Egon von Greyerz, founder
of Goldswitzerland.com (Matterhorn Asset Management AG) and member
of the board of directors of Goldbroker.com published an article
headlined "ALEA IACTA EST" :
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 out of 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):
1. Gold production is going
down.
2. 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.
3. 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.
4. 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.