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.
So do you think it is the time to put our extra cash in silver or Gold. NOW. before this reset happens?
yes, now! I like silver better than gold because of the out of whack ratio.
Bill,
1. Today I go to the store and buy a can of soup for $1.00.
2. Overnight the $1.00 is revalued by 25% less.
3. So when I buy the can of soup tomorrow will I pay $0.75. $1.00 or $1.25 ? Or does it even matter? Or should my worry be will there be a can of soup at the store for me to buy even if I have an ounce of silver in my pocket?
4. I can’t seem to get this through my hard head.
a 25% devaluation would mean that that your soup will cost 33% more…IF it is even available. If the system breaks down… so will distribution.
Bill, enjoy your articles, thanks.
Question about China’s levers: If they decide to sell US $’s, who will buy them? Their like-minded friends certainly wouldnt want them as they would be on the same page in thinking. As you mentioned, our friends and ally’s have seen the writing on the wall and are moving more in line with China so they too would be a hard sell.
if they bid $4,000 for gold there would surely be some sellers… thus China could unload dollars in this fashion and kill 2 birds with one stone.
Bill, yet another interesting article. As you may know, Jim Rickards thinks that the Chinese actually are buying gold in order to hedge their dollar holdings. Now, he is way smarter than I am, but I have this nagging thought that there is much more at play here. I believe that the Chinese know the dollar is eventually going to be Zimbabwe´d, and since their own debt level is currently around $17 trillion or so (and rising), the only way they can neutralize such an enormus sum is to buy as much gold as possible (while slowly cashing out T-Bills), wrench control of the gold pricing mechanism, and then they will divide their debt amount vs. gold ounces owned…and that will be the new price of gold in renminbi. Far fetched?
We shall see soon enough how this plays out.
not far fetched, I believe you are very close to the reality.
Also, they will get very little gold when paying $4000 US for it. How do they maintain their std of living? They will be shipping much less to the ‘broke’ US customers so their balance of trade will decrease dramatically. They will put themselves in the same boat they put us in, similar to the nuclear “mutual destruction” concept and have little to gain by a major upset in world currencies. I think they will be forced to attain their ultimate objective not by a dramatic reset, but by a slow and very gradual change that all can manage better. They do have other significant home country pressures to consider to be able to retain their control without major upset. Of course the end result may be similar, but it will be through a very long and slow process, we know they have the patience and long term perspective. What are your thoughts on this?
this will not be slow once it begins. China could target products for sale internally to somewhat offset the collapse of U.S. purchases. If $4,000 won’t do it, how about $10,000? $100.000? More?
I wouldn’t do a ‘next writing’ Bill, you are doomed to be wrong, because this article is nearly spot on with my line of thinking. And, I have been predicting a dollar collapse or devaluing for a couple years. So if you are thinking like me you are in ‘deep weeds’ partner.
SG
it’s already written, unfortunately so is the mathematics involved.
I.ve read some articles [by the way, nice article Bill] that one way to cancel out the worlds debt would be to raise the price of gold. I owe a hundred bucks to Joe over there, but I’ve only got a quarter dollar in my pocket. So I say this 25 cents is now worth a hundred and ten dollars and we both come out on top. {That would destroy the little guy would it not] Just a thought—
by the “little guy” do you mean the one who has no gold or silver? The answer of course is yes …so don’t be the “little guy”.
Your column makes great sense, Bill. I look forward to Part 2!
If China backs its currency with gold overnight (I think it will), assuming that everyone else in the world except the U.S. and the EU also convert to gold-backed currencies, China is at risk of losing 34% of its exports markets:
http://www.statista.com/statistics/270326/main-export-partners-for-china/
BFD. The Chinese people will be able to buy U.S. and EU stuff for a pittance (U.S. real estate, EU machine tools and cars), and the hard-hit U.S. and EU will be happy to sell whatever they can to the Chinese.
But, the writing on the wall is clear, that the EU is not going to go down with the U.S. ship, e.g., France continuing with its work on the Russian aircraft carrier. So, China is at risk for losing probably less than 20% of its export markets today.
China is in a wonderful position to move now, and I hope they do so soon.
I believe they are positioned …or very close to it.
Bill,
Your answer on my soup question should give everybody a scare, because the soup I am talking about is not my soup but everybody’s soup. I try to get answers by asking simple questions and you never fail to give a great answer. I can’t wait for tomorrows article.
I wonder what Alpo tastes like?
tastes like dog food.
Bill,
I agree with you over 90% of the time, but will have to respectfully agree to disagree on this one.
Steve, because of the leverage in use the collapse, when it comes cannot possibly be slow. Just opinions, we will see.
