Friday, February 12, 2010
We take the pressure and we throw away
Conventionality belongs to yesterday
There is a chance that we can make it so far
We start believing now that we can be who we are
Greece is the word
Greece is the word, is the word that you heard
It's got groove it's got meaning
Greece is the time, is the place is the motion
Greece is the way we are feeling
This is the life of illusion
Wrapped up in trouble laced with confusion
What are we doing here?
We take the pressure and we throw away
Conventionality belongs to yesterday
There is a chance that we can make it so far
We start believing now that we can be who we are
Greece is the word
The situation with Greece and the euro presents us with a fresh opportunity to explore what is really wrong within the system from a macro perspective. And I am not talking about the euro system. I am talking about our global system of savings that are value-fixed directly to a transactional currency unit whose value doesn't even matter in the context of its primary function.
This problem is what we call a Catch-22, or a no-win situation for the system as a whole. This means that because of its fatal flaw and current precarious position, the global financial system faces threats from too many fronts, any one of which can bring it down like a house of cards. And attempts to shore up the system on one side are kneecapping the legs supporting it on the other. Our global monetary/financial/economic system today lies in a "critical state", barely surviving on a "knife-edge of instability".
In order to understand the greater systemic problem that is presenting today as a boiling pustule in Greece, we must first understand the flow of capital and the growth of debt. With debt growth as the deadly tumor in the cycle, it is easiest to visualize the flow of money as a circular feedback loop, where the debt cycle feeds back on itself in a sustained growth pattern.
The denouement or final shakeout of this systemic crisis will include two separate events, no matter what decisions are made along the way. In this statement I have full confidence. For semantic simplicity I call these two events freegold and hyperinflation. But these terms seem to cause consternation and confusion in many readers, so you can think of them simply as the dramatic devaluation of paper gold and the catastrophic devaluation of the dollar. Two inevitable devaluations. Two unavoidable outcomes.
In order to understand how we get there, we must think about the three main forces at work in today's systemic crisis. The three forces are nature (you can call it "math" or "physics"), politics (call it socialism or "the collective will"), and self preservation (of the giants and the savers). These three forces are interacting in ways that appear chaotic here on Earth, but that form a clear, emergent pattern when viewed from outer space.
Further, we must understand the dynamics that brought us to where we are today. And those are the dynamics of debt, the global dollar system and the roles of money in the collective mind. Imagine that I am the debtor in the above diagram and you are the saver. I am going to keep living off credit as long as you keep buying my debt repackaged by the banks as a bond. The more you buy, the more the banks are going to offer me credit cheaper and on easier terms. Can you really blame me? Who should know better? Little ol' negative-net-worth me or super-producer giant you?
You see, by buying my debt from the banks you have become my enabler. You are feeding the dynamic that will bury me in debt until I hit the mathematical limit of my ability to pay. Eventually it will become clear that life is simply not long enough for me to pay back the principle I have borrowed. And ultimately it will be impossible for me to even pay the monthly interest. But can you really blame me? I have always had an out. Have you? I have always had the option to default and declare bankruptcy! I know this, and even though I am not the sharpest tool in the drawer, at least I know where my escape route lies. Do you know where yours is?
The first thing we must understand is that almost no one holds actual dollars as their savings. When I talk about the problem of transactional currency being used as a wealth reserve, I am talking about the paper assets that are denominated in dollars, fixed to a specific number/flow of dollars, and therefore whose value is directly fixed to the value of an actual dollar.
And when I talk about dollars, I am talking about the actual physical bills, cash, monetary base and bank reserves (which are all basically the same thing). So the only people who hold actual dollars as savings are those who employ a shoe box or a mattress at home. Even if you keep your entire savings in a checking account earning no interest, I am not calling those dollars. Those are credits to you from a corporate counterparty authorized to call its units dollars.
So all the money circulating through the economy without physical Federal Reserve notes passing from hand to hand I am going to call "credit money", not dollars. We do think of them as dollars when they come from special institutions that are authorized to call them dollars (banks). But they are really just credits from an institution.
