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Paper Currency Is In the Final Stage of the ‘super cycle’

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Money manager Felix Zulauf while been interviewed on King World News joined a long list of people warning of the end of the current monetary system.

“The global banking system, particularly in the industrialized world, is still highly undercapitalized.  That’s the big problem.  So if anything goes wrong, bank balance sheets are highly leveraged and you have a problem.  The central banks were running behind the curve.”

“Over the last couple of months, central banks have woken up and they see the risks, particularly the move by the ECB here in Europe means that they are ‘all in’ now.  That means they will finance whatever it takes to not let the system go down.  For the short-term this gives you some assurance.  For the long-term it’s a different story because there is a cost associated with this….

“The cost is that the fiat currency, paper currency standard, is in the final stage of the ‘super cycle.’  Fiat currency systems always collapse at the end.  We are in that stage of the super cycle where things are accelerating.

 I don’t know how many years we still have, but you can assume that central banks, as the ECB stated just recently, will do everything necessary to prevent a collapse of the system.  That means they will even finance bankrupt governments, they will finance bankrupt banks, they will finance every bankrupt entity that is important to the system.

 That means they debase our paper currencies further and further, and in an accelerating way.  This is very bullish news for all of the gold holders of course.  A good year or so ago, gold had accelerated into a sort of a climax peak above $1,900.  It has taken almost a year to correct that sharp advance.

I think gold has absorbed the selling pressure very well, and has gone through a lengthy, cyclical corrective process, into the low $1,500s.  There was always a risk that it could break down once more to make for a climax low, but I don’t think this is likely anymore.  The odds of that happening have decreased.

The recent announcements of Draghi and Bernanke means there is no going back as the Central Banks are going full out to protect the system.

The recent change at the ECB that they are ‘all in’ is a big plus for gold because it’s a big negative for paper currencies, and gold is just the other side.  So while gold has run up into the $1,700s, we could any time see a setback of $50 or $60 or so.  That would be normal.

When asked how the collapse of the fiat system will unfold, Zulauf responded,

“That’s a difficult one because I cannot tell you when it occurs, but usually in a super cycle you have to debase your currency more and more.  You monetize your debt more and more.  Your level of debt on a public-sector basis, and on a system-wide basis goes higher and higher until the system collapses.

 I think we first see, over the next couple of years, the transfer of government debt from private balance sheets to central bank balance sheets.  I do believe the 30 year bull market in government bonds is over.  I mentioned in the media (Barron’s) Roundtable that one should be selling half of what he owns, and should sell the other half in September at the latest.

I think the whole game is over.  Bonds are very overvalued.  The real return is negative.  Normally bonds yield at least as much as nominal GDP growth.  Nominal GDP growth at the present time is about 3% or 4% in the US.  I’m not suggesting we go right there tomorrow (in terms of yield), but bonds are very overvalued. I have stayed bullish, but it’s over.  The game is over and we have to look for other assets.”

 Felix also predicted a plunge in stocks:  “I think over the next two years or so we will probably see 1,000 in the S&P again (a decline of more than 30%).”

Felix also added: “Obviously policymakers are completely lost in this environment.  Therefore, when the market forces are such that it jeopardizes they system, and they dislike it, then they change the rules.  For instance, if interest rates of government paper shoots up, like it was the case for Spain or Italy, then the central bank comes in and provides the money, and buys whatever it takes to move the interest rate to levels it likes.

Source: King World News

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Unlimited QE3 And Gold Shoots Up By $50

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Bernanke finally unveils QE3 and gold immediately reacts by going up by over $50. The Fed will purchase up to $40 billion a month of mortgage debt for as long as it takes as reported by Bloomberg. He looks to be trying to blow another housing bubble.

The Federal Reserve said it will expand its holdings of long-term securities with

open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing

as it seeks to boost growth and reduce unemployment.

Operation Twist is to continue

The Fed said it will continue its program to swap $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action dubbed Operation Twist. The central bank will also continue reinvesting its portfolio of maturing housing debt into agency mortgage- backed securities.

The Fed’s economic forecast is as follows but what happens to inflation?

The Fed now expects the job-market outlook to improve more swiftly by 2014, with unemployment forecast to fall to 6.7 percent to 7.3 percent, compared with 7 percent to 7.7 percent in their June projections. In 2015, unemployment will fall to 6 percent to 6.8 percent.

Growth will improve to as much as 3 percent next year and as much as 3.8 percent in 2014, up from upper estimates of 2.8 percent and 3.5 percent in their previous forecasts. The so- called central tendency forecasts exclude the three highest and three lowest of 19 estimates.

There was some dissent about the decision.

Richmond Fed President Jeffrey Lacker dissented for the sixth consecutive meeting, saying he opposed additional asset purchases. Lacker opposed the FOMC’s June decision to extend Operation Twist through the end of the year and has said he expects interest rates will need to be raised in 2013.

ZeroHedge makes a good point about the Fed’s ability to surprise has now been removed. It has no more weapons left in its arsenal.

There is one big problem with the Fed’s announcement of Open-Ended QE moments ago: it effectively removes all future suspense from FOMC announcements. Why? Because the Fed has as of this moment exposed its cards for all to see from here until the moment it has to start tightening the money supply (which may or may not happen; frankly we don’t think the Fed tightens until hyperinflation sets in at which point what the Fed does is meaningless). It means easing is now effectively priced into infinity

All this of course is extremely bullish for gold when coupled with Draghi’s announcement of sovereign bond purchasing and Germany’s court ruling in favour of the ESM.

What Life Outside The Euro Would Look Like

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