DEUS EX MACHINA

by Egon von Greyerz – Dec 2011 (GoldSwitzerland)
With most of the world’s major economies as well as the financial system bankrupt, there is only one solution that can save the world economy. Like in the Greek tragedies, Deus ex Machina is now the only way that the world can avoid a total economic collapse. This would involve God being lowered down onto the world stage and miraculously saving the plot.

DEUS EX MACHINA by Leo Lein – www.leolein.se

For those few who believe in this, may God bless them. But since this is a very unlikely solution most people will instead rely on governments and central banks to save us. But how can anyone possibly believe that totally incompetent and clueless politicians and central bankers could solve anything. They created the problem in the first place and are therefore totally unsuitable to play the role of Deus. The main objective of governments is to stay in power and thus to buy votes. Therefore they are incapable of taking the right decisions. And the opposition, aspiring to power is even less suitable since they will lie through their teeth and promise the earth in order to be elected. (We know that there are exceptions like Ron Paul, but the voters will most probably find his medicine too strong to swallow.)

What about central bankers, can’t they save us? Unfortunately any sensible person who becomes a central banker loses all his senses and becomes a prisoner of the political system.

Solution?

So if there is no Deus ex Machina and if governments or bankers can’t rescue the world, who can and what is the solution. Let us return to the wise von Mises to look at the options available now:

“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

Mises is absolutely correct: “There is no means of avoiding a final collapse of a boom brought about by credit expansion”. Whatever politicians, bankers, economists or others experts say, there is no solution to this crisis. We have reached the end of the road and are now staring into the abyss.

The credit manufacturing system that started in 1913 when the Fed was founded, began its terminal phase in 1971 when Nixon abolished gold backing of the dollar. It has been clear to us for at least 20 years that the outcome was inevitable. It was never a question of “if” but only “when” it would happen. It is now clear to us that the false prosperity that the world has experienced by printing unlimited amounts of money will very soon come to an end. Thus the “if” and “when” conditions are now satisfied so the remaining question is HOW?

To try to answer this let’s return to Mises: “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion ….” 

To stop the money printing and credit creation would be the only sensible way of ending the failed quasi-capitalist, socialist experiment which is in the process of destroying the structure of the Western world. For almost 100 years we have lived on a system based on debt. This has created a false prosperity as well as false values. The transfer of capital from private enterprise to government by massive taxation is approaching 50% in many countries (see table). The average for 18 industrialised countries is almost 40%. This means that on average 40% of the productive economy is transferred to a non-producing entity (government) which wastes most of the money in the process of redistribution. But not only that, since the state has taken over up to 50% of the economy in these countries, the desire to work, to strive, to take risk and to invent has been taken away from a major part of the population.

For a great many people it is now totally natural to rely on the state for their needs rather than on themselves. And the state needs to borrow/print ever increasing amounts to perpetuate this economy based on an illusion. This situation is totally untenable. Since any additional money printing will only exacerbate the crisis and make the final collapse so much greater, the swiftest solution would be let the financial system implode now. We need to reset the world to a level which is sustainable. The consequences of this implosion would be a collapse of the financial system and a reset of debt to zero. Although this is unthinkable to any government or politician, it would be by far the quickest way to get the world back on its feet with no major debts, minimal government interference, and no central bank that can print money. It would be like a forest fire getting rid of all the dead wood. Out of that would rise masses of green shoots in the form of strong unchequered growth. The transition will of course be traumatic and the current generation will experience enormous hardship. But not voluntarily abandoning the money printing now will just delay the inevitable and the consequences will be dramatically greater and affect many future generations.

Anyone who has followed my articles will know my view that governments worldwide are totally incapable of stopping the money printing. This is their only means of staying in power and buying votes. But not only that, this is the only method they know. This has been their patent solution to all economic problems in the last decades. Not that this is new in history. Most empires have resorted to diluting the value of money by reducing the gold/silver content of coins or printing paper money. But as far as I know it has never before been done by so many countries simultaneously to such an extent.

Since there won’t be any voluntary abandonment of credit creation what will the likely outcome be? Again let’s use Mises words: “…… a final or total catastrophe of the currency system involved”.  The problem this time is that we are not talking about one currency or one country. No, we are talking about most of the world’s major currencies. We have been used to measuring currencies and economies on a relative basis i.e. against each other. But this is a total fallacy since all major currencies have been in a race to the bottom for the last 100 years. Most currencies have lost between 97% and 99% against real money –GOLD – since 1913. And since 1999, most currencies have lost 80% or more against gold. So paper money has been a very poor measure of wealth in the last 100 years. Governments are creating credit and paper money and consequently through their fraudulent actions “stealing” from the people whilst at the same time increasing the people’s dependence on the state. And the people does not understand that the value of paper money is declining continuously. But gold reveals the deceitful destruction of paper money. This is why governments do not like gold and try to suppress the gold price.

