Hindsight is the most exact of all sciences. Most people who live their life backwards have a miserable life. Having been around for a while, I tend not to look back, especially not at negative events. Much better to embrace uncertainty since everything going forward from here is uncertain. We can’t do anything about the past but we certainly have more control over our future. And looking at the next few years, it does seem that these are going to be extremely turbulent both economically, socially and politically.
In spite of not normally looking back, I have had a look at a Newsletter that I wrote in July 2009 when gold was just over $900 and the Dow 9,100. It was called “The Dark Years are here” and received quite a lot of attention at the time. This was at the end of the sub-prime crisis when the Dow had just declined by 60% and gold had risen from $250 in 1999 to $925.
I am clearly putting my head on the block here because like with most forecasts, the timing of my predictions contained many errors. But we must remember that protecting risk is more important than being right on timing.
At the end of the article I am drawing some important conclusions.
The Dark Years are here – written July 2009
In this newsletter we will outline what is likely to be the devastating effect of the credit bubbles, government money printing and of the disastrous actions that governments are taking. Starting in the next 6 months and culminating in 2011-12, the world will experience a series of tumultuous events which will be life changing for most people in the world. But 2011-12 will not be the beginning of an upturn in the world economy but instead the start of a long period of economic, political and social upheaval that could last for a couple of decades. The New Case for Gold Best Price: $0.25 Buy New $6.99 (as of 11:36 EST - Details)
We will discuss the three areas that we for some time have argued will determine the fate of the world for the foreseeable future, namely the coming unemployment explosion, the next and much more serious phase in the credit markets and finally the likely hyperinflationary or just inflationary effect this will have on the world economy and investments.
EMPIRES ARE BUILT ON THEFT PILLAGE, SLAVE LABOUR AND FINALLY MONEY PRINTING
Let us first go back in history and analyse what creates an empire and the prosperity that comes with it.
The British Empire started in the 17th century and reached its peak in the 19th century during Queen Victoria’s reign. By the end of the 19th century The British Empire included nearly 20% of the land surface of the world and 25% of the world’s population. So Britain which is less than 0.5% of the world’s land surface area controlled an empire which was more than 50 times greater. So by using slave labour and by stealing the resources of 20% of the world, it is no wonder that Britain was the wealthiest nation for several centuries. But like all empires, Britain carried the seeds of its own destruction. All empires – e.g. Mongolian, Roman, Ottoman or British etc. – eventually overstretch their resources both militarily and financially. This combined with decadence and illusions of grandeur eventually leads to the collapse of an empire.
The US empire was slightly different from the point of view that it never conquered the world although the US was itself a colony conquered from its original inhabitants. But the US has intervened in many areas (e.g. Korea, Vietnam, Afghanistan, Iraq etc.). Also, there are US military bases in 120 countries. Initially the US was an economic superpower based on an entrepreneurial spirit and a very strong production machine backed by fierce military power. But after the Vietnam war the US had overstretched its resources and by 1971 Richard Nixon abolished the gold standard in order to be able to start money printing in earnest. The money printing phase is normally the last stage of an empire before it collapses and this is where the US is now. The US dollar became the reserve currency of the world when the US was strong economically. But as the US economy started to weaken in the 1960-70’s the US government found a much better method for maintaining a strong economy. It started to print paper that it sold to other nations or exchanged for goods and services. For almost 50 years this has been the most clever way ever devised of maintaining the living standards of an economically deteriorating nation without even having to spend any resources on building an empire. It is a Ponzi scheme which has worked for several decades but slowly the world is now waking up to the fact that they are holding worthless paper printed by the US Government. (We realise this is a much simplified version of empire building and destruction but it is nevertheless an accurate analysis).