Think of it this way: You have two credit cards, one from Citibank and one from Macy's. Citibank is an authorized institution so its credits can be called dollars and spent anywhere just like dollars. They can even be used to pay the IRS. Macy's is not an authorized institution so its credits can only be spent at Macy's. They are truly just credits. Try paying your taxes with your Macy's card if you don't believe me.
Now think about the cash you just deposited at the bank. Did the bank put that stack of cash in a safety deposit box with your name on it? Nope, it went right into the general reserve pool with all the other cash at the bank and they issued you an equal number of their institutional credits! Got it?
Now, think about money circulation in terms of the above diagram. Imagine the rotation as a small hurricane inside of a large hurricane, each spinning in opposite directions. 99% of the flow of money never moves a single dollar. It is just the balancing and shuffling of institutional credits. Bank A credits 100 to bank B and vice versa. At the end of the day they just cancel out for the most part.
Furthermore, we think of new credit money as being created out of thin air every time a loan is originated. It is true, but that new credit money is offset within the system as a whole by two things. The first is the sale of a new financial product by the bank to the savers, a financial product that represents the claim on that new debt. And the second is that inner circle on the diagram above. Investment, income and debt service all work against credit creation in the systematic accumulation of credit money.
That's not to say there is no growth within the system. On the contrary, there is constant and infinite growth and almost never any contraction in the aggregation of debt-related assets. This pile on the right side of the diagram grows uncontrolled like an undiagnosed tumor until it ultimately kills the host. But for "the money supply" that generally affects our inflation expectations, there is very little real movement. And likewise, there is very little visible inflation within the dollar's spending zone.
The base money or cash around which this system swirls is rarely needed or even touched. Yet it is each unit of that base which determines the ultimate value of that mountain of savings growing to the right, a mountain that is more than two orders of magnitude larger than the unit on which its value is fixed.
I realize this is new and probably contradictory to what you have learned about money and the banking system, but this is the way it really works. 99% of the economic activity that swirls in these circles has no effect on the number of actual dollars in existence. But what it does have an effect on is the growth of paper assets held as savings by the entire world, paper tied directly to the value of a single physical dollar. With each rotation the pile of "paper wealth" on the right side grows larger and the hole of debt on the left side is dug deeper. There is no balancing mechanism in this system of debt, only an ever-increasing imbalance.
Religious tradition teaches of a Jubilee, or a debt-forgiveness cycle. Such a theoretical policy would periodically reset the balance between the left and right back to its starting point. And what the awareness and anticipation of an event like this would cause is that debt would be structured in a way to be paid off by the time Jubilee rolls around. If it wasn't paid off, then the savers would lose their savings. So the debt would grow for roughly half the cycle and then shrink for the remaining half and at Jubilee, any debt that remained would have to be forgiven. An imperfect system to be sure, because it does not have a dynamic balancing function, but one that would at least be sustainable through periodic resets.
But considering this hypothetical solution begs the question of where the savings would flow during the debt contraction period of the Jubilee cycle. They would have to flow into either physical goods or reinvestments into the economy, equity positions similar to our stock market today. As the debtors paid down their debt during this latter portion of the cycle the savers would have to choose between equity reinvestment or physical wealth storage. And it would be the collective's job to encourage the former as that would grow the economy and create a larger tax base to feed the collective hunger. But for the latter, the physical wealth storage vehicle par excellence has always been gold.
What we are about to experience today is a natural Jubilee of sorts, a hundred-year reset, only this one will happen at the point when the debt mountain is at its all-time peak, and right when nobody expects it to happen. A grand surprise. An ultimate shock. This will be catastrophic for the savers of debt and will be so traumatic to the system that total systemic entropy will be achieved. And a new system will have no choice but to emerge naturally from an absolute void of confidence.
But I am getting ahead of myself. Let's go back to Greece and my diagram.
