"Paper money eventually returns to its intrinsic value ZERO" - Voltaire 1729

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August 16, 2010 @ 1:06 pm

THERE WILL BE NO DOUBLE DIP…..

by Egon von Greyerz – Matterhorn Asset Management
No, there will be no double dip. It will be a lot worse. The world economy will soon go into an accelerated and
precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world
financial system has temporarily been on life support by trillions of printed dollars that governments call
money. But the effect of this massive money printing is ephemeral since it is not possible to save a world
economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to
print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money
printing of a magnitude that the world has never experienced. But this will not save the Western World which
is likely to go in to a decline lasting at least 20 years but most probably a lot longer.
T he End of an Era
The hyperinflationary depression that many western countries, including the US and the UK, will experience is
likely to mark the end of an era that has lasted over 200 years since the industrial revolution. A major part of
the growth in the last 100 years and especially in the last 40 years has been built on an unsustainable build-
up of debt levels. These debt levels will continue to swell for another few years until the coming hyperinflation
in the West leads to a destruction of real asset values and a debt implosion.
In the last 100 years the Western world has experienced a historically unprecedented growth in production, in
inventions and technical developments leading to a major increase in the standard of living. During the same
period government debt, as well as private debt have grown exponentially leading to a major increase in
inflation compared to previous centuries.

[1]

Until the early 1970s the growth in credit to GDP had been going up gradually since the creation of the Fed in
1913.. But from 1971 when Nixon abolished gold backing of the dollar, virtually all of the growth in the
Western world has come from the massive increase in credit rather than from real growth of the economy.
The US consumer price index was stable for 200 years until the early 1900s. From 1971 to 2010 CPI went up
by almost 500%. The reason for this is uncontrolled credit creation and money printing. Total US debt went
from $9 trillion in 1971 to $59 trillion today and this excludes unfunded liabilities of anywhere from $70 to
$110 trillion. US nominal GDP went from $1.1 trillion to $14.5 trillion between 1971 and 2010. So it has taken
an increase in borrowings of $50 trillion to produce an increase in annual GDP of $13 trillion over a 40 year
period. Without this massive increase in debt, the US would probably have had negative growth for

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most of the last 39 years.
Total US debt to GDP is now 380% and is likely to escalate substantially.

[2]

The coming hyperinflationary depression and the credit and asset implosion that is likely to follow will most
probably lead to the end of a 200 year era of growth for the Western world. If only the excesses from the
1970s were corrected we might have a circa 20 year decline. But more likely we will correct the era all the way
back from the industrial revolution in the 18th century and this could take 100 years or more.
So after the tumultuous and very painful times that we are likely to experience in the next few years, the
West will have a sustained period of decline. All the excesses in the economy and in society must be
unwound. These abnormal and unreal excesses are not just corporate executives, bankers, hedge fund
managers or sportsmen earning $10s to $100s of millions but also a total collapse of ethical and moral values
as well as a breakdown of the family as the kernel of society.
Most people believe and hope that this major trend change could not happen today with all the measures that
governments have at their disposal. But very few people comprehend that it is precisely the government
interference, controls and regulations as well as money printing that have created the problems in the first
place. Power corrupts, and the more pressure a government is under the more they intervene. Because they
believe that their interference in the economy will save the country – read Obama, or the world – read Gordon
Brown. Little do they understand that each interference, each regulation or each dollar or pound or
Euro printed will exacerbate the problems of the economy manifold.
Governments now have two options; continue to spend and print money like the US or introduce austerity
programmes like Europe. Whichever way they chose will not matter since they have reached the point of no
return. The economy of the West cannot be saved by any means. But governments both in the US and
in Europe will still apply the only method they know which is to print money.

