In early 2002, gold was around $300. The primary goal was to preserve wealth. The Nasdaq had already crashed by 67%, but, before bottoming out, it lost an additional 50%. The total loss was 80%, with many companies going bankrupt.
In 2006 the Great Financial Crisis began
In 2008, the financial system found itself minutes from collapse. Banks like JP Morgan, Morgan Stanley and many others went bankrupt – Banca Rotta. Almost unlimited money printing postponed the collapse, and since 2008 total US debt has nearly doubled to $100 trillion.
Backing a currency by gold doesn’t always solve a debt problem, but it certainly makes it harder for a given government to cook the books. The ever so “difficult” Nixon couldn’t get by in the late 1960s-early 70s in part because of the Vietnam War. In 1971, by closing the Gold window, he caused the most spectacular fire on the US government’s budget books.
How wonderful! No more accountability, no more shackles, no more gold deliveries from De Gaulle in France, who was smart enough to ask for gold, instead of dollars, to settle the US debt. So, starting in August 1971, the US started printing money at a rate never seen before by mankind. Total US debt has grown from $2 trillion in 1971 to $200 trillion today – 100 times!
Since most currencies were pegged to the dollar under the Bretton Woods system, the closing of the gold window set in motion a global free-for-all with the printing press, with bank credit replacing real money, namely gold. The consequences of this “temporary” move by Nixon was that all fiat currencies were devalued by 97-99% since 1971.
Asset prices have obviously inflated accordingly. In 1971 total US financial assets were $2 trillion. Today it is $130 trillion, 65 times higher. And if we include off-balance sheet assets, including shadow banking and derivatives, we have assets (which will turn into liabilities) in excess of $2 trillion.
Two options for the global economy
1. De-dollarization continues, the petrodollar is dying and gold is gradually replacing the dollar as the global currency especially in the commodity-rich BRICS countries. This would allow commodity prices to remain low as gold rises and lead to a virtuous cycle in world trade.
2. China, the US bond market, and the global economy explode, pushing the world into another Great Depression, political instability, and possibly World War III. Bitcoin could go to $1 million, but it could also go to zero if it were banned.
Of course, the Central Budget Office of the USA, CBO, does not understand anything, since it does not “see” a recession for the next 10 years! And even though the CBO estimates the debt will increase by $21 trillion by 2034 to a total of $55 trillion, it expects inflation to stay around 2%!
The US federal debt has doubled on average every 8 years since Reagan became President in 1981! From this long-term trend, although there may be short-term deviations, we could predict the debt to increase from $10 trillion to $20 trillion in 2009 when Obama took over from Bush Junior.
Extrapolating this trend, the US Federal Debt will reach $100 trillion in 2036. With debts and deficits growing exponentially it is not unlikely that, as inflation reignites, the $100 trillion federal debt will “ achieved’ earlier than 2036.
Bubble
Investors and many analysts are still bullish on the stock market. As we know, the markets will move higher until all the investors, especially the small shareholders, are absorbed and until most of the shorts liquidate their positions. In this context, we have a remarkable bull market based on unlimited debt creation. No one is worried about the fact that 7 stocks are creating this frenzy.
These stocks are known to most investors (Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla), with their capitalization exceeding 13 trillion. USD – an amount equivalent to the combined GDP of Germany, Japan, India and the United Kingdom! Only the US and China are bigger. At the same time, gold is rising. The smart buyers are of course the BRICS central banks. Almost all of their purchases are black, so in the short term they have only a marginal effect on the price of gold – although it is already at historic highs.
What is the nightmare scenario for the coming years?
- Accelerating deficits and debt
- Falling dollar and other currencies
- Unlimited money printing to bail out banks and the failing financial system
- More printing to save failed zombie companies
- Higher unemployment benefits
- Universal Basic Income (UBI) introduced in most western nations
- Universal basic income means that everyone will be paid a basic wage whether they work or not
- This will lead to fewer and fewer people working
- Higher unemployment means more money printing.
- More money printing by central banks leads to more depreciation of the currency
- This leads to higher velocity of money and higher inflation
- Central banks are losing control of interest rates as the bond market runs out, its end is near.
- High long-term interest rates raise short-term interest rates
- Interest rates will go up to 5% and then 10% and end up at least 15-20%
- At a 10% interest rate the interest cost on the $313 trillion global debt would be $27 trillion. dollars
- 31 trillion dollars is 34% of world GDP – totally unsustainable
- Much more money printing is required
- Insecurities will lead to public and private sector bankruptcies.
- Unemployment rises leading to more UBI universal basic income and more money printing
- Banks begin to collapse, including the $4 quadrillion derivatives market
- Money printing will reach quadrillions of dollars leading to hyperinflation
- The financial system is collapsing along with large parts of industry and society
- Social unrest, civil wars, cyber wars and major conflicts will be rampant
- Political systems fail as governments lose control leading to anarchy
- “Obviously, governments and central banks will be desperate to prevent the worst and therefore will impose the new digital currencies.
- The US could even reassess its supposed 8,000-ton gold reserve.
- The effects of any measures taken by governments will be temporary as the world realizes that it is headed for bankruptcy.
- We sincerely hope that all of the above is really a nightmare in the form of a dream and will never come true.
- But if they do, the world will return to dark times.
- Apart from the initial shock and readjustment, life will go on for most people but on a different level.
- Obviously the standard of living will drop significantly.
- The same goes for security.
- The positive aspect is that moral values will return with family and friends becoming the core of society again.
- And many of the best and free things in life will be there like nature, books, music, good conversation, close friendships, etc.
- By lacking many of the superficial material values, we will appreciate the true value of the new simple way of life even though it will seem much more difficult at first.
- This is not a prediction but a possible scenario that we sincerely hope will not happen, but the risk is certainly there.
- Gold and silver are now in the accelerating phase of a bull market.
- As always, there will be corrections on the way to much higher levels.
- In a period of such severe crisis as we are describing, gold will obviously assume the role it always has, that is, as money and the only money that will retain its purchasing power and act as security by preserving wealth. But remember, it must be in physical form and stored outside the banking system in a very safe place. It will make no sense to measure gold in worthless dollars or euros.
- Instead, think gold in terms of ounces or grams and purchasing power.
