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We take the pressure and we throw away
Conventionality belongs to yesterday
There is a chance that we can make it so far
We start believing now that we can be who we are
Greece is the word
Greece is the word, is the word that you heard
It's got groove it's got meaning
Greece is the time, is the place is the motion
Greece is the way we are feeling
This is the life of illusion
Wrapped up in trouble laced with confusion
What are we doing here?
We take the pressure and we throw away
Conventionality belongs to yesterday
There is a chance that we can make it so far
We start believing now that we can be who we are
Greece is the word
The situation with Greece and the euro presents us with a fresh opportunity
to explore what is really wrong within the system from a macro perspective.
And I am not talking about the euro system. I am talking about our global
system of savings that are value-fixed directly to a transactional currency
unit whose value doesn't even matter in the context of its primary function.
This problem is what we call a Catch-22, or a no-win situation for the system
as a whole. This means that because of its fatal flaw and current precarious
position, the global financial system faces threats from too many fronts, any
one of which can bring it down like a house of cards. And attempts to shore
up the system on one side are kneecapping the legs supporting it on the
other. Our global monetary/financial/economic system today lies in a
"critical state", barely surviving on a "knife-edge of
instability".
In order to understand the greater systemic problem that is presenting today
as a boiling pustule in Greece, we must first understand the flow of capital
and the growth of debt. With debt growth as the deadly tumor in the cycle, it
is easiest to visualize the flow of money as a circular feedback loop, where
the debt cycle feeds back on itself in a sustained growth pattern.
The denouement or final shakeout of this systemic crisis will include two
separate events, no matter what decisions are made along the way. In this
statement I have full confidence. For semantic simplicity I call these two
events freegold and hyperinflation. But these terms seem to cause
consternation and confusion in many readers, so you can think of them simply
as the dramatic devaluation of paper gold and the catastrophic devaluation of
the dollar. Two inevitable devaluations. Two unavoidable outcomes.
In order to understand how we get there, we must think about the three main
forces at work in today's systemic crisis. The three forces are nature (you
can call it "math" or "physics"), politics (call it
socialism or "the collective will"), and self preservation (of the
giants and the savers). These three forces are interacting in ways that
appear chaotic here on Earth, but that form a clear, emergent pattern when
viewed from outer space.
Further, we must understand the dynamics that brought us to where we are
today. And those are the dynamics of debt, the global dollar system and the
roles of money in the collective mind. Imagine that I am the debtor in the
above diagram and you are the saver. I am going to keep living off credit as
long as you keep buying my debt repackaged by the banks as a bond. The more
you buy, the more the banks are going to offer me credit cheaper and on
easier terms. Can you really blame me? Who should know better? Little ol'
negative-net-worth me or super-producer giant you?
You see, by buying my debt from the banks you have become my enabler. You are
feeding the dynamic that will bury me in debt until I hit the mathematical
limit of my ability to pay. Eventually it will become clear that life is
simply not long enough for me to pay back the principle I have borrowed. And
ultimately it will be impossible for me to even pay the monthly interest. But
can you really blame me? I have always had an out. Have you? I have always
had the option to default and declare bankruptcy! I know this, and even
though I am not the sharpest tool in the drawer, at least I know where my
escape route lies. Do you know where yours is?
Credit Money
The first thing we must understand is that almost no one holds actual dollars
as their savings. When I talk about the problem of transactional currency
being used as a wealth reserve, I am talking about the paper assets that are
denominated in dollars, fixed to a specific number/flow of dollars, and
therefore whose value is directly fixed to the value of an actual dollar.
And when I talk about dollars, I am talking about the actual physical bills,
cash, monetary base and bank reserves (which are all basically the same
thing). So the only people who hold actual dollars as savings are those who
employ a shoe box or a mattress at home. Even if you keep your entire savings
in a checking account earning no interest, I am not calling those dollars.
Those are credits to you from a corporate counterparty authorized to call its
units dollars.
So all the money circulating through the economy without physical Federal
Reserve notes passing from hand to hand I am going to call "credit
money", not dollars. We do think of them as dollars when they come from
special institutions that are authorized to call them dollars (banks). But they
are really just credits from an institution.