If you have been following the news lately you have seen plenty of criticism directed at Greece, "the PIIGS", the euro and the ECB. But what you probably haven't seen in the news is what you get here, and what you get in the archives of Another and FOA, a more historic and proper perspective on the euro and what it means, why it was formed, and how it was designed like an iron bunker to weather just this sort of a systemic collapse. How, in fact, the architects saw this coming decades ago and planned accordingly.
Many pundits and analysts have been speculating that this "Greek debt crisis" could mean the end of the euro, the end of a broad-based euro, the break-up of the Eurozone, or something along those lines. But this analysis flows from the shallow and short-sighted thinking that has become the very hallmark of Wall Street and Washington. The euro was and is a political movement (remember I said that politics is one of the three key forces to watch) that spans decades if not centuries, and encompasses much more than just a transactional currency. It is comical to watch some of these Wall Street hot shots criticizing what is really quite an impressive accomplishment in the euro.
Jim Rickards explains some of the history behind the euro and its relation to the Greek debt crisis in a recent interview on King World News:
Eric King: I want to ask you about Greece. Because the Greek situation seems over-hyped as a way to talk down the euro. What are your thoughts on that, Jim? Because I know in another interview you pointed out that the Greeks have a lot of gold and could just sell some if they had to.
Jim Rickards: Yeah, the Greek gold position is not the whole story and it's not the whole answer, but it is significant. What's interesting is that people talk about the PIIGS, you know, with two I's. And of course that stands for Portugal, Ireland, Italy, Greece and Spain. And these are considered to be the weak members, if you will, of the euro system... of the Eurozone. And they all have different fiscal problems in various ways. But the amount of gold they have varies widely from a high which is Italy which has over 2,000 tonnes. Actually about 2,400 tonnes according to the World Gold Council.
Greece is less than that but still has a significant amount at over 100 tonnes, and then you have Ireland which only has 5 tonnes. So the amount of gold they have to back up their reserve positions, to, in effect, back up their central banks varies widely. And I've actually read the S&P and the Moody's, the ratings agency reports on these countries and they don't even mention gold!
[FOFOA: The PIIGS combined gold hoard is 3,233.8 tonnes, more than three times that of China. And their combined population is only 133 million. So the PIIGS actually have about the same amount of gold per capita as the US. And they have 34 times as much gold per citizen as China. In fact, Greece alone has 14 times as much gold per capita as China. China has 0.7 tonnes per million citizens. Greece has 10 tonnes per million and the PIIGS as a whole have 24 tonnes per million!]
I'm not saying it's the whole story. It isn't. And they don't have enough gold [at today's price] to retire their national debt. And I'm not saying that. I'm just saying that it's more dry powder. And it's another foundation for your monetary system. And to completely ignore it or disregard it, which the rating agencies do, is a little bit of a mistake.
So Greece does have a little backstop there and what you could do, for example, is that the Greek central bank could, with a phone call and a couple book entries, swap out their gold for euros and again, it wouldn't be enough to retire their debt, but it would be 3 or 4 billion euros at current market rates and that's not an insignificant amount of money. So it does give them a little bit of a lifeline.
But it's impossible to think about Greece without thinking about the euro system as a whole, because, of course, Greece is a member of that. I mean, does it have its fiscal house in order? No, not completely, but its debt to GDP ratio is only about one half of Japan's. Its deficit to GDP ratio is not that much worse than the United States. So they look bad compared to Germany, but they don't look that bad compared to other members of the G7 for that matter! So it's not as if they've been reckless, or it's not as if they're that different from all these other countries, but they have become the eye of the storm. For a while the Greek stock market was going down. Their interest rates were going up. Credit default swaps spreads were widening out. You know, maybe that was a good opportunity for day traders, but I wasn't really worried about Greece defaulting. I'm quite sure Greece will not default at the end of the day. They seem to be moving in the right direction.
But because their debts are denominated in euro, and because they're a member of the euro system, at the end of the day they are going to be backstopped by the ECB which ultimately is controlled by Germany. And the reason I say that is if you're Germany, and you're the ECB, and you're Trichet, and you start throwing members under the bus, where does that end? I mean if you allow Greece to default and, in effect, impugn the value of sovereign bonds denominated in euros, who's next? I mean it probably will be Ireland, and it will be Spain, and then it will be Portugal. And if you start losing four or five members, there goes the whole euro system. The whole thing falls apart and there's a flight from that currency.
