We live in a world where all currencies are “fiat”, none backed by gold, silver, oil or anything else. Yes of course the dollar, otherwise known as the “petrodollar” has functioned and survived (so far) based on oil revenues being recycled back into U.S. Treasury bonds, but this has been changing over recent years. The change has accelerated greatly over the last five years. This era of “fiat” everywhere and real money nowhere is now 44 years long in the tooth and the very first time in human history there was no alternative currency with a real foundation.
Before you tell me “the U.S. is the most powerful military nation in the world, we don’t need no stinkin’ backing”, think this through. Though for a time, this “arrangement” worked and no one could stand up to the U.S., is this still true? Can we impose our will with everyone and everywhere on the planet? Or has our military technology been leapfrogged as evidenced by the USS Donald Cook last year? Can’t countries just decide to do business with each other …at the exclusion of the U.S. and use their own currencies to settle? Isn’t this what has begun to happen with China and other nations doing individual trade deals? Countries’ trade moving away from the U.S. and away from using dollars is as simple as grade school kids gravitating away from the schoolyard bully and deciding to play in harmony amongst themselves.
This 44 year old experiment has always needed “confidence” to exist. At first it worked because the U.S. was not over indebted and had plenty of room to lever up or “reflate” if you will. We still had plenty of untapped or unencumbered collateral left to borrow against, this is no longer so. Once the 2nd Great Depression kicked off in 2007, the Treasury started to run trillion dollar deficits and have now doubled our indebtedness. The Federal Reserve has more than quadrupled their balance sheet to well over $4 trillion that sits on the head of an equity needle of less than $70 billion, they are THE largest and most leveraged hedge fund in the world! The monetary lunacy by no means is confined to the U.S., it spans the globe and is practiced everywhere. Europe and Japan’s central banks have done the same, so has China to some extent but with a couple of large caveats.
In order to have monetary confidence, there are two prime necessities, collateral and credibility. In other words, who wants to do business with a bankrupt or someone who cheats or lies? Any business partner or someone you will do business with must be both solvent and truthful, neither of these conditions still exist in the big three monetary nations of the West. Each and every year since 2011 we have been told the Federal Reserve would end QE, begin to tighten and thus normalize interest rates. As I have written several times before, the Fed cannot ever raise interest rates again, this would destroy derivatives, the economy, the Fed’s own balance sheet and create a situation where tax revenues would not be enough to pay the interest on federal debt. Raising rates is not an option. Unfortunately, it is the same situation in both Europe and Japan, they have no options left either. Japan began a very outsized QE operation last year while the ECB began theirs just two months ago.
Both of these central banks are running into the same problem the Fed did, namely they are and have already taken too much collateral out of the system. “Collateral” is what underlies the shadow banking system’s ability to lend, without it credit dries up. It is so bad in Japan that the BOJ is buying more treasuries than are even issued. Not only are they at 100% monetization, they are beyond this. In Europe, the situation is so bad that market participants don’t expect a tightening until 2020, (we’ll never get there). This is the reason for the euro’s recent marked weakness, the realization of how poor business really is and the lack of any options available.
My point for writing this very basic (maybe even boring) piece is to remind those who have been distracted by the propaganda. The bottom line is this, the collateral necessary for the “grand plan” of reflation does not exist. The available collateral has already been encumbered and used in previous efforts. The answer, which has always been “reflation” is now an impossibility.
I mentioned “China with a couple of large caveats” above and needs explaining before we finish. First, China sits in the exact same position the U.S. did in 1929, they have the world’s largest manufacturing capacity in a world where demand for this capacity is and will continue to wane. They have attracted huge amounts of capital just as the U.S. did. The second large caveat is China has been importing massive amounts of gold and certainly amassed more than 10,000 tons. The argument can be made they now have 20,000 tons or more.
In my opinion, whether the number is 10,000, 20,000 or even 100,000 tons, it really does not matter. It does not matter because a large part of whatever they have purchased has been delivered FROM Western vaults and highly likely including the FRBNY’s custodial holdings for other sovereigns. You see, if the West is left with little to no gold because of clandestine back door sales or even theft, the difference between China having 10,000 tons and 20,000 or more tons is almost meaningless. It is meaningless because China will have the ability to mark the price up in Western currencies and make it all but impossible to ever “catch up”. The only way to accumulate gold would be the old fashioned way, “mine it”. But this is a very slow and arduous process that takes real work …something of a rarity in today’s Western world and will never happen at current prices.