Think of it this way: You have two credit cards, one from Citibank and one
from Macy's. Citibank is an authorized institution so its credits can be
called dollars and spent anywhere just like dollars. They can even be used to
pay the IRS. Macy's is not an authorized institution so its credits
can only be spent at Macy's. They are truly just credits. Try paying your
taxes with your Macy's card if you don't believe me.
Now think about the cash you just deposited at the bank. Did the bank put
that stack of cash in a safety deposit box with your name on it? Nope, it
went right into the general reserve pool with all the other cash at the bank
and they issued you an equal number of their institutional credits! Got it?
Now, think about money circulation in terms of the above diagram. Imagine the
rotation as a small hurricane inside of a large hurricane, each spinning in
opposite directions. 99% of the flow of money never moves a single dollar. It
is just the balancing and shuffling of institutional credits. Bank A credits
100 to bank B and vice versa. At the end of the day they just cancel out for
the most part.
Furthermore, we think of new credit money as being created out of thin air
every time a loan is originated. It is true, but that new credit money is
offset within the system as a whole by two things. The first is the sale of a
new financial product by the bank to the savers, a financial product that
represents the claim on that new debt. And the second is that inner circle on
the diagram above. Investment, income and debt service all work against
credit creation in the systematic accumulation of credit money.
That's not to say there is no growth within the system. On the contrary, there
is constant and infinite growth and almost never any contraction in the
aggregation of debt-related assets. This pile on the right side of the
diagram grows uncontrolled like an undiagnosed tumor until it ultimately
kills the host. But for "the money supply" that generally affects
our inflation expectations, there is very little real movement. And likewise,
there is very little visible inflation within the dollar's spending zone.
The base money or cash around which this system swirls is rarely needed or
even touched. Yet it is each unit of that base which determines the ultimate
value of that mountain of savings growing to the right, a mountain that is
more than two orders of magnitude larger than the unit on which its value is
fixed.
I realize this is new and probably contradictory to what you have learned
about money and the banking system, but this is the way it really works. 99%
of the economic activity that swirls in these circles has no effect on the
number of actual dollars in existence. But what it does have an effect
on is the growth of paper assets held as savings by the entire world, paper
tied directly to the value of a single physical dollar. With each rotation
the pile of "paper wealth" on the right side grows larger and the
hole of debt on the left side is dug deeper. There is no balancing mechanism
in this system of debt, only an ever-increasing imbalance.
Religious tradition teaches of a Jubilee, or a debt-forgiveness cycle. Such a
theoretical policy would periodically reset the balance between the left and
right back to its starting point. And what the awareness and anticipation of
an event like this would cause is that debt would be structured in a way to
be paid off by the time Jubilee rolls around. If it wasn't paid off, then the
savers would lose their savings. So the debt would grow for roughly half the
cycle and then shrink for the remaining half and at Jubilee, any debt that
remained would have to be forgiven. An imperfect system to be sure, because
it does not have a dynamic balancing function, but one that would at least be
sustainable through periodic resets.
But considering this hypothetical solution begs the question of where the
savings would flow during the debt contraction period of the Jubilee cycle.
They would have to flow into either physical goods or reinvestments into the
economy, equity positions similar to our stock market today. As the debtors
paid down their debt during this latter portion of the cycle the savers would
have to choose between equity reinvestment or physical wealth storage. And it
would be the collective's job to encourage the former as that would grow the
economy and create a larger tax base to feed the collective hunger. But for
the latter, the physical wealth storage vehicle par excellence has always
been gold.
What we are about to experience today is a natural Jubilee of sorts, a
hundred-year reset, only this one will happen at the point when the debt
mountain is at its all-time peak, and right when nobody expects it to happen.
A grand surprise. An ultimate shock. This will be catastrophic for the savers
of debt and will be so traumatic to the system that total systemic entropy
will be achieved. And a new system will have no choice but to emerge
naturally from an absolute void of confidence.
But I am getting ahead of myself. Let's go back to Greece and my diagram.
