A Little Game of Old Maid, Part II

By Robert Ringer

(The content of this series of articles has been taken from my 1982 book “Civilization.” Even back then, I was warning my readers about the role the banks would play in the inevitable economic collapse of this country. Here’s more of what I said 27 years ago …)

Much like the black holes of the far reaches of outer space, which ravenously suck in all matter that comes their way, there are black holes in the financial markets that can make capital vanish without a trace. Unlike their counterparts in interstellar space, however, Capital Black Holes can occasionally be persuaded to release their prey.

Capital caught in a Capital Black Hole can escape, albeit injured, if its owner takes the proper action before it’s too late. On the other hand, if the owner of capital trapped in a Capital Black Hole leaves it there in the hopes that it will eventually resurface on its own, he is ignorantly, stubbornly, and/or naively assuring that it will never be seen or heard from again.

Capital Black Holes include: certificates of deposit at either banks or savings and loans; cash value life insurance (i.e., “whole life” or “ordinary life”); government, municipal, and corporate bonds; and long term, fixed rate mortgages or “deeds of trust.”

All these pieces of paper are, in the words of Dr. Franz Pick, “certificates of guaranteed confiscation.” You are absolutely guaranteed to lose virtually all of your capital, over the long term, if you commit it to any of these Capital Black Holes.

In the short term, the process is reasonably painless, because you lose only a little of your capital each year. In fact, to the degree you are willing to delude yourself, you may feel no pain at all.

The process is really quite simple: The fixed return paid by any of these Capital Black Hole debtors is not enough to compensate for taxes and price inflation. As a result, you automatically lose a portion of your capital each year.

(While it is true that municipal bonds are presently tax-free, price inflation alone during the coming years will be quite sufficient not only to offset any interest paid on these bonds, but to chip away at the principal as well.) The sooner you rescue your capital from a Capital Black Hole, the better your capital’s chances of making a full recovery.

In the long term, the pain is acute. Not only do taxes and price inflation eventually swallow virtually all of your capital, but a great many — perhaps even a majority — of the Capital Black Hole issuers will ultimately go bankrupt. I am speaking here of legal bankruptcy, as opposed to technical bankruptcy. A large percentage of these entities are already technically bankrupt.

Savings and Loans and Banks

To understand the illiquidity of the banking industry and the insolvency of a large segment of the savings and loan industry, one must look at these “institutions” for what they really are. (By illiquidity, I mean that current assets are less than current liabilities. By insolvency, I mean that total assets are less than total liabilities. )

A bank or savings and loan is nothing more than a middleman, which is a somewhat dignified word for “broker.” As a matter of fact, banks and savings and loans are really just glorified syndicators — the only syndicators, I might add, who do not have to file prospectuses with the Securities and Exchange Commission. They are free to solicit money from millions of investors, then turn right around and “invest” the large pools of money thereby generated in mortgages, stocks, bonds, and other “investment vehicles.”

This cozy little exemption would be delightful, but for one problem. For years, these exempted syndicators have been borrowing money from depositors short term and lending (or “investing”) it long term, sometimes for as long as thirty years.

That means that every bank and every savings and loan is illiquid, aside and apart from the fact that many of them are insolvent. Their ability to repay their depositors’ money is entirely dependent upon their success in raising additional money from new depositors. (This practice is commonly known as “pyramiding,” but don’t get any bright ideas … it’s against the law for you to do it.)

Forget about “IRA accounts”; forget about “all savers certificates”; forget about all the other gimmicks that these Capital Black Hole issuers are frantically coming up with in a desperate effort to keep from going under. All these are nothing more than attempts to disguise the bankrupt wolf as Little Red Riding Hood’s grandmother.

In the years ahead, there are going to be millions of people, minus their life’s savings, who are going to be just a bit irritated with certain entertainment figures who urged them, via radio and television commercials, to put their money into “risk free” savings institutions. In fact, such ads collectively constitute yet another of the biggest lies ever told — right up there with today’s accepted description of liberals.

Even if inflation does not completely wipe out the principal in these “tax free” accounts (which it will), count on the government, in a last ditch effort to bail out its bankrupt programs, to pass retroactive laws to tax all types of pension schemes previously declared to be tax-free. Remember, the government has the power to change the rules at will — and does!

Pension funds and various kinds of pension savings accounts are government traps. They make it possible for the bureaucrats to know where your assets are, which in turn makes it convenient for them to get at those assets quickly (under the guise of an “emergency,” of course).

And, for goodness’ sake, I hope by now you’re well aware that money deposited in banks and savings and loans is not insured, in the truest sense of the word. The assets of the Federal Deposit Insurance Corporation and Federal Savings and Loan Insurance Corporation amount to only a tiny fraction of the trillions of dollars that are deposited in banks and savings and loans, and, to make matters worse, most of these assets are in the form of questionable government securities.

(A recent study showed that over 500 U.S. banks have more than 20 percent of their assets tied up in New York City securities, while 179 maintain 50 percent or more of their capital in these and New York State accounts.)

More recently, savings and loan ads have been emphasizing that Congress has passed a resolution saying that the United States government’s “full faith and credit” stands behind every dollar deposited with them.

First of all, if the depositors’ money was safe, the government would not find it necessary to pass such a resolution. Second, the government is the least credit worthy of all entities. If Washington ever has to make good on its “full faith and credit” (and you can count on its being called upon to do just that), you and I know very well where the “money” is going to have to come from. Break out the extra large paper rolls and haul in the fresh ink!

As the economic collapse continues to worsen, the problem is compounded. Not only do financial institutions have to borrow short, but they have to do so at rates that destroy any hope of turning a profit. Worse, they have to relend the money to questionable borrowers, because credit worthy borrowers are reluctant to borrow at such high rates. Thus, the interest rate spiral accelerates onward and upward toward infinity.

Ultimately, there will probably be a “run” on banks and savings and loans, which in turn will force them to dump securities and mortgages at huge losses. It will then become a panic, and suddenly everyone will want to get his money out of these Capital Black Holes.

Or, as Gary North puts it, “When a majority of depositors become convinced that a majority of depositors have become convinced that a majority of depositors are going to try to get their money out simultaneously, a majority of depositors start trying to get their money out simultaneously.”

Part III to follow.

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Today’s Reflections:

Of course, the S&L industry is just a shell of what it was prior to its collapse several years after I wrote the above, when half of all these financial institutions failed. Lack of regulation, as always, is a favorite excuse for their failure, but the truth is that failure was built into their fraudulent business model from the outset.

In the past year, banks have finally begun to follow suit, as I said would be the case. But there’s a big difference with banks: You are being forced to hand them endless billions of dollars to keep them afloat – but you’re handing it to them only indirectly.

By that I mean that most of those billions are in the form of unbacked I.O.U.s being printed up by the Treasury Department, which will result in your being invisibly taxed through a reduction in the value of the paper money you hold.

And since the underlying problems (the existence of the Federal Reserve and the lack of a gold backing for our currency) are not being addressed, it is likely that fiat dollars will continue to be printed and handed over to major banks until paper money is no longer accepted in the marketplace as a medium of exchange.

I’d like to pat myself on the back for my 1982 call on the impending bankruptcy of the S&Ls and the banks, but, in all honesty, it was a slam-dunk for anyone who wasn’t a member of the Flat Earth Society.