THE US GOVERNMENT IS IN DENIAL
The US is haemorrhaging financially and economically. It has lent or committed almost $13 trillion in the last 18 months to prop up the financial system. The estimated government deficit in the current year is almost $2 trillion or 50% of the budget. All the money committed so far has only achieved two things: Firstly it has created some short term hope which together with totally illusionary sightings of green shoots have generated a small stock market correction (which we forecast in our January Newsletter) and some belief that the crisis is ending. Secondly, all the funds printed so far to save the system have gone to Wall Street but has done nothing whatsoever for the real economy. Every single sector of the real economy is deteriorating whether it is production, unemployment, corporate profits, real estate, credit defaults, construction, federal deficits, local government and state deficits etc. The Road to Ruin: The ... Best Price: $2.58 Buy New $7.99 (as of 10:20 EST - Details)
And what is the government doing about it. They are doing the only thing they know which is to print more money. This is total lunacy! How can any intelligent person believe that printed pieces of paper can solve an economic catastrophe?
If that were the case we could all go home and write out pieces of paper or use Monopoly money to spend in the shops or repay our debts.
How can the US government, the UK government and most other governments not understand that the only way to run an economy is to cut your coat according to your cloth. This is why the emperor had no clothes because the country had run out of gold thread to make the cloth. Until now the US as well as other countries have been able to buy the cloth because the world has been foolish enough to accept worthless pieces of paper as payment. But this is coming to an end very soon and many countries will be without both coats and cloth.
What governments are doing with people’s money is to totally destroy its value. Purchasing power in the US and many other countries has declined more than 95% in the last 100 years. While it might buy votes short term it will only generate massive misery long term. And this is what many countries are starting to experience now. But sadly it will get a lot worse. We are still only in the first phase of this tragic saga. The second phase is likely to start in the next 6 months.
THE US HAS 100 MILLION AFFECTED BY UNEMPLOYMENT
The real unemployment in the US is 20% or 30 million. These are the real unadjusted figures calculated on the same basis as the official figures before the method of the calculation was changed in the 1990’s. Reported government figures, especially in the US, are continually manipulated in order to suit the political aims of the government. Therefore, one should not give any credence to the published figures. Most governments mislead the people most of the time.
With 20% unemployment in the US we are already approaching the levels in the 1930’s when peak total unemployment reached 25%. The 20% current level is the non-farm unemployed and is still a lot lower than the non-farm peak figure in the 1930’s which was 35% unemployed.
Since we are still in the early stages of this crisis, it is our firm opinion that non-farm unemployment levels will reach 35% at least in the US in the next few years.
But even the current figure of 30 million unemployed is a catastrophe. Adding dependants to every unemployed person there are currently 100 million people affected by unemployment in the US. In the next three months 3 million unemployed will fall out of the social security safety-net. These are the people who were laid off in the second half of 2008. Including their families this means that around 10 million people will become destitute between now and September with no social security and no savings. If we then add the 4 million that were made redundant in the first half of 2009 that will result in an additional 13 million people including families will become destitute around Christmas.This is a disaster of unimaginable consequences that will affect the whole fabric of American society.
The consequences will be social, political, financial and the effects on the US economy will be of a magnitude which is substantially greater than during the Depression of the 1930’s. We must remember that none of the problems in the financial system have been resolved but only put on a very temporary hold. The rise in unemployment combined with the reduction in consumption will lead to the next and much more severe banking crisis.
Unemployment in Europe is also rising fast and shows no signs of abatement. Many countries are reaching 10% with for example Spain at 19% and Latvia at 16%. But as we have said for quite some time, of the larger European nations, the country with the biggest problems is the UK. Unemployment in the UK is currently “only” 2.5 million or 7% but it is estimated to reach over 3 million by the end of 2009. The combination of government deficits, a banking system which is extremely fragile and too big for the country, very high personal credit that will not be repaid and a housing bubble which still has a long way to fall makes the UK very vulnerable to a major financial shock.
During the next 6-9 months unemployment will severely affect most parts of the world including China, Asia and Africa. Never before has there been a global unemployment crisis affecting the world simultaneously. This will not only mean a massive decline in consumption and world trade leading to a recession or depression worldwide but also poverty, famine and social unrest.