It’s simple: Sell Paper; Buy Gold

Jump to Comments

When Iceland went bankrupt in A.D. 2008, the news seemed “odd”. Although, technically, Iceland was a western “nation,” it was such a small “nation” that it was hardly a “nation” at all. Compared to the U.S., Iceland was more like a county, a municipality or a village than a “nation”. Therefore, while Iceland’s bankruptcy was “curious,” it couldn’t have any implications for the mighty U.S., right?

Right.

Except that, according to a January 21^st article from New York Times (“Falling Pound Raises Fears of Stagnation”), England (actually, the “United Kingdom”/“UK”) may be heading towards a bankruptcy just like Iceland’s—and the UK, clearly, is a “nation” of 60 million living on a territory the size of Oregon. The UK’s GDP is about $2.5 trillion—about one-fifth of the U.S. GDP. Thus, whatever happens to the UK is more than “curious”—it’s a possible harbinger of what might be heading for the U.S..

What happened in Iceland last year is now at least possible for the UK. If the UK falls to the same financial madness (treating debt as assets), can the U.S. be far behind? Or is the U.S.—like Bear Sterns—“too big to fail”?

“With the pound at a multi-decade low and British banks requiring ever-larger injections of taxpayer cash, it is no wonder that observers have started to refer to London as “Reykjavik-on-Thames. While that judgment seems exaggerated, there are uncomfortable parallels between Iceland’s recent financial downfall and Britain’s trajectory. Equally important, news that widening bank losses in Britain have necessitated another round of government life support provides a stark example to the United States.”

Thus, the same “uncomfortable parallels” between Iceland’s bankruptcy and England’s current plight could be extended on to the U.S..

“Ordinary Britons have a more basic worry. After relishing the boom that transformed the drab United Kingdom into Cool Britannia, they fear that the disheartening economic stagnation of the 1970s might return.”

“Disheartening stagnation,” my ass-ets. If the pound hits the fan, the UK will see a result more like the Blitz of WWII than the “stagnation of the 1970s”.

“There has been a steady drumbeat of gloomy economic news for months, but the mood in Britain has darkened starkly in recent days.”

The current economic problems are capable of sudden, almost astonishing acceleration. This “suddenness” is exactly why “depressions” were originally called “panics”. If the “herd” spooks and starts running, there won’t be enough “cowboys” (government regulators) to rein ‘em in. While gov-co cowboys may posture as they have plan to stop the stampede, all they can really do is let the herd run until it’s wore out and begins to stop of its own accord. Then the “cowboys” (politicians) will “round ‘em up” (those which haven’t died in the stampede/panic), and guide ‘em back to the corral.

“On Monday, Royal Bank of Scotland warned that its 2008 losses could hit £28 billion, or 38 billion dollars, even as Prime Minister Gordon Brown announced a second bailout package for the troubled banking sector worth tens of billions of pounds. Ultimately, the British rescue effort could cost at least £350 billion, with some estimates ranging far higher.”

First, the “£350 billion” needed to save the UK banks is roughly one-fifth the size of the UK’s total annual GDP. More, you can bet that the “£350 billion” estimate is conservative; England will probably be required to spend much more (perhaps one-quarter or even one-third of its GDP) to keep its financial house in order. That burden is nearly impossible to bear.

Second, where are all these “extra” pounds going to come from?

Savings? Certainly not. Like the U.S., the UK encourages immediate consumption based on credit and thus discourages savings. The English people don’t have an extra “£350 billion” saved up to loan for saving their banks.

Borrowing—maybe from the U.S. or IMF? Nope; in the currently collapsing global economy, who has any money to lend? Virtually no one.

Taxes? Hah! It is to laugh. If the UK needs the equivalent of (at least) 20% of its annual GDP to save its financial institutions, to raise that 20% by taxes, they’d have to take an extra 20% out of every Englishman’s gross income.

In the U.S., local, state and federal governments currently take about 55% of every American’s income as taxes. In the more overtly socialized UK, the gov-co probably already takes 70%. So if the UK gov-co raised taxes by another 20%, the average Englishman would be forced to either live on just 10% of his income—or burn Parliament and Buckingham Palace to the ground.

English officials are fortunate in that the English people were dumb enough to allow themselves to be disarmed by their gov-co. As a result, if push comes to shove, the gov-co in jolly ol’ England could easily shoot every Englishman who dared to riot over being taxed into oblivion. (The U.S. gov-co is not so fortunate. The American people are armed to the teeth and if push comes to shove, a lot of government employees and officials may go home in body bags.)

In any case, there’s no way any government can suddenly raise already high taxes by another 20% without precipitating a shooting revolution. Thus, the UK will not save its banks by raising taxes.

So where will England get the cash to save its banks? Out of thin air, of course. They’ll “magically create” the currency by simply printing an “extra” 350 billion paper pounds. Of course, this magical creation of cash will cause considerable inflation and the value of the pound (which is already depreciating) will fall further and faster.