Now the history of this is very significant. The euro system, and Greece in particular, those are not Wall Street piñata. I know traders like to bang them around, you know the spreads widen and then the spreads come in. There are trading opportunities there. But this is taken much more seriously by the Europeans. I mean you go all the way back to the Counter-Reformation in the late 16th century which was extremely bloody. And then the Thirty Years' War which was devastating. And then the Seven Years' War and the Napoleonic Wars, the Franco-Prussian War, World War One, World War Two... this is one catastrophe after another! And Europe literally destroyed itself and exhausted itself in fighting all these wars. And finally after WWII they said enough! We're going to pursue unification. It's the only way to keep from fighting each other.
Now, political unification has had modest success. Military and foreign policy unification has really had no success at all. But the crown jewel of European unification is their monetary system, the euro and the European Central Bank. So that's the pinnacle of their world historical efforts to unify the continent. They're not going to give that away lightly. I mean, they view it in a much broader historical context than Wall Street and Americans. And so it's of the utmost importance to them. And they're going to do everything they can to preserve it. And that's one reason, along with the gold, why I have confidence that Greece will not default.
And then following WWII and joining with the dollar in the new Bretton Woods system for stability, Europe stumbled through the shock of the London Gold Pool in 1968 and the end of Bretton Woods in 1971. And then in 1979, at the height of the dollar crisis, they formed the European Currency Unit (ECU) with an eye toward eventually introducing a unified currency. The ECU ultimately became the EMU with the introduction of the euro.
As I said in my Dead End post, "They came to the realization that the path the dollar (and the entire international monetary and financial system) was on was essentially a DEAD END. It was not sustainable! At some point in the future this system, and its MONETARY FOUNDATION, would (MUST) collapse. This was not a plot to collapse the dollar. It was, instead, a RECOGNITION of the inevitable!"
But I'm getting ahead of myself again. Let's get back to the money...
The current system of infinite debt accumulation is unsustainable and has been destined for collapse from the very beginning. There is no device in place for a periodic reset, and there is no automatic counterweight to balance ongoing trade deficits, correct imbalances and hold profligacy accountable. If it weren't for the hard fixed currency zone of the euro, Greece would be headed toward currency collapse and hyperinflation right now, just like in 1944, and just like Iceland, Argentina, Brazil, Zimbabwe, Weimar Germany, Bulgaria, Hungary, Peru, Bolivia, Ukraine, Yugoslavia and so many more.
The euro did not cause Greece's troubles. It has actually spared Greece the worst of it. The problem is the dollar system of debt accumulation that simply continues unabated until finally someone can no longer pay.
Jumping around a bit, what do you think gold, the stock market, fine art and houses all have in common? Their value is inversely related to the value of a dollar. If the dollar tumbles in value all of the above rise in their dollar price in response. This is the opposite of the relation between debt/bond instruments and the dollar. And this **THIS** is the concept we must all assimilate into the core of our being. On one side there is the transactional currency and the debt markets, and on the other side is everything else. And the transactional currency does not depend on a high valuation to perform its primary function. It can do its job as a medium of exchange with literally ANY valuation. So why is the global debt market, which is tied inseparably to this symbolic unit so damn big?
Why? Because of this...
Unfortunately ^_THIS_^ is about to collapse. The mountain has grown too large and the debt hole has been dug too deep. The ability to pay has come to its mathematical limit and now threatens the value of an entire planet-full of savings. First the US consumer and homeowner dropped off from the left side. Then Iceland and now Greece. Here is roughly what it looks like right now...
It is now a broken system where credit money is not circulating with sufficient steam to keep it viable. It is now reliant on A) the one debtor that can print its own debt service and B) the expansion of the monetary base at the center in order to replace the outlying losses.
