The Dark Years are here
July 14, 2009
by Egon von Greyerz – Matterhorn Asset Management
In this newsletter we will outline what is likely to be the devastating effect of the credit bubbles,
government money printing and of the disastrous actions that governments are taking. Starting in the next 6
months and culminating in 2011-12 the world will experience a series of tumultuous events which will be
life changing for most people in the world. But 2011-12 will not be the beginning of an upturn in the world
economy but instead the start of a long period of economic, political and social upheaval that could last for
a couple of decades.
We will discuss the three areas that we for some time have argued will determine the fate of the world for
the foreseeable future, namely the coming unemployment explosion, the next and much more serious phase
in the credit markets and finally the likely hyperinflationary or just inflationary effect this will have on the
world economy and investments.
EMPIRES ARE BUILT ON THEFT PILLAGE, SLAVE LABOUR AND FINALLY MONEY PRINTING
Let us first go back in history and analyse what creates an empire and the prosperity that comes with it.
The British Empire started in the 17th century and reached its peak in the 19th century during Queen
Victoria’s reign. By the end of the 19th century The British Empire included nearly 20% of the land surface
of the world and 25% of the world’s population. So Britain which is less than 0.5% of the world’s land
surface area controlled an empire which was more than 50 times greater. So by using slave labour and by
stealing the resources of 20% of the world, it is no wonder that Britain was the wealthiest nation for several
centuries. But like all empires, Britain carried the seeds of its own destruction. All empires – e.g.
Mongolian, Roman, Ottoman or British etc. – eventually overstretch their resources both militarily and
financially. This combined with decadence and illusions of grandeur eventually leads to the collapse of an
empire.
The US empire was slightly different from the point of view that it never conquered the world although the
US was itself a colony conquered from its original inhabitants. But the US has intervened in many areas
(e.g. Korea, Vietnam, Afghanistan, Iraq etc.). Also, there are US military bases in 120 countries. Initially
the US was an economic superpower based on an entrepreneurial spirit and a very strong production
machine backed by fierce military power. But after the Vietnam war the US had overstretched its resources
and by 1971 Richard Nixon abolished the gold standard in order to be able to start money printing in
earnest. The money printing phase is normally the last stage of an empire before it collapses and this is
where the US is now. The US dollar became the reserve currency of the world when the US was strong
economically. But as the US economy started to weaken in the 1960-70’s the US government found a much
better method for maintaining a strong economy. It started to print paper that it sold to other nations or
exchanged for goods and services. For almost 50 years this has been the most clever way ever devised of
maintaining the living standards of an economically deteriorating nation without even having to spend any
resources on building an empire. It is a Ponzi scheme which has worked for several decades but slowly the
world is now waking up to the fact that they are holding worthless paper printed by the US Government.
(We realise this is a much simplified version of empire building and destruction but it is nevertheless an
accurate analysis).
THE US GOVERNMENT IS IN DENIAL
The US is haemorrhaging financially and economically. It has lent or committed almost $13 trillion in the
last 18 months to prop up the financial system. The estimated government deficit in the current year is
almost $2 trillion or 50% of the budget. All the money committed so far has only achieved two things:
Firstly it has created some short term hope which together with totally illusionary sightings of green shoots
have generated a small stock market correction (which we forecast in our January Newsletter) and some
belief that the crisis is ending. Secondly, all the funds printed so far to save the system have gone to Wall
Street but has done nothing whatsoever for the real economy. Every single sector of the real economy is
deteriorating whether it is production, unemployment, corporate profits, real estate, credit defaults,
construction, federal deficits, local government and state deficits etc.
And what is the government doing about it. They are doing the only thing they know which is to print more
money.
This is total lunacy! How can any intelligent person believe that printed pieces of paper can solve an
economic catastrophe?
If that were the case we could all go home and write out pieces of paper or use Monopoly money to spend
in the shops or repay our debts.
How can the US government, the UK government and most other governments not understand that the only
way to run an economy is to cut your coat according to your cloth. This is why the emperor had no clothes
because the country had run out of gold thread to make the cloth. Until now the US as well as other
countries have been able to buy the cloth because the world has been foolish enough to accept worthless
pieces of paper as payment. But this is coming to an end very soon and many countries will be without both
coats and cloth.
What governments are doing with people’s money is to totally destroy its value. Purchasing power in the
US and many other countries has declined more than 95% in the last 100 years. While it might buy votes
short term it will only generate massive misery long term. And this is what many countries are starting to
experience now. But sadly it will get a lot worse. We are still only in the first phase of this tragic saga. The
second phase is likely to start in the next 6 months.
Continued>>>
http://www.zerohedge.com/sites/default/files/The%20Dark%20Years%20Are%20Here.pdf