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Western Economic Foundations Rotten To The Core

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I don’t want to see gold reach $5,000/ounce.

As a precious metals commentator, this may come as a shock to readers, or seem to be an open contradiction. It is neither. As I have written before, both I and others working in this sector don’t “want” gold (and silver) to soar sky-high in price, we fear that gold and silver will go sky-high in price. There is a huge distinction here, yet most outside of this sector are completely oblivious to such logic.

Going back a decade, to when the “old timers” like Jim Sinclair were already talking about much, much higher gold prices, these people didn’t “boast” that gold and silver would soon move much higher in price, they warned people that this was about to happen.

As writers in this sector explain on a regular basis, most of the price-appreciation of gold and silver is not an absolute increase in value, but simply a relative increase in nominal price – caused by the bankers’ fiat currencies plummeting in value, due to excess money-printing, and even more excessive debts/deficits.

When I and others talk about gold moving from its absolute bottom below $300/ounce to $5,000/ounce (and higher), what we stress over and over is that gold isn’t in the process of becoming 20 times more valuable, but rather the banker-paper that we erroneously call “money” is in the process of losing 95% of its value. This prognosis excludes the U.S. – which is already certainly heading to hyperinflation, and a totally worthless currency.

Yet living in the “best” of the major, Western economies – in Canada – I suffer absolutely no delusions that we are escaping the economic suicide that is recklessly pursued by the leaders of most of the other, even more debt-laden Western economies. Despite a prime minister who is a self-described “economist”, Canada is arguably destroying its own fiscal foundation at an even more-rapid rate than most of the other debt-sinners.

For readers outside of Canada: some brief history. During the 1980’s, Canada’s Conservative government (the infamous Mulroney regime) came very close to bankrupting Canada’s economy – with the most grossly incompetent policies (and massive deficits) of any major Western economy.

When they were finally dumped from office (after roughly tripling Canada’s national debt in just eight years), the Liberal government which replaced them undertook what was (at the time) the harshest real “austerity” program in any Western economy since the Second World War. In just two years, they completely eliminated the record-deficits they inherited from the Conservatives, and then produced a decade of surpluses – the most dramatic, most impressive economic turn-around by any Western economy in a half-century.

After the inevitable decay of a full decade in power, the Liberals were given “the boot” by voters, who naively assumed that the ‘new-and-improved’ Conservative party would somehow be different from its incompetent predecessor. They were wrong.

While many “emerging market” economies have completely recovered from the Crash of ’08, and are now once again steaming forward with budget surpluses, Canada continues to spiral downward. The new Conservative Prime Minister, Stephen Harper, has smashed the Mulroney records for deficits – after scoffing at the mere “possibility” of a deficit little more than two years ago.

Canada’s huge trade surplus is also gone – replaced with deficits. Canada’s large current account surplus is also gone – replaced with record deficits. Despite sitting on one of the two or three largest pools of precious, natural resources on the planet (most notably oil), this fiscally retarded regime has absolutely no clue as to how to restore the economic prosperity that Canadians took for granted less than three years ago. And this is the best of the Western economies…or at least it was.

While Germany may lay claim (at the moment) to being the “best of the rest”, it faces its own self-inflicted doom. Despite a lot of tough talk” (and its role as “economic leader” of the EU), the Merkel government has shown itself to be incapable of “holding the line” on fiscal responsibility in Europe – under the enormous pressure of the banking Oligarchs (and the ultra-wealthy bond-holders they represent).

Much like Canada is being dragged-down by its close connection to the dying U.S. economy, Germany is also in danger of floundering, due to the drowning “PIIGS”. Yet there is a common theme here, from the struggling economies at the “top” (Canada and Germany) to the worst of the debt-sinners at the bottom (the U.S. and the PIIGS): the lack of the will to even admit the severity of current problems.

Just as an alcoholic must admit their addiction before they can begin the “twelve steps” to recovery, so too Western debt-addicts must first openly admit the severity of their problems – as the necessary prerequisite toward beginning to fix those problems.

As with alcoholics, the easier “solution” is simply to take another drink of debt, and feel better momentarily. And just like the alcoholics, the moment that the latest shot of booze/debt wears off, they realize they are even worse-off than before – and reach for another bottle (i.e. more money-printing).

Ultimately, what allowed Canada to escape debt-purgatory once was that it elected a government which came into office and openly and honestly acknowledged the severity of its debt problems. Thus while there were some protests, Canadians undertook the harsh adjustments that were necessary as they weaned themselves off of their debt-addiction – and in a few years went from “worst to first” among Western economies.

There is absolutely no sign that any of the current Western governments (and their spineless “leaders”) have the integrity to openly admit their problems. Why can’t even one of these governments step forward and tell their people the truth?

There is one, huge difference between the turn-around of the Canadian economy two decades ago, and current circumstances. In the late 1980’s despite Canada’s debt malaise, there was enough wealth/prosperity among its middle-class to “tighten their belts” – and essentially pay for our fiscal rescue.

