Yes this is it! We have crossed the Rubicon and events
in the world economy are now likely to unfold in a totally uncontrollable
fashion. Clueless governments still don’t understand that it is their
ruinous actions that have created a credit infested and bankrupt world. They
will continue to prescribe the same remedy that caused the problem in the
first place, namely more credit and more printed money. The consequences are
clear; we will have hyperinflation, economic and human misery as well as
social unrest.
When
will the world finally begin to understand that we have reached the point of
no return and that “the
voyage of their life is bound in shallows and in miseries”
(Shakespeare, Julius Caesar). Sadly, we are probably not very far from
that point. It is already starting to happen in many countries.
The
latest EU and IMF package of $
1 TRILLION (Euro 750 billion) is yet another futile attempt
by governments to abolish poverty by printing paper. Let’s be absolutely clear,
this money does not exist and the EU governments are hoping by declaring such
a large amount that they can con the Wolfpack speculators. At
this point the EU has just picked a large round figure of out the air. But
when their bluff is called by the Wolfpack and the next attack happens, EU
governments will after initial huffing and puffing start printing unlimited
amounts of paper.
So the
world is now on its road to ruin and there is no action, no leader and no new
amount of printed money that can save the world or prevent a
hyperinflationary depression.
Never
in history has the world been in a situation when virtually all
industrialised countries are bankrupt. Therefore there is no precedent for
what will happen in the next few years. What we can be quite certain about is
that events will happen in a seemingly random pattern and that it will be
impossible to forecast where the next crises will start.
But
although we will not be able to predict in what order events will take place,
we can expect much of what is outlined below to happen.
Wolfpack
attacks
Already
back in 2007 we warned about the very high risk of the CDS (credit default
swap) market. This is now one of the primary instruments used by the Wolfpack
(expression coined by the Swedish Finance Minister Borg). The Wolfpack,
speculators with enormous fire power such as hedge funds and investment
banks, use the CDS market to attack any weak financial sector, be it a
country, a bank or a company. The combination of the leverage of the CDSs and
the massive capital available to the Wolfpack makes it possible for them to
bring down or badly maul whatever they attack. It was not the Wolfpack that
caused the problem in for example Greece but they can bring down a weak
victim quickly and profit immensely and immorally from it.
There
are so many weak potential victims that the Wolfpack can attack and they will
start with the most vulnerable ones like, Portugal, Spain and Ireland etc.
But when the time is right they will also attack the US and the UK.
So in
the coming year we will see country after country coming under attack from
the Wolfback which will lead to acceleration in money printing and higher
interest rates.
Iceland
– Ireland – Greece – Who is next?
The EU
support package of $ 1 trillion is supposed to be sufficient to protect the
rest of Europe from another Greek tragedy. The dilemma with such a massive EU
commitment is that no government expects to have to pay the money out. If they
did the voters in the respective EU countries would throw out their
government. Why should the German people, who are also having hard times, pay
for the Greeks, Portuguese or the Spaniards, especially since these loans
will never be paid back.
Greece
is bankrupt but is still taking on additional EU loans of € 140
billion. In addition, their austerity measures are supposed to bring the
deficit down from 12% of GDP today to 3% in a few years time. But who can be
so stupid as to lend to a bankrupt nation which will sink into the Ionian and
Aegean Seas in the next few years. With massive cuts in government
expenditure, with major falls in output, with unemployment rising fast, with
tax revenues collapsing how can Greece possibly be expected to improve the economy
and pay a high interest rate on their exploding debt? In addition, as
long as they have the Euro they will be totally uncompetitive. So if they
couldn’t manage their economy in the so called good times, it is
absolutely guaranteed that they have no chance of surviving in bad times. So
Greece will default and so will Portugal, Spain, Italy, France, the UK, the
US and many more. But before that there will be the most colossal worldwide
money printing exercise which would have used up most of the trees in the
world but for electronic fiat money.
