Economic Posterity Report

By Brett Heath January 27,2009

economicposterity@gmail.com

INTRODUCTION
If you are reading this report to-
day, it was either sent to you by
myself, or passed on to you from a
friend, or a friend of a friend etc...
advice, but rather to expand your
knowledge so you can do your own re-
search and make educated decisions
on how you can plan for the future.

The purpose of this report is to in-
form you about our current eco-
nomic situation, and hopefully
cast a ray of light to help guide you
through the economic turmoil that
may lay ahead for our country .
It is in no way to be taken as financial
In this report I will explain the
future of our currency, real estate,
and inflation. If you don’t under-
stand it, send it to someone that can
read it and explain it to you.

FIAT CURRENCY
Have you ever heard of it? It is the
type of monetary system that our
government has been using for
the last 40 years. The definition of
Fiat currency is: Money that is not
backed by a physical commod-
ity (i.e.: gold). Instead, the only
thing that gives the money value
is its relative scarcity and the faith
placed in it by the people that use it.
the expansion in credit. This
expansion in credit can be seen in
the Debt/GDP ratio. In most cases,
a fiat monetary system comes into
existence as a result of excessive
public debt. When the government
is unable to repay all its debt in
gold or silver, the temptation to re-
move the physical backing (gold) ,
becomes rather irresistible.
This was the case in 18th century
France during the Law scheme,
in the early 1900’s in Germany,
known as the Weimar Republic,
as well as in the 70’s in the US,
when President Nixon removed
the last link between the dollar
and gold, which is still in effect
today. So what is credit really?

In a fiat monetary system, there are

no restrictions on the amount of
money that can be created by the
government. This allows unlimited
credit creation. Consequently,
a rapid growth in the availabil-
ity of credit is often mistaken for
economic growth. As spending
and business profits grow, there
is also a rapid growth in equity
prices. In the long run, how-
ever, the economy tends to suf-
fer much more by the following
contraction than it gained from