Today that situation doesn’t exist in a single Western economy. After roughly four decades of pillaging all of the wealth of the middle-class, and transferring it to the ultra-wealthy (primarily through hopelessly flawed taxation systems), the middle-classes of all Western economies are literally threatened with “extinction”.

There are no reserves of wealth among the middle-class of any Western nation. Thus, any and every Western nation which tries to escape its debt-trap through squeezing those on the bottom (through spending cuts/tax increases) rather than beginning to harvest (through entitlement cuts/tax increases) the $10’s of trillions in wealth which have been stuffed into the pockets of the ultra-wealthy is 100% certain to implode.

Readers must understand that the middle-class has always been 100% responsible for our prosperity. A middle-class level of wealth produces the real “Goldilocks economy”: which balances optimal levels of savings and consumption. Most importantly, the money held by the middle-class has a high “velocity” – it is spent and re-spent again and again. And it is the vigorous use of this capital which promotes prosperity.

Conversely, give an extra dollar to a billionaire, and 99 cents out of the dollar is hoarded. The “multiplier effect” which occurs with the dollars which come into possession of the middle-class operates in reverse when given to the wealthy: every dollar which falls within the grasp of these greedy misers sucks the life out of our economies – at the most-rapid rate possible.

No homeowner wants to deal with the reality of a rotting foundation. It is a long, expensive process to remedy such a defect. Yet no semi-rational homeowner would ever be so reckless as to simply ignore a rotting foundation. The price to be paid when the rotten foundation finally collapses is so catastrophic that the rational homeowner will find a way to repair those foundations, regardless of the time and cost involved.

The foundations of Western economies are now totally rotten. Decades of sabotaging their own prosperity by killing their middle-classes has achieved its inevitable result. The $10’s of trillions being hoarded by the ultra-wealthy must be disgorged (voluntarily or otherwise) or all of our economies are 100% to collapse – as the massive weight of our debts crushes those rotten foundations.

Whether it is fear of these ultra-wealthy aristocrats or servitude toward them, our governments intentionally blind themselves to the only possible path to solvency: taxing-back the $10’s of trillions in windfall gains by the ultra-wealthy over the last several decades, imposing debt-forgiveness on bond-holders (for the weakest economies) so that they can avoid short-term bankruptcy, ending the reckless money-printing which must ultimately lead to hyperinflation – and re-discovering sustainable spending habits.

These “four steps” to recovery can never begin, however, until the liars and fools governing us “come clean” about the state of our economies. Unless and until that happens, each day our rotten foundations get closer and closer to inevitable collapse.

Comments (5)Add Comment
written by R Longley, December 04, 2010
Thanks for opening my eyes and ears with regards to Canada Jeff! Need to talk to my broker on Monday...
Jeff Nielson
written by Jeff Nielson, December 04, 2010
Samix, yes, I probably should have clarified that I didn't expect that wealth to be "disgorged" all at once.

As you point out, even a modest wealth tax will slowly but steadily eat into those idle hoards of wealth. Although for the most severely insolvent economies, they may need to tack-on a high-wealth surtax for a few years.

It's time that the VERY wealthy learned that in tough times it isn't ALWAYS just "the little people" who need to tighten their belts.
written by sameer, December 04, 2010
Hey Jeff,

"The $10’s of trillions being hoarded by the ultra-wealthy must be disgorged (voluntarily or otherwise)"

Not more, all you need is 2.5% per year on wealth accumulated/hoarded, as a result the ultra wealthy will have no choice but to necessarily bring out their wealth and put it into circulation, thereby kick starting the economy...

1 question: How can I disable the feature, whereby I get a mail every time someone posts a comment on this thread, I cannot un-check the "subscribe via email(registered users only)" check box that appears below the comments dialog box.
Jeff Nielson
written by Jeff Nielson, December 03, 2010
Mathnerd, with "wealth tax" system there would be ZERO corporate taxation - thus corporations would be flocking INTO such jurisdictions.

As for the fat-cats at the top, my recommendation is currency controls BEFORE the wealth-tax is implemented. The U.S. is ALREADY heading that way, irrespective of whether it actually tries to FIX anything.

Then, once many of those $TRILLIONS have been taken-back from the ultra-wealthy (and our economies have been returned to prosperity), the capital controls can be lifted, and they can move if they want to.

I would suggest that a stable, prosperous, SOLVENT economy will look quite nice to the ultra-wealthy - even if they DO have to pay their fair share of taxes. Put another way, I don't think ANYONE is going to want to live in any of the Western economies who go bankrupt, suffer hyperinflation, or both.
written by Travis Lucy, December 03, 2010
How easy is it to switch a company's base of operations?

For the ultra-rich, switching from working out of Toronto to Hong Kong wouldn't really be a big deal. Sure, there'd be maybe a year of decreased profits, but avoiding a much higher tax rate many corporations could be worth it for the company. Consequently, I think addressing the situation would require several Western countries addressing the mess together. At this point Canada and Germany would - I think - both have to be in this group.

If I'm right, it means we'd be that much more unlikely to see this situation truly end.

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