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The Coming Financial Tsunami
In light of what’s happening right now (and the fact that I never posted it on ZH before), I thought it relevant to post this article that I wrote in the February of 2009 as a primer for friends and family to help them become aware of what was happening (and prepare for what I saw coming). Remember – this was written for people who were very much enmeshed in the MSM propaganda world and had no clue of the reality behind our economic, financial and monetary system. The idea was to gently introduce them to the truth and give a brief overview, so you won’t find me going into the full technical and gory details; plus I wanted to keep the length manageable so as to not put them to sleep.
If you find it worthwhile, feel free to forward it to your near and dear ones who are still entrapped in The Matrix. Here it is:
What's happening now is just the beginning of the collapse of a multi-decade debt bubble. All the so-called "growth" since the 70's has been based on ever increasing amounts of debt - not just the US, but the entire world. Here is a US Debt (public and private) to GDP percentage graph:
You can see that the debt has increased exponentially since ’71. In fact, the last peak occurred at the time of the Great Depression in the 30’s, and this one is even bigger than that, so you can imagine what the crash this time is going to be like.
A bit of history first. It really starts with the creation of central banking paper-money system in the US in 1913 - the Federal Reserve System, but for brevity's sake we'll just jump onto the story after World War II, as the biggest structural economic imbalances have occurred since then. After World War II, all the major countries decided on the US dollar as the reserve currency for international trade (since the US was the most powerful nation left, and with the biggest reserve of Gold at 20,000 tonnes). All countries would base their currencies on the US dollar, which was in turn backed by Gold. So, in effect, all countries' currencies were backed by Gold. This is also known as the Bretton Woods System. Under this system, all foreign countries could redeem their dollars for Gold. This kept a limit on the number of dollars in circulation and consequently, the debt in the world economy - basically it imposed discipline on all parties concerned. With the Vietnam War, US deficits started to soar and it could no longer afford to redeem dollars in Gold. Its gold hoard was down to 8,000 tonnes from 20,000 tonnes. So under President Nixon, they decided to delink the dollar from gold (Bretton Woods II). From now on, no country could exchange its dollars for gold. They called it a “floating” exchange system, but really, in terms of purchasing power, all currencies started to sink together. What followed was an explosion of money, as the US could now issue (print) virtually unlimited paper dollars for all its purchases. Other countries followed suit, in order to maintain their exports’ competitiveness. This explosion in money fuelled (or rather was fuelled by) an explosion of debt. I shall leave the detailed mechanics of all this for another post, but suffice to say that this explosion in paper money has caused massive misallocation of resources throughout the US, and indeed, the entire world. The stock market boom in (crashing in 2000) and the massive real estate boom (crashing in 2007) were both manifestations of these misallocations. The global boom starting in 2002 was caused by the Federal Reserve printing money and keeping interest rates artificially low (in order to boost consumption and maintain GDP "growth"), and thus injecting massive amounts of money into the economy - which had no basis in the real productive growth of the economy. Since the dollar is the reserve currency used for world trade, this artificially inflated the entire world economy, which is now crashing. This was done to alleviate the fallout of the 2000 crash, but the cure turned out to be worse than the disease. The "Subprime Crisis" was just the tip of the iceberg and, in fact, an effect not a cause of this meltdown. The real cause is unbridled growth of money supply and debt by the Fed and other Central Banks of the world.
At heart, this economic crisis is in fact a currency crisis. Throughout history no paper currency (or "fiat currency", since it is accepted as money by virtue of Government fiat or decree) has survived, and this time will be no different. The average lifespan of fiat currencies has been 16 years*. The present system is unique in that it has survived for 38 years and for the first time ALL countries throughout the world are on a fiat money standard. This means that the resulting crash will be on the scale of something the world has never seen. This will be a time of hardship for many, but for those who are "economically literate" and prepared - they will come through largely unscathed, even prosper. If there ever was a time to educate yourself about financial matters, this is it. And don’t listen to the stock-pumpers and so called “analysts” on television – who really are just a part of the Wall Street sales force. These are the same guys who peddled complete garbage as “AAA” securities and that there was no “bubble” in real estate. The rating agencies (Moody's, S&P, etc.) are in cahoots with these crooks, and in their pay. The same goes for the regulatory agencies in the US such as the SEC (and I think pretty much everywhere), which was caught not only napping, but deliberately ignoring the doings of the biggest "Ponzi Scheme" perpetrator of all time - Bernard Madoff. All they are interested is in making a quick buck off of you. Doing your own research on the internet is the only way of finding unbiased information. Just switch off the TV, and switch on the Internet.
