The entire economy functions without real money; it has practically disappeared. It has become the supply and demand for credit; it’s not money that determines the level of inflation. After government debt, it has become corporate debt as the second most rapidly expanding category. Now businesses too have high debt levels, for the time being still supported by high earnings. But the problem is, as earnings disappear readily they go away much faster than debt and not so easily. Without profit, they have to reckon with decisions they will wish they hadn’t made, and debt they will wish they didn’t have.
As businesses depend on expanding credit they need customers with credit cards, and confidence, willing and able to increase spending. However, real wages are going down, which leaves only credit as an alternative.
These days, banks don’t lend pre-existing money. When they lend, they create money that didn’t exist before. And over the last 30 years, the world economy has come to depend on it. This credit helped the economy expand. It allowed borrowers to command the resources needed to build their houses. Under the gold standard borrowing was anchored to available savings, but not in the new credit economy. Today, the sky’s the limit! In other words, this is more or less how the world economy grew over the last three or four decades – using money from nowhere, which was turned into real assets for the financial sector.
The western world needs to increase credit at 2% per year to keep growing. If credit expands below that, the economy enters recession.Assuming a 2% inflation rate means credit would have to increase by $2.3 trillion this year in the USA.But who will borrow that much? The US federal deficit is falling this year; it’s projected to be less than $600 billion. The Fed is in its fourth or fifth tapering. So who accounts for the other $1.7 trillion? As far as is known, nobody.
When the non-hedonic inflation measures are applied, as painstakingly calculated by John Williams of Shadowstats.com price inflation is REALLY running around 8 – 9 percent, meaning that real GDP, when deflated by the actual price inflation, is collapsing at 7% or more!
If a number of these things come together, the world could have financial warfare, deflation, hyperinflation, market collapse. And yet the markets are merrily going along. Do we live in a fictitious world? All what is known, if that is going to happen, the world economy will collapse sooner than later.
The long-Term Financial Implications are a weakening dollar, which is great for gold. A weakening dollar means higher prices for all things, especially imported goods like oil. Higher prices will push up interest rates. As Russia expands its energy sales to China, the residual supply available for Europe will be smaller, driving European energy prices higher. Escalating international conflicts will lead to larger military budgets, increasing future deficits and weakening not just the dollar, but also all other currencies.
Let’s suppose as first starter it will be deflation. For that event, gold investors must read: ‘The Death of Money” written by Jim Rickards. He explains how an executive order raising the gold price to $7,000 will be the only way to break a deflationary downward spiral in the US if money printing reaches its limits and the Fed pulls back, as probably is going to happen this year.
‘The Federal Reserve could make this price stick by conducting open market operations…” he says. ‘The purpose would not be to enrich gold holders but to reset general price levels… this kind of dollar devaluation against gold would quickly be reflected in higher dollar prices for everything else.”
‘The world of $7,000 gold is also the world of $400 per-barrel oil and $100 per-ounce silver. Deflation’s back can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35 per ounce, a 41 per cent dollar devaluation.” Although that was a far too low price setting for gold, causing the failure of the intended gold backing.
His conclusion is that “if the Unites States faces severe deflation again, the antidote of dollar devaluation against gold will be the same because there is no other solution when printing money fails.”
Logic also tells that money with a fixed supply like gold will be worth more in a world awash with money printing. This explanation just points a path to how it gets there. It takes several leaps forward to achieve this and timing this is always going to be impossible. But events are going to start moving fast.
A record amount of US treasury bonds recently were sold. Russian sales have been strong since the start of the year. China’s economy is slowing and this could be money coming out for a rainy day. However, this is fully in line with the thesis propounded by Jim Rickards about a US dollar collapse. Gold, he argues, would probably emerge at the heart of a new global monetary system as the only money that you can really trust.
The Chinese and Russians are working together against the Americans, and there are many countries that would be happy to join them in dethroning the US dollar as the world’s reserve currency. The historic gas deal between Russia and China is very bad news for the petrodollar.
Also, Russia could announce a major nuclear deal with Iran, where the Russians will build, finance, and supply the uranium for many nuclear reactors. The Russians will do the same for China, and then Syria.
With China signing the natural gas deal with Russia and the president of China publicly stating that it’s time to create a new security model for the Asian nations that includes Russia and Iran, it’s clear China has chosen Russia over the US.
The world could be in the early stages of Cold War 2. The European Union will be the first victim. The EU is completely dependent on Russia for its oil and natural gas imports— over one-third of the EU-28’s supply of oil and natural gas comes from Russia. As it remains a redline issue for Russia, it’s certain that Ukraine will stay out of the European Union and NATO.
“Wall Street concerned over China’s gold hoarding.”Leung said that the US Federal Reserve loans gold to investment banks such as Goldman Sachs, Citibank, JPMorgan Chase, Morgan Stanley and others every year to trade in the market. The amount of gold ranges between 400-500 tonnes and the move acts to artificially suppress gold prices. When the prices are in their favour, these investment banks buy back the gold and return it to the Fed.
But this measure is absolutely useless because China is hoarding the gold and does not follow the rules, Leung said. When it sees that gold prices are going down, the first thing it does is buy them, and does not sell when prices continue to fall. It seems that Wall Street cannot do anything to counter China on this, according to Leung. The analyst said that the People’s Bank of China is putting pressure on Washington and Wall Street as the US dollar has been linked with gold prices since its rise as the leading global currency. The Fed hopes to manipulate gold prices in its favor, Leung said, but the Chinese central bank is standing in its way.
“Most commentators are of the view that the Fed’s massive monetary pumping of 2008 has prevented a major economic disaster. We suggest that the massive pumping has bought time for non-productive bubble activities, thereby weakening the economy as a whole. Contrary to popular thinking, an economic cleansing is a must to “fix” the mess caused by the Fed’s loose policies. To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.” Mises Daily – Frank Shostak.
For the Euro skeptics only: