Best of the Week
Most Popular
1.Gold Price Crash Through Key Support, Crude Oil in Freefall - Clive_Maund
2.Marc Faber Warns Japan's Bond-Buying Program is a Ponzi Scheme - Bloomberg
3.Silver Price and Powerful Forces - DeviantInvestor
4.Stocks Bear Market Catastrophe as Stocks Flash Crash to New All Time Highs - Nadeem_Walayat
5.Marc Faber Warns Not to Hold Any Gold in the U.S. - GoldCore
6.U.S. Housing Market San Francisco at Critical Mass - Harry_Dent
7.Global Scramble For Silver - Coins “Hard To Get,” “Premiums Likely To Jump” - GoldCore
8.Major World Stock Market Indices Analysis: SPY, QQQ, DAX, FTSE, CAC, HSI - Michael_Noonan
9.Japan's kaput?! - Axel_Merk
10.Tesco Empire Strikes Back, £5 off £40 Discount Voucher Spend Explained, Exclusions Warning! - Nadeem_Walayat
Last 5 days
Gold Price 2015 - 22nd Nov 14
Stock Market Medium Term Top? - 22nd Nov 14
Is the Gold And Silver Golden Rule Broken? - 22nd Nov 14
Malaysia's Subsidy and Budget Deficit Conundrum - 22nd Nov 14
Investors Hated Gold at Precisely the Wrong Time: What About Now? - 22nd Nov 14
Gold and GLD ETF Selloff - 22nd Nov 14
Currency Wars, the Ruble and Keynes - 21st Nov 14
Stock Market Investor Sentiment in The Balance - 21st Nov 14
Two Biotech Stocks Set to Double on One Powerful Catalyst - 21st Nov 14
Swiss Gold Poll Likely Tighter Than Polls Suggest - 21st Nov 14
Gold's Volatility and Other Things to Watch - 21st Nov 14
Australia Stock Market and AUD Dollar Analysis (ASX200 and AUDUSD) - 21st Nov 14
New Algae Research May Have Uncovered an “Energy Forest” Under the Sea - 21st Nov 14
The Cultural and Political Consequences of Fiat Money - 20th Nov 14
United States Social Crisis - No One Told You When to Run, You Missed the Starting Gun! - 20th Nov 14
Euro-Zone Tooth Fairy Economics, Spain Needs to leave the Euro - 20th Nov 14
Ebola Threat Remains a Risk - New Deaths in Nebraska and New York - 20th Nov 14
Stock Market and the Jaws of Life or Death? - 20th Nov 14
Putin’s World: Why Russia’s Showdown with the West Will Worsen - 20th Nov 14
Making Money While The World Burns - 20th Nov 14
Why This "Quiet Zone" Is Now Tech Stocks Biggest Profit Sector - 20th Nov 14
My Favorite Stock McDonalds Just Got Kicked Off My “Buy” List - 19th Nov 14
European Economies in Perpetual State of Shock, What's Scarier Than Deflation? - 19th Nov 14
Breakfast with a Lord of War and Nuclear Weapons - 19th Nov 14
The U.S. Economy’s Ebb and Flow - 19th Nov 14
What You Need to Know Before Investing in Alibaba - 19th Nov 14
Forget About Crude Oil Price Testing 2009 Low - 19th Nov 14
What Blows Up First? Part 5: Shale Oil Junk Bonds - 19th Nov 14
Bitcoin Price Did We Just See an Important Slump? - 18th Nov 14
How to Profit From Oversold Crude Oil Price - 18th Nov 14
Stock Valuations Outrunning Profits Growth - And the Band Played On - 18th Nov 14
ECB Buy Gold Bullion? Japan's Monetary Policy Dubbed "Ponzi Scheme" - 18th Nov 14
Gold, Silver, Crude and S&P Ending Wedge Patterns - 18th Nov 14
How High Could USD/JPY Go? - 18th Nov 14
On Obama and the Nature of Failed Presidencies - 18th Nov 14
Globalism Free Trade Immigration Connection - 18th Nov 14
An Epiphany From Hell - Buy Gold and Silver - 18th Nov 14
Too Difficult to Get a U.S. Home Loan - 18th Nov 14
Has the Gold Bear Trap Been Set - 18th Nov 14
Gold Price and Miners Soar on Huge Volume - 17th Nov 14
Cameron Says Second Global Economic Crash is Loomin, Japan in Recession - 17th Nov 14
How to Play the Stock Market 2014 Year-End Rally - 17th Nov 14
What The Fed Has Wrought, Who Needs Wage Earners Anyway? - 17th Nov 14
Stock Market Indexes Fluctuate Along Record Levels - Will Uptrend Continue? - 17th Nov 14
Stock Market Trend Deceleration Tends To Precede Corrections - 17th Nov 14
Stocks Bull Market Set to Continue After Consolidation - 17th Nov 14
The World Is Run By Fools, And We Let Them - 17th Nov 14
Gold Price Golden Bottom? - 17th Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Gold Report 2015

Drowning in Debt Developed Economies Between Rock and a Hard Place

Economics / Global Debt Crisis Apr 07, 2010 - 04:02 AM GMT

By: Puru_Saxena

Economics

Best Financial Markets Analysis ArticleThe developed nations are over-extended, their debt levels are ballooning and their governments are creating copious amounts of money.  Put simply, most industrialised nations are now caught between a rock and a hard place.

