Silver And Gold: Safe Options In An Exponential World

Monetary inflation, by whatever euphemism and at multiple stages in its cycle, has clear benefits to some but major disadvantages for the majority. Sadly, the impact of the final leg of the century-long monetary experiment may be far uglier than many would like to imagine.

Inflation and the Big Banks

Obviously, moderate to runaway inflation is horrible for the middle class and poor.

Inflation is less of an issue for large financial institutions who get first dibs on newly created credit via primary dealer status. More dollars inflate the nominal size of their balance sheets-a positive in the eyes of shareholders.

The Catalyst

China and various sovereign creditors hold massive amounts of US dollar denominated assets. When they decide that they’ve hedged enough, the plug will be pulled on the reserve currency status of the dollar.

Many assumed this would happen quickly, with new currency implemented overnight. A new currency might take the form of a new world or regional currency backed by a new basket of currencies. It may likely include some gold and special drawing rights (SDR’s) on the currency of central banks.

Unfortunately, it seems the scenario will be far worse. Implementation of the switch to a new world or regional currency would require a Herculean effort, perhaps larger than the Euro effort. Any project of that size would be difficult to conceal, to say the least. Therefore, the very threat could ignite a paper crisis.

Finance Versus Economics

Finance obviously plays far too big a role in the functionality of modern economic systems. We are incredibly fragile to exogenous events. Not only do few redundancies exist for basic functioning, the vulnerability to trading errors has grown exponentially with the advent of unregulated high frequency trading. That “financial system” fragility exerts a potentially crippling influence on underlying economies.

The damage caused by the next crisis could easily turn the world economy upside down and break it to the point of no return. The systems underlying the flow of goods, services, and information are too complex for any group, organization, or government to reinflate in the short to intermediate term. We will not go back to anything resembling the present.

The recent and ongoing food stamp debatable should not be discounted. It is likely that we will see events like this accumulate over time. We have already seen bail-ins (Cyprus), pension fund confiscation (Poland), along with all manner of fraud and manipulation from the top down. We may not detect the inflection point because this unfolding is non-linear.

Personal Central Banking and Aftermath

The banks want metals for the same reason individual investors accumulate. One twist for the individual would be to view the metals as collateral, and not currency – but only after emergency insurance.

New laws and taxes will likely come down on everyone, including those holding bank deposits, retirement accounts, mutual funds, and government as well as private pensions.

Ultimately, more and more people will simply opt out, ignoring the law and taxes when things get bad enough. This would of course accelerate the underlying cycle toward hyperinflation as the FED steps in to replace the lost revenue. India’s treatment of gold import duties is a good example of how policy often creates the opposite of the “desired” effect.

Sadly, the few who escape with any assets will write the history books, thereby planting the seeds for a new season of crisis. For the soon to be forgotten middle class there are few options, outside of emergency preparation – where at least some allocation of precious metals would be prudent.