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Q:  What happens to my bank loan after they reset the value of the dollar with a new currency?

Do I still have to pay back $150,000 with the reset “new” currency or do they adjust the loan also?

David Schectman’s Answer:

Jim Sinclair has written about this.  You can be sure the banks will not end up on the wrong side of this.  Yes, their loans will be “adjusted” to the new currency.  If the new “dollar” is worth ten of the old “dollars,” then your loan will be adjusted by a factor of ten.

My suggestion is that if inflation really heats up and there is talk of a new currency, pay up as much of your loan as possible with weak dollars prior to the conversion.  If you owe $100,000 on a loan, you will not be able to pay it up with 10 ounces of gold at $10,000/oz. – unless you sell your gold before the re-set and use the dollars to pay up the loan before everything changes.  Timing will be everything here.  You will have to be early, and if you wait too long, until the re-set occurs, you will not benefit from this.

Maybe we will be able to help you with that via our daily newsletter when the time arrives.

Whatever happens, we, the “little people” will not end up winners.  We never do.

Q: When it comes to the Fed, with the ability to add assets simply by printing money with little or no limit except in theory and discharging liabilities by creating additional liabilities (for example exchange one denomination of currency for another) makes its balance sheet very unique indeed.  It is also understood that the Fed cannot be compelled to discharge liabilities on its balance sheet with any tangible good or service.  Please clarify how the Fed balance sheet and accounting in general makes any sense from a traditional/business perspective.  In addition, what is to stop the Fed from “forgiving” the debt owed by the US government treated as an asset on its balance sheet and if this can be done, what the downside could be (any traditional business can forgive a debt but of course this normally flows through as a loss to its income statement)? The “forgiveness”, if possible, off the top would appear to be a left/right pocket thing when considering the government as a whole.

Thanks – enjoy your daily missives.

Bill Holter’s Answer:

Many questions all wrapped up into one answer, the Fed is insolvent.  They are now leveraged 77-1 which means even a 2% drop in the value of assets held will wipe out their capital.  They are approaching $4.5 trillion in assets with capital of $56 billion.  The Fed could “forgive” whatever debt they would like to but that would also go as a direct hit to their own capital so how could they do this with more than $56 billion worth of Treasuries?  The bottom line is the Fed can never ever sell anything to shrink their balance sheet for two reasons (actually 3).  If they sold, who would the buyer be in a market that everyone would be front running to exit?  If they ever sold when rates were higher they would have to “mark down” the asset to the sale price and thus show a loss which would eat into their capital.  One other aspect would be the “multiplier effect,” if the Fed sold anything then they are in effect taking liquidity out of a system that’s already on liquidity life support.  It will end badly no matter what action they take as they have propagated a global Ponzi scheme …and they know it.

Q:  Thank you for the very informative newsletter, which I look forward to every weekday!

2 questions: If there is a worldwide financial meltdown, what will happen to the PM prices, and how would a realistic price be determined thereafter?

What is happening at the Shanghai silver inventory, why is it being drained like that, might that be the start of a physical squeeze?

Andy Hoffman’s Answer:

Regarding your first question, no one can truly predict what will happen with 100% certainty, especially as a “financial meltdown” could be caused by numerous, diverse reasons – with equally numerous, diverse ramifications.  However, suffice to say that when – sorry, if – such an event occurs, I’d give 99.9% odds that, assuming the world is still standing, precious metals will not only be the best performing asset but potentially the only performing asset.  Despite the initial Cartel attacks, for example, the net result of the 2008-09 debacle demonstrated as much – as from its beginning in September 2008 until stocks bottomed in March 2009, the (PPT supported) Dow fell 42% whilst (Cartel suppressed) gold rose 1%.  Of course, this time around I don’t think TPTB will have the ability to stop the bleeding as they’ve already destroyed their own balance sheets “saving” the world with money printing the past six years.   This time around, I believe the end game will be global currency collapses – in which case, gold and silver will likely become “priceless” whilst most paper assets plumb the depths of “worthlessness.”  Remember, PMs are decidedly not “investments” – especially under such a scenario; but instead, savings to be utilized to survive such a cataclysm.

As for Shanghai silver inventory, it is one of the most important factors we are watching.  Shanghai is by far a more dominant silver exchange than the COMEX – in terms of both trading volume and deliveries; and since the April 2013 “alternative currency destruction” paper raids, Shanghai’s silver inventory has fallen from roughly 1,100 tonnes to less than 100 or more than 90%.  The total inventory remaining is worth a piddling $60 million; and thus, absolutely the potential for a shortage is possible, particularly in light of the ultra-thin COMEX inventories (which likely, don’t exist) and record exports into India and China.  Just as was the case in 2008 – and to lesser extents, 2011 and 2013, silver will unquestionably run out before gold – which is why the Cartel is so desperate to scare buyers off.  Fortunately, the Cartel can’t manufacture physical silver – and thus, it will eventually be swamped by demand.