Since 2007 and the start of the "credit-crunch" the developed world's money system has been under stress. As a consequence, there has been an economic downturn that government and bankers have not been able to stop, convincingly, in the last five years.
The developed world has decayed to the point that it can't handle another major crisis such as an oil price well into the $100+ area.
- Food inflation now threatening, must not be allowed to take off because consumer/voter reaction will undermine government and money still further.
- As it is confidence in both the euro and the dollar is at a low ebb. Yes, it is still the only means of exchange and it can be forced onto citizens, but general confidence in the economy, the monetary system and a broad range of markets is suffering as never before.
There are bright sparks of hope, such as the Dow Jones Index returning to the highs it saw in 2007; however, this is by no means in the same investment climate as before the credit-crunch. Fear and instability pervades most markets as faith declines.
Daily we see another Eurozone crisis unfold casting doubts on the continuance of the euro and the financial credibility of its weaker members. Overall, on both sides of the Atlantic, consumer confidence continues to fall after so many efforts by central bankers to resuscitate their economies.
Why is so large a burden being put onto the central bankers, who should only really support governments' actions? Because the U.S. government is mired in political gridlock, it cannot achieve the vigorous action needed to do all it can to restore growth and confidence, and doubts now remain as to whether it's too late for any government to do so.
Forecasts of a dollar decline are seen daily as its debt levels mount to new unacceptable highs. With the impending 'fiscal cliff' on the horizon and promises of a heated political battle, consumers and companies expect a savage tax blow around year's end, further damaging consumer confidence. Will we see a recession in the States next year? It seems likely. Its timing could not be worse.
In the Eurozone, we daily see discord between citizens of the financially stronger nations and the weaker ones. Government discord is constantly apparent. Growth is proving even more elusive in the world's biggest trading bloc as it stands in a mild recession already.
Hope springs eternal, but today, realities keep hope on the run.
Can the Money System Collapse?
The thought seems unrealistic to people because it's what we use every day. But the money we use is entirely reliant on government and its central bank. If their performance does not meet the criteria required by money then confidence in that money will collapse eventually. It's clear that all currencies are not performing well at the moment as the balance sheet of most nations (except China) gets weaker and weaker. If most nations were individuals, then they would have been bankrupted by now.
A look back in history shows that not one paper currency system has lasted throughout the centuries, with the exception of those based solely on gold and silver, which remain as money assets all the way.
Not today, you may well answer! We say oh, yes, today too. Despite all the rhetoric since 1971 gold remains in the bulk of the world's leading reserves for that rainy day when something else is needed other than the currency issued by the nation's central bank.
How Does Money Collapse?
Look back at Argentina in the 1990's and you see it using the U.S. dollar, but the economy of Argentina could not support the use of the dollar so it reverted to the Peso after savaging its citizen's dollar savings in exchange for that Peso. That was a 'collapse' of their currency. If the Greeks return to the Drachma or the Spanish the Peseta, we will see a similar scene; it will be a collapse of their currency (the euro) inside their nation.
Can the dollar collapse? Because it's a government-controlled money system, the dollar will remain the means of exchange it is, even in a collapse.
A collapse will be expressed in several ways:
- Its exchange rate against other currencies can fall heavily. In the case of the dollar as the world's foundation, un-backed currency, this is unlikely as it supports the un-backed currencies across the world indirectly. Its trading partners will try to pull their currencies down with it so as to protect their trading with the U.S. The same applies to a greater or lesser extent with the other main trading blocs of the world such as the Eurozone and China. You will have noted the narrow trading range of the € & the $ between $1.21 and $1.45 over the last few years. This is because of the mutual support between the Fed and the ECB by way of currency swaps.
- It can collapse inside the country, as its buying power declines rapidly. This is monetary inflation usually caused by the over-issuance of a currency.
- Another form of collapse could include a bond market collapse where the markets push interest rates up so high as to make it impossible for governments to repay debt. This level is generally set at 7% and we have seen it in the P.I.G.S. nations of the Eurozone over the last three years. If these countries had separate currencies, they would have collapsed, but inside the euro we see that that final collapse will be expressed by exiting the Eurozone and returning to past currencies.
- In a nation where there is still a working economy, a collapse can also be expressed by the imposition of Capital and Exchange Controls, restricting the flows of money in and out of a country to protect the capital inside its borders. Its citizens usually bear the brunt.
Can the Global Monetary System Collapse?
We're of the opinion that even if the system is hobbling along, it will continue until global economies collapse. This was the case in Zimbabwe in the last decade. The Zimbabwe dollar continued in use because the government enforced its use inside its borders. But to all intents and purposes, it has collapsed long before then. In the case of Zimbabwe, the U.S. dollar became the currency in use in the country and in what's left of its economy. This is still the case today.
Before any such collapse occurs, we are certain that each individual developed world economy would cooperate with each other to take whatever measures are available to them to shore up the monetary system. These measures will prevent the system from a total collapse, keeping it staggering on all the way. We believe that they will fully harness gold then.
The questions remaining are how and when?
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