"The great depression was produced by
government mismanagement rather than by any instability of the private
economy" M. Friedman
The original idea of
having a central bank was to secure stability by ensuring politicians
kept their hands out of the pockets of the Treasury. The reality is
different. Over the past decennia politicians have tried to avoid
recession at all costs by increasing the money supply through the
creation of debt, which in turn serves as a reserve for (Central)banks.
Now that the debt has become a bubble it becomes impossible for the
economy to honor it and a natural process of debt destruction has been
initiated. Greece and Lehman Bros are two excellent examples.
Dramatic is that because
of the size of the debt not even a balanced budget can and will bring
relief. Interest on existing debt will continue to rise as a percent of
total government expenditures. The higher the general level of interest
rates, the faster the total of interest charges will rise - and this is
why the FED is converting short term debt into long term debt and why
the ECB and the FED are keeping interest rates as low as practically
possible. If interest go up to for example 12% it would add another
trillion deficit. [Imagine what is happening in Greece where interest
rates on 10 year Greek treasuries are 24%]
It is the accumulated
interest expenditure which will in the end bring the system down as the
only way to bring down interest expenditures is to redeem the debt. Any
other popular measures like cutting spending, raising taxes, save on
energy only result in a further reduction of economic activity and this
in turn results in yet another reduction of tax revenues making it the
Authorities even harder to pay for the interest on its debt.
As a result of the
economic decline, unemployment is on the rise and people start to
riot...Bankers and Politicians must at a certain point fear for their
lives (Argentina).
Destruction of debt
equals destruction of Money and less money chasing a same amount of
goods result in lower nominal prices for Investment instruments. Most
dangerous however are Treasuries (which will end worthless) and ANY
investment instrument which is guaranteed by Treasuries: life
insurances, pension funds, bank deposits, saving accounts, bank shares,
e.o.
Add $ 1.4 quadrillion
derivatives (uncontrolled, bank manufactured and bank controlled
investment instruments) and we have a financial atomic bomb. Most people
don't even realize they hold directly or indirectly these kinds of
investment instrument as these are usually sold as ZERO risk paper.
Remember it was Derivatives which brought down Greece in the 1st place.
This poisonous cocktail
will cause a lot of harm and when it all blows up there will be those
who loose it all and those who loose part. Important is to be OUT of
anything which appears to be safe like: Treasuries, bank deposits,
zero-risk bond and stock funds, money market funds, TAK-instruments,
life insurances, financial stocks, ....and to hold Real Money as well as
certain well defined Real Assets (Real Estate is a HOCG and won't do
unless you buy it cheap at the bottom of the market).
Dramatic is that
Authorities are because of their acts punishing the very ones who have
been working and saving their whole life: pensioners and savers.
Europe has a serious
additional problem: society has for decennia been poisoned and
brainwashed by socialism. Society is over-regulated and for this reason
any natural adjustment becomes extremely difficult. If the mentality of
the people doesn't change we may well end up with a remake of the Dark
Ages of Europe when India became the Financial Capital of the world.
Note: Money is a natural
derivative of Bonds and the 1st paper money was interest
bearing.
October 6, 2011
Francis D. Schutte and
the Goldonomic Team
+1
(772)-905-2491