Brief Collapse Update – September 9, 2012

Reading time: 1,946 words, 5 to 8 minutes.

Last week was notable in that three of the world’s most powerful so-called leaders failed to announce anything new about the continuing global economic meltdown. Unfortunately, all they did was confirm my post earlier in the week; Labor Day and the Leadership Crisis.

U.S. Fed Reserve Chairman, Ben Bernanke, after a much anticipated meeting at Jackson Hole said nothing we haven’t already heard for the last four years; that he stands ready to do whatever is necessary, blah, blah, blah. One would hope he at least wined and dined and enjoyed the amenities because he announced nothing new although the Fed’s stooge bank JP Morgan again manipulated the U.S. stock markets higher like they do every Friday in their continuing pretense that ‘all is well’.

Britain’s lackluster Prime Minister, David Cameron, when asked what needed to be done to pull no-longer Great Britain out of its economic death spiral, fell back on the old saw about building more houses. And bazooka pea-shooter Mario Draghi, head of the European Central Bank, again said he would do whatever it takes, blah, blah, blah (where have we heard that before?) and print more money out of thin air to buy more toxic bonds which never helped before but this time he really means it. It would be a yawn if it weren’t so pathetic.

As Alistair Macleod said in Central bankers and politicians are running out of ideas
“The Federal Open Market Committee, the senior civil servants in Whitehall, and the Governing Council of the European Central Bank are all intellectually at sea. They have deluded themselves with Keynesian fallacies … governments and central banks blame market irrationality and seek to manage them to promote economic growth. They then wonder why it all goes wrong.”

Long time readers will recall my earlier statements that, in order to solve a problem, you first need to identify its root cause. Our so-called leaders have FAILED to diagnose the root cause therefore NONE of our economic problems have been fixed. Our pathetic leaders have deluded themselves with Keynesian economic fallacies. They continually prove the old adage that insanity is doing the same thing over and over and hoping for a different result. They are completely incapable of getting beyond their failed mind-set and so the global Titanic keeps sailing towards the iceberg while our inept leaders rearrange the deck chairs. And the band plays on. For now.

As I said in the earlier post, Bank of Canada Governor, Mark Carney berates businesses for sitting on a large amount of cash. Business leaders know we are in the end game. Their objective now is no longer return ON capital but return OF capital. In other words we cannot make money; the best we can do is avoid losing it by unnecessarily risking it in non-existent markets. Years of zero interest rates set by our mentally bankrupt central banksters spurred malinvestments that created unrealistic asset valuations which in turn strangles any economic progress.

Macleod says, “The result is that markets no longer work effectively, so it is impossible for the economy to advance. Governments and central banks cannot face up to this reality, because over-valued assets are collateral for record levels of debt that have accumulated over the last 50 years, the result of government-sanctioned expansion of bank credit … It is a confused policy of making us wealthy by destroying wealth. It seems extraordinary that this simple fact has escaped the combined mental capacity of all those highly qualified committeemen and civil servants.”

And so the global Titanic keeps sailing towards the iceberg.

Ok, I won’t beat this to death. It’s all been said before. So what can you do about it? I thought I’d never ask.

People think I’m a gold bug because I advise people to put a portion of their wealth in gold. I mean REAL gold like coins or bullion, not pretend gold like ETFs (Exchange Traded Funds) which is just worthless paper. In fact, gold ETFs are based on about ten times as much gold as really exists in the entire world so ETFs are just a gambling casino fit for speculators and those who think they’ll be lucky enough to time it just right and pull their money out before the music stops. Good luck with that.

You would think that as a so-called gold bug I’d have a gold wristwatch or gold rings or necklace or bracelet or whatever. The fact is I haven’t worn a watch in almost twenty years and neither do I wear any gold. Nor do I recommend wearing gold in future because an ostentatious display of wealth is a surefire way of missing your next birthday. Since I’m NOT wealthy, gold is not a problem for me nor do I have any. Are you listening, government?

In fact, if you drive a Mercedes or Cadillac or any car that reeks of money, you’re putting your health and future on the line. The time will come when you better drive a clunker because any sign of wealth will put you in the cross-hairs of either a desperate mob or a government gone berserk. I keep a couple cans of flat black spray paint which I hope I won’t need to cover my Subaru Outback’s special FX custom paint job.

If you aren’t wealthy then buy SILVER coins. Historically, the ratio between silver and gold has been about 16 and typically between 12 to 20. In other words, one ounce of gold could buy 16 ounces of silver. Today with gold at roughly $1,700 an ounce and silver at $33 the ratio is 51. In other words the silver / gold ratio is out of whack by about 300%. In other words, silver is undervalued by a factor of three. In other words, silver is CHEAP up to $100 an ounce.

Another reason to own silver is survival. When fiat currency (paper money) and monetary systems collapse – notice I said when, not IF – because it’s only a matter of time; in fact there are hundreds of fiat money collapses throughout history. In fact, there has rarely been a fiat currency that lasted more than a century. In fact, the U.S. Federal Reserve was created in 1913 and other central banks followed shortly after. That’s 99 years, boys and girls so we’re running out of time.

