By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
As more people come to realize that “quantitative easing” (which is the current disguise to avoid stating “inflation of the money supply”) is simply a tax increase on everybody, support for this tactic will decline.
But this growing opposition to depreciating the value of fiat paper currencies may not happen before the global financial system fails on its own account.
What is there to prevent an outright crash before the November US elections
Not major European banks. Almost all of them are bankrupt and insolvent. Their so-called assets of loans made to European governments are close to worthless. Not only do many of these governments have no ability to repay the loans, the collateral put up as security for the debt is barely worth the paper it is printed on.
Europeans governments ultimately can’t save the worldwide financial system. Too many of them are operating on huge budget deficits that can only be covered by additional borrowing or by inflating the money supply (or both). To even think about helping strengthen global finances, they must first sharply cut their own expenditures, reduce their outstanding debt, and cease quantitative easing.
The politicians in Washington, DC don’t offer any hope either. Republicans and Democrats together are still trying to pretend that the 2011 cash-flow budget deficit was only one trillion dollars and change. Until they can take ownership of the fact, as recently reported by USA Today, that the more accurate accrual-basis federal budget deficit for 2011 was $5 trillion, there is no hope of fiscal responsibility from the US government. US government debt is so undesirable right now that the Federal Reserve had to purchase 69% of all US Treasury debt issues going back into 2011.
In order to return the global economy to genuine growth the distortions caused by past government actions such as manipulation of the financial markets, inflation of the money supply, and bailouts are going to have to end. That means massive bankruptcies across the worldwide banking system and also governments. It means that governments will no longer be able to afford to pay even a small portion of current payments such as to retirees, the unemployed, and the poor. In the process, the value of existing retirement plan benefits will effectively be slashed on the order of 50-75% because of the loss of purchasing power.
The crash cannot be avoided. The real questions are whether it will happen fast or slow and how bad it will get.
The reason a crash is unavoidable is that it has already started. There are bank runs across Europe. Even though the Greek elections last weekend supposedly point to Greece remaining within the Eurozone, a billion dollars a day are being withdrawn just from banks in that country. There are US dollar shortages across Europe right now as the public is dumping Euros and other currencies to acquire the temporarily safer US currency.
There is also a run on physical gold and silver. A growing number of central banks, especially in poor and developing nations, are dumping US government debt and replacing it with gold.
When you see widespread capital controls and bank holidays, the end will be near. There have already been a few of these, so we’re already on the way to rampant forms of people control.
There will be a huge amount of financial pain felt around the world. Assume that the average standard of living will decline at least 50%. If you want any guidance of how bad it could get, realize that the Nikkei index that is now around 8,000 was once at 40,000.
But, once the misallocated resources are flushed out, it will be possible to re-establish a sound monetary system and respect for private property rights which have proven over the centuries to spark economic development.
In the meantime, as the values of paper assets plummet, what can you own that will preserve your wealth? That is not an easy question to answer with a comprehensive solution. One indicator can be derived from the experience in Indonesia in 1997 when the value of that nation’s currency was wiped out by the Far East Asia financial crisis. Indonesians who owned paper currency were devastated and lost almost everything. Those who owned precious metals saw their standard of living largely unaffected. Almost certainly other tangible assets such as food and other non-perishable necessities of life would also hold their value.
I’m not saying anything new in suggestions on what to do. However, I am saying that the problems in the global financial system may already be deteriorating so much that a crash could occur before the November US elections. You can make better plans by taking action sooner rather than later.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed athttp://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.