Bond Bubble

I have noticed there has been more interest over the past few years regarding Government Bond Rates. In many countries they are at historic lows, all time lows even. Interest rates in many countries have gone negative, whereby the rate of inflation is now higher than the rate of return in the bond. Its gone even spookier than that now. A rate of return economists thought was impossible has now happened, that is interest rates on bonds have actually turned negative in some countries. In Switzerland a 10+ year bond can be bought to actually have a minus rate of return. This has never been seen before. I first mentioned the bond bubble six years ago and its worth revisiting as it applies equally to where we are now:

However with the new intention for expanding the money supply to "combat" deflation, QE is now monetising many of these bonds, in effect creating artificial buyers. Similar to the recent housing bubble, real demand was never there, it was just people flipping houses to one another with artificial cheap money as the driver. The market anticipates this new QE artificial demand, by lowing rates as there is less risk on default as more buyers have entered the market - seemingly increased demand, limited supply. This is where the real trouble begins, the point we find ourselves in now.... 

We are only in the early stages of the above. In theory, this could be stopped now with the Government abandoning QE, but I doubt it. Not with the huge deficits to come and the lack of Global Capital. The above describes the very process of how the Central Banks believe they can beat the market. However they can't, as the above details, they can only make it worse and the longer they try to 'beat' the market the worse they make the situation. In the event that things go to far they will destroy the currency, the lifeblood of the economy, thus impoverishing us all. Prices are there for a reason. Economists will tell you that when yields come down, that the Central Banks have saved us and proclaim that QE has worked. It can never work and is doomed to failure. The longer they try and hold the short term price down, the higher it will shoot up eventually and the longer it will stay there.

Its a measure of the mess we find ourselves in that rates continue going so low, to lows that we once thought impossible. This is a once in a lifetime super bubble, one that we will tell our Children and Grandchildren about. To an inquiring mind, how and why have rates gone so low and what format will the aftermath take?

A number of reasons exist why bonds have gone so low, the main one however is QE. Its no coincidence that since the ECBs announcement to an extension of the QE program that rates have gone to all new time lows. QE is distorting prices of bonds by creating artificial buyers. The increase in demand causes prices to rise (when bonds interest rates fall, they go up in value as any existing holders can sell theirs on for a increased profit as they locked in higher rates) just like in any market. 

So we have Governments buying bonds but that still doesn't explain private buyers. Well, by law a number of financial institutions have to buy bonds. For example due to regulations set by the Government pension funds for example have to allocate a portion of their funds in Certain Government securities, regardless of the rate of return. How about banks or other buyers who are not forced? We still can't explain why they would buy a bond that will erode in value over time. Like any bubble it works on the premise of buying an asset for the belief it can be sold to a bigger fool.

When people were buying technology stocks in the late 90's, where a company had no dividend, no assets - in fact in some cases barely a business case. Still such companies were on paper worth billions. People bought the stocks not for fundamentals but for the belief they could sell them for a higher price than they bought them for. A similar prognosis back then to now causes this phenomenon; cheap money. Like technology stocks of the late 90's or real estate of the 00's, bonds are the new bubble in town. And just like real estate and the Technology stocks they will go pop. Central banks have made sure of that and when they do you need to stay well away.

How long have we got? I'm sure rates will still go lower, to lows we don't think is possible. However when rates go into long term upward trend Governments (or institutions the Government forces to be buyers) will be the only buyers in town turning the greatest bond bull market in history to the worst bear market. Currencies will gyrate with wild fluctuations. Inflation will go hand in hand with this. Markets will act in ways we have never seen before. Central Banks will provide small glimpses of the illusion that they have control but you can not contain a market price, it always breaks out in some form of spontaneous nature. Stocks and Real Estate will offer no protection. These assets generally go to new all time lows in real terms in such an environment. Precious Metals will once again resume their bull market run, going into a mania phase. CNBC and the such will have feature programs and stories of people getting rich by holding such assets, which incidentally is sure to be the next bubble once the bond market goes up in flames. 

The bond bubble. It may mean nothing to you now. It may mean nothing over the next few years. But in the coming decade however it will mean everything. So long as there exists centralised monopolistic control over money there will be bubbles. Reading what those bubbles will be can be the tricky part but once you can read histories rhythmic patterns the future is for all to see. Then its just a case of taking the correct actions, sit back; relax and watch history unfold.

In the Eye of the Storm

House prices are once again on the rise. London has seen the fastest increases to date with money slowly filtering out towards the rest of the country. Mark Carney, the Bank of England Governor, pays empty lip service to interest rate rises. Even if they were to go up tomorrow the damage is already done. It was done when they bailed out everyone, slashed rates and embarked onwards with Quantitative Easing. Raise interest rates tomorrow and we would be back where we started only worse. However history shows that central banks are always reluctant to raise their rates in a timely manner, even when they are raised they stagger it over months and it then takes months or years for the broader economy to feel the restriction of credit once more and fall back into a recession.

The 21st Century will view the central planning of money as an absolute disaster and free market alternatives will replace the current defunct system, good money always drives out bad and Government money is never good. Many Central Banks are using their faulty inflation rates as guidance as to when interest rates should rise but their metrics are critically flawed. 

Inflation is not just the price of staple goods such as milk, televisions, cheese or oil. If the price of the stock market rises that's inflation. If house prices rise that is inflation. If Gold rises that is inflation. If the price of a Picasso masterpiece rises, its inflation. If we take these items into account, the hard assets, then inflation is rising at increasingly faster rates. Its important to understand that the prices of these items are inflation the Central Banks just choose to ignore them in their indexes.

Another problem facing the planners is that interest rates can't rise or at least not by much. Many Governments don't want them to rise as it impacts on their already woeful deficits. It would hurt their tax receipts. It would ruin the "feel good" feeling in the run up to the UK election. People are beginning to stretch themselves once more and pile up debt on the low rates that are currently on offer. Mark Carney blames everything but loose monetary policy the real fuel to the fire that sparks off an asset price bubble. The same reasons that were cited during the previous boom are once more trumpeted to causing the recent house price rises:

• Too much Demand
• Too little Supply
• Not enough building

The real reason is excess credit. Its loose monetary policies that are causing house prices to rise once more. Demand and supply dynamics have changed no more than back in 2009, the difference is Central Banks have turned on the taps once more to release more credit and banks are once more recklessly lending to anyone with a pulse. Same with Gold. Same with art collectables or with vintage cars, the free market can not produce hard assets to keep up with inflation. Electronics and consumer goods hide real inflation as capitalism does such a wonderful job of providing these services in ever greater quantities at lower prices. We are not building more land. Houses are getting built but its the land they sit on that causes them to rise in value. 

