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The Big Reset

big-reset-cover

Self-made man Willem Middelkoop is a well known personality in the Netherlands. He has been a peak oil and financial Cassandra for several years and is often invited in the media. He ran a successful online gold business before he sold it. He is very active on twitter and as such one of the most interesting news sources in all things finance, politics and many other areas, mostly in English. His latest book, The Big Reset, is an international bestseller and translated in many languages. It is about the inevitability of the collapse of the international financial fiat money system and the dollar in particular. Unsurprisingly, he is a gold bug and expects that metal to play an important role again in the world of finance after the crash.

In principle fiat money can work, but only if strict discipline is being maintained and the amount of fiat money in circulation is correlated to the size of the economy. If a central bank is truly independent and has the task of keeping inflation low, than it could work. The German Bundesbank or the Dutch Nederlandse Bank can be seen as a positive examples. But the problem is, the central banks are rarely independent. There is always the politician who can’t resist putting pressure on the central bank to ‘help him out’ or the public demanding ‘an end to austerity’.

After a general introduction about the history of money, Middelkoop changes to a Q&A format, until the end of the book and poses and answers some 86 questions, of 1-2 pages each. Questions like: ‘what is fiat money?’, ‘what is quantitative easing?’, ‘how much gold does China really have?’, ‘will Special Drawing Rights become the new world currency?’, ‘what will be the role of gold?’, ‘how the gold price is manipulated?’, ‘possible debt cancellation scenarios?’, ‘can we grow out of debt?’, ‘could the renminbi replace the dollar?’, ‘is the Fed really independent?’, etc., etc. A few of the questions from the book will be discussed here.

[amazon.com] – The Big Reset

– What is quantitative easing (QE)?

Essentially money printing originating from the US Fed or ‘expanding the monetary base’. This is accomplished by buying financial assets from commercial banks and private institutions. In this way commercial banks can increase private lending. Additionally the central bank can buy up government debt and fund deficits. Usually the latter is not allowed, so insurers or banks are used as intermediaries, who buy government bonds, which are sold again to the central bank. The result of years of QE:

imf-fulcrum-government-debt

– Hyperinflation

Definition: price rise of 50% per year. It could also be called: ‘death of money’. No money –> economic system disintegrates, general reverting to barter. The classic example was the Weimar Republic in the early twenties. The victorious allies had burdened the country so much that there was no other way to pay for the ‘reparations’ than to print. Historic examples of hyperinflation: Germany (1923), Hungary (1946), China (1949), Yugoslavia (1994) and Zimbabwe (2008).

– How to manipulate official inflation figures?

Change the content of the ‘basket’ used to calculate inflation. Ways to hide high inflation: suppress gold price and don’t publish money creation statistics (US M3 money growth). The government has a vested interest in keeping the official inflation figure low: keep borrowing cost low, as well inflation correction of social benefits and to keep interest rates low, for itself and for its voters.

Manipulated-Monthly-Inflation-1872-Present-10042013-lg[source]
Until 1990 inflation figures were reasonable reliable, after that manipulation began to set in.

– Central banks and inflation

Central banks claim to keep inflation low, but in reality they are the ones creating inflation by printing excess money. [editor: Consider a central bank as a branch of the tax office. By creating new money for governments, central banks inflate and as a consequence the savings of the public decreases in value] Both the Fed and ECB create over one trillion $ per year.

– Central banking

There has always been a strong link between governments and bankers, as governments can impose taxes to pay back the loans from the bankers, or at least the interest, which is enough. The first central bank was founded in Amsterdam in 1609. Most central banks are currently under government control, with two exceptions: the US Fed and to a lesser extent the Belgian central bank. It was the central bank of England (founded 1694) that began with issuing government bonds to finance government deficits and projects, like the creation of a navy.