After years of excesses, the developed world is slowly beginning to realise that you cannot continue to live beyond your means and spend your way to prosperity. 


Today, US national debt stands just north of US$12 trillion, its fiscal deficit for this year alone should come in around US$1.6 trillion and the nation faces mind-boggling deficits for as far as the eye can see.  Furthermore, demand for US government debt has begun to wane and this implies that the Federal Reserve will have to resort to creating even more money over the following years. 

Make no mistake; the US cannot afford higher interest-rates and in order to keep a lid on the government bond yields, we are convinced that the Federal Reserve will resort to debt monetisation.  In other words, the central bank will create new dollars in order to fund the deficits.  Needless to say, this money-creation will be extremely dilutive and end up undermining the viability of the world’s reserve currency. 

If our assessment is correct, within the course of this decade, the interest-payments on the existing government debt will become so large that the US Treasury will need to issue new debt just so that it can keep paying interest on its outstanding debt.  When that happens, you be sure that foreigners will not be eager buyers of US government debt. Therefore, the Federal Reserve will have to create additional money, just to keep the Ponzi-scheme going.  And when all else fails, the US will simply debase its currency, thereby repaying its creditors in significantly depreciated dollars.

Although our prognosis may sound far-fetched, we want to remind you that throughout history, currency debasement has been the norm rather than the exception.  Let us put it simply, the US is now left with three options:

  • Sovereign default (unimaginable)
  • Severe economic contraction (unlikely)
  • Currency debasement (most probable)

For the risk of being thrown out of power, the policymakers will certainly not admit to an outright sovereign default. For such an event would cause a revolution within the US and shock-waves throughout the economy.  So, this drastic measure can be ruled out. 

Next, we are also sure that policymakers in the US will not swallow the bitter pill and pursue sound monetary policies, so this option is also out of the question. 

Finally, it is obvious to us that policymakers in the US will have no hesitation in opting for the inflation pill.  By diluting the supply of money and eventually debasing their currency, policymakers in the US will create the illusion of prosperity via rising nominal asset prices.

Unfortunately, severe monetary inflation and currency debasement is likely to occur not only in the US but in most developed nations.  Remember, a host of nations such as Japan, Ireland, Italy, Spain, Greece, Portugal and the UK are also swimming in an ocean of debt.  Moreover, their populations are ageing and this will put further pressure on these countries’ finances. 

So, in this ‘new era’, whereby most of the ‘advanced’ economies are on the edge of bankruptcy, various paper currencies will come under close scrutiny.  Now, if all these rogue nations decide to inflate and debase, then this basket of paper money will depreciate against hard assets such as gold.  It is worth noting that during times of economic uncertainty when confidence in financial assets is low, gold always assumes the role of a currency.  This has happened since the beginning of time and history will probably repeat again.  When investors try and protect the purchasing power of their savings and gold is re-monetised, its price will sky-rocket.

Another reason why you should own some gold is the looming inflation threat.  Remember, in an effort to prop-up the banking system, central banks in most nations pumped trillions of dollars into the economy and this newly created money is now sitting as excess reserves.  So far, these excess bank reserves have not permeated through the economy, but when they do, prices will surge and gold will serve as a store of value.

Although currency debasement and inflation are good enough reasons to hold on to some gold, the biggest bullish factor is that real (inflation-adjusted) interest-rates are now negative in most nations.  Thanks to the central banks’ reflationary efforts, short-term interest rates today are way below the official inflation rate. Therefore, holding cash is now a loss-making proposition and thus, seasoned investors are turning to gold.

On the supply side of the equation, it is worth noting that central-banks have now become net buyers of gold.  After years of selling bullion, the public sector has done an about face and this is very positive for the yellow metal.  Currently, the creditor nations in Asia are sitting on mountains of foreign exchange reserves and in an effort to diversify out of paper, they will surely add to their gold holdings.  Recently, we have seen China and India buy huge amounts of gold and you can bet your bottom dollar that they will continue to add to their tiny positions.

In summary, we maintain our view that gold is in a secular bull-market and every investor should own some bullion as an insurance policy.  At present, gold mining stocks are undervalued relative to gold bullion, so those seeking extra leverage should consider investing in dominant gold producers.  Finally, in our view, the high cost South-African gold producers which do not hedge their production offer the maximum leverage to gold. And at current prices, these companies are being given away.

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2010 Puru Saxena Limited.  All rights reserved.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014