Endless Money Printing – QE

And how will the currency system collapse? The answer to this question is very simple – through endless money printing. There will be no lasting austerity programmes in any country that can print money. Governments are incapable of sticking to austerity measures since in the end that is a guaranteed way of losing power. As power is the main purpose of all governments, they will use any method to retain it. Within the Eurozone, individual countries can of course not print money but the ECB and the IMF will take care of that. So whilst world leaders are procrastinating and bickering in G8, G20 and all other “summit” meetings, it is absolutely guaranteed that the final outcome will be one QE package after the next. Governments and central banks know that without limitless money printing there would be a deflationary collapse of the banking system and world economy.

The table below shows the financing requirements of the PIGS countries in the next few years. Just Italy and Spain will require €1 trillion in the next 4 years and of that 1/2 trillion Euros in 2012. Only printed money will take care of that.

For many years it has been absolutely crystal clear to some of us (sadly a very small minority) that many major sovereign nations are bankrupt as well as the world financial system. Banks are only surviving because they, with the blessing of governments, are allowed to value trillions of dollars of toxic and worthless assets at full value. And on top of that there are more than $1 quadrillion outstanding in derivatives. These are outside the banks’ balance sheets and there are virtually no reserves against them. The banks are netting the value down to virtually nothing and then applying a miniscule reserve against this net amount. First of all, the netting is only valid when the counterparty pays. When there is a counterparty failure, which is very likely in the coming financial collapse, gross remains gross and the $1 quadrillion remains $1 quadrillion. Secondly, a major part of the derivatives are worthless or not protecting the investors as we have seen with for example Freddie Mac, Fannie Mae, Lehmans and lately MF Global. MF Global had bought CDs to hedge their investment in Greek debt. But they hadn’t understood what they had bought and it turned out it offered no protection at all.

Hyperinflation

The “final or total catastrophe of the currency system” will occur as a result of the QE or unlimited money printing that will very soon start in the EU, USA, UK, Japan and many more countries. And this currency destruction will lead to hyperinflation as I have stated for many years. Throughout history, substantial government deficits leading to money creation or printing have always been the cause of hyperinflation. Because hyperinflation is always the result of a collapsing currency and not of excess demand.

To any thinking individual, it is totally incomprehensible that governments and central banks believe that an insolvent world can be saved by debt issued by bankrupt nations and then bought by the issuers themselves as there is no other buyer. This is the perfect recipe for self-destruction and “total catastrophe of the system.”

IMF, EU and other failed monstrosities

Time and time again, the world creates massive costly, bureaucratic and unaccountable structures that have idealistic and totally unrealistic objectives.

Take the IMF for example. This is what their mission statement states: “The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

If financial stability, high employment, sustainable economic growth and reducing poverty are the objectives of the IMF, then they have failed on every single point. So here we have an organisation that receives/borrows money from mainly bankrupt states and then lends the money to countries that cannot or will not ever repay the funds. And in order to carry out this totally futile task, the IMF takes a major cut in between to finance its costly and failed operation. The world does not need monstrous and costly structures that totally fail in their mission. Thus, the IMF should be closed.

Turning to the EU, they state on their website: “The main objectives of the Union are now to promote peace, the Union’s values and the well-being of its peoples”. There are other stated objectives such as: “sustainable development, based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.” 

The EU or the EEC as it was first called was created in the late 1950s. This was a prosperous period in the world economy based on real growth (not debt). As often is the case, politicians with illusions of grandeur create superstructures which only function in good times. The EU’s main objective of creating peace and well-being of the people is now being severely tested. If we for example asked Spanish youth (50% unemployed) about their well-being or Greek people or the Portuguese etc, we would get a tirade of abuse and complaints about the EU. Instead of “creating peace”, we are seeing major tension within the EU that could lead to serious conflicts. And as to “balanced economic growth and full employment”, this has all come to an end. The false prosperity, mainly based on debt, has also come to an end and the EU can only survive intact with the aid of endless money printing. But even that would only be a temporary reprieve. The EU is a failed experiment which is extremely costly and inefficient. The economic ruin of Ireland, Greece, Spain, Portugal, Italy, France etc would not have happened to the same extent without the EU. Like all artificial fiat currencies, the Euro was doomed to fail. Without the Euro, countries like for example Ireland, Spain or Greece would have recovered much faster.

