Global Currency Crisis & Gold – What’s Really Going to Happen in 2011 – 2012

Following on from the first 2 parts in this series: Whats really going to happen in 2010 Whats going to happen in 2010/2011 – part II Another great writer and analyst makes it into our categories section, Bob Chapman of Global research with a seminal must read piece outlining the road ahead towards a new [...]

When Does a Market Crash Become a Depression?

by admin on 15/08/2010

People call us “permabears” but we prefer the terms “realists” or “students of history”.

In times of trouble, often history is all you really have to go on, when trying to understand or predict what is to come. This is not to say things will be exactly as they happened in the past, but any serious student of history cannot deny the repetition of events over time, and cross-civilization, human patterns and ideas lead to the same scenarios playing out over and over, again and again.

There are of course slight differences, brought about by differing minor circumstances and unpredictable events, but there are also never-changing patterns and trends, and these are the lessons history can teach us with respect to what is to come in the future.

With regards to the (in our opinion) impending inescapable global financial collapse as the (very brief in a historical context)  American Empire draws to a close over the next few years, there are certain timeless and inescapable historical truths you need to be focusing on to protect yourself, wherever you are, because when the US and the Dollar cease to be, the fallout will be worldwide and affect everybody.

In our opinion we are well into an irreversible collapse now, the 2008 crash and panic was just the initial warning of impending trouble, and instead of the corrective actions that could have nipped it in the bud, the Federal Reserve (and global governments) have chosen to delay the pain, by further debt creation, which is the cause of the problem in the first place.

History tells us this was the most likely course of action, this is what the powers that be nearly always do when faced with these circumstances, however history also tells us that the day of reckoning ALWAYS comes, eventually, and that when it does, it’s far worse than than it was in the first place.

“you aint seen nothing yet..” seems very apt.

With this in mind, this article by By Clif Droke – www.clifdroke.com – looking at the lessons of history with regards to crashes and depressions from Roman times is right on the money.  – Over to Cliff.

“At what point does a market crash translate to a lengthy bear market and/or an economic recession?

This question was taken up by a celebrated historian of the early 20th century, one Otto C. Lightner.

In 1922, Lightner chronicled nearly every major economic depression in the known history of the Western world in a 400-page volume entitled “The History of Business Depressions.” Lightner’s comprehensive chronicle of business depressions contains much that is applicable to today’s economic situation following the credit crisis. (It must be noted that before the Great Depression of the 1930s, the word “depression” was used without distinction to describe what could either be considered a mild recession or a major depression.)

One interesting example of an ancient economic crisis was detailed by Lightner, who explained the Roman debt crisis of A.D. 33. This particular crisis had some amazing parallels to the credit crisis of recent times. The Roman debt crisis began by a series of money panics attended by a number of runs on Roman banking houses.

“A description of the panic,” wrote Lightner, “reads like one of our own times: The important firm of Seuthes and Son, of Alexandria, was facing difficulties because of the loss of three richly laden ships in a Red Sea storm, followed by a fall in the value of ostrich feather and ivory. About the same time the great house of Malchus and Co. of Tyre with branches at Antioch and Ephesus, suddenly became bankrupt as a result of a strike among their Phoenician workmen and the embezzlements of a freedman manager. These failures affected the Roman banking house, Quintus Maximus and Lucious Vibo. A run commenced on their bank and spread to other banking houses that were said to be involved, particularly Brothers Pittius.”

Lightner continued, “The Via Sacra was the Wall Street of Rome and this thoroughfare was teeming with excited merchants. These two firms looked to other bankers for aid, as is done today. Unfortunately, rebellion had occurred among the semi civilized people of North Gaul, where a great deal of Roman capital had been invested, and a moratorium had been declared by the governments on account of the distributed conditions. Other bankers, fearing the suspended conditions, refused to aid the first two houses and this augmented the crisis.”

The crisis was solved by the emperor Tiberius, who “suspended temporarily the process of debt and distributed 100 million sesterces from the imperial treasury to the solvent bankers to be loaned without interest for three years. Following this action, the panic in Alexandria, Carthage and Corinth quieted.”

Here we cut to another author – David Knox Barker of Long Wave Dynamics looking at the same events and drawing the same conclusions, and making utterly remarkable comparisons between then and now.

