End of the Line?

“Money, when considered as the fruit of many years’
industry, as the reward of labor, sweat and toil, as the
widow’s dowry and children’s portion, and as the means
of procuring the necessaries and alleviating the afflictions
of life, and making old age a scene of rest, has something
in it sacred that is not to be sported with, or trusted to
the airy bubble of paper currency.”

—Thomas Paine

Our Mission

Like Thomas Paine and other founding fathers – we’ve long been concerned about governments’ uncanny ability to debase their non-gold backed currencies throughout history. Thus, we view it as our mission to help protect our clients’ hard-earned savings from being diluted by the government money printing-press.

The Best Looking Horse in the Glue Factory

In a recent May 5 interview on CNBC’s Squawk Box Jim Rickards and George Doud made some interesting points regarding the Greek crisis – and the impending future of money as we know it. Some excerpts:

“… Jim Rickards: Yes I actually don’t think of this as a just a Greek crisis specifically or even a Euro crisis – this is a more of a global crisis of trust. What is a bond? It’s just a promise to pay you back. It’s all based on trust at the end of the day. So Greece is kind of ground zero today. It’s too bad to see this violence – although not you know totally surprising. They’ve had violent riots in the past unrelated to this austerity. Just imagine what would happen in the United States if China said hey you’ve got to get …your deficit to GDP ratio down to 3% in three years. That would maybe not cause violence but that would be a shock to the US. It’s certainly a shock to the Greeks.

Interviewer: You’re not suggesting that the United States is in the same situation as Greece?

Jim Rickards: I’m having trouble finding a Greek metric where the US isn’t you know as bad or worse or will be shortly. You look at where our deficit to GDP ratio is. Where our debt to GDP ratio is going – money creation and other things. We look a lot like Greece. Now one big difference of course we can print our own money. But where does that get you? That’s really the problem worldwide. In every asset class investors no longer think about the fundamentals. They think about government policy. China – the question is can the government prop up the housing market? In Europe can the government prop up Greece? In the United States can the government prop up the banks? We don’t think about fundamentals or balance sheets any more.

Interviewer: Yeah but in terms of what you’re talking about… In terms of trust – every time there’s a flight to quality you see people rushing back to the Dollar and rushing back to US Treasuries.

Jim Rickards: Well it’s the only place to go – but there are limits to that. And then ultimately it’s going to go to one of two places. There’s a meeting in Zurich on May 11th – I call it the new Bretton Woods. Basically the IMF is convening a meeting. They’re going to look at the issuance of SDR’s – and the alternative is Gold. So the G-20 and the leaders want to go to SDR’s to take the Dollar off the hook. The market may go to gold on their own. So there’s sort of a race between SDR’s and gold. The Dollar is you know pretty much at the end of the line.

Interviewer: George do you agree with that same sort of view about the US vs. everybody else?

George Doud: I couldn’t have said it better myself sadly. I pretty much agree with all of those statements. You’ve seen the Dollar rally – but it’s almost because it’s the best looking horse in the glue factory and there’s nowhere else to go…”[1]

[** Bonds are subject to market, interest rate, and credit risk.]

A “To the Point” Summation

And then there is the ever insightful Bill Bonner who writes:

“…At a cost of 110 billion euros, Europe will pretend to protect Greece from its creditors and the Hellenes will pretend to put their financial affairs in order. Instead, the Greek affair will slide into a larger crisis. As we explained last week, all of modern macro-finance can be understood as an attempt to push problems into the future and onto people who were not to blame for causing them. Now we see the formula at work in Europe.

Greeks borrowed money they couldn’t reasonably expect to pay back. Foreign bankers – largely French and German – hoped to earn outsized yields by taking a risk on Greek debt. A just ruler would let them all collapse, and give them the boot on the way down. Instead, the knaves enjoyed their loot. And, under the terms of the bailout, the fools are supposed to get their money after all; it will be squeezed out of taxpayers all over Europe.

The plans of the ruling classes are not merely unjust. They are unworkable. Over the next three years, Greece will add $50 billion in deficits, stabilizing the debt at 150% of GDP. It will also need to come up with $70 billion to pay off debt that matures over the next two years. That is more than the amount offered in the bailout. Which means, Greece will have to borrow more money as early as next year, probably triggering another crisis. Plus, there are the other weak sisters and spendthrift brothers in the European family. Bailing them all out could cost as much as 1 trillion euros.

But the real problem is much deeper. It is philosophical as well as mathematical. Too much debt, like too much dying, is not a transitional state. It’s a final state. And once the soul has left the body, there is no point in trying to keep the husk alive. Similarly, when a debt cannot be repaid, there’s no use pretending. When you cannot keep up with the interest on a debt, it is added to the principle. The debt grows, becoming evermore unmanageable. It’s better to admit the error as soon as possible and start organizing the details of your financial funeral…”[2]

We’ve seen very little “error admitting” in Europe or the US. Instead we’ve seen accelerating large-scale government bailouts and money printing.

And we prepare accordingly.

While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.

Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.
1.CNBC; “Managing Market Volatility”; May 5, 2010
2,The Daily Reckoning; “Say You Want a Revolution?”; May 7, 2010