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2017 and The Greater Collapse

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The Greater Collapse

Itís the beginning of November as I sit down to write my notes for 2017. Over the past two or three years I have not been concerned to talk about specifics, that is because the general situation is such a mess that looking at the smaller issues, such as house price direction, pale into insignificance in the face of so many other issues, such as bankrupt governments, bankrupt banks, the march of AI, negative interest rates, Brexit, and the possible collapse of the EU. Maybe the biggest issue is going to be the collapse in the importance of individual currencies in the face of the coming onslaught of digital money linked to SDRs.

Those of you who have been following my ravings over the past few years will know that I am waiting for what could be called The Greater Collapse. I have been expecting it, but had no idea when the roof would fall in. My original view was sometime around 2021. I revised that view a couple of years ago in favour of 2017. I am not panicking just yet, but from the spring of 2017 I shall be starting to get very nervous in the face of any new crack appearing in the already seriously cracked egg of world economic madness. In short, although I dont have that crystal ball, I have a nasty feeling that 2017 may turn out to be a disaster.

Even if the roof doesnít fall in there will be ever more nervousness, more and more panics, and life will become impossible, at least in one essential element ó planning for the future.

Is there anything I can usefully say about the future? And there we have the problem bang in front of us. I used to think nothing of planning for the next year or two. Nowadays I wonder if one can seriously plan for the next month or two.

As I look around me, what do I see? First, living in Southern Europe, at least for some of the time, I note the influx of people from France to Portugal. The French are fleeing a tax system they find oppressive, and a way of life that seems to be crumbling around them. France at the moment is clearly not a place to invest in. My new neighbours are French so I get the ugly facts first hand. They may be biased of course, but the last time I looked I noted that two thirds of French voters are dissatisfied with the Eurozone, and the way the EU functions. Thatís a much higher percentage of potential leavers than in Britain.

However, look at the political calendar for the next few months. On December 4th, Italy holds a referendum on constitutional reform which is expected to topple the government. On the same day, itís the next round of the Austrian election. It could prove a pivotal day for the EU. Should Italy be thrown into chaos, it could trigger a crack up across the continent. And next year sees the Dutch, French, Hungarian and German general elections.

I also hear rumours of dissatisfied Dutch and Danish. This is not apparent in the countries that have joined much later, especially in the Baltic regions. In that neck of the woods there is a feeling of relief that they have escaped the Russians, and feel to some extent sheltered by the EU political edifice.

This situation gives the EU a lopsided structure. The less well-off nations are to some extent dependent upon the more wealthy nations, and the way things are going, the wealthier group is rapidly going broke. That in itself is a recipe for disaster. Italyís GDP is said to be lower now than it was at the beginning of this century. Not only that, but itís banking system is shot to hell. It will only take a small push to knock it over. The French economy is stagnating, and there is panic about the French bank loans made to Italy, loans which now look as though they will never be repaid. Even the German economy, which has been relatively strong, has only edged forward a fraction of a per cent over the past year. In fact the strongest performer in the west appears to be the UK.

As far as I can tell every western government would be bankrupt if the day of reckoning came sometime next week. The problem is, with the European banking system on Skid Row there is every possibility that the day of reckoning really could come next week. Iím reminded of the last scene from The Italian Job with the coach hanging over the cliff. Every so often the contents slide towards the back of the coach just a little more, and the tilt gets steeper, which encourages the weight to shift a bit more to the back. Sooner rather than later, the whole thing will go over the edge. Michael Caineís last words sound very much like the words of the worldís central Bankers. ďHang on chaps, Iíve got a great idea.Ē

The only great idea is to get off the bus before it goes over the cliff. But how do we do that?

Obviously the world isnít going to end. Even if we pursued The Italian Job a few days further into the future there would be the remains of a bus in the valley. The money would still be there, maybe scattered about, but discoverable. Life would be difficult, and sacrifices would have to be made, contingency plans to hide the money while someone got some alternative transport, and so on. What it would mean is a totally different set of operations would be needed to get things even partly right side up.

To some extent we can work out what is going to happen in the next few months even if the banking system doesnít implode. Letís have a look at some obvious points.

