World markets are discounting that something big will happen

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For my latest musings - please visit www.scottreeve.com
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This is my take on the world economy - Preserve your wealth while you still can!

The current talk is that the US and Europe may go back into recession. The reality is that they never left recession that hit in 2008. Bogus diluted statistics, such as inflation, unemployment rates have falsely portrayed the economic reality being felt by individuals in towns and cities around the world. Arguably many cities have been in depression for the last decade (look at Detroit and parts of Europe). The world economy is now on a detox diet and it will take many years, if not decades, to clean it up.

The markets are currently discounting that something very, very big is soon to happen. The markets always do this long before the average man on the street and the media realise it.

It could be a combination of things:
*country default;
* Euro monetary changes (Greece is insolvent, and other countries are close behind);
* central bank quantitative easing (monetising debt);
* major bank failure (particularly in Europe); and
* a significant slowdown in China.

All of these things are very real and we are already seeing the effects of this on world markets.


European contagion

All the major Euro countries are so intertwined lending billions to each other. A contagion will quickly spread when more of the bad debts rise to the surface.

Most of the current Euro-cris discussion is centred around Greece. By many measures its economy looks quite sick. It's sharemarket is now at its lowest level in 18 years (This is debt implosion!).

On other measures it certainly doesn't look as bad as other countries. Greece doesn't have the largest amount of government or private debts in the world, or the highest debt-to-GDP. One big difference is that it owes a much higher per cent of its debt to foreign creditors (foreign banks and countries).

Many argue that its non-sovereign entities which are clamping down on Greece. ie. the Global banking cartel led by the IMF, the World Bank, the Federal Reserve etc working in tune with the credit rating agencies (Moodys, S&P, Fitch). All I ask is what is the interests of the global banking groups? All actions to date show that they put their interests and survival ahead of everyone else. They do not care about the sovereignty of nation states.

So which countries banks' have the most at stake with Greece?

The following interactive chart I put together uses Bank for International Settlements data demonstrating which countries banks are most exposed to sovereign Greek debt as of the first quarter ending March 31 2011.

The most exposured banks are (by country):
French banks US$56.9 bn;
German banks US$23.8 bn;
UK banks US$14.7 bn;

The most exposed individual banks are:
BNP Paribas with US$7.1 bn (France)
Dexia with US$4.8 (Belgium)
Société Généralewith US$3.8 (France)

This is just the banks. When you add Government's holding Greek debt the amount is another US$145 bn.

Chart : There has been a huge widening of bony yield spreads and risk insurance on credit default swaps. Greece has gone parabolic. Portugal and Ireland are where Greece was a year ago.

or as Alan Kohler puts it, when the financial crisis hit last time in 2008, it was about liquidity (banks wouldn't lend to one another). This time around its about insolvency. There is plenty of cash around, but the banks might be broke.

Chart:
source: Alan Kohler, ABC News, Sept 2011

The dominoes are lined up

The next graph shows why the banking system is trying to fix Greece before it sets a precedent. You may have heard that Spain and Italy are "too big to fail, too big to bail". Europe bank exposure to Spain and Italy's are 6 to 7 times worse than Greece.

Chart :

The harsh reality is that no industry should be bailed out, including the banks from country to country. The ongoing debt crisis has come about because banks have lended and taken billion dollar bets to keep this unsound monetary system going (which is based on nothing but paper money generated out of nothing).

Monetary systems do blow up - why is the Euro any different?

One article I came across discuses that country default is more common than we are led to believe. There were a number of large defaults in the 1980s and 1990s in emerging countries across the Americas and eastern Europe. Economist Carmen Reinhart states that the list of deadbeat countries included

"current investor favorites like Brazil, which defaulted in 1983, went through a bout of hyperinflation in 1990 and effectively defaulted again, for the same reason, in 2000"

Reinhart and Professor Rogoff show that, on average, nations add 86% to their debt loads within three years of a credit crisis. At the same time, government revenue falls an average of 2% in the second year after the onset of the troubles. The way things are heading Greece and other Euro countries are heading down this path. Debts need to be rolled over...just like...a few snow flakes can lead to an avalanche.

The Stumble Cycle

Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are repeat offenders.

Chart :

The combination can be fatal for investors holding bonds issued by financially shaky countries like Argentina or Greece, which sell a lot of their debt outside their own borders (as does the U.S.--45% of all publicly held debt). As a nation's finances deteriorate, foreign investors sell their bonds, putting upward pressure on interest rates. That usually sets off a spiral including a deteriorating currency, which, if the bonds are denominated in foreign currencies, makes it impossible for the country to pay its debt. Greece doesn't have to worry about this last syndrome, because it uses the euro. But that might make things worse since it can't print its way out of its financial difficulties. "It's like entering a prize fight with one hand tied behind your back," Bass says. Argentina takes a different tack. Still struggling in the wake of its 2002 default on foreign-held debt, its president recently tried, and failed, to seize central-bank dollar deposits (and cashier her central banker) in order to repay overseas debt.

France

Following from earlier discussion, the big questions are which of the big European banks will go under first. The largest French banks, Credit Agricole and Societe Generale have billions in exposure to Greece and other Euro countries.

Chart : The share prices of the 3 largest French banks have fallen 73%, 87% and 87% since start the debt crisis started in 2008.



Italy

Until recently UniCredit was the largest bank in Italy by market capitalisation and a major euro-zone bank. It owns other large banks in Germany, Austria, and Poland with around 40 million customers all up. As the following charts shows, the market is dumping the two largest Italian banks. UniCredit is one of the "too big to fail and bail" euro banks and many of its depositors lie outside Italy, making and bail out practically impossible.

An ironic twist to this is that, UniCredit's predecessor was a bank called
Credit-Anstalt. This bank collapsed in 1931 which lead to a contagion which took Europe off the gold standard and pro-longed the Great Depression. Few people remain from the last depression era. Perhaps the money lessons need to be relearn?

Chart :



Australian dollar

The Australian dollar is a proxy for commodity prices and ultimately China. The Australian dollar has recently fallen sharply to 97 cents and has hit a major support level. If this fails there is another major support level at 94 cents.

Chart: The Australian dollar managed to bounce off the firs support level at US$0.97



Commodities

Overall commodity prices are not showing that China is in immediate trouble. Base metals: copper, zinc, nickel, lead etc are not in a major bear market yet. This may mean that the current correction will be short lived. If base metals start free falling and other negative signs come from China (popping of housing bubble?), than the Australian dollar and commodity prices will fall a lot (a huge amount) further.

Gold

Meanwhile, gold and silver have recently experienced a significant correction. Chart wise (USD/gold), gold's correction is not unhealthy. Gold was sitting at 11 year bull-market resistance line and its trending support line is about US$1550.