Government is Stealing from the People

Very few people understand that money printing is a form of robbing the citizens of their money and their
work. Money is supposed to be a medium of exchange for goods and services equalling the value of the good
or the service produced. For example, an individual works extremely hard to earn an annual wage of say
$40,000 which he receives in the form of paper money. The government, due to its mismanagement and
incompetence simultaneously prints $40,000 in order to cover its deficits. So the government has by pressing
a button produced the same amount of money that a man had to work a year for. This is what is currently
taking place all over the world and which will accelerate in coming months and years leading to a total
destruction of paper money. Paper money has completely lost its function as a medium of exchange or
a store of value. This is why gold is gaining and will continue to gain value against perishable paper
that is called money.
Deflation Inflation or Hyperinflation
The only reason that the US could build up such a major debt is that the US dollar has been the reserve
currency of the world and therefore the US has been able to finance its debts and deficits internationally. The
US has now reached a point when debts have to increase dramatically for the country just to standstill. Like
all Ponzi schemes this one will also come to an end – and this very soon. The US dollar will decline dramatically
and lose its reserve status and the US government will be unable to finance its deficit in any market. This
process will lead to endless money printing, collapsing treasury bonds (substantially higher interest rates) and
the dollar becoming worthless in a hyperinflationary black hole.
Let us just reiterate that hyperinflation arises as a result of money printing leading to a currency
collapse and not from demand pull. The slight deflation that we are experiencing currently is a
prerequisite for hyperinflation. The fear of a deflationary implosion forces governments to print
money, leading to a collapsing currency which historically has always been the cause of
hyperinflation.
Real M3 (source: Shadow Government Statistics) is falling at an unprecedented rate. This is the precursor to
economic decline, quantitative easing and inflation (see early 1970s in the chart).

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 [3]

Many “experts” make the analogy between the deflationary period in Japan since the 1990s and the US today.
In our view the US is in a totally different situation for the following reasons:
In the early 1990s Japan could still export their production to the rest of the world.
In the current downturn all countries (even China and India) will suffer and there will be no one to
export the problems to.
The ability to export made Japan a creditor nation with major payment surpluses. US are a major
debtor and have been for 25 years.
Japan had a very high personal savings ratio at the time (which has now disappeared). US has had a
declining savings rate for years (the US savings rate is now going up which it always does in a
downturn).
The balance of payments and the personal savings surpluses made it possible for Japan to finance their
budget deficit without resorting to QE. Very soon he US will only be able to finance their deficits with QE
and so will most of the rest of the Western world.
Japanese unemployment in 1992 was 2% and went slowly up to 5% by 2000 where it is now. Real US
unemployment is 22% and increasing.
Many major sovereign states are now virtually bankrupt and the financial system is on life support. This
was not the case in the 1990s.
The above are some of the reasons why the current US situation is totally different to Japan. QE will
accelerate in the US and worldwide.
What will make this process so much more complex than the world has ever experienced is that the same
development is likely to take place in many countries around the world simultaneously. It will most probably
happen in the UK, the rest of the EU and most other European nations. Due to the total interdependence of
the world financial system, it will be difficult to forecast which countries can withstand the coming worldwide
tsunami of money printing but many Asian countries probably stand a good chance.
Can we be wrong in our forecast of a hyperinflationary depression? Yes, of course we can. But the alternative
can only be a deflationary collapse which would be unacceptable to (dropping money from) helicopter
Bernanke and deficit demagogue Obama as well as most other governments.
Conventional wisdom and most experts say that we will not have inflation but deflation. The
problem with most conventional wisdom is that it is only conventional without an ounce of wisdom.
When have the world’s so called experts, politicians etc ever been right on the current crisis? They
will be wrong this time again.
The “conventional wisdom experts” also say that it will be years before we can see inflation or hyperinflation.
In our view it can happen a lot faster. The world economy is resting on a foundation of matchsticks. All that is
needed is a change in confidence or psychology for this fragile foundation to crumble. Falling currencies,
rising bond yields and falling stock markets could very quickly result in a vicious and fast spinning
hyperinflationary circle. The frailties of the financial system could make this happen like a flash fire.

Wealth Creation
Banks and the financial industry have throughout history existed in order to finance production and trading of
goods. But in the last 100 years and especially in the last 20-30 years it has become a major industry in its
own right and an important but unproductive part of the economy in many countries. Today, the financial
industry is too a great extent involved in trading for its own and clients’ accounts, creating a raft of obscure
instruments that only benefit the banks and as well as financing consumption rather than investment. All of
these areas are totally non-productive and the only beneficiaries are the participants in the financial industry.
And the rewards have been absolutely astronomical. In investment banking, hedge funds and private equity in
particular, the most massive wealth has been created. Many players have become billionaires or created
fortunes of tens to hundreds of millions of dollars in the last 10-15 years just by shuffling money around. In
the past fortunes were created by building factories and industries. But today any normal employee working
in Wall Street or the City in London will, by just showing up to work, make hundreds of thousands to millions
of dollars. This is the proof of a world totally out of balance when people dealing in money become
the richest segment of society. Since this activity contributes very little to the prosperity of a nation
(but very much to its participants) it is not sustainable. The biggest reason why it exists is the massive

