Matterhorn Asset Management There Will Be No Double Dip... It Will Be A Lot Worse

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by Egon von Greyerz – Matterhorn Asset Management


No, there will be no double dip. It
will be a lot worse. The world economy will soon go into an accelerated
and precipitous decline which will make the 2007 to early 2009 downturn
seem like a walk in the park. The world financial system has temporarily
been on life support by trillions of printed dollars that governments
call money. But the effect of this massive money printing is ephemeral
since it is not possible to save a world economy built on worthless
paper by creating more of the same. Nevertheless, governments will
continue to print since this is the only remedy they know. Therefore, we
are soon likely to enter a phase of money printing of a magnitude that
the world has never experienced.  But his will not save the Western
World which is likely to go in to a decline lasting at least 20 years
but most probably a lot longer.

The End of an Era

The hyperinflationary depression that
many western countries, including the US and the UK, will experience is
likely to mark the end of an era that has lasted over 200 years since
the industrial revolution.  A major part of the growth in the last 100
years and especially in the last 40 years has been built on an
unsustainable build-up of debt levels. These debt levels will continue
to swell for another few years until the coming hyperinflation in the
West leads to a destruction of real asset values and a debt implosion.

In the last 100 years the Western world
has experienced a historically unprecedented growth in production, in
inventions and technical developments leading to a major increase in the
standard of living. During the same period government debt, as well as
private debt have grown exponentially leading to a major increase in
inflation compared to previous centuries.

Until the early 1970s the growth in
credit to GDP had been going up gradually since the creation of the Fed
in 1913.. But from 1971 when Nixon abolished gold backing of the dollar,
virtually all of the growth in the Western world has come from the
massive increase in credit rather than from real growth of the economy.
The US consumer price index was stable for 200 years until the early
1900s. From 1971 to 2010 CPI went up by almost 500%. The reason for this
is uncontrolled credit creation and money printing. Total US debt went
from $9 trillion in 1971 to $59 trillion today and this excludes
unfunded liabilities of anywhere from $70 to $110 trillion. US nominal
GDP went from $1.1 trillion to $14.5 trillion between 1971 and 2010.  So
it has taken an increase in borrowings of $50 trillion to produce an
increase in annual GDP of $13 trillion over a 40 year period. Without this massive increase in debt, the US would probably have had negative growth for most of the last 39 years.

Total US debt to GDP is now 380% and is likely to escalate substantially.

The coming hyperinflationary depression
and the credit and asset implosion that is likely to follow will most
probably lead to the end of a 200 year era of growth for the Western
world. If only the excesses from the 1970s were corrected we might have a
circa 20 year decline. But more likely we will correct the era all the
way back from the industrial revolution in the 18th century and this could take 100 years or more.

So after the tumultuous and very painful
times that we are likely to experience in the next few years, the West
will have a sustained period of decline. All the excesses in the economy and in society must be unwound.
These abnormal and unreal excesses are not just corporate executives,
bankers, hedge fund managers or sportsmen earning $10s to $100s of
millions but also a total collapse of ethical and moral values as well
as a breakdown of the family as the kernel of society.

Most people believe and hope that this
major trend change could not happen today with all the measures that
governments have at their disposal. But very few people comprehend that
it is precisely the government interference, controls and regulations as
well as money printing that have created the problems in the first
place. Power corrupts, and the more pressure a government is under the
more they intervene. Because they believe that their interference in the
economy will save the country – read Obama, or the world – read Gordon
Brown. Little do they understand that each interference, each
regulation or each dollar or pound or Euro printed will exacerbate the
problems of the economy manifold.

Governments now have two options;
continue to spend and print money like the US or introduce austerity
programmes like Europe. Whichever way they chose will not matter since
they have reached the point of no return. The economy of the West cannot be saved by any means. But governments both in the US and in Europe will still apply the only method they know which is to print money.

Government is Stealing from the People

Very few people understand that money
printing is a form of robbing the citizens of their money and their
work. Money is supposed to be a medium of exchange for goods and
services equalling the value of the good or the service produced.  For
example, an individual works extremely hard to earn an annual wage of
say $40,000 which he receives in the form of paper money. The
government, due to its mismanagement and incompetence simultaneously
prints $40,000 in order to cover its deficits. So the government has by
pressing a button produced the same amount of money that a man had to
work a year for. This is what is currently taking place all over the
world and which will accelerate in coming months and years leading to a
total destruction of paper money. Paper money has completely
lost its function as a medium of exchange or a store of value. This is
why gold is gaining and will continue to gain value against perishable
paper that is called money.