Chart:


As I posted recently, I believe the gold demand is getting stronger, and will remain strong, despite the recent price volatility. Since that post it has been reported that Mexico, Russia, South Korea and Thailand have all made large purchases in 2011 and globally, central banks are set to buy more gold this year than at any time since the collapse of the Bretton Woods system 40 years ago. The IMF even reported that European Central banks have started accumulating small quantities of gold after selling on average 400 tonnes of gold a year since 1999.

Silver

Silver plummeted last week by 34 per cent within trading days. It went straight through two key support levels and bounced back above them. After hitting a low of US$26.03, silver rebounded 28 per cent in 28 hours.

Chart: Silver fell 34 percent within 4 trading days, then bounced 28 percent within 28 hours


Is this volatility unusual? Silver is a very small market and historically has been prone to major corrections. My research shows that the major corrections in the last few years has lead to an increase in demand for physical silver (from mints and bullion dealers). I believe this will happen again.

Australia

Take away mining and Australia is in recession, and as I stated early, the key to the Australian economy is whether China can keep its economy upright. If it shows signs of weakness, commodity prices will collapse (along with oil, gold and silver) and the Australian Dollar will fall 10 or 20 cents against the USD.

China kept the world economy somewhat afloat during the global financial crisis, and is the sole reason why Australia didn't go and stay into a technical recession. One of the key barometers on the health of China is commodity prices.

Tourism has been in recession for many years now, in part to the high Australian dollar and a tightening of consumer belts.

Manufacturing has largely been in recession for a number of years except for businesses with astute management and niche business models.

Manufacturing insolvencies growing

Despite insolvencies around the world dropping to their lowest levels in nearly four years, Australia is headed in the opposite direction. This year is shaping up to be a record one for business failures on a par with troubled Eurozone countries. The most recent D&B Global Insolvency Index, ranking business failures in more than 30 key economies, found Australia's insolvency rate was on a par with indebted countries such as Italy, Spain and Hungary. Australia recorded a 12.1 per cent increase in business failures in the June quarter compared with falls elsewhere in the world of 5.7 per cent. D&B said its findings tied in with Australian Securities and Investments Commission data which pegged 2011 as a record year for insolvencies.

Business failures in manufacturing have soared 60 per cent in three years. Almost 300 manufacturing firms went broke in the first six months of this year, the business analyst Dun & Bradstreet says, and just 14 new manufacturers started up. By contrast, in 2008, 974 new manufacturers got off the ground, and only 392 folded.

Retail

Retail is finally entering recession. This has long been coming, even though the likes of Westfield (and other groups) have been creating mega-shopping centres around Australia. The whole retail industry relies on ever increasing amounts of debt (more credit cards and increasing consumption). This model is dead, and there is currently too much competition in Australia alone (before you look at internet shopping of overseas products on eBay and the like). Take electronics, there are so many major stores competing on price, and margins are getting thinner. Many of the private equity firms which bought up a lot of the retailers in recent years have failed, as over-inflated sales targets have missed the mark. In the last 12 months several major groups have entered administration: REDGroup (Borders/Angus and Robertson bookstores); Colorado Group (Jag, and shoe shops), Allied Brands (Baskin Robbins, Cookie Man), Krispy Kreme doughnuts, and Starbucks Australia. Most recently sharper falls in consumer spending has forced Harvey Normany to scrap its Clive Peeters and Rick Hart brands (7 stores to close) and David Jones announcing a 10.3% drop in fourth quarter sales and now expects a small profit for the new financial year.

Sizeable retrenchments are coming.


Housing

Chart:


Lastly, this is a very good presentation by Mike Maloney


Cheers
~ Scott

50 Factors Launching Gold

The following article is written by Jim Willie and published at Goldseek.com (which I came across on goldsilver.com)

It covers many areas I follow on this blog in a quick snap shot. State and local Government debt problems in the US are getting closer on the horizon. Gold and silver continues to advance against ALL government currencies (including in Australia).

Edification is not the word that comes to mind when observing an interview with Larry Fink of Blackstone this morning on network financial news. It was inspirational if not humorous, and somewhat pathetic. Of course the interviewer treated him like royalty, when just a syndicate captain, a Made Man. As a cog within the US financial hierarchy, he was asked why Gold is approaching record price levels near $1500 per ounce. He gave his best 10-second answer, showing no depth of comprehension but an excellent grip of propaganda laced with simplistic distortion. He said, "GOLD IS RISING FROM ALL THE GLOBAL INSTABILITY, AND NOT FROM INFLATION AT ALL." Sounds good, but it lacks much reflection of the world of reality burdened by complexity and interconnectivity that the enlightened perceive. At least he did not babble about Gold being in an asset bubble. It cannot, since Gold is money. It is curious that all the analysts, bankers, fund managers, corporate chieftains who did not advise on Gold investment over the last ten years are precisely whom the financial network news appeals to for guidance in the current monster Gold bull run. They knew nothing before, and they know nothing now. The major US news networks carry the Obama water while the USCongressional members carry the USBanker robes and show respect with genuflection before the priests. But guys like Fink are their harlot squires. Poor Ben Bernanke, despite his high priest position, does not gather a fraction of respect that Alan Greenspan did even though Alan presided over the collapse. The wild card possibly later this year or 2012 will be a national movement to force mandatory wage gains, and thus avert a national economic collapse. The squeeze is on in a powerful manner to both businesses and households.


ANOTHER STRONG GOLD BREAKOUT

As long as Quantitative Easing programs are in place and actively pursued, Gold & Silver prices will soar. The programs are urged by exploding budget deficits and absent USTBond demand. That translates to a ruined USDollar currency. Gold & Silver respond to the debasement and ruin. Efforts will become ridiculously stretched to save the USDollar, but will fail. QE will go global and secretive, assuring tremendous additional gains in the Gold & Silver price. No effort to liquidate the big USbanks will occur, thus assuring the process will continue until systemic breakdown then failure. The more extraordinary the measures to save the embattled insolvent fraudulent USDollar, the more the Gold & Silver price will soar. It is that simple. Gold & Silver will soar as long as central banks continue to put monetary inflation machinery to work. They are attempting to provide artificial but coordinated USTreasury Bond demand. In the process their efforts will continue to push the cost structure up further. In my view, since the Japan natural disaster hit with financial fallout, the Global QE is very much in effect, but not recognized as a global phenomenon. It pushes up Gold in uniform fashion worldwide.


50 FACTORS POWERING THE GOLD BULL

1) USFed is stuck at 0% for over two years and printing $1.7 trillion in Quantitative Easing, otherwise called monetary hyper inflation. They are not finished destroying both money and capital.

2) USFed tripled its balance sheet, with over half of it bonds of exaggerated value, while it gobbled up toxic mortgage bonds as buyer of last resort. The mortgage bonds have turned worthless. The USFed waits for a housing revival to bail itself out, but it will not arrive.

