Storyline Of 2012 – The Economy, Money & Gold by Nick Barisheff

In his latest newsletter, Nick Barisheff looks back to the best insights of 2012. The selection of stories truly summarize what 2012 stands, at least from a higher level point of view. That’s why we took together the key insights in order to create 2012’s storyline.

2012 should be seen as a year of confirmation in our path to over-indebtedness. Excessive debt is the most important factor which sets the scene for a next major bubble. It is expected to be one of historic magnitude. Still, things seem “more or less” normal on the surface. Governments use general macro-economic figures that – aside from being manipulated to look less grave – don’t really show the seriousness of the situation. In an important piece, author John Rubino writes that the “confusion” about the difference between net debts and unfunded liabilities are abused by some to create a rosy picture. Net debts are used as a measure to argue that the debt level is acceptable. The focus however should be on unfunded liabilities, which in 2012 did exceed the GDP of the US with a factor between 5 and 6. That figure is highly underreported and tells a massive bubble is brewing which will end in a gigantic crisis.

Respected researcher Chris Martenson goes on to use an analogy to describe what the monetary stimulus (announced by the US Fed in September 2012) in reality means. Obviously the central bank is never going to put it that way, they will undeniably argue that they are creating economic value.

If an individual earns $50,000 per year, then each month the Fed is effectively printing up the yearly output of 800,000 such individuals.  Said another way, if you earn $50k, then you’d have to work for 800,000 years to earn the same amount of money the Fed prints each month.

Given that the median household income is ~$50k, this means that after one year of MBS purchases, the Fed will have printed up as much money as 9,600,000 households will have earned.  Presto!  Just like that, the Fed is effectively creating the exact same purchasing power as nearly 10 million US households, or 25 million people (I’m rounding a bit here).

And nobody had to do anything except push a key on a computer a couple of times.

The simple fact remains that money printed out of thin air cannot, has not, and will not ever lead to prosperity.  How could it?  It arises without any effort at all, no work performed, no goods transformed or lives improved, no land planted and tended well, no services rendered, and no capital formed.  It is just conjured into existence.

It is just new money tossed after bad debts, with both remaining to work their different insidious effects on the economy and our daily lives.  If printed money could lead to prosperity, trust me – some culture would have worked it out long ago, because people every bit as clever and determined as those alive today (and with the same DNA software installed) have tried it again and again.

There it appears again, the debt monster. The amounts of debts are spinning out of control and the Fed is reacting by creating new money to buy government debt (i.e. monetizing debt). Debt monetization is not new. It has historically proven one thing, again and again:  it leads to a final destruction of the currencies involved. Hence, Chris Martenson expects one of the most colossal failures ever experienced by modern man.

Because of the debt bubble and the related excessive money inflation, Nick Barisheff is more than ever convinced that Gold is moving towards $10,000. He argues that official estimates indicate $23 trillion of [net] debt in 2015, resulting in an indicated gold price of $2,600 per ounce. Unfunded liabilities are not taken into account in this forecast, although they represent the big part of the debt mountain. Barisheff adds that in almost all hyperinflations in history was caused by governments trying to compensate for slowing growth through excessive currency creation. This is what is happening today.

While central banks have been net purchasers of gold since 2009, the real game changers will be the pension funds and insurance funds, which at this point hold only 0.3 percent of their vast assets in gold and mining shares. Continuing losses and growing pension deficits will make it mandatory for them to eventually include gold—the one asset class that is negatively correlated to financial assets such as stocks and bonds. When this happens, there will be a massive shift from over $200-trillion of global financial assets to the less than $2 trillion of privately held bullion.

Barisheff points to the gold bullion portfolio in which physical allocated gold must be a core holding. Given the risks in the financial system and a potential catastrophe waiting to happen, it is mandatory that your physical gold holdings respect the following requirements:

  • Own bullion with clear title
  • Demand documentation that transfers title directly to the purchaser
  • Home storage not worth the risk of invasion or physical assault
  • LBMA bullion in LBMA member vaults

When it comes to the gold price, 2012 was marked by discouraged investors although we saw a price increase for the 12th year in row. Steve Saville points to two misguided assertions of gold. The first one is that gold’s purchasing power remains constant. It means that changes in the gold price are the result of a similar decline in purchasing power of currency. Saville argues that “gold is in an ultra-long-term upward trend in REAL terms because the overall cost of monetary inflation (creating money out of nothing) is much greater than the reduction in the purchasing power of money. Monetary inflation can make things look better in the short-term, but it leads to the long-term destruction of wealth. The faster the rate of monetary inflation, the greater the amount of wealth that eventually gets destroyed by misdirected investment.”

In a much more explicit way, the second misguided assertion became a hot topic in 2012, lead by successful value investors such as Warren Buffett or entrepreneurs like Bill Gates. Their view on gold is that it is a non-productive asset. They tend to compare gold with traditional investments, which does not make sense as gold is an alternative currency. The right way to look at it is to compare whether to hold monetary savings in the form of money issued by banks in unlimited amounts (see above) or in the form of precious metals that have been used as money for 5,000 years given a limited increases in its supply of 1 to 2% per year.

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