It was on that day that the European Central Bank (ECB) "loaned" roughly 500 billion euro to Europe's major banks at 1% interest
On December 21, 2011, investors received a major "buy signal" for gold.
It was on that day that the European Central Bank (ECB) "loaned" roughly 500 billion euro to Europe's major banks at 1% interest. This capital will allow all the big banks to report adequate capital ratios when they file their annual reports... which is code for "getting a huge bailout."
Whatever you want to call it, simply know this: There will not be a deflationary collapse in Europe. The euro will not collapse in the near term.
Instead, Europe will see a gigantic increase in its money supply.
When asked by the Financial Times if there was any substantive difference between what the ECB was doing (printing money and "loaning" it at 1%) and what the Federal Reserve has been doing since 2009 (printing money and buying mortgages and Treasury bonds), ECB President Mario Draghi replied, "Each jurisdiction has not only its own rules, but also its own vocabulary. We call them 'non-standard measures.' They are certainly unprecedented. But the reliance on the banking channel falls squarely in our mandate."
Let me translate Mario's political blather: "There is little difference. We are printing money to bail out deadbeat borrowers and big banks."
I have been writing, consistently, for almost four years, that the world's gigantic debt bubble will end in a massive inflation. I have long believed sovereign borrowers from around the world would choose to inflate their debts away, rather than suffer the consequences of actual defaults and restructurings. The reluctance of some members of the European Union (Germany, in particular) to do so caused a delay in the realization of my thesis... But it will not change the inevitable result.
Soon, you will see a massive financial-led economic rebound as the credit market re-opens, thanks to government-manipulated, ultra-low interest rates. In the short term, millions of people will cheer these moves, as the risk of any economic pain will have apparently been removed.
But this resolution is a mirage...
Instead of wiping out the bankers, brokers, and politicians who approved these bad debts (and were enriched by them), these bad debts will now be paid for by the millions and millions of people who rely on the two major global currencies – the euro and the dollar. The trillions of dollars in bad loans will be paid for through inflation. It's an invisible, secret tax that not one in a hundred regular people even understand.
Over time, the result of these actions will be a vastly lower standard of living, thanks to declines in purchasing power and increasing commodity prices. Real wages will be much lower, as employers will not readily increase wages to keep up with inflation.
Volatile paper currencies will make it harder for entrepreneurs to invest and source products and services across borders. The so-called "wealth gap" will increase dramatically, as inflation will increase the purchasing power of the rich (whose assets will increase in value), while the poor – who have no ready means to protect themselves from inflation – are further impoverished.
And... in a surprise to the politicians who think easy money and bigger annual deficits are the path to greater centralized power... the coming inflation will cause massive social unrest. Occupy Wall Street is merely a sign of what is to come. Soon, the protesters won't merely march past the homes of the wealthy and the powerful... they will firebomb them.
The stability of our currency – of any nation's currency – is ultimately a reflection of the stability and reliability of our culture. It was the "Corruption of America" that led to the paper money system we use today. Many people forget that until 1971, gold-backed money – sound money – was a privilege every American enjoyed. Not anymore...
Today, under a purely paper system, the entire monetary system is controlled by the political class, which has the power to allocate capital or to deny it. Thus, the world's capital markets, rather than acting as capital allocators, have become merely speculative marionettes, whose strings are controlled by the well-connected and the influential.
Consider the recent case of Philipp Hildebrand, president of Switzerland's central bank, the Swiss National Bank (SNB). The Swiss central bank has long been famed as the world's best strong-currency advocate. It has a long tradition of backing its paper money with gold.
In August, the bank made an extraordinary and uncharacteristic decision. Hildebrand decided to cap the value of the Swiss franc by deliberately devaluing the currency against the euro and announcing that the value of the Swiss franc would never be allowed to rise above a certain point. This immediately eliminated the Swiss franc as one of the world's few remaining "lifeboat" currencies. Its value plummeted against the dollar.
Just two days before that stunning change in Swiss policy, Hildebrand placed a $512,000 trade into U.S. dollars from Swiss francs. Hildebrand resigned his post this month after the outcry over his transaction. This kind of petty graft seems remarkably stupid for such a sophisticated political figure. But perhaps it simply speaks to the arrogance of his class. (He claims his wife placed the trade without his knowledge.)
What was not as widely reported about the scandal was, to me, far more interesting. Hildebrand and his wife met at Moore Capital, one of the world's largest hedge funds. Its specialty is foreign exchange trading. How much would you like to bet that Moore Capital was also long dollars – billions of them – prior to the change in Swiss policy?
This is how the game will be played. While the weak currency policies of the major nation states will impoverish their citizens, they will never be allowed to impoverish the elite... who will only grow richer and far more powerful. The only question is, how long will the game continue before the side effects (higher prices, lower wages, more social unrest) turn over the entire apple cart?
We cannot know. God does not whisper in our ear. But... I can tell you how to avoid becoming the patsy of Western governments and their paper scheme: Instead of storing your wealth in soon-to-be-debased paper currencies like the dollar and the euro, store your wealth in gold and silver. Although these "anti-paper money" metals have climbed substantially in the past decade, schemes like the one I've just described ensure they will rise much higher in the coming years.
