The whole world is panicking over Bernanke’s hint that the Fed might start tapering QE. Before we look at why that will be impossible for the Fed to do for any period of time in the U.S., let’s first look at other areas of the world where we have major problems.
Fitch just came out and said that China’s credit model is falling apart. The liquidity in China is under tremendous pressure. The shadow banking system is now at $2 trillion and 50% of debt is rolled over every 3 months, and 75% of China’s debt is rolled over every 3 to 6 months.
So short-term things are very dangerous….
Credit has grown in China from $9 trillion to $23 trillion since the Lehman Brothers crisis. Now total credit is over 200% of GDP. Home prices are an absolutely massive 16 to 18 times income. But the massive credit creation the world has witnessed is leading to diminishing returns. Today, 1 new yuan of credit creates only .15 yuan of GDP. In 2008 that same credit created .85 yuan of GDP.
We are seeing the same thing in the US. Both China and the US are printing more and more money and not getting any return for it. So this is becoming a much more dangerous situation, and because of this liquidity squeeze in China, the entire global financial system could become unhinged. All of this will lead to more money printing and pressure on the currencies. But regardless, China is certainly dealing with a very high rate of inflation at this point.
Of course Japan is even worse. You have collapsing balance of payments and collapsing savings. You also have a population which is collapsing. Population will go from 125 million to 90 million over the next 35 years. There won’t be enough young people to pay for the old.
And you have falling bond markets, which will eventually collapse in Japan. You also have surging debt with all of the money printing. Japan can’t even afford rates now with their terrible financial position, but interest rates are headed higher anyway.
All of this will ultimately lead to a collapse of the Japanese yen. The sad truth is the problems in Japan cannot be solved, and this will eventually lead to a problem for the whole world. This will lead to a huge crisis because Japan has the 3rd largest economy in the world.
If we move to Europe, we have the Greek bond market plunging again and now the IMF is saying they are going to pull the plug. Germany, the strongest nation, is now finding itself under economic pressure. What I am saying, is there are enough problems in the rest of the world that will necessitate printing by the Fed because we are talking about a totally interconnected system. So even if the Fed thinks they won’t have to print for the US, as the rest of the world implodes the US will be forced to print whether they want to or not.
If we move to the United States, just the hint of ending QE lead to massive stock and bond market falls worldwide. The bottom line is if the Fed stops printing the world financial system will collapse. I would also add that the average worker in the US, if you adjust properly for inflation, has had his/her weekly wage cut in half since 1973. That’s a staggering 50% loss of purchasing power over 4 decades. Also, the food stamp usage is up to 50 million, and real unemployment is at 23% in the US.
I was speaking at a conference here in Hong Kong this week and one of the presenters was Nobel Prize winner Joseph Stiglitz. Remarkably, his solution is the US should just keep borrowing more money. Printing more money will just lead to greater misery, but Stiglitz is right in one way — the Fed, despite its false and misleading propaganda, will keep printing more money because they are trapped.
Of course the orchestrated plunge in gold coincided with Bernanke’s speech. But because myself and others you interview know that fundamentally gold is the absolute best way for investors to protect themselves from the coming chaos, this simply means that despite the pullback, gold will continue with its long-term bullish trend.
KWN readers around the world have to understand that as the price of gold eclipses its previous high and eventually moves above the $2,000 level, the volatility will only increase. Investors were shocked at the roughly $100 downdraft last Thursday, but as the gold price soars we will see trading days where gold moves hundreds of dollars a day, not just one hundred dollars.
Investors should simply buy physical gold, store it outside the banking system and not be frightened by the turbulence because the reality is the world is now on the edge of total collapse, and gold is one of the only financial instruments that will survive the coming financial disintegration.