So we are in the eye of the storm and if I'm a betting man it will go on for a few years at least. "Get it on tick" is once more a way of life for people. Once the tanker moves in one direction it generally holds course for longer then people can call it. When will the crash come? No one knows. What format will it take? Again no one can say for sure. All we do know is that the fundamentals are progressively deteriorating. When the 2000 stock market bubble popped the central banks re-leveraged the system, cranking down interest rates to low levels. Then 2007 and interest rates went to zero and monetisation actions were also taken. So once interest rates rise (if they do) then once more they will see-saw back to zero but it will be very hard to get credit moving with all the extra problems. Again monetisation of debt will happen, this time will see even more draconian manoeuvres. We could get "Bail-ins", similar to a Cyprus situation where money is simple taken from the wealthiest account holders (or even across the board) to try and bail out the system; a direct attack on freedom. One thing is for sure, it won't be pretty and it won't be moral.

The asset price bubble is global. This pod-cast with Krassimir Petrov highlights Asias problems and how it is creating reckless bubbles. House prices are rising there even faster than the UK, yet no doubt the same reasons are given, limited supply, too much demand not enough new builds and so forth. As mentioned near the end of the pod-cast central banking really does change the morality of people for the worse. Excessive credit does great harm to us all.

The Reflation Trade

2013 has been a year of consolidation for hard assets. Silver is down over 50% and Gold has backtracked from around $1,800 to $1,200 an ounce. The stock markets have been at near record valuations with general optimism on all the TV financial network channels. The momentum is definitely with the stock market, however the saying "be greedy when others are fearful and fearful when others are greedy" would apply aptly to both stocks and precious metals at the moment. Prices are always subjective and get distorted over time. When Gold hit record highs many said it was at the peak of its bubble rationalising on the headline price, however you need to account for price inflation over a 30 year time period. If you account for this then of course Gold was not at a record level. Also if an asset is in a bull market and fundamentals are still in play then generally the price target of the asset moves, allow me to explain. If Gold is now around $1,200 at a time when Governments are in the midst of a money printing bonanza, the price target moves further. Inflation is still here and it will only get worse which moves the end Gold price higher. Inflation will catch up for one simple reason - Interest Rates.

Talk of Interest Rates rising are just that - talk. They will only raise these to real levels when it is too late. Debt is so high that even if they went up only a few percentage points - which would still be at historically low levels - the Government and public would have to default on large parts of debt. This in turn means private banks go bankrupt requiring bailouts to stop mass financial collapse. Its a debt bubble and one the Central Banks can not stop that is now in play. They will keep rates too low for too long; this is the move Central Bankers took.

A better price metric for Gold is the Dow to Gold Ratio over the past hundred years. As the above chart shows, stocks and commodities (in this case Gold) have been counter-cyclical. This is the price metric I use to assess what value both asset classes really have. The general idea is that an once of Gold should have the same value as the Dow stock market index. Currently that ratio is high, near 15. The stock market in around the year 2000 represented a low for gold with the Dow trading around 40 times more than Gold. Since then Gold has gained back some of that ground, but over the past year has re-traced some of this.

If I didn't own Gold I would be using this as a good price indicator. Gold may go down some more - I don't know, I don't trade as there's better things I like to do with my time (markets are too efficient anyway!). Like many I invest in Value and Fundamentals with a buy and hold mentality. So if we check the fundamentals, have Governments solved their debt problem? Have trade deficits corrected? Have Interest Rates returned to real levels? Then check the value which is the Dow to Gold Ratio, explained from a historical perspective. Both Value and the Fundamentals from my view are in a good state for precious metals.

Mini cycles always occur in long term bull and bear markets, the bull and bear traps as they are known. Prices rise, people get interested, buy, then demand dries up, with professional traders liquidating from the market. Prices fall, people get less interested and stop looking. Then the next stealth phase occurs. Investors notice the value, buy back in with prices slowly rising again. At some point the parabolic stage is when everyone starts jumping into the asset. It goes on longer than expected and its at that time to bail. The recent pullback is just like the one in the mid seventies for Gold or the 1987 Stock market crash - the fundamentals were still there but it just corrects along the way, setting up the next stealth bull phase.

Gold stocks also look very undervalued, again beaten down with no one paying them any attention. I also believe Gold will go to much higher levels from its present level, a target of $5,000 to $15,000 per ounce within the next ten years. In my opinion this is actually a conservative price as the Dow currently stands at 16,000 (of course in 10 years $10,000 may not have the same real worth as $10,000 now). Silver has even more potential, but with more volatility.

If you haven't got any of your assets in precious metals now may be the time to reconsider that position. Why? Because no one else is paying them any attention. The reflation trade in the stock markets can't go on forever.

Labour is always Scarce

The fundamental premise with economics is scarcity. Society has endless desires but only scarce resources to meet those needs. Despite the industrial, telecommunications and off-shoring revolutions we have undergone, we all still would like that extra bit more. Free Markets always create more jobs then there are people to carry them out, new ones that didn't exist 20 years ago. When politicians say we need to protect jobs what they really do is take jobs and create unemployment. The left warned of this during the Thatcherite years. However we all found new jobs. My job didn't exist back then. It was created by the free market (in fact you could say an American created my job by inventing the majority of the leading technologies we use today).

Despite Chinas one billion plus population that 40-50 years ago was enduring starvation they have now moved, in many cases, to a calories surplus state. The progress its people have seen by embracing a little bit of free market economics is phenomenal. As countries become more wealthy their capital structures evolve also. Years ago China had masses of impoverished rural peasants that would work for practically nothing. Now their economy has a service sector, a younger generation of consumers who don't just subsist but buy electronic goods or designer labels. 

As developing countries become more prosperous, the low cost labour that continually brought down the costs of goods and services to the West begins to run dry. As I've warned before we have taken the China deflationary juggernaut to be the defacto standard when in fact it was a mere blip in history. Labour will get scarce once again. There won't be the numbers to do the low cost manufacturing jobs as people in such countries will become more educated and move into the new jobs in law, finance or computers. Cost pressures will increase. Currency debasement throughout the globe will push prices ever higher. Chinas population will increasing move into jobs that didn't exist 20 or 30 years ago, into service jobs to meet an ever prospering nation.

Where will our next low cost destination come form? Africa? There are a lot of problems with the continent, in many cases poor infrastructure and a history of expropriation of property from foreigners. Most of Asia is now going through a similar process to China. South America doesn't have the numbers or the poverty China once has. India has great levels of poverty and could be a potential candidate but is also developing into higher level jobs, so oddly is similar to China. There could be a revolution in robotics that automate most of the once manual jobs but these tools generally progress over a long period of time and there is already a fair amount of mechanisation in manufacturing around the world. 

The expansive monetary policies that many governments are pursuing will be a disaster. Here in the UK our inflation has been above the Central Banks target for around 9 months now (CPI has been higher than 3%), and they have recently been talking about more QE, ie printing money. You want to know what the future brings? Inflation and lots of it. That's something I can agree on with Peter Schiff.

UK Housing Market Crash, Its a Marathon not a sprint

"PricewaterhouseCoopers said there was a 70pc chance that British house prices would be below peak 2007 levels in 2015 in real terms, despite a continued expected recovery in prices in cash terms – in other words any rise in property prices won't keep pace with inflation. ... Even in 2020, after five years of predicted relatively steady growth, the accountants warned there is a 50pc chance that "real" house prices would be below 2007 levels."