If your income is dependent upon the government then you are at risk because the government is broke. It may well be able to function in a broke condition for years, but I would hate to be totally dependent on a pension from that source. Let me remind readers what bankruptcy is. The concept has nothing to do with debt, and everything to do with meeting your commitments as they fall due. The moment you canít do that, you are bankrupt, even though a month earlier you had debts of several billion.

The UK government can handle the problem of debt. There is a simple solution. It can print more money. Life goes on. Eventually the increased money supply causes inflation, so the money becomes worth less, but the world keeps turning.

Thatís one thing that is in the Brits favour should they ever leave the EU.

Let me broach that delicate subject. If we stay within the EU we must get rid of sterling and start using euros. That is an essential part of the deal. At the moment the UK is excluded from all agreements that relate to the euro. That means we are excluded from a vast area of the union. That is not sustainable. Sterling has to go. If we sacrifice the £ we then lose the ability to control our finances. The government immediately loses the ability to print money. That may be a good thing, but look at Italy, Spain, Greece, Portugal. All those countries have lost the ability to control their own finances, and they are going bust at a fair rate of knots. They have become states that are mortgaged to the European Central Bank. There are only two routes out of that condition; pay off the debt, or have the debt foreclosed. The former isnít going to happen. The mortgage holder is the one in control.

There are all sorts of ways to invade another country. You can send in an army. Why bother? Even as long ago as 1939 the Germans had a simpler way. They took down the frontier posts between Germany and Poland. Border? What border? Now the easiest way is to lend a country money, then lend it more, until it canít pay back. Then you impose sanctions, and austerity, which makes it harder to pay back the loans, and then the country loses its credit rating, and then no-one else can lend it money, and so the debtor has been completely controlled. A cheap method of control without a shot fired and no expense.

This could be a long game. Who knows? However, there is one warning that is obvious. You need to be careful where you invest. No-one in his right mind invests in a company going bust. No-one should be investing in a country going bust. Buying a house is a big investment. You could invest in Greece. That doesnít sound very sensible to me. Iím sure that investing in Cyprus has to be on the list of mad things to do after midnight when pissed. The same is true of Portugal.

There is another issue which has burst to the front of the queue over the past six months. Exchange rates.

Generally speaking currency movements are small, unless you happen to trade South American currencies. However, this century, currency movements have been huge. We dont have to go far for a recent example. At the beginning of the century the sterling/euro rate was roughly 160 to the £. Itís gyrated like crazy ever since. Even as recently as this time last year there were 138 euros the £. As I write, this the figure is something like 112.

Iím making money hand over fist on this as I have a lot of euros. I can now get a lot more sterling than I could a year ago to invest in the UK. Never mind whether I should do this. For the purposes of this article I am more interested in looking at things the other way round.

Where I am staying at the moment my neighbour is a retired Englishman who lives on a government pension. His income has been cut by a third. Pensioners are usually by definition on small fixed incomes. Having that cut by such a large amount is life threatening. Brits are returning to the UK in droves for the simple reason that they canít survive in the eurozone at the current exchange rate. Were you prepared for this?

If you are paid in one currency and move to a different currency zone, in these times of violent currency swings you are at the mercy of every scare.

If you sold up in your home country and invested in another country, you are now tied to your investment, or you can try to sell it on if you change your mind. Who are you going to sell it to? Certainly not the locals because you probably paid over the odds for a property in a tourist ghetto. Certainly not the Brits, they are broke. Youíre now stuck between a rock and a hard place.

I have been banging on about this issue for decades. Most people ignore me. I dont give a damn what happens to sterling. I dont care what happens about Brexit, or when the EU implodes, which it will. I own property where it keeps itís value. I regard real estate as an investment, and investments should increase, or at least keep their value, and should produce a return.

Which brings us to an obvious conclusion: real estate is usually a good place to put your money, but where should it be?

Iíve rambled enough for this week. Iíll start to answer that question next week, and then, over the coming weeks, Iíll take on as many of these difficult issues as I feel competent to address.

Part Two >>>


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