The Gini coefficient of income and wealth
is now reaching extremes in many countries. This measures the
inequality between the rich and the poor. In the US the Gini coefficient
is now at the same level as in the 1920s before the depression. In
countries like the US, the rich are getting richer whilst 45 million
people live below the poverty line, 43 million receive food stamps and
over 700,000 are homeless. With a real unemployment rate of 22% and
urban youth unemployment much higher, the US will soon experience social
unrest.
But it is not only the US that will
experience financial misery, famine and social unrest. This will also
hit most European countries and in particular the UK, southern Europe,
Eastern Europe and the Baltic States as well as African countries, the
Middle East, Asia, yes in fact the whole world.
Are boom and busts inevitable?
Well if you listened to the former
British Labour Prime Minster Gordon Brown, he proudly declared that he
had abolished booms and busts and thus economic cycles. But he was
expeditiously thrown out at the next bust which of course had nothing to
do with him since he blamed the US sub-prime market for his ill-fated
destiny.
Cycles or ebbs and flows are a natural
part of both economic life and nature. And right at the point when
something could be done to limit the damage, most nations seem to have
the uncanny knack of selecting the political individuals who will put
fuel on the fire and make the situation catastrophically worse.
Greenspan was one such individual.
During his 19 years as Chairman of the Fed, he could have limited the
economic and social damage that the US would suffer. Instead he took
every single measure possible to ensure that there would be a
catastrophe with uncontrollable consequences. But we shouldn’t just
blame the incompetence of Greenspan. It was sickening to watch every
sycophantic congressman and senator licking Greenspan’s boots and
praising his wisdom. Because Greenspan’s money printing and incompetent
interest rate management created one of the biggest financial bubbles in
world economic history. But the politicians loved this. It made the
stock market boom, and house prices surge. Thus the politicians were all
loved by their voters who did not understand the dire consequences that
were looming. And Bernanke de Pompadour is continuing the same
disastrous policies of creating money out of thin air. When will they
ever learn that creating money out of thin air and running astronomical
deficits that never will be repaid with normal money leads to the road
of total ruin? When will they ever learn? The very sad
answer is that they won’t and therefore they are leading the world into a
hyperinflationary depression that will have uncontrollable and
cataclysmic consequences for current and future generations.
Empty stomachs are rioting
We have for years warned about
hyperinflation leading to famine, misery and social unrest. Well, this
is exactly what is happening in many parts of the world. The protests
and overthrowing of regimes in Tunisia, Egypt and Libya are primarily
due to a major part of the peoples of these nations having no job, no
money and little food. It is their empty stomachs that are rioting. In
addition they are protesting against the leaders of these countries
stealing from the people.
It is virtually certain that these riots
will spread to many countries in the Middle East, Africa and the
developing world. This will lead to new regimes and new political orders
that could either be far left or far right politically or religious
extremists. But the new regimes will not be in a position to change the
root of the problem which is famine and poverty. In Egypt for example
there has been a quiet military coup. It is unlikely that a democratic
regime will take over from the military. So the people will protest
again and again. And this will be the same in most countries. Eventually
the people will take the law into their own hands since no regime will
be able to give them the food that they need.
The hyperinflationary deluge is imminent
Although food and fuel inflation is
rampant worldwide already, we are only seeing the very beginning.
Massive oil price rises are likely to continue as a result of the
geopolitical situation as well as peak-oil. The Middle East is a time
bomb waiting to go off. Israel is in an extremely precarious position
and the involvement or non-involvement of the US in this conflict would
both have dire consequences for Israel and peace in the world. Food
prices will continue to rise dramatically. Major parts of the world are
living below the poverty line today and this will increase
exponentially.
The lethal concoction of rising food and
fuel prices is already affecting the Western world. The Continuous
Commodity Index – CCI, (60% food, 17% energy and 23% metals) has almost
doubled since the low in early 2009 and has gone up 42% in the last 12
months. The almost vertical rise of the CCI is one of the best
indicators of hyperinflation being imminent. A catastrophe of
astronomical proportions is looming. This will hit the world at a time
when there is no capacity whatsoever to take any real measures that
could alleviate the problems.
(Click image to enlarge)
Most
countries are already running major deficits which will increase
dramatically in the next few years. The banking system is bankrupt and
is only holding together due to false valuations of toxic debt and
derivatives. This is done with the blessing of governments since
virtually no major bank could face an honest valuation of its assets.
Unemployment and especially youth unemployment is currently a problem
worldwide and it will get much worse. In 2010, the US government spent
60% more than its revenues. In order to balance the budget individual
and corporate income taxes would have to double.
Never before in history has the world run out of real money as well as (affordable) food and fuel simultaneously. But his is exactly what is happening now and it will get substantially worse in the next few months and years.
Financial misery, famine and high
unemployment combined with governments that will not be in a position to
give real help are a recipe for disaster that will lead to social
unrest and revolutions not only in developing countries but also in the
West. Hungry people are desperate people and desperate people do
desperate deeds. We could see already in 2011 food shortages, and riots
both in Europe and in the US.
