World Economy Is Terminally Broken
After 50 Years Of Misgovernment
by Egon von Greyerz
In a world of manipulated economic figures and markets,
it is not always easy to maintain your sanity. The world economy is
now based on fantasy and hope and has very little to do with reality. But the
problem is that virtually nobody understands this. Whether it is a bank
analyst or a Nobel Prize winner in economics, they are all spreading the same
false message. The Western press and news media are just reporting what
governments and the elite are telling them. There is no analysis and no
attempt to find the truth in anything. This is why we are now in an era of
indoctrination and total brainwashing of the masses. Most people are totally
apathetic and incapable of realising that they are being led down a path,
both morally and economically, that will make life on earth a lot more
difficult not just for the present generation but probably for several
generations to come.
50 years’ experience and the biggest dangers are still lurking
Some of us understand the risks very clearly but the world at large just
sees our message as prophecies of doom. For most people the debt explosion
and the excesses are just normalcy and they believe that this will go on for
ever. Little do they understand the risks and the need for taking steps to
insure against these risks. And the risks are at many different levels,
social, financial, economic, geopolitical including war and social unrest.
There is some advantage in having almost half a century of active business
life. The school of life and personal experiences can never be learned from
books.
Gold and mining boom
As a young banker in Geneva I remember the mining boom in Australia in the
late 1960s. The nickel miner Poseidon for example went from $0.80 to $270
within a year. At that time, it was valued at three times Australia’s biggest
bank. The stock quickly crashed and the company went bankrupt. We were
fortunate to have Adolf Lundin as adviser on resource stocks. He spent a lot
of his time in Australis at that time. Adolf is the deceased founder of the
very successful Lundin Group. The 1970s was of course also extremely exciting
for gold and silver investors with gold going from $35 to $850. In the next
few years, we are likely to see much bigger moves in the metals with gold
reaching in excess of $10,000 in today’s money. The global problems today are
immensely greater than in the 1970s.
Oil embargo, miners’ strike, 3-day week and stock market collapse
I came to the UK in the early 1970s and experienced the Opec oil embargo
in 1973. Within a year oil had gone from $3 to $12 with devastating effects
for the UK and world economy. I was finance director at Dixons that we over
time built to the UKs biggest electronic retailer and a FTSE 100 company. But
the journey was certainly not without major setbacks. Interest rates surged
and in 1974 I paid 21% interest on my mortgage. Today, in most countries
nobody could afford a 5% interest rate. And as they climb to 15% or 20% which
I am convinced they will, nobody will be able to afford the interest of
course. By nobody I mean both individuals, corporates and sovereign states.
Stock markets worldwide also collapsed in 1973-4. The FT index declined by
over 60% and the Dow by nearer 50%. I had my first options in the company at
130 pence and the stock went down to 9 pence. Dixons was always profitable
and had no debt problems. It was a good lesson in what can happen to stock
prices even in strong companies.
We also had a coal miners’ strike in the UK which led to major nationwide
electricity cuts. Our shops only had electricity for 3 days a week. The other
days we sold TVs and radios in candle light. There was also a dustman/garbage
collector strike. London was full of rubbish everywhere in the streets. We
also had serious IRA bombings in London and all over the UK.
Thatcher and Reagan rode the wave
Eventually things improved and the cycle turned. Thatcher and Reagan were
lucky to become leaders at the right time and could ride the new up cycle. I
am quite cynical when it comes to leaders. I think they are instruments of
their time. They are not the ones who bring about change but they are the
right people to implement changes that were meant to happen due to the turn
in the cycle. Clearly Thatcher and Reagan were excellent leaders to execute
the changes that the cycle brought about.
And so in the 1980s, the boom started with bull markets in everything from
stocks, property, bonds and also in credit expansion and money printing.
Financial market regulations were lifted in many Western countries and this
started the major international expansion of US investment banks into
worldwide dominance and their current oligopoly position. It also led to the
massive build-up of financial weapons of mass destruction called derivatives.