– The bond bubble

Currently the total government debt amounts to $50 trillion. There is no way this is every going to be paid of and a global debt restructuring will be inevitable.

us-government-debt-gdp-ratio

[editor: the data presented in this graph somewhat contradicts the idea that debt can’t be paid back. After WW2 the situation was worse, but no US debt restructuring or ‘Big Reset’ was necessary at the time]

– Bank of International Settlements (BIS)

This is the central bank of 60 central banks, the US Fed joined in 1994. Founded in 1929/1930 with the purpose of continuing the looting of Weimar-Germany after the hyperinflation phase. The BIS is located in Basel, Switzerland. The BIS is under no democratic control and the meetings are secret.

Federal Reserve

The Federal Reserve System comprises of 12 regional reserve banks. The New York Fed is more important than the other 11 combined. Nobody still really knows who are the Fed share holders, but it is known that it must be Wallstreet banks, not the government.

Bretton Woods

By 1944 the US knew it was going to win the war and wanted to take advantage of that and make the dollar world currency. Many countries had during the war made payments in gold and as a result 2/3 of the world’s gold ended up in the US by the end of the war. Additionally in 1933, Roosevelt had confiscated privately owned gold. All this gold combined could be used to back the dollar as the new world reserve currency.

Editor: Middelkoop does not draw the obvious conclusion that WW2 had been fought by the US as a global power grab and not to ‘liberate Europe’.

During the Bretton Woods conference two competing plans were proposed: 1) the British by mouth of John Maynard Keynes proposed a new supranational currency called the Bancor, not owned by the Americans. 2) Harry Dexter White (editor: a Soviet spy) proposed the dollar as the new international currency to pay for commodities. The US prevailed. From now on trade deficits could be compensated by printing new money. In the end the participating countries agreed because the US promised that the dollar wold be backed by gold. The French were the most vocal protesters and it would be general de Gaulle who would finally call America’s bluff and started to convert their surplus dollars into gold. Other European countries like Germany, Italy and the Netherlands followed and acquired quite substantial amounts of gold. Between 1959 and 1971 the US lost half of its 20,000 tonnes of gold reserves in this way. Finally president Nixon had to admit that the US could not live up to the promise that the dollar was backed by gold and refused further exchanges. Basically the US defaulted against the obligations of Bretton Woods, but nevertheless the dollar kept its position as global reserve currency, despite a period of high inflation during the seventies. Paul Volcker however could bring down inflation from 12 to 1% with excessive high interest rates (20%) in a matter of five years. It was Henry Kissinger who could strengthen the position of the dollar by persuading the Saudi’s to sell their oil exclusively against dollars and to partially reinvest these dollars in US treasuries. In return, the US would protect Saudi-Arabia militarily and help developing its infrastructure. By 1975 all members of OPEC agreed to sell oil in dollars only. Middelkoop also links the US invasions of several Middle Eastern countries to ambitions of their respective leaders to diversify oil income away from the dollar (Iraq, Libya, Syria and Iran). Only Iran has not yet been attacked. Now with the rise of the BRICS a first real challenge to the dollar system has emerged. It looks as if the days of the dollar are numbered.

During Bretton Woods the IMF and IBRD were founded. Through the years these institutions have developed into economic colonizers of third world countries on behalf of a ‘cabal of corporations, banks and the US government’ (John Perkins) as well as active supporters of the dollar as global reserve currency.

Lehman crash

On December 5, 2008, US banks received $1.2 trillion from the Fed. A full audit later exposed that $16 trillion had been reserved for international banks and corporations. No Wallstreet executive had to fave criminal charges. Instead a total of $100 billion in fines were paid.

– Debt

When in the seventies that gold standard was abolished, the road was clear for an unhindered credit spree that lasted until 2008. The credit crisis was caused by falling housing prices as well as large numbers of home owners who could no service their mortgage (‘sub prime loans’).

Editor: it was mainly a US phenomenon. However foreigners were implicated as well, because they had been sold US debt papers, without knowledge of the low quality of these papers.

In 2008 the US had to face the collapse of Ford & GM, as well as Fannie Mae Freddie Mac and the world’s largest insurer AIG. US Finance minister Henry Paulson proposed a rescue operation (TARP). Lehman Brothers was sacrificed. Between 2008-2013 the central banks created $10 trillion world wide. US national debt grew between 2008-2013 with $8 trillion to a total of $17 trillion.