3) Debt monetization has gone haywire, as over 70% of USTBond sales from the USFed printing press. The QE was urgently needed, since legitimate buyers vanished. Even the primary dealers have been reimbursed in open market operations within a few weeks.

4) PIMCO has shed its entire USTreasury Bond holdings, seeing no value. They joined many foreign creditors in an unannounced buyer boycott in disgusted reaction to QE which is essentially a compulsory unilateral debt writedown.

5) Growing USGovt deficits have run over $1.5 trillion annually, with absent cuts, obscene entitlements, endless war. The prevailing short-term 0% interest rates are out of synch with exploding debt supply and rising price inflation.

6) Unfunded USGovt liabilities total nearly $100 trillion for medicare, social security, pensions, and more. The obligations are never included in the official debt. It represents insult to injury within insolvency.

7) Standard & Poors warned that USGovt could lose AAA rating in lousy credit outlook, one chance in three within the next two years. Ironically, the announcement came on the day when the USGovt exceeded its debt limit. The network news missed it.

8) State & Municipal debt have collapsed, as 41 states have huge shortfalls, and four large states are broken. They might receive a federal bailout. It could be called QE3, maybe QE4.

9) Coordinated USTBond purchases from Japanese sales have relieved the USFed, as other major central banks act as global monetarist agents. The sales by Japan are vast and growing. Witness the last phase in unwind of Yen Carry Trade, where 0% borrowed Japanese money funded the USTreasury Bonds and US Stocks.

10) Quantitative Easing, a catch word for extreme monetary inflation and debt monetization, has become engrained into global central bank policy, soon hidden. It is so controversial and deadly to the global financial structures that it will go hidden, and attempt to avoid the furious anger in feedback by global leaders. This is the most important and powerful of all 50 factors in my view.

11) The FedFunds Rate is stuck near 0%, yet the actual CPI is near 10%, for a real rate of interest of minus 9%. Historically a negative real rate of interest has been the primary fuel for a Gold bull. This time the fuel has been applied for a longer period of time, and a bigger negative real rate than ever.

12) The USGovt claims to have 8000 tons of Gold in reserve, but it is all in Deep Storage, as in unmined ore bodies. The collateral for the USDollar and USTreasury debt is vacant. It is in raw form like in the Rocky Mountain range or Sierra Nevada range.

13) Fast rising food prices, fast rising gasoline prices, and fast rising metals, coffee, sugar, and cotton serve as testament to broad price inflation. So far it has shown up on the cost structure. Either the business sector will vanish from a cost squeeze or pass on higher costs as end product and service price increases.

14) The entire world seeks to protect wealth from the ravages of inflation & the American sponsored QE by buying Gold & Silver. The rest of the world can spot price inflation more effectively than the US population. The United States is subjected to the world's broadest and most pervasive propaganda in the industrialized world.

15) The European sovereign debt breakdown with high bond yields in PIIGS nations points out the broken debt foundation to the monetary system. The solutions like with Greece in May 2010 were a sham, nothing but a bandaid and cup of elixir. Spain is next to experience major shocks that destabilize all of Europe again, this time much bigger than Greece. The Portuguese Govt debt rises toward 10% on the 10-year yield, while the Greek Govt debt has risen to reach 20% on the 2-year yield.

16) Germany is pushing for Southern Europe bank climax in their Euro Central Bank rate hike. Europe will be pushed to crisis this year, orchestrated by the impatient and angry Germans. They have no more appetitive for $300 to $400 billion in annual welfare to the broken nations in Southern Europe.

17) Isolation of the USFed and Bank of England and Bank of Japan has come. The small rate hike by the European Central Bank separated them finally. The Anglos with their Japanese lackeys are the only central banks not raising rates. With isolation comes all the earmarks on the path to the Third World.

18) The shortage of gold is acute, as 51 million gold bars have been sold forward versus the 11 million held by the COMEX in inventory. Be sure that hundreds of millions of nonexistent fractionalized gold ounces are polluting the system. Word is getting out that the COMEX is empty of precious metals.

19) Such extreme Silver shortage has befallen the COMEX that the corrupted metals exchange routinely offers cash settlement in silver with a 25% bonus if a non-disclosure agreement is signed. The practice cannot be kept under wraps, as some hedge funds push for fat returns in under two months holding positions with delivery demanded.

20) China has begun grand initiatives to replace its precious metal stockpiles. They are pursuing the Yuan currency to become a global reserve currency. As they build collateral for the Yuan, they are also elevating Silver as reserves asset.

21) A global shortage of Gold & Silver has been realized in national mint production. From the United States to Canada to Australia to Germany, shortages exist. Many interruptions will continue amidst the shortages, which feed the publicity.

22) The Teddy Roosevelt stockpile of 6 million Silver ounces was depleted in 2003. He saw the strategic importance of Silver for industrial and military applications. The USEconomy and USMilitary will turn into importers on the global market.

23) The betrayal of China by USGovt in Gold & Silver leases is a story coming out slowly. The deal was cut in 1999, associated with Most Favored Nation granted to China. But the Wall Street firms broke the deal, betrayed the Chinese, and angered them into highly motivated action. No longer are the Chinese big steady USTBond buyers, part of the deal also.

24) Every single US financial market has been undermined and corrupted from grotesque intervention, constant props, and fraudulent activity. The degradation has occurred under the watchful eyes of compromised regulators. Fraud like the Flash Crash and NYSE front running by Goldman Sachs is protected by the FBI henchmen.

25) The USEconomy operates on a global credit card, enabling it to live beyond its means. The USGovt exploits the compulsory foreign extension of credit in USTBonds, by virtue of the USDollar acting as global reserve currency. Foreign nations are compelled to participate but that is changing.

26) The USMilitary conducts endless war adventures for syndicate profits. They use the USTreasury Bond as a credit card. The wars cost of $1 billion per day is considered so sacred, that it is off the table in USGovt budget call negotiations, debates, and agreements.

27) Narcotics funds have proliferated under the USMilitary aegis. The vertically integrated narcotics industry is the primary plank of nation building in Afghanistan. The funds keep the big US banks alive from vast money laundering.

28) No big US bank liquidations have occurred, despite their deep insolvency. Any restructure toward recovery would have the liquidations are the first step. The USEconomy is stuck in a deteriorating swamp since the Too Big To Fail mantra prevents the urgent but missing step.

29) The unprosecuted multi-$trillion bond fraud over the last decade has harmed the US image, prestige, and leadership. The main perpetrators are the Wall Street bankers and their lieutenants appointed at Fannie Mae and elsewhere. They bankers most culpable remain in charge at the USDept Treasury and other key supporting posts like the FDIC, SEC, and CFTC.

30) The ugly daughters Fannie Mae and AIG are forever entombed in the USGovt. They operate as black hole expenses whose fraud must be contained. The costs involved are in the $trillions, all hidden from view like the fraud. Fannie Mae remains the main clearinghouse for several $trillion fraud programs still in operation.