I don’t doubt that the UK will try to print enough paper pounds to save their banks, but how long can that strategy succeed? The reason English banks are teetering is that their paper pounds are already depreciating. How can printing more “magical” paper pounds (and thereby causing more inflation) solve the current problem of rabid depreciation?

In other words, the UK is skuh-rued. There may be no way out. If so, the English economy is going to collapse, the herd is going to panic and run wild, and God help anyone who gets in the way. Since the limeys (like the Aussies) were dumb enough to give up their guns, it’s unlikely that England will succumb to a shooting revolution. Even so, I’ll bet members of the Monarchy and Parliament are secretly anxious over the possibility of a political revolution to overthrow (and perhaps behead) the existing gov-co.

“But in contrast to last autumn, when Mr. Brown’s first bailout plan was highly praised, this package has been greeted with anxiety. While few question the need for a quick response, the sheer scale of the borrowing being discussed, as well as the existing debt levels among corporations and consumers alike, alarms many analysts and economists.”

“Borrowing”—my ass-ets! Again, there’s no one to “borrow” from. They’ll “borrow” the 350 billion paper pounds from the printer who works at England’s central bank. They’ll claim to “borrow” the paper, but in fact, they’ll merely print it and inflate the currency. Implication: the pound’s goin’ down.

“Now, with both housing prices dropping and institutions like the Royal Bank of Scotland buckling, the British economic outlook looks even bleaker than the United States or countries that use the euro.”

(For those who like conspiracy theories, it’s conceivable that the UK—still using its own national currency rather than the euro—might be intentionally collapsed by the “powers that be” in order to destroy the pound and force Britain to accept the euro.)

“To make matters worse, Britain is facing a wave of deficit spending, as tax receipts fall and the costs of unemployment benefits and other services rise. He predicts the budget deficit will equal 9.4 percent of gross domestic product in 2009. . . .”

Lessee. The NYTimes already admitted that the UK will need an “extra” 350 billion paper pounds (20% of its GDP) to bailout its banks. And now we see that they expect a budget deficit of nearly 10% of the GDP. That tells me that in A.D. 2009, the UK may need to generate enough extra paper pounds to equal (at least) 30% of its usual GDP. I don’t want to laugh, but I can’t help it. 30%? I don’t think it can be done. If I’m right, this is another indication that England is heading towards a national bankruptcy and possible collapse.

“It’s scary. It reminds me of what you could find in southern Europe 15 years ago, during the worst years in Italy or Greece.”

Yeah, buddy—you better believe it’s “scary”. In a “worst case” scenario, the people of UK (and the U.S.) may not face inconvenience or even hardship—they might be facing a shooting revolution. Before this “economic crisis” is over, people—lots of ‘em—are quite possibly going to suffer violent or unnecessary deaths.

“British stocks have followed the pound lower in recent days as well. The benchmark FTSE index has fallen 2.1 percent this week, led by a plunge in the shares of many leading banks.”

Exactly. As I’ve warned since last July, What can’t be paid, won’t be paid. The paper stocks, paper bonds, paper pounds and paper dollars are all fundamentally the same kind of financial instrument: paper promises to pay. IOU’s. They are not payments (like gold and silver coins). They are not assets (they’re debt instruments). And most importantly, they are nothing but paper and equally vulnerable to fire, flood and sudden depreciation by government or central banks. As it becomes increasingly apparent that the paper promises pay can’t be kept, the value of those paper debt instruments must fall—and perhaps by as much as 80 to 90%.

People are slowly waking up to the fact that paper may be fine for reading and wiping their butts, but is an unreliable means of storing wealth. As more people recognize that paper can’t be trusted, a simple, concise solution to their personal economic problems will become apparent: Sell paper; buy gold. Sell everything paper; buy anything gold. Simple

“The government already controls a majority share in Royal Bank of Scotland, but the prospect of a full nationalization of the bank has alarmed investors, and shares of RBS have plunged 64 percent in the last three days. The prospect of nationalization haunts other troubled banks as well — Barclays is down 33 percent and Lloyds Banking Group is off 54 percent.”

And what, exactly, is “off 64 percent in the last three days,” “down 33 percent” and “off 54 percent”? Paper stocks. Paper debt instruments. Paper promises to pay that can’t be paid and therefore won’t be paid. P-A-P-E-R. Not everyone who holds paper debt instruments will lose their assets, but most will. Lesson? Sell paper; buy gold.

“As in Iceland, banks, real estate and other financial services boomed in London in recent years [just as they have in the US], even as other swaths [industry] of the economy withered. In recent years, this sector has been responsible for about half of total job growth in Britain even though it accounts for only about 30 percent of the economy.”

How can any economy survive if “half the total job growth” is based on government or financial activities that don’t produce anything?

A strong, vibrant economy is based on INDUSTRY. PERIOD.

The western world has been beguiled by the idea that we could prosper in a “post-industrial society”. See, we’ll ship all our industrial jobs (and the attendant pollution) to China and let the coolies sweat and gasp for air while we enjoy the “good life” of flipping hamburgers, giving each other massages, getting a gov-co job, and taking unearned wealth out of homes whose prices were magically and eternally rising.

