The crisis this time hits governments, not banks
Past crises came from the credit cycle breaking in the private sector, which governments could fix. This time credit is breaking in government itself. That leaves no room for error, and it cannot be solved by getting someone else to bail the governments out. This is the terminal crisis.
Foreigners hold $25 trillion in assets that will be sold off as bond yields rise. Earnings matter, but you need buyers, and much of the stock has been bought with borrowed money. Those are the conditions for a credit bubble that bursts. The stock market may rise a little more, but it is very dangerous and will collapse from current levels. If history is a guide, expect losses on major indices of up to 90%.
Why no rescuer exists now
In 1976 the United Kingdom got into a huge mess and its politicians could not handle it. The country's creditors, mainly the United States, sent in the IMF, which effectively took over government policy - forcing spending cuts, tax rises, and a budget surplus. Britain got lucky when North Sea oil was discovered right after, giving it a new lease of life.
The question now is who comes in to fix the problem, because every major economy sits where the UK sat in 1976: America, the whole of Europe, the other G7 members France, Italy, and Germany, plus Canada and Japan. Japan is in a terrible mess and will see inflation go much higher. In the 1974 OPEC crisis, of similar size, Japanese retail prices rose over 25%; right now Japanese inflation is under 3%, so there is a long way to go.
The debt numbers show the difference. In the 1970s, average G7 government debt to GDP was around 30%, and Japan was at 20%. Today the average is about 125% to 130%. A global government fiscal and financial crisis cannot be handed off to an outside rescuer.
Timing and the two-phase collapse
The problem is immediate and will not hang around, though for most people it plays out over the next five years. As bond yields push through 5% and rise further, equities crash. That financial crisis is the first phase.
Markets may fall 30% to 40% in a matter of days. Then comes a G20 panic meeting, markets possibly closed for two or three days, and emergency talks that produce a rescue package. That package always needs an expansion of credit. It gets sold to the public with the story that banks are no longer lending, and that this is the cause of the crisis.
The response follows pure Keynesian theory: replace the lost bank credit with credit expansion at the central bank level. Cut interest rates, run QE, and coordinate it with reciprocal swap lines between the United States and other G7 nations. That steadies markets for maybe a month, or up to six months. The cure is what kills the system. Replacing bank credit with an expansion of currency and currency reserves collapses the value of the currencies themselves. Central banks are already talking about CBDCs replacing existing debt, and a "global reset" is a common phrase. At that stage gold could be worth somewhere between $7,500 and $10,000 - not a forecast.
Why gold, and why silver alongside it
Precious metals and commodities would be the principal assets to hold. Hold the assets, not paper equivalents. You cannot buy a tanker of oil unless you are extremely rich, and then you face where to anchor and store it. Gold stands in for the whole commodity universe, because over long periods it holds its purchasing power measured against commodities.
Equities give you a piece of paper, not ownership. On the other side of that paper is the management's obligation to deliver income to shareholders or build value for them. You do not even get that cleanly, because the true shareholders are intermediaries like Euroclear or DTC, the outfits that turn shares into dematerialized form. You have no control over your slice of that pooled stock, which can be lent out to cover short positions or used as collateral to back someone else's debt. The only way around it is a certificate issued by the company in your own name, bypassing the whole intermediation fraud - and almost nobody does that.
The silver case
Silver is both monetary and industrial, which puts competing claims on a finite stock. Under current conditions, industry actually needs investors to sell their physical silver to make up the supply it requires. Silver is the least affected of the metals by swings in global economic growth because of what it is used in: solar panels, now mandated, and EVs, also mandated. It is the best metal for those jobs with no effective replacement.
Commodities as a whole have been in a bear market in real terms for a long time. A basket of base metals or energy, priced in gold rather than dollars, sits roughly 75% to 80% below where it should be. For energy to return to its proper value measured in gold, it needs to reach $300 at the current dollar-gold exchange rate, and higher still if the dollar keeps losing purchasing power. The dollar price of gold is theoretically somewhere between here and infinity.
Silver moves like a junior version of gold. As gold climbs, smaller investors will look at silver and wrongly conclude that with gold already up at, say, $6,000, silver at $100 is far cheaper and affordable. That flow pushes the gold-silver ratio down hard. The ratio is now 67; it could easily fall below 30, and possibly below 20. Silver acts like gold on steroids.
Gold comes first because it is final settlement, which is why central banks buy it. Silver is also a form of final settlement of credit, just not the preferred one today. Silver's extra advantage: if governments ban private ownership of gold, silver is a way around that. If they ban gold, they are unlikely to ban silver, and if they start banning ownership of commodities the whole situation just gets worse. If they ban further gold purchases, the price shoots up. In the age of social media, governments would find it very hard to ban gold and survive that decision, so it is very improbable. If you do not have silver, buy it now.
