With continued uncertainty around the globe, today the man who has become legendary for his predictions on QE, historic moves in currencies, warned money in banks will be incinerated and also discussed the trade of the century.
Money In Banks Will Be Incinerated
(King World News) – Egon von Greyerz: “Unfortunately the world has reached the point where the future will be a global bust and collapse. During the 2006-2009 financial crisis, a collapse of the global financial system was avoided by massive money printing, central bank guarantees, allowing banks to value assets at cost, rather than market, and a panic lowering of interest rates from as high as 6% in the US to zero or even negative in some cases.
Whatever central banks and politicians say, nothing has been solved. On the contrary, risk has grown exponentially since 2006. As an example, global debt has now doubled to roughly $230 trillion. If global unfunded liabilities of $250 trillion and derivatives of $1.5 quadrillion are included, the world is now staring at total liabilities and risk of a staggering $2 quadrillion.
When the next crisis starts, which is very likely to be in 2018, what central banks will have to focus on is not just the global debt, but also the derivative bubble. Banks will argue that the net derivative figure is much smaller, but in a crisis, gross will remain gross as counterparties fail to settle their obligations. With this as the backdrop, central bankers must be living on a different planet if they believe they can reduce their balance sheets. Debt in coming years, whether it is government or private, will go up faster than any time in history…
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Egon von Greyerz continues: “Just look at the US. It is no accident that Jerome Powell will take over from Yellen as Chairman of the Fed. He is a safe pair of hands and has been a Fed governor for 5 years. He is the perfect choice for expanding the Fed’s balance sheet infinitely. US Federal debt is guaranteed to continue to double every 8 years, as it has since 1981. That means the US debt will go from $20 trillion to $40 trillion by the end of 2024. Even the Central Budget Office’s forecast is not far from $40 trillion. But we must remember that this figure doesn’t include what will happen to the US and global economy in the next few years. And in Europe, Draghi has now made it clear that the Protection Deposit Scheme is no longer necessary. Thus, the ECB is no longer guaranteeing customer deposits up to 100,000 euros. This should come as no surprise. When the crisis starts, no depositor will get real money back form any bank.
When the crisis, that temporarily paused in 2009, resumes in earnest, there will be money printing on a scale that the world has never experienced before. That will be the time when the world will learn that the word ‘quadrillion’ actually exists, although no one can imagine the magnitude of that word. To put it in perspective, one quadrillion dollars is 15 years’ global GDP. So if global debt goes to one quadrillion dollars, including most derivatives, we would have to spend the next 15 years using the total gross production of the world just to repay the debt. That would mean 100% tax for 15 years. But is doesn’t stop there. When debt defaults start on a larger scale, central banks will lose control of interest rates. The manipulation of rates defies all laws of nature and supply and demand. It is not possible to have maximum credit and minimum interest rates. In a free market, if demand for credit is high, the cost of credit will also be very high.
When the $230 trillion world debt starts to implode, central banks will no longer be able to hold rates down as global bond markets panic. It will start with the longer rates going up, and eventually higher long rates will pull the short rates up. In the 1970s and early 1980s, rates reached the high teens. This time they are likely to go higher as default and credit risks rise substantially. If interest rates rise to ‘only’ 14.4% annually, debt will double every 5 years. This means that the one quadrillion dollar debt will have grown to two quadrillion dollars five years later.
Two Disastrous Outcomes
As money printing escalates hand-in-hand with defaults, the world will experience hyperinflation on a level that no one can imagine today. At that point debt will probably have grown to tens of quadrillions of dollars. Most people will say that it would be impossible for debt to grow to these levels. Anyone who has studied historical debt defaults, money printing and hyperinflation, will realize that during these periods, debt grows to many multiples of the original debt.
Money printing and hyperinflation become a vicious cycle that feeds on itself. Powerless central bankers lose control completely and always panic into the next level of money creation. In the end it all fails, since printed money can never create wealth. At that point the hyperinflationary depression turns to a deflationary depression. All credit disappears into a black hole, and so does a major part of the financial system. The assets backed by the printed money collapse in value by 90% or more.
So can we avoid hyperinflation? Yes. That is possible if central banks are too slow to react as defaults start. We would then go straight to a deflationary collapse with a total failure of the financial system, and a very severe and lengthy depression. Thus, either we will see a total destruction of paper money in a hyperinflationary scenario, or a collapse of the financial system in a deflationary implosion of assets and debts. The most likely, in my view, is that we will have both — first hyperinflation and then deflation. But even during the hyperinflationary period, debt and bubble assets will deflate as commodities, including food, hyperinflate.
Protect Yourself From Both Scenarios
In both scenarios, physical gold and silver will be the only real money that will function. In the hyperinflationary case, gold will go to levels that are unimaginable, which could be $100s of trillions per ounce. The number of zeros will be unimportant. But of vital importance is the fact that gold will more than maintain its purchasing power. As the gold paper market collapses and the whole world wants physical gold, the price of gold in today’s money is likely to go up much more than 10-fold. In fact, we are likely to see a major bubble in the price of gold, and perhaps it will rise as much as 50- to100-fold during the next crisis. That would mean a price of $65,000 to $120,000 in today’s money. That might sound like a totally unrealistic target, but we must remember that the catastrophic scenario the world will experience in the coming crisis is also totally unrealistic for most people to fathom today.
In a deflationary scenario, gold will not go to those high levels. First, gold will at least maintain its purchasing power. But since the financial system is unlikely to survive in a deflationary implosion, gold, and probably even silver, will be the only real money available. Thus, even in the deflationary case, gold is likely to go up substantially in real terms. With the troubles the world is facing, gold is clearly not going to be the sole solution to the massive problems we will all experience. There will be a lot of poor people and a lot of hungry people. Owning some gold will be extremely important, but the magnitude of the problems that the world will experience will likely negatively affect us all.
In the meantime, stock markets and cryptocurrencies are ignoring the risks in the world. And we are not just looking at financial risks. Political risks are increasing in many areas. In Europe, Merkel has problems forming a government, the Irish government is about to collapse, and the Brexit negotiations are a total farce. Theresa May and Britain are being held ransom by the unelected, unaccountable and totally irresponsible Brussels elite. They are more interested in maintaining their political power than doing what is best for the European people.
The situation in the Middle East is becoming more serious by the day. Will Crown Prince Mohammed bin Salman succeed with his coup? He will have created many enemies who are likely to cause him problems in the future. In addition, Saudi Arabia has problems all around it, including Yemen, Iran, and Syria. We could see major difficulties in the Middle East starting in 2018. No wonder Saudi Arabia is turning away from the weakening US to China as a strategic partner. For the US, Saudi Arabia only has a strategic value as long as the petrodollar rules. But as the life of the petrodollar is coming to an end in the next few years, the balance of power will change dramatically towards the petro-yuan…..more here