The Cannibalization Of The Financial System Will Force Investors Into Silver

Steve St Angelo

Day in and day out, the global financial system continues to cannibalize itself.  Clear evidence of this points to the massive “Artificial” liquidity and asset purchase policy instituted by the Federal Reserve.  While financial analysts provided several theories why the Fed was forced to inject liquidity via the Repo Market and also purchase $60 billion a month in U.S. Treasuries, the real reason has to do with the falling quality of oil and its impact on the value of assets and collateral.

It’s really that simple.  However, there is no mention of it (energy) by any of the leading financial or precious metals analysts.  For example, in Alasdair Macleod’s recent Goldmoney.com article titled, How To Return To Sound Money, he states the following:

This article provides a template for an enduring sound money solution that will deliver economic progress while eliminating destructive credit cycles. It posits that a properly constructed gold and gold substitute monetary system, which also includes the removal of bank credit inflation as a means of providing investment capital, is the only way that lasting stability and prosperity can be achieved.

Alasdair Macleod, who I have a great deal of respect, doesn’t mention “Energy” once in his entire article suggesting that returning to sound money, through gold, is the only way for lasting stability and prosperity can be achieved. The majority of economic prosperity has come from the burning of oil, natural gas, and coal, not from gold or silver. The precious metals act as money, a store of value, or economic energy, but are not the ENERGY SOURCES themselves.  While this is self-evident, it is very important to understand.

The overwhelming majority of analysts do not understand that ENERGY is the driver of the global economy, not finance.  Here is a perfect example.

If you want to drive your brand new car to a restaurant, what is NECESSARY to have in that car?  Correct… you need the fuel.  That $35,000 car is worthless without the fuel.  If you had no fuel and I walked up to your house and gave you a ticket for 20 gallons of gasoline, would that get you to the restaurant??  NO… it would not. A Ticket representing gasoline is not the gasoline.  This is what people do not understand today.

The money in the bank is not the FUEL; it’s the ticket for the FUEL.  Without the burning of billions of barrels of oil and natural gas equivalents, along with coal, the MONETARY SYSTEM would not work.  The energy comes first, the money second.  It’s always been that way.

Unfortunately, the amount and value of TICKETS in the system have continued to increase exponentially while the quality of the energy is declining.  It’s not the quantity of energy that is important, but rather the QUALITY of energy.  Because the quality (and soon the quantity) of energy is declining, the tremendous amount of outstanding TICKETS in the world will lose their value.

Which brings us to gold and silver… Fiat Money (Federal Reserve Note) is a mere TICKET for energy in the world, while gold and silver represent a BANK of stored economic energy.  There is no stored energy in gold or silver, but they act as a BANK of energy equivalents.

Energy Equivalents Of Fiat Money vs. Precious Metals (based on $ 2.75-gallon gas)

$20 Federal Reserve Note:  Intrinsic Paper value of note worth 13 cents (at most) = 1/20th of a gallon gas

1 oz Silver Coin: Worth approximately $18 = 6.5 gallons gasoline

1 oz Gold Coin:  Worth approximately $1,550 = 564 gallons of gasoline

The energy equivalent values for the precious metals are considerably higher than the Federal Reserve Note… no shocker there, but this is only part of the equation.  I am not going to get into the details in this article, but will be doing so in a new Youtube video update.  If you have not yet subscribed to my SRSrocco Report Youtube Channel, please consider doing so at the link:  SRSrocco Report Youtube Channel.

Getting back to the failure of financial and precious metals analysts to include ENERGY in their analysis, here is another article focusing on the “symptom” rather than the underlying factor, The Fed Won’t Avert The Next “Crisis”… They Will Cause It:

“Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis. But after that, the Fed kept rates too low for too long, reinforcing the wealth and income disparities and creating new bubbles we will have to deal with in the not-too-distant future.

This wasn’t a ‘beautiful deleveraging’ as you call it. It was the ugly creation of bubbles and misallocation of capital. The Fed shouldn’t have blown these bubbles in the first place.”

The quote in that article was from John Mauldin.  Mauldin is the typical financial analyst that seems to believe in the ENERGY TOOTH FAIRY. According to Mauldin and 99% of financial analysts, the majority of our problems stem from Central bank intervention, debt, corruption, or some form of socialism.  Again, nowhere in the article linked above is the mention of ENERGY….  ZIP… NADDA… ZILCH.

