Fed Chairman Ben Bernanke’s decision to go ahead with unabated quantitative easing (QE) seems to have taken many by surprise. To such an extent that, from now on, the major market participants are saying they have totally lost faith in Ben Bernanke. True, Ben Bernanke has been saying constantly, for the last four years, he would first taper and then end his QE plans, and then, at each FOMC meeting, he has been saying the opposite. The Fed has printed over $3Trillion since 2007.
At large, we can say that investors and other market participants do not trust Ben Bernanke anymore.
Ben Bernanke cannot and will not stop QE. On the contrary, he will add more to it soon because the markets and the banks’ solvability are kept alive solely by this « quantitative easing ».
Why Bernanke Can’t Stop QE
If the Fed were to end its asset purchases, interest rates would rise and all debt-related financial products would plunge, the derivatives bubble (an astronomical $489.7Trillion, or 7 times global GDP) would explode, the banks would again become insolvent, and the U.S. bond market would collapse. And let’s not forget the impact higher interest rates would have on real estate and consumption.
The G7, or the seven most industrialised countries, account for half of a world GDP that stands at $30Trillion. The debt of those seven countries amounts to $140Trillion. A simple 1% rise in interest rates would bring in an extra cost of $1.4Trillion.
In this context, Ben Bernanke cannot put an end to QE.
Ben Bernanke’s « Syrian Moment »
There’s a shocking parallel to be established with Barack Obama’s loss of credibility with regards to the recent events surrounding Syria. A majority of countries have stopped having blind faith in the American government and its arguments and justifications for military intervention.
World public opinion is starting to ask serious questions about the real motives behind these wars of the last few years. Many countries, such as China and Russia, know very well that an intervention to de-stabilise Syria (just like in Irak and Lybia) has much more to do with saving the petrodollar than with chemical weapons which, by the way, the United States has been the first to use (Vietnam, Iran, Irak etc).
Sun Tzu was saying that « every war is a lie ». We are seeing that the countries which question the dollar’s hegemony are being systematically declared « terrorist states », using fallacious arguments, these last years. But times are changing and the international leaders, those who have no interest in the dollar surviving, have blocked any intervention in Syria.
Both Ben Bernanke and Barack Obama have become totally defiant, these last weeks. This attitude brings and will bring radical consequences for the dollar and the international monetary system, which we know are built on... trust.
These two events are linked and should be understood as some attempts at imposing the US dollar as the world reserve currency and, thus, preserving this paper-money monetary system.
But the opposite is happening : the dollar is being rejected massively, there’s a loss of global confidence in the dollar, and the United States is more and more isolated.
The actual un-declared war is one for the control of natural resources (natural gas and oil) but, above all, one for determining what currency will be used to trade these vital products (paper money or tangible assets).
Largely speaking, we are witnessing a fight between two « camps » : one, more and more isolated, defending a monetary system based on non-convertible paper money, and the other, not in a position to issue world reserve currency, wanting a monetary system based on real money that everyone trusts and that doesn’t serve any country’s particular interests : gold, that is.
By analysing these economic and geopolitical events while focusing on the dollar, one may better understand how these recent economic and geopolitical events are unfolding and anticipate the consequences of a collapse of the world reserve currency.
A Little Monetary Reminder
Gold has been used as money for as long as 5,000 years. We are living, since the closing of the « gold window » in 1971, through a unique monetary experiment in the history of mankind, since it’s the first time that no currency is convertible into tangible assets anywhere in the world.
Let’s recap : since 1971, we are shunning 5,000 years of human history, 5,000 years during which humanity has systematically revolved around forms of money based on gold, 5,000 years in the course of which every paper money experiment has always ended in its total loss of value.
It is amazing, today, to see that the majority of individuals have totally forgotten the need to own some money that can be converted into tangible assets. Those same people don’t understand where this ravaging inflation that is destroying their purchasing power and leaves them poorer each year comes from.
The Petrodollar System
A paper-money system can only survive as long as its users have faith in and recognise the currency’s capacity of maintaining its real value (purchasing power).
The moment this trust is broken, the system collapses. This is why the issuers of fiat money create a permanent demand for it, thus sustaining its non-convertible value (the value of paper currency is determined by supply and demand).
This permanent demand (sustaining the dollar value) is made possible by the fact that oil is being traded in dollars : that’s the « petrodollar » system.
We understand the will of the United States and the proponents of the actual financial system of making mandatory that oil trade be made in dollars, but they will also go to great lenghts in trying to ensure that no petroleum-producing country decides to sell its oil in a different currency... especially in gold, the real antithesis of all forms of paper money.
Irak wanted to sell its oil in euros, Libya in gold, and so did Iran (via Turkey). Russia wishes to sell its natural gas for some money that is not being created at a rate of $85Billion every month, which is destroying the purchasing power of its currency reserves. China will be paying its oil from Iran in Yuan, which I anticipate will eventually become convertible into gold.
The value of the world reserve currency and the exorbitant privilege of issuing it are being defended at all costs since 1971, whether by negociated accords (notably with Saudi Arabia), by military intervention or by manipulation of the one asset reflecting the devaluation of the dollar : gold.
The Changing Monetary Paradigm
Three pillars of protection for the dollar are progressively crumbling right under our eyes :
1) The events in Syria are very certainly marking the end of the U.S.’s capacity to defend the petrodollar by force. China and, above all, Russia having opposed very strongly with success (to a military intervention), we realise that we’ve slipped into a world of multi-polar powers. The petrodollar system is ending and, with it, trust in the world reserve currency, the U.S. dollar.
2) Many commercial accords are being concluded within the BRICS countries without mentionning the dollar as a means of payment. China, Russia, Brazil and a host of other countries are rejecting the dollar for their energy trade bills or their commercial exchanges. Historically, trading is what has brought evolution to the financial sector. The bi-lateral trade agreements within the BRICS are to be analyzed in the context of a global rejection of the dollar.
3) The gold price manipulation, which must be understood as a defense mechanism for the dollar, will end, while physical gold will be re-introduced as a means of settling international exchanges, with China and Russia leading the way. This manipulation has lasted far longer than I had anticipated, certainly, but it will undoubtedly end, due to the depletion of the central banks’ gold reserves, gold that had to fill the markets. The steep plunge of the available COMEX physical gold (from 11,059 ounces in January to 665,000 today) is proof, and other proofs are accumulating that bank-issued paper-gold-type assets are not convertible into physical gold. Read "GLD ETF Tells Customers You Can’t Have The Gold"
A monetary paradigm change is happening right now. Ben Bernanke just experienced his « Syrian Moment », losing all credibility in the eyes of the remaining few.
Events are accelerating... at the speed at which the currencies’ purchasing power is being destroyed.
What this change will bring, as 5,000 years of history have shown us, makes no doubt : a return to a gold standard, with gold at $7,000 an ounce, to avoid any deflationary crisis; and a monetary change imposed by the new world powers (ex-emerging countries) that never ceased acquiring large quantities of gold in anticipation of the collapse of the international monetary system, based on the dollar.
China has imported 517.92 tonnes of physical gold via Hong Kong in the first six months of 2013, and 116.4 tonnes in July. China, first global gold producer, exports not a single ounce of gold...
In August, Turkey’s central bank acquired 23 tonnes of gold, Russia’s 12.7 tonnes, and the central banks of Ukraine, Azerbaijan and Kazakhstan bought two tonnes each.
Fabrice Drouin Ristori - Founder/CEO Goldbroker.com (FDR Capital)
ceo@goldbroker.com
Twitter : @FabriceDrouin
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