As events in Ukraine spiral out of control, it is possible that in the absence of a thawing of relations between Russia and the U.S., over the Ukraine, a new cold war could be about to emerge.
Particularly as the Ukraine, gets its gas from Russia, and currently owes the Russian Gas Giant – Gazprom over $2.2 BILLION in unpaid bills.
However, all this turbulence in eastern Ukraine, with Russian defenders of their cultural identity, that have stormed Local and Regional government offices, will possibly force Putin’s hand to defend these ethnic Russians which could draw in western forces to defend its supported government in the west of Ukraine.
For Ukraine whose currency has depreciated in value by 27%, since the troubles began, this could spell disaster for the country and its people. The gas bought from Russia was purchased at the highly advantageous gas prices that Gazprom gave to former CIS/Soviet states.
As Gazprom increased its prices to above market rates to Ukraine, to reflect the risk of failure to pay, and to recoup lost income, it is obvious that naturally Ukraine would be upset. Wouldn’t anyone if their energy bill went up 300%? And this has implications for Ukrainian industry, already not as well developed or efficient as their western counterparts.
Aleksey Miller – CEO of Gazprom, Russia’s biggest energy supplier, which in different circumstances would be a huge investment opportunity, suggested that Russia should abandon the Dollar and use the Euro for the international sale of GAS.
Even Christine Lagarde, Managing Director of the IMF, weighed in on the subject of Ukraine, by admitting in an interview on 2nd April, that the problems in Ukraine could affect the global economy.
Of course the Soviet state, went through its own internal challenges in the late 80s, as the commodities prices fell. Russian tanks and soldiers were embroiled in Afghanistan, and the Soviets spent more than they earned, the end result was the end of the Soviet Empire.
Are there parallels today for the U.S. empire? I suspect so – only their printing press has saved them. But will Chinese Gold cause the U.S. empire to collapse? We shall see…
As American and other nation’s troops are stationed in the Far East to – as Hilary Clinton put it – pivot Washington to the Far East, which drew the statement from a senior Chinese military figure, that “Chinese containment” was not possible.
As the raw materials of life have become more important, both Russia and China have used different strategies to achieve similar results.
Russia and the Global Metals Supply Chain
Both Russia and China have large land-masses, and the potential for commodities production. Russia is an important commodities giant. and Russian output is critical to the global supply chain for many items.
Russia is a major producer and exporter of oil, natural gas, ores, refined metals and industrial minerals. According to a recent analysis by the British firm Roskill, the extractive, energy and chemical sectors are vital to the Russian economy and accounted for an estimated 80% of Russian export revenues in 2013.
It’s important to recognise though, that Russia’s commodities are important on several levels. Russia is more than a major producer and exporter of energy and materials; Russia is an important player within Western supply and product chains. So, targeting Russian companies has the potential to provide blow back on Western businesses and economies.
For example: Nickel is much more than a 5 cent piece in people’s pockets. Nickel is critical to manufacturing stainless steel and a lot more. Nickel prices have pulled back in recent years as supplies have had to adapt to lower global demand, but picked up in recent weeks as commodites prices turned around, and Indonesia, imposed restrictions on exporting raw ore.
One of Russia’s big players, Norilsk Nickel, extracts ore in Russia but refines its product in Finland. Overall, Russia is the world’s second-largest producer of nickel, after China. But since China consumes most of its nickel domestically, this leaves Russia as the world’s key “swing” supplier. In 2013, Russia accounted for 26% of global nickel cathode exports, or around 13% of total world consumption of nickel. Without Russian nickel, the world’s steel industry would be quickly disrupted and prices on international markets would rise, possibly steeply.
Cobalt: Although Cobalt is found in many African countries, Russia is an important supplier. Cobalt, is used in steel and alloys increasingly with military applications as it is used to harden steel based alloys for armour piercing shells, and military vehicles as armour re-inforcement.
Russia accounts for about 6% of global mine output of ore and 3% of global refined output. Most Russian cobalt production is related to Norilsk operations in Finland, where cobalt comes out of nickel production. At 6% and 3%, as noted, Russian cobalt numbers are relatively low overall, but the point is that if Western sanctions somehow choke off Norilsk operations in Finland, we’ll see the impact on global availability of refined cobalt which would only add to military hardware costs.