31) The US banking system cannot serve as an effective credit engine dispenser, an important function within any modern economy. It is deeply insolvent, and growing more insolvent as the property market sinks lower in valuation. The banks lack reserves, and hide their condition by means of the FASB permission to use fraudulent accounting.

32) The big US banks are beneficiary of continuous secret slush fund support from the USGovt and USFed. Their sources and replenishments have been gradually revealed. The TARP Fund event will go down in modern history as the greatest theft the world has ever seen, easily eclipsing the biggest mortgage bond fraud in history.

33) The insolvent big US banks continue to sit at the USGovt teat. The vast umbilical cord of banker welfare has not gone away. Goldman Sachs still is in control of the funding machinery.

34) The shadow banking system based upon credit derivatives keeps interest rates near 0%. The usury cost of money is artificially low near nothing. As money costs nothing, capital is actively and rapidly destroyed.

35) A vast crime syndicate has taken control of the USGovt. A vast crime syndicate has taken control of the USMilitary. A vast crime syndicate has taken control of the USCongress. A vast crime syndicate has taken control of the US press networks.

36) A chronic decline of the US housing sector keeps the USEconomy in a grand decline with constant deterioration. With one million bank owned homes in inventory, a huge unsold overhang of supply prevents any recovery of housing prices. Home equity continues to drain, and bank balance sheets continue to erode.

37) Over 11 million US homes stand in negative equity. The sum equals to 23.1% of households. They will not participate much in the USEconomy, except when given handouts. They have become downtrodden.

38) The USEconomy will not benefit from a export surge. The US industrial base has no critical mass after 30 years of dispatch to the Pacific Rim & China. The industry must contend with rising costs in offset to the falling USDollar, which is cited as providing the mythical benefit. Then can export in droves if they do so at a loss.

39) A global revolt against the USDollar is in its third years. The global players work to avoid the US$ usage in trade settlement. Several bilateral swap facilities flourish, mostly with China. If China supplies products, then the Yuan currency will be elevated to global reserve currency.

40) Global anger and resentment over three decades has spilled over. The World Bank and IMF have been routinely used by the US bankers to safeguard the USDollar and Anglo banker hegemony. Neither financial agency commands the respect of yesteryear.

41) A middle phase has begun in a powerful Global Paradigm Shift. The transfer moves power East where the wealth engines of industry lie, far from the fraudulent banking centers. The next decade will feature the Chinese as bankers, since their war chest contains over $3 trillion.

42) The crumbling global monetary system was built on toxic sovereign debt. Legal tender has been nothing more than denominated debt posing as legitimate by legal decree. That is what word FIAT means. The system is gradually breaking in an irreversible manner.

43) The global central bank franchise system has been discredited. It is a failure, which is not recognized by the bank leaders still in charge. The stepwise process of ruin continues with a new sector falling every few months. Next might be municipal bonds.

44) Witness the final phase of a systemic cycle, as the monetary system has run its course. It is saturated with debt from faulty design. The deception cited in the mainstream media focuses upon the credit cycle which will renew. It will not. It will break of its own weight and lost confidence.

45) The recognition has grown substantially that suppression of the Gold price has been the anchor holding fiat system together. The Chinese realize that Gold, when removed, leads to the collapse of the US financial system. They realize it more than the US public. But the syndicate in control of the USGovt understands the concept very well, as they designed the system.

46) The institution of a high level global barter system might soon take root. Gold will sit at its central core, providing stability. No deadbeat nations will participate. That includes the United States and several European nations. The barter system will be as effective as elegant.

47) The movements spread like wildfire in several US states to reinstitute gold as money. In a few states, led by Utah and Virginia, progress has been made for Gold to satisfy debts, public & private. Consider the movement to be in parallel to the Tenth Amendment movements.

48) Anglo bankers have lost control in global banking politics. The phased out G-7 Meeting is evidence. China has wrested control of G-20 Meeting, and has dictated much of its agenda in the last few meetings. The US has been reduced to a diminutive Bernanke and Geithner being ignored in the corner.

49) New loud stirrings by Saudi Arabia seek a new security protector. If security is no longer provided by the USMilitary, then the entire defacto Petro-Dollar standard is put at risk. Remove the crude oil sales in USDollars exclusively, and the US sinks into the Third World with a USDollar currency that cannot stand on its own wretched wrecked fundamentals.

50) The IMF solution to use SDR basket as global reserve is a final desperate ploy. By fashioning a basket of major currencies in a basket, they attempt to enforce a price fixing regime. It is a hidden FOREX currency exchange rate price fixing gambit that will invite a Gold price advance in uniform manner across the currencies bound together. This ploy is being planned in order to prevent the USDollar from dying a horrible death at the expense of the other major currencies. By that is meant at the expense of the other major economies which would otherwise have to operate at very high exchange rates.


THE BIGGEST UPCOMING NEW FACTORS

Introduction of a New Nordic Euro currency is near its introduction. The implementation with a Gold component will send Southern European banks into the abyss, marred by default. The new currency has the support from Russia and China, even the Persian Gulf. In my view, it is a USDollar killer. The first nations to institute a new monetary system for banks and commerce will be the survivors. The rest will slide into the darkness of the Third World.

Gold & Silver seem to be the only assets rising in price, an extension of a terrific 2010 decade. The exceptions are farmland and the US Stock market. However, stock valuations are propped by constant and admitted USGovt support. Their efforts are mere attempts to keep pace with the USDollar decline, as stocks merely maintain a constant purchase power.

A hidden overarching hand seeks the global Gold Standard as the bonafide solution. Darwin is at work, but Adam Smith turns a new chapter. The crumbling monetary solution demands a solution. Further investment in the current system assures a devastating decline into the abyss of insolvency and ruin.

Australia – selling our (fake and real) money to the world

Playing with toy money

If a child tried to pay for lollies at a tuck shop with notes from the Monopoly board game, the shop staff would know instantly that it was fake money... Yet in today’s society, we commonly accept and take for granted the polymer banknotes which we use every day as “money”. They are both just pieces of paper, so what’s the difference? They are both forms of currency, but accepted under entirely different circumstances. Paper money today, whether it be Australian Dollars or Zimbabwe Dollars are deemed valuable, only if the population believes it should represent value. We still believe a $50 Australian dollar note is worth $50 dollars – because that’s what the note tells us. However, we are aware that a $50 note today doesn’t buy as much as it did 10 years ago. Despite the knowledge that inflation is eating away at our purchasing power, we continue to be loyal to our currency. One day this will change, and it will be just monetary history repeating .

