THE WORLD’S FIRST AND BEST CENTRAL BANK

 There are some that will tell you that the world’s first central bank was the Riksbank of Sweden established in 1668, and others maintain that it was the Bank of England in 1694. Whether it was one or the other is irrelevant as both answers are incorrect.

 

The truth is that gold and silver were the first central bank of civilized man and required no act of parliament, no monarch’s seal, no standing army, no common language or numbering system. Their value was universally maintained and accepted without question for centuries.

 

Actually, civilization prior to our modern day central banks did question gold and silver, but only when they were thought to be diluted either by monarchs or scoundrels for their own ends. Heaven help the forger who more often than not did not survive.

 

How things change. In the space of the last 300 years civilized society has now been conditioned to accept that only paper is money despite its repeated dilution, to the point that in 1997 the Financial Times declared the Death of Gold in an editorial. If gold and silver could have spoken at that time they would have uttered the words of Mark Twain who said “reports of my death have been greatly exaggerated.”

 

The two major currencies at the moment are the US dollar and the Euro although China probably sees the Yuan being the third pillar of the triumvirate in good time. The weaknesses in these currencies are all the same. They attach to nothing other than hollow and untested promises. Governments can therefore disown their currencies and break promises in much the same fashion that Germany and Zimbabwe have done in the past. Gold and silver however cannot be disowned.

 

Furthermore, these paper currencies are highly suspect for the simple reason that they are all linked by a tangled web of debt, obligations and relationships. When one goes, they will all go. Why honour any piece of paper when the going gets tough whether it be currency, a bond, a T- Note or cheque?

 

If you have gold and silver though, the outcome is totally different. The economy, the government and the nation can all collapse but gold and silver will continue to exist unscathed.

 

Civilization today is not so advanced that it can stop a repetition of past disasters. Those fleeing Asia Minor, war time Europe and Vietnam will tell you what gold meant for their future.

 

Every single paper currency today is doomed because the weight of future obligations combined with current unsustainable trends will force their continued devaluation and eventual collapse. The unsustainable trends are primarily a combination of dangerous levels of debt and deficit spending and awkward demographic developments. The wild cards are unexpected international conflicts, sudden collapses of banks, defaulting nations as well as food shortages triggering unrest and upheaval. Throw in an earthquake or two and pretty soon you get a clear picture of how fragile the whole show is.

 

Consider every nation and every development over the last two years and you will see that every single element for a catastrophic turn is still embedded in the fabric of finance.

 

The US has foreign debt that cannot be repaid and future unfunded obligations that can also not be honoured. To make matters worse it is engaging in foreign excursions that have no end and so far have no profit. To wit, they cannot even win a decent oil contract in Iraq.

 

 The Europeans on the other hand are like a dysfunctional family. They wear the same uniform (the Euro) but are all marching out of step.  At one end you have the disciplined Germans. Near the bottom you have the Greeks who coined the word ‘economics’ but have no idea what it means in practical terms.  Even a default by tiny Greece which makes up less than 3% of the European GDP could severely shake the Euro’s foundation, and if the much larger Spain was to capitulate, the result is unspeakable.

 

At either end of Europe you now have a bankrupt and broken Empire called England and on the eastern front a rag tag collection of nations which are hanging on by their gums.

 

China is no better given its insatiable appetite after waking from its Communist coma. It is caught in a vicious circle that requires both foreign material inputs and foreign customers to keep its masses both employed and fed. Should this merry-go-round be disrupted there is no telling what will follow given its massive foreign exchange reserves.

 

As for Japan and Russia, whilst their finances are totally different they nevertheless share a nightmare demographic trajectory.

 

In short, every single central banker and world leader fully appreciates that the world’s financial system is broken. All the major currencies are nothing more than terminal cancer patients whose fate is sealed.

 

True recovery is predicated upon destruction of unbacked and unserviceable debt and unless this happens through orderly liquidation we cannot go forward. The attempts by central banks to avoid liquidation by pump priming asset values and incomes through stimulus, quantitative easing and low interest rates will not succeed. It will only impede and delay meaningful structural modifications both nationally and internationally. A delayed liquidation will only bring on a far more brutal liquidation in the end.

 

When this happens, a rapidly imploding system of credit creation will finish the job unless the government lights another Weimar style fire.

 

In the meantime much is made of the movement in currencies without fully appreciating the reality that ALL currencies have lost serious ground against gold and silver in the past 10 years. Anyone who is hung up by short term oscillations in the price of gold is failing to see and appreciate the big picture.

 

As I have previously said, those that lack the historical perspective and do not have time and patience will fail to grasp the importance of gold and silver and will simply be left holding a collection of serial numbers and nothing more.

 

I repeat: there is only one real central bank. It has no offices and no headquarters. Above all it has no need for a Chairman.

 

Peter Souleles

Sydney Australia