I have felt compelled to write this short note to ensure that we understand the implications of the extra-ordinary events which occurred this week. Basically in the UK we are witnessing a run on a bank, Northern Rock customers have lost confidence in the bank and everyone wants their money. With all the talk of sub-prime and financial journalism speak I’d like to ensure that we are all aware of what is occurring.
Our economies in West have become remarkably unproductive industrially and agriculturally. We simply cannot compete with the cheaper labour and cost of resources of the emergent economies – so that industrial production has migrated to the emergent economies especially China, India and the other Eastern economies. This has left us no alternative but to expand our service industries but we have found stiff competition in this sector from some of the emergent countries as they have sought to move into higher profit margin activities. With their lower costs they are seeing strong economic growth based on the strong fundamentals of industrial growth, agricultural growth and the application of new technologies. By comparison we in the UK and similar countries, are seeing the continual shrinking of our industrial sectors and the growing inability of our agricultural sector to compete in the global market. Increasingly our capital has been moving into speculative financial instruments to leverage the considerable financial wealth we still possess. Western bankers have used this to maintain their stranglehold on the world economy, with financial instruments that become increasingly abstract and that place in question the stability of our already fundamentally flawed financial system. These instruments are very efficient at shunting money around the world economy but amount to a patient pumping himself full of adrenaline, whilst he bleeds, to increase his heart rate. The more the heart rate rises, the more blood he loses and the more the blood loss is the greater the attempt of the heart to pump blood around the body. Eventually the patient loses so much blood that life is no longer viable and the heart stops.
The attempts to stabilise the condition of our economies whilst we bled, due to our inability to maintain our position as primary producers and market controllers, has led to the growth of the speculative financial markets in order to ensure that the worlds largest consumer markets (ourselves) kept buying so that we could maintain one of our strongest bargaining chips (our provision of the largest and richest consumer market in the world). This has been centred around encouraging us to invest in speculative financial instruments such as stocks, equity funds, bond markets, etc. However, in order to ensure that we are able to continue to do so in ever larger numbers so that we keep our consumer market the largest and most desirable in the world, we have been encouraged and seduced into an over valued real-estate market. Cheap credit has allowed us to buy immensely over valued property and spend based on borrowing via the equity created by the ever inflating prices. Since there are very little activities that bring in the profit margins as real estate (of course that is if you are not one of those most savvy investors who understands how to play the markets) much of that money has been re-invested into the property markets driving prices up and allowing the investor to borrow even more money to reinvest in property, which itself drives the prices up even more as we rush like lemmings to the cliff’s edge of financial economic meltdown.
Our governments upon seeing what has been occurring have slavishly served their financial masters and compounded the effects of the impending disaster. They have ensured that they have stabilised the conditions which allow such borrowing to continue by ensuring that the conditions exist to allow banks to continue to lend and maintain the burgeoning bubble. When the talk was of 25 year fixed rate mortgages we knew that the writing was on the wall, the drive was to get everyone and his mother on the credit treadmill. Two to three months ago a dear friend of mine asked me to get involved in the real estate market with him, when I investigated the market and discovered that the probable rental yields on mortgaged properties were almost equivalent to the mortgage repayments. This indicated that the market was approaching saturation. The bubble was hitting bursting point and the lemmings were rushing for the cliff face – needless to say I advised him against remaining involved in the real estate market. I also invited him to get involved in gold – but more about that later.
I said that this would be short and I’ll keep it so, what has happened is that the mortgage lenders have taken risks on borrowers in precarious economies, they were encouraged to do so, some of them were overzealous. This has increased the velocity of the bubbles growth and it has approached the point at which it is in danger of bursting. The bankers now believe that the patient has had enough adrenaline so they are voting with their feet. They know the dangers involved, we’ve seen it enough times before – the market has approached collapse point and now no one wants to lend to the mortgage lenders on the front line. Where will people get the money to continue paying their debts if the economy does not become fundamentally productive? What are we selling to the Chinese, the Indians and the other emerging consumer markets?
My advice is buy gold and silver. Gold and silver are commodities, they have historically been money and will always hold their value (even gain value in difficult economic times). As instability has reared its head in the world economy we’ve seen sharp gains in their commodity prices, because they have always been money and a store of wealth. We have lived through an interregnum which has seen the rise of monetarism (which is the control of the economy by the manipulation of monetised tokens), for the first time historically gold and silver were not money, commodities were not money. That interregnum is ending and gold and silver are returning to their natural place after the disastrous watch of the monetarists. Basically gold and silver are natural money and since it is a widespread commodity once it is widely distributed in your hands its very hard to manipulate. In the current circumstances take refuge in gold and silver. If you’re in the EU buy gold but if you can take delivery of silver outside the EU then take it you’ll protect your wealth and see a greater gain in your net worth but you need a wise portfolio to survive the coming storms. Insha-Allah I’ll be explaining some of this in coming articles.
Be careful Northern Rock is the beginning of a terrible time that’s been swiftly approaching for a very long time.
Filed under: Money & Finance