By Peter Souleles B. Com. LLB.
26 April 2012
Many years ago when I was a teenager, my late father had a friend who was in his sixties. His name was Johnny and he was overweight. He was in conversation with my father one day when he started complaining how his fluctuating and ballooning weight required him to buy bigger pants every few months which in turn then required him to look through his wardrobe to find the pants that would fit him as his weight went up and down.
My dad admonished him and told him to lose weight and keep it off. Johnny said it was not possible. It was then that I threw in my two cents worth into the conversation:
"Have you ever thought of buying pants with an elastic waist and possibly one with an elastic waist and a cord that you could tighten when your weight drops a little?"
Well that was it. I had solved old Johnny's problem once and for all. I was feeling quite proud of myself. Needless to say my solution eventually killed Johnny because he kept growing until a fatal heart attack put him into a not so elastic coffin a couple of years later. Since then I have often wondered if he was buried wearing one of those elasticized pants as well.
It seems to me that the central banks of the world have adopted my elasticized waist solution and have continued to print not only money but also solutions that have simply not reined in continually expanding budgets and debt. In fact most of society is walking around with elasticized pants of some sort due to personal or business debt. Now this will all end badly when the world's financial system has a fatal heart attack or when the elastic breaks and we lose our collective pants. Let us be honest, all the QE's, LTRO's, ESM's etc are elastics that will one day snap because they are not solutions.
There are limits of course to how long this can go on for although I must say I have been fascinated by the current alchemy's ability to stave off the day of reckoning to date. But reckoning will come and the bill have to be paid with write-offs, bankruptcy, change of lifestyle, change of attitudes and perhaps even war.
Most of the world's balance sheets are now in the red. And those that are seemingly in the black carry financial assets of dubious quality given that they consist of loans to others that are either unserviceable or unrepayable. As I have said in a previous piece, if a farmer included a dead horse on his balance sheet his bank manager would laugh. In the banking world of today however, this is not only allowed but also encouraged by the regulators.
So what is to be done?
The answer is difficult because the existence of a fractional reserve system complicates matters quite significantly. Let me explain why this is so with an example. If you hold a piece of gold and look at yourself in the mirror you can still see one piece of gold. That to me is a gold standard because the image is the fiat dollar we all hold and the piece of gold is the image's backing. This is quite convenient because the fiat dollar (the image) is much lighter and easier to deal with.
What fractional reserve banking does though is quite wickedly clever. The person holding the gold holds another mirror behind the piece of gold and when you look into the mirror you can see an almost endless number pieces of gold. Everyone feels happy and the banker is even happier than everyone else because he lends out those images to all the cretins of this world and collects real interest on illusory images. Just remember - only the first image is real.
This is going to be an image that is going to be difficult to destroy because the process of removing fake images is called deleveraging and it can easily destroy the system if done incorrectly. At best we should only hope to rein in its growth.
Well the solutions to our debt soaked world are of two kinds. Those that you can proactively adopt and those that are imposed upon you. With the former you continue to be master of your fate and with the latter you become a slave. Iceland is an example of the former and Greece is a fine example of the latter.
It was therefore with interest that I read today that a certain John Butler has put out a new book titled 'The Golden Revolution: How to Prepare for the Coming Gold Standard'. In a nutshell he foresees a return to the gold standard possibly within a year and gold going to $10,000 per oz.
These price predictions always have me shaking my head in disbelief but today I gave the prediction a little more thought. Why? Because governments and central banks ARE the biggest holders of gold bullion. Members of the EU for example have over 10,000 tonnes which if re-valued by a factor of 6 would be the equivalent of 60,000 tonnes which at today's price of gold would equate to over 3 trillion dollars. Now that is a real fire wall, a real bazooka and a real means of re-capitalising banks whilst allowing them to finally recognize and write-off a lot of the toxic mutton they are currently dressing up as lamb as well as giving some much needed respite to debtors.
They can either do this pro-actively and be masters of their fate or they can wait for the elastic to break and then watch as a panicked public first tries to withdraw its funds from the bank and then heads for the bullion shops.
This idea is not new but I am forced to repeat it in the hope that they will overcome their stupidity and paralysis before we see a chaotic resolution to the present impasse.
A revaluation of course is not a magic solution, a silver bullet or manna from heaven. It is simply a reset button that will go along way to restoring some semblance of balance and solvency to enable debtors to breathe and the system to re-ignite. It will in some ways aid the removal of many of those fake images we see in the mirror without breaking the mirror.
Even us plebeians with the odd gold coin, gold ring or gold chain could be allowed to cash in on the big price rise as long as it was handed over to the bank to extinguish debt and thus deleverage the system without breaking it. In fact our sales of gold back to the system would further recapitalise it.
The masters as well as the slaves of this world will still have to understand that this is a one off solution because if they fell into the trap of subsequently and constantly revaluing gold at an official level it would still lead to the same current mess.
In addition to a revaluation, the world therefore has to accept that unfunded liabilities are just images of images, that unbridled consumerism is not sustainable, that trade imbalances do not work out well for the creditor or debtor nations, that growing inequalities in income and assets between the have's and have not's are like pushing all the poor passengers on a bus to the last two rows or to one side which in turn causes a blow out or an accident, that trickle down economics is just a euphemism for the top 1% pissing down on the bottom 80%, that ZIRP and poor lending standards are anathema to economic stability, that unemployment is corrosive to society and so on and so forth.
The little man on the street may or may not understand the complexities of the world's finances but he does understand a repossessed house, a loss of his job and a hungry child. It is not within his power to recalibrate the system but it is within his power to rise up when he comes to his wits end. The top 1% and the leaders of this world have both the income, the assets as well as control of the banking, legislative, judicial and policing apparatus to avoid such an outcome with a just and peaceful solution. In fact it is their moral and financial imperative to do so unless a complete meltdown and war are part of their master plan.
In addition, the world is going to have to pay-off the arms manufacturers to close most of their facilities or else give them a monopoly over some other peaceful and profitable activity, because these guys will not accept redundancy lying down. Let us not forget that had the slave owners of the south been compensated for releasing their slaves rather than starting a civil war, the final cost would have been much much smaller in both human and financial terms. But as one blogger recently said, "men are attracted to war just like moths are attracted to electric light globes."
Failing that, the masters of the system are going to have to figure out how to eliminate all of us baby boomers as we turn 65 so that unfunded liabilities and pensions can also be eliminated so as to allow the younger generation to have the chances that we had at their age and to avoid the world imploding in on itself. I call this the Final Solution - Part II.
Until the participants of this world decide whether to be proactive solution solvers on the one hand or cannibals and combatants on the other, the relative safety of gold and silver is perhaps the best material protection in an imperfect and material world.
What more can I say?