If you have been following the news lately you have seen plenty of criticism
directed at Greece, "the PIIGS", the euro and the ECB. But what you
probably haven't seen in the news is what you get here, and what you get in
the archives of Another and FOA, a more historic and proper perspective on
the euro and what it means, why it was formed, and how it was designed like
an iron bunker to weather just this sort of a systemic collapse. How, in
fact, the architects saw this coming decades ago and planned accordingly.
Many pundits and analysts have been speculating that this "Greek debt
crisis" could mean the end of the euro, the end of a broad-based euro,
the break-up of the Eurozone, or something along those lines. But this
analysis flows from the shallow and short-sighted thinking that has become
the very hallmark of Wall Street and Washington. The euro was and is a
political movement (remember I said that politics is one of the three key forces
to watch) that spans decades if not centuries, and encompasses much more than
just a transactional currency. It is comical to watch some of these Wall
Street hot shots criticizing what is really quite an impressive
accomplishment in the euro.
Jim Rickards explains some of the history behind the euro and its relation to
the Greek debt crisis in a recent interview on
King World News:
Eric
King:
I want to ask you about Greece. Because the Greek situation seems over-hyped
as a way to talk down the euro. What are your thoughts on that, Jim? Because
I know in another interview you pointed out that the Greeks have a lot of
gold and could just sell some if they had to.
Jim Rickards: Yeah, the Greek gold position is not the whole story and
it's not the whole answer, but it is significant. What's interesting is that
people talk about the PIIGS, you know, with two I's. And of course that
stands for Portugal, Ireland, Italy, Greece and Spain. And these are
considered to be the weak members, if you will, of the euro system... of the
Eurozone. And they all have different fiscal problems in various ways. But
the amount of gold they have varies widely from a high which is Italy which
has over 2,000 tonnes. Actually about 2,400 tonnes according to the World
Gold Council.
Greece is less than that but still has a significant amount at over 100
tonnes, and then you have Ireland which only has 5 tonnes. So the amount of
gold they have to back up their reserve positions, to, in effect, back up
their central banks varies widely. And I've actually read the S&P and the
Moody's, the ratings agency reports on these countries and they don't even
mention gold!
[FOFOA: The PIIGS combined gold hoard is 3,233.8 tonnes, more than three
times that of China. And their combined population is only 133 million. So
the PIIGS actually have about the same amount of gold per capita as the US.
And they have 34 times as much gold per citizen as China. In fact,
Greece alone has 14 times as much gold per capita as China. China has
0.7 tonnes per million citizens. Greece has 10 tonnes per million and the
PIIGS as a whole have 24 tonnes per million!]
I'm not saying it's the whole story. It isn't. And they don't have enough
gold [at today's price] to retire their national debt. And I'm not saying
that. I'm just saying that it's more dry powder. And it's another foundation
for your monetary system. And to completely ignore it or disregard it, which
the rating agencies do, is a little bit of a mistake.
So Greece does have a little backstop there and what you could do, for
example, is that the Greek central bank could, with a phone call and a couple
book entries, swap out their gold for euros and again, it wouldn't be enough
to retire their debt, but it would be 3 or 4 billion euros at current market
rates and that's not an insignificant amount of money. So it does give them a
little bit of a lifeline.
But it's impossible to think about Greece without thinking about the euro
system as a whole, because, of course, Greece is a member of that. I mean,
does it have its fiscal house in order? No, not completely, but its debt to
GDP ratio is only about one half of Japan's. Its deficit to GDP ratio is not
that much worse than the United States. So they look bad compared to Germany,
but they don't look that bad compared to other members of the G7 for that
matter! So it's not as if they've been reckless, or it's not as if they're
that different from all these other countries, but they have become the eye
of the storm. For a while the Greek stock market was going down. Their
interest rates were going up. Credit default swaps spreads were widening out.
You know, maybe that was a good opportunity for day traders, but I wasn't
really worried about Greece defaulting. I'm quite sure Greece will not
default at the end of the day. They seem to be moving in the right direction.
But because their debts are denominated in euro, and because they're a member
of the euro system, at the end of the day they are going to be backstopped by
the ECB which ultimately is controlled by Germany. And the reason I say that
is if you're Germany, and you're the ECB, and you're Trichet, and you start
throwing members under the bus, where does that end? I mean if you allow
Greece to default and, in effect, impugn the value of sovereign bonds
denominated in euros, who's next? I mean it probably will be Ireland, and it
will be Spain, and then it will be Portugal. And if you start losing four or
five members, there goes the whole euro system. The whole thing falls apart
and there's a flight from that currency.
