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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
An Often Overlooked Issue!
by Professor von Braun
May 22nd, 2009
What I have referred to before
in earlier articles as the great credit contraction is
now well and truly underway. The credit expansion period is over
and what we are seeing now is the effects of what happens when
a fiat monetary system reaches the limits of its ability to both
inflate the value of non productive assets, and defer settlement
via the ongoing renewal of existing debt.
Attempts by governments and central banks to reinflate declining
asset prices via large infusions of psuedo capital into the banking
system so that the issuing of credit can be 'kick started' are
doomed to fail.
House prices will continue to decline, unemployment will rise,
tax revenues will decline further, government debt levels will
continue to rise and people's net worth will also decline. This
is a given!
This is what happens when you get a major credit contraction.
In simple terms it is like the tide going out prior to the tsunami
coming in.
Since a monetary debacle of this size has not been seen before,
there is nothing to compare it with, for not even the depression
of the 1930's comes close. Then people still had savings and the
US $ was, until late 1933, pegged to gold at $20.67 per ounce.
Today all debts are now due, since the banking system can no longer
lend its way out of its own dilemma and this is what needs to
be clearly understood by investors. The dollar is a liability
and as such being in cash is also a liability. Government securities
are also liabilities, but the issue of liabilities versus real
assets is more widespread than that.
The precious metals are not a liability, and ownership of them
is a very wise move given the uncertainty surrounding everything
else that is happening. We have seen calls by some market analysts
for the Dow to be at 400, 600 and 'under a 1000.' "What does
that mean?" you may well ask.
It means that you have a collapsed banking system along with massive
unemployment and no cashflow of any consequence being generated
within the system itself. What will happen to brokerage houses
if you have the Dow at 400? What will stock exchanges look like
if there is a collapse through to these levels? How will capital
be raised when there is no capital left?
Cashflow during the credit expansion period was 'created' by the
banks themselves via home equity lines, credit cards, and a series
of market bubbles. Productivity, which should have been the benchmark
by which to measure cashflow went off to all sorts of different
places such as Asia, India, China and now we have a situation
that the holders of US dollar denominated 'reserves' are located
outside the US. There is little by way of actual 'reserves' within
the US itself, hence the need to issue more debt.
In addition, money that has been spent within in the US by its
residents has mostly been spent on items that have little, if
any, appreciative value. On the contrary, electronic gadgets tend
to depreciate, as do autos, as do fridges, freezers, washing machines
and dryers. The real estate bubble has now clearly demonstrated
that house prices can and do decline. Those who have been saving
for their retirement are in a double bind, since in most cases
what they believed was assets are now being seen as liabilities.
That second house purchase is now a liability and even the primary
residence is, in many cases, under water.
The root cause of all of this is the banking system itself and
its mismanagement, with some not so little help from both Congress
and the Senate, along with the failure of the deregulation of
the systems put in place during the 1930's to stop this from happening.
There still seems to be a complete lack of understanding
of what the problem actually is, which is clearly demonstrated
by the attempts so far to fix the banking systems dilemma.
The often overlooked issue is CASHFLOW! Where is your income
going to come from now that the capital gains machine is broken?
Even if you are sitting in cash and own high quality government
securities (whatever they are), with a 3% return, what can you
buy into that can offer a cashflow that is reasonably safe and
secure?
What is going to be left to buy when the music stops, when Mr.
Fiat finally succumbs to Alzheimer's disease and you are left
holding his empty bag of promises to pay?
Anything that has debt attached to it is a liability that won't
go away. Any sector that is dependant on people spending money
on goods or entertainment that provides revenue to service their
debt has a problem and all aspects of the economy are at risk.
Real estate, both residential and commercial, travel & leisure,
retailing, the auto industry, even the medical profession will
be facing lower revenues. The economy is not something that can
be easily isolated into safe & unsafe sectors as it is all
interconnected via the banking system which can no longer inflate
the value of the underlying assets, regardless of what they are.
The example given by President Roosevelt's revaluing of gold in
1934 is of interest and contains pointers to the issue of cashflow.
Small mining operations sprung up in many parts of the US. The
reworking of tailings dumps from previous operations became common
and with the increase in price gold mining became one of the few
sources of consistent cashflow. Employment for miners was assured
and towns that were close to producing mines did not nearly suffer
the downturns and bank closures of areas that were not.
The production of gold is as close to guaranteed cashflow as
you can get, even if gold is confiscated and a new 'official'
price created, the gold that is being mined does have to be purchased
and paid for by somebody. Will there be a resurgence of small
privately owned gold mines?
Very few have understood the predicament the banking industry
is in. The banks have been in the business of asset inflation
and for a while it seemed to be working. But when it became the
only game in town, everybody joined in and the ability to keep
a lid on the issuance of debt was lost. Productivity was forgotten
about as the technological advances gave people access to what
appeared to be the goods, but was nothing other than an image.
The need for savings was ignored and now we have a compounding
to the downside as assets continue lose their value. Ownership
of debt is now being seen for what it is, something that can become
problematic very quickly. Investors with capital are few and far
between and assets that have strong cashflow potential are also
few and far between.
The coming cashflow shortage will affect all entities from the
Federal Government, to the states, the counties, pension plans,
investors and homeowners alike.
The Prof can be contacted by email at profvonb2@aol.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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