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The world economy is now at its most dangerous point in history. In
virtually every major country or region, there are problems of a magnitude
which individually could trigger a collapse of the financial system. Because
of the interconnectivity of the system, when the first domino starts falling,
there is zero possibility to stop all the other unstable dominoes from
crashing one after the other in quick succession.
The world is now staring down a deflationary black hole that is on the
verge of sucking into it all global debt of $250 trillion plus unfunded
liabilities and derivatives of another $2 quadrillion or so. That would be
the end of the financial system as we know it. Governments and central
bankers around the world are of course totally aware of this and are standing
with their fingers ready to push the button for the biggest money printing
bonanza that the world has ever experienced.
Deutsche Bank worse than Lehman
Look at Europe – Deutsche Bank, which is one of the biggest in the world,
is valued at less than 1% of its asset value and it has derivatives which are
standing at 20x German GDP. The share price is telling us that DB is bust.
And so are Greek banks, Italian as well as Spanish, Portuguese and French
banks and many more. Deutsche has now become front page news and its survival
is no in jeopardy. It has total assets of EUR 1.9 trillion but a deposit base
of only EUR 450 billion. This means that DB is totally dependent on short
term loans to finance its massive balance sheet. That is extremely dangerous
and the reason for Lehman’s demise. The pressure on DB is likely to increase
in coming weeks.
 
ECB money printing of €80 billion a month or €1 trillion per year is
having no effect. Central banks are now pushing on a string. The bail out of
Italy’s fourth largest bank Monte dei Paschi is failing. Germany is totally
against the ECB stepping in and the Italian government doesn’t want to bail
in the depositors. That would be a political disaster. Non-performing loans
in Italy are 20% of assets and growing. It confirms my view that no debts,
bank or sovereign will ever be repaid.
Bank of Japan’s policies have failed for over 20 years
The news from around the world is just getting worse by the day. Japan’s
Yen 80 trillion ($0.8T) printing programme is having no effect. Kuroda
(Governor of BoJ) is totally lost. He is currently buying all the bonds that
the Bank of Japan is issuing. The BoJ is a top 10 shareholder in 90% of
Japanese stocks. So not only is the BoJ holding Japanese bonds that they can
never repay but they are desperately trying to support the Japanese stock
market. Just as the bonds will become worthless, they are likely to lose
at least 90% on their stock holdings. The balance sheet of the BoJ is
now approaching Yen 0.5 quadrillion ($5T) which makes them the biggest money
printer in the world. But it won’t stop there. Kuroda’s latest folly is to
hold the 10-year bond interest rate at 0% for an undetermined period. As
investors start dumping Japanese bonds, the BoJ will need to print unlimited
amounts of Yen and increase debt exponentially to keep rates at zero. This is
a policy which is guaranteed to fail.
Emerging market debt is unsustainable
The debt explosion in emerging markets has created a disastrous situation
for many countries. Corporate debt in these markets has grown massively in
the last ten years and is now standing at $25 trillion. Without continued
growth of exports and higher commodity prices, these countries will go into a
deflationary spiral. According to the Bank for International Settlement the
debt to GDP ratio in China is 3x greater than what the BIS calls a dangerous
level. The growth of Chinese debt from $2T to $32T in this century has
probably created the credit bubble of all bubbles. A lot of this money has
gone to big infrastructure projects that have zero value and yield no return.
Bad debts in China are estimated at $2T but are probably considerably higher.
US federal and corporate debt continue to surge
In the US, corporate debt has grown from $2 trillion to $6 trillion in the
last 10 years. A lot of this debt has been used for share buybacks and have
thus not created any economic value except for a few shareholders and
executives. And US Federal debt will have doubled from $10T to $20T during
Obama’s presidency. This is an absolutely remarkable and unacceptable
increase and a clear sign of a country on the road to bankruptcy. No country
that runs substantial budget deficits every year for 55 years has any chance
of survival. The only reason the US economy hasn’t collapsed yet is that the
dollar is still the reserve currency of the world. But the dollar doesn’t
deserve to be a reserve currency. Against the Swiss Franc for example, the
dollar is down 77% since 1971. And against gold, history’s only surviving
currency, the dollar is down 97% since 1971. It is only a matter of time
before the dollar starts its final journey to its intrinsic value of zero and
so will many other currencies.
Coming money printing will greatly exceed Weimar and Zimbabwe
Thus we are standing on the edge of a black hole that very easily could
cause a deflationary implosion of all financial assets and all debt. No
government is talking about this and no central banker dares to mention the
seriousness of the present situation. The smallest final snowflake that can
push the world over the edge and start the deflationary avalanche. It is
really surprising that central banks dare to hold back on the biggest
printing programme ever for so long. Because they only need to be a few
seconds late and they will not be able to stop the collapse.
Let’s assume that central bank will intervene in time and print first tens
of trillions and eventually hundreds or even quadrillions of dollars, euros,
yen etc. We will then see a hyperinflationary period which will be bigger
than both the Weimar Republic or Zimbabwe for the simple reason that the
figures involved now are so much greater.
But we know of course that we cannot create wealth by printing worthless
pieces of paper or creating zeros in a computer. So sadly, the world will not
be saved by this money printing which will only create more debt. It is of
course impossible to solve a problem by the same means that caused it in the
first place.
Hyperinflation will be followed by deflationary implosion
After the hyperinflation, which will have solved nothing but just created
a bigger problem, we will still see a deflationary collapse. This will be
absolutely necessary to get rid of all the debt and the bubble assets. It
will be like a forest fire that will get rid of all the dead wood and create
the foundation for new strong growth not lumbered by debt. This is the only
way that the world can progress and grow, totally free from debt, decadence
and the all the false values that the current era has created.
It will not be easy to protect yourself against the coming upheaval. It is
likely to involve social unrest, wars, famine, disease and massive suffering
for most people.
Gold acts as protection against inflation and deflation
During this period of transition, money will be needed as a method of
payment or for barter. Throughout periods of crisis, whether inflationary or
deflationary, gold has always functioned as money. During the
hyperinflationary period, gold will reflect the destruction of paper money
and appreciate substantially both in inflationary terms as well as in real
terms.
What most people don’t realise is that gold also normally does very well
during deflationary periods. If we get the deflationary implosion that I have
discussed above, there will be no financial system for a while and gold will
be one of the few methods of payments. This is why gold will also be
excellent protection in a deflationary period although the nominal value will
be much lower than in a hyperinflationary period.
Thus with the current unprecedented risk in the financial system and the
world economy, physical gold, and some silver, will be the best insurance and
protection that anyone can hold.
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