An interesting articleThe G-20's Secret Debt Solution
by Larry Edelson
Dear Tom,
If you think thisweekend's G-20 meetings in Washington are only about designingshort-term fixes to the financial system and regulatory reforms forbanks, hedge funds, brokers, mortgage companies and investment banks... think again.
Behind the scenes, afar more fundamental fix is being discussed — the possible revaluationof gold and the birth of an entirely new monetary system.
I've been studyingthis issue in great depth, all my life. And given the speed at whichthe financial crisis is unfolding, I would be very surprised if whatI'm about to tell you now is not on the G-20 table this weekend.
Furthermore, Ibelieve the end result will make my $2,270 price target for gold lookconservative, to say the least. You'll see why in a minute.
First, the G-20's motive for a new monetary system: It's driven by and based upon this very simple proposition ...
"If we can'tprint money fast enough to fend off another deflationary GreatDepression, then let's change the value of the money."
I call it ...
"The G-20's Secret Debt Solution"
It would be astrategy designed to ease the burden of ALL debts — by simultaneouslydevaluing ALL currencies ... and re-inflating ALL asset prices.
That's what central banks and governments around the world are going to start talking about this weekend — a new financial order that includes new monetary units that helps to wipe clean the world's debt ledgers.
It won't be an easydeal to broker, since the U.S. is the world's largest debtor. Butremember: Debts are now going bad all over the world. So everyone wouldbenefit.
Fed Chairman BenBernanke ... Treasury Secretary Paulson ... President Bush ...President-elect Obama ... former Fed Chairman Paul Volcker ... WarrenBuffett ... and central bankers and politicians all over the worldagree a new monetary system is needed.
So they'll start hashing out the details to get the new financial architecture deployed as quickly as possible.
If you think I'm crazy or propagating some kind of conspiracy theory, then consider the historical precedent ...
To end theGreat Depression in 1933 Franklin Roosevelt devalued the dollar viaExecutive Order #6102, confiscating gold and raising its price 69.3%,effectively kick starting asset reflation.
Only this time, itwon't be just the U.S. that devalues its currency. The world is toointerconnected. Instead, the world's leading countries will propose asimultaneous and universal currency devaluation.
This time, they will NOT confiscate gold. There would be riots all over the globe if they even mentioned the "C" word.
But they don't have to confiscate gold. Here's one scenario ...
They cease all goldsales and instead, raise the current official central bank price ofgold from its booked value of $42.22 an ounce — to a price thatmonetizes a large enough portion of the world's outstanding debts.
That way, just like in 1933, the debts become a fraction of re-inflated asset prices (led higher by the gold price).
And this time, instead of staying with the dollar as a reserve currency, the G-20 issues three new monetary units of exchange, each with equal reserve status.
The three currencieswill essentially be a new dollar, new euro, and a new pan-Asiancurrency. (The Chinese yuan may survive as a fourth currency, but itwill be linked to a basket of the three new currencies.)
The new fiatmonetary units would be worth less than the old ones. For instance, itcould take 10 new units of money to buy 1 old dollar or euro.
New names would begiven to the new currencies to help rid the world of the ghost of asystem that failed. Additional regulations and programs would bedesigned and implemented to ease the transition to a new monetarysystem.
The InternationalMonetary Fund (IMF) would implement the new financial system inconjunction with central banks and governments around the world.
Keep in mindthat the IMF is already set up to handle the transition, and has hadcontingency plans allowing for it since the institution was formed in1944.
Included in the design and transition to a new monetary system ...
A. A new fixed-rate currency regime.Immediately upon upping the price of gold and introducing the newcurrencies, a new fixed exchange rate system would be re-introduced. The floating exchange rate system would be tossed into the dust bin along with the old currencies.
This would kill any speculation about further devaluations in the currency markets, and drastically reduce market volatility.
B. To sell the program to savers and protect them from the currency devaluation, compensatory measures would be enacted. Forinstance, a one-time windfall tax-free deposit could be issued bygovernments directly to citizens' accounts, or, to employer-sponsoredpensions, to IRAs, or Social Security accounts.
Income taxes maysubsequently be raised to pay for the give-away, or a nominal globaltype of sales tax could be enacted to help pay for the new system andthe compensatory measures.
C. Additional programs would be designed to protect lenders and creditors. Lendersstand a much higher chance of getting paid off under the new monetarysystem — but with a currency whose purchasing power would now be a fraction of what it was when the loans were originated.
