FDR Capital Market Report : January 2012
We are witnessing today a global movement of mass protest all over the world, though, to a large extent, people don’t really know the fundamental cause of this crisis.
One can blame the governments, the banks, the Chinese and so on…but it takes much more analysis and studies to identify what triggered this Financial chaos.
Why is it so hard to understand it ? Because it requires a complete new analysis of what we’ve been taugh about our monetary system.
Studying monetary history since the begining of the 19’s century can help understand the mechanism at the basis of the disruption of the global Financial situation.
It’s quiet a long journey if you want to be able to understand the « big picture », especialy if you don’t have any economic and Financial background, but let’s try to lay down the basis of your journey..
Understanding money and monetary history :
We are experiencing today the end game of the monetary system we have been living in since President Nixon canceled the Gold standard in August 1971.
Since that date, we’ve been living in a fiat money system, a monetary experience, where money can be created out of thin air and almost nothing refrain banks from creating money based on debt. This system is called the fractional reserve banking system or fiat money system.
Now you need to understand that money is created out of debt since that period, and the banking industry is collecting interest on this debt.
If you go futher, you understand that there is less amount of money in circulation than the total amount due to the banks : money in circulation is inferior to the debt + interest due, which condemn, in the long run part of us, to bankrupcy if money is not created perpetualy. Hence the booms and bust when money creation is expanded of contracted.
The gold standard had one very important feature : impose discipline on banks and government. It was not possible at that time to create massive debt without the corresponding gold reserve to back it.
Money creation was limited to the amount of gold a country (or a bank) had in reserve.
During a gold standard, price are stable. You’re not suffering a loss of purchasing power due to inflation.
To the contrary, when no limit is given to the creation of money, the monetary basis explodes wich contribute to the dévaluation of the currency you own.
Here is a simple example to understand inflation :
Let’s take 2 apples on a table, and 3 people who own 1000 dollars each , compete to buy these 2 apples : we can conclude that the maximum price for these apples will reach 1000 euros
Now give these 3 people 10 000 dollars each. What price do you think the apples are going to reach ? much more than 1000 euros for sure.
This is inflation,
when the monetary basis explode, price are going up when they are chasing the same amount of product. And those with a salary not keeping up with the rate of inflation are loosing purchasing power (even though they still have the same amount of money).
Exponential creation of money has been made possible because of the end of the gold standard. We are living in a world of fiat money where money is not convertible in tangible asset like gold anymore.
No Wonder we have experienced in the last 40 years the biggest credit bubble in human history. No Wonder banks are making so much money collecting interest on all that debt in circulation.
The total debt of the USA has reached 15 Trillions dollars. Every minute the national debt of the USA grows by 2 Millions dollars.
Gold wars :
Since the end of the Gold standard, and actualy since the inception of the Federal Reserve in the USA, there has been a constant fight in between fiat money supporters and gold standard supporters.
The Financial sector has been able to generate tremendous profit thanks to this fiat money system, so they have tried to protect this system by constantly fighting gold (manipulating it as described by GATA thesis) and brainwhashing people about what is the real basis of a sound monetary system.
Have you ever attend a monetary course at university ? i’m sure you never had the chance…
Economists like Milton Friedman and Keynes were supposedly the best minds in economic circles, but they were actualy promoting only one system : fiat money.
Fiat Money system always end up in chaos and the value of fiat money always goes back to its intrinsic value which is zero.
Our fiat money system is responsible for all of the major problems we are experiencing today : inflation, poverty, wars, unemployment.
Let me quote here Ferdinand Lips, swiss banker and monetary Historian, author of Gold Wars (which i deeply recommand if you want to understand the strategic role of Gold) during history.
« If the countries at war in World War I and World War II had not hastily and foolishly given up the gold standard, WWI might not have lasted more than six months, because the warring nations would have run out of gold to pay for it… i contend that WWI lasted as long as it did because the gold standard was abandoned. Deficit financing made it possible for it to last over four years, destroying capital wealth, a rich cultural héritage and unnecessarily killing millions of Young soldiers and innocent people ».
The end of this fiat money system is now very close, we have reached pick debt : governments, people, companies have almost all reach a level where they can’t take on more debt. so as explained, if debt can’t be issued the whole system collapse. The debt pyramid crashes at the same time as people lose their confidence in paper money.
The crisis will end up in hyperinflation depending on how many trillions will be printed and on, as Pr Antal Fekete mention, the velocity of money, but in any case, this fiat money system like all previous experiment will end up very badly unless gold standard becomes the basis of our monetary system again.
Those who don’t own their wealth in tangible assets will be destroyed by the implosion of the gigantic debt pyramid. It has already happened in the past (French Assignats, John Law) but this time we are going to expérience it on a global basis. Be ready and protect yourself as the domino effect has already started.
Gold is not just an asset in which you invest to make a potential profit, you will, but it’s much more than that, it’s more powerful than a vote nowadays (unless you’re voting for Ron Paul in the 2012 US élections).
I truly believe that, were people more educated about monetary history, Gold would be considered as the best political weapon to make things change towards a more stable world.
To conclude i will quote Ferdinand Lips again :
« The knowledge of those few who have taken the time and effort to study the history of money an man will be needed badly one day. When the time has come, it will serve to end the suffering of mankind and to relaunch the world economy by putting the world Financial system back on a safe golden track ».
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