When Richard Nixon closed the gold window in 1971 and detached the dollar from the metal was the beginning of the end for America’s 240-year-old grand experiment in liberty and free markets.
From that point forward, the central bank was empowered to create as much debt money as it wished. When the United States rebacked its currency, it did so with oil in which oil producers promised to sell their product only in dollars. This promise on the part of oil producers was enforced by the U.S. military. Therefore what backs up the petrodollar is extraeconomic coercion.
In turn the dollars oil producers received for their resource were then converted into sovereign debt instruments—U.S. treasury bonds. That propped up the value and demand for the dollar. More importantly it created the means by which the U.S. could fund wars and military expenditures that ironed out the boom and bust cycle of production.
The financial system muddled along until the 1990’s when Bill Clinton came to power. At the end of his term of office two important pieces of legislation became law: the repeal of the Glass-Steagall Act and the enactment the Commodity Futures Modernization Act.
On one hand repeal of Glass-Steagall broke the barrier between investment banking and commercial banking that had prevented risky gambling in the financial markets since the Great Depression. The termination of Glass-Steagall now allowing commercial banks to engage in risky trades like derivatives, mortgage backed securities, and collateral debt obligations. Concomitantly, derivatives were deregulated resulting in credit default swaps, and interest rate swaps, and naked shorting to a bank’s repertoire of bets.
Banks essentially became gambling houses instead of vehicles for funding productive activities, innovation, and investment in plant and equipment. And what increase in productivity occurred was not passed on to workers, so real wages have slowly declined. The stodgy old economy of production, as opposed to the new economy of derivatives.
While exciting, derivatives I would argue are not really productive, as in producing surplus value. The casino being the artificial creation of unlimited credit creation and expansion of the money supply. So while the casino expanded, production contracted. Total notional value of derivatives is now beyond a quadrillion dollars.
There is now so much debt on the balance sheet of banks, there is not enough money in existence to retire that debt. Meaning obviously the money will never be repaid, much of it conjured out of thin air. The Achilles heel of all this debt, I would argue is the amount of money parked in sovereign bonds.
To keep the casino wheel rolling the Federal Reserve has had to print ever larger mounds of money, with ever less growth in GDP—or diminishing bang for the buck. But all the money printing must eventually undo the bond market that does not take kindly to inflation. So the implosion of the bond market will be catalyzed by a currency crisis.
The secular trend was visible long ago
I would estimate we are about six months away from a serious currency crisis that will grip Cyprus and Japan first. Shinzo Abe’s money printing will sooner rather than later force investors to demand a higher rate of interest for the risks of their money printing, and Japan will quickly lose control of its interest rates as Greece did. The country being among the most indebted in the world. Once interest rates begin to rise I think the game will be over.
The moment Japan defaults confidence in all central banks and fiat currencies will evaporate, and will in short order infect the Eurozone before travelling like the Spanish flu to the United States. Banks will fall like dominoes, and the change in bank rules making depositors into unsecured creditors will then kick in robbing the plebes of their savings. Riots will ensue, but the police state and martial law have already been tested in places like Boston and Los Angeles.
To restore social order a new currency will have to be issued like the Rentenmark in Germany during the 1920s. I’m sure this will likely result in an international currency, perhaps backed by gold, but any number of commodities can be bundled to together to back the new currency. But like Greece for a country to be saved from the chaos, they will have to agree to abdicate their sovereignty.
That is no doubt why the banksters took down the gold market to provide a buying opportunity for the rich to load up on a commodity that will be used to back currencies. What the banksters didn’t anticipate was how strong the physical market in gold would become because of their price suppression. That is, they underestimated the intelligence of the investing plebes.
With physical gold unavailable at any price, investors will have to load up on gold shares as George Soros has done. Gold shares now being pretty much a call option on a gold miner’s output. Anyway keep your eyes peeled to the Japanese bond market, and prepare accordingly. Just follow the smart money here, like Soros and Jim Rogers. They are trading on inside information, I’m sure.