I am no financial adviser or any kind of expert, but an ideal portfolio in my opinion would be majority in Gold (strictly physical – no ETF’s or any kind of “paper” gold), some Silver (again, physical) and some cash for day-to-day needs. As you must be aware, more and more banks are failing every day, so it’s not advisable to keep an amount over and above that insured by the FDIC in any single bank. If you are not sure about the solvency of your bank (which can be said of pretty much every bank these days), you can also park your cash in short term Treasury bonds. It is also advisable to keep some cash at home in case there is a “bank holiday” or withdrawal restrictions are imposed by the government. Why the bias towards gold, you may ask. Well, gold is a long and complicated subject so I can’t explain it here (although I do urge you to explore it on your own), but suffice to say that not only will it protect your assets in case of Financial Armageddon, but is sure to rise manifold in value as this crisis progresses. It has retained its purchasing power for thousands of years, and this time will be no different. The record of paper currencies on the other hand is quite dismal, to say the least. This is a once in a 100 year crisis, so you really need to have a historical perspective about this. I reiterate - NO other asset is safe, not even the dollar itself. If anything, gold is a sort of insurance for your portfolio that you will not regret buying. And beware of people who tell you that gold is just an "asset" or "commodity", for they don't know what they are talking about. It's not. It's a currency - the best there is.
At some point, after a huge crash has occurred, the stock market will rise. In fact, it may rise tremendously. It will rise not because of strong fundamentals of the economy, but because of the depreciation of paper currencies (hyperinflation). Hence, any steps that you take to retrieve your investments from the stock market will only prove useful if you invest the proceeds in Gold, as Gold will rise much, much more than the stock market at that point. In fact, in such a scenario, it may even become impossible to obtain physical Gold in exchange for paper currency.
There is a lot more to this than what I have just mentioned, so I urge you to do your own research and take the steps necessary to protect yourself and your family financially. We are heading towards a global currency crisis and it will affect everybody throughout the world.
[Update 13th May, 2010: I originally provided a list of blogs/websites, books and people to follow as a starting point for their research, but some of them have since become dated/irrelevant in my mind. Feel free to provide them with your own list]
And if you think the Government can get us out of this mess, think again. They had a major role in screwing things up so far, and what they are doing now will only make a bad situation even worse. This crisis was caused by excessive money printing and debt, and guess what the Government's solution is - more money printing and more debt. The best they could do in this dire situation was to come up with a budget full of pork randomly throwing money - our money - here and there without any rhyme or reason. All it will do is ensure that the ensuing collapse is even more severe than it otherwise would have been. The Government and the politicians will keep mouthing lies such as it's going to get better next quarter, next year, ad infinitum even as thing get worse and worse everyday. Don't believe them. All they are interested in is preserving their own power. Read a bit of history and know that it's every man for himself now.
As you may or may not be aware, Gold recently hit $1000 an ounce for the third time in history. It started rising from 1999 onwards when it was priced at around $250 an ounce. This is the proverbial "canary in the coal mine" telling us that the international monetary system is at risk of collapse. I can't put a finger on when this is going to transpire - it may happen next month, next year or in a couple of years – but happen it will and the risks today are greater than they ever were. As I am writing this, another crash is brewing in the global stock markets (it may not happen now, but it will - sooner or later). On Friday, the US stock market closed at its’ lowest level since 1997 - over a decade of gains wiped out. Gold has receded in price a bit, presently undergoing a correction after a quick rise from $900 to $1000 an ounce within a span of ten days in February. It has become pretty volatile in the short term (although the long term trend remains up and away), so I am not sure how long this correction will last. It may continue moving a bit downwards or sideways for a while, but it may just be the last chance we have to get it at such low prices. America's - and indeed the world's - disastrous experiment with paper money is about to end in a catastrophe.
