“THERE IS NO MEANS OF
AVOIDING THE FINAL COLLAPSE OF A BOOM BROUGHT ABOUT BY CREDIT EXPANSION. THE
ALTERNATIVE IS ONLY WHETHER THE CRISIS SHOULD COME SOONER AS A RESULT OF A
VOLUNTARY ABANDONMENT OF FURTHER CREDIT EXPANSION, OR LATER AS A FINAL OR
TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED” – Ludwig von Mises
The Cyprus event may later, in the history
books, be seen as the catalyst of the fall of a century long Ponzi scheme.
This could rank in line with the shot in Sarajevo as the start of WW1 or the
collapse of Kreditanstalt in 1931 as the start of the Great Depression.
Isn’t it ironic
that exactly 100 years after the creation of the Fed (a private bank created
for the benefit of bankers) that the fragile and bankrupt financial system is
likely to fall due to the insolvency of a couple of Cypriot banks.
But what is
happening in Cyprus will not be the reason for a collapse but just the
trigger for what has always been inevitable.
There are only two
possible outcomes of the crisis we are now in:
- Either there will now be a run on the massively leveraged (25-50 times)
banking system which would lead to no debt being repaid and a deflationary
collapse.
- Alternatively, we
will now see the beginning of the most massive money printing that the world
has ever experienced, leading to a hyperinflationary depression.
The second outcome
is the most likely although the risk of an systemic implosion is very high if
central banks are too slow in flooding the system with money. The
deflationary outcome would lead to no banks surviving and no money in the
system. And the hyperinflationary outcome would lead to money being totally
worthless. In both cases gold will be a major beneficiary.
But printing money
will of course not solve anything since worthless pieces of paper with ZERO
intrinsic value can never create wealth. At best it will just kick the can
down the road for a very short time.
Cyprus is a mini
model of the world financial system. The IMF, ECB and the politicians thought
they could get away with the depositors taking part of the loss. But they
have clearly not considered the consequences. This action (if ratified) will
not only lead to a run on the Cypriot banks but also on banks in other weak
areas such as Ireland, Spain, Portugal, Italy, Greece etc. Eventually it
could spread worldwide.
The IMF, Fed, ECB,
BoE, BoJ and other central banks are likely to very soon come out with a
concerted action to support the financial system in order to avoid a total
collapse.
For well over ten
years I have advised investors to get their assets out of the banking system.
This doesn’t mean just their money but also all other investments (stocks,
bonds, gold etc) which are likely to be lost when banks go bankrupt.
Wealth preservation
is now absolutely critical. This involves eliminating counterparty risk
whenever possible. EverythIng within the banking system has counterparty risk
even if it is segregated or allocated. Lehman, MF Global and Sentinel are all
examples of client assets being lost in the financial system.
Gold (and silver)
will continue to reflect the total destruction of paper money that the
unlimited money printing will lead to. But investors must hold physical
precious metals and they must be stored outside the banking system.