A recent PwC report on UK House Prices

The beloved British property bubble has recently looked shaky once more. QE has come to a short term end, political talk of fiscal austerity, interest rates with only one way to go and a Government who are fast running out of money. There are no fundamentals supporting the recent dead cat bounce in the UK's property market. Many still believe that you can't go wrong with property, that its business as usual with never ending positive returns from the value of their land, but the coming decade will smash all those myths with a bear market that will endure for a whole generation. If market forces were allowed to play out we would have had the housing market crash, we would have had the 50-60% falls but with modern Government its never a quick sprint, it always becomes a drawn out marathon.

Over the long term as I have mentioned the value of the land (or houses as people commonly mistake) goes nowhere (Of course the free markets lowering of many consumer goods means assets can indeed buy more consumable goods in the future. It's one of the reasons the rich always get richer with our current monetary system). Its the depreciation of the value of our currency that provides this illusion. Don't believe me? Take a look at the chart of gold to house price ratio in the UK. 

The target area is not my illustration but obviously someone who predicts rising gold prices relative to houses. The chart is probably not quite up to date, but it displays the important historical ratio of how many ounces of gold it takes to buy a house. The chart illustrate some important historical changes notably 1971 when Bretton Woods - the fixing of many Western currencies to the dollar which in turn was pegged to gold - collapsed. Through the 50's and 60's house prices seemed to rise relative to gold, but this is because the fixed price masked the real price a free market would have determined for Gold. After 1971 when the price was liberated the value of houses to gold indeed fell greatly. This is during a time of great inflation, generally rising house prices in Sterling - but the key thing is they may have been rising but not in real terms. Then came the 80's, 90's and 00's - a historical unprecedented credit boom based on pure fiat money with no restraint. Free markets did their job and lowered prices of consumer goods, the authorities reaction - expand the money supply to counteract this based on their flawed central planning metrics. It reached a peak of over 500 ounces of gold to buy the average house, but this is where the illusion stopped and gravity would take hold once more.

Record low interest rates, huge private debt levels, trade and budget deficits, a Government fast running out of money and bullets there is only one way for this asset and thats down. 

The bigger problem I see is - we haven't liquidated any this debt - we haven't de-leveraged! Politicians like to proclaim that our public sector debt is low (however its now exceeding and growing at a faster rate than our peer nations) but forget to mention our private debt levels. They are astronomical compared with other Western Nations. We borrow huge amounts of money from the Russians, the Saudis, the Chinese, or owe it to ourselves and we dig further into debt to buy overpriced assets such as houses in order to fund short term consumption. We kid ourselves into thinking we can do this by becoming a financial centre but in reality it's just a ponzi scheme under the hood. We borrow huge amounts of money, spend this money through the economy, which in turn drives the City of London which packages all this money up and in turn we kid ourselves into thinking we have a sound economy. Of course it will all come crashing down with disastrous consequences. The world will not look kindly on us when we can't pay our way without turning to the printing press. 

These private debts are weighing down on the economy and will stagnate growth for many years to come. Unlike other nations who are in the Euro we have our own currency. Worryingly 99.9% of economists seem to think devaluation and money printing are the way out, but this will only compound the troubles. This will in turn drive interest rates ever higher over the long term, ultimately making it harder to service our debts, that the Government are obsessed with not liquidating just like Japan's politicians 20 years ago. 

People naively think inflation is great for high debts, but again they forget that goods and services rise under such conditions. Serving debt may become more expensive but what happens when the price of energy or food rises beyond pay inflation like what is happening now here in the UK? People struggle further opting for present consumption or living costs over future investments. Inflation erodes our existing capital and savings or drives it out of the country, just like what is happening now with negative saving rates. Society doesn't invest in capital goods (tools, for example computers, machines, roads) as it needs ever more resources in the present time to stand still. Societies prosperity relies on the capital structure, put simply the access each generation has to tools. I have higher living standard than my grandfather as I have more tools at my disposal. University, the Internet, a computer and so forth. When Governments inflate they give people pay cuts instead of allowing the capital structure to adjust. Companies accept this as a solution but in reality we get less productive as tools or innovation are deemed surplus to requirements over the short term. To an Austrian economist all of this makes perfect sense, but to the many it will only become clear once the process occurs. Then it will make perfect sense to all.

The Spanish are another country with similar issues to the UK. They also have a lower public debt compared to others, but their private debts are relatively large. They also try and prop up their zombie banks and prevent liquidation. The US on the other hand leads the western world in this aspect. Who was the nation writing off all these bed debts? People viewed the sub-prime fiasco that the US was becoming the basket case of the world but in fact they are ahead of the curve, indeed ahead of Europe that's for sure. The value of their houses have already fallen around 25-30% but their bubble was no where near as bad as others such as the UK. They don't have as much private debt as the UK. And despite talk of manufacturing decline, who produces some of the most innovative and high tech products in the World? The US. I'm bullish on the US relative to other nations. I'm wouldn't invest there, which tells you the trouble the world is in.

For example Apple is a marketing machine, with a whole fanatical legion of followers. They make their hardware in China buts its in their product design, software, marketing - the creative economy - that provides the real income. The UK would be lucky to have the same clout, but we don't. Sure we have small to mid size innovative companies which I take my hat off to who do a great job, but we have no Googles or Microsofts. All US based with their profits going back to their home country. 

My employment record is great illustration of the UK's problem. I currently work for a large Japanese based firm, prior to that a large American Services Company. I've worked for 3 UK based organisations. A UK government backed learning centre called the Open University, a car sales company called Reg Vardy who sell cars made by companies based in France, Germany, Japan the US - basically anywhere but the UK and a telecommunications company who sold German telephone equipment made by Siemens and photocopying products made by Cannon a Japanese imaging specialist.

Where are the large British companies? This is the problem - I agree with letting foreign companies and expertise come in - this increases all of our living standards. But it can only do so much. We will never be able to maintain the illusion we have made for ourselves under the current framework of more debt, more sales, more jobs based on this debt, rising assets based on this 'prosperity' with the cycle going full loop. It doesn't matter if its tangible or intangible - we only seem to be able to sell others products to ourselves by increasing our short term consumption debts. We make an excellent nation of salesman and people who get into huge debts but at some point in the future others will demand payment and stop lending at which point we will come short. 

The values of these such debts are tied in many places to assets such as houses. The government can not dampen or assist in this rebalancing process, all they can do is make the imbalances worse like they are doing now. By enforcing the cycle listed above. People like to think this is different to the seventies.

Back in the seventies we propped up manufacturing, car makers, our steal works etc. This was despite the fact that others around the globe were doing it cheaper and better. Then Thatcher came in and changed all this. She stopped propping up these type of jobs. Of course unemployment went through the roof as it takes time for the private sector to create sustainable jobs that were competitive in the global marketplace. In our present time replace factory worker or coalminers with estate agents or beauty therapists. Same problems just different unsustainable lines of work.  Sure we may have a need for such people but not on the sheer scale we have them now. That's the simple fact why for example estate agents haven't been hit as hard as they should have been. Low interest rates and printed money have supported the assets that they sell. The government has in fact given many of these lines of work a bailout, by ensuring the debt economy and imbalances can continue. 

