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Those people who
have saved for the future could soon form our own generation of bankrupted,
Babushka pensioners...
TWENTY-FIVE years
ago, the Russians found themselves in a hole.
They had an
official price for petrol (gasoline) of 1 rouble. But the cost of providing
it, for example by buying it on world markets, was 8 roubles. In so far as
the state could supply any petrol to anyone at all, it was definitely going
to be at a big loss. Yet they obstinately refused to accept that their price
was wrong.
How we laughed at
this dogmatic denial of the discipline of the market! We put it down to some
sort of political imperative, but in fact it was much simpler than that.
Rather than lose
money at a world-record rate, the Russian state responded by distributing
official petrol in limited quantities, and only to favored clients, which in
their society meant party members. The members used to fill up their Zil
limousines with this cheap petrol, and effect a supply chain to retail via
the simple device of draining their tanks into the jerry cans of local
teenaged entrepreneurs – at 6 roubles per liter. That left the last 2
roubles to the entrepreneur, who sold it on the side of the street at 8, with
hardly a murmur from official sources.
Party members
were getting rich, after all, and the taxpayer was footing the bill.
Now substitute USA
for Russia,
and credit for petrol, and you have the essence of what is going on today.
Can you get a mortgage in America
or the UK
at 2%, even if you pay a 50% deposit on your house? Certainly not. In America,
only government mortgage agencies (Fannie and Freddie) and megabanks which are
too big to fail have access to the 0.25% credit provided by the Fed. And once
again, those megabanks are making very large sums, much of which gets
distributed via bonus pools to those with an unremarkable talent for
re-selling this cheap credit at market rates of 5.0% or more.
Political leaders
regularly rail against greedy bankers, but the problem – all that cheap
money – has for the last five years come directly from the false market
in credit extended by ultra-low rate policies sourced in the Treasuries of
the West.
Who's at fault is
academic. The issue now is that this artificially low interest rate
environment can set off a hyperinflation chain reaction, just as it did in Russia
once market forces prevailed. Not much is different from previous hyperinflation
episodes, save that the melting of a glacially frozen stockpile of $50
trillion in government bonds performs the role traditionally played by the
printing press.
In the end, those
who have saved for their futures could form our own Babushka generation of
pensioners. Paid out monthly, and in full, their pension will buy them a
sandwich or two. The nominal value of sovereign debt will not decline, but
the value of it will inflate away, taking with it the value of all those
bonds.
We could end up
needing to remove a couple of zeros from banknotes, because otherwise the
coinage will be melted back into nickel and copper ingots as soon as it is
issued, and then sold to the Chinese...
This excerpt
comes from a presentation made last month at CLSA's Investors Forum in Tokyo,
Hong Kong and Singapore.
You can receive the full report – Towards Hyperinflation –
for free today, plus a complimentary gram of gold, stored securely in Zurich,
Switzerland. Simply register with
BullionVault here...
Paul Tustain
Director
and Founder
Bullionvault.com
Also
by Paul Tustain
Paul Tustain is
director and founder of BullionVault - the world's
fastest-growing gold ownership service, where you can buy gold today
vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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