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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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Mayer Amschel Rothschild:
Give me control of a nation's money and I care not who makes the laws.true, it was said, but that only applies if the nation accepts the currency, and the people decide. If people refuse to use the currency then Mayer anit got shit.
What are these other currencies that survived?
Fiat currencies are only a subset of currencies.
Look at history gives that all currencies 've failed (willing people can still cling to tangential exceptions)
Gold as a currency is not different from any other currency in this regard.
I'll know that gold is in a bubble when they have vending machines with it.
Oh wait, they do:
http://www.cnbc.com/id/37124207
You goldbugs are going to take a buttreaming without the lubage.
1251 and possibly 1304 are the targets of the breakout. Then, it's all downhill.
How much fiat currency do you want to bet--5 yr cds!
I'm with you on that one, Johnny. The setup for metals has been so transparent at every step of the way. It's hilarious and it all ends in tears. Here's a hint to all who still don't fucking get it: In order to have a bubble, you have to capture the imagination of the general public and get them to buy in so that they can become the last bagholders as the perpetrators pull out, laughing all the way.
I know, right?
The people here like to make the argument that "nobody is bullish on gold" when the exact opposite is true!
I can't think of ONE person in the mainstream that is bearish on gold right now. That's pretty telling if you ask me.
Meanwhile, the "smart money", the people who had perfect trading quarters, and made over 100 million a day trading, are the people supposedly bearish (and short) on gold.
These people want to act like JP Morgan doesn't know what they're doing, but that Cramer and Glenn Beck are the gospel. It's pump and dump all the way. The dump hasn't occured just yet, however.
LOL. Exactly.
The problem is you are on the wrong side of the fence. LOL.
Will you and aeroflop please go check into a motel?
Good one , lol WW
If I ever need the precise definition of "internet troll", I will just refer back to any of your posts.
Don't forget when Johnny was trolling as Master Bates, he was even trollier.
You mean trollier than this?!
Damn, glad I was not present for most of that!
It's sad, really, to watch those in denial of reality rage against it, as if the universe would actually bend to their misdirected hostility and frustration.
It's not denial, he's probably being paid.
They do push the conversation in direction other than the topic at times. reminds me of a 5 year old pushing for attention. Do they work for the government? Who else would be so stubborn in the face of facts.
Yes, who indeed?
Who has such a single-minded motivation and desire to derail discussion over anti-establishment topics with such zeal?
Cass Sunstein, is that you?
Good self-analysis. That's the first step to getting better, you are on the right track.
Don't remember when silver is at $3 and gold at $600 that you heard it here first.
.
When gold never looks back from $1150 (I'll give you that much a dip), then $1300, then $1500 within the next 12 months, remember that you heard it here first!
When your precious Treasuries are barely worth the paper they used to be printed on, remember that you heard it here first!
When you are wondering how you are going to pay for your visit to the grocery store patrolled by armed guards, because we are in the middle of another "bank holiday", remember that you heard it here first!
And you're still a God-damned troll.
If I ever need the precise definition of "prison bitch", I'll will just refer back to any of your posts.
this article should be read to all children ages 3-22 every day in kindergarten, elementary school, high school and college. Then things would change without the need to burn the place down. It would be natural to those children to use gold and demand the usage of gold for everything that implies monetary exchange. The dollar would be dead in a decade. Just like it is the most natural thing for the idiots who roam this planet to exchange pieces of cotton with some pretty faces of dead dudes on them.
Absolutely excellent writing Gekko old boy.
+10000 e84
Unfortunately what takes place below looks like a kindergarten lunchroom fight where just about everyone aged 3-22 got involved and gave away any credibility they had to begin with. Childish @ best.
Nice article btw GG, too bad the kiddies had to ruin the thread.
Hi "ho" Silver
http://www.youtube.com/watch?v=0Kb2x0D584c
http://finance.yahoo.com/news/Remove-Card-and-Take-Bullion-cnbc-760626755.html?x=0&sec=topStories&pos=4&asset=&ccode=
Gold despensing ATM.
Apparently, Abu Dhabi gets it.
CB, I was thinking the same thing when I read it - required material for junior high students.
Though I have a feeling before this is all over most will have learned the lesson - the hard way.
Cheeky, you nailed it, but the public schools are to busy teaching the children to praise Barry the great. Sorry, but the real teaching will have to happen at home (as usual) with the parents. Sadly that is waining these days as well.
Great post GG. Thanks a bunch. The Debt/GDP chart can not be denied.
They should praise the guy in my avatar instead.
When Obama was playing basketball in high school, Bush was the cheerleader for his team!
No... really. Bush was a male cheerleader in high school. Now he's just a cheerleader for wars that cost trillions of dollars and thousands of lives.
make that satanic dead dudes.
http://www.jesus-is-savior.com/Evils%20in%20Government/Federal%20Reserve...
Thanks for your kind words Cheeky. Much appreciated!
BTW, that article you just wrote, "Imminent power centralization within the EU" sent a chill down my spine.
+ 100000
Great Article. Thanks. This is far more preferable to
talking until one's blue in the face.