*I’m not sure where I got the 16 year figure from.
Brief Opinion: Massive PM Demand in Europe
As an aside, ZH just reported that bullion dealers in Europe were sold out, with many such as Kronwitter having to shut shop temporarily due to their inability to meet the massive demand [sure, they might open back up ala 2008 with or without massive premiums above the spot price, but they just as easily might not if there starts a real run on the PM’s with unlimited demand (i.e. the beginning of hyperinflation) - which WILL be the case at some point in the not too far off future].
Here is what a potential run on bullion looks like:
Kronwitter Sold-out page (translated using Google translate)
Here is one of the bigger dealers Proaurum:
(Translated using Google translate)
Another one Westgold sold out:
(Translated using Google translate)
Tell me, what good is the paper price if you can’t buy the real metal at it? The only thing providing credibility to the paper/futures price is its link to the physical metal. If there is no metal available at that price then it’s just a worthless paper ticket with the words Gold/Silver printed on it. You think that was silver you just bought in the futures market? Nope. More likely a WORTHLESS contract to deliver and it’s not even paper, just some bits in a computer somewhere! (This is practically true even right now for certain corrupt exchanges like the COMEX, considering how hard it is to obtain delivery there). If there is no metal available at the “displayed” price, then it’s just a government dictated price level (ala price controls), with an illusion of free trading thrown in to draw the retail suckers into the casino – just like the stock market. What’s more, due to these hidden price controls created by massive government interference in various markets, we have no price discovery in ANY market right now.
Got Gold?
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MBA and Quant Fin will forever be relegated to the dustbin of history.
Two of my best frenz are going to enter MBA programs and they "really really" believe that these degrees will lead them to the glory lands (i.e. trading at Goldman).
They both know shitz what's going on around the globe and drink the redbulls on the "recovery" talk. Like many others, they were blinded and brainwashed through school and work. They simply don't comprehend the magnitude of the problems within this matrix.
If you have any suggestions, plz let me know, I have forwarded your piece and many articles on ZH to my frenz and others
A terrific primer GG. The biggest scam in the world occurred when our government allowed the banksters to remove the gold and silver backing to our money. Everyone needs to protect themselves from the coming consequences. There is NO way that all these government debts and obligations will ever be met without hyperinflation or default. Gold and silver have been accepted as money for thousands of years. The dollar bill is just a scam to keep everyone in debt to the banksters. That's why everything keeps going up in price. Own some real money instead.
Let them go to ebay and buy gold @ 1300 usd/oz
I'm not sure what your point is, but eBay can be a good source. I never place running bids. Sniping at the end prevents useless run-ups of price. Snipe your bid to place 10 seconds before the item ends. Use: https://esnipe10.esnipe.com/
You can vary the time of the bid. I set my price according to what I want to pay and forget about it. I'm notified later on how I did. Don't chase these auction lots around. Set it and forget it. Some sellers will pull a lot when the metals market is going up -- bad practice. Avoid these sellers. Some bidders will pull bids when the price of metal is going down. Not much you can do about that.
You can track current eBay prices here:
http://www.24hgold.com/english/buy_sell_gold_coins.aspx?co_id=0
Double post due to latency on the website....
you wrote this DAYS before the official SP500 bottom, when stocks were already about to turn. lol. terrible timing
Stocks crashed to new lows weeks later
And look what happened...
no, you were giving into the ultimate FEARS right at the bottom. those days i waS going heavy LONG into financials and some commodities
at least your timing is much better this time
Thanks for your brain, G.
Sunstein's trolls are trying to take over your comment section because it's about real money.
Yes, any talk of gold ("real money") and financial collapse really brings out the pro-establshment trolls and truth-haters, doesn't it? I have seen the same phenomenon in forum after forum. Just coincidence?
Hey Gordon,
I love the write up.