So programs wouldhave to be designed to help lenders offset the inflationary costs oftheir devalued loans, probably via the tax code.
Naturally, all thisis a bit more complicated than I've spelled out above. But that givesyou a big-picture outline of what the plan could look like. And I thinkmajor changes like these are going to be set in motion at thisweekend's G-20 meetings in Washington.
Would they work?
Yes. They would helpavoid a repeat of the deflationary Great Depression. But don't expecteven a new monetary system to put the U.S. or the global economy backon track toward the high rates of real growth that we've seen over thelast several years. That's simply not going to happen. Not for a while.
Instead, I'm talkingabout a massive asset price reflation, negative real economic growth inthe U.S. and Europe — but continued real GDP gains in Asia.
The Big Question: What gold price would be legislated to reflate the U.S. and global economy?
I can't tell you what gold price the G-20 would ultimately agree to. But here's what they will be looking at ...
- To monetize 100% of the outstanding public and private sector debt in the U.S., the official government price of gold would have to be raised to about $53,000 per ounce.
- To monetize 50%, the price of gold would have to be raised to around $26,500 an ounce.
- To monetize 20% would require a gold price a hair over $10,600 an ounce.
- To monetize just 10%, gold would have to be priced just over $5,300 an ounce.
Those figures arejust based on the U.S. debt structure and do not factor in global debtsgone bad. But since the U.S. is the world's largest debtor and theepicenter of the crisis, the G-20 will likely base their final decision mostly on the U.S. debt structure.
So how much debt doI think would be monetized via an executive order that raises theofficial price of gold? What kind of currency devaluation would Iexpect as a result?
I would not be surprised to see the G-20 monetize at least 20% of the U.S. debt markets. THAT MEANS ...
- Gold would be priced at over $10,000 an ounce.
- Currencies would be devalued by a factor of at least 12 to 1, meaning it would take 12 new dollars or euros to equal 1 old dollar or euro.
The return of the Gold Standard?
"But Larry," youask, "how could this be accomplished when we no longer have a goldstandard? Further, are you advocating a gold standard?"
My answers:
First, you don't need a gold standard to accomplish a devaluation of currencies and revaluation of the monetary system.
By offering to payover $10,000 an ounce for gold, central banks can effectivelyaccomplish the same end goal — monetizing and reducing the burden ofdebts, via inflating asset prices in fiat money terms.
Naturally, hoards ofgold investors will cash in their gold. The central banks will pile itup. At the same time, other hoards of investors will not selltheir gold, even at $10,000 an ounce. But the actual movement of thegold will not matter. It is the psychological impact and thedevaluation of paper currencies that matters.
Second, I do NOTadvocate a fully convertible gold standard. Never have. There isn'tenough gold in the world to make currencies convertible into gold. Itwould end up backfiring, restricting the supply of money and credit.
What should you do to prepare for these possibilities?
It's obvious: Make sure you own some core gold, as much as 25% of your investable funds.
Also, as I've noted in past Money and Marketsissues, you will want to own key natural resource stocks, and evenselect blue-chip stocks that will participate in the reflation scheme.
For more details and specific recommendations to follow, be sure to subscribe to my Real Wealth Report.
Best wishes,
Larry
About Money and Markets
For more information and archived issues, visit https://www.moneyandmarkets.com
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weissalong with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson,Michael Larson and Jack Crooks. To avoid conflicts of interest, WeissResearch and its staff do not hold positions in companies recommendedin MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but notguaranteed. Performance returns cited are derived from our bestestimates but must be considered hypothetical in as much as we do nottrack the actual prices investors pay or receive. Regular contributorsand staff include Kristen Adams, Andrea Baumwald, John Burke, AmberDakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy,Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers!Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Marketsis a free daily investment newsletter from Martin D. Weiss and WeissResearch analysts offering the latest investing news and financialinsights for the stock market, including tips and advice on investingin gold, energy and oil. Dr. Weiss is a leader in the fields ofinvesting, interest rates, financial safety and economic forecasting.To view archives or subscribe, visit https://www.moneyandmarkets.com.
From time to time, Money and Marketsmay have information from select third-party advertisers known as"external sponsorships." We cannot guarantee the accuracy of these ads.In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
View our Privacy Policy.
Would you like to unsubscribe from our mailing list?
To make sure you don't miss our urgent updates, add Weiss Research to your address book. Just follow these simple steps.