Final or total catastrophe

So we are heading to the final stage or as Mises says a “final or total catastrophe of the currency system involved”. I don’t think that even Mises envisaged at the time that this could involve a major part of the world rather than just one country. This is why this catastrophe will be unprecedented in world history and have consequences that will affect the world economically, socially and geopolitically for a very long time.

Wealth Preservation – Gold

Since 2002 we have advised investors to put up to 50% of their assets into physical gold, stored outside the banking system. Gold has appreciated between 15% and 20% per annum since 2002 depending on the base currency. And most stock markets have declined 70-85% against gold in the last ten years. In spite of this most major investor groups (institutional, funds, asset managers or individuals) own no gold. Gold is money and reflects the total destruction of paper money. But most investors do not understand gold. Common arguments I hear is that “you can’t eat gold” or that “gold pays no return.”  It seems that these investors prefer to eat paper money. And as to the argument that there is no yield on gold, who needs yield on an asset that has massively outperformed all major asset classes in the last 11 years. And if we look at 2011, gold has greatly outperformed stock markets in most major countries. Whilst stock markets are down between 1% and 24% in 2011, gold is up more than 20% against all major currencies. So in real terms (gold) all stock markets are doing very badly but still investors persist in riding these falling trends.

Stock markets will benefit temporarily from QE but it is still our view that they will fall another 90% against gold in the next few years.

The correction in the precious metals is now likely to be over and we should see the metals going to new highs in 2012. I had the pleasure of becoming acquainted with Alf Field at the recent Gold Symposium in Sydney where we were both speakers together with Eric Sprott, John Embry and Ben Davies amongst others. Alf is one of the few in the world, if not the only one, who knows how to apply the Elliott Wave principle successfully to gold. Alf’s next intermediate target is at least $4,500 and the ascent to this target could be rapid. That would probably mean a silver price of $150. These technical forecasts certainly confirm the fundamentals as outlined in this article.

The world is in a total mess and there is absolutely no solution to this unprecedented crisis. The hyperinflationary depression that we will experience in the next few years will totally destroy the majority of the credit based wealth that has been created in the last few decades. 

In order to preserve wealth and keep capital intact, it is critical to keep a major part of investment assets in precious metals held outside the banking system. But for investors who continue to follow conventional wisdom, they will sadly find that their investment strategy was merely conventional and contained no wisdom.

Abnormal Risks Have Abnormal Consequences

Egon von Greyerz (June 2016)

Most people believe that the era we live in is totally normal. This is the case whether you live in a war-zone or in “Shangri-La”. It is the same with the economy. Everybody in the West today believes that stocks always go up and that property grows to the sky and that government bonds are the safest investment you can own. So these strong markets have been the norm for the average investor for the last 100 years. Everything they touch has gone up and any down move is only a correction. And so far investors have been right to stay in the market. Anyone who sat on a diversified portfolio of stocks, property and some bonds has made a massive fortune in the last hundred years. Very few skills in picking the investments were required. It was enough to buy high quality investments and just sit on them.

After 1929 it took the Dow 25 years to recover

Yes, there have been scary moments like for anyone who bought stocks when the Dow was at 400 in 1929. By 1932 the investor had lost 90% and felt very poor. But 24 years later he was breaking even and today, his heirs would own stocks that have achieved a handsome return of 4,400%. Anyone who was clever enough to put $10,000 in the Dow at the 1932 bottom would today sit on a $4.5 million fortune. Hindsight is of course the most exact of all sciences. But the point I am making is that we have seen 100 years of investment markets when no skill was required, just staying power and patience.

Stock market profits are due to printed money and not investment skills

Most investors have the opinion that it is their skills that is creating the high returns. In the late 1990s for example, every single person was an expert in the Nasdaq and internet stocks. That is until they lost 80-100% in the early 2000s. At that point all the self-made experts vanished completely. The majority of people have got no idea that their gains in all asset markets have very little to do with investment skills but instead all to do with the extraordinary generosity of governments and central banks. Because the creation of the Fed in 1913, started a fool proof method of making money especially for the bankers. And the Fed was a creation by private bankers for the benefit of private bankers and major investors. As Mayer Amshel Rothschild said: “Give me control of a nation’s money and I care not who makes its laws”.