With any announcement of how much gold China has hoarded will come the above realization of what comes next, the price of gold will explode! With an announcement of gold holdings will come credibility that they have collateral followed by the “natural” confidence the U.S. once had …a fairly simple concept if you stand back to look at it.
Regards, Bill Holter
You must have been reading my mind this morning as you prepared to release this piece.
I watched them attack the gold price this morning (paper) and said to myself SOON this will no longer matter. SOON the new Asian Physical Market will become the go to place for buying and selling physical and likely the producers will all use this medium to sell their production.
Western control of the Precious Metals market is nearly gone and the truth will set the prices of PMs free.
This week…next month…matters little in the big picture.
Get yourself some while the getting is still possible.
Canada will be allowing people to hold PMs within the RRSPs and TFSAs within weeks and that will cause some new buying in my view.
(With any announcement of how much gold China has hoarded will come the above realization of what comes next, the price of gold will explode!)
This line in your piece says it all Bill.
All Aboard. The PM Express.
thanks Mike, it’s already happening as volumes were VERY large in Shanghai last week.
Interesting mike, I presume that means canada doesn’t plan to confiscate gold then?
Andrew McGuire hinted that there would be big news from this exchange very soon.
Bill do you recommend that is one owns a small amount of PMs and store this at home that one insures it.
should have some you can get your hands on.
Another hidden source of gold demand is the ever growing call by countries for their gold repatriation. The debtors here are the bullion banks who leased gold from central banks, then loaned it back out to customers who in turn used it in their ordunary business operations.
This gold is now long gone. Widely dispersed among the global population. Getting it back cannot be done on demand. As a result the bullion banks are forced into the open market, feeding demand.
The western world is ruled by an elite group of psychopaths who own the banks that control the governments and media. They fund both sides of war for profit and they manufacture the consent of the public through the propaganda of the media.
Jeb or Hillary? Is this the best we can do folks? If it is, then all is lost. The US is no longer a republic nor a democracy but an oligopoly. Wholely owned by the financial and military industrial complex, through their financial capture of the government. Choice? You have no choice now.
70% of the gold that hits the market becomes jewelry.
That being the case, then a goodly portion of that 70% is in India, since their privately held gold is mostly in the form of jewelry.
At some point one would think that the powers to be would try very hard to silence our voices.
I suspect that desperation moves will continue to occur over the coming months.
2015 will it be the summer of SILENCE or will it be the summer of discontent….
“2015 will it be the summer of SILENCE or will it be the summer of discontent….”
Hard to say. It might even be the summer when the SHTF. That will not be silent but it will entail MASSIVE discontent as tens of millions of Americans realize just how financially screwed they really are. Life savings? Life’s work? Can we say, “POOF! And its gone!”?
Never mind the theory of conspiracy to describe what Governments have done to society the last few decades.
NOBODY with any amount of common sense could have created this mess unless it was by design.
Yes maybe by design from high up behind the scenes but by design never the less.
Politicians today seem to be there not by their abilities but simply because they were chosen.
NOT FOR ONE MINUTE do I believe that we got here as a result of simply bad decisions.
THIS WAS BY DESIGN.
The only leadership provide us has been leading us to the slaughter we are about to face.
My heart is broken for what I am leaving for my children and grandchildren.
The world is on the eve of destruction of hopes and dreams.
“The Federal Reserve has more than quadrupled their balance sheet to well over $4 trillion that sits on the head of an equity needle of less than $70 billion, they are THE largest and most leveraged hedge fund in the world!”
And yet, as terrible as this is, it shrinks to utter insignificance when compared to the big banks running 200-300:1 leverage on their derivatives books. 🙁
“It is meaningless because China will have the ability to mark the price up in Western currencies and make it all but impossible to ever “catch up”.”