Fake (Fiat) vs Real Money

Part of the money problem today is that the definition of money has changed over the generations. Few people alive today were alive in the 1920s or 1930s when coins actually had silver in them, where your savings in the bank held its purchasing power, because our money was linked to gold. 100 Years ago, gold and silver were referred to as money, as it was the lifeblood to the monetary system. Today gold and silver are.... gold and silver, and banknotes and circulating coins are referred to as money. Another way to put it, gold and silver has and always will be real money, as it is a finite resource, while banknotes and circulating coins are merely currency. Currency is not money! It’s a fake, and more and more people will realise this over the coming decade as inflation dilutes our currency, while at the same time, increasing the value of real money (gold and silver).

Banknotes used to represent value

Historically banknotes were merely receipts for “real” money, that is, gold and silver. If you deposit 1 ounce of gold, you got a banknote (a receipt) which said it was redeemable for the amount written on it. In the US, its Constitution was written to include , that "No State shall...make any Thing but gold and silver Coin a Tender in Payment of Debts." Therefore, up until 1933, US banknotes held the words “Redeemable in gold on demand at the United States Treasury”. (confirming the role of the banknote as a receipt). In the Australian Constitution, Section 115 establishes the same principle, that “a state shall not coin money, nor make anything but gold or silver coin a legal tender in the payment of debts”.

The Constitution is our legal and political rule book (in this instance in Australia, Section 115 is the rule for monetary policy), but despite this, in 1971 the principle of backing a currency with real money was removed, when President Nixon removed the gold window for US Dollars, thus making the US Dollar and all other currencies in the world completely fiat (money declared by a government to be legal tender). In other words, between 1946 and 1971, any nation could hand in their US Dollars (receipts) and buy gold from the US for US$35 dollars a troy ounce.

Because the US printed extra dollars to pay for a negative trade balance and increasing inflation, other countries (particularly France, Switzerland and Great Britain) began to convert/redeem their US Dollar reserves with US gold. Thus the US had no choice but to abandon the system in order to preserve its gold. However, following this change, the US Dollar remained the world reserve currency, despite there no longer a requirement to link the Dollar to gold. Thus an endless money tree was born – and now around 70 per cent of the world’s currencies are denominated in US Dollars (with half of these Dollars residing outside the US).

Private bankers control our monetary system – not Governments

After explaining this brief history, there is one critical element which has not been covered. Since 1913, the Federal Reserve has been responsible for issuing currency in the United States. The Federal Reserve is a non-Government, private corporation which has private shareholders. It was established by private European bankers from families such as the Rothchilds, and Warburgs. These private banking families still remain shareholders of the US Federal Reserve, and thus have direct control over world monetary policy – through the US Dollar, and through the debt based Fractional Reserve Banking system. If the US Government can issue bonds, why does it need a private banking consortium to issue currency for the people? (I will go into greater depth another time).

Likewise in Australia, Australia’s banknotes and coins are issued in the same was that US Dollars are issued in the United States. For one year in 1910, Australia’s notes and coins (Pounds) were controlled by the people, under the Treasury Department. By 1911, the Commonwealth Bank was given powers to issue banknotes (however this was not made law until 14 December 1920 through the Notes Issue Board), and given central banking powers in 1945. The convertibility of Australian banknotes into gold effectively ended during World War I. In 1959, the central banking powers held by the Commonwealth Bank were transferred to the new Reserve Bank of Australia (RBA). Like the recently created Future Fund, the RBA is not a Government Department, but an independent statutory authority. Essentially the RBA make decisions on monetary policy (how much money (or inflation) to print) – just like the Federal Reserve has the power to influence the US Dollar (and economy through interest rates) in anyway it sees fit.

So why do we have confidence in paper money such as Australian Dollars today? Why do we allow bankers to control our money (by inflating it continually year in year out, largely through fractional reserve banking). Aren’t we just using Monopoly (Central Bank controlled) money?

So now that we know Australia no longer backs its Dollars with gold, what has the RBA done with our gold?

The Australian Government sold "our" gold

In early 1997 the Reserve Bank of Australia held nearly 250 tonnes of gold bullion reserves. By July 1997, the RBA sold 167 tonnes, reducing its holdings from 247 to 80 tonnes (selling some 6 million troy ounces). That 167 tonnes of sold gold is now worth an extra US$4.2 billion more 12 yrs later. What will it be worth in 10 years time? More importantly, what sort of purchasing power will that gold have in 10 years time (remember, there is a huge difference between price and purchasing power!) It’s ok for the RBA to make such a mistake though?

The RBA, the bankers, sold our gold (our money) near the bottom of the commodity cycle so it could leverage its balance sheet to speculate in fake money (currencies).

It’s even in the RBA’s charter that:

'It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.'

I would argue that the RBA, and all other central banks around the world are:

A) Increasing the instability of the currency
B) Creating fake job opportunities through the current monetary system (eg. How many jobs rely on an inflation society – superannation, sharemarket, house prices inflating. ie. Bankers, accountants, lawyers...)
C) Decreasing the economic prosperity and welfare of the people of Australia (through the debt-based fractional reserve banking system to ensure businesses and individual become enslaved to the banks)

Anyway, its ok for Australia, we are naturally endowed in gold. We have enough gold in the ground to replenish and to restore to a more sound monetary system in the future – right? Only if our politicians, and everyone else learn basic monetary history. We are conditioned at school, amongst other things, to be savers, not investors - to rely on debt to buy “assets”. It is not a coincidence Australia is now a consumption/services economy today (and why we are willing to sell our gold dirt cheap).

Taking this one step further, from a different angle, lets examine what Australia, as a country does with its real and fake money. The great paradox is that Australia is well endowed in both real and fake money. We are a major gold producer/exporter (real money) and a significant producer and innovator of banknotes (fiat money).

1. Fiat Money

Note Printing Australia (NPA) - a wholly owned subsidiary of the Reserve Bank of Australia, prints the banknotes for Australia, New Zealand and a handful of other countries. In 2008, it exported 182 million (fiat) banknotes.

Securency International – 50 per cent owned by the Reserve Bank of Australia, prints the polymer substrate for banknotes which is used by 27 countries around the world. In 2008, it supplied polymer substrate to 13 countries. The company now has substrate manufacturing plants in Mexico to supply Latin America.

Both NPA and Securency achieved similar profits in 2008 to 2007.

So it appears Australia has been a world leader in the evolution of currencies, and has done modestly out of exporting banknotes (receipts) and banknote technology.

Let's compare to Australia's recent achievements selling real money.

2. Real Money

Lets now examine Australia’s production and export of real money – specifically gold.
For anyone who may not be aware, Australia and the world is currently experiencing a major bull market in gold and silver. With the explosion of Government and private debt, it is inevitable that more and more people will flock to real money, as opposed to printed money. We are currently halfway through a normal commodities cycle (which started in 1999). I feel this will be no ordinary cycle,but a once in a lifetime opportunity for a large wealth transfer to those who hold real money (particularly silver).