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amount of money that governments have created or printed and the fact that the financial industry has
developed into a fractal wealth creation machine for the benefit of its participants.
For the last 40 years in particular the rich are getting richer and the average person has seen very little
increase in real income. In the US, the real annual income of the bottom 90% of US families has increased by
only 10% since 1970. And in the expansion between 2002 and 2007, median US household income dropped
$2,000. The perceived increase in wealth for the majority of Americans derives from an increase in
their debt level not from an increase in real earnings. So the improvement in living standards that
the average American and many other Western countries have enjoyed in the last 40 odd years is
primarily based on debt – debt that can never be and will never be repaid with normal money.
On the other hand, management has achieved a major increase in income and wealth. In 1973, chief
executives in the US earned 26 times the median income. Today they earn 300 times. This enormous widening
of the gap between the top few percent in society and the masses is morally and socially unacceptable. When
the bad times start in earnest, this is likely to lead to major social unrest and violence directed against the
privileged.
T he Focus will Shift
For a major part of 2010 the focus has been on the problems within the EU starting with Greece, then Spain,
Portugal, Italy etc. The problems in Europe are major and many European countries as well as the European
financial system will lead to massive money printing. Although the problems in Europe are very serious, the
US economy is in a much worse state. The diversion of the focus away from the problems in the US economy
onto Europe has suited the US Administration perfectly. It can hardly be a coincidence, for example, that US
rating agencies downgrade the Sovereign debt of Greece and Spain on the same days as Treasury auctions
are held. But the problems in the US economy are deteriorating at a rapid rate; factory orders, consumer
confidence, existing home sales, retail sales, the ECRI index (Economic Cycle Research Institute) are all falling
more than expected and real unemployment, personal bankruptcies (will exceed 1.6 million in 2010), trade
deficit, state and federal deficits are all increasing.
The ECRI index is an important leading indicator. It has now fallen for 10 straight weeks.

[4]

There are three insurmountable problems in the US economy that are of a magnitude and gravity which
can only be remedied by money printing:
Federal and state deficits will soon escalate at an exponential rate. The US Federal debt has increased
from $ 8 trillion in 2006 when Bernanke took office to soon $ 14 trillion. Many forecasts expect this debt
to go up to nearer $ 20 trillion in the next 5 years. In our view it will be substantially higher. Add to that
interest rates of 15% or higher and the American people will work just to pay taxes that don’t even
cover the interest payments on the federal debt. This is why the US will either default or more likely print
unlimited amounts of money.
The real unemployment rate is now 22%. Since 2007 over 8 million Americans have lost their jobs
and it will get a lot worse. Non-farm unemployment in the 1930s reached 35% and we would expect
this level to be reached in the next few years.
The financial system is bankrupt. Banks are failing at a much faster rate than last year. In the first 7
months of 2010 circa 110 banks have failed. More seriously the assets of the failed banks are only
worth an estimated 30-50% of their balance sheet value. Banks are valuing their toxic debt at phoney
values with the blessing of the government. But even debt that today is considered safe will soon turn

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 toxic with the consumer coming under enormous financial pressure. Add to that the OTC derivatives
held by US banks of at least $ 400 trillion. A big percentage of these are worthless and there are
virtually no reserves to cover potential losses.
Within the next few years, the three areas above are likely to result in the biggest money printing programme
in world history and simultaneously lead the US (and many other countries) into the abyss.
Markets
There has probably never been a period in world history which has caused the amount of wealth destruction
that we are likely to see in the next few years. If we are correct in our assumption that the West will see a
correction of the excesses of the last circa 40 years but more probably of the last 200 years, since the start
of the industrial revolution, we could see a total annihilation of the assets that have been fuelled by the credit
bubbles. The spike in asset values in the last 100 years, which is unprecedented in history, is likely to be
corrected by a waterfall which could start at any time. We will issue a separate report in the next 10 days
covering our market predictions and the importance of physical gold for wealth preservation purposes.

Matterhorn Asset Management AG

Bahnhofstrasse 28a
CH 8001 ZURICH
Switzerland
+41 44 213 62 45 - Tel
+41 43 456 97 11 - Fax
matterhornassetmanagement.com

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