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After Peak Debt Comes Deflation
Paper money, ‘the Heaven-sent leaf’, is nothing new, but it has not always been held in high regard nor previously attained its unquestioned position as the lubricant of trade, financial markets and the road to wealth.
In fact, for most of the last 2,500 years, since Croesus brought scalable coinage to the world, paper money has been considered a temporary, even flaky, alternative to real money – hard money – gold and silver specie. Indeed, even in recent memory, the road to the Emerald City was paved with ounces of gold, hence the Yellow Brick Road in the Land of Oz
If you are an investor, this may be the time to have a serious talk with the face you see in the mirror and ask: Have we really moved on from the ‘barbarous relic’? Can paper money keep its value when all the Central Bankers and planners in the world are intent upon printing as much of it as they possibly can? Is it different this time?
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Who needs paper, you say? Now we have electronic money, bits and photons flashing across our screens, capable of leaping vast oceans at a single bound. That is different. What isn’t different is that those bits, and that paper have to represent something of value, and in a world where the ability to produce anything and everything – from the paper itself, to copper, aluminum, iron ore, oil and the ships to move them around the world – has reached a point that there seems to be more stuff available than demand from those who put that stuff to work, or even on the shelf expecting to sell it in the not too distant future.
In the process, driven by animal spirits that have always taken markets to new heights, another summit has been reached – peak debt. From the pages of The New York Times we read: “Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.”
One sure way to know that the world’s economy is in a pickle is the arrival, and continuation, of low, even zero or negative rates of interest around the world. What does that even mean? It means that investors are so concerned they would rather pay a government or institution for the privilege of lending them money than keep it in a local bank or under the mattress. It happened in 1932, just before the wheels fell off the U.S. banking system. It is happening now.
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David Stockman, the Reagan Administration’s boy wonder when it came to financing ‘supply-side’ economics, a policy that Mr. Reagan’s presidential rival in 1980 (George Bush Sr.) called ‘Voodoo economics’, has seen the light. “I think it’s the end of an era . . . [Central Banks] create[d] a massive credit expansion in the world that’s stopping . . . Everywhere is at peak debt . . . Secondly, the Central Banks are all out of powder. The Fed has painted itself into a corner . . . They can’t see what’s coming right at us which is
a global deflation . . . We’re gonna have a Capex depression,” he told Bloomberg on February 9. What a pity it wasn’t gold paint.
Chart of Gold Prices
A move from 1,100 to 1,900 -- 2011 peak -- is a gain of 72 percent, roughly the gain mandated in the Gold Reserve Act of 1934.
Even if the thought of buying or owning gold is sacrilege to your ears, and you just cannot bring yourself to do it, you ought to be asking yourself if more paper money makes sense now. When you had that chat with the face in the mirror did you ask: “How much faith do you have in paper money? How much faith do you have in Central Banks? How much faith do you have in the fiscal probity of the government?”
“Attention K-Mart shoppers, shares that could be bought in 2009 at the devilishly low price of 666 on the S&P 500 are now going for 2,000. Get ‘em while they last. Don’t wait for 3,000.” In other words, shares that were ‘too risky’ at 666 became ‘prudent’ investments at 2,000. At 3,000 they should be risk free. Am I missing something?
If you cannot help yourself and still believe that the road to wealth and security lies along the paper trail (and not a trail of tears), you won’t be alone:
We few, we happy few, we band of buyers . . .
. . . Be he ne’er so vile,
This trade shall gentle his condition;
And gentlemen in T-Bills now instead
Shall think themselves accurs’d they were not here,
And hold their net worth’s cheap whiles any speaks
That bought with us upon St. Greenspan’s Day.
By Henry Hewitt of Oilprice.com
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Henry Hewitt is an investment strategist and portfolio manager with 36 years of experience in renewable energy. He is also a seasoned writer having published…