People don't understand when you try and put all this into context - the unsustainablity of the debt we amass. Business as usual, I don't know how you will afford to buy if you don't buy now and so forth - as though this exponential debt boom can continue. "Surely the Government will turn to negative interest rates or the Government won't allow the prices to fall". Everyone misses the real crisis to come when the Government has no more bullets, they will no longer have control of circumstances and events will dictate policy. Greece may have been removed from red alert but the solution was just more of the same - more debt for all to bail the Greeks out. Economic gravity will take hold - you can't escape it. 

The illusion still seems real to people. Like a magician Derren Brown or David Blaine who kid people into believe that they are performing an art form or something that is indeed beyond the realms of magic but they are just the same as Paul Daniels - it's a trick that has been handed down through the generations only with their modern twists on such acts. The Gold ratio of house prices illustrates that house prices are just an illusion over history. Its the decline of the purchasing power of our governments monopoly over our money that provides the magic trick. The magic act has many more years to run.

China Hedge Part II

Earlier last year I wrote a post about the China Hedge and there's further activity as the video shows.

Click here to view Video.

Is Gold in a mania? Is this the end of the bubble? Or are the Chinese ahead of the game yet again? The clip mentioned that China has now become the largest Gold producer in the world, surpassing South Africa (which incidentally has been in decline for a while now). The Chinese are digging like crazy for the stuff, they have been for years as the Government knows the yellow stuff is the key to their economic well being during the next 10-20 years. We don't have a bubble, but the Central Banks and Governments will create one here. George Soros aptly called it the 'ultimate bubble' and I agree. When he said this many looked at his comments and concluded that this meant gold was already in a bubble, but I never drew that conclusion, he's a smart guy. As it transpired later Soros actually added gold to his fund. Funds all around the world are increasing their holdings. But we are way off the bubble top, years away. 

The fundamentals for the bull market just keep getting better and the authorities apostles, such as Paul Krugman, keep telling us Gold bugs what we want to hear. Apparently we aren't doing enough. Right? We've been here before Mr Krugman. You've been telling that gruff to Japan for 20 years now and what have they got? Huge debts and a basket case economy. Get those interest rates lower, increase spending and get more money into the pockets of people. I forgot that prosperity was that easy.

China has also become the largest Gold consumer, which is another huge shift in the world. Ten years ago their citizens couldn't buy it, now the Government actively encourages purchases. You can't eat gold? You can't use gold? But you can't use or eat worthless paper tickets, promises of payment, that we call money. Bonds are a disaster. Housing is going to be a terrible way to hedge going forward and stocks, dear me, companies have that much state intervention Karl Marx would be proud. Only Cash is going to do worse than the list above. However Gold is outside the system. It's no ones liability. However stupid, despotic or mad our leaders become, it won't affect gold. 

We all await the China crash. Marc Faber seems to suggest sometime in the next 9-12 months. More market commentators have noticed. Hugh Hendry, Jim Chanos, Mish Shedlock with many of the underground economics forums also beginning to discuss the events that are happening. Evey Credit boom ends, and there is never the 'soft landing' that is always told, it always gets messy. However when China does run into difficulties don't think this is it. It will just be a setback, many of the above also agree with that concept. Unlike the West, China is starting from a very low industrial base, meaning there is still huge potential to grow. She will just grow her way out of problems eventually. Remember the US had huge issues as it rose to become the superpower. The Great Depression, the panic of 1907 and many financial storms throughout the nineteenth century. She overcame them all as it was from a lower industrial base and she borrowed money to produce not consume, similar to China. Of course when China stumbles what will happen to Australia in the short term? Many Asian nations - Japan, Malaysia, Vietnam? African nations such as oil rich Angola or Nigeria? South America, with Chile and Venezuela? Not only are the Chinese buying gold but they are forming huge trade links around the world and also practice a form of check book diplomacy. They use their monetary reserves and labour to build infrastructure for such countries to access the natural resources they need and buy some friends while they are at it. 

The Eurozone, Chinas biggest importer won't be doing the country any good with what's happening there. Previously I contemplated that Euro members could leave as they can't adapt to the Germans mentality. However I now think its the Germans, the strong rather than the weak, who will leave! I mean the recent bailout is a complete disaster - no one has the funds to pay for it. This will just further undermine the Euro in the long run. I think it may now be more likely that Germany will leave as there are more mutterings from their public that they've already had enough and want a return to the sound Mark. If that happens you can kiss the Euro goodbye. The Germans are the only ones disciplined enough to run a relatively sound currency (perhaps Finland, Holland and France also). The Euro needs the Germans. Again all this just puts further gloss to the gold bull run. You can't even turn to the Germans for sound money any more.

We are witnessing the breakdown of the welfare experiment since Nazi and Japanese expansion created the Western promises 'a society fit for their war hero's'. The social ratchet kept tightening, with no politician loosening the grip. Just like the collapse of communism it will be the free market that defeats statist policies. It always does. While we transition there's going to be some pain along the way. Chinas Hedge continues....

Britain, the Canary down the Western Coal Mine

"We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step."

Jim Callaghan - Speech at the Labour Party Conference, 28 September 1976

Gold prices had been on the rise for weeks, then all of a sudden fell back with a thud as we were told that only 11,000 jobs were lost in the US during November. Another Brown bounce in the polls left Cameron backtracking, austerity is so last month, instead 'growth' by government spending is now acceptable as policy is dictated by focus groups. The Middle Easts version of Las Vegas got a helping hand which was good news for many UK banks, however only a mere $80 Billion would have been at stake. Years ago it would have meant something, not today with Trillion dollar bailouts. China's vice governor at the peoples bank declared 'We must watch out for bubbles forming on certain assets, and be careful in those areas' referring to golds recent upward trajectory. Nice try, that deceit may wash with CNBC but those of us in the loop know full well that China would love to transfer much of their paper assets into hard assets such as Gold.

It's sometimes easy to forget what the average person thinks in relation to financial matters. Articles posted here are certainly not consistent with mainstream thinking. People are still on the same broken record, 'Buy a house now while prices are cheap before you get priced out', 'We are past the worst now and good times are ahead', 'The government will make a good profit for the taxpayers with the bank bailouts'. Ask people who read the financial sections of broadsheet newspapers about gold and you get told 'The price can go up as well as down' as though this is a unique quality that does not apply to other assets such as bonds, real estate or stocks. Indeed it is important to remember just what people are thinking, because you don't want to be on the same page as them. 'Repeat after me, Gold is a bubble, Central Banks can 'tame' markets, the sustainable recovery is here and there is no inflation! There is no spoon!' There's no analysis of the thunderstorm that is brewing in the distance.

