Before Money Collapses?
Thursday September 13, 2012 10:50
The Current Scene
Since 2007 and the start of the “credit-crunch” the
developed world’s money system has been under stress. As a
consequence, there has been an economic downturn that government and
bankers have not been able to stop, convincingly, in the last five years.
The developed world has decayed to the point that it can’t
handle another major crisis such as an oil price well into the $100+
- Food inflation now threatening, must not be allowed to take off
because consumer/voter reaction will undermine government and money still
- As it is confidence in both the euro and the dollar is at a low
ebb. Yes, it is still the only means of exchange and it can be forced
onto citizens, but general confidence in the economy, the monetary system
and a broad range of markets is suffering as never before.
There are bright sparks of hope, such as the Dow Jones Index returning
to the highs it saw in 2007; however, this is by no means in the same
investment climate as before the credit-crunch. Fear and instability
pervades most markets as faith declines.
Daily we see another Eurozone crisis unfold casting doubts on the
continuance of the euro and the financial credibility of its weaker
members. Overall, on both sides of the Atlantic, consumer confidence
continues to fall after so many efforts by central bankers to resuscitate
Why is so large a burden being put onto the central bankers, who
should only really support governments’ actions? Because the U.S.
government is mired in political gridlock, it cannot achieve the vigorous
action needed to do all it can to restore growth and confidence, and
doubts now remain as to whether it’s too late for any government to
[Forecasts of a dollar decline are seen daily as its debt levels mount
to new unacceptable highs. With the impending ‘fiscal cliff’
on the horizon and promises of a heated political battle, consumers and
companies expect a savage tax blow around year’s end, further
damaging consumer confidence. Will we see a recession in the States next
year? It seems likely. Its timing could not be worse.
In the Eurozone, we daily see discord between citizens of the
financially stronger nations and the weaker ones. Government discord is
constantly apparent. Growth is proving even more elusive in the
world’s biggest trading bloc as it stands in a mild recession
Hope springs eternal, but today, realities keep hope on the
Can the Money System Collapse?
The thought seems unrealistic to people because it’s what we use
every day. But the money we use is entirely reliant on government and its
central bank. If their performance does not meet the criteria required by
money then confidence in that money will collapse eventually. It’s
clear that all currencies are not performing well at the moment as the
balance sheet of most nations (except China) gets weaker and weaker. If
most nations were individuals, then they would have been bankrupted by
A look back in history shows that not one paper currency system has
lasted throughout the centuries, with the exception of those based solely
on gold and silver which remain as money assets all the way.
Not today, you may well answer! We say oh, yes, today too. Despite all
the rhetoric since 1971 gold remains in the bulk of the world’s
leading reserves for that rainy day when something else is needed other
than the currency issued by the nation’s central bank.
How Does Money Collapse?
Look back at Argentina in the 1990’s and you see it using the
U.S. dollar, but the economy of Argentina could not support the use of
the dollar so it reverted to the Peso after savaging its citizen’s
dollar savings in exchange for that Peso. That was a
‘collapse’ of their currency. If the Greeks return to the
Drachma or the Spanish the Peseta, we will see a similar scene; it will
be a collapse of their currency (the euro) inside their nation.
Can the dollar collapse? Because it’s a government-controlled
money system, the dollar will remain the means of exchange it is, even in
A collapse will be expressed in several ways:
- Its exchange rate against other currencies can fall heavily. In
the case of the dollar as the world’s foundation, un-backed
currency, this is unlikely as it supports the un-backed currencies across
the world indirectly. Its trading partners will try to pull their
currencies down with it so as to protect their trading with the U.S. The
same applies to a greater or lesser extent with the other main trading
blocs of the world such as the Eurozone and China. You will have noted
the narrow trading range of the € & the $ between $1.21 and
$1.45 over the last few years. This is because of the mutual support
between the Fed and the ECB by way of currency swaps.
- It can collapse inside the country, as its buying power declines
rapidly. This is monetary inflation usually caused by the over-issuance
of a currency.
- Another form of collapse could include a bond market collapse
where the markets push interest rates up so high as to make it impossible
for governments to repay debt. This level is generally set at 7% and we
have seen it in the P.I.G.S. nations of the Eurozone over the last three
years. If these countries had separate currencies, they would have
collapsed, but inside the euro we see that that final collapse will be
expressed by exiting the Eurozone and returning to past currencies.
- In a nation where there is still a working economy, a collapse
can also be expressed by the imposition of Capital and Exchange Controls,
restricting the flows of money in and out of a country to protect the
capital inside its borders. Its citizens usually bear the brunt.
Can the Global Monetary System Collapse?
We’re of the opinion that even if the system is hobbling along,
it will continue until global economies collapse. This was the case in
Zimbabwe in the last decade. The Zimbabwe dollar continued in use because
the government enforced its use inside its borders. But to all intents
and purposes, it has collapsed long before then. In the case of Zimbabwe,
the U.S. dollar became the currency in use in the country and in
what’s left of its economy. This is still the case today.
Before any such collapse occurs, we are certain that each individual
developed world economy would cooperate with each other to take whatever
measures are available to them to shore up the monetary system. These
measures will prevent the system from a total collapse, keeping it
staggering on all the way. We believe that they will fully harness gold
The questions remaining are how and when?