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The Daily Reckoning | Saturday, September 15, 2012 A Titanic Financial Disaster...100 years in the making, Readers weigh-in on gold, real money and real risk, Plus, all this week’s reckonings archived for your high-elevation enjoyment... --------------------------------------------------------------- Amazing... But True! Tobacco is being resurrected — making it the profit opportunity of the decade. It turns out that one man’s quest to help people quit smoking has led to what could be the most important “accidental” health discovery since penicillin. And for you — it could be the biggest potential “profit bonanza” since Pfizer accidentally discovered Viagra. Discovered by accident: A chemical compound in tobacco that doctors are now recommending to slow aging! BUT because Wall Street inexplicably thinks the biotech firm that owns the patent — and is already selling this miracle product without a prescription — is a nasty, dirty tobacco company, you still have a little time to load up before the truth is finally revealed! Learn more about this amazing opportunity right now, right here. Joel Bowman, on the train out to Charles de Gaulle airport, Paris... Joel Bowman No time for lengthy preambles this weekend, Fellow Reckoner. We’re hopping a plane and heading back to the Paris of the South. Our friends tell us things are getting pretty interesting there...what with the protests and pot-banging and all... We’ll check in again from Buenos Aires next week. As for this week’s feature column, please enjoy a Daily Reckoning “Classique,” one that first appeared in Whiskey & Gunpowder on December 1, 2004, recounting a Philadelphia exhibit of Titanic artifacts. Resident man of letters, Byron King, has the floor... The Daily Reckoning Presents A Titanic Disaster Byron King The first item is a set of gold-rimmed eyeglasses. Further on, there is a pocket watch stopped at 11:14. Then there is a brown leather suitcase, somewhat worse for the wear. There are stacks of white dishes and racks of dark green bottles. Another display shows brass plumbing fixtures and a gray, steel wrench. And at another stop along the walk one sees a copper and glass engine thermometer. There is a jade rosary, and a man’s boulder hat, of all things, in remarkably fine condition, considering... And a pair of woman’s shoes, made of black leather. Not one shoe, but a pair, recovered from the sea floor beneath 12,000 feet of cold North Atlantic water. Then there are the coins and paper currency. Gold coins, silver coins, copper. British, American, French. This was real money back then, from a gold standard era. And the paper notes also tell a tale. They are a collection of official British and American treasury promissory notes, and a remarkable amount of scrip from private banks, redeemable in precious metal. Every note has an annotation at some spot or another, promising to pay to the bearer some quantity of gold or silver. “One Dollar Silver Note,” from a bank in New England, redeemable in an ounce of silver from that institution. Or a “Two Dollar Silver Certificate,” to be paid on demand by the Treasury of the United States of America in, not surprisingly, two ounces of silver. Or “Ten Gold Dollars,” half an ounce of yellow metal in 1912, promised by and intended to be paid to the bearer from the precious gold assets of the Government of the United States. These artifact paper notes, recovered against all odds from their watery grave, still retain a certain sense of dignity. They do not declare mightily and officiously that they are “legal tender for all debts, public and private.” They do not have to... The notes represent a solemn promise by the issuer that, in return for a person lending a sum of honest money to the bank or government, the issuer of the note will repay an equal sum of precious metal at a time and place of mutual convenience. There is, it seems, a sense of financial humility, respect and national or corporate duty to these documents. The Titanic exhibit explains that within about two years of the ship sinking, the British and American governments changed the methods by which they permitted currency to be issued. The exhibit does not go into detail, which is understandable. This is a display of artifacts from a sunken ship, not an exposition on monetary history. But it is interesting that the curators would mention it at all. In late 1913 the US government enacted the Federal Reserve Act, which removed the power to issue monetary notes from private banks and the US Treasury, and gave that power to the newly established Federal Reserve, or the American central bank. And in 1914, Great Britain’s central bank, the Bank of England, went off the gold standard shortly after Britain entered into what became the Great War, now known as World War I. For the 100 