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ZIRP Leading to Economic Collapse, Much Higher Gold and Silver Prices

Video: David Jensen: ZIRP Leading to Collapse, Much Higher Gold & Silver Prices

1. Two overarching concepts:

a) Time Preference - Austrian Economics perspective:

    • http://www.zerohedge.com/article/presenting-capital-based-macroeconomics-overview-austrian-school-and-business-cycle
    • http://www.newmedia.ufm.edu/gsm/index.php/Muellerinflationmacroeconomic
    • http://www.auburn.edu/~garriro/cbm.htm
    • Higher interest rates (limited availability of capital) required to pull the economy out of post credit-binge economic slow-down through
      • (1) clearing excess debt (debt burden and cause of economic distortion);
      • (2) finance only highly productive enterprise and projects that can clear higher interest rate hurdle and generate high returns in the near term; and
      • (3) ZIRP (free money) distorts consumer time preference in that consumption occurs today which cannot be sustained (consumption with false wealth or 'eating the seed corn') and an inefficient production base is built to meet today's artificial demand - unsustainable.
    • Easy credit policies such as Quantitative Easing distort the economy further and have merely recapitalized the Too Big To Fail (TBTF) banks and
      • lending at low interest rates finances inefficient enterprises and projects that do not generate a return quickly with artificial consumption
      • end result of artificially low interest rates is distorted economy that cannot generate jobs reliant on free money

b) John Exter

In the context of Time Preference, the ever increasing consumption and debt level would require continually lower interest rates which distorts the economy. Low interest rates lead to stagnation and collapse not recovery.

John Exter's Asset Pyramid - ordered from most risky to most stable:

John Exter's Asset Pyramid

Today we've had 7 years of emergency zero interest rate policy (ZIRP) in the US and gloabally.

    • An Emergency Rate but is the economy getting better?

2. Macro US

3. Macro Europe

4. China - slowing economy

Plunging industrial commodity prices:

5. 2008 was the Global Economic Collapse and efforts since 2008 have focused on more cheap debt to address distortions caused by prior cheap debt and speculation/consumption:

    • Emergency ZIRP still everywhere
    • Austrian school - due to time preference, false consumption, and speculative excesses, more cheap debt cannot solve the problem; leads to collapse
    • Wall Streee Journal estimated global debt or leverage in Nov 2013 at $223 trillion or 315% of global GDP
      • vs historic sustainable level of 150% of GDP
      • $120 trillion too much leverage
    • US $58 trillion of credit market debt (330% of GDP)
    • Canada 280% of GDP

6. Problem is central planning of interest rates and creation of fiat money

    • Migration of collapse down the inverted pyramid
    • John Exter pointed to gold as the final escape as gold (and silver)
      • gold = 'power money' - an asset that is nobodies liability; gold and silver stand as independent assets
    • Why then is the gold price not responding?
    • LBMA trades 200 million oz of paper gold per day and is the defacto world gold and silver price benchmark
    • Price cannot move because infinite supply of paper gold available in London at the LBMA with the Bank of England acting as market maker for the trading;
    • Gresham's Law - bad money (paper gold instruments) drives out good money (real gold) ; physical gold will disappear from London / NY exchanges leaving only the paper gold (bad money) to circulate:
    • Meanwhile massive amounts of physical gold being swept away by China and India (in excess of annual global mine supply)

7. Physical Silver Shortage

    • Physical silver shortage is possible as the price is, again, set by trading paper silver instruments in London and NY;
    • Price control is effected by creating artificial paper supply in the market
    • Will lead to shortage of refined bars to market if the price is insufficient to support mining or high enough to draw silver from hands of silver holders to the refineries

8. Solution

    • Open mints to citizen held gold/silver and mint/circulate new sound monetary unit at much higher gold / silver prices
    • Organized write-down of debt to reduce the debt-to-GDP ratio
    • Close central banks
    • Liquidate overleveraged TBTF banks
    • Crisis with stable currency much more palatable than crisis with failed currency (famine)
    • Stability will return much more quickly

 

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