Two Bad Currency Choices: Stop Printing Money or Keep Printing Money

Tuesday, 20 Nov 2012 08:06 AM

By John Morgan

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Economist and author Detlev Schlichter says governments now have two stark choices: stop printing money and spark economic tumult, or keep printing money and risk total currency collapse.

Both choices are grim, and holding physical gold is the safest course of action, he wrote on his website. Schlichter is the author of the book “Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown” and is a former asset manager.

“My three favorite assets are, in no particular order, gold, gold and gold,” he wrote, noting that the current global economic problems represent a paper money crisis provoked by central banks.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

“Whenever paper money dies, eternal money — gold and silver — stages a comeback,” Schlichter said. He said that throughout history, every experiment with paper money has sooner or later ended in failure, with over-issuance the predominant cause.

As for bonds, they represent the worst asset class of all, especially government bonds, according to Schlichter. “In most cases, it is ridiculously expensive, especially when considering that most of it will never get repaid,” he said of sovereign debt.

The global economic establishment — financial managers, politicians, and central bankers among them — are united in pursuing the same familiar course of easy crisis resolution and growth as usual, Schlichter implies. But he sees a dark outcome lurking.

“With yield for bonds of major bankrupt nations now in the 1 to 2 percent range, if that much, there is, in my view, little point in sitting on a gigantic powder keg and hoping the fuse is long enough,” he wrote.

“When this one blows, the fallout will be substantial.”

Gold might no longer be cheap, but both equities and real estate are even more overvalued, according to Schlichter. And in the event of an inflationary spiral or currency meltdown, he believes it would be better to own gold.

Today, paper money would be preferable to gold only if central banks stop the printing presses, Schlichter said. In 1980, then-Federal Reserve Chairman Paul Volcker did just that. Interest rates shot up, the economy fell into a harsh recession, the dollar revived and gold prices plummeted.

Schlichter believes the chances of that scenario are unlikely today. “The global financial system is considerably more leveraged than it was 32 years ago, and presently much more dependent on never-ending cheap money from the central bank.”

Separately, The National reported that HSBC’s Global Hazard Indicator, which tracks signs of volatility in trading of the U.S. dollar, euro and yen, forecasts big variations in currency prices over the next year.

Analysts told The National the reading signals a shaky ride in the coming year for currency investors as dramas unfold in the United States and the eurozone.

“There’s a great deal of uncertainty and this is reflected in currency markets,” said Giyas Gokkent, chief economist of National Bank of Abu Dhabi.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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