A Change is Coming - 2013 and Onwards - Part II
In the first part of this article we looked at the sad events that appear unavoidable in 2013 and beyond, despite the best efforts of politicians and monetary officials. We then said events are on the way to bring nations in the developed world the ability to survive these blows.
Oil Self-Sufficiency in the U.S.
The first point of hope pointing that way came from the news that the U.S. is headed to becoming the world's largest oil producer in the world, even ahead of Saudi Arabia. Through the use of a system of "Fracking" (the pumping of water into oil wells to extract remaining reserves) the U.S. will become not only self-sufficient in oil by 2016 but could become a net exporter after 2020.
It current dependence for 20% of its oil needs from imported oil will disappear. The consequential impact on the U.S. Balance of Payments will be dynamic. Strategically and politically the U.S. will look considerably more robust. It remains to be seen whether it will save the dollar or its buying power but it will give resiliency to the U.S. economy it sorely needs now.
Considerably lower oil prices -which we imagine will follow, but not necessarily so-- inside the U.S. will have a dynamic impact on the profitability of the U.S. economy and the underlying state of its economy. We cannot say whether this will be enough to provide enough growth to absorb the massive money supply we currently see threatening 'stagflation' or not. We cannot say that it will arrive in time to do so either. We are too far away from these events to paint an accurate picture of their impact. But the change will remove the danger of a collapse of the U.S. economy and the dollar, provided politicians have not caused it already.
Oil Self-Sufficiency in the Eurozone
The news that the Eurozone may become self-sufficient in oil as well is very new news as well. Yes, "Fracking" could do the job in the old Eurozone oilfields but better still, it appears that Albania has as much oil as Kuwait and that it is light crude oil. This is favored by a Europe with a rising dependency on Russia for gas and oil that makes it uncomfortable. Being able to access Albanian oil (still 5 years plus away) will lower dependency on Russia and on the Arab suppliers of oil to those nations. Not only that, but the Eurozone's balance of payments will look far healthier and provide the same buffers that U.S. oil self-sufficiency will do.
The protection against outside economic shocks that such oil independence will give the Eurozone might eventually save the euro's bacon.
Loss of the "Measure of Value"
The events now taking place in the monetary system and the financial markets and those that will happen in the future will not be conducive to a sound dollar even with oil self-sufficiency. Right now the dollar and the rest of the world's currencies have lost a considerable portion of their ability to measure true value. This has been pointed out by much respected monetary leaders in globally respected institutions over the past few years. We cannot see this changing.
For the monetary system to survive the shocks that lie ahead, in the relatively near future (bear in mind that medium term has not been reduced to five years and long-term to ten years) a great deal need to be done to reinforce it, to withstand the shocks that lie in wait for it and for us. In its present form, the unbacked paper currency system, entirely dependent on the confidence that governments can garner, looks far too vulnerable to even stem the further decline in confidence in currencies.
Worst of all, that loss of confidence is being seen inside the banking system itself. It's there that it needs to be combated first. The sight of banks unwilling to lend to each other in the last couple of years and their placing liquidity given to them to resuscitate lending in the economy back with their central banks highlighted those dangers. Presently attempts at modifying the system to face these threats is moving at such a slow pace that they will be too late.
Bear in mind that the state of the global banking system has been shown to be the top priority of both government and central banks with measures taken to date designed to rescue them and not the consumer. We expect this to remain the case in the future!
Monetary System Adjustments Accelerated
But at the start of this article, we pointed out that any view of the future must be pragmatic and face current realities. The monetary system will not be adjusted until present events demand it. Then the sight of scrambling monetary officials will be on the news daily as they accelerate adjustments to stave off collapses. As it is, the chances of a financial accident on both sides of the Atlantic have increased exponentially. When push comes to shove, the plans already in the works will appear out of the blue. This we believe will include those on gold taking it to a level I asset on bank balance sheets.
One of the prime adjustments will be the movement of gold to a pivotal position in the system, not being directly used in line with its market value, but in the background, much like a guarantee is used. To use it at its market value is to undervalue its capabilities in a monetary role. It's quite correct to reject the idea that gold will be confiscated to expand the money supply. Central Banks need no assistance in this. They already do it without reference to gold. Gold has considerably more value than paper currencies have in another way.
Provider of Confidence
Gold will have to act as a counter to currencies rising in value as they fall. It must be harnessed to provide liquidity at reasonable rates as was the case when involved in the gold/currency swaps undertaken by that central bank of central banks, the Bank of International Settlements three years ago and thereafter in a less discernible role.
Its prime function will be to act as defense, as back-up to paper currencies. Its role will be to provide confidence in currencies when it is waning visibly. And we're not far from that happening on a broad front.
No Gold Standard or Money Supply Expander
We cannot be too precise on this role or when it will take place. What we can say is that there is little prospect of a resurrection of a 'Gold Standard' with gold at a fixed price. Gold will never see a fixed price against currencies again. Gold will 'float' just as currencies do today. It is in that floating format that as currencies decline, it rises. But it is far too valuable to be more than a reference point to currencies. Its confidence-raising abilities demand that it only be used as a last resort by any country. Such use would be an act of desperation. As a past President of the Banque de France, M. Noyer put it, it would be like selling the family jewels. It will be in this role that it will be used to hold the global monetary system together more effectively than any unbacked currency can do now or in the future as the globe goes through the changes in the balance of power and wealth from next year onwards.
It is precisely because of this that it is too valuable to leave in the hands of its private citizens. We feel that it is only a matter of time before one or more countries confiscate it and place it under official control. Once one country does this others will follow. Once a developed world nation confiscates citizen's gold, the scramble to confiscate citizen's gold will accelerate. Unbacked currencies will then need to follow the confiscation road. We believe that preparations have already been made, awaiting only the right conditions for it to be announced over a weekend or at a time when you can do nothing about it.
Queries to admin@Stockbridgemgmt.com