Now the history of this is very significant. The euro system, and Greece in
particular, those are not Wall Street piñata. I know traders like to
bang them around, you know the spreads widen and then the spreads come in.
There are trading opportunities there. But this is taken much more seriously
by the Europeans. I mean you go all the way back to the Counter-Reformation
in the late 16th century which was extremely bloody. And then the Thirty
Years' War which was devastating. And then the Seven Years' War and the
Napoleonic Wars, the Franco-Prussian War, World War One, World War Two...
this is one catastrophe after another! And Europe literally destroyed itself
and exhausted itself in fighting all these wars. And finally after WWII they
said enough! We're going to pursue unification. It's the only way to keep
from fighting each other.
Now, political unification has had modest success. Military and foreign
policy unification has really had no success at all. But the crown jewel of
European unification is their monetary system, the euro and the European
Central Bank. So that's the pinnacle of their world historical efforts to
unify the continent. They're not going to give that away lightly. I mean,
they view it in a much broader historical context than Wall Street and
Americans. And so it's of the utmost importance to them. And they're going to
do everything they can to preserve it. And that's one reason, along with the
gold, why I have confidence that Greece will not default.
And then following WWII and joining with the dollar in the new Bretton Woods
system for stability, Europe stumbled through the shock of the London Gold
Pool in 1968 and the end of Bretton Woods in 1971. And then in 1979, at the
height of the dollar crisis, they formed the European Currency Unit (ECU)
with an eye toward eventually introducing a unified currency. The ECU
ultimately became the EMU with the introduction of the euro.
As I said in my Dead End post, "They
came to the realization that the path the dollar
(and the entire international monetary and financial system) was on was
essentially a DEAD END. It was not sustainable! At some point in the future
this system, and its MONETARY FOUNDATION, would (MUST) collapse. This was not
a plot to collapse the dollar. It was, instead, a RECOGNITION of the
inevitable!"
But I'm getting ahead of myself again. Let's get back to the money...
The current system of infinite debt accumulation is unsustainable and has
been destined for collapse from the very beginning. There is no device in
place for a periodic reset, and there is no automatic counterweight to
balance ongoing trade deficits, correct imbalances and hold profligacy accountable.
If it weren't for the hard fixed currency zone of the euro, Greece would be
headed toward currency collapse and hyperinflation right now, just like in
1944, and just like Iceland, Argentina, Brazil, Zimbabwe, Weimar Germany,
Bulgaria, Hungary, Peru, Bolivia, Ukraine, Yugoslavia and so many more.
The euro did not cause Greece's troubles. It has actually spared Greece the
worst of it. The problem is the dollar system of debt accumulation that
simply continues unabated until finally someone can no longer pay.
Jumping around a bit, what do you think gold, the stock market, fine art and
houses all have in common? Their value is inversely related to the
value of a dollar. If the dollar tumbles in value all of the above rise in
their dollar price in response. This is the opposite of the relation
between debt/bond instruments and the dollar. And this **THIS** is the
concept we must all assimilate into the core of our being. On one side there
is the transactional currency and the debt markets, and on the other side is
everything else. And the transactional currency does not depend on a high
valuation to perform its primary function. It can do its job as a medium of
exchange with literally ANY valuation. So why is the global debt market,
which is tied inseparably to this symbolic unit so damn big?
Why? Because of this...
Unfortunately ^_THIS_^ is about to collapse. The mountain has grown too large
and the debt hole has been dug too deep. The ability to pay has come to its
mathematical limit and now threatens the value of an entire planet-full of
savings. First the US consumer and homeowner dropped off from the left side.
Then Iceland and now Greece. Here is roughly what it looks like right now...
It is now a broken system where credit money is not circulating with
sufficient steam to keep it viable. It is now reliant on A) the one debtor
that can print its own debt service and B) the expansion of the monetary base
at the center in order to replace the outlying losses.
Notice the growing concentric circles around the central bank and the cash.
Here is what that looks like in an official graph...
