Thursday, September 1, 2011

Not Worth the Paper it's Not Printed On

Gerald Celente has a way with words. His accent may make him sound like a mobster, but his views are refreshingly honest. His latest interview on King World News is a must listen.

The miriad of problems that have flowed from the issuance of too much debt over the last 40 years, are coming home to roost. Too much money has been printed and loaned out and it has to be dealt with. If not, the world economy will continue to grind to a halt and the poor will be poorer, the middle class desist and the rich will hold a majority of the world's resources.

Debt is issued by banks through loans. For example, when you make a credit card payment, that money is literally created out of thin air. Or when you obtain a mortgage, the money that is lent to you is created. Perhaps you thought it was someone else's deposit that you are borrowing? Now the bank own your asset (and they own it till the last cent is paid) and you are paying that debt back with your future wealth. All debt has to be paid back.

The process that allows banks to create money out of nothing is called Fractional Reserve Banking. John Galbraith put it like this:

“The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent.” Galbraith, 1975

There comes a point, mathematically, where debt explodes exponentially. Take this example from Chris Martenson's Crash Course. If we take an eye-dropper to a ball park (see pic) and place one drop into the centre of the park and then double the size of the drops every minute.



First minute, one drop, second minute, two drops, third minute, four drops and so on, compounding. After six minutes you have enough water to fill a thimble. If you started the whole process at 12.00 noon and you were sittng up in the top row, by 12.49 pm (49 minutes) the park would be completely filled and you would be floating out of there. Note, at 12.44 pm (5 mins before the park is filled), the park would only be 93% full.

This is the power of compounding and it will happen with debt. But what people perhaps do not realise, is that wealth gets redistributed when debt goes bad. Those holding the collateral, the real assets, get to own them. This of course are the big banks that issued the money in the first place. Just look at the amount of housing stock that the Federal Reserve owns becasue of the bailouts of large home loan institutions like Freddie Mac.

New Zealand is in a power of trouble financially. Just another case of too much debt. The Christchurch earthquake costs have ballooned. As a country, do we need to ask the serious questions about the rebuild of this city. Hearts and memories aside, can we look at this objectively and be practical about the money we spend on this going forward. Do we rebuild in the same place or think of other options.

We cannot afford the new debt. What would happen if there is another large disaster, say in Auckland? There would no money to fix that. The Goverment would have to quickly reprioritize resources from Christchurch to Auckland as Auckland is the economic hub of New Zealand. Issues surrounding that would be highly problematic.

The Government is now forced to sell critical state-owned assets to merely fund the ongoing duties of government. Duties like building schools and hospitals. Not even to pay down old debt. NZ is even borrowing to pay for welfare programs. How international investors are seeing the New Zealand dollar as a good buy here is beyond sense. Maybe it's just the better of a bad bunch right now.

Perhaps New Zealanders need to face up to the fact that they can't totally blame the Governmant anymore. Using the house as an ATM before 2007 caused massive private debt. Accepting the common mantra that house prices always go up will haunt those who accepted it. The consequences of folly are about to bite us.

Wealth, yours and mine, is being transferred. The middle-class is being screwed. This is why some are very passionate about owning real assets. They put information and views about the world economy, and particularly the debt situation, to others for them to consider shifting some of their wealth from their paper money, that's encumbered, to real assets they can own. Not financial instruments that are not worth the paper they are not printed on.

Gold in New Zealand dollars: $2138.69 per oz
Previous all time high: $2319.47 per oz (23 Aug, 2011)

Silver in New Zealand dollars: $48.62 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodian
Your reference: an-001
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