For investors who are both just beginning their foray into gold investment, and for those who have been long time proponents of gold, Sprott Senior Advisor John Embry breaks down the recent history of the U.S., highlighting the pressures that have brought fiat currency to the brink, U.S. debt liabilities to staggering heights, and gold back to the institutional investor’s crosshairs. It’s a must-hear, dispassionate and highly instructional speech for anyone seeking to fully understand the state of the global economy and its implications for gold and silver, and why gold remains a cornerstone of a well-constructed portfolio today.
To quote Voltaire: “Paper money eventually returns to its intrinsic value. Zero.”
The U.S. has provided the world’s reserve currency since Breton Woods. Though we did not lose the implicit gold backing until 1971, the pressure of the 1960s set the stage. As President LBJ tried to fund both his Great Society program and the Cold War era arms race and the Vietnam War, cash was flying out of U.S. coffers. In the process, an ever-greater amount of U.S. cash – gold-backed cash – was ending up in foreign hands. At the time, only central banks could redeem U.S. currency for gold, and they came forward with arms outstretched.
By 1970, the U.S. gold reserves were depleting at an alarming rate, causing Nixon to close off the vaults and unpeg the dollar. Few could imagine the financial engineering that was to follow.
After that came the reigns of Fed Chairmen Paul Volcker and later Alan Greenspan, who began to take enormous liberties with monetary policy, effectively addicting the financial markets to stimulus. Inflation remained muted, thanks in part to emerging China flooding the world with cheap goods, and therefore financial returns were spectacular. It has also corresponded with dramatic market dislocations.
The bond market bottomed in 1981. The stock market bottomed in 1982. The stock market crashed in 1987. The dot com bubble popped in 2001, followed by real estate – and essentially the global economy – in 2007 and 2008. And the central bank’s been there every step of the way, accommodating fresh paper money – monetary heroin — to shore up markets at any sign of trouble.
And what has been the result?
In 1981, when Ronald Reagan was sworn in, federal debt was $960 billion, an amount accumulated over the better part of 200 years.
In 2007 and 2008, federal public debt was $10 trillion, a 10-fold increase in 26 years. This only led to greater stimulus via QE.
Eight years later and we find ourselves saddled with federal funded debt which has doubled again to $19 trillion. And this isn’t the whole picture: Off-balance sheet debt liabilities, including Freddie Mac and Fannie Mae, at an estimated $5 to $6 trillion; unfunded liabilities for Medicare, Medicaid, and social security, estimated between $60 trillion and $150 trillion; plus other liabilities, equals a range of about $85 trillion to $175 trillion.
Factor in that U.S. GDP is a mere $18 trillion, and we can see that our obligations are between 4x and 8x our productive capacity. And how long can this charade continue?
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