Notice the growing concentric circles around the central bank and the cash. Here is what that looks like in an official graph...
All the other monetary aggregates contain credit money and debt assets that are generally very liquid and directly tied to the value of a physical dollar. These assets that we are taught are the same as dollars are the direct debt of certain approved corporate institutions. They are mere credits while the institutions engage in a murky game of financial smoke and mirrors with your real money. These credits may be the most dangerous of all during a systemic collapse as they are cloaked in a morass of legalese small print.
And as I have shown to some degree in this post, and in greater depth in past writings, these wider aggregates have little effect on the consumer price index we all watch so closely. The big secret of the central bankers is that it is the monetary base, the cash, that has the most effect from a quantity theory perspective. And it is systemic confidence (YOUR confidence in the system) that has an equal effect from a velocity perspective.
To demonstrate my point, I have adapted the above diagram to show what it looked like in Zimbabwe last year...
The important thing to remember is that the pile of debt on the right side of the diagram is fixed to the value of each individual physical dollar. So as the physical stuff is diluted to fill the void left by the failing credit/debt system, it directly impacts the real value of the debt market.
This is exactly where we are heading. So you have to ask yourself: With a whole planet-full of paper debt wealth, how long are the savers going to sit there waiting for their value to disappear? But the fact is that it doesn't matter how long they sit there. The only difference that will make is how much value they are going to lose. You see the system can no longer support their value on its own. This is clear from the housing crisis, Iceland and now Greece. But the system must go on so the very unit their value is fixed to must be diluted to infinity just to keep the circle spinning.
And infinity is truly the limit. Don't expect austerity or a deflationary collapse. Don't expect them "to do the right thing" and let the bad debt fail. There is simply too much of it out there. It is our entire global monetary system, not just the bond investors. There is no political will anywhere in the world to let the people's wealth simply vanish in order to maintain the value of a silly little physical dollar. This **THIS** is the big Catch-22!
In order to save the people's "money" it will be destroyed!
And the first thing to go will be the low price of gold. The depressed price of gold did many things for this failing debt system. It kept the savers, that didn't feel like braving the equity markets, going to the debt markets instead of physical items... "for a yield". It kept the heat on the debtors of the world, forcing them to pay off their debt in real, difficult terms, even though the same system made it ironically easy to get into debt. It made the dollar appear strong, as the numéraire of the debt markets. And it allowed the central banks a certain ease in shuffling reality around while maintaining a myth.
But most importantly, it provided an escape route for those savers who noticed the finite timeline of this system and sought safety. We can see that this group now includes the Saudis, the Chinese, the Russians, the Indians and the euro architects, among many others.
Probably the biggest and most visible (and visibility is one of the keys to collapse) problem with our system, reliant as it is on infinite debt accumulation, is that with the majority of the world at its mathematical limit, only one entity remains that is both willing and able to dig itself the infinite debt hole required to keep the system churning.
The problem is that this entity also controls the printing press of the numéraire of its own debt, so no one, or certainly not enough people with real credit money on the periphery, are willing to feed this black hole of moral hazard. So the only one left to fund this debt hole to the extent that is required is the Fed itself. And that means that the fuel needed to churn the credit money system is now fresh base money. And as this fuel flows out from the center of our diagram into the formerly credit-driven periphery, the center base swells like a red giant about to consume its own solar system.
This dilution of the base diminishes the real value of each unit with each unit of fuel that flows. And like an advanced alien civilization fleeing its dying sun, the savers will flee as they see this visible threat swell. Either that or their savings will be swallowed whole by that which was meant to protect them from the default of the "deadbeat" borrowers.
Default or devaluation. Only two ways to go. Catch-22. Math. Inevitable. Unavoidable.
Politics will force devaluation over default, inevitably, presently.
Self preservation will choose the only escape route not subject to economic health nor subject to credit-driven bubble deflation.
Freegold, then hyperinflation.
You see, the system, because it is made up of billions of humans, is like a living organism itself. It will seek out and find what it needs, which is an automatic mechanism to deal with imbalances and bring them back into sustainable equilibrium. That mechanism is extremely high-value gold. And the only way that can be achieved is the destruction of the paper gold-promise market.
