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Tuesday, 26 June 2012

Ask Not What Germany Can Do For You, Ask How Many Government Workers You Can Fire

Image from Spiegel based on calculations with ING bank 
Well the Euro crisis has ramped up again and set the touch paper to the price of gold and silver, the Spanish have indicated that they will require a further 547 billion Euros between now and 2015 to recapitalise their banks. Cyprus has also sought aid from the European Union and the Greek Finance Minister has resigned just days after being appointed. In fact it has been a rather interesting EU summit.
Merkel's unequivocal comment on her nation's unwillingness to 'share' burdens and slap the proverbial cheek of Monsieur Hollande, Italy's banking union looking for more 'aid', Spain actually asking for their bailout, Greece 'avoiding' reality, and Cyprus pulling the 'China rescue plan' last ditch retort to market angst; ZeroHedge.com
I have been reporting the impeccable analysis from the Gold Jackass, that Germany is planning on leaving the Euro to the socialist nations of the South and forging its own path with its Northern European neighbours and now others are picking up on this.


I think Greece leaving the euro zone or being pushed out is now a real expectation and this is what is necessary to strengthen the rest of the euro zone because the way the financial markets work they can actually push a country like Italy into default - see this is what the weakness of the euro as it is currently structured because a developed country has no reason to default because it can always print money. By printing money it can devalue the currency and people can lose money by buying debt but there is no danger of default, but the fact that the individual members don't now control the right to print money - they have given that right over to the central bank you see, and that has created this situation with a European country that could actually default and that is the risk that the financial markets price into the market and that is why say ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%. That difference is due to the fact that these countries have abandoned the, surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.George Soros in an interview with Bloomberg

So there we have it. As I have previously written the United Kingdom is in the midst of a massive round of quantative easing £5 billion per month for the next 20 months. Well lets look at how £100 billion pounds compares to the current amount of currency in circulation. At the end of 2011 there was a total of just over £50 billion pounds in circulation. What has been proposed it effectively taking every pound and making it worth the same as 35 pence today  over the course of the next two years. In my lifetime (and I was born just after the end of the gold standard in 1971) the value of £1.00 has fallen by around 94% with this latest round of printing the pound should fall to around 2% of its 1971 value. This is what the Greek, Italian and Spanish government can no longer do. They, like every government everywhere is unwilling to cut spending (in absolute terms), its hard because the voters love 'free stuff' even but have not quite worked out yet that there is no such thing as 'free stuff', even if you can't see it you are paying for it somehow and most likely through the stealthiest tax of all, inflation.


Courtesy of kitco.com
At the same time the price of gold which was fixed at $35 per ounce between 1945 and 1971 has moved in a similar manner despite wholesale attempts to discredit gold by the central banks, governments and media. The people know that ultimately only gold and silver are money and that a gold backed currency is the only thing that can replace the paper promises we currently trade in. As more money continues there is only one direction for the price of gold and that is up... not because gold becomes more valuable, but because money becomes less valuable.