|The staggering debt situation throughout the industrialized world…will be terminal for the financial system we have known since the end of World War 2 [and, as such, have a major] impact…on the value of paper money and by extension, gold and silver. [Let me explain.] Words: 2328|
So said John Embry (www.sprott.com) this past weekend in a speech to the California Investment Conference which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Embry goes on to say, in part:
I believe in the immutable law of mathematics and when you reach the point of no return, there is obviously, by definition, no going back. As the economist Herbert Stein…[said back] in 1986: “If something can’t go on forever, it will stop.”
The Debt Situation in the U.S
The poster child for this development has been the good old U.S.A. In my estimation, the U.S. debt situation is so far beyond the point of no return that you can’t even catch a glimpse of it in the rear-view mirror… I think that we are very close to that unhappy moment and the implications for the U.S. dollar and economy are simply horrific. [Read: 2012: More Money-printing Leading to Accelerating Inflation, Rising Interest Rates & Then U.S. Debt Crisis! Got Gold?]
The actual funded federal debt of over $15 trillion is just a small part of the problem. The state and local governments are in various states of disarray. Then there are the off-balance sheet items of the federal government such as government-sponsored entities like Fannie and Freddy which have many trillions of debt supported by very dubious assets. The true elephant in the room is the unfunded liabilities for social security, Medicare, etc., which, using the most conservative estimates, easily exceed $50 trillion. Thus, without even stretching, the total federal government debt liabilities in the U.S. are, at a bare minimum, more than five times the current nominal GDP. One of the few reasons that this remarkable debt edifice is still standing is the Fed’s zero interest rate policy which, in conjunction with massive Fed monetization of Treasury debt, has kept the interest rates on government debt ridiculously low, and thus the charade has been allowed to continue.
Mark my words, if the interest rates on U.S. government debt truly reflected both the real level of inflation in this country and the rising risk of some form of default, rates would already by sky-high and the U.S. would resemble a massive Greece.
The Debt Situation in Europe
Speeking of Greece and its impending debt default…it is really a rounding error in the European scene. As we make our way up the food chain we encounter larger and larger entities with ever-greater quantities of questionable sovereign debt accompanied by essentially insolvent banking systems. The great fear is contagion and the supposed antidote is to build firewalls around the smaller miscreants so the risk can be contained and not topple the larger entities…
The idea that austerity can solve anything in countries that are as far gone as Spain, Portugal, Italy, et al., is preposterous. Spain, for example, already has 22.5 percent unemployment with a staggering rate of more than 50 percent in the critical 16-25 age bracket for males. In addition, the real estate morass is imperiling the entire smaller and mid-cap bank sector that financed their outrageous real estate bubble, and the federal government is just discovering the extent to which the local governments have run amok financially.
I find what has unfolded in Spain to be mind-boggling but generally representative of the overwhelming financial irresponsibility of the peripheral European countries once they were under the umbrella of the euro, which facilitated cheap financing…
Germany is viewed by all and sundry as the model of financial rectitude on that continent….[but, in fact] the Germans have…government debt that comfortably exceeds 80 percent of nominal GDP — not in Italy or America’s league, but remarkably similar to France, which is currently being targeted for a debt downgrade by the ratings agencies. In addition, like most industrialized nations today, Germany has huge commitments to retirees and future medical requirements that apparently are not well documented anywhere.
The real Achilles’ heel of the German situation, however, is their banking system. While the citizens and the government maintained a considerable degree of financial restraint when the global credit bubble was inflating, the German banks went hog-wild. They financed Irish real estate, the bonds of peripheral European governments, U.S. sub-prime debt via CDOs, etc., while leveraging up their balance sheets to unconscionable levels. The Germans may currently be talking tough, but I suspect, in the end they will be forced to bend in the direction of the bankrupts in Europe and that means further massive quantities of money creation. The long-term refinancing operation we have seen to date is just the tip of the iceberg.
The European elite, who crammed the euro down the throats of their somewhat reluctant citizens, have invested far too much time and effort in their dream to quit now which simply means creating whatever amount of paper necessary to keep the sovereign debt afloat and to allow the crippled banking systems to function.