So what about this Gold bubble then? People are right, however they are 5, 10, 15 years too early in calling it. People are buying the stuff because one day it will be a bubble as the Worlds Central Banks are busy blowing the next bubbles as I write. The currency and Government Bond bubbles will eventually burst causing mass inflation and creating the next bubble, commodities and precious metals. As Bernanke and Company try to assess how best to deal with bubbles, they fool the public as though these events are some mystical force that no one can control. I have a simple solution, how about stop printing so much money. We instead move from bubble to bubble, the Centrals banks policy after one pops is to inject further easy money into the system. Like some drunk who throws up after a bottle of vodka, 'I best have another to sort myself out'.

Could the US unemployment figures signal the turn with people getting back to work? Maybe in the short term, but I don't think this will be a long term trend. You have to remember governments everywhere are printing huge amounts of money and this is bound to give the so called 'prosperity' effect in the short term but it won't last, the free market hasn't healed. During the coming stagflation a lot of conventional indicators will seem to be healing when in fact the underlying fundamentals are deteriorating. For ten years after the credit crunch in 1973/74 the unemployment rate in the UK kept rising.

It didn't move up in a straight line, with periods of consolidation and even movements to the downside. When the correct path was taken it took years to fall. Numbered estimates in the news are useless, three million, four million, all have been given as figures for the short term, however no one can say for certain, all we do know is that history says it will keep rising over the long term.

For a developed country the British people sure do love their inflation. While many other nations inflation indices have plummeting like many a British Banks shares, the UK's inflation rate has remained remarkably 'sticky'. Whether its the appreciation of our assets, our rising incomes, our increased levels of debt or the fallacy that we believe the weak pound is good, we really do want to beat other nations in the race to the bottom. The yanks scream 'bloody murder' watching their beloved dollars debasement from the powers that be, not realising that one hundred years ago a British pound used to be worth $5. Anything you can do across the pond, we can do it much worse. Over the next decade I'm sure we will show the developed world what not to do. The problem I see is that British people want inflation. We want to see rising prices, we believe that this is a healthy state of affairs and will thus allow a greater level of leniency towards our policymakers compared with other nations when it comes to expansive monetary policy.

Will the BoE raise interest rates when the market forces their hand? Contrary to what people believe it is the market that controls long term interest rates. We may like to think of central banks under a paternalistic viewpoint, our saviours there to insulate us from financial destruction and chaos, to solve economic issues should they arise. Central bankers are just like their Communist Central Planning counterparts, eventually market forces get the better of them where eventually they follow the market, not set the tempo as they would have us all believe.

In order to understand how markets dictate prices such as interest rates its easier to compare the lowering of interest rates to say lowering the price of bread. If the government declared rather than liquidity not been easily accessible that the issue was now high bread prices, they therefore set forth a policy to fix the price lowering it below the market one. As suppliers begin making losses they shut down production, at the same time people consume more as they can purchase more of the product. Eventually the country runs out of bread with all stocks depleted. Rather than bite the bullet immediately the government would in all probability resort to rationing rather than admit the error of their ways with bread queues becoming a common occurrence. A black market may appear as people under their free will and against the governments law begin selling bread to one another for a price set by people, the marketplace. If however the government wishes to fix the state of affairs they must liberate the price once more, allowing the market to determine the price of production. As suppliers closed down long ago abandoning their supply networks it takes a short while for supply to meet demand once more. During this period the price of bread goes into the stratosphere as people bid up the cost of the present scarce bread. Eventually market forces will drive the cost down over time to a point of equilibrium.

How does bread relate to interest rates? Its the same principle. Governments can set the price low but eventually the market will force its hand to raise the price, with the price going into the stratosphere. This is why we had 18% interest rates when Thatcher tried to put things right, or when Paul Volker put US rates above 20%. The policy makers were just chasing the market, trying to reign in inflation which was driving the free markets interest rates haywire. During the 1973/74 credit crunch Central Banks had the same idea as now, that is they lowered interest rates in response to the recession, but the longer and lower you try to hold down these prices the higher and sharper they have to eventually rise as many an older reader will painfully remember.

The BoE could be forced to raise interest rates under a number of scenarios. They may have to raise rates if there is a currency crisis with the pound falling as investors flee. Like the bread situation above, they will put off the price liberation, instead they will put currency controls or limits on capital (like bread rationing) in order to try and provide a short term fix. Eventually the market beats them and they have to hike rates as over the long run a lack of foreign investment creates a less dynamic economy and higher inflation.

It could be forced to raise rates if inflation got out of hand with the free market demanding increased real rates of return to negate the depreciation of the currency. Even if central banks keep buying government debt at artificially low rates, private banks still lend to all of us, with this mortgage rates could rise for example. Its similar to what we see now, despite base rates at near zero average mortgage rates are far higher as the free market realises there are inflation risks over the medium to long term. They are also hedging against their potential losses as the government props them up.

However they could do none of the above. They could keep rates low, spurring on more inflation as the government can no longer afford increased rates on the ever expanding debt. They by pass the market and lend to individuals themselves at these rates. They print money directly to cover the shortfall in the various government payrolls. Currency collapse is ensured at this point as it becomes clear to all that its time to pack your suitcase. Marc Faber believes this is the conundrum America will face at some point in which its policymakers will not rise to challenge, instead they will shirk away from the correct action to take, opting for runaway inflation. At some point the stock market of such a country would be a screaming buy, just at the depths of the seemingly never ending hyperinflation when the average person has lost all confidence.

Could the UK be the Canary down the Western coal mine? There are many other nations with serious issues that have faced or will face issues sooner, but I wouldn't put them in the same tier as Britain, a nation who still has a recent innovative and industrious past. She could however, be the warning signal for many other Western nations that mass inflation and/or interest rate rises are just around the corner. Either option ain't pretty.

Central Banks are changing their Tune

This week the IMF began sales of their Gold reserves. I have mentioned previously that the IMF have been looking to do this, however how wrong was I regarding what may happen to Golds price! Two hundred tons came onto the market and rather than the price possibly dropping, the price instead soared. The Central Bank of India gobbled it all up in a single transaction. Many articles have already been published in relation to the event, and with good reason. The shiny stuff has risen in price for the past decade, despite european central banks selling huge quantities, the most infamous being my countries sale of half our reserves known appropriately as 'Browns Bottom'. The worlds central banks are suddenly looking at Gold from a different viewpoint. The move by India shocked everyone. The next sale could see multiple buyers apply, China, Russia, Brazil and other emerging nations will be feeling anxious - "How do we get out of our paper reserves"? One day there will be a rush for the exits, a dash for the ultimate form of cash. Meanwhile Geithner and Obama parade around the globe, reassuring foreigners of their strong dollar policy, their words contradicting their actions. A sound currency does not exist with zero percent interest rates, deficits as far as the eye can see along with printing more of the stuff. You don't need to be an 'A' grade economist to see the anomaly.