Hyperinflation Watch
The following are INDISPUTALBLE FACTS:
- The US dollar is down 82% against gold since 1999
- The US dollar is down 49% against the Swiss Francs since 2001
- The Dow Jones is down 81% against gold since 1999
- The Continuous Commodity Index is up 100% since 2009
The above facts are clear evidence of an
economy that has been totally mismanaged. But more importantly most of
these trends are now starting to accelerate – a clear sign that
hyperinflation is just around the corner.
With
years of negative net worth and negative cash flow, the US is bankrupt
today. The Federal deficit is forecast to increase by at least another $
5 trillion in the next 5-7 years. Add to this the State deficits, the
Municipal and City deficits that are rising at a galloping rate and we
have a country that is going to haemorrhage to death in the next few
years. One wonders when the totally ineffective and clueless rating
agencies are going to fathom this. Not that it will matter if they once
do. One also wonders what Mme Bernanke de Pompadour and his court are
thinking. “She” and her courtiers should have above average intelligence
and could not possibly avoid seeing the facts that we all see today (of
course, some of us have seen it coming for over a decade). But “she”
has to please her master King Louis XV Obama and her devotion to the
king goes above all reasonable common sense, or rationale. So the two of
them will continue to crank up the printing press and drown their
people and the world in worthless paper.
Stock Market
To believe that the current money
printing liquidity boom is real and sustainable would be a very serious
and expensive mistake. The temporary and illusionary pickup that we are
now seeing in the economy and stock market is the normal initial phase
of a hyperinflationary economy. It must not be mistaken for a real
improvement in the economy.
The normal pattern at the beginning of a
hyperinflationary period is that stock markets surge. This is the
result of the increased liquidity and a flight to more inflation proof
assets. This was the case in for example the Weimar Republic and
Zimbabwe. Just look at the chart below of the Zimbabwe stock exchange
that went from 1,420 in January 2005 to 5.4 trillion in June 2008, a 3
billion per cent increase. That was of course in Zimbabwe dollars. In
US dollars the stock exchange went sideways with major volatility. So
in hyperinflationary terms stock markets could continue to rise
initially thus making them a better investment than cash. However,
measured against real money, the Dow has gone down 82% against gold
since 1999 and 86% against silver since 2001 (see chart above). We are
currently seeing a dead cat bounce but we expect the Dow to decline a
further 90%, at least, against gold in the next few years. So even if
stock market investments will initially give the illusion of protecting
investors, it will be a very poor hedge against the ravages of
hyperinflation in real terms.
ZIMBABWE STOCK INDEX 2007-2008
Bond market
In January 2009, we warned investors
that long term interest rates were bottoming. Since then the 30 year
bond yield is up from 2.6% to 4.6% an 80% rise. But more importantly the
30 year is currently in the process of breaking a 17 year downtrend
line which dates back to 1994. This confirms that rates will now start a
major and rapid rise which is likely to reach the mid-teens or higher.
Governments will attempt to keep short rates low due to weak economies
but eventually the rising long rates will put strong upward pressure on
the short rates. So the flight to government bonds that we have seen in
the last few years will soon reverse into a massive rush for the exit.
This will coincide with rapidly increasing financing requirements by the
US, UK, EU and many other governments. The poisonous concoction of
rising rates and rising financing needs will create a vicious circle of
collapsing bond markets and unsustainably high financing cost. This will
continue to drive interest rates even higher which will further
increase deficits and necessitate even faster running printing presses.
Add to that a collapsing currency and the hyperinflationary picture is
complete. It is our very strong view that investors should exit bond
markets entirely if they want to avoid a total destruction of their
assets.
Currency Market
As we have explained for many years, hyperinflation is created by the
government destroying the currency as a result of money printing to
finance deficits. This leads to the cost push inflation that we are now
experiencing. Add to that, shortages in commodities worldwide, thus
creating the perfect hyperinflationary scenario. The Dollar, the Pound,
the Euro and many other currencies will continue to decline. They can’t
all decline against each other at the same time so the market will take
turns in attacking one currency at a time. But all currencies will
continue to decline against gold. We believe that the dollar will soon
start a very rapid fall against gold and against many currencies.
Investors should exit the Dollar and also the Pound and the Euro. There
is no currency better than gold or silver but for any small amounts of
cash we prefer the Swiss Franc, the Norwegian Krone, the Singapore
dollar and the Canadian dollar.
Wealth Protection
A hyperinflationary depression will
destroy the value of money as well as most assets that were financed by
the credit bubble (property, stock market). Wealth protection is now
critical and urgent. We see no better way of protecting assets against
total destruction than physical gold and silver stored outside the
banking system. Thereafter, precious metals, energy and food stocks are
our preference. But it must be remembered that any asset including
stocks that is held through a bank is dependent on a sound and surviving
banking system.
The real move in precious metals is
still to come as we have outlined in many articles. Less than 1% of
investors own gold. Before this economic cycle is over we are likely to
see a mania in physical precious metals that will drive prices
exponentially higher. And luckily for investors, this is a mania which
is unlikely to end in a collapse since gold most probably will be part
of a future reserve currency.
