Italy is about to break ranks in Europe. They could easily do the same on Zirp
There’s an excellent piece by Ambrose Evans-Pritchard at the Telegraph website at the moment. It explains how the blame-game between China and the US is being ratcheted up, and most importantly how Politburos are in the same Premier League of can-kicking as Congresses and Parliaments. Basically, the global ‘economy’ is being kept going by funny-money, the banking system by taxpayers, and the Chinese ‘growth’ by subsidies fuelled from the trade surpluses. Leaving aside this Ponzi-meets-grand larceny arrangement, one day very soon there will be no way to stop a ubiquitous driving down of currency values: push will come to shove, then shove will come to punch, then punch will come to gun. What happens between China and Japan now could be Germany and us within two years. Don’t smile: we’re nearer to it than you think. Say ‘Schäuble’ a few times to yourself each day.
Part of the madness is this curious inability to look up from the drop-handlebars that have for some reason been fitted to the world’s econo-fiscal three-square-wheeled bike. We push currency values down/ so that Western consumers can only afford cheap Asian crap/ so the West’s trade-gap just keeps on getting wider and its debt mountain higher/ so the Chinese retaliate by spending more surpluses on more export-price subsidies/ so the trade gap widens again and the debt gets bigger and…..ad nauseam et infinitum.
I wouldn’t hold your collective breath waiting for sanity to prevail. Rather, the process will come to an end because a left-field event or seven forces the maniacs out of office. The best example of this at the minute is unquestionably the Iberia-to-Italy truculence that has taken off bigtime. I’ve been talking to friends and opinion formers over the ten days since I last suggested that Ben Bernanke & the Troikanauts do not rule the world, and cannot keep interest rates at Zirp levels forever. I have to fess up here and say I’m pretty much alone in this view, but anyway here comes another go. Let’s look at how the Italian situation is likely to pan out.
‘Pan’ is the operative word there, because that’s where Italy is descending at an accelerating speed. Equally significant however is that a majority of its political leaders are finally getting through to the People that there is absolutely no point to austerity, and that for pretty much everyone in the long-term, debt forgiveness and/or default is the only practical answer. Yes, I know the damage this is going to do to bondholders and pension providers and banks, but what’s your idea – we just carry on putting monetary infrastructure before people? We continue the race to the currency bottom?
Let’s suppose that Italy won’t play the austerity game any more. Let’s suppose it reneges on its debt, and starts to pull out of the euro just about the same time as some CDU backbench arse-licker starts mouthing off about chucking them out. All confidence in Italian debt disappears overnight….and then the markets adapt. They take the weekend to think about it, and by Tuesday the guys at Goldman are already costing out ways to lend profitably to Italy. But to attract them in, the margins will have to be very attractive indeed…..and with such an epidemic of charred fingers everywhere, the medium is unlikely to be bonds.
Once out of the eurozone, the Italians can ignore what the ECB says about interest rates. The country is broke, and the economy needs seed capital. All they now have to do is make the guarantee of eventual payback stand up.
Not many people know this, but Italy has the fourth largest horde of gold reserves in the world.
Its gold holdings, which account for 66.5% of its foreign reserves, amount to 2,451.8 tonnes of gold. Italy’s holdings, in fact are only a smidgin behind those of France.
Now let’s say the top Italian finance blokes still on the safe side of their office windows decide to go not for the bond markets, but direct to wealth funds and mega-rich investors with an unparalleled deal: a sliding scale of interest – starting at 2.7% – paid monthly depending on size of deposit, with the entire investment being backed by gold held elsewhere in escrow.
I think this would probably have the following immediate effects:
1. Clever product design sells, and greed buys. Within a week, the Italian Treasury would be full to bursting.
2. At least one other European country would follow suit.
3. Italian banks would start lending to business again: at highish rates of interest, but to far more confident borrowers.
4. The value of gold would head for the stratosphere.
5. The US stock markets would drop equally dramatically, and negate anything QE could afford to manipulate.
6. The US Federal Reserve would become actually rather than just technically insolvent.
7. The value of the lira would sky-rocket.
8. The Americans would sell every ingot in Fort Knox to depress gold’s price, and very probably they could apply pressure to other central banks to do the same.
9. With a rising currency and a falling gold price, Italy could keep on buying it, and back more and more investment products.
10. The eurozone would collapse – an event made inevitable when the Germans pull out and start backing their investment range with gold too.
Washington might at this point consider nuking the European continent, but even the Special Relationship would be put under pressure from that one. In turn, the entire global banking system would collapse under the weight of bad debt…except in those countries following the Italian model. America would default. China would be left whistling for its money. Australia would go broke too.
Then and only then – perhaps – would the political, commercial and banking classes be forced to accept that the old system was dead, and the new one wasn’t going to do anyone outside the boot of Italy any good at all. (A hundred other socio-political earthquakes would be in play by then anyway).
Now the most common raspberry blown at this scenario is that Italy’s gold reserves are nowhere near enough to pay for the bailout it needs. But there are two obvious flaws in that thinking:
1. Italy wouldn’t need a bailout, because Italy would default and start again.
2. The Italian gold reserves are worth, at today’s prices, around $102billion. Nobody ever heard of leveraging? Tim Geithner spent most of last year trying to persuade Europe that it could be worth two to three trillion. Like every guarantee in finance, the amount available for guarantee would be exceeded. Nobody would care. And over time, if even only part of my scenario played out, the Italian government could keep on buying more gold.
Nothing is ever quite that straightforward, of course. Pretty early on in this mission, the world – prodded by a large Fed stick – would band together and sequester Italy’s gold reserves. But that wouldn’t hold either if by that stage Spain (and perhaps even India) were doing the same thing. And it is highly likely that, quite early on with gold prices soaring, the Chinese would be attracted to the idea of simply getting richer and richer via its reserves…especially with the Americans selling theirs.
I am only making a general point here, and it’s this: Canute knew he couldn’t reverse the waves, and Bernanke – somewhere behind that anally clipped beard – knows he can’t stop an eventual interest rise somewhere. He’s just praying (like everyone else) that things won’t reach that stage. But they must, and they will.
www.hat4uk.wordpress.com / link to original article
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3/09/2013
John Ward – The Saturday Essay : Why Italy’s Gold Could Change Everything – 9 March 2013
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