1
FIAT CURRENCY CONT’D
In its fundamental state, it is the
future value of the country, the
business, and the individual that
obtains it. During the times when
the United States was on
the gold standard, ex-
cess credit was given strict
limitations. This was because the
amount of new gold that was
mined every year was about 1.3%
This allowed economies around
the world to grow at a steady
rate without the fear of inflation.
The founding fathers were con-
cerned about the unrestrained
control of the money supply. One
thing they all agreed upon was the
limitation on the issuance of cred-
it. Thomas Jefferson warned of the
damage that would be caused if
the people assigned control of the
money supply (Alan Greenspan)
to the banking sector, He said
“I believe that banking institutions
are more dangerous to our liberties
than standing armies. Already they
have raised up a money aristocracy
DEFLATION
So why is our government more
worried about deflation than
inflation so to speak? Dr. Marc
Faber, one of the leading
21st century economists, said
it best in one of his reports,
“Economic growth and
deflation is entirely compatible.
The entire economic expansion of
the US in the 19th century was a
deflationary boom. Declining prices
led to strong real income gains.
As time went by, workers could buy
with their incomes a larger and larg-
er basket of goods because prices for
that has set the government at defi-
ance. This issuing power should be
taken from the banks and restored
to the people to whom it properly
belongs. If the American people
ever allow private banks to control
the issue of currency, first by infla-
tion, then by deflation, the banks
and corporations that will grow up
around them will deprive the people
of all property until their children
will wake up homeless on the conti-
nent their fathers conquered. I hope
we shall crush in its birth the aristoc-
racy of the moneyed corporations
which already dare to challenge our
Government to a trial of strength
and bid defiance to the laws of our
country” Thomas Jefferson, 1791
The type of credit expansion we
have seen over the past 30 years
has often led to hyper-inflation,
which is the terminal stage of any
fiat currency. In hyper-inflation,
money looses most of its value
practically overnight. Hyper-infla-
tion is often the result of increas-
ing regular inflation to the point
consumer goods and commodities
declined. In other words, whereas
inflation is the equivalent of a loss of
purchasing power of money, in defla-
tionary times the purchasing power
of money increases. With deflation,
my 100 dollars today are worth
more in a year’s time since they will
buy a larger basket of goods and
assets, whose prices are declining.
There is one condition under
which deflation is a disaster and
this is when total credit market
debt is high as a percentage of
the economy. When debts are as
large as they are now, deflating
where all confidence in money is
lost. In a fiat monetary system, the
value of money is based on confi-
dence, and once that confidence is
gone, money irreversibly becomes
worthless, regardless of its scarcity.
Gold has replaced every fiat
currency for the past 3000 years.
Just to give you an idea, the US has
about 268 million ounces of gold in
its reserve. If it were to revert back
to the gold standard, gold would
have to go to about $7000 an
ounce to account for M3 or the total
amount of money supply in the US.
Image above: 1923 in the Weimar
Republic, Germany, citizens had to
transport their cash with wheel bar-
rows to pay for groceries!
prices and especially deflating as-
set prices would wreak havoc in the
economic system and lead to mas-
sive defaults and bankruptcies.
After 1980, and in particular after
Mr. Greenspan became Fed chair-
man in 1987, debt to GDP exploded.
Therefore, it is not deflation that
is the problem, but the preceding
debt inflation for which the Fed’s
expansionary monetary policies
are fully responsible. So having cre-
ated a monetary and debt mon-
ster, the Fed embarked starting
2001 in a huge money printing op-
eration in order to avoid deflation.”
2
BUBBLES
You hear about bubbles all the time
in the news, tech bubbles, housing
bubbles, and credit bubbles. How
do they come? Why can’t people
see them coming, or realize when
we are in one? What many do not
realize is that all of this is part of
a massive “easy money” bubble,
created by Alan Greenspan and
company in 1995. The savings and
loan crisis of the early 90’s, the col-
lapse of long term capital man-
agement and the Russian debt
default in 1998 , the tech bubble
crash, and now the housing crisis,
were all remedied with one tool…
interest rate cuts, and massive li-
quidity injections into the banks.
towards living a healthy life, which
would entail a sound monetary
system, such as the gold standard,
having a savings rate of at least
10% (The savings rate is currently
0%, but was briefly negative) by
raising interest rates, discontinu-
ing over-consumptive spending,
and bringing our manufacturing
jobs back to the United States
while supporting entrepreneur-
ship. Instead, President Obama
and friends are jamming a heroin
filled needle, (stimulus package)
works by allowing the weak and in-
competent people and businesses
to fail, thus allowing the stronger
more competent people to take
market share. Right now we are
doing the exact opposite. We are
allowing the incompetent entities
to lose more of our money as they
are proped up by the government!
This is a recipe for massive gov-
ernment spending and socialism.

I will try to break this down into

terms that everyone can under-
stand. Think of credit expansion
and an easy monetary policy as an
addictive drug, like heroin. Every
time our economic body has start-
ed to correct itself (or come down
from its high), the federal reserve
was there to step in with the nee-
dle of credit, ready to give us an-
other illusive high of new wealth.
What has happened over the last
year is that our economic body
could no longer physically handle after needle, (government pro- Chart above: Dow Jones Index from
any more drugs, as the housing, grams to supply jobs) into this 1971 -2008 Look what happened
credit, and commodity bubble, unresponsive economic body, in 1995 to the DJIA when the start of
simultaneously burst and fell to hoping the drugs will take effect, an easy monetary policy took place!
the floor in need of a doctor. The but the body is still unresponsive
correct recovery program for this lying on the floor. Want to take back
would be to go to rehab and work that vote yet? You see capitalism

3
REAL ESTATE
I feel the need to touch on this sub-
ject because I feel that so many of
my friends still feel the need to pre-
maturely jump into the real estate
market and I am watching their
down payments get wiped out
in a matter of months because of
falling home prices. Don’t get me
wrong, I firmly believe that real es-
tate is still probably one of the best
investments over time (especially
income producing properties like
apartment complexes where you
can have solid positive cash flows).
home prices from today’s value
especially if unemployment gets
to the teens. Just think of how
many people will be walking away
if they are down 50% or more on
their $1 million dollar investment.
In Southern California at the peak
of the market, the median home
price in an upscale neighbor-
hood was upwards of $1 million
dollars. Imagine what that would
do the banks balance sheets, oh
wait, that’s our balance sheet be-
cause we now own the banks!
Scary.... So save your money and
don’t be afraid to jump in when
you see everyone else panicking.