– Is China still financing the US?

Between 2000-2010, the Bank of China invested almost $1 trillion in US treasuries, but seems to have stopped buying since and now concentrates on buying gold and other commodities in the hundreds of billions. Now it is the Fed that is buying the Treasuries (QE). The Fed’s balance sheet now increases with $1 trillion/year.

– What about China’s credit growth?

According to some, China is even more addicted to money printing than the US or Japan. Chinese bank’s balance sheets grew with $14 trillion between 2008-2013. Total Debt/GDP is now 200%. The debt fragility has reached dangerous levels in China as well. Both Japan and China have rapidly aging populations, which could end a period of decades of growth.

– Can the renminbi replace the dollar?

Won’t compete with the dollar before 2020, but could become a co-world reserve currency. China has announced it wants to ‘de-dollarize’ the world.

– Chinese prudence

The Chinese leadership knows very well that the communist party came to power thanks to a financial crisis. The nationalists had to supervise a period of hyper-inflation, which destroyed people’s savings, which led to strong support for the communists. Between 1931-1949 China lost all its gold. This is one of the main reasons why China is buying gold now.

– Currency wars?

Most of the major economies are now actively engaged in debasing their currencies in an attempt to get a competitive advantage. Relative to each other, the value of the major currencies has remained more or less constant, but declined vis-a-vis commodities, like gold.

– Can we grow out of debt?

Meanwhile countries are now the ones running into trouble, like Greece and Portugal. Between 1980-2011 total amount of debt (private and public)/GDP rose from 160% to 321%. This could be achieved because of declining interest rates from 20% to 0% in the same period. And then there is aging. Most countries are ill prepared. Pension reserves per capita in euro: France – 2,300, Germany – 4,850, USA – 42,000, Netherlands – 63,000. According to the Boston Consulting Group the excess debt if $6 trillion in the EU and $11 trillion in the US.

No, we can’t grow out of debt.

– How to get rid of debt?

The problem with debt is, that the larger it becomes, the public starts to lose faith in the value of the currency. Ways out:

  • Default/bankruptcy. The creditor has to write off loans.
  • Inflation/printing money. Current approach of many countries.
  • Increase taxes. Difficult to achieve in a democracy.

Debt default has happened many times in history. Spain is the absolute champion in going broke, with France as good second. Switzerland always paid its debts and Holland went broke once under Napoleon in 1802. Countries that defaulted in recent history are Argentina, Russia, Iceland, Uruguay and Indonesia, but they did rather well afterwards.

– Scenarios

Ron Paul has proposed to simply cancel the $2 trillion of debt owned by the Fed.

– War on gold

Middelkoop states that deregulation is to a large extent responsible for the financial crisis and that the crisis want go away, but will end is a ‘big reset’. What happened in Cyprus recently was an example of a ‘mini big reset’, with massive bail-ins. Many of those in charge of the system would prefer that the collapse would come from outside, so the collapse of the dollar can be blamed on foreigners. According to Middelkoop, the days of the dollar as global reserve currency are numbered, which explains why gold is making a comeback and why in general investors start to prefer commodities, land, real estate, in short anything you can touch. In parallel ever more gold is moving from west to east, which can only be interpreted as a power shift from west to east.

In order to keep the dollar dominant, it was in the interest of the US to try to keep the price of gold low (the “war on gold”) and several methods were applied to accomplish this. When these means however will be exhausted, expect the gold price to explode. Part of that strategy to suppress the value of gold was to confiscate gold in 1934 (Executive Order 6102), which basically forbade the citizens to own gold. But the real war on gold started in the sixties, when the trust in the dollar began to wane. A reaction was the formation of the London Gold Pool, with major western countries as members and strategy, that every time investors would show signs to want to flee into gold, the LGP would intervene and dump gold on the market. The LGP ceased to exist in 1968, because France refused to cooperate any longer, in a general move of the French to distance themselves from the US (good old general the Gaulle in action). The consequence was a meteoric rise of the gold price in a 13 years bull market:

100-Year-History-of-Gold[source]
100 years gold price in $

The IMF played a role in the war on gold as well, when she introduced Special Drawing Rights in 1963. The IMF itself had gold reserves as well, obtained from member states. A famous example of suppressing the gold price was the sale of British gold against unfavorable conditions. The explanation was not that Gordon Brown was acting foolish, but that he acted on request of the US. IIn 2003 the central bank of Australia admitted that gold reserves were used to manage the gold price.

