The monetary Monster-Crisis (46)

The monetary cataclysm is to be expected

Entering cataclysm is in the web will not bring you anywhere yet: the Wikipedia does not provide us with definitions and numbers in English. Still a monetary cataclysm is coming and the Wikipedia-site probably will follow. According to the already existing German entry1 the word cataclysm has been derived from kat down- + klzein flush) and must be understood as a gigantic disturbing and destroying catastrophe, comparable with the legendary flooding of Atlantis. Atlantis is said to have been beyond the Hercules' pillars at Gibraltar. Therefore it must have been located somewhere in the middle of the Atlantic Ocean. Is this the place where the AmericanEuropean fiat-system is going to be drowned? Nobody knows...

Paradigm change
Technically spoken we are standing at the eve of a paradigm change. US-Americans will have to decide at the 6th of November whether interest rates may be remaining low (if president Obama wins) or start rising (in case the opposing candidate Romney wins). Anyway, even if Obama wins, there will have to come a date from which interest rates are going to rise. What will be happening if this date arrives? It might be important for our future and wellbeing.

Scenario at a rise of interest rates

The scenario of what is going to follow after a sharp rise of interest rates may be reconstructed from the records of Black Monday 19th of October 1987, at which a similar event has been occurring2. At Black Monday the Dow-Jones-index plummeted 23%. The downfall had been accelerated by new technology of computer-trading. Today new technology are supposed to prevent sudden changes at the market, but these technologies probably never have been checked or tested. Unexpected events will always come suddenly, without warning. In contrast to 2012 US-business 1987 seemed to have been developing as normal, but inflation started rising and to stabilize the dropping dollar the Fed raised the interest rates for the first time. However the dollar had lost 50% in the inflation phase between 1985 and 1987 3. The 27%plummet 1987 emptied a gigantic speculative bubble, which had been building up during the low interest rates. This is exactly the set of conditions we find at today's markets: we have a gigantic bubbles in shares and in bonds. And we have a very low interest rate. Officially we have low inflation, but every citizen knows these numbers have been beautified and real inflation already is on the rise...

1 see: Kataklysmus Wikipedia 2 Reference (in German language): Angst vor einem Schwarzen Montag bleibt | Schweizer Radio DRS 3 Reference (in German language):Wirtschaftskrise | Internationale Kommunistische Strmung

The basic problem of low interest rates

The basic problem of low interest rates has not been solved. It is easy to flood the market with money and set interest rates to zero. The big risks are coming up as soon as central banks decide to return to high interest rates. At a long period of low interest rates companies and governments feel accustomed to cheap money to invest it in risky and uneconomical or even simply bad projects. These projects would never have had a chance at higher interest rates and expensive money. Now these uneconomical projects will only be surviving as long as somebody is going to pay for the extra expenses. Otherwise these projects will have to be given up at huge losses. At a rise of interest rates we will have to expect plummeting DOW-Jones-values. A 35%-loss would have to be expected. Simultaneously we might expect equivalent lower values for existing bonds. Bad projects will be given up and the owners (including governments, investment companies, private owners) will have to take losses. Owners of real-estate for mortgages with flexible interest rates will be confronted with steeply rising costs for their mortgages.

A return to sound interest rates

There is no real alternative for a return to sound interest rates. Of course we could try a monetary reform, which may be considered as a monetary cataclysm as well. For private citizens there seems to be no way out without losses. The only advice left is to split up your capital into three equal parts: one third in a house without a mortgage, one third in real money (well-hidden precious physical metals) and one third in cash (not in long term-low interest bonds). We should be prepared to loose at least one third in a monetary cataclysm.

Precious metals
I am not sure what is going to happen with precious metals. The current ca. 10% plummet-phase seems to be a preventive price-manipulation to avoid to stabilize the dollar in advance, before a new Fed-management orders the initial rise of the interest-rate. Whatever happens - I expect somebody seems to be planning something big - the big one may have been started...