USA

The rise of the US as a world power was accomplished militarily and on credit (Graph 5). Like the shown examples in Part I with Rome, France and England, the end of the US will be in a similar fashion.

A main difference is left: as the other powers openly declared conquered land as colonies and installed a governor, the US government and its powers behind could not, because it is against the beliefs of the American people and American values. Many Europeans left their countries for America not only for economic reasons, but also political ones. They didn’t want to serve in armies and just being the cannonfudder for silly colonial and feudal wars. Therefore the US had to install puppet regimes and operate with undercover actions. Putsches were the main tool in Latin America, Middle East, Africa and Asia. Another tool was and is economic strangulation via overextended credits for useless economic projects and then a hard regime via IMF. In Europe important was and is secret service information to blackmail politicians (to Gerhard Schroeder and Joschka Fischer Bill Clinton supposed to have offered dirty information about Helmut Kohl for their return to join the Jugoslaw war (which was against the German constitution) and also bomb attacks before elections to drive voters away from socialist orientated parties, because leftist groups were blamed for it were used, (Bologna bombing) but even murder was and is not uncommon (Aldo Moro).

In newest history, we see US financed orange revolutions in Eastern Europe and central Asian countries to bring US friendly groups to power. Whether one agrees to that analysis of power or not, is not that important, because it does not change the picture of the debt situation. But the reader probably feels we are not looking at history anymore, but we are online in real time. But let me quote the official view of the US government (Interview with Donald Rumsfeld to Al Jazeery on Feb. 27 2003, whether the US is an imperial power):

“Well I’m sure, that some people would say that, but it can’t be true because we are not a colonial power. We’ve never been a colonial power. We don’t take our force and go around the world and try to take other people’s resources, their oil. That’s just not what the United States does. We never have and never will. That’s not how democracies behave. That’s how an empire-building Soviet Union behaved but that’s not how the United States behaves.”

But back to financial history:

Already the US civil war after 1860 was financed via the printing press and did let the dollar drop massively, as the gold standard was the measurement of the time.

With the start of the US central bank in 1913, the financing of WWI, New Deal and WWII became easy. Federal government debt rose from 3% of GNP in 1913 to 130% of GNP. With that debt, the federal tax for US citizens started during WWI, after more than hundred years without and after a revolution against England and his King George V (always these Georges), who wanted more tax from the American colonies to finance his colonial wars. Today’s quote with 65% debt/GNP seems to be fine, but it is rapidly rising. The main danger comes from private debt, which is now above 300% of GNP, total above 350% or 47’000 $US in figures.

How did it come that the US$ did not break in after WWII, at least against gold, like the British pound did? The main reason was that most countries were completely destroyed economically as well as their currencies. Another reason was the start of Bretton Woods.

Bretton Woods.

In 1944, still during the war, the currency system of Bretton Woods started. The main pillar was the US-obligation, to accept dollars from foreign central banks and pay them with gold at 35$ per ounce. As there were hardly sound currencies left, there was a big hunger for dollars, as it was a widely preferred medium for payments. Central banks kept it as reserve and did not exchange it. For the first time in history, a currency became reserve and covered the currency of another country. Until then it had always been gold. The Fed could print and the dollar did not go down, but only until August 15, 1971 when Nixon stopped the delivery of gold against dollars and just after De Gaulle exchanged French dollars against gold. From here on the US$ tanked for eight years, from Swiss Francs 4.3 per $ to 1.45 in 1979 (see chart above). This time was worldwide inflation time, Kondratieff summer. As the credit leverage was still low, Volcker could stop the fall with tight monetary policy. So it was not Volcker who stopped it, the circumstances allowed it. A new fall of the US$ today cannot be stopped with tight monetary policy, as the economy could not stand high interest rates and would collapse including the banking system.

A new cycle started in 1982, Kondratieff autumn, disinflation and flying financial markets. The world was fine again, everybody made money. But the credit mountains started to pile up. The dollar kept its status as a reserve currency despite the collapse of Bretton Woods. Whether this was out of free will or US pressure is not important -- it's a fact. This enabled the US economy to have a trade deficit (Graph 7) which would not have been possible otherwise. Total accumulated net flows abroad come today up to 6000 bio $US (Graph 8), but total holdings of financial $ assets in foreign hands are around 9000 bio $US. That’s a big long position and that can be slaughtered. Due to this high debt relative to foreigners, the balance of capital revenues also starts to become negative (Graph 9). The spike three years ago was Dick Cheney’s action to call US corporate profits held abroad home. From a technical point of view, the dollar forms a thirty-year head and shoulder top against the British Pound (Graph10). The technicals against the Swiss Franc (Graph 6) show a falling wedge, usually bullish, but when they turn the other way, the drop is fast. Whether these technicals come true or not, it does not change the massive supply of 3 bio $US per business day.

There is also a very interesting cycle for currency devaluation: of ca. 72 years or 36 respectively:

1720: South Sea Bubble, strong devaluation of the French currency (graph 1, part I))

1790: French Revolution and destruction of the French currency

1862: US-civil war, printing press financing

1934: devaluation of the US$ versus gold from 22.5 to 35$

1971: end of Bretton Woods

2007: implosion of the US$ or other currencies?

