Egon von Greyerz: The World is Heading Rapidly Towards Calamity! Got Gold?

ALEA IACTA EST – The Die Has Been Cast!
Yes, this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have created a credit infested and bankrupt world. They will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money. The consequences are clear; we will have hyperinflation, economic and human misery as well as social unrest. When will the world finally begin to understand that we have reached the point of no return?

The latest EU and IMF package of $ 1 TRILLION (Euro 750 billion) is nothing more than a futile attempt by governments to abolish poverty by printing paper. Let’s be absolutely clear, this money does not exist and the EU governments are hoping by declaring such a large amount that they can con the Wolfpack – speculators with enormous fire power such as hedge funds and investment banks. At this point the EU has just picked a large round figure out of the air. When their bluff is called by the Wolfpack, however, and the next attack happens, EU governments will, after initial huffing and puffing, start printing unlimited amounts of paper.

Never in history has the world been in a situation when virtually all industrialised countries are bankrupt. Therefore there is no precedent for what will happen in the next few years. What we can be quite certain about, however, is that events will happen in a seemingly random pattern and that it will be impossible to forecast where the next crises will start.

We can expect much of what is outlined below to happen:
1. ‘Wolfpack’ Attacks Will Increase
The Wolfpack will use the credit default swap (CDS) market to attack any weak financial sector, be it a country, a bank or a company. The combination of the leverage of the CDSs and the massive capital available to the Wolfpack makes it possible for them to bring down or badly maul whatever they attack.

There are so many weak potential victims that the Wolfpack can attack and they will start with the most vulnerable ones like, Portugal, Spain and Ireland etc. – but when the time is right they will also attack the US and the UK. As such, in the coming year we will see country after country coming under attack from the Wolfback which will lead to acceleration in money printing and higher interest rates.

2. Greece, Portugal, Spain, Italy, France, the UK, the US and Many More Will Default
The EU support package of $1 trillion is supposed to be sufficient to protect the rest of Europe from another Greek tragedy. The dilemma with such a massive EU commitment is that no government expects to have to pay the money out. If they did the voters in the respective EU countries would throw out their government. Why should the German people, who are also having hard times, pay for the Greeks, Portuguese or the Spaniards, especially since these loans will never be paid back.

Greece is bankrupt but is still taking on additional EU loans of €140 billion. In addition, their austerity measures are supposed to bring the deficit down from 12% of GDP today to 3% in a few years time – but who can be so stupid as to lend to a bankrupt nation which will sink into the Ionian and Aegean Seas in the next few years. With massive cuts in government expenditure, with major falls in output, with unemployment rising fast, with tax revenues collapsing how can Greece possibly be expected to improve the economy and pay a high interest rate on their exploding debt? In addition, as long as they have the Euro they will be totally uncompetitive. So if they couldn’t manage their economy in the so- called good times, it is absolutely guaranteed that they have no chance of surviving in bad times. So Greece will default and so will Portugal, Spain, Italy, France, the UK, the US and many more. Before that happens, though, there will be the most colossal worldwide money printing exercise which would have used up most of the trees in the world but for electronic fiat money.

Spain has the lowest total debt to GDP of 250%. Germany and the UK have around 400%, the US over 500% and Greece over 800% debt to GDP. These figures are absolutely astronomical and prove that most governments in the world will be totally incapable of repaying their debts or funding the pensions or medical care which they have committed to. It doesn’t matter however much governments cut expenditure or raise taxes, all these countries are insolvent and nothing can save them.

3.The World Will Experience Hyperinflation
Most governments still believe that deficit spending and money printing is the solution to all their problems. Because the world economy’s expansion in the last 100 years and particularly in the last 40 years has been primarily based on credit and not real growth, governments live under the false impression that money printing will work this time too. When investors will no longer buy worthless government debt that will never be repaid with real money governments issue and buy their own debt thus monetising the debt or print money. This will be the hyperinflationary phase. Thereafter the world will realise that none of the government debt and very little of the bank debt will ever be repaid. Credit will then implode and so will also the assets financed by credit.

Precious metals will be the primary beneficiaries of hyperinflation. Certain commodities, especially food and energy, will also go up in price but most assets that have been financed by the credit boom will go down in real terms. This includes property, stocks and bonds. It is true that in hyperinflationary money these assets could still go up in price because if someone who earned $50,000 per annum in real money now earns $5 million in newly printed money, his house will probably also go up in nominal terms but in real terms property prices will decline massively. There will be no credit available and interest rates will be very high, probably at least 15-20% so very few people will be able to buy a house.

Hyperinflation will destroy many currencies so paper money will definitely reach its intrinsic value which is zero. Gold and silver will virtually be the only assets that will protect investors fully against the destruction of money.

4. Eventually a New Monetary and Financial System Will Be Established
The adjustment period will be very long and will involve economic and human misery, leading to social unrest and major political change. It will be a horrible experience for the world during this extended period of adjustment. It will be like a forest fire that clears out the deadwood and creates the conditions for strong new growth. Once the new era starts it will therefore be from a very much lower level and individuals will be rewarded for hard work with little or no social security safety net. Credit will only be granted for sound capital investment projects, not for consumption or speculation. Ethical and moral values will return and the golden calf will not be worshipped. Before that, however, the period of readjustment will be very long and extremely difficult for the whole world.

The Next Leg of the Debt Crisis is Here
The $1 trillion EU/IMF rescue package was never intended to be more than a headline figure. EU governments were hoping that this would frighten the Wolfpack away but so far this has failed. How can anyone take a massive rescue package seriously when most of the countries making the commitments are bankrupt themselves? Spain and Italy have committed tens of billions each – and they are the ones that will be attacked by the Wolfpack next. This is the bankrupt saving the bankrupt. The IMF has no money but is dependent on its members of which the US is the biggest contributor – and they are bankrupt too. The UK, which is not in the Euro Zone and which has a worse budget deficit than Greece, committed £15 billion which, if paid out, will never be repaid. The US offered European banks dollar Swap facilities (dollar loans) of a minimum $500 billion while at the same time its Federal Reserve Bank injected at least $500 billion into the U.S. banking system thereby making it very clear that the banking system is under tremendous strain similar to 2008. The whole thing is a total farce. Governments commit trillions to rescue banks and sovereign states but cannot even make budget cuts of a few billion in their own countries.

The world economy and the world financial system is being run by morons who only have their own self interest in mind and do not understand the consequences of their ruinous actions but this is just the beginning. Things will get a lot worse. [Got gold?]

*http://matterhornassetmanagement.com/2010/05/18/alea-iacta-est/

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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