The Current Scene
Since
2007 and the start of the “credit-crunch” the developed
world’s money system has been under stress. As a consequence, there has
been an economic downturn that government and bankers have not been able to
stop, convincingly, in the last five years.
The
developed world has decayed to the point that it can’t handle another
major crisis such as an oil price well into the $100+ area.
· Food inflation now
threatening, must not be allowed to take off because consumer/voter reaction
will undermine government and money still further.
· As it is confidence in
both the euro and the dollar is at a low ebb. Yes,
it is still the only means of exchange and it can be forced onto citizens,
but general confidence in the economy, the monetary system and a broad range
of markets is suffering as never before.
There
are bright sparks of hope, such as the Dow Jones Index returning to the highs
it saw in 2007; however, this is by no means in the same investment climate
as before the credit-crunch. Fear and instability pervades most markets as
faith declines.
Daily
we see another Eurozone crisis unfold casting doubts on the continuance of
the euro and the financial credibility of its weaker members. Overall, on
both sides of the Atlantic, consumer confidence continues to fall after so
many efforts by central bankers to resuscitate their economies.
Why
is so large a burden being put onto the central bankers, who should only
really support governments’ actions? Because the U.S. government is
mired in political gridlock, it cannot achieve the vigorous action needed to
do all it can to restore growth and confidence, and doubts now remain as to
whether it’s too late for any government to do so.
[Forecasts
of a dollar decline are seen daily as its debt levels mount to new
unacceptable highs. With the impending ‘fiscal cliff’ on the
horizon and promises of a heated political battle, consumers and companies
expect a savage tax blow around year’s end, further damaging consumer
confidence. Will we see a recession in the States next year? It seems likely.
Its timing could not be worse.
In
the Eurozone, we daily see discord between citizens of the financially
stronger nations and the weaker ones. Government discord is constantly
apparent. Growth is proving even more elusive in the world’s biggest
trading bloc as it stands in a mild recession already.
Hope springs eternal, but today, realities keep
hope on the run.
Can the Money System
Collapse?
The
thought seems unrealistic to people because it’s what we use every day.
But the money we use is entirely reliant on government and its central bank.
If their performance does not meet the criteria required by money then
confidence in that money will collapse eventually. It’s clear that all
currencies are not performing well at the moment as the balance sheet of most
nations (except China) gets weaker and weaker. If most nations were
individuals, then they would have been bankrupted by now.
A
look back in history shows that not one paper currency system has lasted
throughout the centuries, with the exception of those based solely on gold
and silver which remain as money assets all the way.
Not
today, you may well answer! We say oh, yes, today too. Despite all the
rhetoric since 1971 gold remains in the bulk of the world’s leading
reserves for that rainy day when something else is needed other than the
currency issued by the nation’s central bank.
How Does Money Collapse?
Look
back at Argentina in the 1990’s and you see it using the U.S. dollar,
but the economy of Argentina could not support the use of the dollar so it
reverted to the Peso after savaging its citizen’s dollar savings in
exchange for that Peso. That was a ‘collapse’ of their currency.
If the Greeks return to the Drachma or the Spanish the Peseta, we will see a
similar scene; it will be a collapse of their currency (the euro) inside
their nation.
Can
the dollar collapse? Because it’s a government-controlled money system,
the dollar will remain the means of exchange it is, even in a collapse.
A
collapse will be expressed in several ways:
· Its exchange rate against
other currencies can fall heavily. In the case of the dollar as the
world’s foundation, un-backed currency, this is unlikely as it supports
the un-backed currencies across the world indirectly. Its trading partners
will try to pull their currencies down with it so as to protect their trading
with the U.S. The same applies to a greater or lesser extent with the other
main trading blocs of the world such as the Eurozone and China. You will have
noted the narrow trading range of the € & the $ between $1.21 and
$1.45 over the last few years. This is because of the mutual support between
the Fed and the ECB by way of currency swaps.
· It can collapse inside the
country, as its buying power declines rapidly. This is monetary inflation
usually caused by the over-issuance of a currency.
· Another form of collapse
could include a bond market collapse where the markets push interest rates up
so high as to make it impossible for governments to repay debt. This level is
generally set at 7% and we have seen it in the P.I.G.S. nations of the
Eurozone over the last three years. If these countries had separate
currencies, they would have collapsed, but inside the euro we see that that
final collapse will be expressed by exiting the Eurozone and returning to
past currencies.
· In a nation where there is
still a working economy, a collapse can also be expressed by the imposition
of Capital and Exchange Controls, restricting the flows of money in and out
of a country to protect the capital inside its borders. Its citizens usually
bear the brunt.
Can the Global Monetary
System Collapse?
We’re
of the opinion that even if the system is hobbling along, it will continue
until global economies collapse. This was the case in Zimbabwe in the last
decade. The Zimbabwe dollar continued in use because the government enforced
its use inside its borders. But to all intents and purposes, it has collapsed
long before then. In the case of Zimbabwe, the U.S. dollar became the currency
in use in the country and in what’s left of its economy. This is still
the case today.
Before
any such collapse occurs, we are certain that each individual developed world
economy would cooperate with each other to take whatever measures are available
to them to shore up the monetary system. These measures will prevent the
system from a total collapse, keeping it staggering on all the way. We
believe that they will fully harness gold then.
The
questions remaining are how and when?
|