This is a brief excerpt of Tim Price’s recent conference call with subscribers to The Price Report.
My contention has been for as long as I can remember, certainly in a sense pre-dating the financial crisis that started in 2007-2008, is that the biggest problem for the financial world is that there is too much debt in the system, and that oversupply of debt which has been accumulated over decades has gummed up the workings of the financial markets. And in a sense, it’s crowding out other types of savings and investment, because so much effort is now being put in to simply servicing that accumulation of debt that it’s now distorting the global financial system.
So, if you accept this argument that the primary problem is too much debt in the system, then you then have to ask yourself – how is that debt mountain going to be resolved? Because, although in the case of Greece, the authorities have been kicking the can down the road as long as we can all remember. The reality is that at some point, the can kicking, the extending and pretending has to stop and you have to face reality and grab the nettle.
Only three possible outcomes
So if you accept that there’s too much debt in the system, there are really only three outcomes. There are three and only three ways to try and resolve that problem.
The first is that in effective economies, you are able to generate enough economic growth to service that accumulated debt. In Greece, that is impossible, but I’d go much further and say not only is it impossible in Greece, it’s impossible in the UK, it’s impossible in the US, it’s impossible in the eurozone. It may even be impossible in China. And it’s certainly impossible in Japan.
So my contention, which you may or may not feel is contentious, is that most of the world is now wrestling with a debt burden it can never hope to pay back. That has implications. But one option is that you enable enough economic growth to service the debt, but as I say, I now believe that’s impossible in large pockets of the world.
The second way of dealing with a surfeit of debt is to default. In other words, you repudiate the debt. You default. You effectively, more or less forcibly impoverish bondholders. There’s one problem with that, which is clearly a fairly dramatic step anyway, and that problem is that we operate in a debt-based monetary system.
All of the money that we use as cash was lent into being by commercial banks. So the simple act of paying down debt causes the money supply to contract which is deflation. But clearly, if you extinguish large amounts of debt through default, you are causing a potentially spectacular cascade of contraction in the money supply and that’s back to the 1930s effectively. So I park that as an option because I’m not sure it’s necessarily remotely likely to happen. And if it were to happen, it would be catastrophic. So let’s park option number two.
Option number three is a slight variation on option number two, but option number three is the option that all governments over time have ultimately succumbed to when they’ve got out of control in terms of the issuance of debt, and that’s called inflation. It is an explicit policy of state-sanctioned inflationism, and that is, in a sense, what the authorities have been trying to do ever since 2008 and the height of crisis. They have been trying to trigger inflation. Why? In large part, they’ve got so much debt, it’s the only way they can continue to service it. So they just devalue it.
So if you like, it’s a sort of default-lite option
And this is where gold comes in. So if we think, and this is why I’ve had a slight… not quite a Damascene conversion exactly, because this is something I’ve always been concerned about, but it’s why I think now the timing and the road ahead are maybe a little bit clearer.
Two analysts in particular have led the charge on this. These are people I’ve mentioned in my report, namely Albert Edwards of SocGen and Russell Napier, and they’ve pointed out that the way they see the world, the real problem now is deflation.
Albert Edwards has been warning about this since the year 2000 and he’s referred to something called ‘The Ice Age’, which effectively means that the West suddenly starts turning an awful lot like Japan in the 1990s, and the whole system gets gummed up with zombie banks.
Russell Napier has written about it much more recently, but he talks about ‘The Great Reset’, which is in large part inspired by countries such as China suddenly finding that they have got out of control with their own domestic conditions, and they’re now exporting deflation to the rest of the world.
Category: Economics