All the other monetary aggregates contain credit money and debt assets that
are generally very liquid and directly tied to the value of a physical
dollar. These assets that we are taught are the same as dollars are the
direct debt of certain approved corporate institutions. They are mere credits
while the institutions engage in a murky game of financial smoke and mirrors
with your real money. These credits may be the most dangerous of all during a
systemic collapse as they are cloaked in a morass of legalese small print.
And as I have shown to some degree in this post, and in greater depth in past
writings, these wider aggregates have little effect on the consumer price
index we all watch so closely. The big secret of the central bankers is that
it is the monetary base, the cash, that has the most effect from a quantity
theory perspective. And it is systemic confidence (YOUR confidence in the
system) that has an equal
effect from a velocity perspective.
To demonstrate my point, I have adapted the above diagram to show what it
looked like in Zimbabwe last year...
The important thing to remember is that the pile of debt on the right side of
the diagram is fixed to the value of each individual physical dollar. So as
the physical stuff is diluted to fill the void left by the failing
credit/debt system, it directly impacts the real value of the debt market.
This is exactly where we are heading. So you have to ask yourself: With a
whole planet-full of paper debt wealth, how long are the savers going to sit
there waiting for their value to disappear? But the fact is that it doesn't
matter how long they sit there. The only difference that will make is how
much value they are going to lose. You see the system can no longer support
their value on its own. This is clear from the housing crisis, Iceland and
now Greece. But the system must go on so the very unit their value is fixed
to must be diluted to infinity just to keep the circle spinning.
And infinity is truly the limit. Don't expect austerity or a deflationary
collapse. Don't expect them "to do the right thing" and let the bad
debt fail. There is simply too much of it out there. It is our entire global monetary
system, not just the bond investors. There is no political
will anywhere in the world to let the people's wealth simply vanish in order
to maintain the value of a silly little physical dollar. This **THIS** is the
big Catch-22!
In order to save the people's "money" it will be destroyed!
And the first thing to go will be the low price of gold. The depressed price
of gold did many things for this failing debt system. It kept the savers,
that didn't feel like braving the equity markets, going to the debt markets
instead of physical items... "for a yield". It kept the heat on the
debtors of the world, forcing them to pay off their debt in real, difficult
terms, even though the same system made it ironically easy to get into
debt. It made the dollar appear strong, as the numéraire of the debt
markets. And it allowed the central banks a certain ease in shuffling
reality around while maintaining a myth.
But most importantly, it provided an escape route for those savers who
noticed the finite timeline of this system and sought safety. We can see that
this group now includes the Saudis, the Chinese, the Russians, the Indians
and the euro architects, among many others.
Probably the biggest and most visible (and visibility is one of the keys to
collapse) problem with our system, reliant as it is on infinite debt
accumulation, is that with the majority of the world at its mathematical
limit, only one
entity remains that is both willing and able to dig itself
the infinite debt hole required to keep the system churning.
The problem is that this entity also controls the printing press of the
numéraire of its own debt, so no one, or certainly not enough people
with real credit money on the periphery, are willing to feed this black hole
of moral hazard. So the only one left to fund this debt hole to the extent
that is required is the Fed itself. And that means that the fuel needed to
churn the credit money system is now fresh base money. And as this fuel flows
out from the center of our diagram into the formerly credit-driven periphery,
the center base swells like a red giant about to consume its own solar
system.
This dilution of the base diminishes the real value of each unit with each
unit of fuel that flows. And like an advanced alien civilization fleeing its
dying sun, the savers will flee as they see this visible threat swell. Either
that or their savings will be swallowed whole by that which was meant to
protect them from the default of the "deadbeat" borrowers.
Default or devaluation. Only two ways to go. Catch-22. Math. Inevitable. Unavoidable.
Politics will force devaluation over default, inevitably, presently.
Self preservation will choose the only escape route not subject to economic
health nor subject to credit-driven bubble deflation.
Freegold, then hyperinflation.
You see, the system, because it is made up of billions of humans, is like a
living organism itself. It will seek out and find what it needs, which is an
automatic mechanism to deal with imbalances and bring them back into
sustainable equilibrium. That mechanism is extremely high-value gold. And the
only way that can be achieved is the destruction of the paper gold-promise
market.