Until more recently, Australia, like South Africa, has had declining gold production for the past couple of decades. China became the world’s largest gold producer in 2007, but Australia should resume number 2 spot in 2009. If we compare the Australian Government’s view of gold to that of China, we get two completely different views. Australia is short-sighted, we see gold as a commodity export earner only, to fuel our consumption/services economy. On the other hand, the Chinese central Government is slowly accumulating gold and is buying most of its domestic production (oddly enough, an Australian company, Sino Gold is China’s largest gold producer). China is about to overtake India as the world’s largest buyer of gold.

Recent trade statistics supports this view. In 2008, Australia exported $14.3 billion worth of gold (up 27% on 2007), of which nearly 40 per cent was exported to India. Australia is also a major importer of gold, importing nearly $9.7 billion (up 59% on 2007), reflecting Australia’s niche capability in refining gold dore’ bars. Most of this gold is then re-exported.

This then leads into: AGR Matthey. This company (40% owned by the Perth Mint) refines about 60 percent of Australia’s annual mined gold. AGR Matthey refines the dore bars into 99.9% gold bars.

Now, the most interesting part of this post.

The Perth Mint - is one of only about six bullion mints in the world (partly owned by WA Govt). It is a top 50 export earner for Australia, with over 90% of its products exported overseas. It is Australia’s largest gold refiner (under the name Gold Corporation) and refines about 60 per cent of Australia’s annual gold production.

The Perth Mint recently released its annual report for 2008-09.

The growth in volume and profit is quite staggering for only one year. The Perth Mint is selling real money to the world, and making very handsome currency profits.

- A ten fold pre-tax profit increase to $38 million (up from original forecast of $4.9 million).
- Sales of coins, bars and medallions up 50 percent to 2.7 million units.

What I find most interesting is the growth in metal volumes. Here are my calculations based on their recent annual reports.

Graph 1:
To me, silver is the clear stand out in growth.

Analysing further:
- Averaging 100% volume growth per annum over the last 5 years.
- The 229 tonnes of silver produced in 2008-09 equates to 7.36 million troy ounces of silver (vs. 4.5 million in 2007-08).
- Excluding the last couple of years of silver product production, 229 tonnes is more than all the Perth Mint silver coin production for a 20 year period from 1987.

Clearly silver is exploding in growth, but only about 1 in 100 people would know this. But why?

Silver's price is biscuits compared to gold, and yet silver is 4 to 5 times rarer in gold today! This is because silver is still heavily manipulated by two US based banks on the NY COMEX exchange. No other investment opportunity I have studied comes close to the potential of silver. This may seem uncharacteristic to overstate such a claim, but do not take my word, study and draw your own conclusions. To determine if gold and silver are going to be good long-term investments will largely depend on your 10-20 year outlook for the world economy and for inflation. It's better to do a bit of study than to put it into the too hard box. I believe big inflation, political and social instability is almost all but inevitable because the current debt-based monetary system is broken. It’s just monetary history repeating. All past fiat currencies have collapsed to their true value - zero. There are times when fiat currencies, and debt are king (post WWII to 1999), and there are periods when real money is king, and is the only form of accepted money (other than barter). Don’t take my word for it. Like any investment, it is important we do our own due diligence. We must embrace individualism and always look outside the box (tv screen).

This post is starting to hit the crux to the reasoning behind why I first set up this blog. Understanding basic monetary history and having an awareness of current monetary events are vital if we are to shed some light on where the world economy is heading to in the next decade.

Best,
Scott

Concluding thought:
A few weeks ago I visited the Perth Mint, and one thing I found most intriguing is that it’s large gold bar collection is owned by N M Rothschild & Sons (of London). The same, famous banking dynasty which set-up the first central bank, the Bank of England, and later the Federal Reserve in the US. More on central banking soon...

Saving Printed Money

A couple of weeks ago Alan Kohler of BusinessSpectator.com.au wrote an article detailing a complete reversing in money habits of Australians. We are now net savers, the highest in nearly two decades.

Australians saved $15.1 billion in the December quarter, lifting the savings rate to 8.5 per cent, the highest in 18 years.

The amount saved during 2008, according to Westpac’s economists, was equal to all the savings of the previous 11 years combined, and it subtracted 5 per cent from demand – the largest drag on GDP from savings since 1960.

Saving used to be safe?

People always look to increase savings in uncertain times. Unfourtately, in my opinion only, most Australian's are saving the wrong type of money. Putting your dollars in the bank used to be a relatively safe, conservative investment a few decades ago, but no longer is for two main reasons.

#1) Our currency is backed by nothing
#2) You go backwards saving today due to inflation


Reason #1:

The Australian Dollar (and its physical coins) used to be backed by gold and silver. Well at least up until 1971, when U.S. President Richard Nixon closed the gold link, and in effect making all currencies around the world truely fiat, backed nothing more but our confidence in Government (whom prints the money). To best illustrate my point consider these two scenarios.

* If you put $1 dollar under your bed in the year 1801 and kept it there for 100 years, it would still be worth around $1. ie. It would still hold its purchasing power.

** However if you put $1 dollar under your bed in 1901 and kept it their again for 100 years, it would only be worth around 3 cents. The other 97 cents has been lost to inflationary (and we have had a massive decrease in purchasing power).

This is the first main reason why knowing the difference in money over time can mean a huge difference in your power to save. We currently live in a monetary environment which punishers savers and encourages inflation, debt and easy money.

So why the huge difference? A $1 coin 200 years ago was backed by gold and/or silver (gold standard). Today there is no link to gold, and through the printing presses and fractional reserve banking, the total supply of money grows by 1 or 2 digits each year. The more new money, the more inflation (decrease in purchasing power).

Australians are saving the wrong type of money

This is why I believe the bulk of Australians are saving the wrong type of money. There is a huge difference between currency and money.

Australian Dollars (currency), will be highly susceptible to future inflation (decrease in purchasing power).

Conversely, everyone should be saving “money” (gold and silver) which is finite in supply. Historically, gold and silver is the most sought after tangible form of money. Many monetary economists often refer to it as “real” money. It’s real, its finite and it becomes obvious if you try to manipulate and expand its supply.

Australia’s notes and coins

As stated previously, the notes and coins in Australia today are backed by nothing but our faith in Government. Today in Australia our coins have nickel, copper and other metals in them (see Trivia at bottom of post on the 1966 round 50 cent coin) – there is no monetary metals in them. There is really no tangible difference between a $5 note and a $100 note – except that the Government tells you one is more valuable than the other. In reality, our money today is backed by nothing. It hasn’t been backed since 1971, and right now it is being printed by the Government (including Australia) like there is no tomorrow.

So the “real” money Australians should be saving is gold, silver. Avoid cash. “cash is trash”. The importance of this difference should not be understated.


Reason #2:

Inflation statistics are manipulated (see a more detailed post I did >here<)

Last year in 2008, Australia’s M3 money supply (the broadest measure of money supply) grew by 15 percent. M1 money supply (notes and coins and short term deposits) grew by 12 percent.

