Why Do Investors Tolerate It; Gold And Silver Report

For the first time since we began publishing this Report, it is a day late. We apologize. Keith has just returned Saturday from two months on the road.

Unlike the rest of the world, we define inflation as monetary counterfeiting. We do not put the emphasis on quantity (and the dollar is not money, it’s a currency). We focus on the quality. An awful lot of our monetary counterfeiting occurs to fuel consumption spending. And much of this, certainly a very visible part of it, is government borrowing to pay for the welfare state that is not supported by taxation.

There are four components to our definition of legitimate credit:

  1. The lender knows that he is lending
  2. The lender agrees to lend
  3. The borrower has the means to repay
  4. The borrower has the intent to repay

It is counterfeit credit, if one or more of these criteria are breached.

If the government cannot pay current expenses out of tax revenues, then obviously it can never amortize its debt. So this shows the Treasury bond itself to be counterfeit credit. But let’s consider the dollar.

The funny thing about the dollar, it is universally regarded to be money. This is no mere dispute over definitions or semantics. It means that people who hold dollars deny being lenders! They do not believe and would not agree if you told them that they are creditors, financing profligate welfare-state spending. The dollar is base money, end of story. Well perhaps not end of story, if push comes to shove. Yeah, the Fed accounts for it as a liability but since it’s not repayable, it’s not really a liability. And so on.

So the lenders cannot know that they are lending, as a definition neatly forecloses on this knowledge. Or admitting to having this knowledge.

Anyways, borrowing to finance welfare spending is covered under #3. Let’s consider a different case. It is when corporations sell a bond to finance a capital asset. Perhaps they are acquiring a profitable company. Or maybe they are building a new plant.

Corporate bonds today are often non-amortizing. They pay interest only, with a balloon payment at the end to return the principle. How do they plan to pay? Either they must sell more shares (raise equity), or else they must sell another bond to repay the first bond.

Obviously, this exposes investors to the risk that the market will not let the company sell equity or debt at the time when the bond matures. From where we sit today, after nearly a decade of endless bidding up of assets, this seems a remote risk. But 10 years ago, the market was closed and many companies were forced into bankruptcy as they were unable to pay debts when due. Including the acquirer of Keith’s previous company, Nortel Networks.

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