The deal is that the last home price

appreciation run that we went
through was far greater than any-
thing we have ever seen in history.
So here is a little barometer to go
by, because I believe that markets
tend to over correct, look for the
median home price in the US to
come down to 145k-155k before
it recovers to a steady level again.
Or if national unemployment is
between 10%-15% that would
also be a good time to step in. In
this case there still might be some
down side, but I believe the up-
side will considerably outweigh
the down. For the hot markets in
California and Florida, that could
mean another 30%-40% drop in

4
INFLATION AND THE PRESERVATION OF PURCHASING POWER
As you are reading this right now
central banks around the world
are running their printing presses
at full speed. The US, China, UK,
Europe, Russia, and now finally Ja-
pan and Switzerland have made it
clear now that they are willing to
print and spend. Last Thursday (Jan
22) I read in TGL, a daily forecast
on the markets written by Dennis
Gartman, he said “Mr. Philipp Hil-
debrand, the Swiss National Bank’s
Vice Chairman, and the gentle-
man usually called upon to make
official statements regarding Bank
policies, made it very, very clear Chart: Median home price over last 100 years adjusted for inflation
that the SNB (Swiss National Bank)
is joining the Fed and the Bank of tion… [and] the national bank itself to buying foreign currencies at
England in making more than am- will continue to act decisively to a fixed rate.“ The reason why I am
ple supplies of liquidity available fight the impact of the economic going into such detail about this,
to the market, and that the Bank is contraction… [further], a central is because Switzerland has always
prepared to do what it must do… bank can always increase the abso- been a safe haven for the wealthy
including buying government and lute amount of its own currency in to store money (In Swiss Francs)
even corporate debt securities for circulation [and] the national bank around the world. It is the reason
its own account if that must be could sell Swiss Francs against why I believe it moved the price of
done. He said, “The national bank other currencies without limits. In gold (Money leaving Swiss Francs
states publicly and clearly: defla an extreme case, it could commit being transferred into gold) up
tion is as undesirable as infla $50 dollars an ounce in two days
while breaking and holding above
key resistance levels. You see peo-
ple around the world are starting
to realize that their central banks
cannot be trusted and gold, along
with other hard assets such as sil-
ver and oil, will soon become the
world’s reserve currency again.

Chart left: ( 5 yr Chart of the GLD

ETF) If you look closely, you can see
GLD broke a key resistance level
and is in position to make the next
move higher.

