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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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Why? Is that your password? Or is it "I jock Jim Cramer"?
Akak, out of all the people on zerohedge, you are the person I would love to meet the most.
Since when has that crack head cramer every been bullish on gold. Secondly even idiots can sometimes pick a winner.
Oh please don't give me Mish's idiotic argument. They are dropping now; its no guarantee that they will in the future. Remember, I didn't say hyperinflation has started; I said it will in the near future. Anyways, trust me, when hyperinflation starts, nominal prices of things will be the least concern you'll have as the currency things are priced in will become worthless.
Mish's thesis is not idiotic. He has said he expects massive inflation, possibly even hyperinflation, just not until the debt balloon has mostly deflated.
And "near future" is pretty vague. I don't think you, Mish, or anyone can accurately predict when this global economy has cleared enough of the debt load, which will be the turning point that allows printed money (of which I agree there is plenty and plenty more to come) to actually begin to affect the economy.
In fact, I don't think this is a classic deflation or inflation scenario at all anymore. Instead, I think the monkeys at the Fed have created a real Frankenstein horror that is going to manage to bring out the worst in both scenarios and maybe even at the same time.
I think we're breaking somewhat new ground here, Gordon, in terms of just how bad the bankers can really screw things up. This one may make the Great Depression and WWII look like a picnic. And instead of relying on old economic cliches, we may have to really think our way through this one because Binging Ben is trying his darndest to create the biggest socio-economic disaster in the history of the world. (What a way to get your name in the history books, eh?)
And how long have the goldbugs been saying it WILL?
Since 2008 now?
I know, I know.... hyperinflation will start "soon."
And then we'll all be Zimbabwe!!!
When? Fuck... I already said "soon!" What else do you want?
Also, gold will be 2000 by June. Then it will be 6000, "soon."
As I have said before, havent you kept saying that gold would go to 800, I love how you never respond to me when I trounce your arguements.
So JB or should it be BJ, when will gold go to 800?
Prices of high-end properties are falling because the financing needed by typical buyers isn't available anymore. Their "money supply" has dried up. Prices of low-end houses are actually appreciating in some markets.
Because inflation is a rise in the overall price level -- not a rise in the relative price of any one thing. During inflationary, deflationary and static-price periods, the relative prices of many things will change, but those changes alone do not define in-/deflation. House prices can fall precipitously due to many factors relative to the overall cost of living -- that doesn't mean life isn't more expensive. So when people say that rising oil prices "cause" inflation, they are wrong. A rising oil price is a change in relative price, and as a component cost of so many other things, forces changes in many relative other relative prices. But without growth in the volume or velocity of money, the price level will remain the same.
No, inflation is an increase in money and credit beyond the increase in production. Increasing prices are a symptom of inflation, not its cause. I think we are seeing who "has been swimming naked" to paraphrase Buffett. Housing prices are going down in the U.S. because we built too many of them in the bubble years and their prices weren't justified by income levels. Food and energy will go up in the coming years because we all have to eat and every government is debasing its currency.
What you describe is the symptom, not the cause. Inflation is caused by excess creation of money and credit. Deflation is the opposite.
Which would make Bill Still pretty much spot on about the cause of recession/depression, regardless of whether you subscribe to his ideas of how to 'fix' it.
Because in tiered money supply scenarios ie constrained for large segement of the population and rediculously unconstrained for small sections of society cheap things raise in price and expensive things drop in price.
Big historical counterexample: French assignats.
Hyperinflation while church lands were being seized.
"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."
Massive government intervention or massive fraud by massively unregulated monopolistic actors?
I think its the same thing. The "monopolistic actots" (i.e. banks) ARE the government.
So in other words, Uncle Sam is in the process of Enron-ing the world economy, and the Fed cum TBTFco. are the set-up guys. Am I getting warm?
Watch the forums. Gold and silver will go into backwardation and the paper trolls will be trying to milk it. It's going to be funny.
Its not what backs our money, but who controls the supply. - Bill Still
Unfortunately, we gold bugs, are walking right into the Rothschilds hands.
Yes, could be. But do you have a better short term alternative? should we wait for the World Revolution against banksters and politiksters?
Gold has two relevant words:
Pump and Dump.
Why does it matter to you whether people buy gold or not?
It doesn't. Trolls don't work that way. JB, alias MB, drops in from time to time to drop a few steaming turds on the discussion. Then he goes away for a while, probably under some other goofy name, to drop turds on a different website. Before this nice post by GG the last time I heard from JB/MB, his only comment was, "Your (sic) gay". The comment was totally ignored by all. He didn't get the response he needed so he's back. It's just sport with no value in reason nor sanity. Note that he does not attack GG directly. That would incur wrath so he avoids direct confrontation with the author of the post. He just stirs up the other folks who are trying to have a relevant discourse. Same crap, different day.
Rocky, you having been here longer than I, perhaps you know, are such obvious and demonstrated trolls ever dealt with here on ZeroHedge by banning? If not, they really should be! I can't understand why any website or forum manager or owner would allow the likes of MasterBates/JohnnyBravo or this JayBayBaker to infest their forum and seriously degrade the quality of the discourse here to no good purpose.
