Big Changes Are Coming, But The World Will Not End

Today 40 year veteran, Robert Fitzwilson, wrote the following piece exclusively for King World News.  Fitzwilson, who is founder of The Portola Group, warned, “Changes are coming, but it doesn’t mean the world will come to an end.  But financial regime changes do result in a massive transfer of wealth from those who own paper assets, to those that own real assets.”

“Reflecting upon the news and the current state of affairs, it is striking how events are playing out according to script, as history and strategists have predicted.  In the beginning of our journey, it was focused on discovery, historical context and understanding as to what had changed about markets, governments and people.  The answer is almost everything if one looks just at our lifetimes.

On the other hand, nothing has really changed if one takes a longer view.  One of our favorite sayings is, “The only thing new is the history you have not read”

“We can vouch for that.  After a review of much of the last 2,600 years, we have concluded that we are not the historic anomaly that we surmised at the beginning of the journey.  In fact, we are simply repeating the same cycles and mistakes that all of our ancestors have made before us.  Every culture throughout history has done exactly what we are doing now.  The only difference is that this time it involves the entire planet.

As we read history, paper money was not designed to be an asset.  It was an intermediary between sellers of goods and services.  A seller might not have an immediate purchase in mind, so receiving a paper receipt that could be redeemed at a later time, and even at another location, was both efficient and much safer than receiving payment in gold or silver.  The return trip from Rome to London was perilous under normal circumstances, let alone if one was returning with precious metals.

In our era, these receipts have taken many forms.  Even the cash in our pockets is a derivative.  In technical terms, it is a zero-coupon, perpetual obligation of the issuing government.  In essence, the writing on the paper currency is promising “somebody owes you something, someday”.

The post-WWII monetary system began at Bretton Woods, New Hampshire.  It began to unravel in the middle of the 1960s, but the mortal blow was struck by President Nixon with the suspension of dollar/gold convertibility.  It has certainly been a long “suspension”.

Almost every ugly chart relating to the growth of debt and money can trace it’s roots to 1971.  The evidence is incontrovertible.  The value of the ancient form of receipts has been sliding ever since.  The slide has not been linear over that 40-year period, but it certainly went into free-fall 12 years or so ago.

In the past, rulers created money out of something considered to hold value, often gold and silver.  Seignorage was the right of kings to make a profit on that money.  Unlimited seignorage was impossible as supplies of gold and silver came and went, and it was expensive to mint the coins.

With the use of paper and now electrons to create money, we now have unlimited seignorage.  Money is created out of nothing, and you can see how it has been abused in the post-1971 charts.  The abuse is accelerating on a massive, global scale.  Cash and other derivatives have replaced our markets.
 
Profits were to be made on creating and trading derivatives, not providing real goods and services.  The real aspects of our economies continue to function, but the derivatives dwarf the size of the real global economy.

Much has been written about the historic confluence of our population growth coming together with the exponential endpoint of our resources.  The same can be said for our money.  Our resources are finite.  The ability of our planet to sustain a population is finite. 

We are now witnessing the exhaustion of our savings and real assets and our ability to sustain an exponential growth in money and derivatives.  Unlimited derivates are hitting the proverbial brick wall, and their collapse will destroy everything based upon them, it is just history.  This cycle has been repeated time and time again.

We also believe that we are approaching the end of a wonderful 200-year period in human history, driven by the industrial and technological revolutions.  The exponential usage of resources and our population growth began almost precisely 200 years ago.  If we combine this resource endgame with various groups which are desperate to maintain power or inflict it on others, it is a very toxic historical “soup”.

As to the resolution of what comes next, it is impossible to say.  There are too many moving parts, or ‘Black Swans’ as people say.  All we can do is to pay careful attention to events as they unfold, looking for clues as to how this mess will play out. 

For our portfolios, the message is clear.  Get out of paper assets that can be destroyed by the unlimited seignorage, and convert them into real assets.  The end of the fiat money system will come swiftly, and perhaps overnight.  It cannot be too far off at this point. 

Changes are coming, but it doesn’t mean the world will come to an end.  But financial regime changes do result in a massive transfer of wealth from those who own paper assets, to those that own real assets.  Historically, gold and silver are traditional safe havens. 

Despite what we read, the physical supply of these metals is becoming diminished for a variety of reasons.  Waiting too long to purchase them could result in the inability to do so or certainly being forced to buy at much higher prices.”