Scalpuman
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 |  Subject: MoneyWeek's Wealth Assault #4 : The "Great Wealth Destroyer"  Mon Aug 10, 2009 5:37 pm | |
| Wealth Assault #4
The ‘Great Wealth Destroyer’ In February the Bank of England and HM Treasury agreed to a £150 billion injection of new money into the economy.All this is designed to kick start the economy and to get people spending. But Weimar Germany – in the 1920’s - is a stark example of where this tactic can lead to. During WWI, Germany began printing loads of money that had no backing of economic resources. The plan was simply to pay back the loans with the spoils of war: annexations of industrial areas and tributes from the defeated. As you know, things didn’t quite go to plan... When Germany surrendered, the costs were staggering: vast national debt, forced Versailles reparations (in gold), loss of major industrial areas to France, a stunted domestic market, war veterans’ disabilities and more. And there was more... The new democratic socialist government came to power by promising the German people higher wages, better healthcare, shorter work week, better education and a new welfare system. And where would the money come from for all this? Answer: The printing presses!A bull market in bank notes By late 1923, 300 paper mills were working 24/7 and 150 printing companies had 2000 presses going day and night turning out currency. In 1914, one US dollar could be bought with about four marks.By 1923, it was ONE TRILLION marks to the dollar.Most Germans were completely unprepared. People raced to spend their wheelbarrow-loads of wages before prices went up... Shoes were traded for shirts, crockery for cornflour... Households started frantically converting savings into real goods. Pianos, wrote the British historian Adam Fergusson, were bought even by unmusical families. You could order a cup of coffee at a cafe for 10,000 marks, and the bill would be 12,000 when you left. Remember... Five years earlier this was the most advanced nation on the planet.You can understand why many Germans today are nervous as banks and businesses are bailed out with printed money worldwide. They know that – however hard hyperinflation is to imagine now – it can happen with frightening speed. But this couldn’t happen here, today, in Britain... surely? Maybe not hyperinflation. But dismissing the threat of massive inflation in the next 24 months could be one of the worst mistakes you ever make.Read on and I’ll show you why... "There is no subtler, no surer way of
overturning the existing basis of society than
to debauch the currency." -- John Maynard Keynes Here’s the thing... There are very worrying similarities between the massive inflation I believe is about to engulf Britain and 1920’s Germany. There is no Treaty of Versailles and no reparation payments. But in their place, there is a vast expansion of debt – both private and public - over the last three decades. Britons have borrowed far more money than they can ever hope to repay. Much of this debt is tied to residential real estate, but there are also record amounts of credit-card, commercial real estate, and public debt. Now the credit bubble has popped. $50 TRILLION has been wiped from asset values worldwide, according to the Asian Development bank. And governments the world over are trying to re-inflate this bubble – with more debt!See, the Bank of England now has no room to move. Interest rates are at 0.5%. They pretty much can’t get any lower.
Now it’s all about how much money the Bank is prepared to print...
- When the Bank met in May, it dropped a bombshell: it would pump another £50bn into the bond markets. (That’s essentially printing money).
- The UK Treasury is already forecasting annual public deficits at their largest since records began in the 1960s. It will be £1.1trn in the hole within five years. Most analysts fear even these dire predictions are far too conservative. April's government spending shortfall was the highest-ever - four times last year's.
- As such, Britain is now on the verge of the once-unthinkable: losing its top-notch, triple-A credit rating for the first time. Credit ratings agency Standard & Poor's (S&P) has cut its UK outlook from "stable" to "negative", warning there's a one in three chance it will cut Britain's rating.
- And this is hardly just a British problem. In the US, the fast-rising public debt mountain has now reached $11.3trn... climbing by a further $1.85trn in 2009 and $1.4trn in 2010.
Those who think we’re heading for a Japan-style deflationary scenario may beg to differ. But on the evidence so far, it's looking increasingly likely that our policy makers’ desperate and relentless bailouts and buy-ups will lead the other way. As fund manager Peter Schiff says:
“This is pure inflation, Latin American style. This is hyperinflation. This is Zimbabwe. This is the identical monetary policy, this is what the Weimar Republic did and we’re going to have the same result.”
Frankly, you have no
choice in the matter… You see, it is the express wish of the government that we have a return of inflation. It’s what ‘quantitative easing’ is specifically designed to create. They are recapitalising the banks, cutting interest rates, putting spending money into the hands of pension fund managers by buying their bonds, giving £2,000 to consumers to go and buy cars AND helping the same poor consumers buy a house through the HomeBuy scheme. It’s all inflation-stoking and the real question is when, not if, it will take hold. So... What should you be
doing about it
RIGHT NOW? I want to be completely frank with you... At MoneyWeek our primary goal is to inform you of the best places you can invest your capital. Right now, this is an EXTREMELY difficult job!We’re not like mainstream financial media outlets. Unlike fund managers, we’re not obligated to promote certain assets, stocks or sectors. Unlike brokers, we don’t get a commission by railroading you into investment vehicles. We tell it like it is - always. And right now – virtually across the board, we are VERY bearish...
On one side, you have a whole army of bankers, politicians, and economists fighting for a system based on debt and counterfeit money. On the other, there’s a legion of bad loans in investments created by the credit boom.
This crisis is NOT resolved. The current rally has blinded most investors to this fact. We feel there are precious few places to hide from the next stage in the financial crisis. But good investors don’t sit in a state of paralysis during times of market upheaval. | |
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