Gold to the Rescue ?
My previous article on the current world mess concentrated on politics.± My conclusion at the moment is that both US and Chinese governments are wrecking their economies, and the EU is right behind them, and that includes the UK.
But what about the money?
Politics only functions when there is money behind it. In my book Governments Are Obsolete I suggested that kings and communists survived by confiscating land and then leasing it out in exchange for funding. The Chinese are finding that form of funding has collapsed. Since we are in a world recession with investment moving out of China, that leaves the CCP in a bit of a mess.
But Russia seems to be in a financial mess as well. Funding a war is never easy, but by raising oil prices Russia is pricing its own people out of essential energy as well.
Russia needs to go back to pricing its commodities in gold.
I am far from being an expert in these matters, but one thing seems certain. If any country goes over to a gold standard, that will play hell with the value of fiat currencies.
It doesn’t matter much which commodity you price in gold versus the local currency, what you see is consistency in the gold valuation, but chaos in the fiat valuation.
Russia was keen to see the debut of the proposed BRICS trade currency last month. That has not happened, but one has to wonder when Russia takes the presidency of the BRICS next january whether its issue will be firmly back on the agenda. If that does get released sometime next year what is that going to do to fiat currencies?
Alastair Macleod of GoldMoney.com has no doubt. He says “if Russia does introduce a gold standard for the rouble, it will be the financial and economic equivalent of a nuclear attack on the entire fiat currency system.”
“Whichever way you look at it, it is the currency factor which matters above all else and the Russians have no option but to stabilise the rouble by defining it in gold grammes and making it immediately exchangeable.”
“…the impact of a move to gold on funding the western alliance’s deficits will be substantial, because not only will The Global South stop buying their bonds, but they will seek to liquidate their existing holdings. In the absence of severe spending cuts and increased taxes, increasing monetisation of government debt will become inevitable. Kiss goodbye to lower inflation, lower interest rates, and lower bond yields: embrace crashing bond prices and collapsing asset values. What over-leveraged bank can survive the squeeze on their balance sheets? Which of the western alliance’s central banks, already deeply into negative equity, will be able to monetise their government’s debt with further QE against a background of soaring bond yields?”*
Have another look at the chart above, which also come from Macleod’s article. If Russia does go for a gold backed trading currency, countries using fiat currencies will have increasing costs to bear to cope with paying in depreciating currencies.
The outlook for western Europe looks increasingly dire.
Living in one of the cheaper, warmer EU countries will continue to be fine, but ideally, you need to try and get your business into one of the BRICS+ countries because they will be the ones transitioning into a gold backed currency system first. The Western Alliance countries will be the last ones in, and therefore at a crippling disadvantage.
If the currency goes, everything that is based on it also goes. If you own a house and use it as your residence, that’s fine. If you dont own a house, but rent it, you wont be able to afford the rent.
Think about that statement for just a moment or two.
If you rent out a property your tenant wont be able to pay the rent, so the rent will start to drop. It will become your problem far more than the tenant’s problem.
But suppose you rent from a mortgage company. You are both the tenant and the landlord. You wont be able to pay the rent because you will be using a rapidly depreciating currency, so you will no longer be able to pay the landlord/mortgage company. There will come a time when you will default, and lose your home.
How do you ultimately value a house?
By comparing it to other house valuations.
And I dont mean what you think I mean.
I mean that if you own a house type A, and someone else rents a house type A (for sake of argument, let’s assume you pay a mortgage and your neighbour, living in a similar house, pays rent). Who is paying more?
The one who pays more is the one who is living in an over-priced house and paying that mortgage. When your currency is buying less and less because it is depreciating, the last thing you want to do is pay too much for something.
Owning a house in a country where the currency is being trashed is going to bankrupt you.
Sadly I do have a mortgage on one property, but it is for about £20,000, and will be completely paid off within four years. I dont think things will get really bad for at least another eighteen months, or maybe even longer. This train wreck is playing out in tantalisingly slow motion.
The smart people will have been listening to my advice and be ready to buy maybe eighteen months after all hell has broken loose.
i dont know what is going to happen, or when anything will happen, but several things are quite clear.
First, the old order changeth. The Western Alliance is fading, and is going to start fading a lot quicker while the east is rising.
Fiat money systems have run their course, and are in serious trouble. How much longer they can hold up is not visible in my cheap crystal ball. But please note the following:
We are already in a world where commodities have been weaponised. I’m sure you’ve noticed.
We live in a world which functions on diesel.
The tractor that pulls the plough runs on diesel.
All the machines that continue the farming operations run on diesel.
The truck that hauls the produce to a processor runs on diesel.
The truck that delivers the goods to the supermarket runs on diesel.
Stop or decrease the flow of diesel and you crucify the production and the supply chain, and people start to starve.
Who controls the world’s supply of diesel?
Russia and Saudi Arabia, and they happen to be singing from the same hymn sheet.
Russia wants to put the rouble on a gold standard. Probably the Saudis would prefer to be paid in a gold backed currency too. Putting up with being paid in fiat currencies they are effectively getting 30% less for their oil than they were thirty years ago.
Interest rates in Russia are currently running at 13%.
US treasury bonds are paying 5.25% or thereabouts.
Do the maths. Arbitrage is the easiest way to make money.
Who would want to have an asset based in fiat currency rather than gold?
Who would not want to take advantage of an arbitrage of 7.75%?
I dont know what’s coming, but all the signs point in that direction. It would be foolish not to have noticed, and at the very least considered taking evasive action.
All I can say against the above seemingly obvious set of parameters is that if things dont work out the way they seem to be going it will be because something worse happens.