So in 1913, an absolutely extraordinary period of 100 years started that has led to a total explosion in most asset classes, population numbers, inflation and credit growth as well as medicine and science including some amazing technical innovations and developments. There is of course nothing wrong with rapid growth. But when it becomes exponential and relates to a bigger sample like the world or a major continent, the likelihood is that it won’t last and that there will a substantial move in the opposite direction.

World population to decline by billions?

Let’s take the example of population growth. For almost 12,000 years, global population grew gradually to reach 1.2 billion people in 1850. It then reached 1.4 billion at the turn of the 1900s. But since then, as shown in the graph below, there has been an absolute explosion to 7.4 billion currently.

Screen-Shot-2016-06-13-at-14.00.12

Prosperity, food and improvement in medical science have all contributed to this exponential growth. Experts are now forecasting that global population will double to 15 billion by 2100. This is in my view very unlikely. If we look at the 100-year spike on the graph, that is likely to end abruptly at some point. Yes, population can continue to grow for a number of years but spikes or exponential growth never continues straight up and doesn’t just pause with a sideways move. Instead a spike move will eventually result in a spike in the other direction. So at some point world population will come down by say 30-50%. This sounds implausible today, but remember that throughout history there have been events that have resulted in a major reduction of humans on earth. Take the Black Death in the mid-1300s. It is estimated that up to 40-60% of Europe’s population were killed and maybe as many as 200 million worldwide. Disease is only one way which can reduce the population. War and economic depression could also have serious implications on the size of the population. A nuclear war could be totally devastating and collapse of the financial system would lead to famine. I am not forecasting these events, but the probability is major that one or several of these disasters will happen at some point in the future.

Coming hyperinflation will lead to deflationary swoon

Another unsustainable trend is the explosion in US inflation. Between 1665 and early 1900, US inflation was on average maximum 1-2% p.a. Then from 1913 with the creation of Fed, the credit explosion and money printing started. Initially it was gradual but from 1971, when Nixon abolished the gold backing of the dollar, inflation has gone exponential and so has credit growth.

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I know that many people will argue that we are not seeing any inflation in the US or the world economy and that we currently have deflationary pressures. There are a few reasons for this. The first is that governments deliberately skew the inflation figures so that they are totally misleading. Secondly, the credit created and the money printed does not go to the ordinary consumer. Instead it goes to the banks and major investors. This has led to the most massive asset inflation that the world has ever experienced with the explosion of stock, property and bond prices. Just like the population bubble, the exponential growth in inflation will not last. But before the bubble bursts we are likely to see one final and futile attempt by governments and central banks to try to save the world economy and financial system by unlimited money printing in the trillions or even quadrillions of dollars. So another spike in inflation, leading to temporary hyperinflation is likely before it all implodes in a deflationary swoon.

The biggest debt implosion in history

The third spike is the explosive growth in global debt. This is what has created the mess the world is currently in. Central bankers took Amshel Rothschild’s words to heart but then they turned too greedy until they totally lost control of the monetary system. And that’s where we are now. Together with governments, the bankers have now created disastrous vicious circle that is spiralling down at ever increasing speed. Exploding government deficits and debts and the insolvency of the banking system combined with zero or negative interest rates have produced a situation which central bankers have not got a clue how to deal with or solve. The only solution they know is to apply the same method that created the problem in the first place, namely to print more money and issue more debt.

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Just look at how global debt has exploded 22 times in the last 35 years from $10 trillion to $230 trillion today. At the same time global GDP has gone up 7 times only. We could call it the law of diminishing returns if we want to be kind. More and more credit is needed to create an increase in GDP. But if we want to be truthful we should call it the biggest disaster that man created throughout history.

The world cannot continue to grow naturally before the current debt of $230 trillion together with the $1.5 quadrillion of derivatives have all disappeared. This must and will happen at some point in the not too distant future. The result will be an implosive depression that will make most debt disappear and assets such as stocks, property and bonds to decline by 90% or more. Of course that seems impossible today but the spikes in the charts above all indicate that this is likely. And based on logic this has to happen. It is only a question of when. The consequences will be totally devastating for the world economy and for almost all human beings. A lot of people will die prematurely for the reasons discussed above.

The next phase of the gold and silver market will be explosive

It is clearly impossible to protect yourself against all these risks. Close family and friends is always the best protective network in times of crisis. For the privileged few who can afford to acquire some physical gold and silver, this has throughout history been the best financial insurance to own.

The precious metals have now started a sustained and very strong up-move.

Egon von Greyerz

MORE: https://goldswitzerland.com/risk-of-total-global-collapse-is-greater-today-than-any-time-in-history/