Debt Monetisation - an Economic Powder keg

Posted by Gregor Gregersen on 15 Nov 2016


Silver Bullion Pte Ltd


Dear Subscriber

The world is changing. Here in Singapore, foreign banks have started to retrench personnel and there is an sombre mood among bankers. Negative interest rates are wreaking havoc and even the future of Europe’s largest bank, Deutsche Bank, is uncertain.

Many sense that something fundamental is wrong with the global economy but few can put a finger to it. In this newsletter, I share my views on why we are sitting on an economic powder keg.

Meanwhile, we see increasing physical bullion and storage demand and have increased our vault’s insurance to 250 million SGD to fully cover all metals stored. We have also become a Royal Canadian Mint DNA Bullion Dealer and are celebrating this with a great Canadian Maple Leaf bullion coin promotion.

The bullion secured P2P loan platform has also flourished: it has matched more than 700 loans worth over 18 million SGD over the last 15 months; providing good liquidity, especially to borrowers.

We are also proud to announce that Loomis International (former VIA MAT) will be storing precious metals in our vault – The Safe House. Loomis International is a market leader in the international end-to-end transport of bullion and valuables. It is a great testament that our vault met the stringent security requirements necessitated by Loomis.

The Loomis deal means that a large portion of bullion entering Singapore will soon pass though the Safe House, making us a key distribution centre for the country. We hope that it will further improve the turnaround of bullion supply between mints and our customers since the gold and silver will be re-stocked directly at The Safe House.

 

Debt Monetisation - an Economic Powder keg

At the recent LBMA Conference here in Singapore, the head of macro strategy and FX research at Standard Chartered Bank indicated that 26% of globally tradable bonds now have negative yields.

 

Our financial system has become fundamentally unstable

At a time when global debts are 20% of world GDP higher than during the 2008 crisis these negative yields are a big warning sign that something is terribly amiss with our financial system. There is simply too much debt which has been artificially made too cheap for too long and it is routinely financed by printing new currency (debt monetization).

The US Monetary base for example has been expanded by a staggering 450% since the 2008 crisis while federal debts have doubled to nearly 20 trillion in 8 short years. Looking forward the enormous unfunded liabilities, which are mandatory future expenditures, will ensure that these debt levels become much worse.

Japan has even greater debt levels and has monetized enormous amounts of currency as part of their Abenomics policy of ultra-cheap money. Meanwhile Mario Draghi at the Europe Central Bank is monetizing debt and spearheading negative interest rates, having set the ECB rate at negative 0.4%.

When central banks monetize debt and impose these artificially low and/or negative interest rates for long periods of time, they create massive imbalances in the economy, ensuring that an eventual re-adjustment will occur. The more extreme the interventions, the more painful the re-adjustment will be.

USD Base Currency increased by 450% to 3.6 trillion USD

since 2008, USD Base Currency increased by 450% to 3.6 trillion USD
while Federal debt increased 110% to nearly 20 trillion USD
while Monetized Debt held by the FED increased 590% to 2.8 trillion USD

 

Hyperinflation, Germany’s painful re-adjustment from excessive debt monetization

Throughout history, over-indebted governments often created currency well in excess of real economic growth and eventually had to pay a high price for it. The German Reichsmark was such an example:

To finance the massive costs of World War I, Germany suspended it’s currency gold backing in 1914 and turned on the printing presses to monetize it’s ballooning debt. The German government would pay creditors with a constant flow of newly printed money. This money gradually seeped into the economy and went into people's cash holdings.

This monetized currency was also referred to as the “Papiermark” (Papermark). By the end of the war, the amount of currency in circulation had increased by over 400%, and debts had skyrocketed.

Initially despite the debt monetization, prices for real goods (such as food and coal) rose relatively slowly because most people did not spend but rather saved most of their excess currency as they were afraid of what tomorrow may bring.

It all started to go haywire when people started spending more of their saved currency causing prices of everyday goods to increase. Soon, too much currency chased after a limited number of goods. It started a self-reinforcing cycle of higher prices, prompting more people to panic and buy any physical goods which in turn caused prices to rise at an even faster rate.

Sellers also became reluctant to sell their produce, believing that prices would increase soon and asked for even higher prices. At its peak, prices of ordinary goods would be many times higher in the evening compared to the morning causing people to spend their currency as fast as they could on anything available before their daily wages became worthless.

With the collapse of the currency also went many of the lifetime plans of average citizens. Widows dependent on insurance found themselves destitute. Savings became worthless and people who had worked a lifetime found that their pensions would not buy even a cup of coffee.

a wall of currency during the Weimar hyperInflation years

"My father was a lawyer," says Walter Levy, a German-born oil consultant in New York, "and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.

 

The few Winners of Germany’s hyperinflation

Eventually after years of debt monetization a new gold backed currency (The Goldmark) restored price stability to the traumatized financial system.

By this time, lenders and creditors had lost nearly everything while holders of gold and ex-debtors (those who had paid off their debt in worthless Papiermark) emerged very well from the financial carnage.

A borrower who would have taken a German mortgage of 1,000,000 Papiermarks in 1918 for example, which was the equivalent of 9,218 oz of gold (worth 11,523,000 USD today) could have paid if off for just 0. 00000008 oz of gold (worth 0.0001 USD today) by November 1923.

