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Central Planners Are Destroying the Financial System
After a wild week of trading in global markets, today 40 year veteran, Robert Fitzwilson, wrote the following piece exclusively for King World News. Fitzwilson is founder of The Portola Group, one of the premier boutique firms in the United States. Here are Fitzwilson’s observations on the ongoing crisis: “On a recent excursion, the car in which we were driving experienced a flat tire. Fortunately, we had not gotten onto the freeway and a gas station was nearby. We also were fortunate to have a pressurized product that you can use to seal the inside of the tire and the puncture. The label on the can said that we had up to 20 miles of driving to find a tire store.”
Robert Fitzwilson continues:
“Interestingly, when we got to the store we were informed that the tire would need to be replaced. It turns out that the substance we used to seal the puncture meant that the tire would now be unusable. Our flat tire is a more mundane metaphor with which to understand the problem with our global financial system.
Michael Pento’s piece on KWN yesterday, and others before him, did a great job of describing the punctures in the Eurozone. The central bankers keep injecting monetary sealant into the system through short-term policy initiatives, while destroying it in the long-term....
Continue reading the Robert Fitzwilson piece below...
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“Since the financial meltdown occurred in 2008, nothing has been done to solve the structural issues. They just keep driving the monetary car down the road on the patched tires. How many miles can we go before the tires explode is impossible to know, but there is a limit to be sure.
Another example of patching the tires was yesterday’s announcement of a change in the way pension funds calculate the future liabilities. The funds can now use a 25-year rolling average of corporate bond rates instead of the current 2-year rule that is in place. A higher rate will make the liabilities smaller. However, it does not change the actual outlook for the return on their portfolios, given the interest rates currently available.
What the provision does suggest is that much higher inflation and interest rates lie ahead. If we are to escape this mess, interest rates must be allowed to rise. Nominal, global GDP must begin to close the gap with nominal liabilities. At the same time, fiscal balance must be restored.
If GDP and liabilities achieve parity, by whatever means, we will have generated a great deal of inflation, but the system can still move forward. If we do not achieve fiscal balance, the system will explode. The arithmetic is incontrovertible.
One possibility is the reintroduction of something like Regulation Q. This regulation was included in the Glass-Steagall Act of the 1930s. It specified maximum interest rates on certain deposits. Eliminated in 1986, we might need something akin to it now.
However, the new regulation would specify minimum interest rates. We must end the zero interest rate policy (ZIRP). As we said last week, ZIRP is savaging savers, retirees, and pension funds. While such a suggestion would have been inconceivable before now, the system is in cardiac arrest and strong actions need to be taken.
We experienced a long awaited resurgence of resource-based and monetary assets on Friday. It is impossible to know whether or not it will signal the bottom for oil, gold and silver, given the political and monetary forces at work, but real assets will win out in the end.
It is hard for people to visualize the relative prices of gold and silver when compared to other currencies such as the dollar, yen, etc. Think of a row of stools sitting on stable ground. On one stool is an ounce of gold. On all of the other stools are amounts of different currencies equal to the ounce of gold.
As long as the foundation for the stools is relatively stable, people will choose the currency that suits them well for their business and investing needs. When the ground becomes unstable, the stools start to sink down at different rates. The paper currency stools have sunk dramatically since the gold bull market began 12 years ago.
Relative to paper currencies, gold has compounded in the neighborhood of 18% per year. If one were standing on one of the currency stools, looking up at the one with gold, it would be easy to remark at how high gold had risen. The opposite is true. Gold has not gone up, it is the currency stools that have gone down. This will continue to be the case until the printing stops.
The system is addicted to creating ‘wealth’ with electrons and paper. There is no example in recorded history of an attempt to debase the currency which ends well. Every culture that has tried such a scheme has brought destruction and despair upon themselves. The Mongols, Chinese, Hungarians, French, Germans, and Romans have all tried. None succeeded.
The current path of debased currency will collapse, as before, and gold and silver will regain the role of preserving wealth as it has done for thousands of years.”
© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
The interviews with billionaire Eric Sprott, legendary Art Cashin ($612 billion UBS), Jean-Marie Eveillard (oversees $50 billion) and Don Coxe ($538 billion BMO) are available now. Also, be sure to listen to this week’s line-up of other KWN interviews which include Ben Davies, Nigel Farage, James Turk and John Mauldin by CLICKING HERE.
Eric King
© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,
rewritten, or redistributed. However, linking directly to the blog page is permitted and encouraged.
July 1, 2012
