The Global Tug of War

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I’ve heard it said by some, that there is a “Tug of War” being waged between the forces of Deflation and Inflation.

The Federal Reserve is attempting to create just a little inflation with its political goal of 2% inflation. This halves the value of your money over 36 years by the way – under the “Rule of 72”, which states that the number 72, divided by the interest rate (or inflation rate) is the number of time periods that your money will halve, or double – assuming you are on the receiving end of the deal.

The West’s demographic time-bomb, which got a mention in last night’s television programme on the rise in the number of benefits recipients was a case in point – and which includes amongst others – Peter Stringfellow, who has returned his winter fuel allowance to the chancellor with a note to say he doesn’t need it, for the last 3 years.

The end of the second world war in 1945 in Europe, saw the west’s population embark on the emotional equivalent of a spending spree, and all those returning husbands, boyfriends, fathers, and brothers – relieved at having survived, set about creating the “Baby-Boom” generation. (of which I am a member)

In America over a 15 year period, 75 million new citizens joined the population of America, and a further 8 million joined them from around the world, but mostly from the Hispanic community.  That bubble in births, has been the driving force behind much of the economic success and malaise of the last 65 years.

The first of those baby-boomers began retiring  as long ago as 2003 – 2007, as some of the better off ones could, and were buying property to rent out as a way of funding their retirements, of course, given the ages of their offspring, who were at the time also setting up single family homes to raise their impending brood, the price of housing went through the roof.  Of course this was all made a little easier than perhaps it should by the lax lending policies of several countries, as the banking sector gave the population the rope with which to hang themselves.

This also happened to almost coincide with the wild spending spree that business of the late nineties was forced to make, as the world’s computer systems had to be replaced en-masse as the end of the millennium approached.

At the time, I was an I.T. Consultant, advising companies on their computer hardware and software needs, but I also spent time as a software engineer, writing the code, that would allow the storage of a full date with a four digit year, which needed 32 bits of data to encompass, and allow calculations with.

As the computers in use the world over had to be replaced with 32-bit hardware, 32-bit operating systems, 32-bit applications and 32-bit databases, particularly for financial applications where accuracy was paramount, especially for debts and credits on Bank ledgers and on Insurance Industry policy statements.

This immovable deadline, forced the biggest boom in tech-spending the world has ever seen, created a boom in tech company profits, produced a boom in tech-wages, and in the financial world’s profit centres of New York, London, Berlin, Paris, Frankfurt, Singapore, Hong-Kong, Tokyo and other major centres of finance, drove up property prices as these newly rich technical staff competed for the limited supply of housing, with the financial industry stalwarts of the previous 25years.

The housing boom rippled out into the wider economy, pushing up house prices elsewhere too, like the spreading rings of a pebble thrown into a pond, as the waves spread out around the original “Bloop”, of the stone…

Of course it was inevitable that come January 1st 2000, the bulk of the spending would have already been done, and the hangover would start – apart from a few companies whose systems needed further remedial work. By March 2000, the numbers on the corporate profit and loss and balance sheets of these tech giants revealed the truth – the splurge was over, and the Nasdaq collapsed.

The baby-boomers didn’t just happen in Europe, and America though. Because the whole of the world was involved one way or another in the worldwide conflagration, the relief felt the world over led to similar expressions of relief, and China, and the surrounding east did likewise.

Japanese Woes

Japan was perhaps different. Perhaps because they were isolated from the world their baby boom was ten to twenty years in advance of the rest of the world, as they had their baby-boom during the 1920s, as America expanded in the Pacific Ocean region, and new trade began as the cities of San-Francisco, Seattle, Los Angeles, and the others of the West Coast of America traded with their Asian and Australasian peers. Japan now has the highest average age population in the whole world, with 25% of its citizens either in, or close to retirement.

The earthquake of 1906 off-shore San-Francisco which almost totally demolished the city, led to a rapid housing boom, with this influx of new capital, from Insurance companies, which caused the financial problems of the era, but also led to a boom in Asia, as trade rose to rebuild the stricken city.

This leads me to the meat and drink of this post.

Deflation Rules. Ok?

The current forces of deflation are largely being caused by the baby-boomers saving for their retirements.  This huge pool of accumulating wealth, drove down interest rates, gave Gordon Brown, Barack Obama and others the opportunity to tax these pensions, drove up the prices of equities to previously “overbought” territory, and has led largely to the problems of the last 15 years.

