World Affairs Brief, June 29, 2012 Commentary and Insights on a Troubled World. Copyright Joel Skousen. Partial quotations with attribution permitted. Cite source as Joel Skousen’s World Affairs Brief (http://www.worldaffairsbrief.com)

RASH OF DIRE ECONOMIC COLLAPSE PREDICTIONS

I field more questions from subscribers and preppers each week on the subject of economic collapse than any other topic, despite having covered in the WAB numerous reasons why neither hyperinflation nor a complete and sudden collapse of the dollar can happen this year or in the next couple of years. In fact, a total collapse could never be sudden just because of the sheer size of the dollar pool internationally.

Yet there is an unending flow of predictions of complete and imminent collapse coming from both the uninformed and the informed financial newsletter writers on the conservative/libertarian side. The latter should know better, but simply haven’t thought this out very well and are using the hype to generate sales of newsletters, financial products or the need to redeem themselves from their long litany of failed collapse predictions already posted.

Pastor Lindsey Williams is continuing to push the banking holiday/collapse scenario based upon his bogus insider sources. My late friend Bob Chapman also got fooled into believing the various scenarios supposedly touted by law enforcement people claiming that the banks were going to close down due to an imminent collapse. That was in August of 2010. But even though that failed, Bob continued to push the collapse scenario.

There is absolutely no reason why the FED would call a banking holiday which would cut off people’s access to money. The economy would collapse within weeks, and they would get the blame. As long as they’ve got the means to keep creating money, there simply is no rationale for this. People who continue to make these claims simply don’t understand either the power of the Fed or the plans of the PTB.

The list of those calling for imminent collapse is growing longer by the week, but it doesn’t mean it is any more true. R.G. Allen, Robert Kiyosaki, Gonzalo Lira, Mike Maloney, Mike Dillard (who’s been pushing the collapse of the EURO for years now and still won’t stop despite the failure of his predictions), and more recently the National Inflation Association, Porter Stansberry and Sandy Leeds are all pushing imminent collapse. While economic fundamentals are crying out for a collapse, these good people don’t understand the powerful nature of the conspiracy we are dealing with and their ability to manipulate the economic numbers.

Even Peter Schiff is predicting collapse by 2014, as reported by Dominique de Kevelioc de Bailleul of Beacon Equity Research—and she’s a believer too. “Gold and silver investors watching metals prices move back down near to the Dec. 29 lows of $1,523.90 and $26.15, respectively, should seriously consider accumulating the metals now. The ‘Big Reset’ of the global financial, slated for no later than 2014, will reward precious metals holders as the big winners among investors [that part is true, if you take possession], according to Peter Schiff.

“Schiff, the CEO of Euro Pacific Capital said, ‘The United States is in a lot of trouble [true].’ After the Fed presumably embarks on QE3, and that stimulus wears off, ‘I think we’re going to have a crisis. I don’t think we’re going to have time for QE4 or QE5. I mean, ultimately, that’s where we’re headed, because that’s all QE does. Each QE sows the seeds of the next QE [also true, there’s no solution in the Fed monetizing the debt, but it does prolong things—a lot longer than these guys think].’

“And global money looking for a safe haven won’t stand for another repeated currency debasements through debt monetization by the U.S. central bank [but, in fact, do stand for it and they applaud it. All the big investors were hoping for the bailout in Europe, even those not directly involved, because it means the chances are better at keeping the whole system propped up. Few have any principles anymore]. Because Europe’s woes have forced politicians to make tough choices there, the spotlight has been taken off, temporarily, the even-more dire circumstances of debt loads and deficits of the U.S., according to Schiff [true, but understates the FEDs far greater ability to inflate and get away with it, without causing a collapse]. ‘Nationalism will emerge. Healthier countries will not see fit to spend their hard earned money to bail out their less responsible neighbors [Not true at all. While there is growing public sentiment for national interests before global interests, all the politicians in power are wedded to globalism and go along. Chancellor Merkel of Germany is a prime example—always bashing bailouts but going along and pushing for even more EU powers to deal with the crisis].’

“Schiff’s time line for the Armageddon scenario of a U.S. dollar crisis matches predictions made by commodities legend Jim Rogers and ShadowStat’s economist John Williams, with each man projecting 2014 as the year the U.S. dollar no longer maintains its former role as the world’s premiere reserve currency—implying a severe decline of its global purchasing power and much higher metals prices [The latter is mostly true, but not the destruction of the reserve status, as I will explain].

“In 2014, that’s the year the U.S. economy is expected to reach fresh new lows and the year politicians will finally be forced to face the tough choices regarding proposed cuts to federal, state and local government budgets, according to the three men [There will be no facing of the tough choices—no politician will survive if they cut spending to a balanced budget level]. It will also be the year that ushers in severe social unrest, similar to what is happening in Greece, in the case of Jim Rogers’ prediction for 2014 [maybe, if they really cut benefits and special interest spending, but that’s not going to happen].

Social unrest would only come if the government had the courage to really cut back in not only welfare and benefits, but all their other spending outlays that put millions into the hands of government connected companies and foundations.

