Monty Pelerin's World

Collapsing civilizations happen infrequently. The process, at least in the beginning, is slow and unnoticed. Even in advanced stages, most people are oblivious to what is happening. They mistake a symptom, economic hard times, with the cause, political corruption.

At some point the political leadership realizes their Ponzi scheme is nearing an end and their positions are at risk. As political fear increases, government behavior changes. Governments begin to do things that would otherwise be unacceptable, even unthinkable. These changes are rationalized as necessary for the good of society when in fact they are mainly made to protect the leadership class.

The US government has passed this point as evidenced by the heretofore unimaginable amounts of taxpayer money used to bail out banks, use of the Federal Reserve in ways never intended and an inability to accomplish even the most rudimentary tasks of government (controlling corruption, producing a budget, controlling spending, etc.).

Contracts and the law no longer seem to matter. That was apparent in the GM bankruptcy when bondholders, in a preferred position in a bankruptcy, had their rights abrogated arbitrarily so that the government could reward unions. It is further apparent in President Obama’s flaunting the Constitution by bypassing Congress. But perhaps the seminal and defining event might be the MF Global failure.

MF Global  has scared many investors, casting doubt upon our developed financial system. They are worried about whether their money is safe in brokerage houses and other financial institutions like banks. The law was violated in the MF Global situation, as explained by Mac Slavo and Barrons:

As the financial house of cards collapses around us, investors who think they are holding real assets with the claim ticket being a stock certificate, bond or even precious metal warehouse receipt better wake up.

The latest revelation from the MF Global ponzi debacle proves, yet again, that if it’s not in your possession you don’t own it. Take heed.

It’s one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well-publicized phenomenon at bankrupt MF Global. It’s something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%.That, in essence, is what’s happening to investors whose bars of silver and gold were held through accounts with MF Global.

The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold “warehouse receipts” to prove it—they’ll have to forfeit 28% of the value.

That has investors fuming. “Warehouse receipts, like gold bars, are our property, 100%,” contends John Roe, a partner in BTR Trading, a Chicago futures-trading firm. He personally lost several hundred thousand dollars in investments via MF Global; his clients lost even more. “We are a unique class, and instead, the trustee is doing a radical redistribution of property,” he says.

Roe and others point out that, unlike other MF Global customers, who held paper assets, those with warehouse receipts have claims on assets that still exist and can be readily identified.

Source: Barron’s via Yahoo

The entire paper system – from stocks to bonds – is coming unhinged. There are trillions of dollars in debt across the world, and all of it is nothing but a number on someone’s balance sheet. In essence, the majority of it exists only in the virtual world. While you may think you have claim to a physical asset in exchange for that certificate, receipt or note, what you really have is a promise from an entity that may very well be insolvent and unable to make good.

Financial institutions and brokerage houses like MF Global are just the tip of the iceberg. The accounting practices of our government are far worse, and the consequences of collapse significantly more dangerous. When MF Global collapsed, customers lost access to their precious metals and other investments. When our monetary system, predicated on the same ponzi scheme as insolvent financial companies, crashes, holder of US dollars, much like those MF Global warehouse receipts, will be wiped out in terms of purchasing power, and it will likely be a devaluation much more than just 25%.

But when that happens the holders of those notes won’t be trying to cash them in for precious metals. Rather, they will find that their paper Federal Reserve Notes will buy far less food and gas, if any at all.

We are witnessing a complete and total assault on the Constitution and the Rule of Law by corrupt politicians. The system is on the verge of collapse and they are desperate. The political elite and their cronies will do anything — ANYTHING! — to protect themselves and what they deem as their rightful spoils.

Perhaps “mattress investing” is the safest of all.

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