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From World
War II until very recently, the West - specifically Europe and the United States
- was on a course for greater centralization, greater integration, and
greater economic intervention. But this consensus is breaking down. In
Europe, the euro has gone from steadily adding new members to now facing the
prospect of having its weaker members quit. In America, the US Congressional Supercommittee has now officially failed in its mandate
to bring even meager cuts to the bleeding US deficit.
This is the beginning of the end. Both the EU and US
are politically paralyzed, seeming only to be able to make compromises that
involve more spending, more debt, and more central planning. The results are
all too predictable to free-market thinkers: bailouts leading to moral
hazard, low interest rates leading to ballooning debt, and eventually a cascade
of systemic failures - leading to more bailouts.
This was confirmed yet again last Wednesday when central bankers on both
sides of the Atlantic announced a coordinated tidal wave of new money to bailout the Western banking system yet again. Now, the only
money you can trust is the gold and silver in your pocket.
LIKE LEMMINGS OFF A CLIFF
The poison of Keynesianism has left the politicians unable to even listen to
free-market solutions. Personally, I have found it nearly impossible to find
a Keynesian professor or official to debate me - even though (or perhaps
because) I have a track record of accurate economic predictions. You would
think at least one of them would want to tell me why I'm wrong... to offer
some excuses for their failure to predict the dot-com bubble, the housing
bubble, or anything that has come after that.
This is just an illustration of what we, as investors and citizens, are
facing. The halls of power, the media, and academia are completely closed off
from reality. They're clutching their theories and hoping that they don't end
up having to work for a living like the rest of us.
EUROPE
I have repeatedly stated that the fact that Germany has been resistant to
printing more euros is the main argument in favor of the euro. Of
course, the mainstream consensus is the opposite. The same people who pushed
for entitlement programs that Western nations couldn't afford are now arguing
that the EU must use the power of the printing press to "help"
bankrupt Greece, Italy, Spain, and others. Really, this is just a secret tax
on those who chose to save for a rainy day, and it will lead the euro on the
road to ruin just like the US dollar.
If Greece, Italy, et al, can't stomach the austerity that comes with staying
in the euro, they should withdraw and see how the bond markets treat them
without the implicit backing of Northern Europe. Either way, they must be
made to face the market consequences of their previous spending.
Unfortunately, with this past Tuesday's announcement that the EU would
provide another $10.7 billion bailout to Greece and Wednesday's bank bailout
announcement, there is no sign that Europe's politicians are going to allow
market forces to play out. Instead, repeated bailouts will ensure that other
ailing economies, like Italy or Portugal, do not make the necessary cuts in
time to avoid needing their own bailouts. And no one, save perhaps China, can
afford to bail out the likes of Italy.
Thus, like pulling off a bandaid, the politicians
have made the euro crisis more painful by drawing it out. This means more
risk and more volatility for investors, causing them to abandon the
supranational currency in droves.
AMERICA
Abandoning the euro looks like a wise course of action, but it becomes
extremely unwise when you buy dollars instead. Remember, my concern with
Europe is that they have started down a path that may lead them to the sorry
state of the US. If you're worried that your refrigerator doesn't get as cold
as it used to, you don't move your perishables to another fridge that won't
even turn on!
In other words, the current status of the dollar is the nightmare
scenario for the euro: no significant member-states are thriving,
bailouts are assumed and given without significant debate, and the money
supply is growing rapidly to cover the debts. At worst, the EU could be
facing a rump euro comprised of the healthier Northern economies or years of
debt monetization to try to "save" the PIIGS. But the US has already
spent decades monetizing its debt and is now facing a 'game over' scenario.
Remember, the EU might be going along with the latest bank bailout scheme,
but the US Fed spearheaded it and the swaps are denominated in dollars.
The failure of the Congressional Supercommittee
shows how laughable Washington - and, by extension, the dollar - has become.
The Federal Reserve is frantically buying Treasuries at auction to make up
for wilting demand from foreign creditors, such that it may soon hold 20% of
all outstanding Treasury debt. Meanwhile, the Supercommittee
failed in its meager mandate to slow the growth of new spending by $100
billion a year, barely a dent in an annual deficit that runs over $1 trillion
a year - not to mention the $15 trillion in debt already accumulated. The
failure caused ratings agency Fitch to downgrade its outlook on US credit,
potentially joining S&P soon in stripping the US of its AAA. Perhaps the
analysts at Fitch realize that if the Fed were to stop buying Treasuries, say
because consumer prices started rising too quickly to ignore, then rising
interest rates would add additional trillions to the debt problem, making
default inevitable. Or maybe they're starting to realize that getting paid
back the whole coupon in worthless dollars is just another form of default.
In short, the US is going to be mired in economic depression for the
foreseeable future, with no reform efforts likely, and so the Fed will
continue printing as much as it can to paper over the problem. This is
tremendously bearish for the dollar, even moreso
than a euro facing the loss of a few weak member-states.
THE BUCK STOPS HERE
The knee-jerk buying of US dollars, which has sent metals prices on a roller
coaster this fall, represents pure market manipulation by the Fed. Private
buyers and foreign governments were selling dollars and Treasuries before
this recent market action sent confusing signals. We saw a short rally, but
on last Wednesday's bank bailout news, dollar selling resumed in earnest.
Overall, the trend remains: the Fed will continue to buy a greater and
greater share of US debt until all the new money it's printing sends
inflation into the double digits.
So, in a world where the two major reserve currencies are both faltering,
which asset is going to become the new foundation for international trade and
personal savings?
A look at history sees periods of monetary debasement and market mania
followed by a return to more fundamental values. Every successful
civilization in history has relied on sound money to grow, always in the form
of precious metals. With globalization, we live in a world where investors
don't have to live with their governments' bad choices. Allocating a portion
of your portfolio to precious metals means being able to sit on the sidelines
and laugh at the comedy of the sovereign debt crisis. It means that when new
dollars or euros are printed, your metals simply go up in price.
That is the ultimate resolution to this crisis. More banks, institutions, and
individual investors will simply withdraw from the fiat money system and rely
on precious metals as their reserve asset. As they do so, the fiat system
will be all the weaker for the those left behind.
After this period of uncertainty, a new consensus is sure to form, and the
24% run up this year alone indicates that gold may play a central role.
Peter Schiff is CEO of Euro Pacific Precious
Metals, a gold and silver dealer selling reputable, well-known bullion coins
and bars at competitive prices. To learn more, please visit www.europacmetals.com or call
(888) GOLD-160.
For
the latest gold market news and analysis, sign up for Peter Schiff's Gold Report, a monthly
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