Look at the political realities: There are huge constituencies for welfare, bailouts, foods stamps, school loans, foreign aid, military spending, loan guarantees, export-import banks, etc, etc. There are 45 million people on food stamps alone and 25 million government employees, 3 million total military, including civilian employees, and most of these people vote for a continuation of the status quo.

In addition there are millions of liberal, well healed Americans that vote for their favorite government spending programs: the arts, entertainment subsidies, education and foreign aid. After all, they aren’t getting a tax bill for it—it’s mostly deficit spending. None of these are going to tolerate the massive spending cuts necessary for national solvency.

Let me quickly review, once again, the reasons why a collapse or devaluation of the dollar, hyperinflation, or the dollar quickly losing its reserve currency status is not imminent and can’t happen quickly any time in the next few years:

1) Collapse: Collapse of a currency can only happen if it becomes relatively worthless in a short period of time. Inflation of the currency at high rates is the only thing that can cause this, ending either in devaluation and/or hyperinflation. Neither of these are real threats to the dollar currently despite the huge debt crisis.

2) Devaluation: Devaluation happens when a currency value is pegged to another at a fixed exchange rate, and the smaller currency inflates at a more rapid rate than the pegged currency causing an imbalance in demand which eventually causes the peg to be broken and a new fixed rate set. The dollar isn’t pegged to anything—it’s the standard. In a non-pegged system an informal devaluation can only occur if the dollar is being inflated at a much higher rate than other currencies. That isn’t happening because every other currency is inflating about the same rate proportional to their base as is the dollar. In fact, other currencies approve of US inflation, because it allows them to inflate their currency while maintaining the same relative exchange rate with the dollar.

3) Hyperinflation: Two things must be present for hyperinflation to happen. First, you must start with a relatively small money supply that can be expanded multiple times. The dollar base is so large, after having been inflated and spread around the world for so long that it literally can’t be inflated rapidly as compared to smaller currencies. The quantity of dollars in circulation is estimated at $300 trillion (not counting the huge non-monetized economy of derivatives, contracts and hedges perhaps as big as $500T). The FED could create $30T a year and it wouldn’t exceed 10% inflation rate. Even that huge amount isn’t hyperinflation, which results in panic spending due to rapidly rising prices. Second, a nation has to have an automatic injection mechanism to put increasing quantities of money into the pockets of consumers so they can keep up with rising prices, otherwise the inflation kills stops economic growth. We don’t have that, and what we do have (food stamps, unemployment compensation, Soc. Sec. etc) isn’t effectively indexed to inflation. Without the public’s ability to get more money each month as in Germany in 1936, the economy retracts as people can’t keep up, and spending decreases—again stopping hyperinflation and causing stagflation.

4) Loss of Reserve Status. This also can’t happen anytime soon since the dollar base is so much larger than any other currency. You’d have to print up probably 5 times the existing quantities of Euros to supplant the dollar and that would have devastating inflationary effects on the Eurozone. The same with the British Pound. No one would trust the Chinese Yen because there’s no transparency there either. What about a basket of currencies? —The same problem exists there as in the EU—even their strict rules about one nation expanding their Euros over another, the southern tier of nations found ways of cheating. No one can trust any of these voluntary agreements anymore.

If there is a real threat right now, it’s the huge derivatives and hedge fund bubble—trillions of dollars committed in contracts but almost without actual asset backing. No big paper investment happens today with CDS derivative insurance or hedging, and little of that can actually be paid to the beneficiary if a sufficient crisis develops. However, this mainly affects the huge speculative economy—and these have the most power to get a bailout from their fellows at the FED.

Rather than see a collapse coming this year or even by 2014, I think we are going to see another mild inflationary recovery (not a true recovery), but one where inflation finally starts to overpower deflationary forces and people start to spend again, and hire. It won’t be big, but it will help the PTB extend this debt spiral until the end of the decade where even bigger world conflicts will help them escape final blame. Don’t underestimate the power of the PTB to keep inflating enough to stave off default and yet keep inflation below 10%.

That said, we are dealing with conspiracies here—and the PTB could simply decide to pull the plug on the economy. All they would have to do is stop intervening in the huge derivative market to keep those contracts from defaulting, as they have been recently in Europe. The derivatives bubble is by far the largest ponzi scheme ever—trillions in promises to pay without any means to make good on all those promises, even after the hedges balance out the excess exposure.

In fact, the derivative mess has been threatening to collapse ever since AIG in 2008, and yet the financial PTB continue to stop the derivative contracts from being collected on. In Europe, for example, they kept insisting that no default had occurred when investors in Greek bonds had to take a 50% haircut (loss on their bond investments). Hence no one could make good on those CDS default swap insurance policies (which are sold as guarantees on all these big risky investments). They change the rules all the time, and control the higher powers that might rule those changes illegal. I think they can keep this up for several more years.

This doesn’t mean you shouldn’t be preparing for a major disaster in the world, I just don’t think it’s imminent or that it is going to be financial in nature alone. I think war is the big thing that will drop all the world’s economies and that’s at least 10 years away. So, you’ve barely got time to prepare.