As the amount of accumulated wealth was parked in Pension funds, Insurance Savings, Exchange Traded Funds, and other products the Banks were able to take these huge sources of funds to lend to Governments, and Corporations who assumed this money tap, was never going to be turned off, and governments spent with gay abandon as might have been said a few decades ago.

Of course, the public sector managed to grow because the taxes generated during this heady period, came at a time when the private sector was having to compete with the newly emerging manufacturing nations, and as a result were forced to become efficient by exponential degrees.

The public sector, which went largely unscathed during this period, now needs to be reined in, as the tax base shrinks, and that has led governments to reach for money from central banks.  Of course the Central Bank of America – The Federal Reserve – was set up after the 1908 financial crisis, which had partly been caused by the San-Francisco earthquake, mentioned previously, but also because of the growth of the Banks and their power to control the supply of money through fractional reserve lending practices.

For every $100 or £100 deposited in a Bank’s deposit account, they are allowed to lend out the vast majority of that money.  Of course when interest rates are low, and the markets stable, they tend to lend out a bigger percentage – as much as 95% of the money, than otherwise, and that money lent, gets deposited in another bank, which gets lent out again and again. As interest rates begin to rise Banks need to carry more capital as some of their loans turn bad. This is why in recent months, the ECB and BoE have required their banks to increase their capital base, and this led Barclays to ask its shareholders to stump up some new cash last year.

It is also why Lloyds-TSB, and RBS needed rescuing by the British tax-payer, and Northern Rock suffered the ignominy of seeing its depositors standing outside its doors trying to get their money out before the Bank went under.  It’s also why Cyprus had to rob its citizens of their cash held in their nation’s bank vaults… Rumours abound that other banks within the UK are far from over this recent turmoil, and in fact may be in a worse situation.

Money in bank vaults is secured by deposit insurance, but only up to a point. So if you have just won a sum on the lottery, sold your old uncle’s E-type Jaguar or old Ferrari, and one or two of his Gainsboroughs, Picassos, Rembrandts, Renoirs, or even Hockneys, then you would be wise, to ensure you don’t have more then £85,000 in one bank or branch.

Of course if you hold your wealth in Gold and/or Silver, the storage fees might be burdensome, but at least you might get your money back – assuming the government doesn’t do what President Roosevelt did in 1932, and make the holding of Gold illegal once again. (Silver was added to the prohibited list in January 1934)

So how is the Fed trying to tackle this world wide saving spree?

By conjuring up money out of thin air to lend to the banks at below inflation rates, it does two things: First it is a low cost way of re-capitalizing the banks, who can lend it to the government at slightly better rates (1% on a few billion is not bad for just parking your money)

But second, this cheap money has also rescued the collapsing equity markets, and driven them to new highs in America. The UK, FT100, which has a higher proportion of Gold and Silver miners has suffered in the retrenchment of the commodities space. But all this new money will one day have to be paid back by hard-pressed tax-payers.

During the 1970s, taxes were higher, and incoming Chancellor of the Exchequer – Denis Healey famously said in 1974 that he would “Tax the rich until the pips squeaked” Just 2 years later, he had to suffer the embarrassment of being re-called from his holiday near the mediterrannean sea to deal with a currency crisis, and later call in the IMF to bail out this once proud nation. Britain was reduced to the begging bowl to fund its government spending.

Thus began monetarism in Britain, which ultimately led to the “Winter of Discontent” in which the unions attempted to force through wage rises not earned by being more efficient, and the next year Margaret Thatcher was elected in May 1979, vowing to “Get Britain working” again.

The Debt in Britain, which grew steadily during the early New Labour years, ballooned as the taxes from lax Banking regulation, and Tech industry arrived, and then subsequently disappeared forcing Gordon Brown to move the goalposts, inducing sole-traders to register as Corporations, on the pretext of a 10% base tax-rate, before reversing it the following year, snapping it shut again by doubling the rate once more.

As the manufacturing base shrunk in Britain during the 90s, as more and more of what was once manufactured here, was now bought in – designed in the U.S., and manufactured in China and the Far-East, Japan had stagnated for 20 years as their debt  which ballooned during the 80s weighed heavy on their economy, and its population aged.

