Let the damned chips fall
How did we end up in such a mess? Hundreds of billions of taxpayers’ money poured down the ratholes of speculators, banks and failed companies. There are still about 600 trillion USD in notional derivatives outstanding, of which roughly 30 trillion are the most toxic credit default swaps ( CDS ). We’re talking about sums which exceed the total gross national product of the USA, Europe and Japan - combined!
So why are governments calling on taxpayers to bail out the speculators and bankrupts? The endlessly repeated answer to this question is the alleged danger of a total financial and economic collapse - if some big banks are allowed to fail. But what if we spend a few trillion of newly printed money in endless rescue operations to find out that the holes are still much deeper than anybody dared to say? The end result will not only be the bankruptcy of some banks, but the bankruptcy of whole countries.
Look at the Iceland horror story: The country is on the hook for hundreds of billions of dollars and in such desperate straits that a third of its population is contemplating emigration. A much better way forward would be to let the people who got us into this swamp pay. That’s capitalism as it should be. Let some banks fail and wipe out their stock- and bondholders. Let the speculators who dealt in CDS’s for profit and not for genuine hedging purposes ( the vast majority ) deal with their own mess. The money which has been earmarked for further stimulus and rescue operations could be used to support the jobless and set up some new, clean banks.
Of course the politicians will not follow this Schumpeterian course of creative destruction. Instead they will muddle through and waste a few trillion in the process. Whichever way it goes, we can’t trust the banks and we can’t trust the politicians. Therefore I recommend a continuous position in gold, the only currency which doesn’t depend on somebody else’s promise or guarantee. While paper money can be created by the bucketload at essentially no cost, it takes horrendous efforts to gather gold. I’ve been in a gold mine near Johannesburg a few thousand meters below ground. The temperature is hot, the tunnels are low and narrow, the work is extremely hard and dangerous. Gold is rare and valuable. It has been accepted throughout history in contrast to every other money which has become worthless sooner or later.
The other commodity which is valuable and difficult to get is oil. At present, it is cheap because of speculation and a temporary drop in demand. Therefore I also recommend now oil-related assets, companies like Royal Dutch or direct investments, for example USO (traded at the New York stock exchange as an ETF).
Right now everybody is waiting for President Obama’s rescue package, but after it’s been passed it will be discounted quickly, and we’ll move closer to the edge.