Get Off The Bus

–Imagine being in a packed bus on the edge of a cliff. The bus is see-sawing back and forth toward the safety of the cliff-top on one side and the abyss below. Everyone in the bus is arguing about the best flavour of ice cream.

–The obvious answer is: strawberry. But the obvious point is when you’re in a bus tottering on a cliff, you shouldn’t be arguing about ice cream. You should be arguing about how to shift the people in the bus so its centre of gravity is toward the front. Then everyone can get off.

–It would be better to not be on the bus at all. But… shifting gears now to the sovereign-debt crisis – which currently features the nation of Greece as the lead protagonist – we are all on the bus whether we like it or not. So where is it stopping next, if not the abyss?

–Well, European finance ministers are scheduled to meet on Sunday, July 3rd. By then, they hope the Greek Parliament will have approved the combination of budget cuts and asset sales required by Europe’s overlords for Greece to receive $12 billion in emergency funds. The French are reportedly pushing for private sector creditors to roll over a portion of their Greek debt and voluntarily extend the maturity to 30 years.

–The French have essentially said, “We prefer chocolate. Strawberry is rubbish.”

–Greek communists and unionists, who’ve taken over the Parthenon with English language signs, are set to participate in Greece’s first 48-hour national strike since 1974. The timing of the strike coincides with the debate in the Greek parliament over the austerity measures demanded by Brussels.

–Brussels prefers vanilla.

–The advantage of a perpetual debt system, where the government can roll over debt and always pay interest on that debt through taxes, is that you never actually have to pay off the debt. You just roll it over and keep on rolling…and borrowing. But we have reached the point in Greece where the people may no longer roll over and accept a debt burden that requires their sacrifices in order to satisfy Greek’s creditors (the Money Power).

–That’s what makes Greece so interesting. A Greek default wouldn’t be the end of the world. French and German banks stand to lose, as does the European Central Bank. And the Euro’s credibility would be damaged. But the principle of what’s happening in Greece is what’s important.

–If the general strike in Greece intimidates the Greek Parliament into voting “no” on the austerity deal, it will be a kind of tipping point in this Global Financial Crisis. It will be the first time ordinary people have rebelled against the measures imposed on them by central bankers and bureaucrats. It will be a precedent to follow in other countries where the default of the State on its debt obligations WILL have systemic consequences.

–That list of countries includes Spain, Italy, and the United States. The Italians don’t want ice cream at all, by the way. They prefer gelato.

–None of this changes the fact that the bus is doomed. You cannot indefinitely promote state-sponsored prosperity by borrowing more and producing less. The Welfare State is cooked. And if you think that is hyperbolic, central bankers-the people who’ve been funding the Welfare State for years and collecting interest on it-know the gig is up.

–That’s why they’re buying gold. They know the dollar-standard is ending. Half of central bank managers surveyed believe the dollar will lose its reserve currency status, according to this story in the Financial Times. Central banks have bought 151 tonnes of gold this year. That means we’re on track to see the largest yearly purchase of gold by central banks since 1971, when the Bretton Woods world currency system collapsed.

–This doesn’t guarantee the gold price will go up this year. In fact it doesn’t guarantee the gold price will be immune to a world-wide asset price crash when the bus falls off the cliff. But at the very least, it shows you that the underlying financial events you’re seeing happen once in a generation. They are not to be taken lightly, even though they are often lightly dismissed.

–What does all this mean for energy? Well you can’t have an economic crash without a fall in demand for energy. And a fall for demand in energy would mean lower oil prices. It would also make questionable a lot of the investment in other sources of energy.

–But you can’t have life (or ice cream) without energy. It is not a discretionary item, at least in terms of economic growth. This is why oil and gas resources are becoming an even more coveted strategic asset. Whatever financial system emerges after the replacement of the dollar standard is still going to require energy.

–A very long-term perspective then, assumes that the financial crisis will destroy asset values, but not destroy the laws of thermodynamics. Assuming the collapse of the Welfare State does not hurl our standard of living back to the Middle Ages, one sensible strategy is to buy quality energy assets when they are cheap-especially after they’ve crashed.

–Speaking of which, did you see that last week the Chinese and the Russians were unable to finalise a $1 trillion dollar gas deal? We wrote about in the latest issue of the Australian Wealth Gameplan briefly. The Russians are keen to supply the Chinese with lots of cleaner burning gas from Siberia to replace China’s coal-fired power plant fleet.

–The Chinese are arguing over price. A deal will probably get done. But China is not going to put all its eggs in one energy basket (or bus) be that a country or a kind of fuel. China is the world’s largest consumer of energy and is busy making deals for oil and gas all over the world.

–One final aspect of the dollar standard’s collapse is that it likely means the end of the 80-year geopolitical alliance between the United States and Saudi Arabia. The Saudis want a reliable consumer (and currency) for their remaining oil reserves. With the dollar in trouble, it’s forced the Saudis to look long and hard for new strategic partners. More on this tomorrow.

Dan Denning
Markets and Money Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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“the collapse of the Welfare State” ?? Is there something i don’t get here about what Welfare State means?? Example from today, Welfare recipients (long term jobless folks) have gotten a monthly payment increase of 8 Euro’s in Germany – at the same time the guys and dolls at the “Reichstag” have quietly given themselves a pay rise of 600 Euros a month, that is up from already some 7100 Euros a month. I don’t think the welfare state is the problem, it’s the bureaucrats that don’t know how to responsibly use the amount of all the taxes they rake… Read more »
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