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What do you get when the producer of the world's reserve currency takes on too much debt? Nothing less than the end of the US Treasury-based monetary system.
So says Eric Janszen, economic and financial market analyst and proprietor of iTulip.com. In chronicling the decline of the global economy over the past decade, Eric has formulated a framework called the "Ka-POOM" theory, which endeavors to understand how the immense run-up in global debt will be resolved.
In short, it looks at the credit bubble that began in the early 1980's, started accelerating in 1995, and has now reached epic proportions. The amounts are so staggering at this stage that Eric believes it is too politically undesirable to let natural market adjustments clear them away -- the magnitude of the deflationary pain this would create is simply unacceptable for politicians looking to get re-elected. The only other available option is to service these debts via a dramatically devalued currency. Hence the key role the Fed is playing today.
The Fed is at the epicenter of this process, intervening heavily to keep the natural corrective market forces at bay. In this, it has a dual strategy. The first is to keep asset prices high (i.e., fight asset deflation), which it is doing by keeping interest rates historically low. The second is to keep wage and commodity costs under control, which it primarily does via devaluing the currency (maintaining a "weak dollar").
And, of course, through its intervention, the Fed is doing all it can to keep the current financial system in place to perpetuate the process for as long as possible. The end result is a fundamental shift in risk from Wall Street to the taxpayer.
So the big question is: How long can this last? Is there a point at which confidence in the system breaks and market forces finally overwhelm the intervention?
Eric's answers: "Much longer than most people expect." And "Yes."
First off, as the most important central bank in the world, the Fed has supernormal powers. In theory, it can expand its balance sheet infinitely. Its ability to absorb massive amounts of new liabilities is theoretically limitless, much of which can be easily concealed from an accounting standpoint.
And since the US is both the world's largest economy, as well as the provider of its reserve currency, other countries are compelled to support the current regime. A mortal crack-up in the US economy would deliver undue pain to all its trading partners, so they continue to buy Treasuries in sufficient amount to fund US economic activity.
But that's not to say they're happy about it. And here's where attention should be paid (and where the importance of gold comes in).
For much of the past century, the United States comprised approximately 54-58% of the global economy. Today, its share has shrunk down to about 18%, meaning its relative importance to the global system has diminished.
Issuing the world's reserve currency is a privilege that must be continually earned through transparency and sound stewardship -- qualities the US has flagrantly lacked in the past several decades as it has been blowing asset bubbles and running trillion-dollar deficits, via incurring massive debts and increasing its money supply tremendously. So, even as they continue to support the current Treasury-backed monetary regime, the world's central banks have begun hedging their exposure.
After several decades of being net sellers, the world's central banks became net buyers of gold in the second quarter of 2009. As Eric puts it:
There was no Plan B in the global monetary system when it switched over to the US dollar reserve basis for global monetary reserves. The only fallback is gold, gold is the only reserve asset that central banks hold other than dollars, and to some extent euros, but it is mostly gold. So gold is the fallback. So what I thought was going to happen is that over time, gradually, that there would be an increase at some point in gold holdings by central banks as they hedged the marginal increase and the number of Treasury bonds that they needed to hold as a result of conducting trade with the US and also simply maintaining the US economy through low interest rates and providing sufficient investment to continue to offer the US government.
So what is very interesting to me is [that] starting in the second quarter of 2009, right after the financial crisis, is when global central banks became net buyers of gold, which to me indicated that they had as a group, determined that it was time to more seriously hedge their dollar assets, even as they continue to buy Treasury bonds to increase their hedging.
Before that, there were effectively two teams: There were the buyers, who were countries like India and Russia and China, and the sellers, which are most of your European countries. And that structure of the gold market occurred and was maintained until the second quarter of 2009, and it shifted to a much broader base increase in the number of governments participating in the gold market, including Saudi Arabia, Mexico, and other allies of the United States.
Eric sees this move by central banks, of positioning themselves closer to the door, as a natural step to the inevitable endgame here, which is the dissolution of the US Treasury dollar-based monetary system. Due to entrenched special interests, politics, escalating commodity scarcity, and other factors, he does not see the US taking necessary corrective action before confidence in the solvency of the US and its currency collapses.
As such, Eric advises investors position themselves into gold and assets that take advantage of rising rents and energy prices.
Click the play button below to listen to Chris' interview with Eric Janszen (runtime 43m:46s):
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Eric Janszen is founder and president of iTulip.com. Eric is a prolific economic, financial market analyst and author of several notable books including the most recent one, The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.
Our series of podcast interviews with notable minds includes:
- Eric Janszen
- Paul Brodsky
- Carolyn Baker
- David Stockman
- Rob Hopkins
- Joel Salatin
- Charles Hugh Smith
- Frank Barbera
- Nate Hagens
- David Morgan
- James Turk
- Eric Sprott
- John Rubino
- Addison Wiggin
- Simon Black
- Axel Merk
- Paul Tustain
- Francis Koster
- Dogs_In_A_Pile
- Bud Conrad
- John Williams
- Robert McFarlane
- David Collum
- Joe Saluzzi
- Jim Rogers
- Bill Fleckenstein
- Marc Faber
- Willet Kempton
- Dan Ariely
- Ted Butler
- Adam Taggart's blog
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Chris - you may have discussed this in the past, but clearly what the subject of this discussion with Eric and a lot of your other research points to is a return to some form of a gold standard.
