A new financial architecture

Rich countries’ debts have now risen so much, that it is only the most naive of pension fund managers that continue to insist that all bonds will eventually be repaid in full. With a public debt exceeding 250 percent of GDP in Japan, and more than 100 percent in the US and many other Western countries, it is more apt to rename these rich countries poor countries.

In comparison, Russia has a national debt of only 14 percent of GDP, whilst China’s is set at just over 40 percent. Remarkably, both countries are operating in tandem within the current monetary system. They have both exchanged a portion of their dollar bonds for large amounts of gold. Combined, they have now exchanged about $500 billion in US Treasuries for roughly 1,000 tons of gold.

Both countries appear to be readying themselves for the next phase in the global financial system, where gold will be revalued, or rather, the dollar devalued. Precisely as former IMF chief economist Kenneth Rogoff, now Harvard professor, suggested in an essay that was published recently. According to him, the emerging countries would do well to use their dollar reserves in order to purchase huge amounts of gold.

In recent weeks, several economists from the inner-inner-circle, came with a similar analysis. Thus, a PIMCO analyst in a provocative analysis suggested revaluing the gold price to $5,000 in order to neutralize the dangers of deflation.

And according to Yanis Varoufakis, the former Greek finance minister, now a professor of economics at the University of Athens, it is high time for a monetary reset. In an opinion piece entitled “Imagining a New Bretton Woods”, he writes that it is time for a new global currency as the successor to the dollar.

It is my conviction that these types of publications or announcements never crop up by coincidence. They can be seen as a further indication that people are working hard on a new financial architecture behind the scenes.

Investors such as George Soros, who became a billionaire by making correct and timely investment decisions, have readied themselves for the next large market shifts by accumulating a generous portion of gold investments. He is in good company: billionaires Stanley Druckenmiller, John Paulson, Paul Singer and Carl Icahn have all recently gone before him.

In this way, they seem to be preparing for a pending surge in the price of of gold. Either by the inevitability of a gold revaluation by central bankers (in order to devalue the dollar), or because the market does the work for them as a result of excess demand in too small a market. We now understand why even ABN/Amro Bank has so significantly raised its price target for gold.

Willem Middelkoop