The fate of the global economy was decided decades ago as
deficits, debts and derivatives started their exponential growth and reached
the time bomb phase that we are now in. This final chapter of this 100-year era
will end in “a final and total catastrophe of the currency system” as
von Mises succinctly articulated.
It started on Jekyll Island
It all started in 1910 when a few senators
and bankers, led by JP Morgan, secretly met on Jekyll Island with the purpose
to set up the Federal Reserve and so control the banking system. Thus, the Fed
was a creation by private bankers and for the benefit of these bankers. Few of
them could have imagined the enormous success of their venture as the control
of the financial system led to vast fortunes for a very small elite. The back
side of these fortunes is global debt of $230 trillion plus unfunded
liabilities and derivatives. The total which is in the quadrillions is what the
poor masses in the world are liable for. Not that they will ever be able to
repay it but the implosion of these debts will lead to misery for the majority
of people for generations to come.
Critical to protect yourself against these
events
Sadly,
things have now gone too far to stop the inevitable currency collapse and
implosion of the financial system but that doesn’t mean that it is too late for
individuals to protect themselves. As we enter this final phase, there will be
panic in financial markets with governments and central banks taking draconian
measures. Below are some of the potential risks that all investors must protect
themselves against today:
·
Currency collapse –
leading to destruction of capital
·
Capital controls –
making it impossible to take money out of bank or country
·
Bail-ins – the
bank will steal your money in order to try to save itself
·
Forced investments – compulsory
purchase of treasuries with your bank or pension assets
·
Custodial risk –
stocks and bonds will be hypothecated by the bank, leaving you nothing
·
Bank failures – all
your investments will disappear as the bank becomes insolvent
The
above list in not exhaustive but it contains the most likely events that will
take place in the next few years. Most private investors don’t see these risks
and have zero protection against them. And professional money managers haven’t
got a clue about real risk, nor do they see any need for protection or
insurance. When you manage OPM (Other People’s Money), you take maximum risk in
order to benefit from the upside. The downside is not your risk and thus it can
be ignored. This strategy works extremely well until the music stops. But as
long as money printing and credit creation inflates markets, these
professionals will never spend a second worrying about the total destruction of
clients’ money.
So how
likely are the above risks and how do you protect against them? Anyone who has
followed some of my work will know that I consider all the above risks as
guaranteed to materialise.
Currency collapse is already happening with all
currencies down 97-99% in the last 100 years. The final 1-3% will happen in the
next few years as governments print unlimited amounts of money. But remember
that the last 1-3% fall is 100% from here and thus a total destruction of
money. So whatever cash you have will be totally worthless in the coming
hyperinflationary phase.
Capital controls are likely to start within
12-18 months in many countries including the US. As deficits increase and
currencies fall, governments will stop anyone from taking money out of the bank
as well as out of the country. This is just the next step in the total control
money. We have lately seen FATCA (Foreign Account Tax Compliance), cash bans
and the OECD AEOI (Automatic Exchange of bank Information). Capital controls
will be the next logical step in an attempt to virtually confiscate money.
Governments on the road to bankruptcy will take any desperate measure to
control the people and their money.
Bail-ins are guaranteed and in the legislation of
most Western Countries. The average person has no idea what bail-in is nor its
consequences. Simply, it means that for insolvent banks, which will be the case
with most banks, governments will not bail them out but instead depositors’
money and assets will be used to cover the banks’ losses. Since banks are
leveraged 10-50 times, all the money belonging to the bank customers will be
gone. At that point, after the bail-in, governments will need to step in with
bail-outs. But any government intervention will be futile since they will just
create more debt to solve a debt problem.
Forced investment in treasuries will happen as
governments issue an ever increasing amount of debt. At that point, the
government will be the only buyer as we are seeing in Japan currently.
Therefore, governments will force people to put their bank assets into
treasuries to shore up the country’s finances. But then it will of course be
too late and all the money going into government bonds will be totally
worthless as these bonds go to zero.
Custodial risk means that it is not just
clients’ cash which is at risk. Any asset deposited in a bank carries the same
risk as cash. In theory stocks, bonds or physical gold should not be in the
balance sheet of the bank and therefore not be part of a bankruptcy. Firstly,
it could take years for the receiver to sort that out. But more importantly as
banks come under pressure they will use client assets in order to shore up the
assets of the bank. This was the case for MF Global for example. We often see
banks not actually having the allocated physical gold that they have told the
customer he possesses. When banks come under pressure, they will take any
desperate measure to save themselves and this will definitely include client
assets. And don’t believe that the government will help you since they are
bankrupt too.
Bank failures will be commonplace in coming
years as banks’ irresponsible lending will be exposed. Collapsing asset
prices will exacerbate this problem dramatically. Most people believe that
money or assets in the bank will be totally safe. Personally I wouldn’t deposit
any major amounts of money or assets in a bank. And if I did I would ask for
collateral. Banks today are totally untrustworthy borrowers of
depositors’ money and anyone hoping to get their money back will soon learn
that they won’t.
So if
you can’t trust the banks, what do you do with your money? In uncertain
times it is essential to avoid counterparty risk. Therefore, no assets must be
held with a counterparty who is heavily exposed financially. Directly
controlled assets is the best way to control investments. This can be property,
land, direct ownership of companies including direct registration of stocks.
The best insurance money can buy
The best and cheapest insurance against the risks outlined above
is to hold physical gold and silver. But it is not enough just to own gold and
silver but just as important how they are held. It is a sine qua non to
hold metals in physical form, outside the financial system and outside your
country of residence. It is also critical to have direct access to your wealth
preservation asset which should not be held through a counterparty.
Gold
and silver will not protect investors against all the problems that the world
will experience in coming years. But if they are held in the right way and
place, precious metals will be the best insurance against the massive wealth
destruction that will take place in the next few years.
Egon von Greyerz
Founder
and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com