Here is a graph that correlates nicely with your % of debt to GDP graph. Put them side by side, its eerie.
Incarcerated Americans 1920-2006
http://www.csa.com/discoveryguides/prisons/images/incarceration.jpg
People say that debtors prisons are a thing of the past?
As in Taleb's book- you have been fooled by randomness. Give the book a read before you suggest any more ridiculous correlations.
Does anyone have any insight on Jpm's acquisition of rbs sempra commodities European operations in the first quarter? Did Jpm close out a net short position with that acquisition? I see their building vaults in Singapore now
maybe London metal exchange is not long for this world.
Where do the gold dealers get their supply wholesale? What kind of margins are there in dealing precious metals?
It depends on the dealer. The big guys get U. S. bullion coins directly from the Mint. You can find a list of those at the Mint website. They get generic rounds from private mints and bars from the refiners. Smaller dealers get their bullion from other dealers, persons wanting to sell holdings, and, yes, from the folks who advertise to buy your stuff! There is a dealer who sells small lots on eBay who sells under at least 5 usernames. The goods are obviously from purchased private owner yields. I have bought from this/these dealers and still do. The prices are in line with the premium for lots varying from 5 to 25 ounces according to current spot. I have posted details on all this previously.
Some from the mints themselves (the Guernsey Mint I am told deals directly with the Austrian and Canadian mint) and I think the margin is ~2% above London rates for the specific coin. But don't quote me on that!
Ireland and Thailand (some general just got sniped in the grape) are rioting...Greece was and probably will again. Interesting Eastern Europe has been quiet with so many countries in far worse shape. Unemployment here is still ugly. SNAP is even uglier (projected 40.5 million by September 2010). Gold and Silver are solidly in their new up price. Oil is gushing from the gulf and will probably at minimum collapse a few local economies as many there live pay check to paycheck which isn't coming.US Debt/deficit is out of control and the govt just keeps on spending..
When exactly is the market going to realize they are fucked? Or do they know it and just trying to make as much $$ as they can while they can?
They are rioting because the infantilized masses whose votes were bought with promises of massive handouts are finding out that those massive handouts are impossible to keep going and are thus being withdrawn. The system is already correcting, but gold bugs are using this as yet another convenient moment of fear and uncertaintly to ply the wares on an unsuspecting public.
Seriously! My pea-sized brain cannot imagine why written history acclaims it - not to mention why sovereign nations hoard it!
Why would anyone suppress the price! Why! Why!
Why would anyone suppress the price! Why! Why!
so that the scrum of pimple faced zit kids would have a paper size pile of goo to set on.
No shortage at Tulbing or Ebay.
Another thank you for a clear and well put resume of the situation.As suggested by C-B, I am going to send my 12 year old daughter to school with a copy tomorrow. She is already asking sensible questions about inflation and currency values like "why is it more expensive to go skiing in Switzerland this year than last year ?"
Thanks Gordon! I have been a ZHer for a while and usually see your gold comments, but I never got the full monty...so this was helpful. A few questions if you don't mind:
- Is it possible that during a crash, that gold will go down as well (in the heat of 2008 and 2009 meltdowns)...or do you think that gold is disconnecting more and more from its "commodity" status and more of a currency status (so it went up during the hecticness of last week)?
- Do you think that Soros, Paulson, et al, have the same philosphy as you do in buying gold, or do you think their's is a bit different? Also, why are they so busy buying up stocks at the same time (do they think hyper-inflation is coming sooner than later)?
- Are you not at all concerned about the short term price of gold (there seems to be a bit of euphoric buzz about gold which kind of freaks out the contrarian in me)?
- What do you see happening to treasuries and investment grade corporates during the crash and subsequent hyper-inflation?
- Where are you buying your gold and silver...and where would you store it (I would need a fixed location, since I try to be away from the US as much as I can nowadays)?
- Is an ETF like PHYS even a possibility for you if there wasn't such a premium?
Please read this: http://gordongekkosblog.blogspot.com/2010/03/its-going-to-implode-buy-ph...
They're big and well connected guys. I'm sure they've thought it all out.