Vanadium: Russia is the world’s third-largest producer of vanadium – providing about 10% of the world’s supply. Vanadium is critical to hardening steel and other alloys and is a key element for the future of utility-scale storage batteries. If vanadium supply takes a hit, all manner of metal and energy projects could be disrupted. Though a small miner – American Vanadium – is about to commence mining operations in the U.S..
Tungsten: Russia is the world’s second-largest producer of tungsten (behind China) and accounted for about 6% of global supply in 2013. Don’t be fooled by that low raw number, though, because about 70% of global tungsten is a Chinese play. So that Russian 6% “global” statistic is really about 20% of what’s available to the world outside of China. Tungsten is critical to building machine tools as well as manufacturing drill bits. In essence, tungsten is used for requirements that call for hard, dense metals with high melting points. Europe is a major tungsten importer from Russia, and much European industry will have to scramble to make up for any loss due to sanctions.
Titanium: Russia is a large supplier of aerospace-grade titanium to both the U.S. and Europe, accounting for about 12% of imports. Two important buyers are Boeing and Airbus, whose operations could be slowed by lack of titanium supply, certainly in the short term. I’m guessing you can see a trend here?
Rare Earth metals may also be included in this list of essential resources that modern economies cannot do without and that are sourced, at least in part in the former Soviet Empire.
Will Russia Look More to the East?
I could go on with other energy and materials that come out of Russia, but you get the point. Western politicians may feel like they have to “do something” about Russia annexing Crimea. but they have to be careful to not bite the hand that feeds them.
For our purposes, on the investment front, one potential result of Western sanctions will be to give Russian leadership even more incentive to look east, toward Chinese markets. China is a major consumer of many raw materials and refined products and would likely be able to buy and use Russian materials that no longer move west.
Different commodities will move in different ways, of course; some more than others…
Is China’s growth story about to unravel?
David Stockman writer for the Daily Reckoning, says: China is in the greatest construction boom and credit bubble in recorded history. An entire nation of 1.4 billion has gone mad building, borrowing, speculating, scheming, cheating, lying and stealing.
The source of this demented outbreak is not a flaw in Chinese culture or character – nor even the kind of raw greed and gluttony that afflicts all peoples in the late stages of a financial bubble.
Instead, the cause is a kind of monetary madness with an oriental face. Chairman Mao was not entirely mistaken when he proclaimed that political power flows from the end of a gun barrel – he did subjugate a nation of one billion people based on that principle. But it was Deng Xiao Ping’s discovery that saved Mao’s tyrannical communist party regime from the calamity of his foolish post-revolution economic experiments.
Just in the nick of time, as China reeled from the Great Leap Forward, the famine death of 40-60 million people – depending on whose figures you use, and the mass psychosis of the Cultural Revolution, Mr. Deng learned that power could be maintained and extended from the end of a printing press – just as Western Bankers did 200+ years ago. And that’s the heart of the so-called Chinese economic miracle. Its not about capitalism with a red accent, as the Wall Street and London gamblers have been braying for nearly two decades; its a monumental case of monetary and credit inflation that has no parallel.
Will Hutton who wrote “The Writing on the Wall.” (an ironic play on the Great Wall of China) suggested back in 2007, that the mixture of capitalism and political direction, would eventually lead to a collapse in China’s economy, when investments, and prices were centrally controlled, because the market mechanism of the free flow of information in markets – the price signal – and “Contract Law” is a requirement for all modern capitalist economies to function properly.
Perhaps our own politicians and Bankers would do well to remember that too, as they force Bullion Banks into manipulating currency prices by manipulation of interest rates, and precious metals prices, but I digress.
At the turn of the millennium, credit market debt outstanding in the US was about $27 trillion, and they’ve hardly been slouches in attempting to borrow their way to prosperity. Total credit market debt is now $59 trillion; so America has been burying itself in debt at nearly a 7% annual rate.
But America has been out-banked – to coin a phrase. In 2000, China had about $1 trillion of credit market debt outstanding, but after a blistering pace of “borrow and build” for 14 years it now carries nearly $25 trillion. BUT, this stupendous 25X growth of debt occurred in the context of an economic system designed and run by elderly party apparatchiks who learned their economics, when Chairman Mao was still alive. That said, the country sent highly educated senior communist figures around the world to study other cultures, and political and economic systems, so it is possible they have learned something since then.
