Life After a Monetary Collapse – Death of the Republic
from Grams Gold Some people say, “When the dollar collapses, gold is of no use, as you can’t eat it!” Gold and silver may be just lumps of metal but what makes them extremely interesting is the psychological association people have with them. Gold and silver have been used as currencies throughout the centuries. And people perceive them as valuable, particularly in times of economic turbulence. “In the case of the collapse of paper currency, gold could quite naturally come in as the base of a new monetary system. I would like to paint a scenario on when the dollar crashes. In this scenario, a new currency system based on the gold standard is introduced. The financial collapse is usually perceived as Armageddon but doesn’t necessarily have to be . Just imagine, even if the U.S. government defaults, the assets that the country has would remain in place. The buildings, cars and infrastructure would still be here, for example.A lot of property would change hands and there definitely would be turmoil, but it wouldn’t need to amount to a civil war. Take a look at Latvia, a country where the GDP between 2007 and 2009 shrank by 24%, where unemployment shot up to 30% in 2010. Where the government laid off 30% of the civil servants and cut payrolls by 40%. Latvia didn’t disintegrate. The U.S. Federal Reserve, led by Ben Bernanke, initiated three substantial rounds of what it called quantitative easing (QE). In short, QE is a process in which the Fed bought 4 trillion of government bonds with newly created dollars, printed out of thin air. Its (official) purpose is not to finance government deficits but rather to bring the U.S. economy back on the growth trajectory. Nonetheless, the effects of QE can be compared to those of printing enormous amounts of money.” The consecutive rounds of QE have so far created approximately 4 Trillion dollars. “The points mentioned above add up to a picture which is not at all rosy for the U.S. But it’s not apocalyptic either. Particularly for precious metals investors. Let us explain why. It belongs to common sense that you can’t borrow money forever. Economics has a lot of intricacies and can be quite complicated at times but the basic rules are very simple. You borrow, you have to pay back. So if the government borrows too much and can’t pay it back, it will have to go bankrupt. The more debt it has, the worse its reputation is. People are less willing to put their money into treasury bills of a government with excessive debt. If the economy is shaky and the government is printing money, it damages its reputation but also makes the currency worth less and less. Hyperinflation is not a default nor bankruptcy in technical terms, but it is in practical terms. For the USD bond holders it will make little difference if they are not paid or paid something that is worthless. In such an environment investors, motivated psychologically, turn to gold and silver. As Warren Buffet correctly pointed out:” “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” But there’s one side of precious metals that is not covered by that quote. Gold and silver may be just lumps of metal but what makes them extremely interesting is the psychological association people have with them. Gold and silver have been used as currencies throughout the centuries.
And in case of the likely collapse of paper currencies, gold could quite naturally come in as the base of a new monetary system.
The possibility we would like to highlight now is the default of the U.S. on its obligations and the demise of the dollar. In this scenario, a new currency system based on the gold standard is introduced. The financial collapse is usually perceived as Armageddon but doesn’t necessarily have to be one. Just imagine, even in case of the U.S. government defaulting on its obligations, the assets that the country has would remain in place. The buildings, cars and infrastructure would still be there, they wouldn’t melt down in the possible financial crisis.” There will be a new currency that will include as part of the new monetary system. Will it be a “Republic dollar” as Jim WIllie hypothesizes, or will it be the Chinese Renminbi, or the Russian Ruble, the SDR or something entirely different? No one knows for sure, but experts are sure that it will be gold-backed, as that is the only monetary system that has historically worked. It appears that China is quietly positioning themselves to hold an attractive gold-backed currency, because they have been accumulating large amounts of gold for the last few years. Here is Weidermer’s version of life after the coming big financial collapse, as taken from his latest book Aftershock, 2nd Editon: “When the U.S. government can no longer borrow and has a rapidly declining tax base, the first action will be to make up the difference by massively increasing the money supply and creating horrendous multi- hundred percent inflation. However, this will be a short term solution as the devastating effects of that level of inflation on our economy will fairly quickly force the government to make massive cuts in spending, just like the rest of us. These will be very unpopular to say the least, but when the alternative is raising taxes on a populous that is reeling under the pressures of the falling economy, the government will be forced to make lots of unpopular cuts. Key cuts will hit both the ―guns and butter of the government budget. Cuts in military spending will be much larger than contemplated today and will focus disproportionately on the Navy and Air Force On the ―butter side, the most important cut will be to make Social Security means tested, making Social Security essentially a welfare program. For those who have little or no income or assets, Social Security will definitely be there to help. However, for those who have income or assets, forget it. In addition, Medicare (medical care for older people) reimbursements to doctors and hospitals will be reduced. Since huge numbers of unemployed people and retirees with no more retirement money will qualify for Medicaid (medical care for poor people), Medicaid will explode in size so reimbursements to doctors and hospitals will have to be cut from their already abysmally low levels, and there will be tougher rules on what gets reimbursed. A large percentage of doctors today won’t even accept Medicaid payments because the reimbursements are too low. But Medicaid will grow to be so important that doctors won’t have any choice but to accept its payments. Essentially, in a post dollar bubble world, Medicaid will become our national health care program. Probably the only thing more unpopular than big spending cuts will be big tax increases. Many people will be out of work and those who are working will see their incomes lowered by their employers and their standard of living squeezed down dramatically by the collapse of real estate and stock market values. So they will not be happy about tax increases. Of course, many wealthier taxpayers will avoid an enormous amount of taxes by losing many, or most, of their income producing assets, such as real estate stocks and bonds. Many will also see incomes from their business decline substantially or stop altogether. Obviously, this will only affect those wealthy Americans who don’t invest to protect their assets. There won’t be mass violence in the streets but there will be increased stresses on individuals due to the immense economic pressures. Divorces will increase and domestic violence will increase. Expect more killings of family and friends by distraught people who have lost so much economically . Also, expect more killings of small business people and lower level executives who have to lay off so many people. There will be a lot of anger all the way around and no doubt, people who lay off other people will be a focus of some of that anger. The high unemployment and high bankruptcy rates of the post dollar bubble economy, combined with a greatly pared down government will, for a while, create an unusual set of economic conditions. For example, in such a chaotic economic situation, there will be little incentive for people to pay their mortgages or other debts. Many of their creditors will be insolvent and there will be no significant market for selling the properties. Much of the management of these debts will be handed over to an overwhelmed government with little interest in foreclosure. Even if it did foreclose, who would it possibly sell the properties to? And there will be no serious financing available for buyers at that point, anyway. Certainly, the government won’t be able to provide financing. A good decision for many people will be to simply stop paying their debts. Even rent may not be worth paying as evictions could become increasingly politically difficult for elected sheriffs to carry out. As a result of all this, squatters will be increasingly common for business, and even more common for individuals since it will be politically difficult, and of little economic advantage, to throw tenants out. Local governments will have very tight budgets and won’t have the resources to spend on throwing people (and voters) out of their homes so that the landlord can have a vacant property with no prospects of rental. This situation will not last forever, but in the meantime, people will take advantage of it.”