I am all for a diversity of opinion ---- any forum would be sterile and meaningless without it --- but I cannot for the life of me understand why Tyler, or anyone else, would allow such miscreants and intellectual vandals to metaphorically shit in the middle of their living rooms. There is a world of difference between honestly differing viewpoints and blatant flaming and trolling. It is an insult to not just the site owners, but to everyone participating and reading here.
I have seen the lack of moderation, and the apathetic and misguided tolerance of trolls, degrade and outright destroy other online forums, and I predict that if the current laissez-faire attitude towards egregious trolling here does not change, the same will happen before too long to this forum as well.
I'm not sure about ZH troll policies. So long as the comments are at least minimally about the main topic they are probably tolerated. You gotta admit that this troll stirs up some argument for/against the intimacies of the gold debate. That can't be all bad. It's the name calling and fruitless, countless, brainless, useless posts that will finally take most trolls over the line. I think that this troll will either suicide himself (get banned), or perhaps come over to the dark (gold) side. Note that I have not used his name here because he searches for it so that he can attack the comment.
As Burnbright points out, ignoring them is the best tactic.
Well we shouldn't be feeding them, but at the same time I have seriously had it. Its easy to have a short fuse on the internet though.
pump deez.. I'll clutch my physical and then short paper when the fed finaly raises rates.. then with the gains on paper, I'll buy more physical bawhahah
Why would you short paper when the fed raises rates? To lose money?
Higher rates = currency scarcity = rising currency prices.
Once upon a time there was supply and demand.
When supply goes down, the price goes up.
Raising interest rates is accomplished by buying back treasuries, which reduces the money supply in circulation.
When the money supply goes down, the value of money goes up.
There, I gave you an economics lesson for free.
This Johnny knows his stuff!
Are you on crack? You the official BJ giver? He said he would short paper gold if interest rates rise and buy physical gold. That is exactly what you should do if interest rates rise because the price of gold would drop. You would make money on selling paper gold short and then buy the physical at a discount, its win win.
I have a strange feeling that you give BJ's to BJ. If you know what I mean.
Indeed he does!
Too bad "his stuff" happens to consist of mindlessly pro-paper, pro-bankster, anti-gold bullshit.
And just as handsome as Bill Still too.
Pity you don't know shit about economics. Did you and Bill Still both go to Harvard?
You miss understood him, he was talking about shorting gold paper and buy physical.
Buried canned ham Biatchies!
LOL. You know I love you guys, no matter how much I disagree with you about a certain shiny metal.
"Because gold is honest money, it is disliked by dishonest men."
(Ron Paul, The Case for Gold)
Wow, a one trick pony. I don't know how many times I've seen that quote.
What's next, the fofoa website?
"Because gold is shiny and pretty, it is liked by the likes of Kudlow and Cramer."
The truth bears repetition.
And as for "one-trick pony", is there any better example than a pro-establishment, anti-truth troll who flocks to and trolls any and every article, such as Gordon's here, that challenges that whole rotten, corrupt and collapsing establishment? Like a dog returning to its vomit, you simply can't stand having the crimes of your masters derided and exposed.
akak speaks for many of us. Go back to "Trolls are us" punch your time card.
Wow. What kind of dope are you on?
I don't support any "collapsing establishment."
Once again, you make false connections that have no basis in reality.
I argue with the goldbugs because they're wrong. It has nothing to do with "being paid by some banksters." Those are the only articles I disagree with anybody on.
The economy and world financial situation WILL improve. It's not speculation, it's fact. it does every time. At that time, gold will be worth less, and the "hyperinflation" that people that have no idea what they're talking about say will happen will be the reduction in the gold price.
Now call me a troll, offer nothing substantive, and keep that tin foil hat on, buddy.
And how did gold go down last time it reached its peak BJ, you can't tell me because you don't fucking know. You're such a dipshit.
Good points.
They don't understand that we have already had the inflation because they don't know how money is created. And how it is destroyed. Gold has nothing to do with inflation, just look at the CPI and gold price correlation. It has to do with fear, and we have plenty of that this week, that's it. As fear subsides, people have better things to do with their money than to bury it in their backyard.
The economy will come back when we have worked out the debt or defaulted on it. It'll take a few years ...
You are really the most stupid and ridiculous troll I have ever encountered.
So when times were "good" and bubblelicious in 2002, 2003, 2004, 2005 and 2006, with virtually no fear for the economy out there at all, pray tell why was the price of gold rising during EACH ONE of those years?
GOD, you are a dipshit!
lol you are such a dip shit. You don't understand how many is made. It is made at no cost, free, its worth nothing because it isn't capital. Got it?
You know that your signature is what creates the money for your credit card, the mortage for your house, the federal reserve note even says what the fuck it is, a god damn note. It is a debt instrument.
http://en.wikipedia.org/wiki/National_Banking_Act
I have never seen you so much as mention how money is "created". You don't know dick you little fuck.
Good point Johnny. MAybe gold will become worthless.
Troll.
Inevitably it is the word the pushes itself to the forefront the most quickly when encountering Sunstein's crew. They're not even very good at it - but there's gov't in action for ya! Tax dollars workin' away.
Baits,
How's the progressive agenda working out for ya?
"Unfortunately, we gold bugs, are walking right into the Rothschilds hands."
Until I trade my gold for carbon credits. I ain't playing into anyone's hands.
Bill Still is a rat rooter. That's the dumbest statement ever.