It's important to remember that you can't grow gold. Gold can't be produced in a factory, or planted as a tree. There has always been a finite supply throughout history and when there's no where for investors to turn, they head to safety, historically that has been precious metals. The limited supply can be seen with the recent "Sell your Gold" adverts, dealers buying the public's jewelry, melting it down, and selling it to institutional investors. While the recession continues to force the public to liquidate their hard assets for paper cash, the paper cash investors are diversifying into such assets. One only has to look at the events last autumn, bullion dealers ran out of stock which caused the adverts you now see. Hoarding along with limited ground supply has led the dealers to impell the public to sell.

One thing you have to understand is that China is sitting on 2 Trillion Dollars of paper promises. They currently have around 1,000 tonnes of gold. $2 Trillion could buy them an awful lot more, if they can find willing sellers. The recent IMF sale was $6.7 Billion for two hundred tonnes, I'm sure you can do the maths to see China's buying potential. Compared with nations in the West, many other emerging economies still have woefully imbalanced Gold reserves as the table details (original table taken from following article).



There are many countries who have plenty more cash to convert into Gold, histories ultimate form of payment. Germany, Italy and France hold approximately 70% of their nations reserves in Gold. Compared to China, India and Russia with 1.9%, 6.2% and 4.3% respectively, if I was a betting man I would say the latters percentages will inevitably increase.

For too long the West had a monopoly of talent and capital, corrupt regimes around the world ensured this. Battles between the far left and right in South America, Asia's experiment with Communism, Eastern Europe held back by the Iron Curtain, Middle Eastern states squandering the oil bonanza of the seventies and of course Africa's various despotic rulers. For too long during the 20th Century statism looked like the solution to peoples problems, when in fact it was the cause. Many talented individuals migrated to the West in search of a better life for their families. The collapse of Communism along with the revolution in telecommunications saw to it that many emerging nations began to realise their potential. Why emigrate to the West when they now have the same intellectually challenging jobs at home? Many Western countries still have one trump card - longevity in respect to human rights. No matter how bad my government messes up I always know I will be able to say what I want. I always know that the right path will eventually be trodden. I always know that Britain was the first nation to overthrow a monarchy on the continent during its Civil war, thus beginning the process towards the present inherently stable democratic system that has endured for centuries. The above may not seem much, but its amazing how we can all take this for granted. It won't stop the shift of power from West to East. Gold, it seems, is also moving in the same direction.

Whats the deal with house prices?

You can't seem to escape news regarding the property market, regardless of how insignificant it is. Both the UK's main indexes, the Nationwide and Halifax, have been putting together recent small upticks. Historically when house prices turn they don't reverse for years. Could it be different this time? It's never different, in fact this is how it always works in history, prices drop a bit, drag a long for a while or show slight upwards movements, then the process repeats for years. The housing market is so illiquid it is always very hard to determine what a market price is.

I have become tired of news regarding house prices. Throughout my adult life I have heard nothing else, the news gives greater coverage to the value of your home then real issues that occur throughout the world.

House prices are one of the most misunderstood asset classes. A while back I said that houses are historically a poor investment (a house is a home, but many believe them to be the best investment you can make) and I think many people would find that hard to believe as we have been continually told for the past 10 years that houses are the best investment. During the boom, pundits and experts were proclaiming that houses had the largest returns, yet also had the least risk associated with them compared with stocks and bonds (in fact many said no risk). This is what happens during a bubble, history is disregarded with risk/reward concepts turned upside down.

However when history is examined prices of homes performed poorly against all other assets. We can run through the numbers to illustrate this. If we take the Dow Jones during its 1980's and 1990's bull market along with the upturn in the current decade, it went from around 850 in 1982 to 14,000 in 2007. This equates to a return of 1657%. The Gold bull market during the seventies, went from around $35 to $850, a return of 2428%. Even if you disregard $850 as a top as this price was only achieved for one day, gold consistently hovered around the $450 mark for years after, a return of 1285%. So what about housing? This is where we come to the relative poor performance of home prices. Using the Nationwide's figures from a low in 1982 of around £67,000 to £186,000 in 2007 - a return of 277%. This was under two of the greatest housing bull markets in history. Even if we take the recent boom it gave around 250% returns on average. So to summarise:

• Stocks - 1657%
• Gold - 1285%
• Housing - 277%

Of course the figures I have used are by no means rigorous, they just illustrate the performance of particular asset classes during their bull market. So what gives the impression that returns on a house are so great? One word, leverage. Most people that buy a house have to take out a mortgage and subsequently only put 10% or so down. Therefore any gains that are made seem all the greater. If you bought a house for £100,000 with £10,000 down, if the house rises 10% in price then you have doubled your money. This is the power of leverage. However in the event that the asset falls in price this is where the story gets a lot more painful. Just as gains are amplified, losses are also increased. The house would only have to fall 10% in value for your deposit to be cleaned out.

Leave it to the professionals to make their living from property, for the rest of us it should always be viewed for its primary function, a home.

With the bull market figures above you can see how people have got it wrong when they talk about the recent 'commodity bubble' or the current 'gold bubble'. Gold in dollars has only gone up around 300% since its low. Its only just above its all time high 30 years ago. History says bull markets in these types of assets have much further to go. Another good indicator is the Dow to Gold ratio. In recent history when stocks are in a bear market and commodities are in a bull market this ratio gets close to around 1:1 meaning an once of gold is the same value in dollars as the Dow Jones index. We are around 9:1 currently, however what happens if the Dow increases over the years to come as the government continues to inflate all asset classes? The gold target moves. 15,000, 20,000, 50,000 Dow? However high it goes, until fundamentals return to the stock market, I'm sure golds price will match it at some point in the future.

When the news reports on house prices, they always make statements like "Good news, house prices are on the rise" or "Bad news, house prices have fallen". Why is it that rising house prices is deemed to be good news? Many would find it odd if the journalist said "Good news, bread has risen again in price", but that's what they are saying with housing. The higher they go, the richer we are? Not at all, it just means there is more domestic currency in circulation and that rising prices are symptom of this action. Not too long ago when I was a teenager I remember being able to buy a good half a dozen sweets and chocolates with a pound. You could buy a mars bar for around 20-25p. I recently went to buy chocolate for my partner and couldn't believe the prices now. It was around 50-55p for the same bar. You would struggle to buy two items with a pound these days. Maybe the media should report this as good news, or if they ever fell in value report it as bad news.

Of course we are hearing all the usual babble as to why house prices will rise forever, the old myth of supply and demand, there is not enough houses. I always forget how we have waiting lists to buy houses as they are rationed out, or like under a Communist regime we form queues to buy our house. I always feel for those poor estate agents, their windows empty, as there no supply to meet demand or people resort to homelessness. Last time I looked there was plenty of houses to buy, in fact I get a paper full of them every week. Its more pounds that pushes prices up, not supply and demand. It becomes supply and demand issues when you start to see some of the above happening.

The recent reported 'rise' in prices will run out of steam at some point. The governments and central banks have declared war on anyone holding cash. Many people have turned to stocks or houses to place their money rather than in a bank earning nothing, but it won't last. QE have enabled the government to buy up bonds with the bailouts they gave to banks used to push up stock prices. The FTSE-100 recently had its largest quarterly gain, larger than during the tech bubble mania. As I've said before, bubbles are not inherent human 'flaws' or greed and so forth. They are caused by the exact expansive monetary polices we see today. Once you understand this, the financial system becomes a whole lot clearer. In fact you start seeing where the next bubbles will occur. There will be great volatility in many asset classes over the years to come as the governments try to inflate everything. This includes the price of our homes.

