Friday, September 26, 2014

Two Polar Opposite Views of the Future (Sort Of)

On this blog we are attempting to follow all news that is relevant to what we think is a coming change in the international monetary system. Trying to cover this topic is not easy because there are very strong opposing views about how and when this change might take place. And there is a lot of confusing and contradictary information related to this topic. What we will do here is try to provide readers with as much good information as we can so they can stay on top of this topic and be able to evaluate all the conflicting information in a (hopefully) logical way. First let's look at the two major conflicting views.

The first thing to say is that surprisingly, there is not all that much disagreement that major change will take place. Having read hundreds of articles on this topic from all sides of the spectrum, I think I can say that there is a general consensus that change will eventually happen. By change, we mean that the present monetary system based on the US dollar as sole global reserve currency ends and is replaced by a new monetary system where the US dollar is not the sole global reserve currency. 

The IMF and other global institutions have predicted this change is coming. The BRICS leaders have predicted this change is coming. World leaders from all over the globe have predicted this change is coming including US officials. Critics of these global institutions have predicted this change is coming. Credible insiders like Jim Rickards have predicted this change is coming. Hard asset advocates (like Eric Sprott, James Turk, Jim Sinclair, Egon Von Greyerz, David Morgan, Mike Maloney, William Kaye, Peter Schiff, Micheal Pento, and many other respected analysts) have predicted this change is coming.

The difference I see in studying this topic for years now is how and when the change may arrive. I see two polar opposite views on how change may happen which I will try to describe below:

1- Mainstream view (IMF, Central Banks, BIS,  BRICS, etc) - I believe this group generally believes that the change will come slowly and steadily over time in a controlled fashion. They recognize there are problems and risks in the current system, but think these are manageable. They believe that the sovereign debt problem can be spread out over years by the use of a controlled inflation rate (goal is 2-3% per year) that slowly makes paying the debt off less burdensome (using cheaper dollars). If any sovereign debt becomes unsustainable, that can be written off with the debt holders taking the loss or the debt extended to a longer term. They believe that even though there are massive derivative products out there in the system, that they are hedged in such a way that they can be contained from taking down the whole system. 

I think this group believes that over the next 10-20 years the US dollar will lose its sole reserve status and be supplemented by other major currencies (euro, yen, yuan, and maybe the ruble). They see a possible new role for the SDR currency unit now used between nations at the IMF if need be to stabilize things. Maybe even a way to extend a version of the SDR for individuals to use. If all else fails, I think they believe they can use the existing gold reserves at these institutions as collateral backing at much higher gold prices to bring about stability. So they see things as basically under control with several contingency plans available to them if another crisis does emerge But they think it won't and that change can evolve slowly over time in a controlled way.

2- Those who see the above institutions as failing. Some in this group view them as sincere in their efforts to run a sound financial system, but just doing a poor job at it (like Jim Rickards for example). Others view these institutions as intentionally creating conditions for the present system to fail as an excuse to institute a new global system to enhance their own power. But both of these sub groups believe that the change will happen as the result of a new global financial crisis that will happen fairly soon (anywhere from this year to at least by 2018). This group believes that eventually when the crisis happens, all "paper" assets (like bonds, stocks, pensions, annuities, etc) will take a gigantic loss in value versus hard assets like gold, silver, oil, and other tangible assets. 

This group believes that when the US dollar loses reserve status it will suffer a very large devaluation versus gold and silver; so naturally they encourage people to own some as insurance to protect themselves against this future event.

So what do we think here on this blog? 

We don't know. There are credible voices on both sides of the discussion. They all agree on a lot of things. They agree that debt is a problem. They agree that there are risks right now that bubbles are forming in things like stocks and bonds. They agree that the US dollar will lose its sole reserve currency status at some point. We have proven this without any doubt if you go and read all the many articles linked in this blog all during this year. We are following predictions from both sides over time to see who gets things right more often. And we watch for key signs of change (us dollar value, gold prices, deflation, trouble in China, Central Bank policy, etc). Staying alert and informed is the first step for sure.

If we don't know the answers, how do we prepare for the future?

That part seems easier to us. We have established from credible voices on BOTH sides of this discussion that the current system has risks and problems. We don't know if those risks  will be managed successfully or not, but we know they exist. Since they exist, the potential exists that some unforseen event (or some planned event if you prefer the conspiratorial view) could trigger another major global financial crisis. 

This is much like the typical homeowner. You have a house. There is some unknown risk that the house will suffer a loss in the future. It is impossible to know for sure if the house will suffer the loss in your lifetime or when it might happen. What does any reasonable person do? They buy homeowner's insurance. In fact, if they owe money on the home they will be forced to carry insurance because everyone recognizes this is the prudent thing to do. A lender does not want to share the risk of your home suffering loss with no insurance on it. This concept is simple and easy for most people to understand.

Why would it be any different when considering the risk of another financial crisis that could lead to a major loss of value in the US dollar and various forms of "paper" assets valued in US dollars? The sensible thing for anyone to do (that can afford it) is to buy some insurance. Insurance in this case would be hard assets as a hedge against loss of paper assets.

When we buy insurance, we hope we never use it. We feel more peace of mind because we have it though. We are even willing to pay a premium that will lose its entire value if we never use the insurance. So buying some hard assets as insurance against another crisis is actually more reasonable than the normal insurance we buy. The cost of hard asset insurance will never be completely lost. In fact, we may even make a gain on it even if no crisis ever does happen. For example, silver might go higher in the future just based on its supply and demand fundamentals as an industrial product. 

So in our view, we can prepare even if we don't know the future. We don't have to hope for bad things to happen. We don't have to do anything radical or extreme. Just set aside some insurance as we can afford it over time. It seems strange to us that is concept is so ignored by most people who see regular insurance as mainstream essential for daily life.

Our suggestion to consider: Stay informed and alert. Buy whatever insurance you can afford as a hedge. Upon doing this, enjoy life and don't spend every day in fear that something bad is about to happen knowing you have done what you can to prepare. And do what you can to help your neighbor think about doing the same. The more people who are prepared, the better chance to withstand a crisis if it does happen. If it doesn't happen, be thankful.

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