American Roulette vs Gold & Silver

April 4, 2010

GREEN SHOOTS & DELEVERAGING

There is no doubt that some green shoots have been making an appearance in recent times. They do so even in cemeteries. This is only to be expected with the amount of cow manure that has been spread around through stimulus, quantitative easing and by press release. All this is about as effective as treating a cancer patient by giving him new pyjamas. This unparalleled interference by the Federal Reserve and the Federal Government in the market place derailed the massive deleveraging that was to take place beginning in 2008. Unfortunately, this interference also cut short the structural changes and reform that a liquidation of non-productive and over-indebted activities would have triggered. By liquidation I mean assets changing hands at more economically viable prices and bad debts being written-off.

The net result of such interference both in the USA and elsewhere is that the underlying problems linger on without any clear cut strategy or agreement between economists, politicians, bureaucrats or top level bankers as to how they are to be overcome. Despite this they all continue to be employed and rewarded handsomely. Top level bankers in particular continue to loot their shareholders and the world with impunity more akin to psychopaths.

At this stage of the game we are still left with governments that cannot control their spending, national debts that defy repayment, rising interest rates that will lead to capitalisation of interest on sovereign debt, persistent unemployment etc etc. Every single current problem has long term consequences which will compound with increasing severity unless a wholesale cleansing of the system takes place. The question is whether we are past the point of redemption. My guess is we are as governments fear the political backlash of admitting to fault and revealing the full damage and lack the resolve to make the politically hard decisions.

THE NEXT TSUNAMI WILL BE BONDS AND....

There is a commercial property tsunami coming next year and with the reality of rising rates, decimated values and rising vacancies, one wonders whether the Fed will this time refuse assistance or whether the bankers will once again present their best doom and gloom scenario so as to extricate another round of socialized losses. The Fed already has a cesspool of toxic debt which it knows will eventually form either part of its archives or its own funeral pyre in the future.

SAFE HAVENS

Amongst all this confusion there are only a handful of assets that defy the gravity of gross economic incompetence due of their intrinsic value. These include gold, silver, productive land, water and oil amongst others. Those that find themselves holding dollars or euros are playing a dangerous game to say the least. These currencies (and eventually all fiat currencies) will be about as useful as a cloakroom ticket in a burning theatre when things start to unravel. The US government has no real net assets against which it can back its dollar whilst Europe is a badly fitting jigsaw puzzle with multiple owners. As for those holding the British pound I can only say that it has not been such a 'sterling idea'.

THE ODDS ARE NOT GOOD AT ALL FOR ROULETTE PLAYERS

No matter which way the roulette wheel is spun, the odds of a disaster far outweigh the odds of any favourable resolution. The roulette table above is meant to remind us that whilst a few positives could improve things, they cannot fix things. On the other hand any one of a number of negatives either alone or in concert could bring the whole show to an end. Projected accumulated deficits exceeding $20 trillion in the USA within the next 10 years are an insult to the intelligence of any college student with a calculator. More importantly such an accumulation of debt is a yoke worse than tyranny on the aspirations of those that have not as yet started to work. The same applies in other nations.

Perhaps the thinking by the current President, congressmen of both parties, bankers and CEO's is that they will be out of the picture by then and that someone else will have to front the nation and confront the problems. We are therefore left with a world where governments and parents are no longer able to leave a legacy of any value. Only scorched earth and perhaps a string of tyrants await our children.

SO, WHERE TO, FROM HERE?

A Trade War?

Who are they kidding? Look at the quote below which is from 1998. Nothing has changed except China's reserves which have ballooned from US$149.2 billion in 1998 to $2,399 billion at the end of 2009. Over the same period US manufacturing has been clinically gutted while Congress remonstrates, deliberates and procrastinates. If the number of Congressional seats was tied to the number of manufacturing jobs, perhaps only then some change would have been effected.

"America's annual trade deficit, already large by historical standards, could reach a new record in 1998, fuelling protectionist sentiment in Congress. Political fallout from the trade deficit numbers could impede efforts to reduce barriers to trade in the United States and abroad." (Daniel Griswold - Cato Institute- April 20, 1998)

Congress did not have the determination and foresight back then and now lacks the strength to either confront China or to even successfully prosecute a trade war. One also needs to keep in mind that it has already been pointed out by others that America runs trade deficits with over 40 nations and they could hardly all be labelled as manipulators.

China is clearly not ready to float her currency. Perhaps this is attributable to three factors:

  • Being a communist regime they are fixated on being control freaks.
  • They are concerned about the destabilizing effect of unemployment in a system that is almost devoid of social security structures.
  • They are worried about what might happen once the renminbi starts to become part of the hedge funds' speculative plays and manipulations.

I may be mistaken but in my view it is not the renminbi that needs revaluation but the wages and conditions of Chinese and Asian workers in general and hence prices. This will be far more effective in closing the gap between the two nations. In any case the USA will continue to struggle. The whole scenario is complicated by the U.S. multinationals in China which produce for the US market. A revaluation would hurt them and hence the USA.

Perhaps China can be warned that once her FOREX reserves hit a certain dollar value, that she will automatically be labelled a currency manipulator. After all, that which is not allowed to float must to some degree be manipulated. This approach however also has limitations if China can at the same pace, off-load its increasing forex reserves for the purchase of overseas assets. Given China's gargantuan reserves and inexorable appetite for resources, this too will lead to confrontations down the track.

Rebalancing Global Wealth?

We are stuck in a world where the have-nots have nothing to give because they have already lost their jobs and/or their homes whilst they continue to draw on government for survival. At the other end we have such an incredible concentration of power and wealth which in the main neither sees nor acknowledges the necessity of restoring the solvency and sustainability of the system. The middle class has had to bear the cost of carrying the cost of the bottom end's demise and the top end's avarice. The middle is now caving in as well. Who then carries the load? The wealthy must re-invest in the bottom layer of society if society is to continue being civilized. Preferably the investment should be on home ground.

Debt for Equity Swaps?

Perhaps what is also needed is some kind of debt for equity swap between those that have lent money and those that have borrowed it to buy assets that are now severely devalued. The former are faced with the impossibility of collecting in full while the latter are clearly incapable of paying in full. Failure to reach some pragmatic resolution will only allow compounding interest, legal expenses and time to make the final outcome acrimonious and very damaging monetarily. This will require depositors (as one example) to have their savings take a haircut in return for units in some kind of property trust of foreclosed property.

This is perhaps an unfair imposition on those that have diligently put their savings away, but as I have said elsewhere, "telling people that their savings are safe and guaranteed but then lumping bank losses and failures onto the public purse is a circuitous subterfuge that breathes life into a monster rather than slaying it." I also believe that savers must be nearing the end of their tether with the ridiculously low rates of interest paid to them, which is nothing more than a wealth transfer to banks to assist them in recouping losses and avoiding implosion.

Watching the Game whilst holding gold and silver

Whether gold and silver are manipulated for the purposes of profit or price suppression, is neither here nor there when the dangers of holding fiat paper have never been so pronounced since Weimar Germany.

The bottom line is that those with gold and silver will be best placed to avoid the bad luck of the roulette wheel and table. Roulette is designed to make money for the house whilst holding gold and silver assures you of winning without spinning.

Care to spin or to watch?

Sydney Australia

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).

Gold Eagle twitter                Like Gold Eagle on Facebook