Financial System Will Go Out With A Bang

-- Posted Monday, 4 January 2010 |
By: Vincent Bressler
Like many of you, years ago I became aware that something was horribly wrong with our financial system.  For me the awakening was in 2003 and 2004.  Back then, this was a taboo subject, even among my family.  Now it is a subject that everyone seems to accept and most try to ignore.  Meanwhile, my fascination continues. 

It is 2010 now, and the internet is full of intelligent (and and also dull) ideas regarding the state of the financial system.  My every thought seems to be anticipated, refuted, and played out.  But every once in a while I have something new to offer.  Today is one such occasion.  Here is that thought:

The bankruptcy of the existing financial system will become a reality in one explosion.

If you have studied the current situation, you know that the dynamite for the explosion is already in place.  There is simply no way that even five percent of all the dollar denominated debt can find a "real" home.  Congress, the Fed, foreign central banks, farmers, workers, social security recipients, unemployment recipients... they all play along with the game because every one else does.  This ends with a currency crisis, when everyone decides at more or less the same time that the game is over.  I see no alternative to this.  Our increasing dependence on Fed guaranteed debt or Fed printed money just makes the situation more inevitable.  The one and only thing holding our financial system together is that the dollar is still accepted as payment. 

When the explosion occurs, the world will be re-oriented.  People will be worth what they can actually produce.  I don't think that this will be the end of the world, although it will feel that way to people who thought that they were worth a lot but can not in fact produce much of anything.

Deflationists see the Fed printing money, giving it to JPMorgan Chase and other favored banks who ultimately consolidate most real wealth into their basket.  In this scenario, the favored banks pay pennies on the dollar for real wealth and the debt is wiped out.  The result is a company with less debt, owned and operated incompetently, by people who have a right to print money, not by people who have their own capital on the line and a plan.  Look at GM as a prime example of this.  The result is a financial black hole that requires more and more money creation.  This is not deflationary in the long run.

Ultimately everyone will realize that they are being paid in monopoly money, and we will have the explosion.

Dynamics of the explosion:

The explosion will be a rapid hyper-inflationary event.  Money will race into gold and silver.  The GLD and SLV exchange traded funds will at first receive a tremendous influx, and the owners of these structured financial products will make sure that there is always plenty of supply.  As people realize that closed end equivalents like CEF that have real gold and silver are appreciating much more rapidly, money will abandon GLD and SLV and pour into CEF and probably the stocks of gold and silver miners.  At this point the markets may go into lock down mode, as the authorities sense the explosion and make moves to stop it.  Lines will start forming at banks as people try to get their cash out in order to buy physical gold and silver at coin shops.  The result will be a bank holiday.

The world will look very different when the banks and stock exchanges open up again.

Vincent Bressler
vincentbressler@yahoo.com
-- Posted Monday, 4 January 2010 |