by Egon Von Greyerz, Gold Switzerland:
We are now in the very final stages of the most remarkable era of alchemy in the history of finance. This cycle started in 1913 with the creation of the Fed and had its death knell in 1971 when Nixon took away the gold backing of the dollar. It has been a long and slow 50 year death of the world economy and the patient has only been kept alive due to the creation of fake money, fake assets, fake (paper) gold, fake wealth, fake valuations, fake balance sheets, fake bankers, fake politicians all built on a colossal mountain of fake debt.
What will be the trigger for the coming biggest financial crisis in history? There are so many time bombs around the globe that it really doesn’t matter where and how it starts. Because when it starts, there will be a chain reaction that will lead to the most spectacular economic fireworks in history.
FAKE GROWTH BASED ON FAKE MONEY
Central banks around the world have already set the coming fall in motion. What has kept the world going for so long, in spite of being bankrupt, is the massive liquidity that all central banks have added to the system. The world economy can only grow, albeit artificially, by a constant injection of liquidity. Without that the patient would die quickly. This has created an illusion of growth but all that has grown is debt. In real terms the world economy is hardly growing and how could it just based on fake money.
But central banks are now creating the perfect situation for the coming collapse. They are taking away the punch bowl that has fed all the asset and debt bubbles in recent years. It is not just the US where liquidity growth has reversed abruptly by the quantitative tapering. Also in the Eurozone, Japan, and China liquidity growth is slowing down significantly. This is all that is needed to create the perfect setup for the coming collapse. The bubbles will implode if they are not constantly expanding.
MONEY PRINTING WILL RETURN BUT TO NO AVAIL
Yes, there will be a point when stock and bond markets collapse and central banks will start wild money printing again. But since they are always behind the curve, it will all be too late and what the world economy will experience is a hyperinflationary depression that eventually leads to a deflationary implosion of the system.
So what will be the initial specific events that starts the coming fall of the world economy? Will it be Japan’s economy sinking into the pacific, or the Chinese debt dragon catching fire or maybe some little boy who will proclaim that Uncle Sam has no clothes. The Brussels elite is certainly doing a superb job in destroying Europe both economically and socially. They will clearly cause the fall of the Rome Empire. Not that Italy is much of an empire these days. But just like all empires collapse under its own debt, so will Italy.
With Italian debt to GDP the second highest (after Greece) in the Eurozone of 130% with Target 2 loans (Italian loans financed by Bundesbank via ECB) at Euro 500 billion, plus, plus plus, Italy will have no chance to even service its debt. The Eurozone QE has grown to Eur 2.5 trillion since 2015 and the ECB has virtually been the lone buyer of Italian debt. Yield on the debt has surged and many European banks are heavily exposed, especially the French ones.
Germany has long been the milk cow of the Eurozone but even Germany is now coming under pressure. The manufacturing sector has been hit with a weakening of some German export markets like China, Turkey and Italy. The PMI (purchasing managers) survey for Europe has just dropped to a four year low.
NOT THE FIRST TIME ROME WILL BURN
In a bunch of sick economies, it is always difficult to determine who should get the prize for the sickest. Italy certainly has a good chance to win that obscure prize. That they can never repay the debt is a certainty and this will soon lead to Rome burning and the rest of the EU also catching fire.
The Brexit saga is a symptom of how desperate Brussels is to hold the EU together. The EU elite has pushed Theresa May to accept an exit deal which is totally unacceptable to the British people as well as to the British parliament. Brussels is extremely frightened that the UK leaving the EU on good terms will not only open the flood gates for other countries to do the same. It will also lead to the failure of the Brussels’s attempt to create a European Superstate, led by an unelected and unaccountable elite. So Eurexit or the breakup of the EU is coming, that is certain. It is not going to happen overnight, but the bursting of market bubbles combined with weakening economies across the board will most likely precipitate the collapse.
History tells us that when you reach the end of a global economic cycle, the whole world is super bullish. Virtually no one can, or wants to see, the coming collapse. We know that from peaks like 1929 or 1973 when all market observers were certain that the golden era they were in will go on forever – “Because it is different today”.
“IT’S DIFFERENT TODAY”
I certainly concur that it is different today. But not from a positive point of view. Sadly the world economy is living a lie and will soon have the most horrendous awakening. The laws of nature always win in the long run. The manipulation of the world economy in the last 100 years is now coming to an end and nature will open the flood gates to flush out all this falsity, dishonesty and hypocrisy. This cleansing process will create a lot of suffering for quite a long time, but is the only way for the world to get back to a sound system with sound real growth that is not based on money printing and debt.
GOLD BACKED ECONOMIES EVENTUALLY FAIL
The basis of a sound system is sound money. Throughout history the monetary system has always functioned better when gold has been backing the currency? So why has every currency system in history then failed and why have all currencies always gone to their intrinsic value of zero?
The explanation is simple. Soundly based economies with budget and trade surpluses carry the seeds of their own destruction. Once the economic cycle has peaked, the country continuous to spend money it doesn’t have and deficits are created. This becomes a vicious circle, more deficits lead to more money printing which in its turn increases the deficits. At that point the country abandons the gold backing of the currency in order to print more money and this eventually leads to the collapse of the country’s economy. This cycle has happened throughout history and we are seeing the perfect example of this cycle since 1971. Both US and global credit have grown exponentially since then and only since the beginning of this century, global debt has tripled to a staggering $250 trillion.
THE US DOESN’T HAVE THE GOLD BUT CHINA DOES
So once the current cycle has run its course and bottomed, are we likely to have a new gold backed reserve currency? Well, it won’t be the dollar, that is certain. Because the dollar will disappear into the Atlantic and Pacific as the US economy collapses. Yes, the US will try to resurrect the dollar like a Phoenix but that would soon fail. Also, the US would then need to prove that they have the 8,000 tonnes of gold that they claim to have. But they are unlikely to have even half of that. The rest has been sold covertly or leased to the market and is now in China or India and will thus never come back. China on the other hand has officially 1,800 tonnes but the real figure could be substantially higher. Some market observers estimate that China has up to 20,000 tonnes but no one really knows what the true figure is. China will only reveal their gold position when they call the US bluff of 8,000 tonnes.
Personally I am not in favour of a gold backed reserve currency. Because eventually, the country will mismanage its economy and live above its means. This will necessitate the abandonment of the gold backing and the start of money printing and currency debasement.