by Gary Christenson via Deviant investor
A Return to Financial Sanity?
Financial sanity and stability may not return, but we can protect our assets and learn from the discussion.
The DOW, S&P500, NASDAQ and other markets sell at all-time highs. However, many imbalances exist within our financial world.
This is not new – things have been crazy before, are now, and will be again. But to regain financial sanity we need:
From “Doug Casey on the New Fed Chair”
“In an ideal world there would be some radical changes. The best thing for the US in the (famous) long run is to go “cold turkey.” To abolish the Federal Reserve, fire its thousands of employees with their worthless PhDs. Return to 100% reserve banking with a strict separation of demand and time deposits. Depoliticize money by using gold, not Federal Reserve Notes. And default on the national debt, which is rewarding crony capitalists, and will turn future generations of Americans into serfs. And massively deregulate. And abolish the income tax, while cutting spending 90%. Etc. Etc.
The chances of that happening are exactly zero.”
It’s easy to see there is no chance for a return to financial sanity as defined by Casey.
Doug Casey is not alone in his assessment of the self-created problems in our current financial system. Alasdair Macleod in “Deflation Must Be Embraced” defines what he calls “the minimum policy changes required to escape from the credit-fueled merry-go-round that will end up destroying us all.”
CHOICES AND CHANGES
The choices are: continue the insanity and hope to survive the next election/crash/war/disaster, or contemplate the abyss. Macleod’s eleven point plan for change is:
- “Accept that another nation’s business is not your affair. Cease all military spending, other than required for purely defensive purposes. The resources and technologies released by this move would be redirected by entrepreneurs for the service and benefit of consumers.
- Stop colluding at the supra-national level to follow common monetary and economic policies. G20, G8 meetings only promote interventionist groupthink, to the exclusion of a proper understanding of policy errors.
- Embrace the benefits of free trade, removing all tariff barriers. If a foreign manufacturer wishes to dump excess capacity into your economy, let your consumers reap the benefit.
- Deregulate, making it clear that individuals must look out for themselves. The state is useless at protecting the consumer. Companies that plan to prosper will realize their reputations for fairness and honesty are paramount, instead of hiding behind regulations.
- Encourage family cohesion, instead of automatically expecting the state to look after your elderly, your handicapped and your children. Socializing family values is not the business of the state, which cannot deliver welfare services effectively.
- Reduce the state’s role in the economy with a long-term objective of absorbing less than 20% of GDP.
- The state should be banned from running deficits. Tax must match state spending. Capital loaned to the state will no longer be drained away from productive use in the private sector.
- Re-introduce sound money, by means of a currency-board arrangement tied to physical gold, which is deliverable on demand to all-comers.
- Make it clear to the banks and their customers there is no lender of last resort, and no deposit guarantees. Deregulation of financial services and the removal of this safety net will force banks to stop speculating in financial markets and be conservative in their financial gearing, to protect their reputations. Interbank loan rates will penalize financial aggression.
- Sack all government economists, and close all government statistical offices. At best, they serve no constructive purpose, and at worst they are repositories for bad advice, as growing economic and financial instability attest.
- Close the central bank, and replace it with a currency board with one purpose: to regulate the issuance of the currency convertible into the national stock of gold.”
Yup, he’s not expecting a return to financial sanity.
“We criticize Venezuela and Zimbabwe, because their mistakes are obvious to us. But we fail to realize the only difference between them and us is the speed of their failure compared with ours.”
Macleod sees “money printing” and inflation in our future – with Zimbabwe and Venezuela leading the way. Oops!
The process and direction are clear. The uncertainty revolves around the timing and degree of the inflationary disaster.
Consumer price inflation is here to stay. Consider prices from 1970 to show how consumer price inflation is “hard-wired” into our financial system.
From Casey on choices:
“It will be a deflationary collapse if the Fed doesn’t continue buying debt and creating new dollars. And a hyperinflation if they do.” … “the government and the Fed will definitely veer towards more inflation.”
Choice: Collapse or hyperinflation!
Debt increases exponentially – as shown from the St. Louis Federal Reserve:
Date Total Debt Securities S&P 500 Index
1/1/1971 $0.77 trillion 92
1/1/2009 $31.6 trillion 902
11/30/17 $44.1 trillion 2,646
The U.S. increased debt securities by $12.5 trillion in the last nine years and levitated the S&P by 1,700+ points. The consequences of that debt creation will manifest in coming years.
Total debt securities have increased at a compounded rate of 6% per year for over two decades. At that rate current debt of $44 trillion will grow to over $66 trillion in 2025. That massive increase in debt (currency in circulation) will create the price inflation that Casey and Macleod foresee in our future.
But, add a teaspoon of panic to the inevitable debt increases, mix with a double-handful of fear, stir in several cups of counter-party risk, add five heaping tablespoons of central bank and government intervention, and bake this toxic cake in the central banker oven for a few years. The result will be a huge boost in consumer price inflation and large increases in gold and silver prices.
Expect inflation, possibly hyperinflation, asset price crashes, and reflation of equity bubbles. Central bankers will be prodded by politicians to “do something,” and they will, to the detriment of most people.
The result is predictable since the world will choose not to act on the suggestions from Casey and Macleod. Governments and central banks will choose inflation and continued currency devaluations.
However, we can protect our savings and retirement. Consider the long-term correlation between total debt securities and gold prices.
Panic, fear and “out of control” debt increases will drive gold prices higher. This will accelerate when central bankers and governments lose remaining credibility. Expect the gold to S&P 500 Index ratio to move much higher in coming years.
Expect a rise in volatility, consumer price inflation, massive central bank printing, and more debt … lots more debt.
Gold and silver prices will rise!
- Casey and Macleod have defined what is necessary to correct our self-created fiscal and monetary insanity.
It won’t happen.
- Expect massive “money printing,” stock and bond crashes, asset price levitations, inflation, and possibly hyperinflation.
- Timing: Coming soon to our world, probably in 2018.
- Debt increases exponentially. Gold prices follow, occasionally zooming ahead of debt and then collapsing, but always tracking the inevitably increasing debt and devaluation of fiat currencies. Gold will rise compared to the S&P 500 Index in coming years.
- Gold and silver will help protect your savings, retirement, and purchasing power. Their prices will fly much higher when the coming category five crises devastate our financial system.
The Deviant Investor