Collapse of banking system to drive up gold price

Monday, May 24, 2010
By Paul Martin

By Kenneth J. Gerbino
CommodityOnline.com

There is so much hysteria in the hard money camp on Greece and the European Union that one had better start looking at the facts otherwise it could cost you a lot of money.

Before discussing the Euro, Greece and Gold, let me go over some important concepts:

The economic problems faced by all countries are rooted in paper money systems. In fact, paper money systems are one of the root causes of socialism and socialist thought. Paper money also gives capitalism a bad name. Right now the temporary solutions from bail-outs and printing money will change the short and medium term outlook for many investments. These changes must be analyzed properly. The long term will always get worse from these bail out policies, but making money in the markets means having the good sense not to get carried away by hysteria from the press and gold coin shops (although everyone should buy some gold and silver coins).

Greece and the Euro

The current European Union problems with Greece and the countries expected to follow with bailouts (Portugal, Italy, Spain and Ireland) are serious but not as horrible as the press is reporting. The groups behind the hysteria are the usual suspects…the banks who own a lot of the troubled debt that could default. Most of my friends in the hard money camp are also “losing it” over the Greek crisis.

Since the European banks are more leveraged than the U.S. banks were in 2008, I can see why these people and politicians would be panicked as a domino effect could happen. The solution to bail out Greece and the rest of these countries will end up with plenty of money being created. The five PIIGS countries comprise 7.7% of the global GDP and their collective Government Debt (which will increase in 2010 by 5-10%) is approx. $4.2 trillion. Approximately 30% is in danger of defaulting over the next 3-4 years. There is more private debt as well, but there are plenty of assets (buildings, factories, etc.) backing much of that debt. It’s not all bad.

The PIIGS government debt is a lot of money owed to lots of institutions and investors all over the world. The EU bailout, recently announced, is almost a $1 trillion package and soon, I believe the structure will be modified and most likely go something like this:

Restructure most, if not all, of the entire $4.2 trillion of debt over 10 years.

This means that the authorities are now dealing with $420 billion on an annual basis from all five countries.

30% of the entire PIIGS debt is feared to be “bad debt”.

Stretching this out over 10 years means we are now talking about 30% of $420 billion. This is now a $126 billion per year problem.

Dealing with $126 billion a year is workable. The Greek bailout which is expected to be approx $145 billion is being spread over three years or $48 billion per year and is part of this. I believe the Greek solution will be soon stretched out further than three years as well.

So now this entire EU “end of the world scenario” becomes a $126 billion annual problem matched by $1 trillion of commitments from the EU, ECB, IMF, Federal Reserve and other central banks.

This package buys time to have certain countries stop freeloading. With their backs against the wall they will have no choice but to put severe budget and financial changes in place in their countries.

Remember that the PIIGS are not alone. The EU Growth and Stability Pact requires all EU countries to keep budget deficits below 3%. But not one of the 16 countries has complied.

This “crisis” should cause a lot of decreased government budgets that should have a positive long term effect, but this will slow down the artificial economic activity that was called “the economy”, because the deficit spending will be curtailed.

In the short term, the injection of new paper money could stimulate economic activity (artificially) but the decrease of government spending will hurt corporate profits (remember government spending, even welfare checks to people, eventually is spent on consumer goods by the welfare recipient. The consumer goods are made and distributed by corporations). So a slow down in deficit spending means EU stock markets could face an uphill battle for many years.

The key to a healthy economy is when people who are consuming something are also producing something of value back into the economy. This is why socialism and welfare destroy economies. Too many people eating the corn and too few planting it, means a lot of hunger eventually. So by curtailing as much welfare to people and corporations (they line up as well for government hand outs) as possible, one allows an economy to right itself.

In the long run, assuming that everyone wakes up, less government workers, honest work weeks and the curtailment of a culture of laziness and socialism could actually make the EU a better economic sphere. Only time will tell.

The possibility of higher taxes now becomes a nightmare for politicians as the people get sick of them spending the money on waste and bureaucrats and demand accountability.

EU Money Supply and Socialism

The EU money supply is $8.2 trillion. If the aforementioned $126 billion annual rescue package was entirely printed out of thin air it would be a 1.5 % increase to the money supply, enough to handle the new stretched out annual $126 billion of potential problems. A bad solution, but one that might find time for the authorities to correct the outrageous mismanagement that has taken place in these countries.

The EU increased their money supply by $1 trillion in just the last two years, so these debt problems, if spread out and facilitated with this new $1 trillion of EU and other Central Bank help (including the U.S.) would seem manageable for the time being. Of course, the net result of these bailouts will be inflation showing up in future years.

Debt laden EU governments will have to raise taxes, cut government salaries and pensions and do a lot of things people in these countries are not going to like. Governments putting their houses in order is a real long shot and I am not optimistic. But if this glaring fiscal mismanagement allows the guy in the street to see that he has been lied to, deceived and totally taken in by the stupidity of these socialist policies and the absurd promises of politicians then maybe it will wake him/her up. This could put some reality back into their lives which will include working regular hours for a living and not ripping off their fellow citizens by getting benefits not earned.

Socialism will now become a fool’s passion and the concept of the State taking care of people will start to be eroded by this crisis and reality. There is no free lunch. The sad thing about socialism is that if there were honest monetary systems, low taxes and no socialism, 98% of the population would be so well off and affluent that they could easily support the real poor and sick and less fortunate. The charitable inclination of the common man is so much higher than he is given credit for even in tough times charity and giving is in the hundreds of billions in the U.S. I would think that 2008 was probably the worse year for any American financially yet charitable giving topped $300 billion. Bleeding heart liberals take note. You are “right on” about your humanism and benevolence and deserve credit for these high character values, but you are being led down the path to disaster if you think the government is the answer to your ideals.

The Rest…HERE

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