23 June 2010

Golden Armour

Another excellent recent piece from Tim Price, deserves to be reprinted in its entirety – Philipp Bagus, on the consistently excellent Misys website, asks whether we have now crossed the point of no return. As Austrian economic theory essentially warned, a credit expansion led by a  largely  unchecked  banking  system  triggered  an  unsustainable  boom  with  all  the  attendant malinvestments. The problem, however, is not that the free market has been allowed to run out of control. Quite the contrary.  Under  a  free  market  system,  unsustainable  financial  organizations would  have  been  liquidated.  Instead,  as  Bagus  explains,  governments  across  the  world  chose  to inject  capital  into  the  banks  whilst  guaranteeing  their  liabilities:  “malinvestments  induced  by  the inflationary  banking  system  found  an  ultimate  sponsor  –  the  government  –  in  the  form of ballooning public debts”. If the level of public debts before the crisis had been modest, the cost of the banking system bailouts might have been manageable. But since the level of public debts was itself at crisis levels pre-crisis, it may now be beyond the point of salvageable return. The example of Greece is hardly reassuring. Bagus suggests that the ultimate outcome of our present dilemma is the inevitable collapse of the welfare state.  But whatever the outcome, the tone of the public debate requires that electorates recognize that politicians are not and cannot be the solution, because they are unequivocally the source of the problem.

The also excellent Zero Hedge blog recently carried a damning polemic entitled “The Selling Out of  Germany”  which  makes  largely  the  same  points,  albeit  in  some  more  richly  spiced  language Since  most of the mainstream  media remain unaware  of,  or  unable  to  satisfactorily report the issues, we make no apology for quoting liberally from it here:

“I feel very bad for the German people. Not only do I feel bad for them but I can empathize. I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation.”

A former client asks what the writer thinks of the Euro zone bailout. His response:

“Basically, it’s a total joke as is everything else the politicians have done. No  one and nothing is allowed  to  fail  and  this  relates  to  the  fact  that  the  global  monetary  and  financial  system  is  a complete  house  of  cards. It’s insanely bullish for gold. If Germans rioted they would be on the streets today. They totally got sold out beyond belief. But it doesn’t seem to be in their nature to riot  so  rather,  I  think  they will  dump  their Euros  and  buy  gold.  That’s how Germans riot. With every  passing  day  and  every  new  bailout  of  the  global  banks  (which  all  this  is,  all  TARP  [the notorious  US Troubled  Asset Relief  Program] was,  and all everything has been) more and  more paper currencies we use today in favour of hard assets as this system is obviously coming down. A lot  of  people  keep  asking,  is  this  the  same  as  post-Bear  Stearns  ?  I mean here is the biggest difference in my mind.  Back  then  people  believed  in  the  system,  the market  and  what  we have going generally. Not now. Not anymore. Thousands more people every day figure out its rigged and it’s a Ponzi Scheme.”

After a one day fall in the price of gold following the Euro zone bailout announcement, it then rose to a new high in dollar terms.

“The Germans remember history and they do not disappoint.  Muenze  Oesterreich  AG, the Austrian mint that makes the best-selling gold coin in Europe and Japan reported that buyers had purchased 243,500 ounces of gold since April 26, compared with 205,300 ounces in the entire first quarter..  what  has  happened  in  Germany  in  the  last  week  (the  elections  in  North  Rhine - Westphalia and the rush to convert coloured pieces of paper to gold) is the financial equivalent of the  shots at  Lexington and Concord  in 1775. I  give the German  people a  lot of  credit  for  what they have done  as  this  is  not just  a battle  inside America.  This battle is global and the German people just launched an impressive counter-attack on the control freak bureaucrats. The writer then cites a quote from the German Chancellor, Angela Merkel:

“In some ways it’s a battle of the politicians against the markets.  That’s how I do see it.  But I’m determined to win this battle.”

“What an incredibly sad woman she is.  Now of course she believes every word of this as do her fellow  political-class  colleagues; however,  to  anyone that has  worked and succeeded  in the  real world  the  statement sounds  as  if  it  is from an indignant infant..  In a seemingly simple statement, Angela Merkel said what every control freak bureaucrat that wants to run your life the world over thinks.  They ARE the market.  They decide who fails and when.  They decide who is to succeed. This is prevalent across the entire developed world right now. They  decided  to  bring  down Germany  and  its  currency  because  they  want  to  save  face  and  because  the  banks basically  are forcing them to save them again (as if this will ever end).

“The  larger  point  which  I  have  mentioned  repeatedly  in  these  emails  is  that  the  markets always wins.  The scary thing is that when the market does win, within the context of a political class with excess power the political class turns on its people and attacks them, shuts down the market and then there is the potential for serious tyranny.  Every country in the OECD faces this now and we must be prepared financially and emotionally so that we do not allow the political class with their corporate  oligarch  allies  to  turn  what’s  left  of  the  middle  class  (and  a  lot  of  what now  can  be considered the upper class) into a bunch of serfs in this nightmarish neo-feudalism we seem to be progressing  toward.   The  more  gold,  silver  and  platinum  in  the  hands  of  the  people  when the house of cards comes down the better.  This way not everyone will be destitute and we can start over on our own without having more insane ideas shoved down our throats by our “kings and queens”.

You may question the tone of the polemic but the underlying thrust is difficult to challenge. When faced  with  the  market’s  verdict  on  years  of  fiscal   irresponsibility  –  namely  the  dumping of government bonds and financial shares – the German political response is to unilaterally impose a ban on that selling. So much for European integration.

So  yes,  it  increasingly  feels  like  we  are  approaching  the  endgame.  Political credibility, like fiscal credibility, is close to an all-time low.  The  answer  in  large  part  –  in  the  UK,  in  Europe, and in North  America,  is  to  shrink  the  state.  Since that is anathema to most of the political classes, particularly those of a socialist bent who are largely responsible for the current global fiscal crisis, we can be assured that we will not get there without a fight. But as we wait for that battle to be joined, gold represents the finest ammunition.”