Britain’s aging population also began retiring in earnest at the start of the millennium, and the tax base shrank even further. More and more of the working age population are now retiring, collecting their pensions, and reducing the tax take of the Government.

Britain’s Woes

Britain’s national debt is now believed to be close to £1.4 TRILLION. (1,400,000,000 British Pounds Sterling)

Which brings me to the name of Britain’s money. Back in the dim and distant past, Britain’s currency was literally – a pound weight of Sterling Silver. (.925 under the millesimal fineness system) and the British Golden Guinea, was a one ounce Gold coin – James Bond used some of them in one of the early Bond films.

Imagine for a moment owing 1,400,000,000 pounds of Sterling Silver... The world wide production of silver is about 700 million troy ounces of silver. That means the British people would owe the equivalent of  29.19 years of the global annual production of Silver to these Bankers

So who are these Bankers?

Think, Goldman-Sachs, JP Morgan, Deutsche Bank, Warburgs, and Barclays; think Rockefeller, Rothschild, and others of the wealthy banking elite who now hold court over Governments at Davos in the World Economic Forum you see on Bloomberg every January. And why are many of these meetings held in secret? Perhaps because they wouldn’t like the sheeple – that’s US – from knowing what gets discussed there.

The additional paper notes (currency) bid up all kinds of prices, and this is where the Tug of War comes in. Depending on the rate at which these notes are printed, or produced electronically these days, this will determine the rate of “Price Inflation”and the point when the deflation spills over into inflation is unpredictable.

Deflation first… Inflation later.

I expect that in the short term, inflation will be modest or negative over the next year or so, as the number of baby-boomers retiring increases, but by 2017, or 2018, this will change as retirers peak. That will be the critical juncture in my opinion.

The money that has been pushed into the system since 2009, will leak into the wider economy, and begin to increase prices, and employees will probably begin fighting for wage increases as the current inflation rates calculated by the CPI method, hides the real inflation rate for most ordinary citizens.

By understating the effect of inflation on incomes and food and other essentials such as petrol, you postpone the backlash, but it will come.

Unfortunately, if you have to go to work in your own vehicle these days, the price of fuel is a major factor, and not one you can easily avoid. This will probably mean that the price of gold and silver will remain in the doldrums, rising gently until China notifies us of its intentions to hold 10,000 tonnes (or tells us it’s achieved it), and/or inflation gets to 5% as measured by the CPI numbers.

If you love movies, there’s films produced by Mike Maloney, of GoldSilver.Com,  who after his mother lost her former husbands savings, took up the role as her financial adviser, and built a business around it. He now educates the people around the world about money, and acts as a global advocate for precious metals backed currencies.

The outcome of this global experiment will be messy. If the world’s Central Banks continue to inflate the money supply, the outcome is a given.  The Weimar Republic and Austria, in the post World War 1 world, tried this experiment, and Zimbabwe in recent years tried it too with the Zimbabwean Dollar, which in one of the Mike Maloney videos, Mike gives away hundreds of millions of Zimbabwean dollars to the participants in his lecture.

In the book – “When Money Dies: The Nightmare of the Weimar Collapse.” by Adam Fergusson, the author examines the economy in Germany and Austria in the post WW1 period, and by way of analysis looked at the price of eggs.  The price of just one egg in 1923, would have bought 500 Billion eggs in 1913 – That’s inflation.

I’m not saying that will happen, but something approaching it might.

In Britain in 1973/74, inflation raged at 26.9%, and the lights went out as Coal miners, and Power station workers went on strike for higher pay, against a background of rampant inflation. Edward Heath went to the polls in February 1974, and asked – “Who governs Britain?”, and the electorate said – “Not you!”.

If you are saving for your retirement, then some Silver or Gold or other hard assets are a must.  If you want to read in a little more depth about the above, you can still get a FREE copy of  “The Coming Battle”   from the web page linked to.

Mike Maloney can be found on YouTube.com and has probably a dozen videos, which tells the story of the world’s money since the time of the Babylonians, and how you can protect yourselves.

Because Gold and Silver are both money and commodities, they are useful as money, and have been for more than 5,000 years.  If, or rather WHEN, inflation takes off, the price of both will rise exponentially.

W.

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