of a clearly predetermined ‘DECISION
TREE’. Let me explain what I mean by this terminology.
Don’t try and outguess what the government is going to do. Since the government has only so many options, you
can put together a ‘decision tree’ of alternatives in advance. Knowing this you can watch government activities
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9. closely for signals and shifts. Legislative and regulatory actions are usually well telegraphed. Large professional
fund managers have known this and executed such strategies for years. It is now a strategic imperative for all
investors.
If you have proportioned your gold investments in advance based on the probabilities on your decision tree ( i.e. so
much in coins because the probability of a confiscation is say 15%) then you would shift your ALLOCATION as
events unfold. The trick will be to stick to your strategy and not to be lulled by the spin that will accompany
government actions. You can fully expect it to be camouflaged or misrepresented but not hidden.
The trick will be to stick to your strategy and not to be lulled by the spin that will
accompany government actions
So how does this strategy actually protect you over the long term? The fact is government legislation and
regulation is often ripe with loopholes. Either intentional or mistaken it is the world where accountants, tax
advisors and lawyers live. You can be assured that new options for your decision tree will emerge if you are vigilant
and know this is integral to your long term investment strategy. Welcome to the 21st century of investment
management.
THIS APPROACH CAN BE FOLLOWED THROUGHOUT YOU PORTFOLIO AS GOVERNMENT CONTROL IS INCREASED
AND THE WORLD OF PROFESSIONAL CAPITAL AND REGULATORY ARBITRAGE ACCELERATES
Upcoming in the Extend & Pretend series will be the Decision Tree for Gold (Decision Tree sign-up) along with a
Tipping Points overlay map (Overlay Map sign-up) to track critical unfolding developments.
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