So I ask why are official interest rates in Australia dropping like a falling knife in the last few months? (Ans: The central bank and Government is lowing interest rates because they want to manipulate investment decisions - get financially uneducated young people into the top of the largest property bubble in Australian history.)


If interest rates were left to the market (a scenario before we had central banks), interest rates would be climbing sharply right now into the double digits (and we wouldn’t have huge bubbles bursting in the sharemarket and property market). The market would actually be encouraging people to save (what should happen), and not encourage people to take on more bad debts.

So if money supply grew by 15% last year, why are term deposits paying 4.5 percent at the bank currently? Inflation is much worse than what the bank is paying out in interest!

It turns out Treasurer Wayne Swan was actually right! when he talked about the “Inflation Genie is coming out of the bottle” – but of course he no longer believes this.

Yes, money supply growth (inflation) will likely slow substantially in 2009, but “stimulus” actions taken so far, and the greater role of Government trying to centralise the economy will bring highly inflationary consequences in two to three years from now.

Don’t buy the statistics thrown willy nilly by the Government, by the ABS or by the media. Everybody knows that 78 percent of statistics are made up. The numbers being released are overwhelmingly and increasingly more un-believable.

(Refresher example: You only need to work 1 hour a week to not be included in the Unemployment Rate number. How many Australians have had their hours cut in half in the last 12 months, or working a lot less than they would like?)


Be concerned about inflation, not deflation!

In the last year many economists are talking about a deflationary depression. An important distinction must be made. The world, including Australia is experiencing asset deflation, all the while most economies are expanding their money supply (through printing, fractional reserve banking etc (measured via M0, M1, M2, M3 money supply)).

Ignore the advice the U.S. Government, the Treasury Secretary Timothy Geither or the Fed’s Ben Bernanke’s rhetoric (likewise the equivalent in Australia). Watch their actions instead. All signs point to more asset deflation and a huge amount of future inflation (of food, commodities, rents and other basics).

Asset deflation needs to happen. Bubbles must burst. Sharemarket bubbles are been bursting and we are already at pre-bubble levels in most major markets. Property markets are bursting as well and we are yet to see things really heat up in Australia yet.. It’s happening in commercial property already. Industrial, rural and residential will not be spared. Expect minimum 40 to 50 percent falls within the next few years.

Toxic Bank/Rudd Bank/Other Government-made institutions.

I will discuss these later this week, after the expected “big” news coming from Timothy Geither in the U.S. As i’ve said previously, no government-made institution or printed money can reverse the direction of the market. Expect news of more helicopter drops of money which will fall into the growing black hole (of debt deflation).

Part of the Govenrment response so far is the government guarantee of deposits in the major banks in Australia. Why would you want them guarantee dollars which are loosing purchasing power? If they had to save our banks the only way they could uphold their guarantee promise is to print hundreds of billions of dollars, thus lowering the purchasing power of your savings substantially.


Conclusions:

- Study basic monetary history
- Save some ‘real’ money, not fiat money
- Australia's money supply is growing at its fastest rate in 20 years, while Australia's gold production has been declining for over a decade. So which will increase its purchasing power in the next 10 years?
- Savings should be a core investment for anyone... but it depends what you save.
- Do you have trust in the bank guarantee to protect your inflated-dollars?
- If you could print your way out of trouble, Zimbabwe would be the richest nation on earth! (gold is worth Trillions of Dollars over there!)

Best,
Scott

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Trivia

Ever wondered why the 50 cent Australian coin is not round like the 20c, 10c and 5c? Well it used to be.

In 1966 the Canberra Mint released a round 50 cent coin (each round coin was progressively larger from 5c to 50c). The round 50 cent was 80 percent silver and 20 percent copper (containing 1/3 ounce of silver). Unfortunately for the Australian Government the price of silver appreciated some 60 percent for the year to the end of 1966. There was now more than 50 cents worth of silver in each 50 cent coin. As a result the coins were replaced the very next year with the 12-sided 50 cent coin.
The original 1966 round 50 cent coins now sell for over A$8 dollars each on eBay and are still seen as an (bullion) investment in physical silver. Around 14 million round-1966 50 cent coins were put into circulation.

Likewise the bronze 1 cent and 2 cent coins were removed from circulation in 1991 due to the metal (copper, zinc, tin) exceeding face value.
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Trivial?

Recently I travelled on a holiday to Vietnam. The first question Vietnam’s Customs asks you on entry is:

“Are you bringing in more than 300 grams of gold?” ... now why is this?

A few years ago Vietnam had one of the lowest valued currencies in the world. It has been experiencing huge inflation. Last year the reported inflation rate of Vietnam was 26 percent. If this is the Government’s reported statistics – imagine what the real rate is....

Its a cash society. Everyone has little small bundles of cash hidden in their homes, but everyone knows that gold and silver is finite and that it has value.

It’s just that some countries understand the monetary significance of gold and silver. Australia is yet to learn this lesson.
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Money Supply, Debt, Inflation and Purchasing Power!

Today I detail over money supply and what this means for inflation, purchasing power and the world economy.

What is Money Supply?

- is the total amount of money available in an economy at a particular point in time.
(http://en.wikipedia.org/wiki/Money_supply#cite_note-18)

Money supply used to be backed by a gold standard. However all this changed in 1971 when the Bretton Woods system fell apart. Today money represents debt. The total supply of money is infinite so long as there is debt in the economy. No debt = no money being created.

Money supply and Inflation

To leverage our potential buying power we borrow money (debt) to be able to buy more goods then what we could have done otherwise. However, the first rule in economics is that we have unlimited wants, yet limited resources. So at its most basic level, the more money supply in existence (created from loans), the more money there is competing for food, land, labour etc. This leads to price inflation and increased volatility and uncertainty in the economy. Booms and busts become more extreme.

How do you measure Money Supply?

In Australia the RBA define Money supply as:

M0: currency

M1: currency + bank current deposits of the private non-bank sector

M3: M1 + all other bank deposits of the private non-bank sector

Broadmoney: M3 + borrowings from the private sector by NBFIs, less the latter's holdings of currency and bank deposits

M3 is generally used by economists to estimate the total amount of money available in the economy.

What increases money supply?

Every time someone borrows money from the bank, the money supply expands. If you get a new mortgage for your house, or a margin loan to buy shares, you are helping increase the money supply and you are leveraging credit. Through fractional reserve banking, banks have the ability to make money out of thin air. If the fractional reserve is 9 to 1, you deposit $1,111.12 dollars into a bank, the end result is that the original $1,111.12 can ultimately create almost $100,000 of new money!

Movie: See Money as Debt to understand how our Monetary System works today (part 1 of 5 below)



Governments can increase money supply by spending more than they tax (one of the big reasons for money supply growth in the US). US money supply has expanded significantly in recent years due to a double whammy of tax cuts and increased expenditure.

