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In
the first part of this article we looked at the sad events that appear
unavoidable in 2013 and beyond, despite the best efforts of politicians and
monetary officials. We then said events are on the way to bring nations in
the developed world the ability to survive these blows.
Oil Self-Sufficiency in the U.S.
The first point
of hope pointing that way came from the news that the U.S. is headed to
becoming the world’s largest oil producer in the world, even ahead of
Saudi Arabia. Through the use of a system of “Fracking”
(the pumping of water into oil wells to extract remaining reserves) the U.S.
will become not only self-sufficient in oil by 2016 but could become a net
exporter after 2020.
It
current dependence for 20% of its oil needs from imported oil will disappear.
The consequential impact on the U.S. Balance of Payments will be dynamic.
Strategically and politically the U.S. will look considerably more robust. It
remains to be seen whether it will save the dollar or its buying power but it
will give resiliency to the U.S. economy it sorely needs now.
Considerably
lower oil prices –which we imagine will follow, but not necessarily
so— inside the U.S. will have a dynamic impact on the profitability of
the U.S. economy and the underlying state of its economy. We cannot say
whether this will be enough to provide enough growth to absorb the massive
money supply we currently see threatening ‘stagflation’ or not.
We cannot say that it will arrive in time to do so either. We are too far
away from these events to paint an accurate picture of their impact. But the
change will remove the danger of a collapse of the U.S. economy and the
dollar, provided politicians have not caused it already.
Oil Self-Sufficiency in the Eurozone
The news that
the Eurozone may become self-sufficient in oil as well is very new news as
well. Yes, “Fracking” could do the job
in the old Eurozone oilfields but better still, it appears that Albania has
as much oil as Kuwait and that it is light crude oil. This is favored by a
Europe with a rising dependency on Russia for gas and oil that makes it
uncomfortable. Being able to access Albanian oil (still 5 years plus away)
will lower dependency on Russia and on the Arab suppliers of oil to those
nations. Not only that, but the Eurozone’s balance of payments will
look far healthier and provide the same buffers that U.S. oil
self-sufficiency will do.
The
protection against outside economic shocks that such oil independence will
give the Eurozone might eventually save the euro’s bacon.
Loss of the “Measure of Value”
The events now
taking place in the monetary system and the financial markets and those that
will happen in the future will not be conducive to a sound dollar even with
oil self-sufficiency. Right now the dollar and the rest of the world’s
currencies have lost a considerable portion of their ability to measure true
value. This has been pointed out by much respected monetary leaders in
globally respected institutions over the past few years. We cannot see this
changing.
For the
monetary system to survive the shocks that lie ahead, in the relatively near
future (bear in mind that medium term has not been reduced to five years and
long-term to ten years) a great deal need to be done to reinforce it, to
withstand the shocks that lie in wait for it and for us. In its present form,
the unbacked paper currency system, entirely
dependent on the confidence that governments can garner, looks far too
vulnerable to even stem the further decline in confidence in currencies.
Worst
of all, that loss of confidence is being seen inside the banking system itself. It’s there that it needs
to be combated first. The sight of banks unwilling to lend to each other in
the last couple of years and their placing liquidity given to them to
resuscitate lending in the economy back with their central banks highlighted
those dangers. Presently attempts at modifying the system to face these
threats is moving at such a slow pace that they will be too late.
Bear
in mind that the state of the global banking system has been shown to be the
top priority of both government and central banks with measures taken to date
designed to rescue them and not the consumer. We expect this to remain the
case in the future!
Monetary System Adjustments Accelerated
But at the start
of this article, we pointed out that any view of the future must be pragmatic
and face current realities. The monetary system will not be adjusted until
present events demand it. Then the sight of scrambling monetary officials
will be on the news daily as they accelerate adjustments to stave off
collapses. As it is, the chances of a financial accident on both sides of the
Atlantic have increased exponentially. When push comes to shove, the plans
already in the works will appear out of the blue. This we believe will
include those on gold taking it to a level I asset on bank balance sheets.
One
of the prime adjustments will be the movement of gold to a pivotal position
in the system, not being directly used in line with its market value, but in
the background, much like a guarantee is used. To use it at its market value
is to undervalue its capabilities in a monetary role. It’s quite
correct to reject the idea that gold will be confiscated to expand the money
supply. Central Banks need no assistance in this. They already do it without
reference to gold. Gold has considerably more value than paper currencies
have in another way.
Provider of
Confidence
Gold will have
to act as a counter to currencies
rising in value as they fall. It must be harnessed to provide liquidity at
reasonable rates as was the case when involved in the gold/currency swaps
undertaken by that central bank of central banks, the Bank of International
Settlements three years ago and thereafter in a less discernible role.
Its
prime function will be to act as defense, as back-up to paper currencies. Its
role will be to provide confidence in currencies when it is waning visibly.
And we’re not far from that happening on a broad front.
Julian D. W. Phillips
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