The Debt Situation in Japan
Japan has by far the largest embedded federal debt-to-GDP ratio in the industrialized world (more than 200 percent and rising rapidly) but has always benefited from the Japanese public’s thrift and their propensity to buy the government’s bonds. However, in the face of the world slowdown, the continuing deflationary issue, and the ongoing impact of last March’s terrible natural disaster, the fiscal picture continues to deteriorate.
The real short-term problem, though, is the remarkable strength in the yen. This is having an extremely adverse impact on many Japanese companies and exacerbating an already difficult financial situation.
Looming over all of this is a longer-term problem that, in reality, may be much more serious. This is the rapid aging of a shrinking population. This would suggest that the relentless bond buyer of the past, the Japanese baby boomer, will be cashing in his bonds shortly to support himself in his old age. In the absence of domestic buyers and with the existing massive debt overhang, Japanese interest rates are fated to rise and this could prove catastrophic.
At this juncture, it seems obvious to me that in a world of increasing competitive currency devaluation, the Japanese will have to get in gear very shortly and, as things continue to deteriorate, I fully expect they will. Thus they will represent just another major world economic entity turning the monetary spigot wide open.
The Debt Situation in China
The key economic player on the planet at this point is China and it is easily the most controversial because its fate doesn’t seem sealed like the other three abovementioned main economic engines…where stagnation and unsustainable levels of debt ensure quantitative easing as far as the eye can see if a deflationary collapse is to be averted…
China will be the economic powerhouse of the 21st century, just as the U.S. was in the 20st century. People sometimes forget though that it wasn’t a smooth ride, particularly in the first half of the century, when the country had to endure two world wars and a decade-long depression. I think it is unrealistic to think that China won’t experience considerable turmoil along the way as well and we may well be approaching a large bump in the road.
It must be recognized that China has dined out on the West’s profligacy in the past 20 years and became the world’s de-facto manufacturer by maintaining an undervalued currency while rapidly ramping up its manufacturing capacity and using very cheap labor. This whole process created a remarkably unbalanced economy with well over 50 percent of GDP being generated by net exports and capital spending on plant and equipment, housing and infrastructure, all of which tend to be very cyclical.
They avoided the worst of the 2008 global financial crisis by embarking on a historic bank lending spree, which resulted in mounting inflation, a dramatically weakened banking sector, and a truly historic housing bubble. Now, as they are attempting to maneuver a listing economic ship, commentators are predicting a “soft landing” for the Chinese economy in 2012. I don’t know about you, but when I hear that expression invoked following a huge debt-fueled boom, I become very uncomfortable.
The idea that the Chinese can easily morph into a consumer-driven economy to offset a sharp decline in net exports and dramatic overcapacity in many areas of the economy seems to be a bit of a stretch, given that the consumer is the same individual whose services may not be needed in the export or capital spending sectors to the same extent as previously.
Compounding this whole conundrum is the fact that the ruling Communist government has been dependent for popular support on economic growth and job creation. In its absence, the fractious population may be hard to keep under control.
Thus my suspicion is that when push comes to shove, the Chinese authorities will provide whatever amount of fiscal and monetary stimulus that is required to keep the economy moving forward at an acceptable clip. This, I firmly believe, will ultimately be hugely inflationary.
The Presence of Derivatives
Finally, I can’t make a speech about our terminal financial state without a couple of points on derivatives, which continue to proliferate. The justly reviled ex-Fed Chairman Alan Greenspan used to extol derivatives as vehicles for spreading risk and making the system more resilient while he strenuously opposed any attempts to regulate OTC derivatives… In fact, [however,] derivatives have tended to concentrate risk as a large majority of them has ended up in a few hands, creating too-big-to-fail financial entities that are imperiling the whole system.
The idea that derivatives net out and thus it is really a zero-sum game is equally ridiculous. Since every derivative has a counterparty, to suggest that an investor is satisfactorily hedged because derivatives offset a long with a short is simply wrong. If the counterparty fails on either the long or the short, the entire notional value is at risk. Given that the notional value of all outstanding derivatives would easily exceed a quadrillion dollars had not the Bank of International Settlements changed definitions to intentionally understate the true amount, the toxicity of this garbage is obvious. [Read: Derivatives: Their Origin, Evolvement and Eventual Corruption (Got Gold!)]
