Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Debt Crisis Solutions are Leaving Investors Behind

Interest-Rates / Global Debt Crisis 2012 Nov 22, 2012 - 04:24 AM GMT

By: Ben_Traynor

Interest-Rates

How the losses are being paid for...

It used to be taken for granted that you could put aside some money and earn enough interest to be better off than when you started.

As the world continues to struggle with the aftermath of an enormous credit boom and its subsequent bust, though, this kind of objective seems hopelessly naïve. Events in Europe and the US this week are the latest reminder of this. To see why, let's start with a riddle:


If I owe you €10,000, and the amount of money I have is zero, is it possible to let me off the hook without you taking a loss?

The question is rather silly, yet it is analogous to the one facing policymakers in Europe right now as they decide what to do about Greece.

Here's the problem in a nutshell: Greece was tasked with reducing its debt-to-GDP ratio to a 'sustainable' 120% by 2020 (by complete coincidence the ratio for the Eurozone's biggest debtor Italy at the time the target was set last year). That wasn't not enough time, Euro politicians decided last week, so they extended the deadline to 2022.

Christine Lagarde, managing director at the International Monetary Fund, was not happy about this. She would rather see the deadline stay as 2020, with the debt being reduced directly by further write downs. Germany and other Euro members are averse to this since it would impose further losses on creditors. Private sector Greek bondholders were burned back in February, compelled to take losses as part of a restructuring deal.

A further write down might also hit the European Central Bank, which has already agreed to forego profits on its Greek bonds. If the ECB takes actual losses, would this not amount to central bank financing of government debt - something prohibited by European treaty? According to Germany, it would.

So we have a problem where a debtor cannot pay and creditors don't want to take a hit (and in the case of the ECB may not legally do so, many argue). Naturally the first maneuver is to give the debtor a bit more time, which is exactly what Eurozone politicians did last week.

This will only achieve so much though. The latest figures show the Greek economy is still contracting; policymakers will have to buy an awful lot of time if Greece is to pay down the debt through economic growth alone.

So what else can be done? This is where the people at the top are yet to reach agreement. One of the suggestions doing the rounds is to lower the interest rate Greece pays on its bailout loans, a classic move to lower the real, inflation-adjusted value of debt.

Just ask Ben Bernanke. In a speech given this week the Federal Reserve chairman reiterated the need to maintain loose monetary policy for the foreseeable future.

"A highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," he said.

Bernanke also repeated his call for US lawmakers to sort out the deficit, arguing that monetary policy can only provide a supportive environment; it cannot solve fiscal problems. Not the Bernanke is a deficit hawk:

"Even as fiscal policymakers address the urgent issue of longer-run fiscal sustainability," Bernanke said, "they should not ignore a second key objective: to avoid unnecessarily adding to the headwinds that are already holding back the economic recovery."

In other words, the US government should maintain borrowing near record levels, while also trying to get borrowing onto that sustainable path.

It's a tricky balance, but Bernanke seems confident America's politicians can pull it off:

"Fortunately, the two objectives are fully compatible and mutually reinforcing. Preventing a sudden and severe contraction in fiscal policy early next year will support the transition of the economy back to full employment; a stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability. At the same time, a credible plan to put the federal budget on a path that will be sustainable in the long run could help keep longer-term interest rates low and boost household and business confidence, thereby supporting economic growth today."

He may be proven right. But whether he is or not, that "accommodative" policy of below-inflation interest rates is here to stay.

That should give continued support to the gold price. The chart below is from a presentation by Charlie Morris, head of global asset management at HSBC, given at last week's London Bullion Market Association annual conference:

Real Interest Rates

Morris points out that when the annual real rate of interest (i.e. how much you make adjusted for inflation) has been below 2%, gold has tended to do well:

Many investors today would be happy with a real return of flat zero - at least they wouldn't be losing ground.

As the world grapples with the plight of sovereign debtors, though, the idea of getting a reliable real return from an investment is sadly starting to seem rather out-of-date. Moody's downgraded France this week; here's one of the reasons it gave in its ratings rationale:

"...unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption."

In other words, if France could just print what it owes, it could probably still be rated triple-A. Creditors would get back the money they lent out, and there would only be the small matter of it being worth a lot less than when they lent it.

That is today's reality. It may be unavoidable given the sheer size of the debt problems affecting much of the globe; but it's a pretty raw deal for those trying to grow or even hang onto the value of their savings.

By Ben Traynor
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 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

6 Critical Money Making Rules