So just like that, you are going to double down as either you still can’t wrap your head around the difference between a “Dollar” and a merely a “Claim for a Dollar” whether such be in the form of a NOTE, or some digital credit sitting in an account, or you simply can’t bring yourself to actually say “Dollar BILL”, right William? Back in 1994 G. Edward Griifin wrote the book: The Creature from Jekyll Island: A Second Look at the Federal Reserve. It has since been reprinted many times as well as numerous updated editions, just curious if you have ever read such William? Because in Chapter 26 “A Realistic Scenario” Mr. Griffin discusses the “reset” issue and how easily such could be implemented with the least amount of pain and/or disruption, and smoothest transition possible. So if you haven’t read it yet, I suggest you get it the latest edition from Amazon or download to your Kindle if you have one, or if you have already read this book, perhaps go back and review Chapter 26 and express your thoughts on same, and what you would suggest differently than what Mr. Griffin has put forth on the subject matter of Reset. BTW, I managed to pick up 50 of these before the U.S. Mint sold out the entire 50,000 production limit in only 90 minutes:http://catalog.usmint.gov/webapp/wcs/stores/servlet/ProductDisplay?catalogId=10001&storeId=10001&productId=17492&langId=-1&parent_category_rn= and have 100’s of these particular “Dollars” : http://mintcoinguide.com/wp-content/uploads/2010/06/2005-P-Marine-Corps-230th-Anniversary-Uncirculated-Silver-Dollar.png Just wanted to remind you William what REAL “Dollars” of Real “Money” looks like. Do take notice that real Dollars neither Fold, nor Burn unlike those IOU Clown Bux you still like to call “dollars”. Semper Fi!
STOP! I know the definition of a dollar and have written about it many times before, I’ve read Creature from Jekyll Isle twice but don’t have it any longer as it burned up in my house fire. And PLEASE stop the shit calling me William, that was reserved for my mother when she was pissed off at me. We are all happy for your good sense to purchase the limited production coins, now, be a good boy and go sit in the corner and stop harassing me about clown bux.
Bill what if there is a USD/SDR exchange rate of 1,000/1 when the consolidation through the SDRM takes place?
This would suck up a lot of US debt and bring commodity prices back in line after an inflationary episode.
And couldn’t they reset the system more or less overnight so there is no run up in commods before the reset?
I see this as unlikely but possible.
anything is possible but you will need to be in place before any reset is triggered.
Great article Bill!
Spartacus Rex is a troll. Trolls always attack and never help anybody. Everybody at TF Metals Report put him on “IGNORE” and he finally went away.
GOT SILVER?
thanks SS, for now hopefully he is in timeout and sitting in the corner!
Hey Mikey, Go Pound Sand! The only reason for my absence at TFMR for the last 6 Mos. was from working 18-19 hrs. a day straight for the last six months on the hunch I had about how fast the HoF $5 Half Eagles would sell out and to make sure I would have enough left over scratch to outright buy the 50 coin limit. How many did you buy? And for that matter, how much business do you do with Miles Franklin every year you mouthy little P*ss Ant? You presume to know so much, How is it that I get more Hat Tips on a single post at TFMR then you have gotten in the entire time you have even been there? Just this morning I got 23 Hat Tips on my post (Author of article received 30 Hat Tips, Pining4the Fjords received 31 for his post) So how is this possible if Ol’ Rex is on everyone’s ignore list, thus automatically blocking my post, you little Sh*t Bird? BTW Do you even know the amount of Bill and Andy’s posts I have linked @ TFMR over the last year in order to drive traffic to their website? FYI: I’ll be leaving Kerr County heading up 35 W to the Twin Cities in about 5 Weeks, and if you got a problem w/ Me, I am willing to make a stop at your neck of the woods, to resolve your issues face to face, man to man. Care to Say Again?
Spartacus, this will be your last aggressive post. I will not let my blog get hijacked by anyone for any reason, if you have questions or comments that pertain to the topic I will post them, if your comments are not pertinent they will be trashed. Any post like this one I can assure you will be trashed in the future. This is my blog and I moderate it at my discretion, good or bad in anyone else’s opinion does not matter. Be pertinent or don’t bother posting.
Bill,
Great article as always. I think that a reset is the simplest way out of the mess that the U.S. is in. This is why I also think it won’t be used. Those in charge want to stay in power. It is in their best interest to keep the ponzi going.
We know that China bought the JPM building in downtown NYC which has the largest gold vault in the world. It is also next door to the NY FED and there are reports that a tunnel exists between the 2 buildings 5 stories underground. China is buying gold and the West is selling it to them. You have reported on all of this before.
Now what if the Treasury and the FED are manipulating the price of gold and silver down on orders by the Chinese. Moving gold to China in exchange for their propping up the ongoing FED debt monetization ponzi and the final end game is for China to take over the FED either directly or via shares in the controlling banks. The FED now owns more U.S. homes than any other entity and has a large share of the Treasury debt. Could control of the FED allow China to trade this debt for land and resources in the U.S.
Maybe that Chinese solar deal of Harry Reid’s which sparked the Bundy Ranch standoff is the canary in the coal mine.