Humanity has been here before, with strikingly similar conditions. It was the overuse of debt funding that led to a Roman crisis at the height of the empire in the year A.D. 33, as told by Lightner (1922), and quoted in Jubilee on Wall Street.  Just exchange a few of the bank names, politicians and programs with those of the current global financial crisis and the parallels are disturbing:

When we make a hasty survey of the Roman Empire (read the global economy) to find the symptoms of decay (stagnant and falling GDP) there is brought to light as the outstanding feature industrial stagnation (overproduction) and commercial ruin (excessive debt from loads from subprime, consumer, and corporate debt, triggering bankruptcy, etc.). The year 33 A.D. was full of events in the ancient world. It marked two disturbances as the outgrowth of the mob spirit. The first was in the remote province of Judea where one Christus was tried before Pontius Pilate, was crucified, dead and buried (this was the real deal in debt forgiveness of another sort, but that’s another subject). The other event was the great Roman panic which shook the empire from end to end. The consternation accompanying the latter died down and it was soon forgotten (of course the empire later collapsed), but the murmurings of the former swept down the centuries until, bursting into flames, it enveloped the world.

A description of the panic reads like one of our own times: The important firm of Seuthes and Son, of Alexandria (read Bear Stearns), was facing difficulties because of the loss of three richly laden ships in a Red Sea storm, followed by a fall in the value of ostrich feather and ivory (fall in the value of real estate). About the same time the great house of Malchus and Co. of Tyre (Lehman Bros.) with branches at Antioch and Ephesus, suddenly became bankrupt as a result of a strike among their Phoenician workmen (unions) and the embezzlements of a freedman manager (Madoff). These failures affected the Roman banking house, Quintus Maximus and Lucius Vibo (Goldman, Merrill, JP Morgan, etc.). A run commenced on their bank and spread to other banking houses that were said to be involved, particularly the Brothers Pittius (Wells Fargo, etc.). The Via Sacra was the Wall Street of Rome and this thoroughfare was teeming with excited merchants. These two firms looked to other bankers for aid, as is done today. Unfortunately, rebellion had occurred among the semi civilized people of North Gaul (Ireland this time), where a great deal of Roman (European) capital had been invested, and a moratorium (banking holiday) had been declared by the government on account of the disturbed conditions. Other bankers, fearing the suspended conditions, refused to aid the first two houses and this augmented the crises.

Money was tight for another reason: agriculture had been on a decline for some years (the Internet bubble and then the real estate bubble) and Tiberius (Bush/Obama) had proclaimed that one-third of every senator’s fortune must be invested in lands within the province of Italy in order to recoup their agricultural production (why don’t we try this one, and let the senators eat some of their own cooking).

Publius Spintler, a wealthy nobleman (Rangel), was at that time obliged to raise money to comply (pay his taxes) with the order and had called upon his bank, Balbus Ollius, for 30 million sesterces, which he had deposited with them (OK the analogy isn’t perfect). This firm immediately closed their doors and entered bankruptcy before the praetor. The panic was fast spreading throughout all the province of Rome and the civilized world (still pretty accurate). News came of the failure of the great Corinthian bank, Leucippus Sons (pick a bank name), followed within a few days by a strong banking house in Carthage (pick a city). By this time all the surviving banks on the Via Sacra had suspended payment to the depositors (it almost happened, but round II of the banking crisis is dead ahead). Two banks in Lyons next were obliged to suspend; likewise, another in Byzantium. From all provincial towns creditors ran to bankers and debtors with cries of keen distress only to meet with an answer of failure or bankruptcy (money funds broke the buck).

The legal rate of interest in Rome was then 12 percent and this rose beyond bounds (these were real market interest rates before central banking). The praetor’s court was filled with creditors demanding the auctioning of the debtor’s property and slaves; valuable villas were sold for trifles (a real estate crash) and many men who were reputed to be rich and of large fortune were reduced to pauperism (rumored billionaire Allen Stanford, along with jumbo mortgages down the tubes). This condition existed not only in Rome, but throughout the empire (from New York to Greece).

Gracchus (pick Paulson or Bernanke), the praetor, who saw the calamity threatening the very foundation of all the commerce and industry of the empire, dispatched a message to the emperor, Tiberius (Bush/Obama), in his villa at Capri (Texas/Hawaii). The merchants waited breathlessly for four days until the courier returned. The Senate assembled quickly while a vast throng, slaves and millionaires, elbow to elbow, waited in the forum outside for tidings of the emperor’s action. The letter (TARP, but probably not an August Surprise) was read to the Senate then to the forum as a breath of relief swept over the waiting multitude.