So, if
virtually bankrupt nations don’t cut their deficits, they will
definitively go under and if they try to cut, they will also go under due to
collapsing output and tax revenues and colossal debts. Thus whatever actions governments
take or don’t take, they are damned.
The
table below shows debt as a percentage of GDP for various OECD countries. The
official debts (in red) are massive and unlikely to ever be repaid in real
money. Total debts (grey bars) include unfunded liabilities such as pensions
and health care. Spain has the lowest
total debt to GDP of 250%. Germany
and the UK have around 400%, the US over 500% and Greece over 800% debt to
GDP. These figures are absolutely astronomical and prove that
most governments in the world will be totally incapable of repaying their
debts or funding the pensions or medical care which they have committed to.
It doesn’t matter however much governments cut expenditure or raise
taxes, all these countries are insolvent and nothing can save them.
The
world must permanently readjust
Most
governments still believe that deficit spending and money printing is the
solution to all their problems. Because the world economy’s expansion
in the last 100 years and particularly in the last 40 years has been
primarily based on credit and not real growth, governments live under the
false impression that money printing will work this time too. But we have reached
the point when investors will no longer buy worthless government debt that
will never be repaid with real money. We will first go through a period when
governments issue and buy their own debt thus monetising the debt or print
money. This will be the hyperinflationary phase. Thereafter the world
will realise that none of the government debt and very little of the bank
debt will ever be repaid. Credit will then implode and so will also the
assets financed by credit. Eventually there will be a new monetary and
financial system and the world will start afresh. The adjustment period will be very
long and will involve economic and human misery, leading to social unrest and
major political change. It will be a horrible experience for the world during
this extended period of adjustment. But it will be like a forest fire that
clears out the deadwood and creates the conditions for strong new
growth. Once the new era starts it will therefore be from a
very much lower level and individuals will be rewarded for hard work
with little or no social security safety net. Credit will only be
granted for sound capital investment projects, not for consumption or
speculation. Ethical and moral values will return and the golden calf will
not be worshipped. But before that, the period of readjustment will be very
long and extremely difficult for the whole world.
Hyperinflation
For
several years we have predicted that hyperinflation is the most likely
outcome of the economic predicament that the world is in. But it is unlikely
to be a straightforward hyperinflationary period. Precious metals will be the
primary beneficiaries of hyperinflation. Certain commodities, especially food
and energy, will also go up in price. But most assets that have been
financed by the credit boom will go down in real terms. This includes
property, stocks and bonds. In hyperinflationary money these assets could
still go up in price. If someone who earned $ 50,000 per annum in real money
now earns $ 5 million in newly printed money, his house will probably also go
up in nominal terms. But in real terms property prices will decline
massively. There will be no credit available and interest rates will be very
high, probably at least 15-20% so very few people will be able to buy a
house.
Hyperinflation
will destroy many currencies so paper money will definitely reach its
intrinsic value which is zero. Gold and silver will virtually be the only
assets that will protect investors fully against the destruction of money.
The
next leg of the debt crisis is here
In our
February newsletter “Sovereign Alchemy will Fail” we discussed the
Sovereign Time Bomb and we are now experiencing the initial small explosions
with Greece as the first victim. The $1 trillion EU/IMF rescue package was
never intended to be more than a headline figure. EU governments were hoping
that this would frighten the Wolfpack away. But so far this has failed. The
Euro went up 4 cents when the package was announced but is now down to new
lows again. How can
anyone take a massive rescue package seriously when most of the countries
making the commitments are bankrupt themselves? Spain and
Italy have committed tens of billions each. And they are the ones that will
be attacked by the Wolfpack next. This
is the bankrupt saving the bankrupt. The IMF has no money but
is dependent on its members of which the US is the biggest contributor. And
they are bankrupt too. The UK, which is not in the Euro Zone and which has a
worse budget deficit than Greece, contributed £15 billion. The new UK
government is planning to cut a massive £ 6 billion of costs out of its
next year’s budget which will bring major hardship. But as a last act,
the outgoing labour government committed £15 billion which if paid out
will never be repaid. The whole thing is a total farce. Governments commit
trillions to rescue banks and sovereign states but cannot even make budget
cuts of a few billion in their own countries. This shows that the world
economy and the world financial system is being run by morons who only have
their own self interest in mind and do not understand the consequences of
their ruinous actions.
