The world is confused. The world is overleveraged. And the world continues to explode with new supplies of fiat currency. What’s next?
I often turn to some of the world’s greatest investment minds for their opinion. Earlier this week, I was watching an interview with the world’s biggest bond fund manager, Bill Gross. Big bond fund managers are some of the smartest people in the world at predicting and understanding the overall global economic outlook.
What he had to say clearly reiterates what I had mentioned in last week’s letter, The Last One Standing:
“We’re very worried [about the global economy]. Aside from recent action in risk markets, which has been very good, we think the global economy and the global financial markets are at risk in 2012 due to a number of reasons.
Basically, we’re suggesting instead of the normal, bell-shaped curve, we’re talking about two fat tails: the one of re-flation, which is what the markets are anticipating at the moment – a significant input of reserves and credit from the central banks – and on the other hand, a significant left fat tail of deflation in which policies promoted by the ECB, the Bank of England and the Fed (through Twist) ultimately don’t convince the private market to take the bait and continue to buy risk assets and believe in a thriving economy.”
For the past year, and in particular last week, I have mentioned there is nothing the world governments can do to avoid printing money. Given the circumstances, both the ECB and the Fed will do what they have to in terms of expanding base money and providing sovereign credit that ultimately expands the asset bubble – leaving the central banks completely overleveraged.
As a fundamental banking rule, a bank should typically be eight-to-one, or nine-to-one in terms of its leverage. But if you look at the central banks of the world as one individual bank and include the shadow banking system on top of that, the central banks of the world are really 18 to 20 times leveraged, according to Bill Gross.
Anytime the banking system is overleveraged, it adds to deflationary pressures as the banks look to deleverage – the same deflationary pressures that central banks want to avoid. Most people don’t understand the central banks’ primary concern is not inflation – it is keeping over-leveraged insolvent banks afloat through a period of private sector credit deflation.
The world banks will avoid deflation at almost any cost. The problem is there is no solution to fix our economies instantly as there is nowhere near enough income to service debt at any level. So the central banks will have no choice but to expand asset purchases through QE’s and ultimately centralize and sovereign-ize the private banking system.
The new head of the European Central Bank, Mario Draghi, just told us rates will remain low for an extended period – following directly in the footsteps of the Fed’s policy of suppressing interest rates for as long as possible. This is just a precursor to more money printing.
The world is confused because it has no idea if we’re deflating or inflating. Nothing Has Changed
Back in February 2011, I wrote in The Shocking Truth that the US ranked 190th in the World in current account balance – dead last in the 190 countries tracked.
The account balance is a country’s net trade in goods and services, plus net earnings from rents, interest, profits, and dividends, and net transfer payments (such as pension funds and worker remittances) to and from the rest of the world during the period specified.
It’s been nearly one full year and that number hasn’t changed one bit, nor will it anytime soon. The US is still dead last with countries such as Haiti, Kosovo, Uganda, Rwanda, Zimbabwe, and Vietnam all having better balances than the US.
While the account balance has improved for the US and currently sitting at minus $470,200,000,000, China remains the number one spot by improving its numbers to a positive $305,400,000,000. That’s a difference of $ 775,600,000,000 – nearly one trillion dollars.
Take a look at this picture that shows a world map of public debt as a percentage of GDP:
Pretty straight forward. The redder the colours, the more public debt to GDP a country has. Notice that Canada, US, Japan, Autralia and the European nations have the highest levels of public debt to GDP.
The whole world is riddled with debt. Every powerhouse country’s debt to GDP ratio are exceeding the Rogoff & Reinhart’s 90% point of no return (countries with debt beyond 90% simply cannot grow.) including Germany, France, U.K., and the U.S. Japan has already been off the charts for some time, with debt well exceeding 200% of GDP. Keep in mind these figures are just for the official government debt. If countries were required to report their debt like a corporation, their unfunded entitlement promises to future generations are four to six times more than their official government debt. Most of this debt well never be serviced.
The US is adding $3.7 billion per day to the National Debt, which is equal to more than $1.3 trillion per year and growing. It has already surpassed the 100% to GDP mark. By the time the US has a new president, the National Debt will be over $16.5 trillion.
Want to know why Bernanke and the Fed have decided to keep short term interest rates near zero? Interest on the National Debt in 2011 was an all-time high of $454 billion with an effective interest rate at approximately 3%. However, each percentage increase in rates would cost American taxpayers an additional $150 billion. From 1971 until 2010 the United States’ average interest rate was 6.45 percent. If interest rates ever return to the historical average, it would take more than $1 trillion to service the interest on the national debt.
Complete Faith For the last five years, I have been putting my complete faith into gold and silver. During this time, the world’s debt level and money supply has risen exponentially and this trend is only getting worse as I just mentioned.
As a result, gold has continued its decade long bull run. This won’t change because governments around the world won’t – I mean can’t – change. Anyone who says gold has collapsed back into a bear market is wrong. Gold is merely correcting in a bull market.
Practically every central bank is churning out paper money like there’s no tomorrow and using the money to buy up even more gold for their own vaults. That’s because gold is real money and the world’s only real safe currency. No central bank has ever been able to print gold, except for exchanging th
eir own currency for the metal.
Back in December (see The Eurozone’s Banking Secret), I mentioned that gold purchases by the central banks have already been reaping the benefits of exchanging currency for bullion. As an example, Switzerland’s central bank said on Oct. 31, 2011 it returned to a profit in the first nine months as gold holdings helped counter losses on currency reserves. This week, the bank announced it had profited 13 billion Swiss francs ($13.8 billion) with 5 billion of it as a result of its gains in gold holdings.
The central banks won’t stop printing money. They won’t stop buying gold either. So while you are busy saving up cash that they are so mindlessly creating from thin air, they are busy using it to buy gold. Don’t be a sucker.
If you think $2000 gold is the mania, you haven’t seen nothing yet.
Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies.
Until next week,
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