Gold is an alternate currency! That’s it folks; when the value of paper currencies are worth less all the time, then gold becomes a more attractive option. And right now, currencies across the developed world are in fact becoming worth less and less because of their deficit issues and the amount of money that is being printed in order to try to support their economies. This of course is eroding the value of fiat currencies, and now we are seeing gold become a more attractive option, hence the rising prices. I know it sounds simplistic, but just as I tell my clients, there is no need to suffer paralysis by analysis, just view gold as an alternate currency and remember, value of paper currency down, alternate currency up.
Now, as you know, we went through a dramatic housing/banking crisis that has a long cast of characters to blame. To better understand what we are currently facing I believe it’s extremely important to know where we came from.
This housing/banking crisis was in the making much longer than some of the politicos would have you believe, and some of the funniest things that I have read or heard was that this was G.W’s fault and that his “failed policies” over the last eight years and lack of regulation were to blame. That has to be one of the most laughable and ignorant answers you will hear.
The reality is that this housing/banking crisis can be traced all the way back to the days of FDR. In 1938 Fannie Mae was created as a mechanism to make mortgages more available to low-income families but just like with most Federal plans, the politicos were well-intentioned, but constructed fundamentally flawed programs. It was added to the Federal Home Mortgage association, a government agency during The Great Depression in 1938, and was meant to provide liquidity to the US mortgage market under FDR’s NEW DEAL. Then in 1977, under the Carter Administration, they passed yet another well-intentioned piece of legislation known as the (CRA), Community Reinvestment Act of 1977 which was basically done to provide more assistance to individuals in low-and moderate-income neighborhoods. Then in 1999, Fannie Mae came under tremendous pressure from the Clinton administration to expand mortgage loans to the lower income populace in distressed inner city areas designated in the CRA of 1977. Because of the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans.
The reason I refer back to these dates, programs, and pieces of legislation, is because these decisions that were made contributed to the housing crisis. They were noble decisions with the best intentions, but when the government starts pressing the housing industry to alter their risk management decisions by allowing people who shouldn’t qualify for home loans, then this is something that is certainly a major problem in the making.
Today, Fannie Mae and Freddie Mac own or guarantee 53% of the nation’s $10.7 Trillion in residential mortgages, according to a June 10 Federal Reserve report, and considering that the U.S taxpayer owns 80% of Fannie and Freddie, that leaves we taxpayers with serious liabilities. Fannie and Freddie already have drawn $145 Billion from an unlimited line of government credit (can you believe that?) granted to ensure that home buyers can get loans while the private housing-finance industry is caught like a deer in the head lights, not making many loans… and rightfully so (not in these conditions).
To make things worse, the US taxpayers’ exposure to the market is growing, not reducing; last year they bought or guaranteed three-quarters of all U.S. home loans. There are estimates from Barclays Capital and Egan-Jones Ratings Co. that state that the U.S tax payer could face losses anywhere in between $500 Billion to a $1Trillion over the next 10 years. Can you believe that? Let me repeat: $500 Billion to $1 Trillion dollars in losses! Now I know that these numbers, Millions, Billions and Trillions all sound alike and they get thrown out there with such regularity that they can lose their meaning, but they represent an awful lot of dough, folks, and just to put things into perspective, we haven’t spent $1 Trillion in the Iraq and Afghanistan wars together the entire time we’ve been there.
I want to be clear, this is not the only reason for the banking/housing crisis, and there are many more culprits to blame here. The repeal of the Glass Steagall act in 1999 was another monumental moment basically allowing depository institutions such as Bank of America and Citigroup to partake in risky behavior that the Investment banks were supposedly better equipped to handle. You can also go back to Alan Greenspan who left interest rates too low for too long which helped fuel the mortgage markets.
When you combine the three influencing factors of Government interference on basically dictating who is creditworthy or not, depository institutions packaging unregulated risky subprime bonds, and record low interest rates, speculative fervor will occur and bubbles will be created in a capitalist society. Unfortunately these conditions created a massive amount of liquidity for home loans, which meant that the capital was available for new mortgage companies to pop up in just about every corner. With these new mortgage companies appearing everywhere, unscrupulous activities took place and it was like the wild wild west for the mortgage industry. There was virtually no enforced regulation and these guys were advising their applicants to lie about their incomes, net worth, you name it; anything to circumvent the process to get their client in the home, who in many cases should never have received that loan.
Of course, the banks are to blame as well; it’s not as if they were stupid and didn’t know what was going on. But they had their shareholders to answer to and everyone was making record profits, so they were chasing those profits, and as long as interest rates were low, and home prices were rising, then everything was copacetic. Then of course the Investment banks were continuously creating new investment vehicles such as synthetic CDO’s which basically were side bets on the subprime mortgage markets that realistically speaking had no tangible value for helping out the markets other than investors betting on the markets.
The problem is that these CDO’s were valued in the Trillions and they were 20 to 30 times leveraged, and when the prices began to fall, all banks that owned these CDO’s (which was most of them) came crashing down, and as a result Bear Stearns, Lehman, Merrill Lynch, WAPO and others weren’t able to survive the carnage that took place.
