Writer after writer talks about the global currency game of “competitive devaluation”, and their writing implies what the impact of this will be on the gold (and silver) market, however I have yet to see our current scenario explicitly laid-out.
Before I get into the heart of this analysis, let me briefly summarize the concept of “competitive devaluation”, for readers who may understand what is happening, but not why. The premise which is guiding the policies of our “leaders” (and the “experts”) who advise them is that the way for each nation to solve its massive, domestic debt/deficit woes is to get other countries to fund their deficits.
How does this relate to the phenomenon of competitive devaluation? The idea is that if any particular nation drives-down the value of its currency that it forces one’s own citizens to buy fewer imports (by destroying their wealth), while simultaneously making one’s domestic manufactured goods cheaper and (supposedly) more-appealing to both domestic and foreign consumers. In other words, every country is planning to fund their domestic deficits with “trade surpluses”.
Obviously, as many have written and most can figure out on their own, it’s impossible for every nation to simultaneously have trade-surpluses, since trade is (by definition) a zero-sum game: for every “surplus” there is a corresponding “deficit”. This means that with everyone trying to do this at once, that (roughly speaking) at least half the nations are doomed to fail – on that basis alone.
To further amplify the idiocy of this monetary ritual-suicide (by Western governments), these governments are engaging in competitive devaluation, irrespective of whether they have anything to sell and/or irrespective of whether there is anyone to buy their goods. The only people with any spending-power (in aggregate terms) are the citizens of Asian/developing economies. However, Japan and the Western debtor-nations are generally only competitive (even with debauched currencies) in producing high quality/hi-tech goods – goods which are still out of reach for most of the low-but-rising incomes of the surplus nations.
This means that even if only one Western nation was engaged in this form of economic devolution that the likelihood of success could not possibly justify the guaranteed harm which comes from destroying the wealth of one’s own citizens, compounded by the ever-increasing risk of hyperinflation if these monetary lemmings are too “successful” in destroying their own currencies.
It is ironic that it is our debt-pushing bankers who are 100% responsible for this voluntary mass-destruction of all the fiat, paper-currencies which they claimed were our path to prosperity. Even more ironic, the only possible end-result of this hopeless gamble is that investor wealth will flee all forms of banker-paper.
Unlike “hard assets”, like gold, silver and the raw materials which fuel our world, the banker’s paper-assets only retain any value at all as long as the (paper) currencies they are expressed in retain their value. This means that destroying currencies also means destroying all banker-paper and the entire paper-empire of Western bankers. This brings us to the bond market.
As I read article after article about Western debtor-nations (and Japan, the surrogate “Westerner”), there is a common theme in the writing of all these commentators (at least by all the competent ones). In very nearly all of these economies, there is an enormously strong case to be made that the bond-markets of each/every one of these nations represent a massive bubble, on the verge of bursting.
What should be terrifying here to any/every person idiotic enough to hold any sovereign debt of the Western-debtors is that the argument being made about these bond-bubbles (and their imminent collapse) is 100% independent of the effect I just described: that destroying currencies must destroy all-banker paper.
Bond-holders can crow all they want about the “fabulous prices” these bonds currently fetch. Presumably bond-holders still retain enough of a vestige of intellect to understand what those nominal bond prices really mean – once converted into worthless currency. Yet even when totally ignoring the monetary argument which concludes that all Western bonds must go to zero, we have analyst after analyst arguing that on pure, domestic fundamentals alone, these markets already represent ridiculous bubbles – ripe for spectacular implosions.
1) These nations are simultaneously all dumping the most “supply” onto the market in history.
2) Since bond-prices are the inverse of interest rates, and all Western interest rates are near-zero, the bond-market is beginning this massive-dump with prices already near their absolute maximum.
3) All global bond-buyers either want to “diversify” away from sovereign bonds (in the case of Asian surplus-nations), or, they have nothing with which to buy bonds, except the latest funny-money, hot off of their printing presses.
Anyone who has ever cracked-open an Economics 101 text-book can tell you that when you increase supply that price goes down, and when you reduce demand price goes down. And you don’t even have to know how to spell “economics” to know that when the price of something is already at its maximum that the price must go down.
In a world of lemming-investors, bond-holders have the dubious distinction of being the largest herd, running the fastest, toward the largest cliff. As just mentioned, the only way in which Western governments (and Japan) can even temporarily prop-up the world’s largest, most-obvious bubbles is to print-up new “money” at an even faster rate – in order to buy-up their own bonds, or to continue the current bond-market game of “musical chairs”.
For those who still haven’t clued-in to what is happening already in bond-markets, we have these morally/intellectually/economically bankrupt Western nations pretending that there is still “demand” for their bonds, by printing-up more and more fiat-paper for the sole purpose of buying each other’s bonds. Such an exercise usually goes by the name “Ponzi-scheme”.
Simply, the only way to prop-up these doomed bubbles day-by-day is through accelerating money-printing, and thus accelerating the speed with which all banker-paper (including bonds) goes to zero (irrespective of nominal prices).
To this point, I have literally done nothing more than just mention gold and silver. There was little need to do more. In the world’s giant “FX” (foreign currency-exchange) market, when currency-traders see a particular currency weakening, they move into an alternate paper-currency, or gold.
In the world’s even larger market for the bonds of sovereign nations, if you have fears for the bonds of one nation/currency, you sell those bonds in order to buy the bonds from “stronger” nations, and if there is any general uncertainty, you hedge that portfolio with gold.
What we now have in the world’s two largest markets for banker-paper (outside of the derivatives casino) is a scenario where all options for investors are being simultaneously destroyed except for gold and silver. Sadly, in destroying themselves, the bankers are dragging down all of our economies (and all the people) with them.
Whether it happens tomorrow, next week, or next year, the real exodus out of banker-paper is is about to begin. Naturally this exodus must (as a simple matter of arithmetic) cause the bankers $1 quadrillion derivatives market to be vaporized – since it is nothing but leveraged-bets on all of this paper.
Let me repeat the current dynamic one more time (since bond-holders are not the “brightest bulbs on the tree”): the only strategy to prop-up a series of bond-bubbles over the short-term is one which must destroy all of these bond-markets over the medium-term.
Even if we multiply the current prices of bullion by ten, that would still only make the bullion market large enough to absorb less than 5% of all the paper from the gigantic, FX and bond markets. Obviously some of this capital will (and has) flooded into equities markets – yet more paper vulnerable to banker-driven bubbles.
While equities representing “hard assets” (like commodity-producers) will retain value even as other paper goes to zero, equities which are merely based upon more banker-paper (like the entire financial sector) will go to zero – as Western bankers complete their self-annihilation.
The same bankers who have tried to destroy the gold market, and to deny the 5,000 year-old fact that gold and silver are the best “safe havens” for investor wealth have now managed to destroy every other “safe haven” on the planet – while keeping bullion prices low enough to allow precious metals investors who got here first to load-up at (literally) once-in-a-lifetime prices.
Under different circumstances, we should thank them…