Monday, April 23, 2012

The Next Great Depression

A challenging interview has been posted on the interest.co.nz website today. Of course the headline is, "The Property Market is a Trap". Like we won't read any article unless it has the word 'property' in it. But that aside, Nicole Foss has some pertinent things to say about the coming depression worldwide.

Firstly, though, the reaction to such statements is largely that of ridicule. And who amongst us preaching this sort of scenario, has not been unfairly judged and ridiculed; given the silent, 'You can't be serious" John McEnroe treatment?

But that aside, Nicole Foss lays it all on the line. Lays out the worst case scenario. The portrayal of coming tough times, caused by the realisation that debt is unsustainable and resources are scarce, will not be comments which many have the capacity or energy to think through. Most will cast her off as part of the looney brigade. This is common for those who come across such large issues which challenge their worldviews (or business direction).

Here is the synopsis of her prophecy: "The euro will become a footnote in history, civil unrest will sweep Europe, nations that are not self-sustaining will be thrown into total chaos, oil will plummet to US$20 a barrel and the remaining housing bubbles including New Zealand, Australia and Canada will burst violently.

Let's look at some of these areas.

Housing

"She describes the property market here as "a trap" that will leave thousands helpless, homeless and bankrupt when the bubble bursts and interest rates rise."

The big 'known unknown' here is rising interest rates. Unknown when they will rise; known that they will. The costs of money (interest) here, and worldwide, is artificially low. Kept that way by monetary easing in the US and the EU and the flow through of that easy money in loans to New Zealand. It cannot last.

Her advice, "If you have a job, by all means rent. Don't jump in to the property market especially not in Auckland.'

Is this good advice? What do you think?

The Eurozone

"I'd be surprised if the single currency lasted more than a couple of years. It could go all at once or shed members. Various countries on the periphery of Europe look poised to go over the edge pretty much immediately."

Not much to add here. This pretty much says it all. The ECB and soon the new ESM, have carte blanche control over money-printing in order to save the euro. They print, the banks take, the banks buy sovereign debt, the banks get further into balance sheet trouble. The only way out is back to the marks and drachmas of Europe past. And soon.

USA

"Interest rates are very, very low because the U.S. is perceived to be a safe haven. Rightly or wrongly there is a perception that the U.S. will never default on its debt. And that's enough to make it the recipient of capital flight from Europe."

This capital flight to the US dollar is understandable. They are the best house in a bad neighbourhood. However, when confidence to invest in this bad house goes, where to then? Gold may just be the last safe-haven out there.

I find this story fascinating, and as I stated above find the reactions to it unsurprising. We may soon see the demise of this fiat money experiment. Even if half of Nicole's predictions come true, we had better be prepared.

Gold in New Zealand dollars: $2006.84 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $38.73 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)
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