Deflation Inflation or Hyperinflation

The only reason that the US could build
up such a major debt is that the US dollar has been the reserve currency
of the world and therefore the US has been able to finance its debts
and deficits internationally. The US has now reached a point when debts
have to increase dramatically for the country just to standstill. Like
all Ponzi schemes this one will also come to an end – and this very
soon. The US dollar will decline dramatically and lose its reserve
status and the US government will be unable to finance its deficit in
any market. This process will lead to endless money printing, collapsing
treasury bonds (substantially higher interest rates) and the dollar
becoming worthless in a hyperinflationary black hole.

Let us just reiterate that
hyperinflation arises as a result of money printing leading to a
currency collapse and not from demand pull. The slight deflation that we
are experiencing currently is a prerequisite for hyperinflation. The
fear of a deflationary implosion forces governments to print money,
leading to a collapsing currency which historically has always been the
cause of hyperinflation.

Real M3 (source: Shadow Government
Statistics) is falling at an unprecedented rate. This is the precursor
to economic decline, quantitative easing and inflation (see early 1970s
in the chart).

Many “experts” make the analogy between
the deflationary period in Japan since the 1990s and the US today. In
our view the US is in a totally different situation for the following

  • In the early 1990s Japan could still export their production to the rest of the world.
  • In the current downturn all countries (even China and
    India) will suffer and there will be no one to export the problems
  • The ability to export made Japan a creditor nation with major
    payment surpluses.  US are a major debtor and have been for 25
  • Japan had a very high personal savings ratio at the time (which
    has now disappeared). US has had a declining savings rate for
    years (the US savings rate is now going up which it always does in a
  • The balance of payments and the personal savings surpluses made
    it possible for Japan to finance their budget deficit without
    resorting to QE. Very soon he US will only be able to finance their
    deficits with QE and so will most of the rest of the Western
  • Japanese unemployment in 1992 was 2% and went slowly up to 5%
    by 2000 where it is now. Real US unemployment is 22% and
  • Many major sovereign states are now virtually bankrupt and the
    financial system is on life support. This was not the case in the

The above are some of the reasons why
the current US situation is totally different to Japan. QE will
accelerate in the US and worldwide.

What will make this process so much more
complex than the world has ever experienced is that the same
development is likely to take place in many countries around the world
simultaneously. It will most probably happen in the UK, the rest of the
EU and most other European nations. Due to the total interdependence of
the world financial system, it will be difficult to forecast which
countries can withstand the coming worldwide tsunami of money printing
but many Asian countries probably stand a good chance.

Can we be wrong in our forecast of a
hyperinflationary depression? Yes, of course we can. But the alternative
can only be a deflationary collapse which would be unacceptable to
(dropping money from) helicopter Bernanke and deficit demagogue Obama as
well as most other governments.

Conventional wisdom and most
experts say that we will not have inflation but deflation. The problem
with most conventional wisdom is that it is only conventional without an
ounce of wisdom. When have the world’s so called experts, politicians
etc ever been right on the current crisis? They will be wrong this time

The “conventional wisdom experts” also
say that it will be years before we can see inflation or hyperinflation.
In our view it can happen a lot faster. The world economy is resting on
a foundation of matchsticks. All that is needed is a change in
confidence or psychology for this fragile foundation to crumble. Falling
currencies, rising bond yields and falling stock markets could very
quickly result in a vicious and fast spinning hyperinflationary circle.
The frailty of the financial system could make this happen like a flash

Wealth Creation

Banks and the financial industry have
throughout history existed in order to finance production and trading of
goods. But in the last 100 years and especially in the last 20-30 years
it has become a major industry in its own right and an important but
unproductive part of the economy in many countries. Today, the financial
industry is too a great extent involved in trading for its own and
clients’ accounts, creating a raft of obscure instruments that only
benefit the banks and as well as financing consumption rather than
investment. All of these areas are totally non-productive and the only
beneficiaries are the participants in the financial industry. And the
rewards have been absolutely astronomical. In investment banking, hedge
funds and private equity in particular, the most massive wealth has been
created. Many players have become billionaires or created fortunes of
tens to hundreds of millions of dollars in the last 10-15 years just by
shuffling money around. In the past fortunes were created by building
factories and industries. But today any normal employee working in Wall
Street or the City in London will, by just showing up to work, make
hundreds of thousands to millions of dollars. This is the proof
of a world totally out of balance when people dealing in money become
the richest segment of society. Since this activity contributes very
little to the prosperity of a nation (but very much to its participants)
it is not sustainable.
The biggest reason why it exists is the
massive amount of money that governments have created or printed and
the fact that the financial industry has developed into a fractal wealth
creation machine for the benefit of its participants.