You often ask these guests about Treasuries and gold and other ways of insulating, but I think one fundamental question or fact that I have never seen any information on is how much gold is held by the central banks of each country, including the United States.
If we believe there will ultimately be an end to the fiat based system, what would inform whether I should hold on to dollars or not would be whether the U.S. has sufficient gold reserves to make my dollars useful relative to other currencies when buying imported oil, for example.
I'm sure part of the problem is that this type of information is very closely held by governments around the world. (I recently watched a History Channel video - from this site I think - that suggested Fort Knox might secretly be empty.)
Conspiracy theories aside, it would be interesting to share or discuss an anlysis of the levels of gold reserves in central banks around the world.
My 2 cents - thanks.
Chris - you may have discussed this in the past, but clearly what the subject of this discussion with Eric and a lot of your other research points to is a return to some form of a gold standard.
You often ask these guests about Treasuries and gold and other ways of insulating, but I think one fundamental question or fact that I have never seen any information on is how much gold is held by the central banks of each country, including the United States.
If we believe there will ultimately be an end to the fiat based system, what would inform whether I should hold on to dollars or not would be whether the U.S. has sufficient gold reserves to make my dollars useful relative to other currencies when buying imported oil, for example.
I'm sure part of the problem is that this type of information is very closely held by governments around the world. (I recently watched a History Channel video - from this site I think - that suggested Fort Knox might secretly be empty.)
Conspiracy theories aside, it would be interesting to share or discuss an anlysis of the levels of gold reserves in central banks around the world.
My 2 cents - thanks.
Interesting question.
However, I have very little faith that the reported official gold reserves are what actually exist.
For some reason, pick your favorite, the actual, audited amount of gold in Ft. Knox is a more closely guarded secret than plans to build a nuke (whihc leaked out over the web a long time ago).
Further the level of opacity surrounding official swaps and leases is extraordinary. Who actually holds what is a rather unknown set of variables.
So any analysis of what a gold standard might mean in fiat money terms is hobbled by this lack of transparency.
However, I am rather comforted by all this jealous guarding of gold data by TPTB. It means that instead of gold being a barbarous relic of the past, it is actually quite near and dear to a central banker's heart. So dear, that they cannot part with even the most rudimentary of what should be quite public data.
Watch what they do, not what they say.
I'm a loyal subscriber to both iTulip.com (Eric Janszen's site) and of course CM.com, and have long thought you guys would make an excellent team. You're both miles ahead of the MSM and the blogosphere, and you both bring some of the finest, most objective analysis I've ever seen to the table. You guys are, hands down, my favorite sources of forward-looking economic analysis. Bar none.
Chris and EJ, I hope this will mark the beginning of a long relationship between you guys. Your views differ slightly, but are very complimentary. Quite a few of us subscribe to both sites, and follow both of you on our own. Having a "one stop shopping" opportunity to benefit from your brilliance is a real treat.
A request... What I'd absolutely love in a future podcast is a frank (but of course polite) discussion of the areas were you disagree. You are both really, really smart guys, and I think that your followers would really benefit from a discussion that focuses on the areas where you see things differently, and a discussion of why your views differ. For example, I know EJ feels that a U.S. hyperinflation is a near impossibility, whereas Chris thinks it much more plausible. I would so love to hear you guys discuss why you see this differently.
Thanks again for doing this, and I look forward to more!
Erik
a/k/a xPat on iTulip.com
This is interesting, although not sure how accurate it is...also check out the energy output tab.
http://www.usdebtclock.org/gold-precious-metals.html
This is interesting, although not sure how accurate it is...also check out the energy output tab.
http://www.usdebtclock.org/gold-precious-metals.html
Thanks for the link Retha.
Travlin
You can always trust your government -- to do anything necessary to preserve itself. Travlin
Seconded.
(jpatter666 on iTulip)
"As such, Eric advises investors position themselves into gold and assets that take advantage of rising rents and energy prices."
Eric mentions that RE will be down for quite some time. What is he refering to when he says "assets tha take advantage of rising rents"?
Nate
"As such, Eric advises investors position themselves into gold and assets that take advantage of rising rents and energy prices."
Eric mentions that RE will be down for quite some time. What is he refering to when he says "assets tha take advantage of rising rents"?
Nate
That one really took me aback when EJ first started touting it on iTulip about a year ago. I remain convinced (as is, apparently, EJ) that the rout in U.S. residential real estate is anything but over, and has a long way left to go.
But his thesis seems to be that while single family homes - particularly high-end - will continue to slump, more and more people will be taken out of the ownership market and thrust into the rental market. EJ advocates a fund he has personally invested in that is all about large rental developments.
I'm still a little skeptical about why this would make sense now, but EJ is as brilliant as CM, and he seems very committed to the idea. I suggest reading the relevant posts on iTulip.com for more.
ET
The value of real estate is between 6 and 16 kg silver for a three bedroom house are figures I have encountered.
Please don't confuse yourselves by converting to meaningless fiat money unless you are going to buy silver with the stuff.
If we were are firmly committed to an inflationary future then we can put our money where our mouths are and borrow to the max to buy silver.
I for one will not. (Until I change my mind.)
"Common sense is the collection of prejudices acquired by age eighteen." Einstein. ""Absolute certainty is a privilege of uneducated minds-and fanatics. It is, for scientific folk, an unattainable ideal." Cassius J. Keyser ."