Growth of control by banks and government
Quietly, but thoroughly, governments and the banking system have taken an ever increasing role in every aspect of the economy and individual's lives. Where in the distant past cash was the only means of exchange, cash is now controlled by the banking system and cash transactions reduced to a miniscule role in all our lives. Even in Cyprus after the 'confiscation' of deposits, cash is rationed and transactions within the banking system are allowed up to €200,000 before a 'bank committee' has to approve them. The banking system is answerable only to government. Government is grateful to the banking system because government has a means of visible monitoring and controlling its citizen's financial affairs. Through the banking system, government is able to control our financial lives as never before. Cyprus demonstrates how that control will be increased even in crises caused by themselves.
Now fast forward to 2007, when the 'credit crunch' hit the banking system directly, catching it in reckless lending and issuing of dubious property securities. The crisis threatened to bring down the banking system and a good many citizen's businesses (through no fault of their own) and damage the level of control government had over our financial lives. That's why the efforts of government and central banks were directed at saving the banking system. It's also why such efforts will, inevitably, persist in the future. The economy and its citizens are a secondary priority to government.
The rise of China and Asia
Where the consumer has seen a rise in his disposable income he has sought to get the best out of it. This has meant that he bought cheap imports instead of locally produced goods. Local manufacturing has persistently shrunk because of this. In other words much of the stimulation has stimulated China ahead of the developed world.
We cannot emphasize the effect of Chinese growth on the developed world enough. Over the last 20 years it has sucked the wealth and the manufacturing out of the developed world with the direct help of developed world companies. To vastly improve profits developed world companies shifted their manufacturing to China and teaching Asia how to do the job in the process. In time the Chinese manufacturing has equalled the production quality of the West. It now produces much of it, under their own labels and competes directly with their mentors, winning industry after industry. Take the computer this is being written on, a Lenovo, the equal and cheaper than its equivalent in the developed world.
As a result China now has (not far off) $4 trillion in reserves in its pocket and is spending it globally to build a resource base separate from the west and an independent empire. It will continue to do so, so long as the dollar is accepted.
We hear reports that perhaps China will boost global growth, implying that the developed world will benefit too. Little is further from the truth. China is building an empire that will be able to function with little need for the developed world.
Shortly it will launch its own currency the Chinese Yuan, which will draw off reserves from the USD as fast as it is available, allowing the Chinese to pay in Yuan for foreign goods and perhaps to demand payment for its goods in Yuan too.
It will then be in a position -as the U.S. has been for generations--to demand the 'exorbitant privilege' of running its foreign reserves down and allowing gold to be a huge [75%] of its foreign reserves as is the case with the U.S. at the moment.
Excess dollars!
We saw China and the rest of Asia stop buying dollars until a month ago, when it began again. It appears that it may have become fearful of buying other more vulnerable currencies, including the euro and switched back to the dollar as the best of a bad bunch. But there will come a time when for the safety of the value of its reserves, it will heavily reduce these foreign currencies, as a percentage of its reserves, including the dollar.
It is then we may see Capital Controls in the U.S. to stem the inflow of dollars back to the U.S. and allow its exchange rate to fall. Due to a resuscitation of its oil industries, the U.S. may have reduced its Trade Deficit to nearly nil, so will not import the consequent inflation as the dollar drops. This alone will boost import replacement industries now able to compete through a cheap dollar.
We foresee a general and huge repatriation of dollars to the U.S. then, from other sources as well, such as the 'carry trade', other nations reducing their dollar holdings as their value falls and as its use as a reserve currency diminishes.
If interest rates do rise (and we're constantly being fed the impression that that is coming after the end of this year) then there will be an exodus of foreign-owned Treasuries. This may be followed by a stalling economy, a falling housing market, and a massive rise in fear as confidence dissipates.
Quantitative Easing
Moving ahead to the advent of quantitative easing, apparently aimed at saving and reinforcing the banking system and hopefully boosting the economy, we saw what seemed like an inspired move to lift first the U.S. then the Eurozone, the U.K. and now Japan, out of a no-growth situation, recession or deflation. After four years of this have we seen an improvement? Not really. What we have seen is a staving off of a depression and a huge expansion of the money supply.
The money printed to turn the developed world to growth has wound up mainly back in the central banks, making bank's balance sheets look good, but never reaching the underlying economy. The balance sheet of the Fed is expected to rise to $6 trillion by the expected end of QE.
But central banks are fully aware of this and continue to tolerate it and to print more money. The result is that the deflation, which is in the underlying economy, continues to progress, unseen.
If Q.E. fails to produce growth and the above takes place, then a loss of confidence will be quick. The loss of confidence will be virulent with its victims the dollar, the euro, the pound and the Yen alongside the developed world economies. Just as the rest of the developed world followed the U.S. into Q.E. so it will follow the U.S. into a loss of confidence in its currencies. As of now, the euro is clinging on desperately to a diminishing confidence, one spawned out of necessity for a means of exchange not by preference and the Yen is being purposely weakened.
If Q.E. fails to produce growth the only way to contain the foreign exchange markets and prevent both currency chaos and the failure of paper currencies to do their job will be through Capital Controls on a broad front forcing citizens to keep using them. We saw this in Cyprus. We have seen the extent austerity is allowed to go, usually at the expense of citizens.
Capital Controls to become Draconian and to include Gold
The Capital Controls we have seen to date are a pale shadow of what will come if the above comes true. What's frighteningly true from the evidence we already have is that governments and banks will be made to survive and will be made to do so at the expense of their citizens and clients wealth, employment and overall future.
It is in this environment that the monetary world will have to turn to gold and for it to be used in support of declining confidence, distrust in national currencies and to ensure the global monetary system remains liquid.
What's already apparent is that too few nations have sufficient gold to retain the credibility of their currencies under such conditions. There's too little by way of supply of gold to raise gold reserves to a sufficient size. There's only one source available to them and that is their citizens' gold.
Just as the new U.S. tax legislation FATCA and new reporting requirements are becoming increasingly onerous and Swiss banks and vaults are distancing themselves from client's gold (though rejecting them or pushing them into allocated accounts) so the ability of the government authorities to see what gold their citizens have at home and overseas is increasing.
It's a small step to add to this visibility and should they decide to do so, order their citizens to ship their gold home for their government's use!
It's reported that ABN AMRO, one of the largest banks in Europe announced in a letter to clients that it would no longer allow clients to take delivery of their metal and instead will pay account holders in a paper currency equivalent to the current spot value of the precious metal.
Hold your gold in such a way that governments and banks can't seize it!
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