Federal Reserve witch doctors
We had some serious setbacks in bubble asset markets in 1987 and 2000 but the
just gave extra incentives to governments and central banks to flood markets
with more credit and printed money. Everybody loved Greenspan although no one
ever understood what he said. But that didn’t matter because his financial
shenanigans made stocks and property boom. And when Bernanke took over,
everybody admired his ability to more than double US debt from $8 trillion to
$17 trillion, especially since he did it in 8 years only. It had taken the US
over 200 years to go from zero debt to $8T but Bernanke managed to more than
double US debt in just 8 years. I am sure that this record won’t last for
long. Yellen and her successor will need to print much, much more to save the
US and world economy. I don’t think $100s of trillions will be enough but more
likely quadrillions. And however much they print, it won’t have any effect
this time whatever Krugman and the Keynesians say. It is just not possible to
solve a problem with the same means that created it in the first place.
Currency debasement, manipulation and repression will lead to defaults
Retuning to my 50 years’ professional experience, I have been lucky to
live in an era of peace and economic prosperity. But gradually since the gold
backing of the dollar was abolished in 1971, real economic growth based on
hard work, savings and investment has been replaced by currency debasement,
credit expansion, money printing and financial manipulation or repression.
And what is absolutely certain is that the unsound economic climate that we
currently have cannot last. It is not a question of IF only of WHEN it will
end. Of that I am 100% certain. The massive build-up of debt since the 2006-9
crisis is a futile and desperate attempt to put Humpty Dumpty back together
again. But sadly the world cannot be put back together this time.
If we scratch under the surface, we find a plethora of insoluble problems
on every continent and in every country whether it is exponential debt
explosion in Japan or China or a bankrupt EU with the added problem of the
migrant crisis. Most emerging markets are on the verge of collapse as
commodity prices are collapsing and China’s expansion has stopped. But the
biggest problem is of course the US. This is a country that has lived above
its means for over 50 years. Since 1960 the US has not had a real budget
surplus. Debts, including unfunded liabilities, are $230 trillion and to that
we can add a worthless derivative position of at least $400-$600 trillion.
This guarantees that the US will default at some point not too far away and
that the dollar will sink into the ocean.
I know that the US government and media are telling everyone that the US
is in excellent shape. Unemployment is at 5% and the stock market is near the
high. Thanks to manipulated figures and total apathy of the media no one is
interested in the real figures or the truth.
I know that the US government and media are telling everyone that the US
is in excellent shape. Unemployment is at 5% and the stock market is near the
high. Thanks to manipulated figures and total apathy of the media no one is
interested in the real figures or the truth.
Let me just take a few examples like US median real earnings being at the
same level as in the 1970s. Real unemployment is not 5% but 23%. And S&P
GAAP earnings are down 25% from the peak. If we take real S&P earnings
and adjust for share buybacks, they are down 30%. But nobody looks at the
real figures. Whatever the Government or Wall Street reports is accepted as
the truth without any critical analysis.
Final chance to buy insurance
It is not my intention to spread a message of doom and gloom. What I am
trying to achieve is to make people aware of the truth and the risks. And the
risks in the world are greater than ever. Therefore, people must take whatever
protective measures they can depending on their circumstances. An obvious
insurance against these risks is physical precious metals stored outside the
banking system and outside your country of residence. But there is a major
risk that the premiums will rise very soon or that this insurance will not be
available due to severe lack of product.
Many countries will introduce exchange controls and especially the ones
with collapsing currencies. The EU, USA, UK, Japan and many more are likely
candidates. There will also be food shortages and bank failures. Big cities
will be an unpleasant place to live.
It is clearly difficult to predict the exact timing of these events but
forewarned is forearmed. And as I have stressed before, family and a close
circle of friends is more important than anything else in periods of crisis.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