It wasn’t without reason that Warren Buffett many years ago termed them “Financial Weapons of Mass Destruction.” If sufficient liquidity is not continuously made available in the entire global system, a potential implosion of derivatives would be activated and rapidly annihilate the entire global banking system [which is] just another reason why quantitative easing to infinity is virtually assured.
The Presence of Cognitive Dissonance
When I try to convey the seriousness of this whole issue of monetary debasement and its disastrous impact on society, most people are resistant or, more often than not, seem indifferent to the whole subject. I attribute this to a state of cognitive dissonance, which unfortunately appears to affect the vast majority of society.
Basically, most individuals when confronted with an unpleasant issue that is at odds with what they choose to believe go to great pains and extreme lengths to deny it. They are hugely biased to think of their choices as correct, irrespective of any concrete contrary evidence which is provided…There is essentially some sort of blocking mechanism in most human minds which permits people to stick their heads in the sand rather than confront a difficult issue before it is too late.
What All of the Above Means
To me, it all seems crystal clear at this point:
1. More quantitative easing is coming: To avert a near-term economic and financial implosion the authorities throughout the developed world will have to hold their noses and stimulate to whatever degree necessary. No politician today wants to see the system collapse on his watch, so the world will risk eventual hyperinflation and a collapse of the present currency regime rather than voluntarily accept a debt deflation. [Read: Why More QE is Coming and What That Means for the Future Price of Gold]
Ironically this was all foretold many years ago by Ludwig Von Mises, the founder of the Austrian School of Economics, who said in his epic book “Human Action,” published in 1949:
Given that this credit cycle has dwarfed anything seen in the history of mankind, its resolution is going to be something to behold. Global Financial Crisis No. 1 in 2008 was merely the hors d’oeuvre and we are now awaiting the main course.
2. A hyperinflationary depression is coming: [This will be] accompanied by the final denouement of the latest experiment with pure fiat currency — that is, the worst of all worlds. [Read: Williams STILL Believes a Hyperinflationary Great Depression is Coming! Here’s Why]
3. Demand for physical gold and silver will skyrocket: In the event that I am right, I can assure you that the demand for physical gold and silver is going to overrun all possible sources of supply and
4. Even the most outrageously bullish price projections for gold and silver may be exceeded. [Read: Gold: $3,000? $5,000? $10,000? These 151 Analysts Think So!]
I believe that investors can’t own enough gold and silver. Don’t be concerned about daily fluctuations in price, focus only on how many ounces of gold and silver you own and, above all:
Jim Sinclair had an interview with King World News today which a number of friends of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) discussed at length with one of them, putting together this synopsis of what Sinclair was conveying.
I believe our fiscal situation is much worse than most people realize. True, the situation might be resolvable with a hard-nosed turnaround specialist in charge [Romney?] but, even here, the emphasis is on “might”! In a political context, where citizens have been conditioned to believe they are entitled to live at the expense of government (i.e other citizens because, after all, government has nothing that it first does not take from someone else), the situation is beyond hopeless. Let me address the true economic situation of the U.S. by way of an email I received from a regular reader recently. Words: 615
The U.S. government is spending more than a trillion dollars more than it takes in every year…[which] all gets into the pockets of ordinary Americans [who,] in turn,…use that money to pay the mortgage, buy food, shop at the mall, etc. – creating a “false prosperity” bubble that is not real. It may feel real to you right now, but it is unsustainable…We are living in the greatest debt bubble the world has ever seen and, as such, a devastating economic collapse is on the horizon no matter what we do [so] don’t let this false prosperity and this “calm before the storm” fool you…There is going to be a massive amount of pain so you might want to get yourself and your family prepared for that. [Let me explain.] Words: 1211
Canada has the lowest total debt-to-GDP ratio of the world’s 10 largest economies (Australia is 2nd best, Germany 3rd and the U.S 4th) while the U.K. and Japan are 9th and 10th but when such debt is broken down by sectors the findings are quite different. Let’s take a look. Words: 800
The term “derivative” has become a dirty, if not evil word. So much of what ails our global financial system has been laid-at-the-feet of this misunderstood, mischaracterized term – derivatives. The purpose of this paper is to outline the origin, growth and ultimately the corruption of the derivatives market – and explain how something originally designed to provide economic utility has morphed into a tool of abusive, manipulative economic tyranny. Words: 3355
Countries around the world, particularly in the West, are hopelessly in the red, with debt rising every day. Even worse, politicians seem paralyzed, unable — or unwilling — to do anything about it. It is a global disaster that threatens the immediate future… [Let me explain.] Words: 1132
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
Question: What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks? Answer: An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. [Let me explain further.] Words: 1049
The onset of the world’s worst financial crisis in many decades is one of the most important factors (if not the most important factor) currently influencing investment decisions. The crisis has created chaos and confusion. Not many people understand how the world has arrived at this unfortunate situation. This report endeavours to identify the underlying causes of the crisis and explains why the USA current account deficit has been the main destabilising force in world finance. Words: 3806
The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation… [is old hat – see links below to many such debt clocks – but] our clock (here) shows the global figure for all (or almost all) government debts in dollar terms. Words: 300
I am astonished to see how much money the central banks are printing and how their balance sheets are expanding. We have the absolute perfect recipe for hyperinflation and thus a massive increase in the price of gold and silver.