(Thanks for this cycle to Claude Weiss, Zurich Switzerland and Ray Merriman, Michigan USA, history before 1934 by the author)

The military might brought Bretton Woods. The market forces destroyed it. It will also be these forces – and they are already heavily at work - that will bring back silver and gold as a store of value as it has been for thousands of years. The period from 1944 (Bretton Woods) to 1971 to now are only an episode in financial history.

I will discuss the situation of other economies in coming articles. Is their situation so much better? But let me first turn to the gold and silver on a fundamental and technical view and the opportunities to invest in those.

The situation of the silver and gold market.

Both metals are in a bull-marke,t which started in 2001 for silver and 1999 or 2001 for gold after a bear market since 1980. And what was before? (Graph11) shows you the price of gold since 1800 in US$ with an Elliott wave labeling. According to that labeling, this bull market is a fifth wave and the next one too. Fifth waves in tangibles are driven by fear, the strongest human emotion and therefore the biggest price moves take part in these parts of the bull market. Around 150,000 tonnes of gold have ever been mind by mankind and maybe 90% or 2,500 bio US$ are still around, but not liquid as lots of it disappeared in jewellery. Central banks say they hold 32,000 tonnes, but reliable research by many writers on this page come only to around half of it. Relative to a total world debt of at least 120,000 bio $US, gold is scarce and confirms the fifth wave.

Goldmines are scarce too as the capitalisation is only about 150 bio US$, relative to world stock markets of around 25,000 bio $US. Mines or metal? (Chart 12) shows the gold mining index HUI divided by silver. Mines have been stronger than silver, but are due for a corrective move against silver. Is gold cheap? Graph 13 shows the Dow industrial against gold since 1792. In 1869, at the top of the gold bull market and the end of the US Civil War, 0.17 ounces bought on Dow Jones. If the Dow Jones would drop to 5000, it would need 29,000 ounces to achieve the same ratio. Can the crisis become that heavy? Graph 14 shows Zurich real estate in gold in 1900 one ounce bought 2.9 square meters of real estate, now around 0.15. Zurichs, sell your house, buy gold and you will get at least 30 of them!! Graph 15 shows gold in real terms measured against the Swiss CPI (it's probably less cheated than the US CPI).

Yes, gold is cheap. What about silver?

The price behaviour of silver is very different to the one of gold. (Graph 16) After the Civil War, the price fell with an interruption of WWI until 1932. In 1932 the bull market started and it lasted until 1980 when it 250 folded, from 0.2$ an ounce to 50$. That was the first leg and in 2003 silver started the second leg up. Why did silver behave so differently?

In 1823, after the Napoleonic wars, England reorganized its currency system. Silver was skipped as a monetary metal. In 1873 the US did the same. Whether this was power strategy of the British empire, because England controlled a major source of gold from South Africa, but not silver, is open, but the suspicion stays. The Latin Coin Union (Italy, France, Belgium, Greece and Switzerland), founded in 1865, started to drop silver as money in 1893. In 1926 the union was given up. In 1925, Mexico founded the central Banc Banco de Mexico with the monopoly to issue bank notes and silver disappeared after more than 300 years as money. But also China, where silver was used as money, ran into major difficulties. As there was no more monetary demand, the price fell and became an industrial commodity. Over the decades, the stock fell to almost zero. All mined silver is around 45 bio ounces (according to David Zurbuchen. (www.silverinure.com), but only 300 – 500 Mio are left with a market cap of less than 10 bio $. In 1900, 8 bio ounces were around with a market cap of 12 Bio$. (www.butlerresearch.com) But this market cap alone (without gold) covered one third of all US private debt !! To get the same coverage, it would need 4000 times more silver or a 4000 times higher price. (35,000 bio$ private debt in the US). So the gold/silver ratio does not show the scarcity of silver. How cheap is silver? Look at these two charts: (Graph17) shows Zurich real estate (leveraged with 60 bio $US) in terms of silver. It got 60 times cheaper. You sell your house and go into silver, you will get at least (without overshoot) 60 houses. (Graph 18) shows silver in real Swiss Francs (probably less cheated CPI than the US one): the purchasing power lost at extreme up to 12 times its value in 1850!

Silver is cheap like dirt. Never in history was a relationship of credit money to physical silver so extreme as today -- e.g. the smallest possible supply to the biggest potential demand.

--------------------------------------

I wish to express my appreciation for the political insights of William Engdahl, author of the book ‘A Century of War: Anglo-American Oil Politics and the New World Order,’ where he describes all the power around oil from its beginning. The work is essential to understand the current time. The economic research was done by me. See also www.engdahl.oilgeopolitics.net

© 2007 Rolf Nef
Manager, Tell Gold & Silver Funds

Rolf Nef is an independent asset manger in Zurich, Switzerland. Graduated from university of Zurich in economics, he has more than 25 years of experience in financial markets. He manages the “Tell Gold & Silber Fonds, a regulated hedge-fund according to Liechtenstein law.” Due to the current extreme situation of the silver market, the fund is invested 60% with long-life silver options of European banks (no Comex) and 38% physical gold, the US-dollar sold forward against Swiss Francs. He also manages private clients assets, where the main target is to survive and profit from the coming economic and financial crisis.