However, it is probable, that there is no legitimate banking system in China – just giant state banking bureaucracies which are run by party operatives and a modus operandi of parcelling out quotas for national credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages.
There have never been any legitimate financial prices in China – all interest rates and Foreign Exchange rates have been pegged and regulated to the decimal point; nor has there ever been any honest accounting either – loans have been perpetual options to extend and pretend. Even the Yuan was pegged to the dollar at 8 to the dollar, until an agreement to enter the World Trade Agreement meant they had to freely float their currency by 2015, and China has allowed the Yuan to strengthen to circa RMB6.5:$1 – and is also behind their drive to collect as much gold as they can.
However, in two short decades, China has erected a monumental Ponzi economy that is economically rotten to the core. And, needless to say, there is no system of financial discipline based on contract law. China’s GDP has grown by $10 trillion dollars during this century alone — that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison. Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies. When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief – a courtesy that the regime has invariably granted.
Since 2000 China has 1.5 billion tons of steel capacity, but “sell-through” demand of less than half that amount and, on-going demand for sheet steel to go into cars and appliances and rebar into replacement construction meaning the other half is produced merely to go into surplus storage – once the current pyramid building binge finally expires.
The same is true for its cement industry, ship-building, solar and aluminum industries – to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping malls and new cities.
Will this ultimately lead to a price and economic collapse? Probably, but WHEN?
In short, the flip-side of the China’s giant credit bubble is the most massive malinvestment of real economic resources – labor, raw materials and capital goods – ever known.
Effectively, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods with glass, cement and steel erections that can’t possibly earn an economic return, but all of which has become “collateral” for even more “loans” under the Chinese Pyramid scheme.
China has been on a wild tear heading straight for the economic edge of the planet – that is, monetary “Terrain Unknown” – based on the circular principle of borrowing, building and borrowing. In essence, it is a giant re-hypothecation scheme where every man’s “debt” become the next man’s “asset”.
Thus, local government’s have meager incomes, but vastly bloated debts based on stupendously over-valued inventories of land. Coal mine entrepreneurs face collapsing prices and revenues, but soaring double digit interest rates on shadow banking loans collateralized by over-valued coal reserves. Shipyards have empty order books, but vast debts collateralized by soon to be idle construction bays. Speculators have collateralized massive stockpiles of copper and iron ore at prices that are already becoming ancient history.
Is this factored into China’s Plans for Empire, so that if – IF – a third world war begins, most of the materials will already have been purchased and produced, and once their currency is re-flated due to their large Gold holdings, they can buy what they need with the world’s strongest currency?
So China is on the cusp of the greatest margin call in history? Or the precipice of the biggest long term plan for global domination the world has ever seen?
Only the Chinese political class know the answer to that one.
But a Chinese market collapse would seriously affect all the world’s economies, and the Chinese have the biggest savings on the planet.
Cracks began showing in this edifice when a bank run began at Jiangsu Sheyang Rural Commerce Bank last month, as worried citizens clamoured for their money when a withdrawal for RMB200,000 (about $32,000) was refused at the Sheyang branch.
This was on the heels of the failure of several shadow banking institutions whereby several rural co-operatives and Farmer’s Credit Unions failed in recent months.
However, once asset values starting falling, these pyramids of debt will stand exposed to withering performance failures and melt-downs. Undoubtedly the regime will struggle to keep its printing press prosperity alive for another month or quarter, but the fractures are now gathering everywhere because the credit rampage has been too extreme and hideous. Maybe Zhejiang Xingrun Real Estate which went belly up last week was the final catalyst, but if not, there are thousands more to come. Like Mao’s gun barrel, the printing press has a “sell by” date, too.
Worryingly, a Chinese man was arrested for spreading rumours/information about these financial problems.
Of the more than US$562 million (RMB3.5 billion) that it owed to debtors, US$112 million was borrowed from 98 private parties with annual interest rates of up to 36%, according to recent revelations from Chinese media. Under that kind of pressure, the only surprise is that the default didn’t happen sooner. The company struggled to find capital for years; the chairman is suspected of borrowing up to US$38.6 million with “fake mortgages.”