years before this time, the respective values of the British and US currency had held more-or-less steady, excepting a period of inflation during the American Civil War. But after 1914 the value of the respective currencies was set by... well, by a monetary system, for lack of a better term, run by each nation’s respective central bankers. The idea was to have an “elastic currency,” meaning a currency base that could expand to meet the needs of a dynamic and growing economy, or in the case of Britain, to fight a war that the nation could not afford. In the ninety or so years since those monetary milestones of 1913 and 1914, both the British pound and the US dollar have lost about 98% of their value due to inflation of the national monetary supplies. That sure makes for one heck of an “elastic currency”, eh? But because this monetary debasement has happened so slowly — year by year, decade by decade, generation by generation — this decline of the value of national currency has seemed almost a natural phenomenon, an immutable law of nature. This is the way that monetary theory is taught in all of the best schools, and is how all modern monetary systems work, right? Typically the politicians have demanded, and people have grown to accept, “a little bit” of inflation fostered by the central bank as the price of progress. Except that “a little bit” of inflation over a long time is actually “a lot” of inflation. Over the long term, the nominal savings of one generation are reduced, in the aggregate, to a pittance. This matters quite a bit when one goes to retire a generation or so after going to work. And in an inflationary environment, valuations of capital become meaningless over the long term, absent using statistical guesses to determine deflation factors. Keep in mind that savings create capital, and inflation destroys savings, hence destroys capital. From the standpoint of ethics, it would seem that the people who run the Federal Reserve and the Bank of England have a responsibility to their respective citizens to maintain a stable value to their currencies, and not to destroy that value over time. It would seem that the managers of a nation’s currency have a duty to maintain monetary standards, and not to wreck savings and impoverish one generation to benefit another. It would seem so, but apparently this is not how the monetary system works. By way of comparison, this ethical duty to maintain standards is much the same as the duty of the principals of the White Star Line to design and build a fine ship, appropriate to the hazards of oceanic crossings. And this is much as Captain E.J. Smith had a duty to train his crew and sail his vessel along a track that would bring her safely into the port of destination. But on the night that the Titanic sank, there was a failure of duty by the Captain to sail a safe course, even after an ice warning was received over the radio. And the iceberg, scraping the rivet heads off the steel plating of the Titanic and permitting the sea to flood the ship through hundreds of small penetrations, revealed a flaw in construction. And the sinking revealed the failure of White Star Line fundamentally to design a proper ship, with lifeboats sufficient to the need of passengers and crew in a time of peril. As fate would have it, J. Bruce Ismay, one of the directors of the White Star Line, survived the Titanic’s sinking by leaping into one of the last lifeboats that dropped from the doomed vessel into the freezing ocean. Later on, Director Ismay was greatly criticized from almost every quarter, because he survived the sinking when over 1,500 others did not. One of the most trenchant critiques of Ismay came from Admiral Alfred Thayer Mahan, the great historian, strategist and sea power visionary of the US Navy, who reviewed Ismay’s retreat to the lifeboats and his abandonment of hundreds to death by freezing and drowning, and wrote: “We should be careful not to pervert standards. Witness the talk that the result is due to ‘the system.’ What is a system, except that which individuals have made it and keep it? Whatever weakens the sense of individual responsibility is harmful, and so likewise is all condonation of failure of the individual to meet his responsibility.” What will the central bankers say in their own defense when the dollar, or the pound, vanishes like the Titanic beneath the sea? Will they simply shrug their shoulders and blame “the monetary system”? What will they say to those doomed souls who are the victims of their failure, and whose lives, communities, nations and cultures are shattered? What will they say as the wreckage of their monetary system slips away and rains down, like the artifacts from the Titanic landing on the dark abyssal plain far below? Regards, Byron King, for The Daily Reckoning Byron King’s Outstanding Investments Explains... Why “gold $2,000” is a joke... On April 24, 2007... one gold expert said “gold is on its way to $2,000 per ounce.” At the time, gold was trading around $688 and the mainstream figured he’d lost his mind. But anybody who listened had the chance to make up to 175% on the metal alone... and up to three times more on related metal plays, as I write you today. So what’s this gold expert’s latest prediction? Click here to find out. ALSO THIS WEEK in The Daily Reckoning... The Art of War By Joel Bowman Outside this quiet room, beyond the building’s walls and across the imaginary lines of the Triangle of Art, a dangerous unrest grips the people once again. The continent, once united, backs turned against a bloodied, war-torn century, now finds itself coming face to face with a creeping disquiet. Gold Just Became Money Again By Doug Hornig On June 18, the Federal Reserve and FDIC circulated a letter to banks that proposes to harmonize US regulatory capital rules with Basel III. BASEL III is an accord that tells a bank how much capital it must hold to safeguard its solvency and overall economic stability. It’s a global standard on bank capital adequacy, stress testing, and market liquidity risk. And Here’s Why Gold Will Remain Money By Dan Amoss One of the longest-running myths in financial markets is going to damage a lot of portfolios: the myth that central bank money printing — in the context of a modern banking system — hikes the value of stocks. Many academics still think printing lots of money...will lead to some sort of trickle-down economy phenomenon. A Tale of Two Whistleblowers By Joel Bowman Justitia, the Roman goddess of Justice, is often depicted as a blindfolded figure, carrying in one hand a sword and, in the other, a set of measuring scales. The image is a conflation of characteristics taken from multiple goddesses; the blindfolded Fortuna (fate) of Rome, Hellenistic Greek Tyche (luck), and the sword-carrying Nemesis (vengeance). The “Lost” Gold Bible Congress Never Wanted Anyone To See “Locked away” for almost 3 decades. Kept virtually secret...until now. You’ll soon discover why all the secrecy surrounds this book...and why it would be to your great benefit to read this book now. You’ll also see why I’m doing everything in my power to get this book into your hands for FREE by following one simple step Click here to read more. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, a Fellow Reckoner writes in response to Dan Amoss’s article on Fed Heads and gold as money... The Fed and Benny are not insane. They are simply high-end crooks taking care of business. Every Ponzi scheme needs a cover story and its sincere preacher/followers to validate it and bring in the suckers. Benny works for the Feds’ private shareholders and I think he’s doing a bang up job redistributing all that wealth in their direction. It’s so unkind, you calling this brilliant servant of his even more brilliant darkitecrural masters, stupid. Stupid are those not doing everything in their power to stay as far away from the whole stinking mess as possible. Next up, Reckoner Daniel M. writes in response to the same article... I remember recently Ron Paul asking Chairman Bernanke quite abruptly in one of Benjamin’s appearances before his House Banking Committee: Is gold money? A brief pause and the monosyllabic response, NO. Congressman Paul then asked, Why does the Federal Reserve then hold gold in it’s monetary base? Bernanke then responded that it was either a custom or a habit, I can’t remember which. Has anyone talked to our esteemed Chairman about the Basel III proposed changes? If you list it right under cash as a riskless asset for banks, it seems to me someone should at least touch base with him. And finally, a “husker fan” Reckoner throws this one out to the field.. I have about 68K in my 401K, 43K in Roth IRA’s, 34K in a traditional IRA, and about 20K between cash and gold/silver. Given that other factors come in to play; age, income estimations, our only child is a third grader, etc., I’ve been toying with the seemingly crazy idea of cashing in some 401k money to buy more gold, being fully aware of a 10% penalty and paying capital gains tax. My degree was in finance, so I know my way around. I just want to protect what we have. Thoughts? I’m guessing there are others who’ve tossed this idea around. --- Whaddya say, Reckoners? Anyone care to comment on “husker fan’s” plans? Feel free to send any thoughts to the address below. And, as always... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Too Much of a Good Thing, Part III Too Much of a Good Thing, Continued... Too Much of a Good Thing Currencies and Precious Metals Rally on QE3 Announcement US Dollar Trades in a Tight Range in Anticipation of QE3 German Court Upholds European Bailout Mechanism... 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