The Nuclear Option
The ECB and the BIS have a secret weapon. They don't want to have to use it
because they don't want to be seen as the instigators of the dollar's
collapse. They would prefer the market to take care of it for them. But don't
doubt for a second that they won't use it before sitting back and watching
permanent damage come to the euro system.
Just imagine how Greece could deal with its problems if its gold were valued
at $55,000 usd per ounce. In terms of current exchange rates that would raise
Greece's liquid assets to 50% of its public debt. In other words, instead of
being a "sub-prime" borrower, Greece would instantly become a PRIME
borrower.
Let's say you owe $200,000 on your home which has fallen in value to
$200,000. You aren't exactly underwater yet but your loan to value is 100%
now, a precarious situation for someone with income and asset problems. Now
let's say you also have $100,000 worth of gold. You could still walk away
from your home if you chose to, but you are certainly not a foreclosure
candidate anymore. And your future needs would be backed by your new asset
base. Of course this would also give you a newfound incentive to get your
fiscal house in order, lest you have to part with your gold!
This is freegold. And this is the secret weapon. Although it is not so much
of a weapon as it is a defense... against the inevitable.
Rumors have been circulating for a few months now about some large physical
buyers on the public LBMA being cashed out with a 25% premium and being sent
to the private cash market to get their gold where such a purchase at a
premium would not move the official price. This rumor suggests a relative
shortage to demand for physical on the official price-setting markets. And
this tightness is confirmed by the low GOFO or Gold Forward Offered rate
reported by the LBMA which is currently languishing at lows only seen twice
before. Both times in close proximity to backwardation events that both times
signaled that the system was teetering on the edge of collapse, only to be
rescued by some entity supplying physical gold to market at an intentional
loss.
COMEX being in the US and the LBMA being in London leaves the ECB and the BIS
with "the nuclear option" if things ever get desperate enough to
use it. This nuclear option is A) for the BIS to begin operation of a public
"physical only" market for gold to be used by the really giant
participants, primarily sovereign entities and billionaires, and B) for the
ECB to use the price discovered by the BIS in its quarterly reserve asset
"marked to market" adjustments.
Such a move would put Greece, and all the PIIGS for that matter, in a much
better position almost overnight. Of course it would have devastating effects
on the value of the dollar and the rest of the paper gold market. You see, in
order for the BIS to supply actual physical gold to each and every giant that
was ready to buy, the price would have to rise high enough that someone else
with an equally huge amount of gold was willing to become a seller. And right
now, at today's prices, we know that the central banks of the world have
become net buyers! So the question is, just how high would the price have to
rise in order to balance out the demand of the world with the supply, in a
physical-only official price discovery market?
Chances are that what would be revealed by such a market would have an
eye-opening and breathtaking effect on the rest of the world and demand would
skyrocket. What passes today for enough demand to almost break the
paper markets would quickly shift all players from paper to physical and add
new savers that hadn't even considered gold before. Literally, the entire
world would shift its view to gold.
And because this would be a physical-only market in the presence of a credit
money contraction it would have no way to bubble in price beyond actual
demand. Instead it will finally plateau once the Thoughts of all the giants
and savers of the world reach their Nash equilibrium. And the price will be
high enough that it becomes a coin toss as to whether you'd rather be in cash
or gold. What it will come down to is your own time preference and your
appetite for investing back into an economy that must be rebuilt.
The euro architects knew the difference between the monetary functions. They
knew that the infinite growth, store of value function was the dollar's
Achilles' heel. So they designed the euro to be a stable transactional and accounting
currency even if the world chose non-euro physical assets as a store of
value. The dollar does not have this design.
This is not to say that the euro will not devalue against gold right along
with the dollar. All infinite, symbolic, transactional currencies will, which
is to say all currencies will. And to a lesser extent, all currencies
will have to devalue against the rest of the finite real world as well. But
they will not all hyperinflate to infinity in the aftermath as the dollar
will be forced to. Some will. Others will not. The euro probably will not.
This is freegold. It is coming whether or not the euro uses its secret
weapon. Like I said, they would prefer not to be seen destroying the paper
gold market proactively. They would rather just wait until it destroy itself
(which, by the way, it is doing pretty well).
