Internet Erodes Faith in Western Economies
By Staff News & Analysis - May 06, 2010

Bill Gross, the manager of the world's biggest bond fund and co-chief investment officer at Pimco, gives the credit rating agencies Moody's and Standard & Poor's another good hiding in his monthly commentary out Wednesday. He says investors should ignore their ratings, because the agencies have shown little intelligence or common sense in recent years. The comments come as the agencies are coming under fire for their role in the subprime crisis as well as a bubbling crisis in Europe, where downgrades of several financially stressed Southern European nations have sent markets tumbling. Gross writes that the rating agencies have managed to escape scrutiny despite their leading role in enabling Wall Street to peddle junk to investors around the globe. The firms, despite a glaring conflict of interest, slapped their supposedly gold-plated triple-A rating on all sorts of housing-related dross ginned up by investment banks – all in the name of expanding their lucrative fee streams. Gross, calling this arrangement "sordid" and "nonsensical," notes that his colleague Paul McCulley likens the rating agencies to the guy who hands out fake ID's at a drinking party. And as drunk as the ratings agencies acted in the housing bubble were, this was hardly the first time, he adds. "Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past," Gross writes, "and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors." – Wall Street Blog/Fortune

Dominant Social Theme: The system must be rationalized!

Free-Market Analysis: Ripples of information and anger spread. Blogs rant about fundamental economic building blocks (see above) and contrarian news aggregators provide information to millions. We wrote an article some time ago that said the incredible bailouts that took place in front of average Western citizens had removed the moral authority of Western governance. The average American or European seeing (and reading about) the "money" doled out to banks and financial institutions to "save the system" was provided an object lesson in unfairness.

Click here to read article: Have the Immoral Actions of Central Bankers Precipitated the Decline of the West?

The same process is at work with the rating agencies. People (average people, not just Gross), scratching their collective heads, wonder why ratings agencies (both financial and consumer) have such clout over their lives when some of the same agencies have entirely misread the larger economic scene. By itself, it may not seem like much. But we believe the entire edifice of trust and awe that the powers-that-be has inculcated regarding the monetary system is eroding. People have seen for themselves that the system is not a fair one and is in fact manipulated.

This is not a quick process, but it is one that has ramifications. Like a rock thrown into a pond, the electronic ripples widen. The process is quiet and personal. People receive their monthly bills. And then they sit and ponder. They read the increasingly frantic mainstream reports extolling an economic bounce-back in the US and Britain, but they don't feel it and they don't see it. Their bank accounts are low, their pension plans are shattered and they live in fear that their jobs will be the ones terminated next.

They turn to the Internet. For the Internet is the rock that has been tossed in the pond. The Internet itself has circumvented the explanations of the power elite. Their promotions have been overwhelmed by the quiet, relentless, unstoppable, spreading phosphorescence of Internet communication. The American government was worried about revolution during the Depression. But the Internet's messaging has made this financial crisis inexorably worse for those who want to retain the current system.

Of course, if the system itself were healthy, it would be a different story. But the Western fiat money system virtually collapsed several years ago. There have been plenty of attempts to resuscitate it by printing money (from nothing). But when you have poured trillions of unbacked paper-ticker markers into an economic system you may end up with such tremendous distortions that the economy itself simply cannot respond anymore.

We think that's where we are now. The distortions run all the way through the system, from the unabated banking bubble (lovingly tended to by central banks that will salvage their distribution system no matter what) to the industrial economy that has been pushed deliberately by lending and regulatory policies toward ludicrous green industries, to "sovereign entities" themselves, failed states that have promised citizens fantastic benefits that are unrealizable. This is what happens when you print money from nothing. After a while the marketplace asserts itself.

Lately, we have been reading that the American economy is starting to grow aggressively once again, and Britain's too. But we also read that the entire Southern hemisphere of Europe is essentially bankrupt (along, actually, with Britain) and that Chinese inflation (which we have written about in the past) has not been tamed by aggressive government action. We don't see this "recovery." The hard-money bull market has at least another several years to travel. The paper that central banks have injected into the marketplace has yet to turn into price inflation. The blow-off has hardly begun.

