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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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That's what I'm thinking. I'm also all in bond funds at the moment and thinking about moving it to IAU. Should be able to avoid the tax hit by keeping it in retirement account. At least for now.
True enough, IAU will avoid the taxes; I guess it's a question of where on the spectrum of doomsayer one falls. Toward that end is the "we slowly melt down but arrive short of Mad Max" variety, in which case IAU works great; If you're farther afield and think we'll wake up one morning with no electricity, you can't eat IAU, right?
Disclosure: I'm 28 and without any substantial assets, so rather than preserving any investment (or inherited, for that matter) wealth I'm looking to be prepared in the event of social upheaval. If my PM grows 5x that's great, but I want gas (to get me to a hunting cabin somewhere) and food and ammo and my fear is that $US won't get me that if TSHTF and the mob heads toward my 'hood.
I am not even in the financial advice spetrum. I, like you, come to ZH for the perspective and news that cannot be found anywhere else.
For my part, I'm not in the armegeddon camp. My philosophy in these day is things are never as good or as bad as they seem. Life is short. Live it, but live it as wisely as you can.
But what do I know?
Have a cookie.
This post has perfect geometry and theology.
Fortuna!
This is a smart crowd.
All too human, as evidenced by 80% of the comments above.
This can't hurt
Please don't dominate the rap Jack
if you got nothing new to say
If you please don't back up the track
This train got to run today
Spent a little time on the mountain
Spent a little time on the hill
Heard some say better run away
Others say you better stand still
Now I don't know but I been told
it's hard to run with the weight of gold
Other hand I heard it said
it's just as hard with the weight of lead
Who can deny? Who can deny?
it's not just a change in style
One step done and another begun
in I wonder how many miles?
Spent a little time on the mountain
Spent a little time on the hill
Things went down we don't understand
but I think in time we will
Now I don't know but I been told
in the heat of the sun a man died of cold
Do we keep on coming or stand and wait
with the sun so dark and the hour so late?
You can't overlook the lack Jack
of any other highway to ride
It's got no signs or dividing lines
and very few rules to guide
Spent a little time on the mountain
Spent a little time on the hill
I saw things getting out of hand
I guess they always will
I don't know but I been told
if the horse don't pull you got to carry the load
I don't know whose back's that strong
Maybe find out before too long
One way or another
One way or another
One way or another
this darkness got to give
One way or another
One way or another
One way or another
this darkness got to give
PS - I've been reading ZH for about 3 months now, so I definitely do not fall into the "smarter than thee" category; just hoping to explore ideas symposium-style.
Love your stuff Double G,
Chris Martenson posted the following in response to last weekend's Euro-bailout. I have a sense you agree:
"About gold, what should be happening right now is that it should be up several hundred dollars on the news that the entire world is now being run by centralized forces that are extraordinarily lenient with the printing press and have demonstrated an astonishing willingness to bail out the most absurd risk-trades. I cannot imagine a more gold-friendly environment than this. Which means, of course, that I am expecting gold to be sold down for a while. [written obviously before this week's sick gold rally]
My personal stance is that every attempt by the authorities to cap the price of gold should be viewed as an enormous subsidy to those seeking to acquire gold for their portfolio. It is a gift. Hopefully, it will not someday be ruled illegal to possess, on the grounds that it provides a legitimate means of escaping the ravages of horrible fiscal and monetary policy."
Except that it was already up 700 dollars, with little fundamental justification, in anticipation of this...
The phrase is "already baked in." (and more!)
GG,
Thanks for the wonderful write-up! Not being a finance guy, I appreciate you leaving out the "gory details" in this one. Helps me understand the underlying concepts before moving on to more complex stuff.
I don't have a lot of gold (can't afford it), but do have more silver. My mix isn't ideal, but it's better than most and fits my budget. :)
Best dealer for small gold coins (1/4 oz maple leafs, etc.)? Suggestions, endorsements, criticisms.
Thank you for the education GG. In listening to your sage counsel, I have used Apmex for over a year in order to take possession, and they are quick, no minimums, 100% satisfied.