It was mainly the confluence of many factors that contributed to the housing/banking crisis, and the IMF estimates that over $4 Trillion was lost during this economic crisis; for this reason there was a historic reaction from governments and central banks across the world. The Chinese poured in over $500 Billion in stimulus spending (and very effectively, I might add); the U.S has earmarked over a $1 Trillion (very ineffectively); Europe over $550 Billion; Japan $160 Billion, and many other governments followed suit.
This doesn’t include the unprecedented actions of the central banks as the Federal Reserve has brought down interest rates to as low as 0% for some banks and they also engaged in a very bold yet risky action called Quantitative Easing, which is essentially the printing of money out of thin air to buy Mortgage Backed Securities (MBS) and Treasury bonds. The reasoning behind this action was to bring down mortgage rates, auto, credit card, and business loans. One of the effects of the banking/housing crisis was that liquidity for the markets had dried up. No one was lending, so the Federal Reserve stepped in and became the lender of last resort. And did they ever!
To be more detailed the Federal Reserve printed over $1.4 Trillion in (MBS) bonds and $300 Billion in Treasury bonds. And now the (ECB) Europeans have recently embarked in Quantitative Easing as well, something that they always vowed not to do, but now the Southern European Economies such as Greece, Spain and Portugal are facing such National Debt problems, the (ECB) now is essentially printing money to fund these irresponsible countries’ spending woes.
So let me ask you folks a question; if governments across the world are racking up tremendous debt, and money is being printed across the globe like there is no tomorrow, what do you think that does to the value of their paper fiat currencies? That’s right, paper currencies are becoming debased, and that is why you are seeing the value of precious metals go higher. Yes, printing and spending money does have inflationary implications, but right now that isn’t the main reason why gold is going higher. Right now, it’s all about paper currencies vs. hard assets and paper currencies are losing and they will continue to lose for the foreseeable future.
Right now, Europe is going through a debt crisis and it’s only a matter of time before the focus shifts to England, Japan and eventually the U.S. Along with the previous countries I’ve mentioned, virtually every other nation in Europe has racked up tremendous debt. The way each of these countries could keep accumulating this debt was by having other investors, governments, and banks, invest in their bonds. If these entities continued buying their bonds (which is essentially a loan) then they could continue with their reckless deficit spending.
One thing that this housing/banking crisis did was to seriously damage each one of these countries abilities to generate tax revenues. So when this happened? Those entities that were funding each of these countries spending binges started to rethink whether or not these countries would be able to repay their debt, and when that began, these bond holders began to sell their bonds, but at a loss. Remember, when there are more sellers than buyers in the bond market, rates go up, when there are more buyers than sellers, rates go down.
Considering that the selling was at panic levels, interest rates soared in these countries, and when interest rates go up, it makes it that much more difficult for these countries to repay their debt, hence the downgrades from the ratings agencies in these countries. The reality is that these countries will most likely never be able to repay their debts, and they will either default at some point in the future or the (ECB) will print more money to support these countries. As a condition from the (ECB) and European Union to help these countries, they have to make very painful cuts in their spending to receive this money, which means wages are going down, people are losing jobs, and pensions are being reduced, which is why you are seeing all these Unions riot, like the images we saw coming from Greece. So you can pretty much bank on Europe going through a protracted downturn for quite some time, and it’s not just these countries that are making cuts, but all of Europe is following suit, so this will weigh on the value of the Euro for quite some time.
Of course, this is causing the value of the EURO to go down, and by default the dollar to go up because after all the Dollar is still the Reserve currency in the world and just as I tell my clients, the Dollar is basically the prettiest house in ghetto, so there is a lot of money flowing back to the States. But this shows you how strong gold is; even though the value of the dollar has been strengthening, the value of gold is strengthening even more. Why? Because it isn’t just gold vs. dollar but more so gold vs. paper currencies, and right now paper currencies are becoming debased, and you can pretty much expect this to happen for quite some time.
Right now the focus is on Europe, but as I stated earlier, it’s only a matter of time before Japan, England and U.S go through their debt crisis. The U.S has a $13 Trillion national debt and is expected to grow by another $10 Trillion over the next 10 years and that is by the W.H’s rosy projections. This is unsustainable, some of the greatest economic minds are warning of a coming U.S debt crisis, and once the bond vigilantes (bond investors) deem U.S treasury bonds too risky to hold, then our rates will soar, and our dollar will free fall. If you think gold is moving high now, you aint seen nothing yet.
I would advise investors to allocate a portion of their reserves into an asset which is highly unlikely to lose value, and that is precious metals, and I urge you to do it soon. You do not want to wait to buy into gold after the focus of our National Debt shifts to us. There are many ways to invest in gold and I believe that the best way is by investing in physical gold and farther down this page is a link that you can click on to learn how to do this. Once again, thank you for taking the time to read what I have to say concerning current economic conditions and some of the measures that you may take to help you achieve financial security.