Putting long-term savings into GICs is turning out to be riskier than investing in hard asset such as precious metals, land, or other commodities such as oil, copper, etc.
The World Gold Council just published a historical view of central bank “balance sheets” since the 2007 crisis: (click on the chart if you need to make it larger)
A central bank’s “balance sheet’ is a relative measure of money supply. Although there are more exact measures of money supply, when you see a central bank’s “balance sheet” tripling in the case of the USA, or quadrupling in the case of the UK, it really doesn’t matter which one you use and this one is good enough to understand the price of gold.
The buying power of money over time reflects the forces of supply & demand in an economy. Basically you have money supply on the one side and economic demand for money on the other (i.e. the size of the economy). If these are not in balance, then inflation or deflation will occur.
Can that be true?
By inflating the money supply beyond the natural growth in the economy, the buying power of our long-term savings has dropped by 60%. The reason why we haven’t seen prices radically increase depends on the type of good:
So if you think that the banking crisis is over in Europe and that the USA can afford its ridiculous debt levels without either raising taxes or cutting military spending, then go ahead and invest your hard-earned savings in GICs.
Or you can invest some of your savings in gold as a safe hedge against further erosion of your buying power in future.
At the request of European Union finance ministers meeting in Nice (Sept. 12-13), the European Investment Bank will modernise and increase significantly its volume of lending to small and medium-sized enterprises in 2008 and 2009 to help mitigate the effects of the current credit crisis.
Ministers agreed the Bank should target loans to SMEs totalling 15 billion euro over the two year period as part of a global envelope of 30 billion euro. This level of lending would represent an increase of around 50 percent compared with 2007, when the Bank lent 5.2 billion euro to SMEs via its network of partner banks from the private sector.
In addition, the EIB announced to ministers its intention to give a new 1 billion euro mandate to its European Investment Fund subsidiary to provide mezzanine finance to SMEs.
The increase in lending will accompany sweeping reforms to the EIB’s SME loan product that should make loans both simpler and more attractive for companies and the EIB’s partner banks.”
Instead of propping up and rewarding reckless banking with bail out packages, it is far better to secure the underlying foundation for the economy. 80% of economic activity in both NA and Europe depends on the health of Small and Midsized Enterprises (SMEs) who are currently finding it difficult to access cash for normal operations.
SMEs routinely need to finance receivables, lease equipment, finance inventory, and make leashold improvements in their physical infrastructure. Most banks are currently jacking up interest rates and lowering credit ratings as they attempt to squeeze SMEs for the cash that the banks need to make up for their mistakes.
Failing to help SMEs will result in massive closures, job loss, and an economic meltdown that will make the Great Depression look like an economic plateau. Already 20% of US car dealers are on the brink of bankruptcy because they cannot finance their inventory. Continue Reading »
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