But before Xingrun gets branded as China’s worst small, private homebuilder, it’s important to understand how it ended up in the mess in the first place, and what specific factors brought the operation down, or at least to the brink of collapse (local government officials insist it hasn’t officially defaulted yet).
Xingrun’s business in Fenghua, a county-level city that is part of Ningbo in a manufacturing belt on China’s east coast, ran into trouble through a renovation project starting in 2007, Chinese media pointed out. The company attempted, after securing government support and taking over for another distressed local property company, to build high-rise apartment blocks in a village called Changting. The project required the company to build homes for the original residents before the existing village could be torn down and the new buildings built. Construction was slated to start in the first half of 2012. Xingrun projected that it could pay off its debts within three years.
The project never got to the construction phase. In fact, the small village homes are still standing. Xingrun built the replacement homes for the villagers but there’s no sign of its main housing product, high-rises. Nothing has happened because the residents of the village have tangled the project and the company in a lawsuit that has stretched for years.
High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago. That explains why Xingrun was unable to pay back its loans. But why has it come so close to keeling over now? Its troubles with the Changting project persisted for years but the company simply rolled over loans and borrowed at high rates from private lenders.
One problem for capital-strapped developers in the Ningbo area is that private lenders no longer want to lend to highly risky companies. In fact, they are calling in their loans. This is just one of the problems afflicting Xingrun. The value of property in some areas of Fenghua is decreasing and that trend has lowered confidence in developers’ ability to pay dizzyingly high interest rates.
Banks aren’t hot on lending to this kind of developer either. In the past, a developer such as Xingrun could ask the local branch of a commercial bank for more credit. The local branch would take that risk because loan officers there knew that, somewhere much higher up the chain, officials promoted the lending.
That support exists no longer. Now, when small developers beg local banks for credit, they will likely be turned away. Local bank managers are reportedly being told that they may lend to risky borrowers if they wish, but they will be held accountable.
High risk is something no one seems willing to stomach these days – in stark contrast to just a year ago.
Fenghua is a small town, and Xingrun’s reach beyond that area is limited. Analysts have come out strong in saying that such a default has little systemic risk. The bigger picture in the region, however, can’t be ignored.
Xingrun’s woes are still the woes of the local authorities. The default will add US$305 million (RMB1.9 billion) to Fenghua province’s non-performing loan portfolio, pushing up the rate of toxic assets to 5.27% and making it Zhejiang province’s most indebted government, according to calculations by The Economic Observer newspaper.
Add Fenghua’s problems to those of the The greater Ningbo Liberty Silver region. The area reportedly has at least six years of housing stock either sitting empty or under construction. The massive buildout will put small developers under great pressure to pay back loans, especially if private debtors are calling in high-interest loans. A slowdown in property prices won’t help either. Without a rescue from provincial-level banks, Fenghua won’t be the last local government stuck in a jam.
So what is The Coming Battle?
It will be between depositors (the people) and the Bankers when the next economic collapse occurs – far sooner than most people think. Crypto-Currencies, do not rely on Banks to transfer value between individuals, or between people and businesses, and will increasingly mean the Banks wield less power over the economy, and the state, but this means that many governments will want to outlaw them. However, if you feel you want to find out a little more on the subject at Review Outlaw.
And, you can get some free currency – HERE.
Of course if you have spare capital, putting some of it into precious metals with no counter party risk – that is – hold in your hands metal… would be considered sound advice, and if you want to know where you can buy these wonderful metals – try HERE.
Addendum: 12 April 2014
Since this piece was researched and written, the PBoC (People’s Bank of China) has agreed to provide RMB1,000,000,000,000 (1 Trillion – Renminbi/Yuan) about $153 Billion to provide increased infrastructure in rural communities, improving roads, agriculture and local amenities. So the end speculated on, won’t be happening soon; but someday the spending has to stop. (or not rise quite as much) to rein in inflation, which will probably now happen circa 2018-20.
The west too will probably make one last attempt to stave off the inevitable collapse, resulting in the final outburst of inflation. Bankers will be held to account by the people, and the result will not be pretty.
And the final analysis, will compare Precious Metals with the number of Dollars, Yen, Yuan, Pounds, and Euros in circulation.