Apmex IMO
+1. NO minimum buys, and lightning fast turnaround. Best place I've found for the little guy.
Even the LA Times is calling this a perfect setup for a gold rally. Forget about Chinese solars, gold is where everybody will seek refuge! :)
That's right leo, chuckle it up. Why should we again invest in a sector of the economy that requires government assistance in order to survive, what's that? Because the government is throwing money at it?
Great fucking plan genious.
I know that when everybody is bullish that the price will NEVER go down again!
I mean, look at dot com stocks or the housing bubble.
The LA times told me that those would never go down either.
Every financial analyst on the planet told me housing could never go down. And now, they say the same about gold.
It's called a contrarian indicator.
Bravo, Johnny Bravo, you get it!!!
Why the hell are you even allowed to contribute your pro-bankster poisonous propaganda to this site, when every piece of crap article you write is in such opposition to the sentiments of both the founder of this site and the sentiments of an overwhelming majority of its participants?
Or are you just the ZH equivalent of Kitco's Jon Nadler, purposing playing the court fool just to generate controversy and raise passions here?
akak, did you know that even Jane Mansfield back in the 50s had a college education? When you go to college you learn many different points of view and you learn to appreciate those who disagree with you. So put away that monkey wrench and get yourself a Pell grant or something. I bet Tyler actually likes Leo's contributions even when he disagrees with them.
Why do you assume that I have not been to college? You are incorrect on that count.
From my experience and "education" at one of the Big Ten universities, I learned much more about conformity, rigidly enforced orthodoxies, and the fine art of political correctness than I ever did about true diversity of opinion or the embrace thereof.
Yes, my posts today to Leo and MasterBates, er, JohnnyDraino were brief, simplistic and harsh, but only because I have been subjected to far too many examples of their conformist, pro-establishment, anti-independent views already. And while Johnny is merely a troll and recognized as such by almost everyone here, Leo I find more insidious and contemptible in his admitted acceptance of corruption and gross criminal behavior by our political and financial elites. He may be a knowledgeable trader, but in his blind refusal to acknowledge the fundamental outrages committed against the American people by our political and financial overlords, he demonstrates that he knows zilch about intellectual courage or moral integrity.
Pretty much.
All the profits these days are created in systems running on the fumes of corruption. Remove the gangrene and everything the trolls and Leo (separate category) are talking about collapses into a pile of rubble.
expose corruption = harder to get gold (higher "price")
Thanks for the measured reply. However, although I myself don't feel any antipathy towards either Leo or MB and I don't have a good sense for spotting trolls, I was prompted to criticize MB above (shades of Mao's Cultural Revolution). I'm not ready to parade Leo through the streets wearing a dunce cap at this point, but I agree that his posts aren't heavy on analysis. I haven't observed that he supports corruption and criminal behavior though.
+ a bunch.
I like to read Leo and Bravo (when he is making sense). Not trolls at all.
Almost everyone, everywhere, is "trying to do their best".
Takes all kinds of opinions to extract truths.
You are a fool akak, I am not a bankster, nor do I promote their interests. Get a life and start thinking independently for once.
How are them solar stocks doing Leo? Hope you enjoyed the nice 1000 point plunge in the stock market casino you love so much.
Yup, I bought more and will sit on them. Have fun chasing your golden goose.
Did your parents happen to adopt you from a Romanian orphanage?
The arrogance, the stupidity, the rigidly and cluelessly pro-establishment beliefs, the narcissism, the rabid loathing of gold, the mocking of monetary and financial honesty --- it all seems to fit:
I think Leo may just be Jon Nadler's long-lost twin brother.
I might suggest you try the same, FOR ONCE, yourself Leo.
Best comeback ever!
The population of 'everybody' on this site or the gold buy side is still lesser than the population of 'everybody' that the MSM controls or gold sell side ...no?
or are you suggesting that zerohedge is mainstream?
so how is buying-gold a contrarian indicator? isnt it the other way around?
Let me ask you this though...
WHO in the mainstream media is actually bearish on gold?
In this case, Zerohedge is with the mainstream. All I see on TV are gold commercials. CNBC, Glenn Beck, and CNN are all bullish on gold. They have gold vending machines now.
