In Part I of this series we looked at the decaying
state of confidence and how this is assisting in the deflationary process
that is slowly, inexorably, moving forward, with limited action from central
bankers and very little action at all from politicians. We looked at
Christine Legarde’s comments that highlighted
the need for value and measures of
value to keep the monetary system under control. And then we looked at
the loss of money velocity, deflation and the damage it’s doing to the
solvency of banks and nations.
Since then the process has moved forward
with 28 Spanish banks downgraded by Moody’s ratings Agency, while the
Spanish government has formally asked for financial assistance from the E.U.
Cyprus now makes the fifth E.U. member to put its hand out for a bailout.
Italy’s borrowing cost jumped to new highs too.
What are we really looking at in the
Eurozone crisis? We ask this question knowing that this story is being played
out in Europe first, to be followed by the U.S. then the rest of the world in
time, as they are part of the same global monetary system. The Eurozone
crisis is a confidence crisis among banks and nations, followed by asset and
debt deflation, as the loss of confidence is priced in.
Holes Isn’t the Answer
A look back over the past five years
shows that we have seen central banks and governments use quantitative easing
in an attempt to stimulate economies while ameliorating the loss of asset
value that started with the housing bubble bursting in the States, then
mortgage linked securities losing huge value, dragging down the owners of
those now-toxic debt assets, including banks, into bankruptcy.
The Fed has been careful to simply fill
the hole left by the deflation and add no more new money than that. As it is,
the Fed’s intention was the business would then be as usual, but
instead these banks did not lend to the economy, they lent back to the
government. The same happened in Europe, but there some governments
approached junk status as borrowers, sending interest rates for those nations
rocketing to unsustainable levels. Thus the noble purpose of quantitative
easing was perverted by prudence, caution and the need for self-preservation.
Now we sit with a healthier U.S. banking system, but a barely growing
economy. In Europe we see a far worse picture where confidence is sapping by
Performance During the Last Five Years
During these last five years, what
impact did this have on gold and its price? Firstly, after the initial impact
of the ‘credit crunch’ hammered investor’s abilities to
invest and pulled the gold price down to $1,000 from $1,200. It then turned
around and for the next four years soared up to $1,900, before correcting
again in the face of a greater ‘credit crunch’ back to $1550,
where it is close to now. The Eurozone crisis is that ‘rose by any other
name’, a ‘credit crunch’. And it is not being resolved, but
Silver, being the long shadow of gold,
moved in a more spectacular fashion, moving in since 2005 from $6 up to a
[false] peak of $49, before pulling back to a low of $26 today.
Gold, silver thus performed their age
old role of broadly ‘measuring’
and holding ‘value’ during these tempestuous times and will
do so in the future.
Not only did Christine Legarde, head of the I.M.F., refer to the need for value
to be determinable at all times, but the head of the World Bank, Mr. Robert Zoellick, last year suggested that gold should be a
value-anchor for the global monetary scene. We cannot stress enough the need
for measuring rods that are reliable and beyond the ability of the political
and monetary authorities to debauch. Without it there can be no stability or
foundation for real growth and enterprise.
and we suspect Mme. Legarde will be ignored by the
central bankers of the world, except for those of the emerging world who
started to buy gold in significant tonnages since 2009. Why haven’t the
developed world central bankers said anything with regard to gold? They
don’t need to because gold in the reserves of the leading nations in
the world reaches as high as 70% of those reserves, with the E.C.B. requiring
15% of its reserves to be held in gold. It is higher now, because of the
recent price rises of gold.
While silver is not a monetary metal in
the eyes of bankers worldwide, it’s considered a hedge against paper
money by the poorer investors worldwide and has performed accordingly.
It’s also likely to stay off the central banker’s radar screens
until the monetary system reaches the brink of collapse. But expect it to
rise alongside the gold price during that journey.
New Money a
So to understand this entire process
properly, we have to understand the ‘cure’ put forward
–namely replacement of value by additional sums of newly-printed money.
The principle applied was that, if the loss of value was replaced in
bank’s hands, then the problem would be solved, provided some
adjustment was made to the regulations governing banks. The banks
subsequently recovered and prospered but they did not carry on business as
usual, within the broad economy.
On both sides of the Atlantic they took
the new money and pushed it back to government and did not send it out into
the broad economy. On both sides of the Atlantic growth stalled and while a
recovery was trumpeted, it was a hormone-free recovery that is barely
recognizable as such, five years on. Many nations are in recession if not
depression and in the best of the developed world have a recovery that can
barely keep up with population growth. Please note that the central bankers
have done a good job, but one that could never succeed without the
governments supporting that efforts by driving the economic growth. They
haven’t and as is the wont of people today, they are targeted for blame
by politicians, who have done an abysmal job of promoting growth.
Quantitative easing has certainly
stopped an economic collapse, but has not produced growth. Growth is needed
if the developed world economies are to truly recover and there is little
sign of true growth. Yes we see money growth but that isn’t the same as
the broader economy will tell you. It’s on-the-ground-production that
gives growth. Money growth should produce that but if government-generated
Q.E. is where the growth is coming from then it is serving merely to mask a
slow, osmotic, shrinkage of the economy and economic confidence. We’re
seeing a ‘stalling’ of economic growth in the U.S., a recession
in the U.K. and several national recessions in the Eurozone. A much better
measure of growth comes in the form of such measures as factory capacity usage,
employment figures, disposable income expenditure levels and the like. These
define growth in the broad economy down to the consumer.
If a bank balance sheet is healthy but
they are reducing lending out into the broad economy that is a sign of
economic shrinkage, which leads to a compounding of that shrinkage.
This’s what happened to all that new money added to the system through
Q.E. It’s still in the banks and in government bonds and bills.
It has not reached the on-the-ground
producer of wealth, the consumer. In the U.S. it is the consumer that
accounts for 70% of the economy. He is still struggling with the loss of
wealth in his house and his business and getting little help from the top.
While the government and banking industries are looking relatively sound,
they are unlikely to contribute effectively to the broad economy for years to
come. While the objectives of government and finance are so separate, this
won’t change, it’s structural.
It is with amazement that the vaunted political
systems on both sides of the Atlantic have failed to produce united
governments capable of producing economic growth that would have resolved the
money crises of the last few years.
· The U.S. has
been mired in a political gridlock that has emasculated government throughout
its present term and promises little more in the next term.
· In Europe,
the political nationalism of each member has shown a degree of disunity that
prompt and effective solutions have evaded all their attempts to rectify
their debt crises.
There is little in the somewhat
bureaucratic actions in both blocs that inspire sufficient confidence that
can steer the developed world back to economic prosperity. Meanwhile,
confidence continues to decay alongside the monetary systems at banking and
We feel that the path forward is more
loss of confidence and value for national assets and currencies, until it
gets out of control and turns into the “Black Hole” of deflation
that this series is about.