Well, that “post-industrial economy” theory is criminal crapola. “Pre-industrial” societies live in poverty and “post-industrial” societies live in (or are headed for) poverty. The only societies that generate a strong economy and a rising standard of living for the average member are the “industrial” societies.

If the UK and U.S. would reindustrialize, our economies and standards of living could be restored and increased. On the other hand, if America and England remain dedicated to “globalization” (low tariffs) and one-world government, the American and English economies and standards of living must fall dramatically to the level of nations like Mexico or Turkey. (If you can tell me how our gov-co will be able to persuade the American people not to riot—and perhaps instigate a shooting revolution—when their standard of living is cut in half, I’d sure like to hear your explanation.)

“Consumers were also lulled into taking on more and more debt by the unusually steady economic expansion Britain enjoyed until last year . . . . Growth averaged 2.7 percent annually over the last decade. “The last 10 years were phenomenally stable, with volatility at its lowest point since the 19th century.”

The last ten years have been “fixed” to appear “phenomenally stable”. Enormous debts have been generated—but concealed or dispersed among the British people in the form or credit card and mortgage debts. The price of gold has been artificially suppressed; the values of the pound and dollar have been artificially increased. The English and American people have nearly choked or gone blind from all the “smoke and mirrors” produced by politicians and central bankers. The UK and the U.S. have lived a lie for at least a decade.

But the truth has finally reached a level that can no longer be suppressed. The gov-co is running out of smoke, and can’t even afford to make many more mirrors. Our “house of lies” is teetering; if just a little more truth escapes, that “house” will fall like the imploding Twin Towers on 9/11.

“But that prosperity camouflaged a steadily weakening manufacturing base, unlike in Germany, where the industrial sector is a relative counterweight to the outsize problems of financial firms.”

Exactly! It’s not the economy, stupid—it’s the industry. In the final analysis, any economy will rise or fall, become prosperous or ruinous based on its industrial capacity.

“For all the debt weighing down British banks, though, Iceland’s situation was far worse before the government was forced to nationalize the banking sector last fall as the krona collapsed. British bank assets total about 4.5 times the country’s gross domestic product, but in Iceland they were 10 times as large as the G.D.P. . . .”

How can bank “assets” that “10 times” the GDP be worse than bank “assets” worth only “4.5 times” the GDP? The previous paragraph makes no sense unless you understand that modern “assets” are actually paper debt instruments (promises to pay) and not really “assets” (payments) at all. How can UK banks be in better shape by holding assets of “only” 4.5 times the UK’s GDP, while Iceland banks were in worse shape for holding assets worth 10 times the Iceland GDP? That’s like saying that one man who has enough savings/“assets” to support himself for 4.5 months of unemployment is in better financial condition than another man who has enough savings (“assets”) to support himself through 10 months of unemployment.

It doesn’t make sense.

Unless . . . the term “assets” actually means “debts”. Then, a bank that held “assets” (actually debts) that were “only” 4.5 times the GDP would truly be better off than another bank that held “assets” (actually, debts) that were 10 times the GDP. Are you better off to owe $45,000 or $100,000? The answer’s obvious.

“Jeremy Stretch, senior currency strategist at Rabobank in London, said Britons might learn that a weak pound can be helpful. A weaker pound would make British exporters more competitive, thus reducing Britain’s dependence on the City, as London’s financial district is known, for future growth.”

But “exporters” of what? Fish and chips? Souvenir models of Big Ben and Buckingham Palace? Insofar as the UK (like the U.S.) shipped much of its industrial capacity overseas, it has diminished capacity to produce anything for export. How can a depreciated pound help English exports if they have little to export in the first place?

“Mr. Stretch also said ‘At the moment, we’re looking the ugliest. But if you sell the pound, what will you buy?’”

Mr. Strech’s question implicitly admits that all paper, fiat currencies are trash. Therefore, Mr. Strech asks How can people protect their wealth by selling the fast-depreciating paper pounds if all they can buy is other depreciating trash called the paper dollars, paper euros or paper yen? In a world of fiat money where the values of all papers currencies are depreciating, why dump one paper loser to purchase another paper loser?

So, if the English pound is “melting, melting,” and you sell your pounds, what should you buy?

The answer’s obvious to anyone with an IQ over 90: You don’t sell paper pounds to buy more paper dollars; you don’t buy more debt instruments denominated in paper, fiat currency. Instead of selling paper pounds and buying more paper debt instruments (promises to pay), you want to sell the paper promise to pay and buy a real “payment”: tangible gold.

The fact that the English are beginning to ask publicly what to buy with their depreciating paper pounds suggests that Americans may soon ask a virtually identical question: “But if we sell the paper dollar, what should we buy?”

Obvious and inescapable answer: gold. While there’s gold to be found and the price is affordable, there’s a simple formula to protect and even increase your wealth: Sell paper; buy gold.

And buckle up.

1 Comment

Filed under Economy, Gold & Silver Coin, Money