By Robert Fitzwilson of The Portola Group

August 25 (King World News) - “What Lies Ahead Is A Chaotic Collapse”

Aristotle was credited as one of the first persons to have discussed the concepts behind the “scientific method,” although he and his students did not conduct scientific experiments.  It was left up to inquisitive minds such as Ptolemy, later on, to apply the concepts to scientific investigation.

In one form, it starts with a question such as, “Is there a better way to conduct monetary policy?”  Next, it forms a hypothesis such as “Printing unlimited money will achieve universal prosperity”  The third phase is the prediction such as, “full employment, a strong economy, low inflation and well-being for everyone.”  The fourth phase is to test whether the real world behaves as predicted by the hypothesis.

For the last 100 years, a vast experiment based upon the precepts of the scientific method has been applied to monetary policy.  We can now say that we are in the midst of the final phase of the test....

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Clearly, the hypothesis has failed.  Those who have experience with history know that this experiment has been conducted many times and by many different peoples.  The details of the failures have been well documented and are available for anyone willing to read the wealth of knowledge written on the topic.

Frankly, the use of the scientific method is overkill.  Through common sense and the human experience, we could deduce that the test always fails -- every time.  Yet, we continue to make the attempt expecting a different outcome.  Multiple, stubborn and consistent actions that lead to failures with the expectation of a different outcome is the definition of insanity.

The announcement last week about the housing starts is the latest example.  It was a shockingly bad report, but we all knew that declining real incomes, stubbornly high unemployment and higher interest rates would translate into a diminished demand for housing.  The mainstream media asks, “who could have seen that coming?”  But in reality it was obvious.

Saying that the central planners are trapped misses the point.  If they are trapped, so are we as it is the environment in which we all live, even if they created it.  There is no painless outcome.  The parade of economic data will continue to worsen.

Interest rates continue to rise.  We find it hard to believe that entities which can print money on demand are “losing control,” -- at least not yet.  The more likely scenario is that the talk of tapering is cover for moving rates to higher levels.  While the impact on housing will be significant, there probably are not many people left who did not refinance, and anyone with buying capability probably already purchased a home.  As home prices resume a downward trend there will be unhappiness, but that is probably not the highest concern for the central planners.

Logic tells us that rates are being pushed upward in order to bail out the insurance companies and the pension funds.  As foreigners dump U.S. Treasuries, the Fed buys whatever is presented.  The Chinese are reportedly paying for resource assets with Treasuries, leaving it up to the seller to dispose of them in a backdoor fashion. 

Rates are moving to higher levels to stem some of the bleeding by the insurance firms and retirement funds, even though there is pain elsewhere.  We expect rates to rise in an orderly fashion for the short-term, to a level that the central planners deem to be a good compromise of relatively bad choices.  They will lose control some time down the road, and then we will see rates many multiples of the current levels.

The scientific method in our time is severely hampered.  It is supposed to be “observe, measure, and reason.”  With data that is not believable and the media suppressing the observations, it is very difficult to reason.

This is where history comes into play.  It is the collective human memory.  The early civilizations that have tried this can be excused because they did not have generational memories or written records of the failures passed down by history.  But we do.

Printing and currency debasement has never worked and it never will.  What lies ahead is a chaotic collapse of any asset reliant upon the integrated web of fiat money creation.  Most people refer to it as hyperinflation of prices.  In our mind, it makes more sense to refer to it as hyper-devaluation of paper currencies -- an instantaneous, hyperbolic collapse relative to real assets.  As was reiterated this week, gold is not going up, the currencies are going down with increasing volatility and speed.

At some point, paper currencies will collapse down the elevator shaft of history.  While the elevator shaft is linear, gravity makes the experience much more terrifying.  Time is running very short for people to convert as much fiat currency assets into real assets as possible.  The stampede into gold and silver continues apace.  One can only wonder about when panic will ensue for industrial users dependent upon silver in a declining production, increased demand world.

Gold, silver and the companies that mine the metals have clearly bottomed.  We are finally on the same side of the table as the people doing the manipulation.  The existing supplies of metal have been nearly exhausted.  Substantially higher prices await.  It will likely be orderly in the short-term, but then explosive to the upside as panic buying of gold, silver and mining shares develops.

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