Silver which is my favourite precious metal, is so oversold as to be the best buying opportunity for anyone with money to invest, and time to wait.
The above chart tells its own story. The MACD (Moving Average Convergence Divergence) shows when we can expect a turn in prices. When it’s high, the price turns down, and when it is low, the price turns up… You have been shown the future.
The below film, tells of The Coming Battle.
And here’s more evidence of what’s likely to follow.
“There are none so blind,
as those who will not see.”
What do YOU see?
As Britain, languishes under the deluge of late, that has seen the Somerset levels returned to their normal pre-historical state – under water – partly due to lack of maintenance of the river systems, which have silted up forcing the unrelenting rainfall to overtop the banks and flood farms, hamlets and villages, much has been said about the costs, to people and businesses in the locality. The wettest Winter in 248 years – since 1766. And this morning too, those on the banks of the Thames have realised the folly of building on a flood-plain – unless you’re in a first floor flat, or your building is on stilts. No-one, who has seen the pictures can not feel sympathy for those poor victims.
Of course several other nations have also suffered under these unusually disruptive weather systems too and other disruptive events. In the U.S., the Polar Vortex, was brought about because of unseasonally wet weather in China and the Far East, which forced a column of warm, moist air north, towards the edge of the North Pacific, which dislodged the jet-stream that tipped the weather into this unusual cycle.
Snow fell as far south as Texas, which most of us from the UK might not find that unusual, until you also learn, that in 1997, when I worked there in Austin, Texas, it was over 100 degrees in February, and during that particular year, I was wearing short sleeves in December taking photographs of the State Capital building, in glorious afternoon sunlight as the sun descended on the Colorado river…
Of course, the Tsunami on Boxing Day 2004 in the Indian Ocean, and the increasingly frequent eruptions along the edge of the Pacific/Australasian tectonic plates, leaving death and destruction in their wake, and the several earthquakes on several continents as the earth’s tectonic plates gradually move, also force resources that are either saved, or were destined for other uses into replacing lost property, and re-building and repairing those damaged buildings, and worse, lower output as people are lost, taking the skills and knowledge that they have built up over many years with them.
Events have a habit of disrupting people’s and countries’ economies and it is usually the Central Banks who benefit.
The floods in the UK. have been costed to-date by Bloomberg at $1.6billion dollars (£1.0billion).
We can but hope, that with all the events of late, that events don’t spiral out of control.
So whilst having money sitting in a Rainy day fund on the evidence above might seem like good insurance. However, the best insurance is Gold and Silver,
Not only do you not need to contact anyone to get at your wealth, not only is there no risk, that your insurance company might be insolvent, due to the huge claims on it.
No, you don’t have to contact your Bank, you don’t have to try to use your crypto-currency stored on your now wet flash-drive or mobile phone, or computer, perhaps valued in the hundreds or thousands of dollars, which might now be irretrievable, but when you own Silver and Gold, held in your own hands, under your own control, they are portable, water-proof and can be carried to any destination in the world, and turned into currency within minutes.
The reason Gold and Silver became money all those centuries ago, is precisely because they have such qualities. Gold sitting in a ship’s hold of centuries ago, still have the value they held all those years ago.
No other form of money has been able to replicate these characteristics, and as my previous posts have indicated, the current low prices will perhaps be the best opportunity to buy and the last chance in your lifetime, to set aside some portion of your income that will still be valuable, (even more so) when you’re over 100, and your pension has been either taxed away, inflated away, or spent long after your ability to earn has passed.
Events in the Bio-tech sphere suggest anyone alive and under 40 today, will have the potential to live to between 120-140 years of age, or even well into the age we might now consider impossible for anyone except those who lived in the fictional Shangri-La – famously written about in the 1930s, when a man who claimed to have been born in the 1600s in the Tibetan/Nepalese mountains died at the age of 264. Dr. Li, reputedly had several certificates from the Chinese Emperor, congratulating him on his 150th, 200th and 250th birthdays, and he was the man who was written about, that the original novel, gave as the foundation of the Film.
As Gold has been rising over the last few weeks, today the price is fast approaching $1300 ounce, at $1284, and that is just the beginning. Read back through my posts to see where I see it going before this particular crisis is over.
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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.
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 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.