Can it Happen?
It’s becoming
clearer and clearer that there is a large blind spot in the minds of
financial people regarding this probability. Only financial men who have been
in the markets for 40+ years understand what can happen. Since then and until
2007, financial men in general have lived in a growing, constructive world
that has bred a comfort zone that’s still the norm for them. But
we’ve entered a decaying zone, one replete with disappointing financial
news and sagging structures that repeatedly fail to meet expectations.
Consequently,
there is an inability to really understand what happens in such a climate and
how human endeavor can react in both a positive and
negative manner. Are you ready, informed and clear on what lies ahead and
what you will do? It’s growing more apparent by the day that the decay
will continue. We say this because like the ice cap in Greenland, what was
taken to be normal suddenly disappears and a new paradigm begins.
The difference
from today onwards is that the exit of Greece from the Eurozone and Spain
asking for a bailout, is so likely to happen, unless
some remarkable, very different and unlikely event happens to turn the
Eurozone economy around to one of vibrant growth. When that happens expect to
see a squadron of pigs flying around the E.C.B. in Brussels in perfect
formation.
What Happens to Italy and Spain, etc.?
The unfortunate “P.I.G.S.” nations
of the Eurozone are extremely vulnerable should Greece exit the Eurozone. The
fact that Greece will have left the Eurozone will set a repeatable precedent
for others.
If Greece’s distress appears
not only tolerable but leads to a healthy balance sheet, then the
debt-distressed nation of the Eurozone may see that as preferable to a
painful and potentially overbearing burden of new debt on their backs with
little benefit to show for it. At the very least, these nations will have to
convince their people of the details of the benefits of remaining inside the
Eurozone. If they can’t then these nations may see it better to follow
Greece out of the Eurozone.
On the other hand, the fact that
Greece has now gone from the Eurozone and its debt perhaps with a value
somewhere south of 10% of its original value –it is now around 30% of
that or less— may frighten the living daylights out of their creditors
and bring a halt to any further loans to those nations. This would
precipitate their departure from the Eurozone quickly.
Impact on the Eurozone and the Rest of the World
Should nations like Spain and Italy depart
from the Eurozone we would see not a nation responsible for only 2% of the
GDP of the Eurozone, but ones with a significant contribution [over 20%] to
the GDP of the Eurozone. This would immediately force a Eurozone-wide
appraisal of the value of the Eurozone itself. Two issues would be
highlighted:
1. The Eurozone accounts for
40% of Germany’s exports. These would suffer hurting Germany’s
export levels.
2. With the weak nations leaving the Eurozone, the
value of the euro would rise tremendously as the overall Eurozone balance of
payments would show a much stronger picture. This would hurt the export
competitiveness of the Eurozone in international trade. A weak euro was
perhaps the greatest benefit to Germany in particular that had to constantly
wrestle with a strong Deutschmark before.
On the capital front, nations like
France and Germany would find that levels of bad debt (on the books of their banks due by these countries)
would cause them to experience further bank crises.
The Issue of Indebtedness Heightens!
Globally, the departure of Greece from the
Eurozone could lead to Spain, Portugal and Italy leaving too. Whatever
happens, the issue of sovereign indebtedness would take on far more serious
proportions. In such a climate and with the global downturn gathering pace,
the days of borrowing to live now would
be replaced by the arrival of pay later
and an extremely painful period of forced
austerity. Politicians –forced by voters where there is a democracy
and forced by social unrest where there is not— would take the only
recourse that would gain them votes, which is to allow monetary inflation to
be unleashed.
By this time, financial and
currency credibility would be at such a low level that the loss of confidence
would require actions by governments and central banks to restore confidence
by whatever means. Controls to force the use of local currencies through
capital controls would certainly be part of this process. Internationally, a
crying need would arise for national currencies to be supported by assets
tradable internationally that have the respect of the entire world.
After the demise of the Weimar
Republic, Germany issued a new currency based on land values, the Rentenmark, which gave the impression that just as the
amount of land that was available was limited, so would the amount of
currency issued against it would be.
But that is no good outside of the
nation. Something would be needed that would be respected and valued
internationally, be capable of having its value realized fully outside of the
nation, and be portable, i.e. able to leave its owners hands entirely and
pass value to its new owner.
Oil could have been a candidate
were it not for its constant consumption and the fact that it lies under the
control of O.P.E.C., which in turn relies on the U.S. for its security.
The
item would have to be completely free of a nation’s control.
Historically and to this day, there’s only one set of items that have
fulfilled this role: precious metals, i.e. gold and silver. Both have served as currencies in the past and
particularly among the world’s bankers gold still does. It fills all
the requirements of international money free of national obligations, trusted
by all nations even when they receive it from their enemies.
Today’s Value of Gold
· The very fact that the B.I.S. undertook over 500
tonnes of currency/gold swaps two years ago, testifies to it
ability to facilitate and support the global monetary system as we know it
now.
· The continuation of the acquisition of gold by
emerging nations also testifies to its current and future value as a support
for the monetary system.
· The discussions going on in banking circles on
rerating gold from a Tier II asset on bank balance sheets to Tier I (equal to
U.S. Treasuries in status) further testifies to its value as bedrock money.
This value goes well beyond its market price.
Member’s only:
· The future of gold as money
· The clash between private
ownership and commercial/central bank ownership
·
Confiscation
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