Danger! Exploding Wealth Gap!

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How can the Federal Reserve taper when the real US economy is in a terrible state? Add to that the massive problems in the eurozone. And Japan, the world’s third-largest economy, is a guaranteed basket case.

In the US, the job participation rate is the lowest since the 1970s, real unemployment (calculated on a consistent basis) is 23%, workers’ real wages have not gone up for decades, 50 million people are on food stamps, government deficit runs at $1 trillion per year and government debt including unfunded liabilities is $220 trillion and growing exponentially.

Does this sound like an improving economy? Well not to me. Also, the banking system has the same toxic debt and derivatives as in 2008. The banks are just fortunate that they don’t have to value their assets at market. If they did, very few banks would be standing today.

In the G-7 countries, total debt is exploding, and it now takes $7 of debt to produce $1 of additional GDP. Talk about the law of diminishing returns.

The G-7 are the top industrialised countries in the world; the US, the UK, France, Italy, Canada, Germany and Japan. Since neither China nor Russia is included, you can question the validity of this group, especially since most of the G-7 countries are bankrupt.

Nevertheless, the G-7 represent around 50% of world GDP and total $35 trillion. But these countries have a total debt of $140 trillion, which is a remarkable 400% of their GDP. If you look back to 1998, the total debt of the G-7 was $70 trillion and their GDP was $30 trillion.

So debt has doubled between 1998 and 2012, and GDP has gone up by only $5 trillion. What this means is that it takes $70 trillion of additional debt to produce $5 trillion of additional GDP.

So the world’s so-called richest nations need $7 of debt to produce 50 cents of GDP. The world is bankrupt, and all of the economic figures that are being published are just a mirage of a castle built on a foundation of worthless paper money. The world can, of course, never pay back the debt with real money, and the world can’t even pay the interest with real money.

Every 1% increase in the interest rate means an additional cost for the G-7 of a staggering $1.4 trillion. That is absolutely massive. $1.4 trillion is only slightly less than the entire GDP of Canada. If interest rates increase by 10%, then we are looking at an increase in interest expense for the G-7 nations which equals the entire GDP of the United States.

Anyone with a sane mind would realise that this whole situation is untenable, and sadly, this will end very, very badly for the world. We don’t just have an economic bankruptcy, but we also have a moral and ethical bankruptcy taking place on top of the threat of war, and the fact that most governments are taking away freedoms and personal initiatives by making people dependent on state handouts.

We also have the very dangerous situation where the rich are getting richer and the poor are getting poorer. Since 2009, the wealthiest 7% have seen their wealth increase by 28%, while the other 93% have seen their wealth decline by 4%. If you take the wealthiest 300 in the world, they have more wealth than the poorest 3 billion. This is very dangerous for a world that will have more and more people going hungry.

If we turn to the situation in gold, there is a major shortage of physical gold, and Western governments and central planners are doing what they can to sell or lease their gold into the market. At the same time, the manipulation in the paper market continues.

Remarkably, only half of 1% of world assets are invested in gold. Considering what will happen to the world in the next few years, that percentage will go up dramatically, but that will only happen at much higher prices, since there is virtually no physical gold available at these prices.

Regards,

Egon von Greyerz
for The Daily Reckoning Australia

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Ed Note: Danger! Exploding Wealth Gap! originally appeared in The Daily Reckoning USA. This essay was adapted from an interview with King World News.

From the Archives…

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How the RBA is Using Low Interest Rates to Destroy Your Wealth
3-09-2013 – Nick Hubble

Is the Stock Market Predicting War?
2-09-2013 – Nick Hubble

Egon von Greyerz
Egon von Greyerz (EvG) is the Founder and Managing Partner of Matterhorn Asset Management AG. EvG started his working life in Geneva as a banker and thereafter spent 17 years as Finance Director and Vice-Chairman of Dixons Group (DSG International Plc) in London, the UK’s largest electronic and electrical retailer. Since the 1990s Egon von Greyerz has been actively involved with financial investment activities including Mergers and Acquisitions and Asset allocation consultancy for private family funds. This has led to the creation of Matterhorn Asset Management. EvG has also held a number of non-executive board memberships.
Egon von Greyerz

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5 Comments on "Danger! Exploding Wealth Gap!"

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slewie the pi-rat
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“Anyone with a sane mind would realise that this whole situation is untenable, and sadly, this will end very, very badly for the world.” should that be realize? i didn’t notice till i pasted it in and lit up the smell-check. if this keeps up, you might wish to put the readership on suicide watch. what if someone realizes that Dad is REALLY Art Linkletter, becomes absolutely convinced, and jumps? 1: both parties fell off Humpty Dumpty’s wall. 2: both parties are vying to fix Humpty Dumpty. 3: after Bush II, Democrats won totalitarity, for 2 years 2008/9-20010/11. oops? still:… Read more »
shortchanged
Guest

realize/realise ? one Yankee the other English, as she is spoken, slewie.
Blame Bill gates and microsoft for the confusion, don’t know the history to it but it confuses the oldies, and the kids can’t spell anyway.

Jason
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The world is screwed and a Third World War inevitable. The whole economic, demographic and political structure of this planet is dependent on a growing supply of cheap oil…and that is ending. The accumulation of false wealth, perpetual economic growth and breeding like rabiits will soon end as the underlying requirment to allow all this (cheap oil) is ending. How many times people forget the fact that it was a massive oil price spike that triggered the financial crisis of 2008. What it was that wrecked the stupid housing bubbles and weakened the power of the world’s most powerful economies.… Read more »
shortchanged
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Well said Jason, I shall copy and frame those words, with your permission of course. (liked the bit, religious bigotry and shit governments)

Jason
Guest

Permission granted.

wpDiscuz
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