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"The
collapse of the U.S. economy is a certainty - only the manner in which it
will happen has yet to be determined. It is just a matter of time before the
global derivatives bubble will produce the same result that has occurred to
every other currency not backed by gold throughout history - those
currencies, our 'money', will become worthless."
Those were the
alarming words of Jeff Nielson of BullionBullsCanada.com in a
recent speech* which has been edited and reformatted below (with his
permission) for the sake of brevity and clarity.
Derivatives: An Unregulated One Quadrillion Dollar Market
"Warren
Buffett once described derivatives as 'financial weapons of mass destruction'
- and for a very good reason. While U.S. 'unfunded liabilities' are larger
than the entire global economy, the derivatives market is 20 times larger
than the entire global economy - at an astonishing $1 quadrillion. Yes, you
heard me correctly - $1 quadrillion! And get this - this derivative market is
totally unregulated. It is totally lacking in transparency, meaning that all
we know about this $1 quadrillion mountain of banker-paper is what the
bankers tell us."
Nielson pointed
out that "During the 2008 U.S. financial crisis, the Wall Street banks
required $10 trillion in loans, hand outs and guarantees just to temporarily
prevent their bankruptcy - more than all other bail-outs for all the rest of
the world, for all of history, combined - and the entire crisis was based
upon settling the derivatives positions of just one Wall Street investment
bank, namely, Lehman Brothers - and even that $10 trillion was not enough to
prevent the collapse of the U.S. financial sector."
Furthermore,
"The Wall Street banks also needed to have the U.S. accounting rules
changed, so that they could assign their own 'fantasy valuations' to the
debts/assets on their books, instead of the actual market value of those
assets" said Nielson. "Without those most radical accounting
changes in history the Wall Street banks would have been reporting their own
bankruptcies rather than reporting their supposed 'record' profits."
All Is NOT As It Seems
Nielson went on
to say that "While the Wall Street banks brag about billions in supposed
profits, there are still trillions of dollars of toxic assets being hidden
off their balance sheets. We know there has been no increase in the real
value of these 'assets' because, in just 2 years, the average amount of
losses on their books has increased 5-fold relative to the value of their
assets when the first bank failures occurred. Thus, if anything, these 'toxic
assets' are even more worthless than they were when the collapse began.
Despite this huge
mountain of unstable debt, Wall Street has actually increased the size of the
derivatives bubble by 30% since the U.S. housing-bubble first burst. This
caused Neil Barofsky, the U.S. 'watch-dog' assigned to oversee the TARP
bail-out, to exclaim recently that the risk of collapse of the entire U.S.
financial sector has increased not decreased saying:
"Even
if TARP saved our financial system from driving off a cliff back in 2008,
absent meaningful reform, we are still driving on the same winding road, but
this time in a faster car."
A Serious Dilemma Faces Investors
"As I see
it," said Nielson, "there is no solution for the U.S.'s economic
problems. "With U.S. hyperinflation likely, but a deflationary collapse
still possible, this not only creates a frightening scenario for us to face
as individuals, but a serious dilemma for investors. Do we prepare for
deflation, or hyperinflation - or, is it possible to prepare for both?"
"Such a
defensive investment philosophy is called wealth preservation and, in my
opinion,' said Nielson, "investors need precious metals components, i.e.
'good money', in their portfolios because they are 'currencies' that cannot
be diluted through inflation or destroyed by imploding debt."
Why the Need for 'Good Money'?
Nielson pointed
out that, while paper 'money' is both uniform and evenly divisible, it is
neither rare nor precious and that the paper it is printed on has no
intrinsic or aesthetic value compared to precious metals., reminding his
audience that "In less than the 100 years that the Federal Reserve has
existed, the U.S. dollar has lost approximately 97% of its purchasing
power."
It important to
understand the above properties of 'good money' said Nielson "because,
contrary to the economic propaganda from the mainstream media, the events of
today are unparalleled in history." He then conveyed that:
- more countries
are carrying debts than at any time in history
- the aggregate size of these debts are more than ten times greater than at
any other time in history
- the whole world is off a "gold standard" for the first time in
history - meaning there is nothing backing all these mountains of debt.
What Happens to Money During a Deflationary Implosion or a Hyperinflationary
Scenario?
a) Hyperinflationary
Scenario
"Gold and
silver have always retained 100% of their value in past hyperinflationary
environment while paper money has gone to zero" maintained Nielson.
b)
Deflationary Scenario
Nielson believes
the circumstances surrounding a potential deflationary collapse are unique
this time round in that we are not talking about a "recession" or
even a "depression" but, instead, about entire nations effectively
going bankrupt and defaulting on their massive debts claiming that "with
none of the world's currencies backed by anything, paper "money" is
now essentially nothing but the unsecured IOUs of the governments issuing
those currencies. As such, he postulated that:
1. were such
governments to default then billions (trillions?) of dollars of government
bonds would have very "questionable" value - if not become totally
worthless
2. were
government bonds to become worthless, then the paper currencies of those
governments would also become worthless
3. were
government bonds to become worthless, then the government would have no
ability to borrow any money to fund government spending - and would have no
choice but to simply print unlimited amounts of un-backed paper money that
would be nothing more than unsecured IOUs. Nielson conclude the aforementioned
with the question: "What is the value of an IOU from a debtor who has
already defaulted on his debts? The answer is: zero."
Summary
Nielson explained
that "Where a deflationary implosion differs from hyperinflation is that
in such an implosion all asset-prices become severely depressed and most
people are more likely to move to cash because of its supposed buying power.
Eventually, however, in either scenario, paper currencies would go to
zero."
Conclusion
He concluded his
remarks with the following advice: "You need to hold 'good money' and
the ultimate 'stores of value' - the only "good money" - is
gold and silver and thus the best protection from the events that lie
ahead."
*Source: http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=11900:debt-denial-and-default&catid=64:presentations&Itemid=141
Lorimer Wilson
MunKnee.com
Lorimer
Wilson is Editor of www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial
writer. He is also a frequent contributor to this site and can be reached at
editor@munknee.com.
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