After all is said and done, this is basically what’s been happening in Europe, where countries like Spain, Greece, Ireland, Portugal, Italy and Cyprus depend on each other and the stronger members of the European Union to keep buying their bonds, burying them ever deeper in debt (to each other).
But it’s not limited to just Europe, of course. The US is in just as bad of shape as far as debt is concerned. In all western nations, as the cartoon above adequately portrays, there seems to be a symbiotic relationship between the banks and the countries in debt. The banks enable the governments to keep borrowing just to be able to buy more debt from other countries’ governments, which are doing the exact same thing. The whole sovereign bond market is one giant Ponzi scheme, just waiting to capsize.
U.S. Treasury Secretary, Timothy Geithner and Federal Reserve Chairman, Ben Bernanke testified at the House Committee Oversight and Government Reform on March 21, 2012. In discussing the European debt crisis and responding to questions regarding IMF funding, the Treasury Secretary suggested that a default by the IMF or any of its borrowers was highly unlikely because the loans are backed by “a substantial amount of IMF gold …”
More commentary from Swiss America can be found here.
At 10AM on Wednesday, February 29, 2012 gold and silver were hit with massive paper selling on the COMEX. Gold was hit for about $100 (5.5%) and silver was taken down $3.75 (10%). But the stock market was flat, untouched.
According to Jim Sinclair, this was a cover-up by the Fed chairman and the precious metals were manipulated to the downside on purpose. Because if the expectation of no more liquidity from the Fed was really the cause of the collapse of precious metal prices, then the stock market should have been hit just as hard, which it was not! Furthermore, this $700+ billion for European banks was QE! The ECB got those funds from two places: “It’s been coming in from the IMF and from swaps done by the US Federal Reserve.” Here’s Jim Sinclair’s audio interview at King World News.
Indeed, here are three articles making the case that the sell-off was initiated by a seller who wasn’t at all interested in profit, but was motivated by taking the market down:
Ironically (or not), the precious metals were hit during this exchange between Ron Paul and Ben Bernanke, where Paul held up a silver ounce coin and asked the chairman why people aren’t given the option of using gold and silver as a “competing currency” with the US dollar.
When the economy of a country faces economic stress, that country’s central bank usually tries to take steps to recover by adjusting or boosting inputs to GDP. GDP is based on:
– Consumer consumption – Investments in housing and business – Government spending – Net exports (Exports minus Imports)
When the country reaches a level where there is high unemployment and excessive debt, it leads to a situation where consumer consumption is weak and no one is investing in housing or business because they are uncertain about the future. Government spending can sometimes overcome this, but it comes with higher taxes or borrowing costs which become politically unpopular.
Therefore, as a last-ditch effort to boost GDP, a country will embark on currency debasement in order to increase its net exports. The currency is devalued by inflating the money supply. The local citizens suffer because their own money buys less goods as things become more expensive at home.
However, as a country’s currency becomes weak in relation to its trading partners’ currencies, it makes its products and services cheaper for foreigners, and thus more attractive to buyers in other countries. As foreigners buy more, the affect is a rising GDP.
But this is only a temporary situation. Other countries begin to experience problems because their imports are rising relative to their exports. This hits their own GDP and now they have to take similar steps – debasing their currency to remain competitive.
Rickards explains that there have been two major global currency wars already – one from 1921 to 1936 and the other from 1967 to 1987 and that we are now in the third global currency war. This war has three main participants – the U.S., China and Europe – although many countries around the world are severely affected by the currency games being played out and make their own contributions to the overall picture as well.
Rickards also gives four possible outcomes of this currency war:
Multiple reserve currencies. Instead of the U.S. dollar being the preferred reserve currency of the world, countries would hold several denominations from currencies around the globe. But imagine having to deal with the policies of several central banking activities – it’s bad enough dealing with those of the Fed.
SDRs. Special Drawing Rights have been the instrument of the IMF. SDRs are backed by a basket of different currencies from different countries around the world. However, the SDR’s value floats – that is, it is adjusted according to global exchange rates. Furthermore, the IMF is able to print SDRs at will. Thus, there really is no difference between any other currency of the world, except it’s worse with the SDR – the IMF controls the SDR and the people controlling the IMF are appointed, not democratically elected.
A return to the gold standard. Here Rickards discusses some of the things to think about prior to a return to the gold standard, like what definition of the money supply (M0, M1, M2, etc.) to use as the base money supply on which to base on the gold supply? Additionally what ratio should be used between paper and gold? And finally, what regulations should be in place for exceptions to be made in certain circumstances?
Chaos. If nothing is done to stem the current path towards currency debasement, a catestrophic collapse could devistate the world as we know it.
There’s also an interesting chapter explaining how currency and capital markets have become so complex that they are quickly approaching a breaking point. Current risk models used by most firms are inadequate to account for the existing risk and thus most are unaware of the true problems underlying the system and thus are unprepared for the inevitable catastrophe.
Here’s an interview with James Rickards where his book is discussed:
And here’s an audio interview discussing the book, whether or not America needs the Fed and whether or not a gold standard is a possible answer to today’s economic issues.