Jim Rickards in an article in 2006 (book 2011) explained how derivatives could be used to influence markets in general and the gold market in particular. Others like Eric Sprott (Not Free, Not Fair – the Long-Term Manipulation of the Gold-Price [pdf]) and in 2006 the London Broker Cheuvreux [pdf] made the same case.

– The Big Reset

1944/Bretton Woods was the last Big Financial Reset, when the gold-based dollar became the world’s reserve currency, taking over the Pound Stirling, that had been the world’s reserve currency up to the beginning of the second world war. According to Middelkoop, the world will need to find a new anchor before 2020, to avoid total collapse. The reason why a big reset is inevitable is a) the demise of the dollar as world reserve currency and b) the endless growth of debt that will never be paid off. In 2013 the Chinese openly began to talk about ‘de-Americanization’ of the world and the replacement of the dollar of a new international reserve currency. When the big reset will come, if it will come in a controlled way, it will come overnight, unannounced, like the mini big reset, conducted in Cyprus recently. Premature announcements will lead to a crash of the system. The best way to protect yourself through the coming transition will be the ownership of gold, when the people with the paper assets will be shaven. Bank accounts can and will be decimated, but not the coins in an old sock. Both the Chinese and Russians are aggressively buying gold and China no longer buys US treasuries. 1944 was Bretton Woods 1. 1971 could be seen as Bretton Woods 2 (US abandoning the gold standard). Now we can expect Bretton Woods 3 fairly soon. There are signs that the US and IMF are preparing for a retreat of the dollar and replacement by a multi-currency reserve system. There will likely be no return to a full gold standard, but gold will become more important. After the beginning of the credit crisis, the United Nations called for a Special Drawing Rights based system [pdf]

goldprice-incrementum[source]
Yearly average gold price

Jim Rickards believes in the introduction of a ‘gold dollar’ with a value ten times of the old dollar.

The West tries to discourage its citizens to buy gold, China does the opposite. The West tries to defend the position of the dollar, China speculates on a golden future, so to speak, and tries to attain at least 6,000 tonnes of gold, to become on par with the US and EU. China is now the largest gold producer in the world:

Top_5_Gold_Producers-timeline

All Chinese produced gold is added to the national reserves. Most gold however in 2013 China got from London vaults. The US still has 74% of the worlds gold reserves in its vaults, much it is keeping for other countries. In October 2013 China announced its plans to ‘de-Americanize the world’ [article]. China does not want to see a rapid implosion of the dollar, because that would null and void its own vast dollar reserves. China prefers a quiet unloading of as much dollars as possible (against assets like gold), without compromising the financial system too much.

The Russians also announced they have enough of the dominant role of the dollar. President Putin called the US ‘parasites‘. Both Russia and China are anticipating, and are working towards, a replacement of the current financial system. To illustrate this, president Medvedev showed a sample coin of a hypothetical new world currency:

Several think that China will not act alone, but in concert with the US and EU. The critical point would be when China has acquired as much gold as the US and EU. James Rickard supports this scenario. He expects the gold price to explode to $2,500-3,000 on the very moment that China has more than 4,000 tonnes and says so. Further increase in gold price is towards $7,000 would be possible in 2015. Other experts like Jim Sinclair hold similar views.

Rickards warns that the US could confiscate the gold reserves it holds of other western countries. The recent behavior of the US (refusal to return German gold) points in that direction.

It is likely that en route towards a new financial system we will several forms of financial repression installed, like low interest rates (inflating your way out of debt), confiscation of pensions, cross border capital controls, taxes for the rich, bail-ins, bank holidays, etc.

You can follow Willem Middelkoop on his english language blog or twitter.

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