The Nuclear Option
The ECB and the BIS have a secret weapon. They don't want to have to use it because they don't want to be seen as the instigators of the dollar's collapse. They would prefer the market to take care of it for them. But don't doubt for a second that they won't use it before sitting back and watching permanent damage come to the euro system.
Just imagine how Greece could deal with its problems if its gold were valued at $55,000 usd per ounce. In terms of current exchange rates that would raise Greece's liquid assets to 50% of its public debt. In other words, instead of being a "sub-prime" borrower, Greece would instantly become a PRIME borrower.
Let's say you owe $200,000 on your home which has fallen in value to $200,000. You aren't exactly underwater yet but your loan to value is 100% now, a precarious situation for someone with income and asset problems. Now let's say you also have $100,000 worth of gold. You could still walk away from your home if you chose to, but you are certainly not a foreclosure candidate anymore. And your future needs would be backed by your new asset base. Of course this would also give you a newfound incentive to get your fiscal house in order, lest you have to part with your gold!
This is freegold. And this is the secret weapon. Although it is not so much of a weapon as it is a defense... against the inevitable.
Rumors have been circulating for a few months now about some large physical buyers on the public LBMA being cashed out with a 25% premium and being sent to the private cash market to get their gold where such a purchase at a premium would not move the official price. This rumor suggests a relative shortage to demand for physical on the official price-setting markets. And this tightness is confirmed by the low GOFO or Gold Forward Offered rate reported by the LBMA which is currently languishing at lows only seen twice before. Both times in close proximity to backwardation events that both times signaled that the system was teetering on the edge of collapse, only to be rescued by some entity supplying physical gold to market at an intentional loss.
COMEX being in the US and the LBMA being in London leaves the ECB and the BIS with "the nuclear option" if things ever get desperate enough to use it. This nuclear option is A) for the BIS to begin operation of a public "physical only" market for gold to be used by the really giant participants, primarily sovereign entities and billionaires, and B) for the ECB to use the price discovered by the BIS in its quarterly reserve asset "marked to market" adjustments.
Such a move would put Greece, and all the PIIGS for that matter, in a much better position almost overnight. Of course it would have devastating effects on the value of the dollar and the rest of the paper gold market. You see, in order for the BIS to supply actual physical gold to each and every giant that was ready to buy, the price would have to rise high enough that someone else with an equally huge amount of gold was willing to become a seller. And right now, at today's prices, we know that the central banks of the world have become net buyers! So the question is, just how high would the price have to rise in order to balance out the demand of the world with the supply, in a physical-only official price discovery market?
Chances are that what would be revealed by such a market would have an eye-opening and breathtaking effect on the rest of the world and demand would skyrocket. What passes today for enough demand to almost break the paper markets would quickly shift all players from paper to physical and add new savers that hadn't even considered gold before. Literally, the entire world would shift its view to gold.
And because this would be a physical-only market in the presence of a credit money contraction it would have no way to bubble in price beyond actual demand. Instead it will finally plateau once the Thoughts of all the giants and savers of the world reach their Nash equilibrium. And the price will be high enough that it becomes a coin toss as to whether you'd rather be in cash or gold. What it will come down to is your own time preference and your appetite for investing back into an economy that must be rebuilt.
The euro architects knew the difference between the monetary functions. They knew that the infinite growth, store of value function was the dollar's Achilles' heel. So they designed the euro to be a stable transactional and accounting currency even if the world chose non-euro physical assets as a store of value. The dollar does not have this design.
This is not to say that the euro will not devalue against gold right along with the dollar. All infinite, symbolic, transactional currencies will, which is to say all currencies will. And to a lesser extent, all currencies will have to devalue against the rest of the finite real world as well. But they will not all hyperinflate to infinity in the aftermath as the dollar will be forced to. Some will. Others will not. The euro probably will not.