But the unfortunate effect of this transition will be the panic that will
ensue within the dollar camp. What has already started through QE, bailouts,
stimulus and liquidity operations (base money creators all) will have no
option but to accelerate to infinity. When I say no option, I mean that there
will be absolutely no political will to do anything else.
So as we can see, we have math, political will and self preservation all
coming together in a perfect storm as our entire system of infinite debt
accumulation teeters on a knife-edge of instability. What could possibly go
wrong?
Well, there's Greece I suppose. It usually only takes one little shock to
bring down a house of cards. And this is why I say you cannot be prepared too
early. There is no such thing when the stakes are so high. Preparation must
happen early and completely. Because once this thing starts to unravel it
will be too late to prepare and to even prosper from the foresight of an
inevitable event. Once it all starts unraveling you will be completely
preoccupied just trying to limit your losses.
Gold
This is where physical gold comes in. I have shown you what is wrong with the
system when viewed from outer space. And I have shown you what is missing,
and what will be found. And I have shown you how the really big money with
really big foresight has prepared.
Notice that Greece and the ECB do not have palladium in their reserves. Just
sayin'.
Of course you should also make other preparations to ensure that your bare
necessities of food, clothing and shelter are taken care of. Some silver and
even some dollar currency makes sense in this regard. This whole "gold
thing" is really just for those people that have more money than they
will need to live on for about a year. And it is for those that would like to
store that excess wealth in the most universally liquid vehicle since they
don't know exactly what they will be needing a year from now.
Perhaps they will need a generator. Or maybe a cow. Or maybe a gun. Maybe a
new Ford F150. This is where gold comes in handy. You can store your wealth
securely now in a universal package that should be convertible into the most
needed things later. It can cost a pretty penny to be totally prepared now
for every possible eventuality. Instead, it is best to prepare for the most
probable events and keep a universal reserve for the unexpected!
But as a practical matter, because of the explosive potential in gold and
because of the proximity of a likely event, many smaller investors are now
piling in with their "six-months-out" money and then some. And to
be honest, I can't really argue with their reasoning.
But what about the stock market? Someone emailed me saying,
"During a currency crisis in the western world, we may see a very
powerful stock market rally as equities are a form of real asset. Better to
own a piece of Procter and Gamble than a unit of currency that can devalue
quickly. Look to the Argentina general equity market MERVAL index during the
peso crisis. It shot up – although not as much as the 3:1 currency
devaluation."
The writer answered his own point. The stock market shot up LESS than the
currency devalued. So while the stock market in Argentina performed MUCH better
than debt fixed to the value of the currency, it only chased - and lagged -
actual inflation. (Actually, short term hyperinflation.)This is partly
because the economy is usually in shambles at the time of a currency
devaluation. So while you would expect real things like real companies to
compensate for a falling currency, you must also weigh in any previous
bubbling that might deflate and any economic factors that might reduce
company profits.
But Argentina is still a good example for us to look at. In January of 2002
the currency devalued 3:1. At the same time the stock market rose in response
to the devaluation and then stayed up (because the currency stayed down). But
what is interesting about Argentina is that just prior to the devaluation, in
December of 2001, inflation dipped into negative territory (deflation?) and
the stock market dipped as well. Then they almost immediately exploded out of
this head-fake in an unexpected devaluation. See the charts. The first is the
MERVAL and the second is CPI:
Hmm... look familiar?
Bottom line: The stock market, because it represents equity not debt, will
fare much better than the rest of the paper world. But the stock market does
suffer from dilution, manipulation and bubbles. Expect the stock market to
languish in economic chaos as it chases real inflation only to fall a little
short.
But gold is different. The system desperately needs a counterweight, and gold
is it. The counter is already in place, only the weight is yet to come. And
once we have seen the reset in gold as it performs its phase transition from
commodity to wealth reserve, it will then chase (hyper)inflation along with
the rest of the "non-dollar" world, only it will be the ONE AND
ONLY THING that will be immune to the economic mess that will still need to
be worked out.
Got any gold yet?
Greece does.
Sincerely,
FOFOA
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