The 'China Hedge' and Western Zombies

Earlier this week the Chinese Government did something that Governments don't usually do. State television began promoting Gold and Silver as a good investment.



So why is the Chinese Government telling its people to buy Precious Metals? Of course I have previously mentioned the Chinese Government increasing their own holding of gold but now it is telling its citizens to follow the same strategy. To me it would seem their leaders must realise that the economy is in a bubble and whatever they try and do, China is heading for a hard landing. The trick with governing people is to try and provide the illusion of prosperity. Its what the West did during the housing bubble. Despite average workers incomes stagnating, people were content as their home was rising in value, giving them a false sense of wealth. People didn't mind that NHS waiting lists got worse, Governments role in the economy expanded along with deficits so long as their homes kept appreciating. When that disappeared, then people became restless. Recently with the 'green shoots' (read another dose of inflation from the government) people again believe how good it is that their houses will hopefully hold or increase in value and we can return to the old days of easy living. The problem comes when people realise the green shoots were in fact weeds, and that the asset prices will fall back - then we go back to unrest.

The Chinese Government aware of this dilemma, seem to be trying to hedge their citizens from the global depression. Their exports continue collapsing, millions of jobs are being lost, the Baltic shipping index is once more on the slide similar to 2008 before the financial carnage occurred. To cover their citizens against this and falling stocks and real estate they are encouraging people to buy precious metals. As recent as 7 years ago citizens were banned from owning such assets. This illustrates how radical the policy is. What does this mean for the price of such assets? I do not know. All I know is that the Chinese Government, again, seem to have studied their history and see where we in the West are now leading the whole world. China has grown phenomenally in the past 30 years, but its still America, Europe and Japan who have the most influential economies. It seems that we wish to create a new set of zombie institutions just like Japan did to try and maintain our illusion of past 'prosperity'.

Western Zombie Banks

"At the moment the investment slump is being compensated by public spending. As long as global growth is supported by public help, we cannot talk of sustainable growth"
Yves Mersch, ECB Council Member

Whenever I mention to people that what we are doing is creating Zombie Banks that will stagnate the economy for years just like Japan I am greeted with exactly the same comments before the housing bubble burst. "It's different this time", "We are not like Japan", "It won't happen here". Well it will happen and as the years go on it will become more evident to everyone.





We haven't learnt anything from the events last year. Bankers are getting their bonuses once more. Banks have merged creating even larger "too big to fail" institutions with the Government guaranteeing all of them. They will use Lehman from now on to scare people, to legitimise further government involvement. Politicians don't dare bring up any previous discussions regarding reforms as they all try to maintain this illusion of prosperity but it won't work. Earlier posts back before Lehman collapsed that I wrote had some hopeful comments, on what needed to be done - saving, the abandonment of wasteful consumption, independent thinking. However I thought we would try and prop up everything, repeating the same mistakes of history with everyone tricked into believing the governments 'solution'. We should have made sure there were more Lehman's. Its just finance. People would have rebuilt their lives. We would still would have all our tools, skills and infrastructure.

So how long will China pursue Gold?

As I have previously mentioned China are acquiring gold to try and build a reserve currency contender against the US Dollar. I have read many articles on how the USD is going to collapse or be replaced by the Euro or some other currency. But as I've said before where is the alternative? The Euro has too many soft nations such as Spain, Italy and Greece. If it was just the sounder economies such as Switzerland, Germany, France, Norway then maybe there would be a sounder alternative. The Chinese RMB is pegged and that's before we come onto the smaller size of the economy compared to the US. I can not see the government letting the RMB float freely while the current crisis is present, they will keep it under control not risking further dislocation that could ensue by allowing it trade in the markets. The Japanese economy has gone nowhere for two decades and despite what people may say that they are due a boom I can't see it happening. The Government has to walk the right path first and I'm yet to see it.

If China did wish to challenge the USD as an alternative world reserve currency then the only way I can see other nations taking up the offer would be to peg it to Gold. The Chinese could then say "sure you can have your paper dollars backed up by American Governments lies as they continue to devalue them, or you can use our currency, fully convertible into Gold". Whoever holds the reserve currency status has a huge advantage in that they can export their inflation to others just like the US has been doing for decades. China and Russia may discuss alternative world currencies but they would both secretly prefer their own nations currency as the reserve standard. In order for China to do this they still have to accumulate a lot of gold. The 1,000 tonnes they already have would not be enough. China still has a lot more to accumulate, just as the gold bull market still has a lot further to go.

What the Autumn may Bring ...

History has a habit of repeating itself. Markets also, follow a similar pattern as history can show. As Summer draws to close, as we enter Autumn, I feel we are in for another action packed time, similar to the close of 2008. Optimism is in the air all around with a complete turnaround of sentiment. When the majority are optimistic, its best to go against the tide and September and October are historically torrid times for the markets. There is evidence all around the globe that imbalances still exist - many worsening as time passes. China is in a rampant bubble driven by the Communist party. Many Eastern European nations are close to currency crisis, exposing many Western European countries who have lent them money. Sterling continues to worsen, as the UK leads the developed world in printing money and debauching the currency. Liquidation is put on hold, as governments believe they can avoid the inevitable. There have already been ominous signs for this month, with the classic August stock market volatility. Central Banks are planning their next moves, in the US there have been rumors regarding a second stimulus package as the first one runs out.

If we take a look at the VIX (the volatility index) it has been moving downwards since the events last October. Notice how quick it can move upwards as last year shows.


There was always going to be a market rally. Nothing ever moves straight up, or straight down. There are always periods of consolidation. If we look at Sterling, it has rallied quite substantially since its dramatic decline last year. Does this mean it has reached a low? I'm afraid not, all the fundamentals point for it to resume its bear market run, and if I was a trader I'd be looking to put shorts on Sterling as the next few months should see a deterioration once more. Sterling looks once again a basket case currency as it did during the sixties and seventies with a new generation that is fooled with the same rhetoric past politicians used to say to justify the devaluations.

30-40 years ago the politicians always justified the devaluations. We need to buy time, it will make our exports more competitive, we need to 'invest' to keep jobs and so forth. Roll forward 30 years and the same fallacies are being told. The idea that a devalued currency can bring prosperity is sheer madness, if it was that easy then no one would have to innovate or increase productivity. Over the long term this policy never works. You need a strong currency and a strong government to put the breaks on and say 'Ok, we tried to inflate, it didn't work, therefore we will stop the printing'. As painful as this would be it works. People adjust, they become more competitive, make better products, start investing. This is how you become wealthy and give your exports the edge. This is what Japan and West Germany did.