Tiberius was a wise ruler and solved the problem with his usual good sense (the analogy breaks down a little right here). He suspended temporarily the processes of debt (debt forgiveness and Fed mortgage purchases) and distributed 100 million sesterces from the imperial treasury (TARP) to the solvent bankers to be loaned to needy debtors (AIG, U.S. Banks, GM and European banks) without interest for three years (Fed funds rate at zero). Following this action, the panic in Alexandria, Carthage and Corinth quieted (the quiet before the double-dip storm, as the debt problem is actually far worse today).

This ancient Roman panic quieted, but marked the beginning of the end of the Roman empire. It was downhill for the empire after this panic. Nero was clearly under added stress. The current debt crisis of the global economy has not yet quieted. In fact, it is growing louder daily as the reality of the coming double dip is now sinking in. The debt crisis during the height of the Roman Empire is interesting, but where government policy involvement and debt cancellation gets particularly relevant to the rumored August Surprise is even further back in human history than Roman ruins.

Back to Clif Droke

After surveying depressions over a period of more than three thousand years, Lightner went on to make the following provocative statement: “What we lose in depressions could easily pay our national debt.” While it’s somewhat debatable that this statement would apply to the present time, there’s no denying there is at least a ring of truth to it, especially as the tally of losses from the 2008 credit crisis continues to mount.

In “The History of Business Depressions,” Lightner also made the following observation: “Panics do not necessarily bring general depression. We have had many panics that have passed away without affecting more than the financial centers, and these only temporarily. Some of them never got on the first page of the newspapers. As to whether or not a panic will lead to depression depends upon whether its force has broken the credit structure. If the prosperity phase of the cycle has not run its course, and inflation has not reached its height, a panic will have little effect on business in general. If, however, it happens at a time when inflation and speculation have run rampant, and the elasticity of credit has reached its limit, then depression will result because there are no resources at hand to stem the evil effects.”

This is one of the important principles Lightner discusses in his book, namely that of inflation running its course. We can see this principle in action in the many stock market panics of the period between the 1980s and before the credit crisis of 2008. Panics in the stock market during that 20-year period were typically followed by a quick recovery because the stock price inflationary trend of those years hadn’t run its course. The same could also be said for the temporary setbacks (mostly regional in nature) for real estate prices in those years. But when inflation has completed its course and the long-term cycles are no longer supportive of the uptrend, a panic will often be followed by a business recession and prices will be quite slow in recovering.

This brings us to an observation about the price of gold. Gold was liquidated along with every other financial asset imaginable during the worst part of the 2008 financial crisis.

Yet gold alone recovered in quick fashion and ended up making a new all-time high while other stock and commodity prices remained well below their previous highs.

Gold passed the 2008 crisis test with flying colors while other asset categories still haven’t fully recovered. Hence gold has taken the torch away from investments that dominated the last century and we see that the inflationary trend in the gold price hasn’t run its course yet.

Lightner also made some interesting statements about the demand for money in times of economic difficulties that has a particular bearing on the gold price. The demand for gold in recent years is a reflection of the fear and uncertainty among investors, which is a spillover effect of the credit crisis.

It’s also based on a latent belief that gold is money.

In his book, Lightner observed that “The use of money as a store of value diminishes its efficiency for the purpose for which it was intended. It therefore increases the demand for money since an inefficient instrument does less work.”

Gold as a store of value, as opposed to its industrial applications, is the main driving force for the yellow metal and will likely continue to be so for some years to come.”

BuyGoldSilver.org say

Do not be thinking about whether the “price” will go up or down in terms of the “paper numbers” you are currently used to, just be focused on the fact that if you had 100 Oz of gold before, you will still have 100 Oz of gold afterwards, redeemable into whatever form of paper or real goods you need at that point.

“Paper value” in general will not make it through. – history is littered with (now) useless paper money or investments, bonds, stocks etc, devalued and worthless, not ONCE throughout the entire span of human  history has this happened to gold.

That’s the kind of history lesson you need to be paying attention to now.

Start buying gold now – IT IS NOT YET TOO LATE!

- Start buying Gold now and receive a free Gram of Gold

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