By MoneyMorning.com.au
“The Frankfurter Allgemeine Sonntagzeitung (FAS) reported that Bundesbank reserves – including foreign currency and gold – would be used to increase Germany’s contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion euros ($20 billion).” – Reuters
On the subject of gold, this time next week the Gold Symposium will have just kicked off.
If you haven’t booked your seat yet, and you can make it to Sydney’s Luna Park for the two-day event, click here for more details.
Your editor is chairing day two of the event. This includes a panel discussion, titled, The Great Currency Debate. Panellists are Eric Sprott, John Embry, Ben Davies and Egon von Greyerz.
You can read the panellists’ biographies and details here.
Back to the report from Frankfurter Allgemeine Sonntagzeitung…
So, the rest of Europe is trying to get their mitts on Germany’s gold eh?
Not so fast. A German government spokesman told Reuters, “Germany’s gold and foreign exchange reserves, which the Bundesbank administers, were not at any point up for discussion at the G20 summit in Cannes.”
If you know anything about how these summits work, the snivelling bureaucrats meet in advance and discuss the subjects to go on the agenda. This is where the bankrupt states say, “So, all that gold you’ve got [sniff], erm, we’ll look after it for you if you like!”
This would have meant transferring gold from the Bundesbank (Germany’s central bank) to the EFSF (Europe’s new bailout fund).
Not a chance, was Germany’s response.
But it’s a tiny and yet important development. Western governments and central banks are getting serious about gold again… and they want to get their hands on it. Why? Because they know gold is money.
And because they know their money printing will devalue any paper assets held by the central banks. So what better way to insure themselves against paper asset devaluation than snaffling some German gold?
Of course, seeing as the European Central Bank (ECB) has full control of the European printing presses, it won’t be too disappointed. If inflation picks up and paper assets are devalued, guess what, it can just print more.
That has plenty – including the Germans – worried…
We’re sure you’ve seen many commentators compare the hyperinflation of 1920s Germany, 18th Century France and even the Roman Empire to the current money-printing frenzy in the U.S. and Europe.
Heck, we’ve made comparison once or twice in these pages.
But it’s an easy comparison. So one of the questions we’ll have for the gold experts at next week’s Gold Symposium is this: “Is hyper-inflation a credible threat?”
Australian Wealth Gameplan editor, Dan Denning pointed out an article posted on contraryinvesting.com. The author (Brett) had been to a presentation by Hugh Hendry, a London-based contrarian hedge fund manager.
According to Brett:
“The widespread belief among the greatest financial minds today that hyperinflation is inevitable greatly disturbs him [Hendry].
“In the Western world, he sees hyperinflation as a political choice – one that requires the will of the populous. (Forget Zimbabwe, he says – that might as well be Timbuktu. It’s not our culture.)”
Remember, this is a second-hand retelling of Hendry’s presentation.
Apparently, Hendry only sees hyperinflation if the world’s major economies descend into a deflationary depression.
The rationale is, with deflation, prices and wages generally fall. Existing money increases its purchasing power. But debts become more expensive to service – because debt levels increase relative to falling wages.
With so much debt held by governments, banks and individuals, the incentive to print money would be irresistible. As governments are sure to do all they can to prevent banks from going bust.
Don’t forget, governments have form when it comes to bank bailouts. Can we really expect that to change?
To us, Hendry’s argument seems fair. But what about the counter argument…
Well, the argument for hyperinflation without depression and deflation is equally fair – that is, governments and central banks will do all they can to try and prevent deflation and depression.
A pre-emptive attack, if you like.
As we see it, the result would be the same.
In some ways the hyperinflation argument is a bit like arguing whether a rag dipped in petrol is more flammable than a rag that has petrol poured over it… light a match to either and see if you get the same result.
For the past three years governments and bankers have done their darnedest to try and prevent another recession – and avoid a depression. Has it worked? Only as far as it has delayed either or both.
Whether it has actually produced an economic benefit is another thing – we don’t believe it has.
But what do we know? We just write about this stuff and try to offer you a few ideas and tips on how to protect yourself when (not if) the worst happens.
Yet as we prepare for the Gold Symposium, more questions spring to mind than we know the answer to. Hopefully we’ll get an answer next Tuesday. Including the question we’ll have for you in tomorrow’s Money Morning…
Cheers.
Kris.
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Totally Standard Hyper-Inflation
Is There Any Upside for Gold Investors?
What a 2,300 Year-Old Coin Reveals About Gold
Gold Investing Far From a Bubble
From the Archives…
Your Retirement Savings – The Day the Government Began to Raid Them
2011-11-04 – Kris Sayce
Fed Up With Inflation…
2011-11-03 – Kris Sayce
All for Gold… But is There Gold For All?
2011-11-02 – Dr. Alex Cowie
Why Australia Needs More Losers
2011-11-01 – Kris Sayce
Qantas – A Grounded Investment?
2011-10-31 – Dan Denning
For editorial enquiries and feedback, email moneymorning@moneymorning.com.au