Finally we are again quoting von Mises who clearly understood that “le déluge” is inevitable:
“There is no means of avoiding a
final collapse of a boom brought about by credit expansion. The
alternative is only whether the crisis should come sooner as a result of
a voluntary abandonment of further credit expansion or later as a final
and total catastrophe of the currency system involved.” – Ludwig von Mises
Submitted by Davis Sherman Okst of Financial Sense
Prove Mayans Right: Address Structural Economic Problems With Chicanery (Part 2 of 2)
Monetizing Governmental Debt AKA Money Printing or in Bernanke’s Vernacular - Quantitative Easing
Here are some realities on Quantitive Easing:
- If
Bernanke stopped QE, the United States of America would default, the
government would close down, there would be massive interruptions in all
Federally assisted programs (Medicare, Social Security, etc.), debt
service to China et al would be impacted or stop totally - We
take in about 2 trillion in tax revenue, we borrow about 1 trillion and,
like drunken sailors, we spend about 4.5 trillion. 80% of our deficit
is entitlements and debt service. Make all the cuts we want, that stuff
can't be cut. QE is a fancy term for counterfeiting the 1.5 trillion
dollar difference we have NO possible way of paying - QE is debt
monetization that IS increasing the size of the money supply. Since that
money has been spent, there is no way in hell Bernanke or anyone else
can “shrink” the money supply at the right time - the horses are out of
the barn, every POMO auction is just money created out of thin air to
cover the Treasury's checking account
There are those who
would point out that without “velocity” we can’t have hyperinflation;
and with 23% employment we aren’t going to get people spending,
therefore there will be no velocity and thus no hyperinflation. I’d
advocate that this argument be looked at again. First, the government
is spending “funny money” that is, to some extent, creating some
“velocity.” What is more important - money is a
commodity as described in Part 1 - and therefore the more of a commodity
that there is the less its value. Since the inception of the Fed in
1913 the dollar went to a value of .04 cents, 80% of that devaluation
happened since Nixon took us off the gold standard. So if our dollar
goes to a value of less than .04 cents, lets say .00000001 cent - we
will have massive hyperinflation. Printing money is the road to
.00000001 cents.
I’m in the camp that gold hasn’t gone up, silver
hasn’t gone up and the stock market hasn’t gone up. Graham Summers of
Capital Research did a fantastic short piece titled “While I Love Gold” at ZeroHedge.
Stocks Priced to Gold
Like
I said, gold hasn’t “gone up” stocks haven’t “gone up” and food prices
haven’t “gone up.” The value of all currencies have gone down. People
who compare one currency to another won't see what is happening until it
is too late.
It is all how you look at it. We are playing an
entirely idiotic game because no president (other than Andrew Jackson)
had the guts to fix the real problem - money.
About the only
thing gold and silver will do is act as a true store of value and pay
off any fixed debt when things get totally out of hand - which, in my
never so humble opinion - is the obvious unstoppable trajectory we are
on now.
Lastly, on the subject of Ben Bernanke’s path to making the USA Zimbabwe I’d like to address the “We can raise interest rates
in 15 minutes” BS. Sure he can. But the rest of the “We can raise
interest rates in 15 minutes” sentence goes like this: of course 80% of
the deficit is unfunded liabilities and debt that is rolling over, so
doing so will bankrupt the country with impossible to pay interest on
debt. Estimates are that higher interest rates
will add TRILLIONS to our debt. Higher rates will be another nail in
real estates coffin, another nail in high unemployments coffin and
another nail in state and local debt burdens.
In summary: The
biggest lies about Quantitative Easing are: It isn’t [governmental] debt
monetization, we can raise interest rates, it isn’t causing inflation,
it won't cause hyperinflation, we aren’t increasing the size of the
money supply, we can contract the size of the money supply when the time
is perfect, we can stop it [QE] at anytime, it is creating jobs, and we
can sell stuff no one else is now buying and the money is just sitting
there, i.e. there is no velocity.
In short: It is QE or America
defaults. A.) Hyperinflate the absurd debt away or B.) Default. If
Bernanke thinks he can secretly devalue the dollar and reduce our debt
to some payable amount by reducing the dollar’s value by like 10% per
year (thus reducing our 128 trillion dollar debt to half over 5 years)
then he is really an utter and absolute moron.
The Maestro of
Disaster came right out and said that debasing a currency is American
robbery. Covertly stealing - even if it is for some lame unworkable
plan to save the economy - is not leadership, nor is it ethical.
Lies are the hallmark of a leadership deficit. Lies don’t fix problems, solutions do.
The Fix
The
fix is simple: Admit that things got out of hand over the past 4
decades and overtly do what they are covertly doing. Stop prolonging the
agony - it is abolishing the middle class. The only trick is to make
the monetary system as sound as possible. I have no false dreams that
we will ever wind up with a better system (read: something that isn’t
debt-money IS debt) but I do know we can do better.
We supposedly have 10,000 tones of gold.
According
to Greenspan’s own 1960 article this country has been and is a welfare
state that is robbing its citizens through taxation and inflation:
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