Big Changes Are Coming, But The World Will Not End

This is a must-read article by Robert Fitzwilson.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/9/30_Big_Changes_Are_Coming%2C_But_The_World_Will_Not_End.html

After a review of much of the last 2,600 years, we have concluded that we are not the historic anomaly that we surmised at the beginning of the journey.  In fact, we are simply repeating the same cycles and mistakes that all of our ancestors have made before us.  Every culture throughout history has done exactly what we are doing now.  The only difference is that this time it involves the entire planet.

As we read history, paper money was not designed to be an asset.  It was an intermediary between sellers of goods and services.  A seller might not have an immediate purchase in mind, so receiving a paper receipt that could be redeemed at a later time, and even at another location, was both efficient and much safer than receiving payment in gold or silver.

In our era, these receipts have taken many forms.  Even the cash in our pockets is a derivative.  In technical terms, it is a zero-coupon, perpetual obligation of the issuing government.  In essence, the writing on the paper currency is promising “somebody owes you something, someday”.

The post-WWII monetary system began at Bretton Woods, New Hampshire.  It began to unravel in the middle of the 1960s, but the mortal blow was struck by President Nixon with the suspension of dollar/gold convertibility.  It has certainly been a long “suspension”.

Almost every ugly chart relating to the growth of debt and money can trace it’s roots to 1971.  The evidence is incontrovertible.  The value of the ancient form of receipts has been sliding ever since.  The slide has not been linear over that 40-year period, but it certainly went into free-fall 12 years or so ago.

In the past, rulers created money out of something considered to hold value, often gold and silver.  Seignorage was the right of kings to make a profit on that money.  Unlimited seignorage was impossible as supplies of gold and silver came and went, and it was expensive to mint the coins.

With the use of paper and now electrons to create money, we now have unlimited seignorage.  Money is created out of nothing, and you can see how it has been abused in the post-1971 charts.  The abuse is accelerating on a massive, global scale.  Cash and other derivatives have replaced our markets.  Profits were to be made on creating and trading derivatives, not providing real goods and services.  The real aspects of our economies continue to function, but the derivatives dwarf the size of the real global economy.

Much has been written about the historic confluence of our population growth coming together with the exponential endpoint of our resources.  The same can be said for our money.  Our resources are finite.  The ability of our planet to sustain a population is finite. 

We are now witnessing the exhaustion of our savings and real assets and our ability to sustain an exponential growth in money and derivatives.  Unlimited derivates are hitting the proverbial brick wall, and their collapse will destroy everything based upon them, it is just history.  This cycle has been repeated time and time again.

For our portfolios, the message is clear.  Get out of paper assets that can be destroyed by the unlimited seignorage, and convert them into real assets.  The end of the fiat money system will come swiftly, and perhaps overnight.  It cannot be too far off at this point. 

Changes are coming, but it doesn’t mean the world will come to an end.  But financial regime changes do result in a massive transfer of wealth from those who own paper assets, to those that own real assets.  Historically, gold and silver are traditional safe havens.