Friday, May 21, 2010

Porter Stansberry Says Buy Gold For The Long Term Due To Euro Mess

Saying that the Eurobailout will bring more inflation, Stansberry points out that the fiat money system has no limits to the amount of credit it can generate - and people are beginning to realize that inflation is in store for them, which explains why they're moving into gold:
To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to "borrow" roughly $1 trillion from itself, the U.S. Federal Reserve, and the IMF. Europe's member states agreed to guarantee these debts, which the ECB claims will be "riskless" because they're simply loans between central banks.

At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the U.S. Treasury, which is itself a troubled creditor at best....

Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued euros, which offer investors almost nothing in interest payments? I don't think there's a chance in hell.

The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts – credit defaults – can be "papered over" rather than restructured. The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.

Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn't destroy just one or two banks' house of cards. It wipes out the entire system, which is linked together by the currency itself.
He also points to gold rising in tandem with the U.S. dollar as exhibiting a sea change in people's confidence in fiat money.

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