It can’t happen here! What is happening in Venezuela and Argentina cannot
occur in Western economies. That’s at least what markets believe with stocks
and most bubble assets remaining in cloud cuckoo land. Rates in Argentina
have just gone to 40% to protect the currency. Anyone who believes
that rates in the US will remain at current low levels or that German and
Japanese rates will remain negative has a massive shock coming.
HYPERINFLATION – A CURRENCY EVENT
Argentina used to be a very strong economy 100 years ago but in the last
few decades the country has gone through several economic collapses and
hyperinflation. Argentina just increased short term rates to 40% to defend
the currency. The Peso has declined 95% since 2001 and is on its way to zero.
So it is quickly catching up with another South American country – Venezuela.
The official Bolivar is down 99.7% against the dollar since 1995. The black
market rate is much worse.
DOLLAR COLLAPSE
Don’t
believe that the dollar in any way should be proud over its outperformance
against the Bolivar and Peso. Since 1999 the dollar is down 80%
against real money which is gold of course. The Venezuelans and
Argentinians would have done very well since the late 1990s to hold dollars
rather than their own currency. But if they, as well as the Americans, had
held their savings in real money – Gold – they would today live like kings in
their home country.
VERY FEW UNDERSTAND HISTORY AND ECONOMICS
I am amazed how few people understand the importance of history and
economics. I meet many Family Offices whose main objective should be to
preserve generational wealth. Very few of them hold gold or understand the
importance of gold for wealth preservation purposes. They don’t understand
what is happening in Argentina and Venezuela will also happen in many Western
countries. I also meet people with less wealth and most think that
having gold is ridiculous and serves no purpose. “You can’t eat gold” is a
very common remark. They don’t realise that people in Venezuela can’t eat the
Bolivar either but if they owned gold, they would be able to buy food or
whatever else they needed. In my article last
week I showed the charts of gold in Pesos and Bolivars. Gold is
such a simple method to preserve wealth but it is a secret that virtually
nobody knows or understands.
In every period of economic depression, hyperinflation or political
oppression (like the Asians in Uganda in the 1970s), gold has always been the
saviour of the people who own it. Since Nixon took the disastrous decision to
decouple the world’s monetary system from gold, we have seen a free for all
money printing bonanza that has destroyed the value of all currencies and
created massive credit and asset bubbles around the world.
Investors and money managers have been under the illusion that it
was their skill that has generated this enormous wealth. Few have understood
that central bankers have created the global Ponzi scheme of all time which
has put a giant rocket under most assets and driven them to the stratosphere.
And even fewer people understand that this rocket will fall down to earth
without all the bubbles which will evaporate in space.
As this happens, the West will do exactly what Venezuela and Argentina are
doing today. They will print unlimited amounts of money and create debt on an
exponential scale. The central banks are most probably aware that
they can’t solve a debt problem by creating more debt. But they will be
totally clueless what else to do. They will at that point lose control of
interest rates. The market will take over, as it should do, and rates will
rise dramatically.
GREED AGAIN CAUSES BIG LOSSES IN ARGENTINE BONDS
Manipulation always ends in tears. The long end of the market will dump
bonds, driving rates to the teens and probably much higher. This is what is
happening in Argentina right now with short term rates at 40%. Last year they
issued a 100 year dollar bond of $2.75 billion at a yield of 7.9%. The bond
was 3.5X over subscribed! How can anyone of a sound mind buy a 100
year bond issued by a country that time and time again has defaulted on its
debt and devalued its currency. We all know why they did it – GREED of
course. At the time US 30 year rates were sub 3% so an 8% return
seemed very attractive. The 100 year bond has crashed 20% since January this
year. It will come down a lot more.
GREED CAUSED DEFAULTS IN THE 1970s
I remember the same kind of greed in the 1970s. Swiss rates were then
around 2% and UK rates were 15%. Many UK companies borrowed in Swiss francs.
The only problem was that from 1972 to 1978 the pound against the Swiss franc
fell from 10 to 3, a 70% fall. This meant that someone borrowing CHF
1 million which was £100,000 in 1972 owed £333,000 in 1978. So saving a few
percentage points on interest was not very clever when the debt went up 3.3X
! I know many borrowers who went under due to this unsound currency
mismatch.
People never learn. High rates means high risk. There is
a reason why Argentina paid 8% when US rates were 3%. Argentina has an
appalling record of economic management and is not a sound borrower. And
Swiss rates were low because the economic policies of the country were
extremely sound whilst the UK had massive economic problems which led to
economic collapse, inflation and a crashing currency.
THE US – LIVING ON BORROWED TIME AND MONEY
The US is now an extremely badly managed economy that has lived
above its means for 60 years. The chart below shows US deficits
since 1968. The surplus Clinton years were not real. They were fake figures
as US debt increased every year that a surplus was shown. In fact, US
debt has gone up every year, without exception, since 1957. As the
chart shows, the deficits are expected to continue at a high level for years
to come. In my view that forecast is much too optimistic.
So there we have it. The “strongest” economy in the world has for
60 years lived on borrowed and printed money. Hard to call that a strong
economy. This has all been possible due to the Petrodollar and the
US military might. But that is now coming to an end. The dollar is
backed by nothing but debt and it will soon accelerate its fall to zero just
like the Bolivar and Peso. And according to independent experts, the
Russian and Chinese military power and sophistication is far superior to that
of the US.
SOUTH AMERICAN CONTAGION WILL GO GLOBAL
In the next few years, the South American contagion is going to spread
rapidly to the US and also to Europe, Japan, China and many more countries. The
fake money and mega debt party is over. The world will soon suffer
the consequences of the sybaritic times that the US and the West have
created. And those consequences will be of a magnitude that few can realise
today.
FOLLOW THE WISDOM OF THE EAST
China does know what is going to happen. That is why the Chinese are
continuing to accumulate gold in enormous quantities. They added another 212
tonnes last month and have bought almost 16,000 tonnes of gold since 2008
which is the majority of the world mine production.
So it is now time to batten down the hatches and take all the
protection that we can. The Argentinians and Venezuelans would have avoided
misery by holding gold instead of paper money. It is now too late for them as
they have little money left. But there is time for Americans, Europeans and
other nations to protect themselves today by owning physical gold and silver.
Anyone who doesn’t heed this warning is certain to regret it in coming years.
Just follow the wisdom of the East who understand the importance
of gold and history, as the chart above shows.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
GoldSwitzerland.com
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