After the Second World War both these nations had worthless currencies. War torn, people had resorted to bartering rather then use government money, they had no currency reserves and their people were living in poverty. Nations usually have to get in this state before politicians get a spine and change their ways and that's what happened. Germany abandoned the flawed Reichmark and introduced the Deutsche Mark with a new emphasis on maintaining a sound currency, and so began Wirtschaftswunder, the great Germany economic miracle. Britain meanwhile became the sick man of Europe and was synonymous with the term 'Brain Drain', despite getting more American Aid than the Germans from the Marshall Plan. Germans on the other hand enjoyed a booming economy, one that had low inflation during the stagflationary seventies.

Japan also took a similar route. Their goal was to get Western Currency, and the only way they knew how to do that was to sell quality products that Westerners wanted to buy, and in return they got their pieces on paper. Did they debase the Yen to achieve this? They did the exact opposite and they created quality products. Westerners used to joke about Japanese products (similar to what they say about Chinese ones now as China tries to emulate Japan) but what do people think of when they see Sony, Toyota or Seiko now? They did this while the Yen appreciated, innovating, increasing productivity and smashing the Americans once dominance of export markets during the 1950's and 1960's. The only reason Nissan or other such companies placed their factories here in the UK is for shipping costs and the 'enlightened' tariffs governments have imposed to 'save' jobs. Even if the Chinese or whoever could do it cheaper.

Of course Japan and Germany are different entities now. Their first and second generations built their wealth and generally as the generations move on it gets wasted. They aren't the countries they used to be. Nations such as China are where Japan were back in the 1960's, a generation who still remember Communist hardship, whose parents still remember the mass poverty and killings. Following a similar model they had no currency reserves and now have amassed $2 Trillion Dollars, and are still amassing them. They have high savings rates like Japan once had and are becoming a huge creditor nation. All of this takes huge personal sacrifice. Sacrifice many current western generations are not willing to make.

So will anyone take similar action as the above for the UK? I don't believe so. Things haven't got that desperate yet. They will keep debasing telling the public the reasons above, a noose will slowly tighten around the government. Spending out of control, exports unable to pay for imports, international investors dumping the currency, tax increases on businesses driving out talent, with the process going full circle. Of course the markets will force their hand eventually. We are a way off yet, but I feel this is what it will take. A real crisis. We should see currency controls at some point in the future as the government attempts to bolster Sterling. They may even start with limiting the amount of foreign money you can take abroad.

People in the UK, I feel, are putting too much trust in David Cameron and the Conservatives, that they will win the election next year and all will be fine, however I personally think the trust is misplaced. Tory Party members have recently attacked the NHS and David Cameron has shown what he feels. He wants the NHS and is willing to spend more money on it. I don't think he has the conviction to scale back government significantly and even if he did the damage is already too bad. Mr Cameron seems to want to mimic Labour as close as he can and won't want to upset the public too much. Even if he was like Thatcher, back then the deficit wasn't as bad, we had oil and gas, and we weren't monetising our debt on the scale we are now. Thatcher would recoil in what needs to be done under our current circumstances.

In a nutshell the world still has plenty more deleveraging, which means Governments will be looking to carry on with printing more money. The UK has continued with QE and for some reason this shocked the markets recently, but it shouldn't have shocked any regular readers to this blog. It will keep on going, £200B, £300B and so on. I don't know how much but I do know there is no way they will sell it all back to the market like many believe. Not when the nation is running deficits for the next decade at least. Now the path has been embarked upon it becomes very hard to stop, and as our politicians were all too weak to take the pain from the credit crunch there is no way they will stop the monetising of government debt. You see people still don't understand and tell themselves "Well we will just wait a bit until the credit crunch passes then we will sort out this or that". It doesn't work like that. The easiest path would have been to take the pain fully as soon as the credit crunch hit. Once you postpone it, you make it worse and then politicians keep saying we will wait until this next crisis passes etc. Then the markets force their hand, and then a nation faces real hardship with no alternatives left.

In times like this there is only one asset for amateur investors - Gold. It reveals all the lies the government and media tell us. Its price tells you what is really happening. Recently the asset has been mentioned in the press, with commentators talking about it, however they still don't understand its value. They ask the wrong questions such as "Why would you place value in Gold?", rather than "Why do you place value in Sterling?". Ignorance and historic naivety, its amazing how well we have been conditioned away from Gold and Silver, free market money. Over a hundred years ago our ancestors would have gasped in horror at the financial system we live in. Four Pounds used to buy an ounce of Gold back then, now its more like 570. Gold may have made the news but what do commentators say when they mention it? Should people sell at these high prices. People are interviewed selling the stuff. When did you ever hear these people call a bubble, and now they seem to think Gold is in one. It will be in a bubble when they are all telling people to buy the stuff, its a safe investment, supply and demand and all that jazz. There's a long way to go until that moment happens.

Gold also tells you the truth of real prices. While people were hysterical regarding house prices, did they realise what was actually happening to the true price? Of course in Sterling prices shot up 200-300% but what about another currency, for example Gold, true historic value. In Gold house prices were stagnant as Gold climbed a similar amount during the same period against Sterling. You could have saved yourself all the hassle of estate agents, mortgage brokers, Tenants, property maintenance and so on, and bought gold in a few minutes online and sat back. Sterling lost its value which gave the illusion that houses were worth more. In other words we never had a housing boom. We had good old currency debasement, mass inflation. Its the same with Oil and so forth. Oil jumped ahead last summer due to demand being larger than supply, but its now still up around 300% since its low 10 years ago in say dollars, but in Gold it hasn't moved.

The governments in recent months have allowed the banks to use false accounting laws. If the market did this the company executives would be sent to jail, but when the Government changes the rules its fine, just like before the S&L crisis blew up. Central Banks have all sorts of worthless paper on their balance sheets. They are monetising the deficits. The banks they have nationalised are trying to lend further money to the economy. Easy money, ruins society. It always has throughout time. The decline of the Roman Empire as they debased their Gold Coins. The Spanish Empire as the Conquistadors drove out the Islamic Moors from what is now Andalucia and continued their conquests by discovering the Gold laden lands of South America, again easy money same effects. Latin American nations throughout the 20th Century had government after government who pursued similar mistakes, despite places like Argentina being richer than the US 100 years ago. Italy and Britain during the sixties and seventies played with easy money and look where it got them during the seventies devaluation sagas. What remained of British Industry collapsed, as companies thought they could keep selling on price, rather than quality and innovation, but eventually costs go up also as companies become sloppy relying on further devaluations to bail them out.

Politicians are too tempted to play the easy money card as the great deflationary juggernaut, China, exports low cost products, recycling their money back to the West to encourage further easy money policies here. China have studied their history well and know full well how destructive easy money is to society, and realise what they are doing to the West.

Unfortunately when Fiat currency exists it is a lot harder for the Government to face the pain and do what is right for the long term. Easy money means easy living for the short term, but it just impoverishes society in the long run and puts a greater burden on future generations. We should have another scramble for cash over the coming months, but I suspect this will be the last scramble for the fiat currencies. After that only true money that has a historic track record such as Gold will be desired. What will the Autumn bring ... we will all have to wait and see.