Thursday, March 21, 2013

Gold ... Beans ... AK-47 ...

A former flatmate of mine, circa 1989, made Private Frazer from the BBC sitcom Dad’s Army sound like a dreamy optimist. I even dubbed him ‘Frazer’. The end was always nigh – in some direction or other. I recall once discovering that he had packed one of the kitchen cupboards with nothing but cans of baked beans, even though he rarely ate them. When I laughed and asked for an explanation, he said, simply: ‘Inflation.’ At that time, the rate in the UK was around 7%. It peaked at 10% two years later. Frazer’s doom-laden logic behind his stockpiling was that by the sell-by date, the price in the shops would be 7 to 10% higher. ‘Beans are a good investment,’ he insisted, ‘if you buy enough of them.’

Looking back, the crazy fool seems to have been way ahead of his time. What happened last weekend in Cyprus is shocking, albeit not surprising, given both the economic catastrophe that is the Eurozone and the devious, autoocratic nature of the EU. The Cypriot government, backed by the EU and IMF, served notice on private citizens that it intended to raid their bank accounts. This was immediately recognized by the rest of the world as naked theft. They have since backed down, and been rebuffed in a parliamentary vote, but it is too late: the EU’s thought processes have been disclosed. An ominous precedent has been set. The EU can now, by its own admission, ransack people’s savings whenever its debts threaten to overwhelm. No one with funds in any Eurozone bank is now safe (Figure 58.1). State guarantees? Deposit insurance? Such fundamental banking principles are no longer valid.

Figure 58.1: A typical scene in Cyprus earlier today, where cash withdrawals have been limited to €260. When all its banks reopen, there might be a ‘run’ severe enough to bankrupt them and, just maybe, force Cyprus out of the Euro, spread contagion to Greece, Portugal, Italy and Spain, and bring the whole house of EU cards crashing down. Could this be a modern-day David and Goliath?

Copyright © 2013 Ekathimerini

There are British citizens currently resident in Cyprus. These include a significant portion of the Armed Forces, all of whose personnel are advised, purely for practical purposes, to open accounts in local (Cypriot) banks. As they would stand to lose, the UK’s government stated that they would be fully compensated from public funds. In other words, the taxpayer would be forced to shell out as a result of the EU’s act of legalized embezzlement.

Since the storm broke, the Prime Minister, his Deputy and the Opposition leader have remained silent, conspicuously so. Why have they not been consumed by fury and indignation? Perhaps they were waiting to learn whether or not the plan would succeed – that is, without prompting a run on Cypriot banks. Would UK politicians ever consider following suit, if they could pull it off? Bear in mind that its national debt has quadrupled in little more than a decade.

The truth is, the British government is already stealing from its people, on a monumental scale, as I write. It is subtle and indirect, but at the same time far more brutal than the Cyprus proposal. Since 2009, the Bank of England has purchased £375 billion worth of debt – or ‘gilts’ – via quantitative easing (QE), or ‘printing money’. The prudent are, in effect, being forced to rescue the profligate. History has proved that such a strategy always results in rampant inflation, the Weimar Republic (1919-33) being the most infamous example (Figure 58.2). At the height of the between-wars crisis, its paper currency had become so outrageously devalued by inflation that a single ounce of gold could purchase an entire street in Berlin.

Figure 58.2: Germany in 1923. Hyperinflation made bank notes a cheaper source of fuel than firewood. Here, ‘millionaire’ children play with worthless money.

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The government’s QE programme will undoubtedly have a similar effect. The British people are, to quote Tocqueville, ‘sleeping on a volcano’. Runaway inflation is now building momentum in the UK pipeline. When I was a schoolboy, the annual rate reached 25% (1975). This meant that, after just a year, savings and pensions had lost a fifth of their value. To put it another way, a cupboard chock-full of baked beans might have cost £20 one year, £25 the next. You see, old Frazer knew what he was about. By stockpiling for twelve months, he could beat the inflation trap and save a few pounds on the following year’s beans.

It will pay, therefore, to invest in anything that will hedge against inflation. Saving money in a bank deposit account might earn 2%, but high inflation will slash its buying power by a far greater percentage. As paper currencies lose value, owing to increased supply, smart investors will look to something that cannot be made out of thin air at the whim of desperate politicians and central bankers. Precious metals – gold, silver, platinum, palladium etc. – are of finite quantity and arguably the most effective anti-inflation measure (Figure 58.3), even better than beans. Invest now, do not leave a paper trail, and watch their market prices skyrocket during the coming decade, as inflation annihilates savings, and politicians consider confiscating whatever remains.

Figure 58.3: Frazer, if you are reading this, it might not be wise to store bullion in your kitchen cupboards. If you do, and economic and social collapse follow, you might need serious security measures.

Copyright © 2013 Reinder Dijkhuis

Copyright © 2013 Paul Spradbery

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