The U.S. economic and systemic-solvency crises of the last five years continue to deteriorate yet they remain just the precursors to the coming Great Collapse: a hyperinflationary great depression. The unfolding circumstance will encompass a complete loss in the purchasing power of the U.S. dollar; a collapse in the normal stream of U.S. commercial and economic activity; a collapse in the U.S. financial system, as we know it; and a likely realignment of the U.S. political environment.
Most traders and some economists believe the Fed will step in with another round of Quantitative Easing (QE3) in the first half of 2012. This will pump up the stock market, particularly bank stocks, giving the impression that the US economy can’t be that bad, after all, [but in the process] debase the dollar and reduce purchasing power. [This, in turn, will result in higher]…inflation causing prudent investors to buy more gold. [Let me explain further what I see transpiring this quarter and why.] Words: 718
Inflation is the central banks’ method of avoiding the pain of austerity. Inflation is the current economic narcotic that is used by modern nations. It’s the old ‘beggar thy neighbor’ system, and it will ultimately result either in all out hyperinflation and a collapse of the fiat currency system or a corrective deflationary crash. Either way, the last currency standing will be gold.
151 analysts maintain that gold will eventually reach a parabolic peak price of at least $3,000/ozt. before the bubble bursts of which 101 see gold reaching at least $5,000/ozt., 17 predict a parabolic peak price of as much as $10,000 per troy ounce and a further 13 are on record as saying gold could go even higher than that. Take a look here at who is projecting what, by when and why. Words: 844
Every fiat currency known to man has failed at one time or another – every one – and ours will be no exception! What factors are contributing to this eventuality and what can be done to protect ourselves from this impending event? [Let me explain and provide you with links to 37 supportive articles to give you a complete picture of what is unfolding and why.] Words: 2700
This is not a typical bull market. Gold is not rising in value, but instead, currencies are losing purchasing power against gold and, therefore, gold can rise as high as currencies can fall. Since currencies are falling because of increasing debt, gold can rise as high as government debt can grow. Based on official estimates, America’s debt is projected to reach $23 trillion in 2015 and, if its correlation with the price of gold remains the same, the indicated gold price would be $2,600 per ounce. However, if history is any example, it’s a safe bet that government expenditure estimates will be greatly exceeded, and [this] rising debt will cause the price of gold to rise to $10,000…over the next five years. (Let me explain further.] Words: 1767.
For the uniformed on Wall Street and in Washington, the growing tide of red ink is a signal that America is returning to normalcy. The only problem with that is our so called ‘normalcy’ is rapidly leading us into insolvency. The sad truth is that our desire to consume foreign made goods, with money that is borrowed, is evidence that our country is growing weaker by the day.
I am increasingly confident that the consequences of fragile sovereign debt, precious metals market manipulation, insufficient physical supply, and the need for a safe haven investment refuge, will contribute to rampant price inflation and drive precious metals bullion and mining stock to a parabolic peak price of $10,000 sometime in 2012 or 2013 at the […]
A perfect storm of converging criteria is almost perfectly timed and aligned with the 2012 election cycle. When the moment arrives, the financial earthquake will rapidly demolish the existing highly precarious financial system. Government will stand by helpless, unable to shield itself, much less its vulnerable citizens or private financial institutions from the tsunami of debt and currency destruction. Let me explain. Words: 2055