From Unsustainable To Sustainable

From Unsustainable To Sustainable – Jun 14 2011

This is why Gold is going up. Invest in Gold and Krugerrands as these will protect your wealth while the world enters a painful transition phase.

THE ROAD FROM WHERE WE ARE NOW TO OUR FINAL DESTINATION

We are at a point where the current social and economic system is unstable, unsustainable and nothing adds up anymore. We need to get back to basics, where these systems revert to a more sustainable, viable and ethical historical norm. This will take at least a decade. I am going to map out point by point my take on the road from the “unsustainable” now back to a more viable “Reality”:

1. Governments, States and Counties no longer balance their budgets with expenditure exceeding revenue by far, with all shortfall funded by excessive debt, thereby deferring the cost of their profligacy to future generations. We will only be back to Reality when government officials are, once again, held accountable for delivering balance budgets i.e. tax revenue = expenditure. The painful transition will include higher taxes, expenditure cutbacks, retrenchments, demotions, salary cuts, etc;
2. Almost all Western governments have incurred excessive debt and they are unable to service this debt, particularly if interest rates rise. We will only be back to Reality when these debts and their debt service costs have reverted to manageable levels in relation to the countries’ economies and can be serviced by the tax revenue stream. The painful transition will include higher taxes and substantial defaults coupled with re-negotiated terms with lenders i.e. reduced loan amounts, extended loan terms and reduced interest rates. Bankruptcies will become a norm;
3. Almost all Western governments have raided the coffers and instead committed to deferred entitlement programs i.r.o. Social Security, Health Care etc for which no provision was made in current budgets, i.e. they have transferred the cost to future generations. We will only be back to reality when these entitlements have been cut back, money for the reduced entitlements has been set aside and the expenditure provisions are reflected as provision reserves in government balance sheets. The painful transition will mean that most people who had no “own” pension provisions will be left impoverished by bankrupt entitlement funds and they will get marginal support from current taxpayers by way of higher taxes. Suicides will become common;
4. All currencies are Fiat and this situation is being exacerbated by rampant printing, which benefits only the politicians, the bankers and the rich, while it undermines the currency, savings and economic growth and destabilises global politics and trade. Fiat currency systems make the general public poorer. We will only be back to Reality when currencies are back on the Gold Standard or some sort of global managed benchmark/scheme that ensures fiscal responsibility i.r.o. balanced fiscal, state, municipal, trade and current account deficits. The painful transition back to Reality will require the immediate resumption to fiscal discipline (discussed above) and will bring to a halt the shenanigans of many government politicians, bankers and executives. In the fallout, it is likely there will be many prosecutions of politicians, bankers and corporate executives for fraud, corruption, manipulation and countless other dishonest practices;
5. For the past 25 years, average PE Ratios have been unusually high at 15-17 times and Dividend Yields have been unusually low at 1.5%-2.5%, partly due to low rates (manipulated), low inflation (manipulated) and easy money. This was mainly because money was easy to come by and less and less money was made from value added activities, while more and more profits were made from commissions and speculation. When we return to reality, company earnings will once again reflect real value with average PE Ratios at 5-8 times and Dividend Yields at 5%-10%. The painful transition back to reality will be felt mainly as lower returns in the banking and investment arenas and most people will have lost a very considerable portion of their wealth as stock markets adjust downwards;
6. The past decade has been characterised by negative real returns in equity and bond markets. When we return to reality, investors will once again demand a fair return for their money. The painful transition is discussed under other points;
7. During the past 25 years, easy money made executive and management remuneration packages grow at the expense of workers’ wages and this was exacerbated when most companies introduced huge incentives. The result was that most packages were disproportionately large in relation to the value the management employees added to their companies and were skewed in favour of the employees at the expense of the shareholders. We will know that we are back to reality when an employee is paid to do a job and the annual bonus is the equivalent of 0-2 months pay at the discretion of management. The painful road back to Reality will entail huge pay cuts for the majority of people in senior management positions. This will also result in dramatic reductions in consumption particularly in upmarket products and services;
8. The past 25 years were characterised by manipulated Statistics with inflation understated, growth overstated and unemployment understated. These tactics were aimed at misleading the public, causing “the people” to think they were being treated fairly when in fact they were being systematically impoverished. In effect, workers wage increases were not keeping up with cost of living increases (inflation) and, over many years, the cumulative effect made them ever poorer. The result was that the workers earned progressively less as they were initially compelled to work a day and a night job and finally sent the wife to work to make ends meet, while management lived a life of luxury. We will know that things are back to normal/Reality when inflation, GDP growth and unemployment statistics once again fairly reflect cost of living adjustments, economic growth and unemployment. The pain of the transition will be felt mainly by politicians who will have less room to manipulate matters to their own advantage, particularly when this is used to secure re-election. However, it will also be felt as reduced earnings at management level, which will hopefully be offset by greater recognition for workers with higher rewards for fair labour (the latter will take a few decades as unemployment will initially be too high);
9. For the past decades, greed, exploitation and selfishness have become the norm. Once the abovementioned Reality/Norm sets in, people will have experienced and shared such hardship that they will have gained a new perspective of and respect for their fellow man. The pain of transition will have been felt by all, either by way of loss of wealth, unemployment, a reduced standard of living, serious hunger or legal prosecution.

You may ask who is going to bring about this change.

The pressure will come from three primary sources:

• Developing countries who have had enough of being disadvantaged by the Fiat system and policies of Developed countries, particularly i.r.o. depreciating trade surpluses;
• The market makers like Investment funds, Private Investors, Bonds and Equity traders who will demand a fair return for the risks they are taking after they progressively realise they have lived with negative Real returns. Eg. Pimco has exited the US Bond market and is shorting same;
• The voting public who will have had enough of being exploited by their elected officers, bankers and employers.

Characteristics of the decade period leading up to and following the point at which a sustainable norm is re-established will include the following:

• Higher taxes in Developed countries like USA, UK, EU;
• Balanced budgets at municipal, county, state and national level;
• Seriously lower share prices – when measured in real “purchasing power parity” terms, which means most people will have less wealth and many will have been wiped out. However this will be accompanied by shares offering Real Value, with lower PE ratios and higher Dividend Yields;
• A marked decline in the number of rich people and opulent lifestyles;
• Seriously high unemployment coupled with serious hardship, including greater homelessness, less food etc, with Government protests spreading to most countries including the USA, UK and EU. All this is likely to be initially accompanied by an increase in lawlessness and crime;
• A generation of pensioners who will not be able to afford full retirement and who will experience severe hardship in their later years;
• Government will account for a lesser part of GDP and will employ less people;
• A wave of prosecutions of the architects of the demise of ethical business practices;
• An increase in selflessness and integrity, fairness and consideration