I could go on and on.

One aspect not considered by the Mainstream or Alt-Media analysts is that the Fed and Central Banks are likely postponing the collapse of our global economy for as long as possible.  No one seems to GET THIS.  Sure, there are a few like Gail Tverberg.  She gets it.  But, most just point out the mere symptoms without looking at the underlying factor.

I changed my negative opinion of bankers over the past few years, especially after I watched the movie, MARGIN CALL. The movie Margin Call takes place during the 2007-2008 Mortgage-Backed Security Financial Crisis.  Here is a scene from the movie that points out the obvious from this investment banker that most analysts and investors seem to ignore.  The important part starts at 50 seconds in the video clip.  While everyone wants to blame the bankers for all our economic ills, they also provide a standard of living that wouldn’t be possible if the global playing field was equal. CAUTION:  some foul language in the video clip:

I gather readers will have a different opinion of bankers than I.  Still, if it wasn’t for the debt and the leverage that the bankers provide, our economic system would have collapsed a decade ago… with no recovery.  So, if there was an option available, I can assure you that most Americans would select the present fiat banking system over a global sound money equalized playing field. Without bankers, most Americans could not afford their standard of living which they get off the backs of most of the poor in the world… LIKE IT OR NOT.

That being said, by looking at the symptoms taking place in the financial system, we can see just how bad the situation is becoming.  The chart below shows the amount of asset purchases the Federal Reserve has added to its balance sheet over the past four months versus the total value of all global above-ground silver stocks:

I decided to compare the Fed’s balance sheet to silver rather than gold because I believe silver will be the GO TO ASSET once investors get PRECIOUS METALS RELIGION. Silver’s future price action or value will make Palladium’s current bubble look tame indeed. Unfortunately, Palladium’s value will crash once the global economy heads into a depression.  Even though Palladium and Platinum are precious metals, the overwhelming majority of investment demand is in silver and gold.  Palladium and Platinum’s value is based more on industrial demand rather than investment demand.  KISS – Keep It Simple Stupid.  Acquire the 2,000+ year history of money… gold and silver.

In the last four months, the Federal Reserve added $414 billion to its balance sheet.  What a change compared to the $708 billion in assets the Fed sold back to the market (primary dealers) over a two-year period.

The Fed was selling an average of $118 billion of its assets every four months over the 2-year period.  However, it purchased more than three times that rate of $414 billion in the past 4-month period.

Now, think about this.  The Fed announced on October 15th that it would start purchasing $60 billion a month of U.S. Treasuries.  The Fed has purchased at most, $240 billion in U.S. Treasuries in the 4-month period.  But, the total increase in the Fed’s balance sheet is $414 billion, or $174 billion higher.  So, it also has been slowly adding assets (liabilities) via its Repo Market operations.  I call them liabilities because there is no real market for them. And, as time goes by, the world is going to watch as the majority of so-called ASSETS turn into LIABILITIES.

As I mentioned in previous articles, I believe the “FINANCIAL CRISIS” started on September 15th, when the Fed had to step in with emergency Repo Market Operations and has continued to do so.  While the markets believe the Fed has fixed the problem, it’s only going to get worse.  Why?  Because the Thermodynamics of oil depletion doesn’t stop and the quality of oil (or net energy) that makes it to the market continues to decline.

Thus, The Federal Reserve increased the value of its balance sheet over the past 4-month period by nearly 10 times the value of all the global above-ground silver stocks:

Based on a global value of available silver stocks (2.5 billion oz X $18 = $45 billion), the Fed’s balance sheet purchases of $414 billion are 9.2 times all the investment silver held in the world.

Investors do not understand this CRITICAL comparison… YET.  But, they will in time.

While the Austrian School of Economics Aficionados believe that returning the world to sound money with gold will put us back on a path of future prosperity, they couldn’t be more wrong. Gold Money will not alter the ongoing Thermodynamics of oil depletion and its impact on the massive JUST-IN-TIME-INVENTORY SUPPLY CHAIN SYSTEM.   Gold can’t fix our dire future energy predicament.

However, gold and silver will offer BETTER OPTIONS in the future than most of the present-day competing assets, such as STOCKS, BONDS, and REAL ESTATE.