I could go on and on about all the people who are bullish on gold.
Can you name somebody that is mainstream that is bearish on it? Didn't think so.
Also, the majority of ZH has been bearish on stocks since the rally began. (I don't think that many can read charts, honestly.)
Is the majority of ZH right?
In the case of gold, they're even in line with the rest of society, and that's scary.
It reminds me of when people told me I was high for saying the housing bubble was going to burst and drag down the economy.
Now they're 30% upside down on their mortgages.
Mainstream media? Have you been under a rock? JPM,MS, GS hold millions of short paper on PM! So you say there are no bears on PM?
Why does it matter to you whether people buy or sell gold?
i'm sure there were a few indonesians watching that tsunami rumble up their city streets saying, "look at you idiot sheeple, following the trend. there is no tsunami, it is just a high tide with vans floating in it, really. look at the fools running. won't they ever get it...?"
http://www.youtube.com/watch?v=bblk6hD-l5c (indo tidal-wave - nutzo)
your response sounds just about as substantial as that...
it may be slower, but the tide *is* rising. and i know which trees i'm climbing if it gets this high...
i hear nothing from you other than 'you fools'. make me smarter, please.
question in general, what if Mr. Beck is correct?
gather your fish...
Somebody needs to go over and check Leo's temperature!
LOL, you guys obviously can't detect my sarcasm! I will never buy gold...ever!
No, you almost certainly won't, because you are a contemptible sellout to the bankster financial establishment, as you have made abundantly clear here again and again. You advocate surrender and acquiescence to them, and have neither the intelligence nor the courage to stand up to those who grossly violate your rights and your wealth at every turn.
You utterly disgust me, Leo. As do most go-with-the-flow sheep.
I think Johnny Bravo said it best, go f*ck yourself akak!
Eat shit and die, Leo, you coward and amoral bastard.
And interesting to see that you take the side of the most notable anti-gold troll in this forum. Enough said.
akak , dont waste your energy or allow this to knock you off center. The trolls are working you. Its their job, i too think they are paid for this. Why be so adamant for free? i think they are to distract and steer the conversation from real issues. Pirating the thread so to say. Peace bro.
Coward? Hah! My real name is up there while you hide behind a pseudonym. I get barraged every day here but the markets keep grinding higher, just as I predicted. Save it, akaka!
>>Johnny, don't bother with gold zealots who think the sky is falling. They're going to get creamed.
"My real name is up there while you hide behind a pseudonym. I get barraged every day here but the markets keep grinding higher, just as I predicted."
I'm sure you would be in the next edition of "Profiles in Courage" if JFK were still alive.....
When somebody decides to write the book "Profiles in Moral Apathy", I am sure that they will be contacting Leo.
And when they write a book on moral hypocrites, they will point the finger at you. Give me a break, and grow the fuck up.
.
Does "growing up" mean turning a blind eye to crime and corruption?
Will I finally be "grown up" when I become indifferent and apathetic to the swirl of elite criminality and corruption around me?
Oh, wait, that's right --- it's never a crime, nor corrupt, when Washington and Wall Street do it. Only the little people like us commit "crimes" ---- in Washington, it is called "policy".
It seems like the only way gold would drop substantially is if interest rates were to rise, signaling some sort of fiscal responsibility. This is what happened in the early 80's, correct? Barring a rise in interest rates, not sure how we'll see a significant drop in the gold price.
.
Your cowardice lies not in your anonymity or lack thereof, but in your repeatedly admitted moral indifference toward, and apologizing for, the crimes and outrages being inflicted on the vast bulk of the population by a handful of sociopathic elites who are clearly bent on raping and burning our economies and societies.
An increasingly large and exponentially growing number of people are waking up to this twisted reality, and rightly expressing their rage with the perverted system, and their outrage at those who abet and condone it.
But Leo's response?
"Banksters own you. Accept it, and move on."
Pathetic.
PS: I wonder how many other ZH'ers do not appreciate the oversized photos you repeatedly post of scantily-clad women, indicative to me at least of what is most likely a shallow, materialistic, morally questionable fratboy mentality.