Dburn,
Any thoughts on the Gulf disaster? I liked your previous posts and imagined you might have an interesting view.
Imagine the following:
This sparks a crisis within all big EU states and the chaos reigns for, lets say, a year. Union and non-union workers enter into a multi-month long strikes and productivity drops off the cliff. With app 3 trillion EUR in bond redemptions in the next 2 and a half years sovereigns become unable to collect taxes and the cost of new borrowing soars to multi decade levels. EMU decides to monetize the debt away and citizenry sees their purchasing power disappearing overnight. Then in all that chaos somewhere comes a figure who preaches against immigrants, free monetary and economic zones, against FIAT. Obviously being well (mis)informed and with non-retarded inductive abilities he starts to blame one group of people who, in his opinion, hold the people of his country enslaved via constant unilateral debt agreements which they call money. He is at first laughed at, dismissed, marginalized and even not spoken of. Then the crisis becomes worse and he evokes biblical rhetoric and mixes it with his political message. He forms a party in which he holds all four pillars and enter the parliament. No one in that new parliament has the majority so they call to him to help them form one. They think he can be manipulated by, used by and then discarded; but he waited, planned and prepared for this long enough to know how to explore his new found position so that he gains the most from it. The crisis only becomes more bad and he ramps his rhetoric 100% and leads the people into populist revolt. There are killings, there are bombs, burning buildings. He then decides to implore the strategy he long foreseen and evokes the necessary enemy in order to unite the people around him even more. He promises prosperity, hope and happiness. People rejoice and start to be blindly obedient to hic charisma. He than takes his plans into action. History does and will repeat itself. But this time EU is not the hub of industry as it was in the old day and if the plan is to spark war in EU is for one reason and one reaon only; to shift the remaining production to China and Southeast Asia in order for them to keep financing bond purchases on the bonds issued by the US government. Europe is in an artificially induced peace, which is not natural to Europe and what is needed is one little spark to bring the ghosts of ideologies thought long dead to spark another great conflict. Europe is brewing under its polished surface, people are angry, people need faith in someone larger then life. As they say; we have seen nothing yet.
People are misreading Europe:
The folks in Europe who are buying now at the top during this mini-mania will be badly burned and won't touch gold for a while. If it goes down enough, they will even sell, fearing lower prices.
The key is the political class in Europe:
What do you think they will abandon: their favorite pet project, their chosen reason to be, the euro; or their spending ways.
I know a bunch of Europeans and they have been preparing the population for harsh austerity measures for the last 2 years. They will come and some are there already. With the IMF as the enforcement squad.
The euro is the greater cause for them, a long-term cause that is worth defending against a couple of (even serious) protests.
The Greeks will also get "protest fatigue" after a while. Europeans have a more thrifty way of living anyway than Americans, they will just hunker down and do it.
The shot across the bow that the gold market is sending right now only reinforces the belief in the European political elite that austerity is the only way to maintain the euro.
So now, that everyone and their grandmother is bearish on the euro (as usual after the move!), is a good time to buy.
And it's a good time to sell gold, since we have this mini-mania in Europe, forcing the politicians to work hard to gain back the confidence. They will, as they have run out of options. They know, if they need only one more package, the euro is dead for real.
In dollar land anything is possible, and the reserve status allows us to extend ourselves much more, which is bearish for the dollar.
I stand alone with this analysis right now, which is a good indicator that I am right.
Have fun, guys insulting each other!
I hope this isn't your only post here. You have many good things to say. Maybe you're right.
One lone idiot standing firm against an onrushing tide that everyone else is fleeing in self-preservation is no indication that everyone else doing otherwise is automatically wrong.
Reading your blinkered missive above, I am forced to think of the famous video from the Asian tsunami of 2004, in which a single man, standing in the surf, just remains in place without even trying to flee as the monster waves wash over him and kill him. You are like that man, JayBayBaker --- with either a death wish, or an arrogant stubbornness that denies the reality staring him in the face. Frankly, I don't pity you a bit either way.
Sounds like something out of Lahaye and Jenkins, ie the AntiChrist
"Europe is in an artificially induced peace, which is not natural to Europe and what is needed is one little spark to bring the ghosts of ideologies thought long dead to spark another great conflict."
Agreed that it is in an artificially induced peace. The entire construction of "Europe" was meant to make wars between each other unlikely. Social democracy and heavy regulation in each of the countries, now imposed from Brussels, were meant to take out the tops and bottoms of boom and bust cycles, those cycles being what laid the ground for the success of the sort of demagoguery and inflamed nationalist sentiment that regularly sets Europe ablaze.
Where I disagree with the quote sentence is the notion that their are ghosts of dead ideologies that were thought to be dead. Hell no. Nationalism, fierce ethnic identity, and socialist/marxist ideology never went away. Particularly socialist/marxist ideology which is infused into the population by the state controlled schools. The whole recipe for nationalist socialism is a live and well. On top of that they have a largely parasitic foreign minority amongst them that is actually troublesome, as opposed to the jews prior to WWII who were involved in high value industries and trade. It could get very ugly faster than expected, but that's Europe. Remember Sarajevo/Kosovo/Bosnia wasn't that long ago, and happened right in the middle of sophisticated post-nationalist enlightened Europe.
