The world’s most powerful banker openly admits he doesn’t understand gold prices.
And in nine days, there’s a good chance he’ll need a crash course, as the U.S. dollar dies a dramatic death.
Ben Bernanke told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.” He also chastised fellow central bankers for stocking up on gold and collectively losing $545 billion since 2011.
Central banks own about 18% of all gold ever mined, will add an estimated $15 billion this year, and have expanded reserves by 20% over the last two years. Over the same period, gold prices have slumped about 30%.
Bernanke shouldn’t be so quick to judge his peers…
After all, if our deadbeat elected officials can’t get their act together in a little over a week, he’ll be at the helm as the U.S. dollar drives far greater losses overnight.
The Backbone
The Lehman Brothers collapse imperiled the global economy with a $517 billion debt when it all went down, leading to global recession and a crippling credit crunch.
The $12 trillion of outstanding government debt is 23 times larger.
As bad as things got when a handful of corporations at the heart of the global finance became illiquid, a U.S. debt default will strike a dire blow to every nation and business worldwide.
This is due to a flaw in global finance that was exposed during the credit crisis: Shadow banks and repurchase agreement markets (or repo markets) have grown exceedingly large. When the economy is healthy, they boost liquidity for corporations, banks, and investment firms that want to use collateral to create secured, short-term financing. But when the economy turns, the opposite occurs…
Many of the counterparties of Lehman Brothers discovered the collateral they thought was backing their loans wasn’t available at all. After all, virtually all of it was rehypothecated and used to guarantee other deals.
In turn, the entire market was spooked. Everyone went into triage mode and started ditching exposure to these securities through fire sales. Prices dropped, spurring more selling, and the decline was reinforced.
Then, for a while, these deals dropped off. Once bitten, twice shy.
Now — after just five years — corporations, banks, and financial institutions have forgotten this valuable lesson.
At least $2.8 trillion in Treasuries are being used in these repo or reverse-repo deals right now, according to the Fed. If the U.S. government defaults, that would mean $2.8 trillion in toxic assets would be created overnight.
Trust in what has been the best and most widely accepted collateral would vanish at the same time.
And that’s just what’s slushing around in the markets…
Twice as many U.S.-backed securities are held elsewhere.
Goodbye Reserves
According to the Treasury Department, foreign central banks currently hold $5.5 trillion of U.S.-backed securities as of September 17th.
Not only will international economies tank alongside the U.S. private sector, but foreign governments will suddenly have to write off huge chunks of their forex reserves, too.
China holds $1.2 trillion; Japan is sitting on $1.1 trillion; and another 11 countries hold between $100 billion and $300 billion.
The sole reason these reserves exist is to stabilize national currencies.
We’re about to deliver a one-two punch to all of them by tanking their national economies and destabilizing their money.
Imagine how happy they will be when their countries are in shambles because foreign politicians refuse to pay their bills...
The U.S. dollar is already facing a future where it will cease being the sole global reserve currency. And the euro is widely used today, but the real contender going forward is the yuan.
The rise is all but inevitable. China is projected to surpass the United States as the world’s largest economy within three years. By 2040, the Chinese economy could be three times as large.
And China has been busily promoting its currency worldwide: In June it signed a three-year swap agreement with the Bank of England for $32.6 billion worth of yuan. The European Central Bank may obtain a deal four times larger, according to lobbying group Frankfurt Main Finance.
China and Japan have plans to promote direct exchanges of their currencies and bring an end to trade that exclusively uses U.S. dollars. Similar plans are being formed between China and Russia, along with all five of the BRICS nations.
All of these plans will undoubtedly be fast-tracked if U.S. politicians continue to fail to handle the most basic aspect of their jobs.
However, none of these plans can be implemented in months, let alone years…
Plus divesting from U.S.-based securities into other currency-based holdings would take a long time.
The United Nations and International Monetary Fund have been calling for a universal reserve currency for some time, but one already exists.
A single reserve currency will not be dragged down by default and inflationary pressure from exposure to the U.S. dollar. And central bankers have been buying it up — regardless of its contrived value in a rigged fiat currency.
Ben’s Crash Course
And that brings us back to Ben Bernanke and his impending crash course in gold prices.
Gold prices don’t make sense to him because he has made them irrational.
He’s twisted everyone’s arm with easy money and convinced the world to keep buying into the U.S. economy.
He has removed the profit potential from just about anything that isn’t exclusively purchased with U.S. dollars, which has pulled the rug out from under gold prices and kept it in an irrational market as well.
Defaulting on national debt would give Bernanke an intimate understanding of how gold prices are supposed to work — and have worked throughout history.
The global recession or depression that would result as the U.S. dollar implodes cannot be contained. The Fed had to pull $3 trillion onto its balance sheet and provide $300 billion of capital to financial institutions with a smaller crisis than what we face now.
Erasing trillions of dollars from central bank reserves and the global economy will end the dollar’s reserve currency status and spur massive inflation.
High interest rates would cripple businesses, home mortgages, and car purchases, because no one will want to hold dollars. Food, clothing, and energy prices would spike, making basic necessities less affordable as more people lose their jobs and income.
On top of this, additional U.S. debt would be virtually impossible to finance. The interest paid by the government would skyrocket, assuming the Treasury can even find anyone willing to take the risk again.
Central banks that have been buying up gold as Bernanke increased systemic risk will be vindicated in the end, and this will reestablish the yellow metal as the only true way to protect national currencies and economies from external manipulation.
It should be blatantly clear to Ben how gold prices work: They work on a universal level.
You can skew them in the short term… but in the long term, they are independent from any one fiat currency.
As much as a central banker should know this, I can only hope for our sakes he doesn’t have to learn it in nine days.
