Friday, 30 September 2011

Is The Euro System the Next Monetary Order ?

The world gets a new monetary system every 30 or 40 years, and it is past due for a change. We had the classical gold standard from 1873 until World War I(43 years), the gold exchange standard between the two world wars(21 years), the Bretton Woods 1 system from 1944 until 1971(27 years), and since 1971, the entire world has been on the Bretton Woods 2 system or the dollar standard.(40 years and counting)

Now let's look back at Bretton Woods 1 again. Earlier I pointed out that the US trade deficit used to be settled by the US running down its monetary reserves—gold. But that was back when gold was a monetary asset and not just another commodity thrown on a futures market. After 1971 they demonetized gold which forced the US into the second option which is running up debt. If you are running a trade deficit you can either run down your reserves or run up your debt.

Before 1971, the trade deficit was settled by exporting gold (via the gold window) to those running a trade surplus with the US. The problem with this system was that gold was fixed at a dollar price. So the US reserves were quickly run down by maybe 65% in 20 years. This was a problem because it was clearly unsustainable.

After 1971 the trade deficit was settled by exporting US Treasury debt bonds. And as we can see, this system is also clearly unsustainable. It cannot be reversed without collapsing the system. The way the US sells Treasuries to China means the US has a "capital account surplus." And China has a "capital account deficit." You see, when the US ships currency to China in exchange for real stuff, that's a deficit for the US. But when China ships currency to the US in exchange for Treasury bonds, that's a deficit for China. I know, it's confusing, but this is how the modern monetary wizards make things balance today. They call it the balance of payments!

Two Historic, World-Class Bubbles are About to Pop

Bubble #1: Government Debt (with a nominal value in the tens of TRILLIONS)

Bubble #2: Perceived Wealth, denominated in purely symbolic, un backed, unsustainable-Ponzi-debt-based currency (with a nominal value in the HUNDREDS of trillions)

Darryl Robert Schoon writes:
For 50 years, not one Dollar of new debt created by the US government to fund the activities it does not wish to tax for has been repaid. The debt has simply been “re-financed” with new debt being sold to retire the existing debt.
(Stocks, bonds, currencies, precious metals - Our Analysis Begins Where Your Information Ends)

At some point, the end finally arrives. Ponzi-financing cannot service debt forever. Investing in unhedged paper assets is the bet that it can. Gold is the bet that it cannot. [5]
Amazingly the mathematical upper limit of Ponzi-finance coincides perfectly with the mathematical limit of the 28-year rise in past-issued bond valuations.

It is the 28-year expansion of the US$-denominated debt asset bubble that is about to pop. When interest rates are falling (like they have been for the past 28 years), the value of past-issued debt assets rise. Anyone who has been playing the bond market since 1981 has made a killing.

Here is the chart of interest rates since 1981:

Flip it over and you will see the rise in the value of bonds.

When interest rates hit ZERO, they only have one way to go. And that means that the value of past issued debt, the very kind of TRASH that China is sitting on a land-fill mountain of, only has one way to go... DOWN

The only way for a purely symbolic store of value to survive the sudden, self-reinforcing and complete coup de grĂ¢ce (death blow) from its nemesis, gold, is for the central banker to get ahead of spontaneously exploding interest rates without completely demolishing the economy on which it feeds like a mutant parasite.

In 1980 this was possible, but only barely, through a drastic interest rate increase to 20%, and only because the economy and the national debt load was much different at the time. If the same thing was tried today the economy and the government would come to a standstill, followed by a complete and utter collapse. For this reason it is not only unlikely, it is impossible. In 1980, the US was a net creditor nation with a balance-of-payments surplus. The financial industry was small and stable. And the US was not subservient to foreign creditors. Today the national debt is over $14 Trillion, the US Treasury Secretary must kowtow to the Chinese, and the financial industry is a brittle behemoth built on derivative quicksand.

Because of these fundamental differences in 1980, Paul Volcker was able to successfully defend the dollar against the same existential threat which WILL take it down this time. That threat is capital flow into the dollar's lifelong nemesis, gold.

To make a long story short, the Euro architects anticipated this. They identified the major flaw in the Bretton Woods 2 dollar system, the use of debt as a store of value. They designed the Euro to use gold as a store of value rather then debt. That is why gold is on the first line of the ECB balance sheet. That is why I was saying earlier that the idea of Euro bonds is just.......fuct. They might do it to buy some time but its just not meant to be.

Bonds was/is the store of value for the last/current monetary system and bonds went up for 30 years and counting. Bonds have since gone even higher in price. Gold is the store of value in the next monetary system and it will  go up for an equal and longer amount of time. We cannot include the last 10 year rise in price of gold because we are still in the Bretton Woods 2 system. Bonds have actually out-performed gold this year so far for that reason.(only after the latest gold dump)

GLD is the gold exchange traded fund, TLT is the treasury ETF. This chart is just for observation purposes. This has been the trend since gold started rising 10 years ago, which is also exactly when the Euro was introduced. That is no coincidence.

I am not interested in points that refute Euro freegold. What I am interested in, is a quick concise explanation on how SDR's will be the foundation of the next monetary order, as Jim Rickards talks about or about how a "tri-metal "standard will be the foundation of the next monetary order,  as Mike Malony contends, or how a "classical gold standard" will be the next monetary order as Peter Schiff and many other gold bugs contend.

To answer the question, Euro freegold is the next inevitable free-market driven monetary order unless somebody can prove otherwise....

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