It depends on whether one is interested in long term wealth preservation or short term paper gains. The long term trend is up and away. Just look at the last euphoric "top" around $1033 in March '08. It's $1240 now. Even if you bought the top, you're still looking at a 24% gain in 2 years. Way better than 0.001% interest keeping your money in insolvent banks.
May rise initially when stocks get volatile; eventually worth zilch, nothing, nada.
Will try to do a separate article on that sometime.
No ETF's for me.
Hope that helps.
Thanks GG! This world has gotten way too fucking complicated!
It seems that all think stops ate " when shit falls apart". What happens after that?
Even if shit falls apart it still isn't Fallout 3. The world doesn't devolve into a Mad Max scenario. If anything it is more like a Richard Morgan novel, hell maybe even Charles Stross.
You wind up with pretty much what we have always had a spectrum from rich to poor, workers to owners, criminals to saints.
And some form of government.
To change the subject a bit, how come there is ne mention of Biomedicine or Biotechnology as investment to carry beyond the storm? Any stem cell anti-aging treatment or rejunivation process, for example, becomes the next Viagra.
Does medicine stop if there is a collapse? Do people with money stop fearing growing old and disfunctional?
I don't think so.
Can you bury it for ten years or need electricity to work?
What money will they have? Not in dollars of course, that system will have died.
The individual skills of medical professionals won't disappear overnight, but will insulin supplies last for very long in hot weather? In what currency will 300,000,000 people be paying for their insulin, viagra, botox?
Will transistion to this new currency be smoother than Katrina kleen-up? Will welfare recipients stay home and remain calm while we transition? What about the unemployed? What about their 14 - 30 year-old children that are used to playing videogames, watching YouTube, and eating twinkies? What will retirees that live hundreds of miles from grown-up children, that also have no 401k, do? Maybe they can pedal their bicycles there - who will sell gas without currency? Will public employees show up to work with angry fellow citizens roaming the streets? Public employees are used to getting plenty of vacation time - and everything working out in the end - they will be the most optimistic. If I were a pubic (oops, "freud") employee I would not work for free, no sireeee! I want my moneeeee!
What will a twinkie cost?
Dont' worry, help is on the way! (that's a lie; the most cruel of myths)
http://www.youtube.com/watch?v=_Ojd13kZlCA
http://www.youtube.com/watch?v=P36x8rTb3jI
http://www.youtube.com/watch?v=dLsNOEt0EX8
I'm with you Gordon
75% Gold 10% Silver 15% Cash and Gov Bonds.
Sound advice. A run on physical metals is what THEY fear the most; it's the little boy crying out, "but they have no clothes!"
Funny how no one expects Gold to drop in price. How everyone thinks TPTB will just allow the peons to collect the same amount of shiny stones they have.
As long as these news of physical purchasing continue, gold cannot fall in price.It's the physical demand they have no control over..
Dear Gek,
Excellent post. I have shared it with my leess financially-focused friends and suggested they pass it on. A simple write-up of how the crisi will play out so folks will know it when they see it would be a wonderful follow-on chapter.
Great stuff. Thanks again.
Thank you for your kind words.
GG
veery well put together and explaination,, thanks
wonder if the 3 amegos here on zero hedge will read ,, even a 22 year old can understand lol
If the solution to national debt is inflation, how much do we need to devalue the dollar over the next 10 to 20 years in order to payoff that debt? 5%? 10%? 20%?
That's a pretty good timeframe for retiring babyboomers.
What investment will out pace that inflation over the same time period?
Does anyone, ANYONE, think that the stock market will be able to give returns that will outpace the devaluation of our currency over the same time period?
There are smarter people than I here at ZH. I'm asking, nay pleading, what am I missing?
DICK CHENEY WAS RIGHT!
http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html
Reading the comments to Ezra Klein's interview with that chatch (sp?), it became clear to me why I love ZH. The dbags defending Galbraith's "because we can print $US we're not Greece" argument were all professors. ALL of them. Effete, theoretical, polysyllabic dismissive types. By contrast, we at ZH are the students who did the reading for class, and can talk about the ideas in English -- not fucking academic-speak. A great example of why I love ZH. Love it, love it. Thanks go out to you all for adding your 2¢, as they say.