Yeah, I said the taboo word: survival. Because survival is what you’ll need to do when the you-know-what hits the fan and paper money returns to its intrinsic value i.e. 3¢ worth of paper and ink i.e. toilet paper and we are reduced to a barter economy until someone comes up with the next bright idea, then silver coins will be useful for buying stuff when everyone else is bartering. And barter sucks. It’s slow and cumbersome and you need to find someone who has what you want who also wants to trade what you have and rarely does that work so you need to find a third party and waste a lot of valuable time.

I’m sometimes asked – usually by gold bugs – where do I think the price of gold is going? Gold bugs want the price to go the moon. Little do they know (more in a minute).

The answer is gold goes NOWHERE! The value (purchasing power) of gold and silver remains fairly constant throughout history. An ounce of gold or silver will buy roughly the same stuff as it did 100 years ago or 1,000 years ago or 5,000 years ago. There have been a few exceptions. For amusement you may want to read Gas Going Down in Price

For those of you who have already seen the bread comparison, you can skip this paragraph. During the Old Testament time of King Nebuchadnezzar of Babylon (600 BCE) a one ounce gold coin bought 350 loaves of bread. Back then, bread, the ‘staff of life’ was whole, multi- grain and weighed roughly 750 grams. On Friday I bought a 500 gram loaf of multi-grain for $3.29. Multiply that by 500 and divide by 750 and a 750 gram loaf would cost $4.93. On Friday Kitco’s Spot Gold Chart showed the price of gold at $1,735.50. Divide Friday’s price of one ounce of gold by $4.93 for a loaf of bread and an ounce of gold today buys 352 loaves of bread. How close is that to 350 more than two thousand years ago? Like I said, gold goes NOWHERE. It retains its purchasing power as does silver although silver is more volatile and you should keep that in mind if you own silver. In other words, relax, don’t panic, silver goes up and down like a yo-yo.

We’ve discussed the VALUE of gold (and silver) but what about the price that gold bugs want to go to the moon? By price we mean priced in money. By money we mean paper money i.e. fiat currency – money backed by the full faith and credit of politicians. The value (purchasing power) of money goes DOWN. It takes more money to buy the same thing than in the past. That’s called inflation. In fact, the dollar has lost about 98% of its purchasing power since central banks were introduced to screw you out of your hard-earned money.

So where is the PRICE of gold going? Up, of course because it takes more worthless money to buy the same amount of gold.

Put another way, gold miners and investors are always surprised that they aren’t making more money as the ‘price’ of gold goes up. How could they? The price of their inputs i.e. labor, fuel, tires, machinery, material, etc. keeps going up too. Everything goes up in unison.

So, where is the PRICE of gold going? Well, if you divided all the money in the world by all the gold in the world, an ounce of gold would be roughly – are you sitting down? – roughly $100,000 per ounce. Yes, you read that right: one hundred thousand.

So, are we going to see $100,000 an ounce gold? No, of course not. Before gold ever got anywhere over $5,000 or maybe $10,000 an ounce, empires would fall (Adios, Amerika!), economies would melt down, governments would collapse, World War IV (that’s 4) would break out and it would be fought with clubs and spears, and hell would freeze.

Once the you-know what hits the fan, there will be social and economic chaos necessitating a complete restructuring and rebuilding of what’s left of economies. And it will be very painful for the survivors. We’ll be earning $10 a day, bread would cost 25¢ a loaf and gold would be $20 an ounce again. And those who have gold and silver would still be able to buy the same amount of stuff.

And life will go on. It always does. And we’ll elect new leaders who will promise us a chicken in every pot and free lunch and we’ll start the whole process all over again. Why? Because we’re humans and we never learn from history. That’s why we keep repeating it.

All of which begs the question; so what if our so-called leaders finally do the right thing? Winston Churchill answered that. He said the Americans always do the right thing but only after they’ve done everything else. Right now we’re in the ‘everything else’ stage.

Don’t despair. Yes, it’ll get worse before it gets better especially after the November U.S. election. In a Depression, everyone loses but some lose less than others. Those who are prepared will fare less badly than those who aren’t. Over the last five years I’ve outlined numerous things you can do. Keep doing them and if you haven’t started, then start now. Time is short.

Enjoy the show.

September 9, 2012

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About gerold

I have a bit of financial experience having invested in stocks in the 1960s & 70s, commodities in the 80s & commercial real estate in the 90s (I sold in 2005.) I'm back in stocks. I am appalled at our rapidly deteriorating global condition so I've written articles for family, friends & colleagues since 2007; warning them and doing my best to explain what's happening, what we can expect in the future and what you can do to prepare and mitigate the worst of the economic, social, political and nuclear fallout. As a public service in 2010 I decided to create a blog accessible to a larger number of people because I believe that knowledge not shared is wasted.
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