I have written many times regarding the potential for a bank holiday and a “re set” of the financial system. Some say that this cannot and will not happen and that anyone believing it will is either scaremongering, gullible or just a little bit slow upstairs. I hope that I am none of these. I write what I believe and pull only a few punches so as not offend anyone (usually) or get “so far out there” that my core ideas are missed.
First off, why does there need to be a reset of the system? Let’s look at this from a couple of different standpoints. From a foreign standpoint, they are producing goods, shipping them to the U.S. and receiving “dollars” in return. Dollars which we can create in unlimited quantities and at a “cost” of zero. In reality, we have and are getting “something for nothing”…a good deal if you are American but not such a good deal if you are not. This “nothing” is also traded (required for oil) between foreigners, the growing thought process is to trade and exclude the use of dollars.
From the internal standpoint, dollars are created only by the “creation” of debt. The U.S. has crossed the line and now owes more than 100% of GDP (in total we owe multiples of GDP), the debt cannot be paid back. We work, we save, we spend and accept dollars for all of our activities… but again, we work, save, spend and accept “nothing” because that is exactly what dollars are worth. Think of it this way, if you were stranded in the desert, how much sense would it make if the currency was “sand?” Dollars themselves are not an asset, they are a liability. Dollars are merely a promise…a promise that you will get more dollars and nothing else. Also, asset values themselves have been “perverted.” This has happened over time, slowly and surely, but it has happened. Wage discrepancies between the top, the shrinking middle and the poor have never been greater than they are now. The “need” to have a reset has never been greater than it is now because never before in history has a financial system been as heavily levered in every fashion, nor has it ever been as lopsided as it is now. I might add the world has never been run where the reserve currency is fiat, this has been an experiment …and we are the guinea pigs.
So, what happens in a re set? How does it play it? What are the advantages, disadvantages, who are the winners and the losers? First, a re set is not some sort of magical formula that resets prices overnight and then things start humming along business as usual. Think about Argentina, Venezuela, Mexico or even Russia when they “devalued” their currencies (or the markets did it for them), there were financial, social and monetary repercussions …none of them good in the short term. The repercussions lasted for many years in some cases and were always a major hardship for workers as salaries always lag the reset. Savers are also hard hit because the value of their past labors and savings are cut in value, it will take more time to “save” and get back on their feet.
I think it is important to understand that no matter how much you plan for this type of event, you cannot cover all of the bases. I say this because each event is different in some ways and what is coming has not ever happened before. The dollar is the reserve currency for the entire world so should it be devalued which looks highly certain, not only will Americans be hurt but also many foreigners up to and including the foreign central banks who hold dollars. Some people have the misconception that a re set will move gold and silver higher and nothing else will be affected. This is entirely false. EVERYTHING will need to readjust. Some goods will be in oversupply and others scarce, the economy will need time to sort out a new pricing. Pricing of the various currencies, pricing of real estate, real goods like orange juice, milk, bread, copper, steel, rubber etc. and even to include water. “Everything” means everything!
If you think back to Weimar Germany, they went from a failed fiat to a gold backed currency and real estate actually fell 30% on a price adjusted basis …and THEN started to go down because money went from grossly oversupplied to very scarce overnight. Could this happen in the U.S.? I think it very possibly could. A re set could immediately make everyday goods cost 25% or more after being price adjusted … and THEN start to rise because of scarcities caused by business interruptions. Today, the picture is even much more complicated because global trade has never been higher or more important than it is today. More important ESPECIALLY to the U.S. for several reasons. One, because we have decimated our industrial base by shipping plant, equipment and jobs overseas but also more importantly that we pay for trade in dollars. Since the dollar itself is the root cause and reason of any reset, the acceptance of “new” dollars for real goods will probably be a tough sell.
As for gold and silver, yes they will be remarked higher. There are those who believe that the U.S. will re mark gold higher in an FDR reenactment, this won’t work because I don’t believe we have the gold to do it with and thus a higher gold price will not aid the Treasury. There are others who believe that the Europeans want to re mark gold to lessen the bite of their sovereign debt. I personally believe that the coming reset will be “imposed” if you will ON the U.S. “On” the U.S. “led” by the Chinese. The Chinese have every tool available to them to force our hand. The two biggest tools being that they are our biggest lender and they also have more gold than any other entity on the planet. This is a powerful one, two punches and one that will allow them to price gold in dollars at whatever level they choose.
Do you see the “levers” that they are in control of? They can torpedo the dollar by selling them; they can also raise the price of gold by making a global statement such as “we will buy any and all gold for 4,000 U.S. dollars per ounce until further notice.” Will they use these two levers? Who knows? I don’t, but I do know that they “can,” I also believe that they have “motive” to. I also can see with my own two eyes that the world is aligning politically, financially and militarily against the U.S. Many of our longtime allies are even doing business deals with the Chinese that exclude the use of dollars, you should ask yourself “why?” The answer is that the writing is on the wall and just like schoolyard kids picking which side to be on, even our allies are readying themselves for what is best for them.
I will finish this thought process later in my next writing. The important thing here is “what would a reset mean to you?” I will discuss this.