Robert Fitzwilson
continues:
“We believe there are really three high-level issues
contained in this monetary fog. The first is ‘free money.’ From the so-called
PIIGS perspective, the euro experiment was about receiving free money from the
Baltic-bordered countries. Indeed, an absolute avalanche of money flooded their
way, not only from their European neighbors, but also from the rest of the world
as the euro was touted as an alternative to the U.S. dollar.
The money was squandered, but it created huge new
demand for products from manufacturing powerhouses, specifically Germany and
China. This is called vendor financing. There is an expectation by the lenders
of being paid back. Clearly, that is not going to happen....
“The amount of money which is owed is monumentally in
excess of the capability of any of the debtor nations to settle their accounts,
even if they were inclined to do so. With the French lowering the retirement
age, Spain and Greece rioting against austerity, the emphatic answer is that
they are not so inclined.
The second issue is the ‘debt as money’ (DAM)
monetary system that has overtaken the world in the last 100 years. The Greek
debt is held by European entities as assets on their balance sheets. Banks lend
based upon their capital base. If the Greeks formally default, the lending
ability of the banks is diminished, perhaps catastrophically.
If a default occurs, how do the banks get
recapitalized? What happens to the quadrillion-plus dollars of derivatives?
The DAM monetary system is the core asset of those who believe in
globalization. It is hard to imagine them giving that up without pulling out
all of the tricks from their very creative rabbit hat. Indeed, as the election
neared, the major countries released announcements that help would be
forthcoming to stabilize things, regardless of the outcome.
The third issue is control of resources. While we
were not ready to believe in peak oil 30 years ago, the arithmetic is
undeniable, and in our view we are approaching a crisis for the materials that
we consume to maintain our global economy and lifestyles. The people in
governments around the world know this. Sophisticated investors know this.
Behind the curtain, there is a feverous rush by key governments to acquire and
stockpile resources before the rest of the world wakes up.
Control of the resources also implies control of the
prices. If one is acquiring and stockpiling, stable to declining prices for
those resources is very important. There was a potentially ominous development
earlier this week when a Chinese entity successfully bid for the London Metal
Exchange (LME).
The LME sets global prices for base metals, with
China being the biggest consumer of those metals. According to one estimate,
the offer values the LME at 108 times net income. If that does not sound like a
motivated buyer, we do not know what would qualify.
If you control the market itself, you can control the
prices. We have certainly seen that type of control in the sovereign debt
markets as interest rates have been forced down to virtually zero. The rates
are decidedly negative on a real basis, regardless of which methodology for
inflation is applied.
The best guess we could foolishly hazard about the
impact of the election is more of the same. The major players in this game of
power need stability for as long as possible. Stability in this case is defined
as the absence of chaos and absolute panic.
There will be panic in our future. The arithmetic of
the resource depletion, the creation of enormous debt that must be fed by more
enormous debt, the derivatives and the increasing desperation and despair in
populations around the world guarantees such an outcome.
So what is an investor to do in this environment? As
we have suggested before, the mountain of paper and derivatives will collapse
under it’s own weight at some indeterminate point. Therefore, it is incumbent
upon investors to act now and transfer wealth from paper to real assets. Sadly,
reports of Greeks taking cash out of the bank, but leaving it in safe deposit
boxes at the same bank tells us that the Greeks have not yet reached the panic
stage. They should already be there.
A senior officer in the London Fire Rescue Service
was quoted as saying, ‘When people die in fires, it is not because of panic, it
is more likely to be the lack of panic.’ The reality is that people generally
look to their peers, waiting until the group panics, and by then it is too
late.
While it may not quite be time to panic just yet, the
survivors, and those who will prosper at the end of this great historic period
in our financial affairs, should quietly be moving toward the exits and the
safety of hard assets such as gold and silver.”
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