We will go out on a limb and make a prediction that this bear market in fiat money is unlike any other of the past one hundred years. It may be so bad that there is no coming back from it. We've written in the past that we believe it possible that a new monetary system could emerge from the shattered shards of the current one. We continue to think it is certainly possible.

What's going on is part of a cycle. But the damage to the current fiat money system has been devastating. And from the Bell's point of view, the control the power elite once exercised over its dominant social themes has been eroded by the 'Net, so the populace itself is beginning to get agitated.

The promotions aren't working anymore, or not nearly as well as they did in the 20th century. Read about the Greek protests: The rhetoric that the Greeks protest-leaders are using is not merely socialist or communist. They're not blaming capitalists – they're blaming their own leaders and the European banking system. They're putting the blame where, to a degree, it actually belongs.

The Greeks in aggregate (like most Western populations) may not fully understand that the current system is based on fraud – from merely creating money from electronic digits at the touch of a button. But people aren't idiots. And many have seen the trillions disbursed to the banking community while their own lives are correspondingly reduced and even ruined. They wonder why their pensions, their jobs, their lives have to be so dramatically constrained while the elites spend trillions to prop up a system that doesn't work.

The ripples spread. They spread and spread. Ripples cannot be arrested. Certainly, they cannot be thrown in jail. They cannot be censored or unplugged. They are soundless but unstoppable. People wonder about the rating agencies now. They wonder why their credit cards are cancelled while mortgage companies went bankrupt with AAA ratings. They wonder why busted banks can borrow again at top dollar when they are struggling to put food on the table. They see the rise in the prices of gold and silver and perhaps after a while they stop believing in paper money entirely. As we were finishing this article, we received the following report from MoneyNews:

David Rosenberg: Euro Breakdown Could Drive Gold to $3,000 … Gluskin Sheff analyst David Rosenberg says the breakdown of the euro could well drive the price of gold to $3,000. … "The case for gold heading to $3,000 an ounce is getting stronger by the day," Rosenberg writes in a note to investors. "The euro has already broken below 1.30 to the U.S. dollar and there is plenty of room for additional decline going forward. It's only at a one-year low — wait until it moves to a decade low."

The European Central Bank, Rosenberg notes, has been forced to water down its charter as it permits sub-investment grade Greek bonds as collateral. "Sadly, the central bank is not a remake of the Bundesbank and the Euro is less of a "hard currency" than its architects could have ever envisaged a decade ago," Rosenberg says. "Now there is talk that the ECB is contemplating a quantitative easing plan."

"Contagion risks" from the Greek financial crisis loom, "and there are simply not enough trees on the planet that can provide enough paper currency to backstop countries like Portugal and Spain," Rosenberg says. "And let's not forget about Italy — its public finances are less dire but still fragile"— all of which make this a great time to buy gold.

We wrote more than a year ago that the bankers at the US Federal Reserve had no idea how to explain their bailouts or the trillions that they had printed from nothing to give to a foundering financial services industry. The Federal Reserve – and the entire central banking meme – we predicted would come under grievous attack. Eventually it did. Now we wonder if the entire sociopolitical compact of the West is not in jeopardy.

Let gold continued its rise. Let the EU continue to desperately print money to bail out its Southern flank. Let China founder while the Western banking system refuses to lend. Let the Anglo-American power elite insist on belt-tightening for Western citizens while the larger financial system continues with its business as usual. Let the system continue to function with its relentless and mercilessness while anger builds … and we think there may come a crisis point.

After Thoughts

We wonder if paper money itself – unbacked by gold or silver or both – will survive long into the 21st century. We wonder if there will be, eventually, increased civil unrest as authorities load up Western economies with tax hikes and inflation. We wonder if, at the end of the day, there will be a spontaneous emergence of barter, free-banking and a private gold-and-silver standard as the power elite continues along the current path of authoritarianism, profligacy, warfare and arrogance. We wonder. And ripples spread.

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