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As the year
draws to a close, understandable confusion reigns in the minds of many
investors. While short-term indicators, such as consumer confidence, appear
to beckon recovery, the longer-term strategic issues remain shrouded in the
smoke and mirrors of central bank monetary manipulation. From the perspective
of someone who has keenly observed global economics for more than a half
century, I see little reason to believe that our economic morass will soon
improve. Indeed, I do not believe we will see meaningful change until the
Bretton Woods era of U.S. dollar dominated paper money finally comes to an
end. In other words, our current experiment in unlimited monetary expansion
will continue until it explodes.
In the
meantime, there is holiday spending to cheer us. From early reports, it
appears that consumer spending in November and December was stronger than
most forecasters had predicted. Politicians and bankers moved mountains to
make this spending possible. Endless unemployment benefits, payroll tax
holidays, and the lowest mortgage rates in history have allowed Americans to
keep spending even as their economic outlook deteriorates. In addition,
people who have defaulted on their mortgages and maintenance charges find
their monthly cash flows increased by hundreds, if not thousands of dollars.
Depressed and frustrated by the hardships of recession, this extra cash has
been spent largely on consumer goods such as autos, home improvement, and
electronics. But it is important to recognize that these positive sources of
funds are simply debits against the accounts of others. In particular
taxpayers who will bear the burden of an ever escalating deficit.
American and
European Union politicians have shown utter paralysis in tackling intractable
economic problems. Unwilling to make the tough decisions they all know should
be enacted to avoid a looming global economic disaster, they have endlessly
kicked the can down the road, while assuming that the road will go on
forever. With an estimated $6 trillion plus solvency shortfall of the
Eurozone banks and $16 trillion in U.S. public debt, it will take leadership
of far greater caliber to avert a disaster. Such leadership is nowhere to be
seen.
Despite the
massive injections of public funds, banks are clearly not lending to small
businesses, the vital source of economic recovery. Indeed, the vast government
borrowings are 'crowding' private corporations out of funds available for
lending. In essence, this cycling of funds, from the governments, to the
banks, and back to the governments, has created profits for the few while
offering no wider economic benefit. In the meantime the euro, as the world's
second currency, is in increasing danger of collapse. The euro is so shrouded
in doubt that investors are fleeing to the U.S. dollar and U.S. Treasuries as
a safe haven. This demand has created an illogical rally in the U.S. dollar
and Treasuries even as the major ratings agencies have telegraphed additional
downgrades of U.S. government debt.
Unless major
structural changes in fiscal policies are combined with sustained economic
improvements, there is a significant likelihood that the euro will
disintegrate in the coming years. As the world's second currency, its demise
would herald unprecedented bank runs and financial chaos. Following an
initial rise, the U.S. dollar may face widespread pressure as investors
realize that the dollar too is built on a foundation of sand. Although I
continue to be amazed by the ability of bankers and politicians to delay this
day of reckoning, I know instinctively that their power is finite.
If and when
our current Bretton Woods/dollar reserve system collapses, the chain reaction
will stun many with its speed and ferocity. Once paper money and government
obligations become suspect, they become not merely less valuable, but will
see severe and rapid price changes. In such an environment the return of gold
and silver as reliable money will become much more widely accepted. This will
usher in the next global chapter in economic history. Hopefully, next time
around we will build on a better foundation.
In 2011,
politicians of the U.S. and EU set their economies on a rendezvous with
economic and financial disaster. If one assumes as I do that no leader on
either side of the Atlantic has the courage to face the music, then there can
be little reason for optimism in 2012.
John
Browne
Euro Pacific Capital, Inc.
John Browne is a former member of the UK
Parliament and a current senior market strategist for Euro Pacific Capital. Click here to learn more about Euro
Pacific's gold & silver investment options. For a great primer on
economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes
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