I actually believe that Eastern Europe is a bulwark against the Marxist madness. However, in general, Western Europe remains vaguely insane.
I take heart in that Europe will traditionally look to America and New York City for leadership. This makes it possible to manipulate foreign opinion and behavior without resort to force.
Of course, if they try to uphold NATO, all will be lost, and the intelligent & productive will need to flee underground and spend some generations breeding. Not joking on that one.
I actually believe that Eastern Europe is a bulwark against the Marxist madness. However, in general, Western Europe remains vaguely insane.
I take heart in that Europe will traditionally look to America and New York City for leadership. This makes it possible to manipulate foreign opinion and behavior without resort to force.
Of course, if they try to uphold NATO, all will be lost, and the intelligent & productive will need to flee underground and spend some generations breeding. Not joking on that one.
Cheeky:
Your scenario is frightening to say the least. I have always thought that we are setting up to establish a tyrranical authority (a la national socialism) to further consolidate power in the elite hands. Germany in the thirties would not have gone its path if it did not have the support of industry and the elite. After all, they were the "master race" and all should bow before them. This just gets too close to home.
Yes, but they did not go that path without the consent of the German people, who were --either consciously or unconsciously-- seeking revenge for WWI. They had "unfinished business" so to speak. Plus people had longer attention spans back then so they could marinate in propaganda :)
Well V for Vendetta seems to be a good blueprint for how bad it could get.
Cheeky, your thoughts are very much appreciated.
As a concerned EU citizen, I am afraid a scenario such as described above could unfold. The search for scapegoats is of all times (witches, Jews, now Muslim immigrants and Greek civil servants) whenever things get sour (plague, hyperinflation, unsafe cities and subsidized early pensions, respectively) and will perhaps only increase when the complex European society starts to un-complexify from great heights, destroying expected wealth in its wake. But it will be a consequence, not a cause.
Will we see a new Serajevo, a new Hitler or a new Stalin, sparking conflict in Europe? Back then (talking WWI/II), people were not educated, nations were young and restless, and had no memory of all-out destructive war or were out to avenge the previous one. Wars were waged ultimately to increase a nation's complexity ("lebensraum"/quest for resources etc). However, relating to what I said above: any conflict in EU nowadays will lead to a decrease in complexity and thus wealth.
Moreover: these days, EU people are much older, much more rested, much more educated, have a collective memory of two world wars fought in their back yards, and a cold war on top of that.
Will it help? Perhaps not: despite education people are still as stupid as ever (i.e. thinking only short-term and self-centered). However they are not willing to give their lives for something that only destroys wealth, they've seen that happen before. Will they revert to nationalism? Yes: "down with the Euro! Long live our glorious Franc/Guilder/olive money!" They will fight tooth and nail to defend the right to take the consequences of their own mistake, instead of others' mistakes. The EU will break up before all 500 million europeans willingly give up their independence to Brussels/Frankfurt/Strasbourg during bad times. Will they revert to European Fascism? No. (also the language barrier and chauvinism prevents a pan European leader to step up)
OK rambling too much, gotta work :)
I think it can be contained. The Europeans are disarmed, war-weary, lazy, whiny, stupid, and have largely lost their sense of culture.
Inflation even sucks away good taste... it's depressing. It's the idiot children come to rule the world. Take a look at Dubai to know how your average British citizen acts when placed in a position of power - they turn into brutes. The United States still has some vestiges of respect for capitalism, at least... as does Germany.
Great, I hope it falls apart and fractures into as many tiny nation states/tribes as possible.
"despite education people are still as stupid as ever"
pretty much explains everything
50% taxation rates ought to drive anyone mad. On another note, I have friends who tell me that the ground reality in Asia is also anything but rosy. Capital has been massively misallocated there too. This time, I think the whole world is f**ked. It's all one big s**thole.
From my Brooklyn perspective, the Chinese are extremely dedicated to Confucian duty and saving face. They want to look busy and trade, even if the price signals are retarded.
IE they will continue to overproduce to achieve non-economic goals - growing their family structure, power, and influence.
Excellent analysis Gordon.
Boys.....you had me! bought 25 ounces and took delivery. If nothing happens...is nice and shiny to look at....if just half of what could happens materializes...well it will be advisable to hold some brass as well....
"Capital has been massively misallocated there too. "
Just back from 3 weeks in the PRC and that is indeed true. The number of empty brand new buildings and freeways is striking. Empty unaffordable condos and yet the "middle class" there can't find affordable units. The same can be said for industrial floorspace.
Ditto for India, or a marginally smaller scale than china.
And super haphazard here.
Lot's of hazard actually.
Yet the credit spigot is wide open and shopping malls are packed, shiny new cars and bikes for all.
Not going to end well.
As a non-funny humorous aside, Indian Banks commonly hold what they call loan Melas (a mela is a carnival, loosely translated).
A loan carnival.... that about sums it up.
Thanks for the boots on the ground info. Any thoughts on this alledged middle class? I keep getting conflicting views.