However this crisis is resolved,
guess who'll be footing the bill...
The World has endured these sorts of crises before.
Somehow they come to an end. What happens?
Sometimes, someone turns up who can prop up the
collapsing debt mountain, and they make it grow higher, for a little bit
longer. For a short while they are even called brilliant, but they leave a
bigger problem than they started with. Eventually the thing comes crashing
down and the creditors pay - always.
Whether the creditor pays through default or rapid
inflation, or the mandated acquisition of government bonds by their pension
fund, or the sequestration of their deposits, the result is the same: it's
always the creditor who pays.
And so they should. They lent the money, and they
receive interest for taking the risk of lending. It doesn't work well if they
can take the interest without the risk - for which we need only look at the
nonsense of naked CDSs! No - as some bondholders are currently finding out, the
creditor always pays.
By and large the creditors in the west are the holders
of about $100 trillion worth of currency denominated assets (bonds and
deposits) mostly owned by savings institutions which themselves have been
pumped up through tax incentives to save. Their owners are the people who are
going to pay. That is good news and bad. Good for our children, who will not
be saddled with this debt, and bad for us, as we
will get pensions - paid in full - that buy a sandwich a month.
But until the bill finally lands on the mat, lots of
earnest arguments and skilful men and women will
turn up, occasionally even offering a glimmer of hope that somehow the
creditors will not end up paying. Some will usher in false hopes, but the
hopes will fade, until eventually - when the debt has finally become near
worthless, and when even the savers realise it is
so - some lucky individual will announce that the money printing and the
devaluation is over. Then suddenly, as if by magic, it will be. This person
will be the 20th or the 50th Treasury Secretary to make the announcement, but
the announcement will stick, because everyone has accepted that the value of
the old debt is finally zero. Only then will growth start over.
All currency denominated assets will by then be
effectively worthless. Until then volatility in a generally downwards
direction will be the norm as false dawns get debated, and implemented, and fail.
It will be very difficult to spot the end of the process, because it will
only happen when finally almost everyone assumes every monetary initiative
will fail. That is a necessary condition for a return to sensible money.
That - at any rate - was how these things got resolved
in the past. It's not very encouraging is it? Sorry.
I find my interest is shifting from the collapse, which
is well underway, and which will go on in its chaotic way for a few years and
will eventually consume the hugely indebted UK and USA economies, as well as
the Japanese and the Europeans. Now I am wondering how to detect the nearing
end of the process, when some wonderful profitable and productive
opportunities will arise. We will then have the wind at our backs, with sound
money and naturally re-emerging demand (albeit from a low base). In the
meantime I will sit on my gold through the rises and the falls, and remind
myself whenever I'm tempted to sell - which is frequently - that it's the
creditors who pay, always. Until they have I must not get involved.
By the way, just in case I didn't mention it: THE
CREDITORS ALWAYS PAY.
Director and Founder