5
INFLATION AND THE PRESERVATION OF PURCHASING POWER
Over the last year there has been
a massive deleveraging across all
assets, largely due to hedge funds
gone wild leveraging up just as
much, or more than the banks.
When they started to lose money
in whatever positions they had,
they were forced to sell everything
especially their investments that
were doing well (gold, silver, oil)
in order to meet their margin re-
quirements. Which is why we have
seen an almost year long worth
of consolidation going on in the
precious metal market. Also, there
have been large “unknown” sellers
in the gold market when prices
reach $885-$890 per ounce. I be-
lieve central banks around the
world are working together to ma-
nipulate the price of gold down in
order to help falsely prop up the
value of their fiat currency. Now
that these key levels have been
broken, I believe we will be enter-
ing a new paradigm of gold prices
as people start to see the value of
their currencies dwindle away and
race to hard assets. In 1970 when
we were still on the gold standard,
gold was fixed at $35 an ounce.
Shortly after we departed from the
gold standard in 1980 it was at $890
an ounce. That is over a 2000% in-
crease! The difference then was
we did not have the enormous
amount of debt, and Paul Volcker
(the Fed Chairman at the time) was
able to combat the inflation by rais-
ing interest rates to double digits.
Now with the amount of debt we
have combined with the levered
up banking system, the Fed is not
exactly in the best position to raise
rates again. This leads to only one
outcome: spend, spend, spend!
Take a look at the chart on pg.5 of
GLD, (gold ETF) you can see that
after every break out since 2000
there has been a consolidation. This
time I believe we might be headed
for the break out of all break outs...
Here is also another chart of the
GLD, clearly showing the consolida-
tion phase with the break out. A safe
bet would be to go long GLD, and
place a stop if it crosses back below
the 200 or 50 day moving average.
6
INFLATION CONT’D
The most important thing you
need to understand is that even
though your portfolio might look
like it is going straight up... You
are actually just preserving the
purchasing power that your dol-
lars used to have. So if gold goes
up 500%, and turns $10,000 into
$50,000, chances are that, that
$50,000 will probably buy you the
same amount of goods or services
as that $10,000 used to. This could
be detrimental to the middle, and
upper middle class as the purchas-
ing power of their life savings and
OUTSIDE VIEW IN
You need to take a step back and
think about the United States as
an investment if you were another
country, and this on the assump-
tion that Obama and company will
to continue with the fiscal policies
and propositions that they have in
place. Other countries hold billions
of dollars of US debt. If we keep
devaluing our currency to bail out
all these business that should fail,
and spend trillions of dollars on
government programs that will
do just about nothing to help the
situation; the purchasing power
that the money they hold will con-
tinue to go down, and at some
point these other nations that are
financing every dollar that we are
spending will stop buying our Trea-
sury bills, or even worse try to sell
the ones they are holding on the
open market which will leave our
government with no other option
other than running the printing
press to make up the difference.
This will surely lead us into a vio-
lent state of hyper-inflation, and I
401k’s could be wiped out without
the income producing assets that
the rich have. In 1970, 28 ounces of
gold bought the Dow, by 1980 you
could buy the Dow with one once
of gold. I am not sure where the
Dow will go from here but I believe
that at some point in the near fu-
ture that 1:1 ratio will show its face
again. You also might want to take a
look at silver as an inflation hedge,
over the last 100 years the average
ratio between gold and silver has
been 40:1. Basically on average it
would cost you 40 ounces of silver
hope all of you that are reading
this will take the proper precau-
tions to prepare yourself. Just think
of it as insurance on your financial
health. The United States has been
able to avoid hyper-inflation over
the past 200 years by going back
and forth from a gold standard
to a floating fiat currency... If they
can’t seem to make it back to a
gold standard this time, it might
be the last time we will see this fiat
currency known as the US dollar.
If you would like to start to do a
little research yourself, here are
a few names of some well re-
spected economists, business-
men, and traders that I follow.
Ken Heebner, Bill Ackman,
Peter Schiff, Marc Faber, Jim Rog-
ers, James Turk, Bill Fleckinstein,
Dennis Gartman, and Doug Cass.
Again I have to say this one more
time, DO NOT TAKE THIS AS FI-
NANCIAL ADVICE, I am not a finan-
to buy one once of gold. Right now
the ratio is about 80:1. In times of
dollar instability that ratio tends
to narrow. In 1980 when gold was
at $890 an ounce silver was at $50
an ounce which would give you a
ratio of about 18:1. Oil also has al-
ways been a good inflation hedge,
but you have to be careful because
it is a commodity that is consumed
so demand and supply tend to
be larger factors, unlike gold and
silver which are accumulated.
cial advisor and do not have the
proper licenses that would make it
legal for me to give financial ad-
vice. You need to do your own
research or consult your own fi-
nancial advisor, as I am merely
scraping the surface in terms of
the information that is available. I
do have a Bachelors in Economics,
and studied Economic Globaliza-
tion at Johannes Kepler University
in Austria. I am an avid market trad-
er/investor, an entrepreneur, busi-
ness owner, capitalist, and firmly
believe in a sound monetary poli-
cy, free market capitalism, with the
government there only to protect
our laws and freedoms that we are
all blessed to have in this country!
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