When
the $1 trillion EU rescue package was announced, the US simultaneously
offered European banks dollar Swap facilities (dollar loans) of a minimum
$500 billion but probably much more. In addition the US Fed also injected at
least $500 billion into the US banking system. These actions make it clear
the banking system is under tremendous strain similar to 2008. But this is
just the beginning. Things will get a lot worse.
Gold
In
2002 we advised investors to put up to 50% of their liquid assets into gold
when the price was $300. To us it was crystal clear that the mountain of
debts and derivatives would never be repaid with normal money but would be
inflated away by money printing and this is what is now happening. The media
are now talking about a bubble in gold and comparing to the 1980 top at $850.
Let us be very clear, although gold has gone up 5 times since the 1999 bottom
at $250, it is nowhere near its peak. Adjusted for real inflation (as
per shadowstats.com) the 1980 gold peak in today’s prices corresponds
to around $7,200 today. So gold could easily go up 6 times from the current
price of $1,220 and still be within normal parameters.
There
are many factors that will contribute to gold’s rise from here (in
addition to money printing):
- Gold
production is going down.
- Neither
Comex (the futures exchange), nor the bullion banks would be able to
deliver more than a fraction of the physical gold for which they have
outstanding commitments.
- Central
banks and the IMF probably don’t hold even half of the 30,000 tons
that they claim they have. Most likely, at least 15,000 tons (6 years
gold production) have been sold to suppress the gold price.
- The
precarious financial system will lead to a total distrust of paper gold
including most of the ETFs which have no physical gold.
The
four factors above will lead to the most massive surge in the gold price.
There will be nowhere near sufficient gold to satisfy demand at current
prices. We had been expecting gold to start its acceleration in March 2010
and this is exactly what is happening. We expect the move to be relentless
during most of this year with very few major corrections but with high
volatility. Moves of $100 in one day could easily happen.
So
gold is likely to make a top in the next few years between $5,000 and
$10,000. But if we get hyperinflation the price could go exponentially higher
like in the Weimar Republic when gold reached DM 100 trillion per ounce in
1923. Will gold experience the same type of correction when is has peaked as
happened after the 1980 peak? Probably not, because gold is likely to be a
part of a new monetary system that will be created when the current one has
collapsed.
The
table below illustrates the total destruction of paper money against gold in
the last 100 years and shows how many ounces of gold that $1,000 bought at
various times. In 1910, $1,000 bought 40 oz of gold at $25 per oz. Today in
2010, $1,000 buys 0.80 oz of gold at $1,230 per oz. This is a massive decline of 98%
in the value of the dollar measured in real terms in the last 100 years. The
next significant year is 1971 when Nixon abolished the convertibility of
dollars to gold. It was this disastrous decision that opened the floodgates
for the credit and money creation that we are experiencing currently. The
dollar is down 97% since then. But even if we take more recent years, the
purchasing power of the dollar measured in gold has declined
catastrophically. Since the 1999 gold low, the dollar has declined by 80%
against gold and since 2002 (when Matterhorn Asset Management recommended
major gold investments) by 76%.
Virtually
all currencies show similar declines in value against gold in the last 100
years. This is the clearest evidence of governments and central banks
defrauding their people of their hard earned money. Where will it end? It
will end when the dollar and many other currencies reach their intrinsic
value of ZERO. That time is not far away.
Egon von Greyerz
Mattherhorn
Asset Management AG
Matterhorn Asset Management has set up a
separate Gold Division called GoldSwitzerland (www.goldswitzerland.com)
in order for investors to purchase physical gold at very competitive prices
and store it in their own name in Zurich, Switzerland outside the banking
system and with personal access to their own gold bars.
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