The problems our global economy face are not anything new; it is basically the same problem of monetary inflation and how best to preserve wealth storage that has plagued humanity for a long time. In the current incarnation of this problem, the problem is that the main form of reserve wealth is US Treasury bonds. These bonds are promises from the US Treasury to pay US dollars in the future to bond holders (plus interest). Check the stats on the US debt clock, and we learn that the US Treasury is broke and the US tax base cannot generate the wealth needed to pay for the promises of the outstanding debt. A debt that can’t be repaid, by definition, won’t be repaid.
That’s the problem. There will be no real growth in the global economy – only fraudulent bubbles arising out of stimulus from the Federal Reserve, which only adds to the global debt problem – until this problem is solved. Here’s a framework for the solution:
- This is an international issue, and any approach that does not operate from this perspective is doomed to failure.
- The US dollar will need to be devalued. International Treasury bondholders are taking a loss here, as are all holders of US dollars.
- Significant budget cuts at all levels of US federal government, and probably a sale of some US assets, as Niall Ferguson suggested. At this point, we may begin to wonder: Is this even viable? Can the US economy survive with a weaker currency, a smaller government, and fewer assets? I’m not so sure.
- It is worth noting that while one part of the problem is US Treasury bonds, another part of the problem is the banking institutions that are outside of any single jurisdiction -- most obviously, Goldman Sachs and JP Morgan, and independent trading desks within those institutions. They need to give some of their wealth back, as they've simply siphoned off too much lately; this is not so readily quantifiable, but perhaps understood intuitively when one considers how unemployment is increasingly leading to rioting and regime changes throughout the world. Wealth from the banking institutions derived from monetary inflation needs to be returned and put towards projects for building the world beyond the nation-state, and towards non-state networks. Non-state networks re-wire the whole world, and their respective virtual currencies serve as the foundation for the new global economy.
Assuming this path is valid, how could we actually get there? I believe some type of a new government needs to be declared. It will need to have access to the capital of shadow economies and multinational banking institutions, and will need to bring this underground capital above ground by re-wiring infrastructure and how our world is governed.
In terms of how all this affects investing, the first and most important step is to have gold. New monetary systems used by non-state networks will be relational to gold, as gold will implicitly be re-monetized. The further we are from this point -- and I believe we are still very, very far -- the further we have to go in this bull market in gold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.