For the last 40 years in particular the
rich are getting richer and the average person has seen very little
increase in real income. In the US, the real annual income of the bottom
90% of US families has increased by only 10% since 1970. And in the
expansion between 2002 and 2007, median US household income dropped
$2,000. The perceived increase in wealth for the majority of
Americans derives from an increase in their debt level not from an
increase in real earnings. So the improvement in living standards that
the average American and many other Western countries have enjoyed in
the last 40 odd years is primarily based on debt – debt that can never
be and will never be repaid with normal money.

On the other hand, management has
achieved a major increase in income and wealth. In 1973, chief
executives in the US earned 26 times the median income. Today they earn
300 times. This enormous widening of the gap between the top few percent
in society and the masses is morally and socially unacceptable. When
the bad times start in earnest, this is likely to lead to major social
unrest and violence directed against the privileged.

The Focus will Shift

For a major part of 2010 the focus has
been on the problems within the EU starting with Greece, then Spain,
Portugal, Italy etc. The problems in Europe are major and many European
countries as well as the European financial system will lead to massive
money printing. Although the problems in Europe are very serious, the US
economy is in a much worse state. The diversion of the focus away from
the problems in the US economy onto Europe has suited the US
Administration perfectly. It can hardly be a coincidence, for example,
that US rating agencies downgrade the Sovereign debt of Greece and Spain
on the same days as Treasury auctions are held. But the problems in the
US economy are deteriorating at a rapid rate; factory orders, consumer
confidence, existing home sales, retail sales, the ECRI index (Economic
Cycle Research Institute) are all falling more than expected and real
unemployment, personal bankruptcies (will exceed 1.6 million in 2010),
trade deficit, state and federal deficits are all increasing.

The ECRI index is an important leading indicator. It has now fallen for 10 straight weeks.

There are three insurmountable problems in the US economy that are of a magnitude and gravity which can only be remedied by money printing:

  • Federal and state deficits will soon escalate at an
    exponential rate. The US Federal debt has increased from $ 8
    trillion in 2006 when Bernanke took office to soon $ 14 trillion.
    Many forecasts expect this debt to go up to nearer $ 20 trillion in the
    next 5 years. In our view it will be substantially higher. Add to
    that interest rates of 15% or higher and the American people will
    work just to pay taxes that don’t even cover the interest payments
    on the federal debt. This is why the US will either default or more
    likely print unlimited amounts of money.
  • The real unemployment rate is now 22%. Since 2007
    over 8 million Americans have lost their jobs and it will get a lot
    worse.  Non-farm unemployment in the 1930s reached 35% and we
    would expect this level to be reached in the next few years.
  • The financial system is bankrupt. Banks are failing
    at a much faster rate than last year. To date circa 110 banks have
    failed. More seriously the assets of the failed banks are only
    worth an estimated 30-50% of their balance sheet value. Banks are
    valuing their toxic debt at phoney values with the blessing of the
    government. But even debt that today is considered safe will soon
    turn toxic with the consumer coming under enormous financial
    pressure. Add to that the OTC derivatives held by US banks of at least $
    400 trillion. A big percentage of these are worthless and there
    are virtually no reserves to cover potential losses.

Within the next few years, the three
areas above are likely to result in the biggest money printing programme
in world history and simultaneously lead the US (and many other
countries) into the abyss.


There has probably never been a period
in world history which has caused the amount of wealth destruction that
we are likely to see in the next few years. If we are correct in our
assumption that the West will see a correction of the excesses of the
last circa 40 years but more probably of the last 200 years, since the
start of the industrial revolution, we could see a total annihilation of
the assets that have been fuelled by the credit bubbles. The spike in
asset values in the last 100 years, which is unprecedented in history,
is likely to be corrected by a waterfall which could start at any time.
We will issue a separate report in the next 10 days covering our market
predictions and the importance of physical gold for wealth preservation

16th August

Egon von Greyerz