Central banks try to manipulate money supply through interest rates. Central banks do this by buying and selling government securities (and other financial instruments). Ultimately, central banks can only do so much to influence money supply. As we saw in the US earlier this year when the Federal Reserve cut interest rates quickly and threw a $168 billion stimulus package, there was short-term elation, but has ultimately did little to prevent the stockmarket and property prices from falling much lower.

Only a very small portion of money supply (M0) is in the form of currency (notes and coins) generated by a central bank to meet physical withdrawals. This is usually less than 5% of the money supply.

What decreases money supply?

When someone pays back their mortgage (or other debts), money supply decreases. Money supply also decreases when someone defaults on their mortgage or closes a margin loan account, or the Government reduces expenditure and runs surplus budgets.

Central banks try to decrease the rate of money supply growth by increasing interest rates and providing disincentives for people to take out mortgages, margin loans etc.

Ultimately today's monetary system needs money supply (and consequently debt) to keep increasing for the economy to function.

Australia's Money Supply

Putting some numbers on money supply growth and using Australia as a case study, we can see that historical through-the-year growth in M3 has been very strong.
Cumulative:

- In the year from July-2007 to endJune 2008 M3 increased 23%
- In the last 5 years (to end of 2007) M3 increased 82%
- In the last 10 years (to end of 2007) M3 increased 174%
- In the last 20 years (to end of 2007) M3 increased 563%
- In the last 30 years (to end of 2007) M3 increased 1847%

As at June 2008, M3 totalled over A$1 trillion Australian Dollars.

Chart 1: Australia's historical through-the-year growth in M3.

Betweem 1971 and 1990, Money Supply growth was very volitile and tended to grow over 10% per annum. The 1990s till 2006 growth was between 5 and 10% per annum. It now appears we are heading for volitile times again.A spike in money supply will trickle into increased inflation.

Chart 2: Cumulative growth in M3 (A$ billions). An exponential curve. As MS increases, debts owed increases.



Chart 3: Log scale of Australia's M3 money growth.

Note the elasticity has been quite constant over time.

The US Money Supply

Since 1944 the US Dollar has been the world currency and until 1971 the $US dollar (and consequently currencies around the world) was linked to gold. Removing the link to gold essentially gave central banks around the world a blank check to print as much money as they want, as the amount of gold under vault no longer constrained how much money supply could exist in the economy. Money is now backed by our confidence in Government (whom guarantee coins and notes are legal tender). The paper used in a $50 dollar note is no more valuable then the paper used in a $100 dollar note – the only difference is that the Government assures us that one is more valuable than the other.

Is US Govt trying to hide something?

In March 2006 (see chart 4), the US Government ceased publishing its M3 money supply data. The reason? To save money!?


Chart 4: United States money supply

M3 was well over US$10 trillion dollars in early 2007.

The simple fact is there is so many $US dollars out there today! (remember a very small amount is actually printed notes and coins ie. M0). As the $US Dollar is the world currency, today about 50% of the world's currencies is in $US Dollars, and about 50% of the $US Dollars reside outside the US! So non-Americans have also contributed significantly to the growth of US money supply.

The US Govt is trying to hide the true rate of inflation. As money supply increases, the new money has to find a home. More money becomes available to compete for finite resources such as food and property. This is why there is always bubbles in property markets, the sharemarket etc. as more money is created through larger mortgages, larger margin loan portfolios etc. All this leads to inflation and ultimately hyperinflation. At the top of booms there is often deflation. This is when buyers hold off from buying in the expectation that prices will be cheaper in the future. Those struggling with their finances are are pushed to sell (to clear debts) are forced to sell to the nearest buyer. People may think their home is currently worth A$1 million dollars today, based on recent prices. However it is only worth $1 million if you have a buyer willing to sign on the dotted line. Your $1 million house might be only worth $800,000 if that’s where the first buyer is. This is deflation.

The $US Dollar = smoke and mirrors

We are constantly reminded by the daily news reports that over the last several years the $US dollar continues to depreciate against other world currencies (namely the Euro). However, in the last few weeks all we have heard is about the rising $US Dollar. I'm expecting this move to be a short-term pull-back, with the long-term downward trend to continue on its way.

As the $US Dollar is the world currency, it has been used as a base reference to provide a measure of value. For example, we hear the price of oil in $US per barrel or copper in $US per pound. Exchange rates are always first compared to the $US Dollar before other currencies. This continues to disguise the true value of assets. The world knows the $US Dollar is becoming more and more worthless over time. Many OPEC member countries are pushing for the $US Dollar to be dropped as the reference currency in favour of the Euro or a basket of currencies. OPEC knows the $US dollar is disguising the true value of their oil!

Is it a coincidence most basic food prices such as rice, wheat and corn have spiked dramatically in the last year? Rice has trebled in the last 12 months, yet the number of people eating rice hasn't gone up dramatically compared to say 24 months ago.

Ponder this. As more people in developing countries go from the poor class to the middle class, deposable incomes increase, and consequently the money supply. There is now more money (supply) chasing a finite resource. Add on top of this, there are hedge funds and large institutions in the futures (derivatives) markets, which help push prices higher (fuelling expectations). This all causes a bubbling of price inflation. As people soon realise they are spending more of their income on food, fuel, rent etc, wage demands increase, which economists argue is the main cause of inflation.

It's all about price expectations! If people expect higher prices, they will factor this into their spending habits. People gradually expect that fuel will cost more. Rice will cost more. Steel will cost more etc. If people expect higher inflation, they will ultimately receive higher inflation (and more money supply).

The US dollar has lost about 97% of its original purchasing power (of 1913) to inflation! The Australian Dollar has lost about the same amount of value, as have most other fiat currencies.

The Euro

A quick word on the Euro.

Chart 5: The Euro M3 money supply is fast approaching the size of US dollrs and is now about 9 trillion Euros.



Conclusions and predictions for the long-term:

- Money Supply growth tells us about the future. The faster it grows, the greater price inflation will be - "the new money has to find a home" - in food prices, in rent prices, in commodity prices etc. There is a time lag for this new money to go through the system and find a home.

Australia:
- Australia's money supply is going to expand rapidly between 10 to 25% plus, and should be volatile like in the 1970s due to uncertainties and expectations in the economy.

The World:
- The $US Dollar will continue to depreciate against most world currencies, however compare any world (fiat) currency to gold/silver/oil and they are all falling.
- The true rate of inflation in the $US is much worse then the US Government is publishing.
- Measuring goods in $US Dollars is disguising the losses in purchasing power.
- The Euro is fast becoming the new world currency; however the Euro’s money supply is increasing at an alarming rate.

In the near future I intend to cover off on some key value indicators. Namely: gold/silver ratio, gold/oil ratio, gold/Dow ratio and go into more detail on purchasing power.

Until then,
Scott