THE MOST INGENIOUS INVENTION IN THE HISTORY OF FINANCE

By Egon von Greyerz

Founder and Chairman

May 17, 2018

We are now in the final stages of a journey which by future historians will be seen as unreal as Lewis Carroll’s “Alice in Wonderland”. Just like Alice called the “Mad Tea Party”, “the stupidest tea party she had ever been to”, the last 100 years could be called the Craziest Extravaganza in history. At the end of the story the Queen of Hearts shouts “Off with her head”. But Alice is not afraid and calls them all “A pack of cards” before she wakes up.

Although the story was written 150 years ago, had Alice dropped down the rabbit hole to the current fantasy world, she would have called the current kings and queens, aka (also known as) government heads and central bankers, not a pack of cards but a giant house of cards. Because we are now at the end of a tea party which in the last few decades has become increasingly extravagant.

WHO WILL PICK UP THE TAB FOR HISTORY’S BIGGEST TEA PARTY?

The problem with the current tea party is that there is no one to pick up the tab since the king and the queen have had to print and borrow $250 trillion to pay for ink in the printing machine which is running dry.. But not only that. They had to create lots of funny financial instruments, to the tune of $1.5 quadrillion, which they knew would blow up one day and cause immense misery. They called them derivatives so that no one would understand what it meant. Finally they promised the people future medical care and pensions of at least $500 trillion, knowing that they could never pay it. But it would keep the people happy until they found out that it was an empty promise.

So this has been a really fine tea party. The king and queen and their friends, the bankers plus the top 0.1% of the population lived in luxury. And ordinary people were totally unaware that they were liable for this debt. Of course it wouldn’t have mattered if they knew, because they could never repay it anyway.

THE MOST INGENIOUS INVENTION IN THE HISTORY OF FINANCE

Wonderland slowly ran out of money over a 100 year period. But the debt grew much faster when in 1971 the king, (aka Nixon), decided to replace gold with paper money. Until then all money issued was backed by gold. But the king and queen and their banker friends loved the new era when they were no longer fettered by the discipline of running a balanced budget and could instead just print pieces of paper that they called money. This was a great period for the king and queen and their close friends. Since they got the money first, whilst it still had value, they could buy what they wanted. Once it reached ordinary people, the paper money was already debased and worth a lot less. And the taxes of the people had to increase from virtually nothing 100 years ago to 50% or more if all taxes were included. This was necessary to finance the deficit spending and service the debt.

The king and queen rewarded their banker friends generously for this ingenious invention. Rather than using expensive gold as money, they could just print whatever they wanted at zero cost. They never understood of course, that if you print money at zero cost, it has zero value.

THE SECOND MOST INGENIOUS INVENTION IN THE HISTORY OF FINANCE

In the end there weren’t even enough tax revenues to pay the interest on the nation’s borrowings. To solve this, the bankers had another ingenious idea, namely to issue debt and make the people pay the state interest on the debt they issued. What a clever idea by the bankers thought the king and queen. That means we can really issue limitless debt so that we and our rich friends get much richer and the people just get more indebted. But ordinary subjects will of course not understand the consequences.

This was the most genius invention by the bankers. The more money, the nation borrowed, the more interest the state received. No one had ever thought about this before to issue debt and rather than pay interest on the debt to receive interest. This meant that the state could borrow unlimited amounts of money and the more they borrowed, the bigger the income.

These two inventions were totally revolutionary in the history of finance. First to print money at no cost and then to issue debt and be paid for that pleasure.

The inventions would keep the tea party (aka a Ponzi scheme) going for ever or at least until some little boy points out that there is no tea in the pot and the whole house of cards collapses.

ALICE IN HORRORLAND

So this is the extraordinary story that Alice found in the modern Wonderland. She would soon experience that it will all end in disaster and that this time it wasn’t a dream but a real horror story. Thus it was no longer Alice in Wonderland but Alice in Horrorland.

And it is unlikely to end as merrily as in the last verse in Carroll’s poem:

All in the Golden Afternoon

Thus grew the tale of Wonderland:
Thus slowly, one by one,
Its quaint events were hammered out—
And now the tale is done,
And home we steer, a merry crew,
Beneath the setting sun.

So here we are in the final stages of a journey that might seem to consist of “quaint events” today but are more likely to end up as horror stories. The current journey will not end well and there willl be no merry crew at the end of it. As I wrote in an article a few years ago, only Deus ex Machina can save this situation and I think that is unlikely to happen.

STILL CHANCE OF A GOLDEN AFTERNOON – FOR SOME

At least Carroll gave one subtle hint in the title of his poem “All in the Golden Afternoon”. As the house of cards collapses, bubble assets such as stocks, bonds and property will lose 75-95% of their real value and sovereign states and banks will default. But there can still be a Golden Afternoon for the ones who protect themselves with physical gold and some silver. Gold is the only money which has survived for 5,000 years and is therefore the ultimate wealth preservation asset:

• Physical gold is scarce and cannot be manufactured or printed
• Gold is eternal – all the gold ever produced still exists
• Gold has no counterparty risk and is not someone else’s liability
• Gold is instant liquidity
• Gold has served as money/barter in every period of distress in history

If you understand risk and you understand history, you must hold gold.