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ALEA IACTA EST - The Global Economy is Out of Control

ALEA IACTA EST - The Global Economy is Out of Control

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Matterhorn Asset Management
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ALEA IACTA EST
May 18th, 2010 by Egon von Greyerz

http://matterhornassetmanagement.com/2010/05/18/alea-iacta-est/
Matterhorn Asset Management
Wealth Preservation and Investment in Gold Search:

Home Investment programmes Gold is money Wealth Planning Newsletters & Commentary About Us Contact Us Disclaimer

commentary archive - newsletter archive

ALEA IACTA EST
May 18th, 2010 by Egon von Greyerz

http://matterhornassetmanagement.com/2010/05/18/alea-iacta-est/

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Published by: bowssen on May 22, 2010
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Matterhorn Asset Management
Wealth Preservation and Investment in GoldSearch:commentary archive-newsletter archive 
LEA IACTA EST
May 18th, 2010 by Egon von Greyerz
 
ALEA IACTA EST 
by Egon von Greyerz – Matterhorn Asset Management
 
es this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totalluncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have createda credit infested and bankrupt world. They will continue to prescribe the same remedy that caused the problem inthe first place, namely more credit and more printed money. The consequences are clear; we will havehyperinflation, economic and human misery as well as social unrest.
When will the world finally begin to understand that we have reached the point of no return and that “
the voyage of their life is bound in shallows and in miseries”
(Shakespeare, Julius Caesar). Sadly, we are probably not very far from thatpoint. It is already starting to happen in many countries.The latest EU and IMF package of 
$ 1 TRILLION (
Euro 750 billion) is yet another futile attempt by governments toabolish poverty by printing paper.
Let’s be absolutely clear, this money does not exist and the EU governments arehoping by declaring such a large amount that they can con the Wolfpack speculators.
At this point the EU has justpicked a large round figure out of the air. But when their bluff is called by the Wolfpack and the next attack happens, EUgovernments will after initial huffing and puffing start printing unlimited amounts of paper.So the world is now on its road to ruin and there is no action, no leader and no new amount of printed money that can savethe world or prevent a hyperinflationary depression.ever in history has the world been in a situation when virtually all industrialised countries are bankrupt. Therefore there isno precedent for what will happen in the next few years. What we can be quite certain about is that events will happen in aHome Investment programmes Gold is money Wealth Planning  Newsletters & Commentary About Us Contact Us Disclaimer  
 
seemingly random pattern and that it will be impossible to forecast where the next crises will start.But although we will not be able to predict in what order events will take place, we can expect much of what is outlinedbelow to happen.
Wolfpack attacks
Already back in 2007 we warned about the very high risk of the CDS (credit default swap) market. This is now one of theprimary instruments used by the Wolfpack (expression coined by the Swedish Finance Minister Borg). The Wolfpack,speculators with enormous fire power such as hedge funds and investment banks, use the CDS market to attack any weak financial sector, be it a country, a bank or a company. The combination of the leverage of the CDSs and the massive capitalavailable to the Wolfpack makes it possible for them to bring down or badly maul whatever they attack. It was not theWolfpack that caused the problem in for example Greece but they can bring down a weak victim quickly and profitimmensely and immorally from it.There are so many weak potential victims that the Wolfpack can attack and they will start with the most vulnerable oneslike, Portugal, Spain and Ireland etc. But when the time is right they will also attack the US and the UK.So in the coming year we will see country after country coming under attack from the Wolfback which will lead toacceleration in money printing and higher interest rates.
Iceland – Ireland – Greece – Who is next?
The EU support package of $ 1 trillion is supposed to be sufficient to protect the rest of Europe from another Greek tragedy. The dilemma with such a massive EU commitment is that no government expects to have to pay the money out. Ithey did the voters in the respective EU countries would throw out their government. Why should the German people, whoare also having hard times, pay for the Greeks, Portuguese or the Spaniards, especially since these loans will never be paidback.Greece is bankrupt but is still taking on additional EU loans of € 140 billion. In addition, their austerity measures aresupposed to bring the deficit down from 12% of GDP today to 3% in a few years time. But who can be so stupid as to lendto a bankrupt nation which will sink into the Ionian and Aegean Seas in the next few years. With massive cuts ingovernment expenditure, with major falls in output, with unemployment rising fast, with tax revenues collapsing how canGreece possibly be expected to improve the economy and pay a high interest rate on their exploding debt? In addition, aslong as they have the Euro they will be totally uncompetitive. So if they couldn’t manage their economy in the so calledgood times, it is absolutely guaranteed that they have no chance of surviving in bad times. So Greece will default and soill Portugal, Spain, Italy, France, the UK, the US and many more. But before that there will be the most colossalorldwide money printing exercise which would have used up most of the trees in the world but for electronic fiat money.So, if virtually bankrupt nations don’t cut their deficits, they will definitively go under and if they try to cut, they will alsogo under due to collapsing output and tax revenues and colossal debts.
Thus whatever actions governments take ordon’t take, they are damned.
 The table below shows debt as a percentage of GDP for various OECD countries. The official debts (in red) are massiveand unlikely to ever be repaid in real money. Total debts (grey bars) include unfunded liabilities such as pensions andhealth care. Spain has the
lowest
total debt to GDP of 250%.
Germany and the UK have around 400%, the US over500% and Greece over 800% debt to GDP.
These figures are absolutely astronomical and prove that most governmentsin the world will be totally incapable of repaying their debts or funding the pensions or medical care which they havecommitted to. It doesn’t matter however much governments cut expenditure or raise taxes, all these countries are insolventand nothing can save them.
 
 
The world must permanently readjust
Most governments still believe that deficit spending and money printing is the solution to all their problems. Because theorld economy’s expansion in the last 100 years and particularly in the last 40 years has been primarily based on credit andnot real growth, governments live under the false impression that money printing will work this time too. But we havereached the point when investors will no longer buy worthless government debt that will never be repaid with real money.We will first go through a period when governments issue and buy their own debt thus monetising the debt or print money.This will be the hyperinflationary phase. Thereafter the world will realise that none of the government debt and very littleof the bank debt will ever be repaid. Credit will then implode and so will also the assets financed by credit. Eventuallthere will be a new monetary and financial system and the world will start afresh.
The adjustment period will be verlong and will involve economic and human misery, leading to social unrest and major political change. It will be ahorrible experience for the world during this extended period of adjustment. But it will be like a forest fire thatclears out the deadwood and creates the conditions for strong new growth.
Once the new era starts it will therefore befrom a very much lower level and individuals will be rewarded for hard work with little or no social security safety net.Credit will only be granted for sound capital investment projects, not for consumption or speculation. Ethical and moralalues will return and the golden calf will not be worshipped. But before that, the period of readjustment will be very longand extremely difficult for the whole world.
Hyperinflation
For several years we have predicted that hyperinflation is the most likely outcome of the economic predicament that theorld is in. But it is unlikely to be a straightforward hyperinflationary period. Precious metals will be the primar beneficiaries of hyperinflation. Certain commodities, especially food and energy, will also go up in price. But most assetsthat have been financed by the credit boom will go down in real terms. This includes property, stocks and bonds. Inhyperinflationary money these assets could still go up in price. If someone who earned $ 50,000 per annum in real monenow earns $ 5 million in newly printed money, his house will probably also go up in nominal terms. But in real termsproperty prices will decline massively. There will be no credit available and interest rates will be very high, probably atleast 15-20% so very few people will be able to buy a house.Hyperinflation will destroy many currencies so paper money will definitely reach its intrinsic value which is zero. Gold andsilver will virtually be the only assets that will protect investors fully against the destruction of money.

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