The Destruction Of Wealth

Greyerz:  “Eric, this is a good time for contemplation. As we have discussed many times, the risks in the world are greater than ever today.

So I decided to look up a couple of definitions of the word ‘risk.’  The first one is:  Risk is a situation involving exposure to danger.  The second is:  Risk is the possibility that something unpleasant or unwelcome will happen.  And in my view this is exactly where the world is today.

The world is exposed to danger to an extent that it hasn’t been for a long time.  So the possibility that something unpleasant or unwelcome will happen is substantial.  Let’s just look at geopolitical risks.  Six months ago nobody talked about Ukraine as posing a major threat to world peace.

Paul Craig Roberts gives very interesting interviews on KWN.  According to Roberts, the risk of a world war is high.  He likens the current situation to the start of World War I.  Of course we hope that there will not be another world war, but the risks are there.  Also, both war and civil unrest cycles are peaking within the next 18 months.  And the geopolitical risk is major not only in Ukraine, but there are many other danger zones like the Middle East, China, and Japan.

Another major risk is, of course, the economic situation.  Never have as many major countries been bankrupt.  The list of these countries is getting longer all the time.  This includes the United States, most of the European Union countries, eastern Europe, Japan, and many emerging markets.  Also, China is at risk with total private credit up 100 percent in the last few years, at 230 percent of GDP, and the shadow banking system at 84 percent of GDP.

If you look at China, for example, one of the richest men in Hong Kong has sold all his Chinese holdings.  This is a clear indication that he sees major risks in China.  And the financial risks have not improved since the 2008 crisis.  Most banks would be bankrupt if they valued their debt at market value.  Many trillions have been printed and gone into the banking system but this has not improved the situation.

Including the more than $1 quadrillion of derivatives, I consider the risks today a lot greater than in 2008.  All central banks are printing money but since the money just stays in the banks and is not used to bolster the economy, the velocity of money is crashing and is now at a 50-year low in the United States.

Eight EU states are now in deflation, and 23 countries have an inflation level below 1 percent.  Sweden had 0.4 percent deflation annualized in March.  Sweden’s economy has been relatively strong but its personal debt level is among the highest in Europe.  So heavily indebted countries cannot survive in a deflationary contraction of the world economy.

In that scenario no debts would be repaid and assets and the banking system would implode.  Central banks know this and this is why a massive new QE program will start in 2014 in the U.S., Europe, and Japan.  This will be done with the help of the International Monetary Fund.

It amuses me that the Bank of England has just published a paper stating that QE has raised growth in the U.K. by 3 percent or 50 billion pounds.  Isn’t this wonderful?  Supposedly money printing raises GDP in real terms.  So the U.K. has had QE of 375 billion pounds, which has raised real growth by 50 billion pounds.

So why don’t they print 375 trillion instead?  This way the U.K. would be the biggest and the most prosperous economy in the world.  Sadly, printing worthless pieces of paper can never create wealth.  In spite of this, we will have massive worldwide QE because this is the only tool that central banks have.

Coming back to all the risks we are facing, personal savings will either be bailed in or destroyed by hyperinflation.  The same thing will happen to pensions and other investments.  To have a job will be a privilege in a world of mass unemployment.  We are already seeing this in many countries in Europe. And of course the real unemployment rate in the U.S. is 23 percent.

All this is likely to lead to famine and civil unrest in many countries.  So the risks are massive and the real solutions are non-existent.  Of course I hope I am wrong in these forecasts, but people must be aware of these risks.  One of the ways to protect yourself against these risks is with physical gold.  Gold is now in its 15th year of a bull market.  Since September 2011 we have seen a 38 percent correction measured on a monthly closing chart basis.  This is totally normal.

We’ve been down at the $1,200 level twice during this correction, and it’s always possible that gold makes another attempt at this $1,200 level.  But even if this happened it would make no difference to gold’s long-term movement, which will be to much higher levels.

Gold must not be seen as a trading investment but as a long-term wealth-preservation asset.  People should just buy physical gold and hold it outside the banking system.  The gold price will be at multiples of the current price in a few years’ time.  That price could be 10 times today’s $1,300 level ($13,000), 20 times today’s level ($26,000), or even thousands of times higher in a likely hyperinflationary scenario.”