The phrase, “Game over, man, game over!” comes to mind. China will control the price of gold soon. How can they not? Those who own the majority of something always have a major say, if not the only say, in its price. After all, don’t we all want what we own to be as highly valued as possible? Sure we do… and so do the Chinese.
Right now they own a LOT of gold. Just how much gold is something that only they know for sure but whatever it is will be recognized as being a LOT. Unlike the knuckleheads who persist in calling gold a “barbarous relic”, the Chinese know that gold is REAL money and economic power embodied in metal.
When WW-II ended, the US was the de facto ruler of the world via its large and intact industrial economy, its oil & gas production, its agricultural production, its huge military, its many weapons systems (including the A-bomb and the B-29 and B-36 bombers that could deliver those bombs anywhere on earth. But there was something else that was just as important, if not more so, and that was the 28,000 or so tons of gold in our vaults. This lesson has NOT been lost on the Chinese. They are a shrewd people and not averse to reading, studying, and understanding the history of other nations in general and their adversaries in particular. They have done this and know what it takes to rule the world. One day, it is very likely that they will do so.
great “learners” the Chinese are.
Spurious thought perhaps, but…
The extreme of forcing silver to a low at the time when demand is over whelming supply by 2 fold causes one to ponder ,”why?”
There is no easy rational answer to why silver is selling at $16.30. But the “Control Group” is showing something to us.
I am afraid they are laughing at us as something bigger than we imagine is about to occur. We may be about to learn a new definition of what a bear market means: starvation for many.
We know the richest families want to reduce the population of the earth by 50%.
Logically this looks like the set up.
part of the story.
The “Credit Applications Index” has hit rejection levels not seen since the height of the Lehman crises. This is one indicator that portends a very high stress level in the global credit market.
Credit vendors are no longer extending credit to their customers. This is a lack of trust and a pulling back of risk, in a financial atmosphere of fear and uncertainty.
If this situation deepens then the credit markets will freeze, as in what happened during the 2008 crises. That “triggering” moment may have just arrived. If inter-bank lending and inter-corporate/institutional credit extension freezes, then “literally” everything stops.
when credit freezes, everything else does.
I watched Greg Hunter yesterday discussing things with Martin Armstrong who keeps repeating that gold will have no importance in a reset but perhaps in a inflationary scenario, but not much.
What say you? Thanks.
I believe he is very wrong about gold, gold is money, everything else is credit.
Thanks Bill, not only for your answer but the tireless work you all do at Miles Franklin! We get to read immensely valuable opinions and facts on your site every day – and all this on voluntary basis, i.e. free. CHAPEAU!!
When I come across views and interviews like Armstrong et al, I ask myself: how come so few people talk like him, and so many others, among whom definitely specialists, say almost the contrary?
What I like about your site: you give the information and we get the chance to compare things for OURSELVES, i.e. take our OWN responsibility. Take it or leave it, there is nothing more you can do. So again, my heartfelt thanks and please keep up the good work!
you’re welcome Marianne, Armstrong in my opinion is out of jail on a “quid pro quo”.
Derivatives stacked on derivatives backed by houses is one thing because no one wanted the houses anyway; but derivatives on PM’s is a different matter because everyone wants the gold and will fight for it.
this is true but “not yet” does everybody want the gold.
Hummm, seems publicly those who own it want it back; and privately those who have it wish to keep it.
see my article for tomorrow.
Thanks Bill. Can you give me a couple of examples of collateral that are used up? If Treasuries are one example, then how are they being used up? I’m trying to get a basic understanding.
real estate, commodities, bonds of all sorts and especially gold. There is nothing left unencumbered.
Did it ever occur to you that the people running our country(Obama, bush family, dick Cheney group neocons…. Clintons)are so insane, like Hitler they will just lie about reasons to bomb and kill everybody. Everyone around the world who are not their friends will be dead. But I think you are better now dying with gold and silver rather than Scam federal reserve notes. So carry on!why don’t we just say to hell with them and trade with gold and silver now? The reason is the Americsn people are all either stupid, dumb, ignorant or selfish. So if Obsma blows up the world and kills all our children we deserve it because we are all so stupid. I wish Andy Hoffmsn was running for president!