Gold already has much, much, more than the inflation of the dollar over the last ten years priced in.
It's speculation at the end of a big, long, crappy, bearish rising wedge.
To answer your question: Probably 2-300%ish
Still, gold is already up more than that. It's fundamentally unsound.
You do realize that this math is incorrect? Gold is only up maybe 50% from the bottom. If 2-300%ish is right, gold could and will go a lot further.
I appreciate you answering my question.
And what you write is likely true. However, I believe there is a 1 to 1 correlation of money moving out of stocks and into bonds and bond funds from the retail investor side. (can't site it at this time, may be incorrect.)
If people lose confidence in bonds because of the ever increasing soveriegn debt problem, where will they go?
Gold may be in a bubble, but that bubble may not be done inflating.
I'd say that they're more likely to go into stocks if they lose confidence in bonds, since stocks are just as nominal as commodities.
Commodities and stocks are inflationary investments.
Bonds are deflationary plays. (You still get par value, plus X percent, as long as it's not junk anyway...)
JB, sorry I'm not following: (i) are you saying that gold at 1230 does have inflation priced-in, and therefore isn't the store of value it would be at ~800 (insert arbitrary # here)? And (ii) is 2-300% how much the market would have to rise to keep pace with devaluation of dólares? Been a loong day already.
It's a store of value at 1230 as long as that is the market price. The market isn't consistent forever though. If it goes up to 1500, it'll be a store of value at 1500. If it goes down to 600, then it's not storing anything if you bought at 1200.
On the second part, I was saying that we would have to print that many dollars to erase the debt.
So what happens to the value of the dollar if we print that many more dollars, Johnny? And if the dollar, which is just another commodity, goes down in value, how many dollars will it take to buy a barrel of oil or a bushel of grain or a basket of groceries?
You are publicly stating that you think serious inflation is imminent to pay off this debt yet you are arguing that gold alone will not rise against a devaluing dollar while everything else will? I don't see it.
Further, you know that the current price adjusted for inflation is nowhere near it's high of 30 years ago. Adjusted for inflation, gold is under $400 per ounce in 1980 dollars, plus we have a very sick economy that is threatening to inflate, as you just noted yourself.
So I am not seeing your argument that gold has peaked. It doesn't make sense in light of your own arguments. So the question I have to ask you is are you actively shorting gold and therefore just talking your book? If not, then why haven't you taken into account the inflation adjusted price of gold in your thinking? Granted, gold may not have as far to run up in a serious (or even hyper) inflationary scenario as some other commodities but it certainly looks to have room to run to me.
Your arguments don't seem to add up, at least to me, from what you are posting here. So either you are missing something or you are not telling us the rest of your position. Which is it?
Don't waste your time grey, he won't respond to reason. If you cuss at him though he will be "johnny on the spot" with something to the effect of "I am rubber and your glue".
His most common retort is, "Your (sic) gay". Then he disappears.
Your thought is that over the next 20 years, the boomers would be winning simply by not losing? That is, gold & silver will maintain their value (like they have since 1920 (e.g., 1oz. still buys a fine suit)) while $FRN devalues 5%, 10%, etc. So even if we don't see gold at 5,000, by virtue of getting out of fiat currency they'd be better off? Makes a lot of sense to me.
My question is, is it worth taking the ~40% tax hit to get at retirement funds and convert the withdrawals into physical? If we go DOW 5,000 by Christmas it would seem so, but "courage of conviction" comes to mind.
1+ How to get retirement funds before 59 1/2 rolls around into physical...
If you believe that ALL pensions will be nationalized, including the death of the IRA and 401K...and rolled into a government controlled SUPERFUND (yeah, toxic!) with all of that sub-prime sludge that the FED now owns....YEAH!
You could try a 72t withdrawal. You would have to take equal annual withdrawals for five years or until you reach the age of 59 1/2, whichever is later. Who knows, in five years the people who are running the show now might be long gone.