Similarly gold owners did very well as a troy oz of gold would have been worth over a trillion Reichmarks by 1923 as the following official revaluation chart shows:

Hyperinflation Conversion Table

The Revaluation Table of 1925 was used to re-value debts after the Goldmark (being about 0.0115 oz of gold) was issued.
Note that Papiermarks refer to Reichsmarks (same thing) after 1914 when the gold backing was removed.

 

Unstable financial systems collapse slowly then suddenly

A key lesson from Germany’s hyperinflation was that although debt monetization was a pre-requisite for the eventual hyperinflation, it was only when a critical number of people started to spend this excess currency that a self-reinforcing cycle of ever increasing prices destroyed the currency.

Just like water pressure behind a dam, debt monetization built up over the years but was largely neutralized by savers who kept the newly printed currency from becoming actual demand for real goods. Savers were the figurative concrete walls of the dam that held the pressure back.

Ironically, the additional saved currency made their owners feel richer (the money illusion phaenomenon), causing them to increase their spending which eventually led to higher prices. As prices started rising people were gripped with fear of escalating prices and even more people started buying goods pushing prices higher faster.

Once the fear of higher prices had set in, the figurative dam breach was a certainty and an unstoppable flood of demand was let loose to hyper inflate prices of real goods. Savers who were too slow or unable to react were ruined.

Hence systemic events such as hyperinflation or massive banks failures require:

  • Imbalances that were built over years to set the conditions necessary to destabilize a financial system
  • A trigger in the form of a critical mass of people to set off a self-reinforcing trend

Imbalances can be built over decades without having much effects. However, the pent-up energy can be released in a very short period of time once triggered and those who are too slow to react will incur substantial or total losses.

 

Imbalances, Uncertainties and Triggers

The ECB’s negative interest rates, the Bank of Japan’s money printing bonanza and the United States’ endless fiscal debt spiral and cheap money policies have created enormous financial imbalances. When 26% percent of global bond yields are negative, the message is very clear (for those that care to look): We are due for a massive systemic adjustment.

Our debt imbalances have been built over the last 25 years and every time a painful re-adjustment came due (particularly the 1998 and 2008 crises), central banks postponed the adjustment through even more debt and liquidity issuance; ultimately creating a larger powder keg.

We are now waiting for a catalyst to spark it all, a misguided trade war or a mishandled bank collapse might be all that is needed for the system to go critical. In such a scenario, physical gold and silver carefully stored outside our over-leveraged banking system can become a cheap insurance for your wealth.

As William White – Chairman of the OECD Economic Development & Review Committee - put it during the LBMA conference after illustrating how irrational behaviours and false beliefs have skewed our traditional risk/return metrics, “Good luck, you might just need it.”

By Gregor Gregersen

 
New Features and Improvements

Improved Payment Balances and History Interface

A more detailed payment history and balance is now available in your management interface, and instead of sending payment updates for each individual order, a single aggregated order update now provides a more convenient overview.

Remote sellback option for non-storage bullion

You can now view and lock-in sellback prices online for local, non-stored, bullion. Submit a local sellback order and bring the bullion within one business day.

Upcoming Two Factor Authentication via Phone

Early next year SMS based authentication codes will be rolled out to better secure key transactions and optionally provide transaction alerts. In the meantime we will be doing phone verifications for submitted change requests forms.

You can view your phone number on record in your profile page.

Improved International Bullion Transfers options

The Safe House can handle all import/export paperwork for international bullion transfers and with Loomis International becoming a tenant at The Safe House we have access to good shipping rates.

Contact us if you want to transfer your existing bullion holding to Singapore.

 
The Royal Canadian Mint DNA Dealer Special

 

RCM Bullion DNA Special - 1.88 USD over spot. RCM Bullion DNA Special - 36 USD over spot.
 
Availability & Services
Buy & Sell Bullion Buy or Sell Physical Gold, Silver or Platinum
Over 7,493,000 physical ounces sold since 2009.
Bullion Secured P2P Loans Store your Existing Gold, Silver and Platinum
See how we built the safest place for your gold and silver:
Bullion Secured P2P Loans Bullion Secured Peer to Peer Lending
Empowers customers to securely lend to each other:
For loan contracts
starting on

November 22nd
Borrowing Request(s)
highest rate

3.25% p.a.
(24 months USD)
Lending Offer(s)
lowest rate

2.75% p.a.
(1 month SGD)
Bullion Secured P2P Loans Authenticated Bullion
Read about DUX Testing:
 

Note: Before importing bullion into Singapore ensure your bullion is classified as Tax Free Singapore IPM so you are not burdened with unnecessary import taxes.

Best Regards

The Silver Bullion Team
Silver Bullion Pte Ltd
Registration Nr: 200907537M
Floor #03-02A Certis CISCO Center II
20 Jalan Afifi, Singapore 409179
Singapore

Phone: (65) 6100-3040
Fax: (65) 6826-4022
Email: [email protected]

Information provided here should not be considered as advice or as an offer or enticement to buy, sell or trade. The contents of this publication, including any opinions and analysis, are strictly intended for educational use. Opinions expressed in bylined articles are those of the individual author and do not necessarily reflect the views of Silver Bullion Pte Ltd. Silver Bullion Pte Ltd. makes no warranties, whether expressed or implied, as to the accuracy of the information provided or for eventual results obtained by using the information. In no case shall Silver Bullion Pte Ltd. be liable for direct, indirect, or incidental damages resulting from the use of the information.

If you prefer not to receive newsletters edit your profile online directly.
if you have changed your e-mail address, please reply to this e-mail and let us know.