If there are any investors that still believe that the Central Banks of the world are in a position to provide stability and security to the financial and equity markets, one only has to watch what recently occurred in Switzerland. Despite assurances that the Swiss franc would maintain the peg to the Euro at a rate of 1:20 to 1 respectively, the Swiss Central Bank in the end threw in the towel and allowed a massive appreciation of their currency. The central bank there, just did not have the power to stop the inevitable movement in the valuation of their own currency. The Swiss franc soared nearly 40% against the Euro in value, before falling back to only a less drastic 20% revaluation.
However, the damage to the reputation of the Swiss and the international monetary system had been done. The situation there is a mere foreshadowing of what is to come. Simply put, the power of the central banks will continue to wane and the deception will proceed apace, as the global financial system unravels. Each crisis will bring increasing debt and ever greater liability to the international banking world.
The economy of Switzerland will now most likely experience a recession in their export market due to the collapsing demand for Swiss goods abroad, which will be the result of rapidly rising prices of Swiss merchandise outside the country. It will be impossible for Swiss exporters or their global wholesale customers, to absorb the costs associated with this massive revaluation of the franc. A decline in market share is inevitable.
Why did the Central Bank of Switzerland take this action? As a small country it was going to be financially impossible for the country to maintain the previous peg to the Euro. Bankers there felt enough money had already been spent in the ongoing and unavailing effort. The escalating policy of quantitative easing (QE) by the European Central Bank (ECB) was now leading to a major devaluation in the Euro, which in turn was creating a disruptive effect on other financial markets.
It will become much more challenging and expensive for the smaller countries of Europe, with their own national currencies, to maintain the previous valuation with the Euro. Witness what has already happened in Denmark, Norway, Sweden, Poland and a number of other countries in Eastern Europe and elsewhere. They will all be facing the same financial difficulties.
Denmark has surprised investors by a third rate cut to its interest rates in two weeks. Hitting another historic low, the country is desperate to keep the Danish krone within its traditional range against the Euro. The central bank in Denmark cut certificate of deposit rates from -0.35 to -0.50. This is a reduction of 45 basis points in less than a month. Corresponding interest rates are now at -0.75.
The Danish Central Bank has intervened in the currency markets every month since last September with the exception of December, in the heroic effort to keep the value of the krone down. In January alone, Denmark spent the equivalent of $100 billion USD (United States Dollar) in defending the krone against the Euro. The Danes insist, they will do what is necessary to maintain the current peg.
The end reality, is negative rate mortgages. This means there are already homeowners in the country, that have been paid to take out a mortgage. This is utterly unsustainable, so how trustworthy is the promise of the Danish Central Bank over the longer term? To what lengths will the central bank there go to maintain market share, of the lucrative Danish export of agricultural commodities?
The opening salvo in the currency wars has already commenced. The massive QE policies of Japan, the United States and the United Kingdom over the last few years, were the first sorties of this intensifying enmity. This massive printing of money has put into circulation tremendous amounts of fresh currency, in the mostly unsuccessful attempt to stimulate new economic growth. This ongoing nonsensical action, also continues to undermine the faith that investors and the public at large, have placed in the major currencies of the world.
The economic outcomes of punishing savers by charging them for holding money, only encourages more foolhardy behavior and ever greater debt accumulation, on the part of consumers and investors alike. That spending profligacy will now be subsidized by an already overextended and bankrupt monetary system, will have dire future consequences.
More industrious and cautious nations of the world, are already beginning to take steps in response to the coming conflagration. A number of countries are taking steps to repatriate their gold, others are buying more, and some are attempting both.
The Netherlands is an example of the latter. In late November of 2014, the Dutch Central Bank (DNB) announced that they had covertly repatriated 122.5 tons of gold from the Federal Reserve Bank in New York City (FRBNY). In addition, last month the IMF (International Monetary Fund) announced that the DNB had bought 10 tons of gold in December 2014. No problem with these transactions in normal circumstances. The problem is that the DNB immediately denied (within hours), that there had been any purchases of gold made by the bank.
Further deception on an international level becomes quite evident if one considers the case of just two national withdrawals of gold from the FRBNY. If the Dutch are to be believed that they in fact withdrew 122.5 tons and Germany supposedly withdrew 85 tons, why is the FRBNY reporting a total withdrawal of only 176.81 tons in 2014? The discrepancy of 30.69 tons cannot be just an accounting error. There should two concerns for investors within the present situation. One is that there is a major deviation in the numbers reported, the other is that none of the entities involved, feel it is necessary to give any explanation whatsoever, of the events that have taken place.
Why all the subterfuge? The answer could not be more obvious. There are not enough physical gold reserves to match the claims of ownership. This is not just the case with the FRBNY, which cannot account for the whereabouts of thousands of tons of gold. As of December 2014, this one bank is supposed to have 6018.70 tons of gold stored in its vaults. This is down from 6195.60 tons from the beginning of 2014. Yet an audit done by the Treasury Department of the United States in 2012, reported reserves of just 491 tons. There have been no substantial deposits since then. A deposit of only 4 tons of gold was made in 2011 and 3 tons in 1999. So where are the remaining 5,527.7 tons of gold?
The much larger question for investors is what else are these financial and monetary leaders lying about? Why are they allowed to continue the fiction of supposed stability, within the international banking system? The financial markets of the world are at a precipice, yet these bankers and officials continue to insist that all is well. In country after country, there is the imperative assurance by these same typed individuals, that there is no domestic or international situation that collaboratively cannot be dealt with.
There is an expectation that there will be little to no transparency at all from nations like China and Russia. These two countries and a number of others play by a different set of rules. The advanced countries of the West are a totally different matter. These officials are accountable to the societies, that have entrusted them to safeguard the financial stability of both the domestic and international markets. They instead are working cooperatively in deceiving almost the entire investment class and the public at large.
What these central bankers are now doing would be considered criminal, in the private business world. They are publishing inaccurate and spurious information as well as making false statements. The purported excuse, is that they are attempting to maintain investor confidence in the markets. Not having the correct information and not being able to trust these reprehensible officials, is what is ultimately undermining the trust of an ever greater share of the populace. The corrosion and the decline of confidence in world markets, is already accelerating at an alarming rate. At this point, one can only be assured that this scenario will not end well.