Waiting for the Reset

Since the collapse of Lehman Bros. in September 2008 the global financial system has been on life support. The insolvent banking system was rescued at the cost of a greatly increased sovereign debt burden. To support the financing of this debt burden, interest rates have been driven down to practically nothing. In the US and the UK this has been achieved by so-called quantitative easing (QE) – basically a fancy name for printing money, as it is almost impossible to envisage how the Fed or the Bank of England could unwind these positions. The Fed is now buying about $85billion in assets every month, while the Bank of England as of July 2012 had purchased about $500billion worth of assets. In the process savers have been punished, with meagre savings rates mostly failing to even compensate for the massaged official price inflation numbers (see www.shadowstats.com). Despite this, the real economies in the US, UK, Europe and Japan refuse to convincingly rise from the sickbed.

One way of looking at this situation globally is to realize that the volume of financial assets – bonds, cash, stocks and others – which have come into existence over the last several decades is a number of orders of magnitude greater than can ever be plausibly covered through the actual production and delivery of goods and services. At some point, or over a period of time, there will have to be a reconciliation. This will take the form either of hyperinflation or of a global currency reform, or perhaps some combination of the two. The US Dollar, as the lynchpin of the global financial system since 1944, will be at the epicentre of this transformation.

The present International Financial and Monetary System ($IMFS) can be considered as an organism. As such, it resists with all it’s remaining strength the inevitability of it’s own death. The ramifications of it’s inevitable demise for the savings of billions of people, and thus the whole political and economic structure, are such that it will not ‘go gentle into that good night’.

The end of the $IMFS has been predicted with increasing frequency since 2008. Unfortunately, seeing the inevitable end is one thing, the exact route to that end is much more difficult to discern and timing is next to impossible. After the transition to a new monetary order, it is probable that one will be able to look back and see the whole train of events as inevitable.

Just as a heart attack is preceded by certain medical phenomena and just as an earthquake is foreshadowed by particular geological and other signs, so this transition will not occur unheralded. Indeed there have been a number of such indications so far:

  • QE as mentioned above, together with rock-bottom interest rates. Effectively, this constitutes dispossession of savers. The purchasing power of savings declines over time as a result of interest rates being below the rate of inflation. For how long savers will allow themselves to be so conned is a crucial question. This position is clearly unsustainable.
  • Central Bank buying of gold. In the last several years these entities have turned net buyers of the yellow metal for the first time in several decades. This clearly signals their own preparation for the transition, gold being the wealth reserve that always survives transition from one monetary system to another. China and Russia, in particular, are stacking gold.
  • Western governments seem to be preparing for civil disorder. Legislation dealing with such emergencies has been refurbished in a number of countries within the past several years – e.g. the NDAA in the United States.
  • ‘Currency Wars’ – In the last several months the new Japanese government has been open in it’s – successful so far – attempt to devalue the Yen. Venezuela carried through a 32% devaluation of the Bolivar – against the US Dollar ten days ago. These are attempts to gain market share, but of course this is a zero sum situation, it being impossible for all countries to gain market share at the same time. We can view these measures as being a transitional stage on the way to devaluation of all currencies against the universe of physical goods – hyperinflation.

These are all sure indications that massive change is on the monetary horizon. When exactly this will be we do not know. It is almost certain that central bankers are well aware of the situation and would prefer the relative order of a currency reform to the chaos of hyperinflation. The instinct of politicians, on the other hand, is to delay difficult decisions as long as possible. What is sure is that the longer it takes until what we may call the reset of the world monetary system, the greater the cost will be.

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