This is freegold. It is coming whether or not the euro uses its secret weapon. Like I said, they would prefer not to be seen destroying the paper gold market proactively. They would rather just wait until it destroy itself (which, by the way, it is doing pretty well).
But the unfortunate effect of this transition will be the panic that will ensue within the dollar camp. What has already started through QE, bailouts, stimulus and liquidity operations (base money creators all) will have no option but to accelerate to infinity. When I say no option, I mean that there will be absolutely no political will to do anything else.
So as we can see, we have math, political will and self preservation all coming together in a perfect storm as our entire system of infinite debt accumulation teeters on a knife-edge of instability. What could possibly go wrong?
Well, there's Greece I suppose. It usually only takes one little shock to bring down a house of cards. And this is why I say you cannot be prepared too early. There is no such thing when the stakes are so high. Preparation must happen early and completely. Because once this thing starts to unravel it will be too late to prepare and to even prosper from the foresight of an inevitable event. Once it all starts unraveling you will be completely preoccupied just trying to limit your losses.
This is where physical gold comes in. I have shown you what is wrong with the system when viewed from outer space. And I have shown you what is missing, and what will be found. And I have shown you how the really big money with really big foresight has prepared.
Notice that Greece and the ECB do not have palladium in their reserves. Just sayin'.
Of course you should also make other preparations to ensure that your bare necessities of food, clothing and shelter are taken care of. Some silver and even some dollar currency makes sense in this regard. This whole "gold thing" is really just for those people that have more money than they will need to live on for about a year. And it is for those that would like to store that excess wealth in the most universally liquid vehicle since they don't know exactly what they will be needing a year from now.
Perhaps they will need a generator. Or maybe a cow. Or maybe a gun. Maybe a new Ford F150. This is where gold comes in handy. You can store your wealth securely now in a universal package that should be convertible into the most needed things later. It can cost a pretty penny to be totally prepared now for every possible eventuality. Instead, it is best to prepare for the most probable events and keep a universal reserve for the unexpected!
But as a practical matter, because of the explosive potential in gold and because of the proximity of a likely event, many smaller investors are now piling in with their "six-months-out" money and then some. And to be honest, I can't really argue with their reasoning.
But what about the stock market? Someone emailed me saying,
"During a currency crisis in the western world, we may see a very powerful stock market rally as equities are a form of real asset. Better to own a piece of Procter and Gamble than a unit of currency that can devalue quickly. Look to the Argentina general equity market MERVAL index during the peso crisis. It shot up – although not as much as the 3:1 currency devaluation."
The writer answered his own point. The stock market shot up LESS than the currency devalued. So while the stock market in Argentina performed MUCH better than debt fixed to the value of the currency, it only chased - and lagged - actual inflation. (Actually, short term hyperinflation.)This is partly because the economy is usually in shambles at the time of a currency devaluation. So while you would expect real things like real companies to compensate for a falling currency, you must also weigh in any previous bubbling that might deflate and any economic factors that might reduce company profits.
But Argentina is still a good example for us to look at. In January of 2002 the currency devalued 3:1. At the same time the stock market rose in response to the devaluation and then stayed up (because the currency stayed down). But what is interesting about Argentina is that just prior to the devaluation, in December of 2001, inflation dipped into negative territory (deflation?) and the stock market dipped as well. Then they almost immediately exploded out of this head-fake in an unexpected devaluation. See the charts. The first is the MERVAL and the second is CPI:
Hmm... look familiar?
Bottom line: The stock market, because it represents equity not debt, will fare much better than the rest of the paper world. But the stock market does suffer from dilution, manipulation and bubbles. Expect the stock market to languish in economic chaos as it chases real inflation only to fall a little short.
But gold is different. The system desperately needs a counterweight, and gold is it. The counter is already in place, only the weight is yet to come. And once we have seen the reset in gold as it performs its phase transition from commodity to wealth reserve, it will then chase (hyper)inflation along with the rest of the "non-dollar" world, only it will be the ONE AND ONLY THING that will be immune to the economic mess that will still need to be worked out.
Got any gold yet?