Investors around the world are blissfully ignorant of
what will hit them in coming months and years. Virtually no one understands
the risks in the world and less than ½% of investors have protected
themselves against the destruction of their financial assets.
It is of course wonderful to live in Shangri-La and be
totally seduced by governments magnificent injection of credit and printed
money which creates eternal happiness and wealth. Many of us live in
fantasyland where it is irrelevant if you work or not. If there is not enough
money, your government will issue food stamps, rent subsidies or help you to
buy the latest car on credit. And if the government runs out of money, it can
always print some more. There is no limit to how many quadrillions the
printing presses or the computers can manufacture. This is the wonderful
Keynesian virtuous circle of unlimited deficit spending and debt. And just
like in Shangri-La this goes on for ever. At least this is what Krugman and
the central bankers believe.
No one ever looks at the facts. It would be a real
mistake to be confused by the darned facts!
The fact that Japan is a basket case doesn’t matter. The
government is buying all the debt that is currently issued and will soon own
over 50% of all the debt they have ever issued. That is the most perfect
example of perpetual motion. Print more than half the government spending
every year and more if needed. It is really unnecessary to collect any taxes.
It is just an administrative irrelevance. Much better to print all the money
that the country spends. That way the people can stop working and just enjoy
life. With 260% government debt to GDP, it is guaranteed that no one has the intention
to ever repay that debt. The fact that the working population will decline by
40% in the next 40 years guarantees that the debt will grow exponentially
until the Yen and the Japanese economy disappears into the Pacific. On their
way down they will obviously sell over $ 1 trillion of US treasuries just to
do their share of global debt implosion. But why should we worry about the
fact that the world’s fourth largest economy will go back to prehistoric
times. Or should we?
But the Chinese economic wonder will certainly save the
world? Well, the Chinese are extremely clever at copying all the things that
we do in the West, good or bad. They are making all the products that the
West invented at a fraction of the price and flooding the West with goods which
we are buying on credit. The dilemma is that China also thought that
Shangri-La had arrived and that this would go on forever. So in this century
they bought all the commodities that the world produced to create a massive
Emerging Market bubble.
They also invested massively in production capacity and
infrastructure. This over-investment led to an increase in Chinese debt from
$2 trillion to over $30 trillion. So now China has infrastructure and
ghost towns that are standing idle. And they have a production capacity that
the world can no longer afford to buy enough products from for the Chinese
economy to survive. Companies in China are now taking over 6 months’ average
payment terms. The Chinese shadow banking system is lumbered with bad
investments and bad debt and will lead to massive defaults. On top of all
that, Chinese demographics is just a bit better than Japan’s and will also
see a fast declining population that can never repay the debt. As the Chinese
financial system implodes the country will dump their $1.2 trillion of US
treasuries.
So what about Draghi land? Well we know that the banking system in Greece,
Italy, Spain and Portugal is bankrupt. But banks in France, UK, and Germany
are no better. Deutsche Bank is too big for Germany. Just their worthless
derivatives portfolio is 25 times German GDP. This is why the ECB is printing
money as fast as they can in order to keep the banks going for a few more
months. But this is a race against time that the ECB is guaranteed to lose.
And it probably won’t take that long before the unelected bureaucrats in
Brussels lose their massive benefits and pensions as their megalomaniac EU
project collapses.
So what about Obama land or is it Yellen land? Well they are clearly both
worried since they are having “secret” meetings. They both of course know that
the world as well as the US economy are in an irreparable mess. With 23% real
unemployment, falling real wages for forty years, 50 million queuing in front
of soup kitchens and debt growing exponentially, they are right to worry.
Since 1982 more than $1 of debt has been required to create $1 of GDP
growth. Today $3 dollars of debt is necessary to produce $1 of GDP growth. In
economic terms this is called the law of diminishing returns. In layman’s
terms this is like pushing on string or to put it frankly, the US economy is
on the road to perdition. Here is the most indebted country in the world
which is only standing because the dollar is the reserve currency of the
world. But a country which hasn’t had a real budget surplus since 1960 is
living on borrowed time. And this especially since debts are increasing
exponentially with no chance whatsoever for the American people to ever repay
or honour the $300 trillion of total liabilities (including unfunded
liabilities). This means that every American is on the hock for “just” $1
million each. As Japan, China, Saudi Arabia and Russia sell their US
treasuries’ holdings, there will be no way out for the US. This must be the
most spectacular of any sovereign insolvency that the world has ever faced.
Coming back to risk, it is absolutely incomprehensible that the investment
community cannot understand the consequences of the risks that I have
outlined above. And I have only touched the surface. But with a surface of
quicksand, what is underneath is just a black hole.
The consequences of all these risks are impossible to fathom. But what is
clear is that the world will look very different once the financial, economic
and social avalanche has started.
It won’t be easy to protect yourself against all the risks in the world
but for the few that have some savings, it is still time to buy very cheap
insurance in the form of physical gold and silver which naturally must be
stored outside the financial system.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
