I recommend this book.
After you read mine, of course. ;^)
Posted on 04/10/2010 6:17:30 AM PDT by Rutles4Ever
The sovereign debt crisis has crossed a threshold. It’s no longer about economics. It’s about math and a complex system whose dynamics tell us there is little time to avoid catastrophe and almost no exit. Going forward, elections and policies will matter less as the debt plague takes hold and dictates hard outcomes.
It is the case that real debt cannot be repaid through any feasible combination of growth and taxes. We will soon arrive at the point where it cannot be rolled over. Debt includes contingent liabilities as well as bonds. In the U.S., this means social security, healthcare and housing obligations estimated at over $60 trillion. That does not include unfunded pension obligations of the states whose plans use fanciful 8% growth assumptions to limit contributions. Pension debt grows exponentially; a toxic brew of increased benefits, contribution shortfalls and anemic performance.
Even what we call money is debt. Paper money is a contract between citizen and government. As with any contract, it pays to read the fine print. Embossed on each U.S. bill is the phrase “Federal Reserve Note.” Give the Fed credit for full disclosure; these notes are liabilities. If the Fed’s mortgage assets were marked-to-market the Fed itself would be insolvent. In short, it’s all debt. Wealth is illusory if it involves a claim payable in dollars which are but a claim on an insolvent central bank backed only by its ability to print more debt. The situation is worse in the UK, Europe and Japan. The global financial system is a rope of sand.
If this system is illusory, how has it prospered over centuries? The answer is that for many years governments ran surpluses and at times had no debt at all. Growth was robust providing support to the tax base. Governments had the trust of bond markets to rollover maturing obligations. With some fits and starts, tangible wealth creation outpaced debt creation. And until recently paper money was backed by gold at fixed rates of exchange. Today all four legs of the table – surpluses, growth, trust and gold are gone or damaged.
There is no prospect for surpluses; nations hit the brink of disorder at the mere mention of 3% deficit-to-GDP ratios. Growth prospects are likewise dim given current policy. Obama grew spending on a feed-the-beast theory that forces taxes to rise to match spending. If Obama does not get his way, deficits will be ruinous. If he does get his way, taxes will stifle growth. You cannot tax your way to solvency in a world of low growth and compound interest.
As for market trust, go ask the Greeks. Each bond buyer has a critical threshold where he will not buy another bond. Picture bond buyers as theatre patrons. The image of someone yelling “fire” and patrons rushing out in a panic is familiar. More intriguing is the case in which just a few patrons rush out for no apparent reason. Do those remaining follow suit or stay seated? It depends on their individual thresholds. If high enough, everyone remains seated. But if some thresholds are low, those patrons leave too triggering other thresholds and so on until a cascade of exits empties the theatre.
In markets, the array of individual thresholds is immensely complex. The scale, interdependence and adaptability of market participants today are greater than ever. It would take very little to trigger a wholesale revulsion with sovereign debt.
What about gold? The view is that systems on a gold standard system cannot increase money supply as needed; of course, that’s the whole idea. Increasing money beyond the modest levels at which gold supply grows is the Keynesian remedy. But empirical evidence shows the so-called Keynesian multiplier is fractional and therefore a wealth destroyer. Another attack on gold is that there’s not enough of it to support money supply; but of course there’s always enough gold; it’s just a question of price.
The U.S. has never truly gone off the gold standard. The U.S. gold hoard today has a dollar value equal to about 20% of U.S. M1 money supply – a respectable ratio even in the heyday of the fractional gold standard. A gold price of $5,500 per ounce would comfortably support a broader U.S. money supply on a one-to-one ratio and maintain confidence in the dollar and U.S. sovereign debt.
Is there an exit? One path involves hyperinflation to destroy the real value of debt followed by redenomination and a new paper money game. The other path involves a gold backed currency at a non-deflationary price. This is a choice between denial and frank talk. Sound money leads to sound growth and the creation of real, not illusory, wealth.
James G. Rickards is a director of Omnis, Inc. and former general counsel of Long-Term Capital Management. Follow him at twitter.com/JamesGRickards.
Is there any reasonable expectation that gold will hit this level?
I recommend this book.
After you read mine, of course. ;^)
goldbug ping
James Rickards (”former general counsel of Long-Term Capital Management” — oops):
“Another attack on gold is that there’s not enough of it to support money supply; but of course there’s always enough gold; it’s just a question of price.
“The U.S. has never truly gone off the gold standard. The U.S. gold hoard today has a dollar value equal to about 20% of U.S. M1 money supply – a respectable ratio even in the heyday of the fractional gold standard. A gold price of $5,500 per ounce would comfortably support a broader U.S. money supply on a one-to-one ratio and maintain confidence in the dollar and U.S. sovereign debt.”
This article is also linked at zerohedge with some good comments here http://www.zerohedge.com/article/ltcm-general-counsel-debt-denial-there-little-time-avoid-catastrophe-and-almost-no-exit-sugg
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Get towards the end and you find out that it’s a gold hawk article. He may be right. But, when the fan becomes soiled gold can’t be eaten, worn or used to heat your house.
I expect it will get up there. The guy is right. There is no way out of this mess by growth or taxes. Sombody has to take the hit. We who relied on government and let them rob us for all these entitlements for a start. Nobody was paying attention while criminal polititions screwed us over.
Time to invest in lead, copper, and brass.
I work at a job where I meet with clients from all walks of life, at all income levels. Every week I meet more and more people who are buying weapons and ammunition, and stockpiling food. This is serious, and people are taking it seriously.
My 60’s+ poker playing buddies have been saying for almost two years now that there is not a peaceful or bloodless way back from here.
Think about it. Gold traded for $35 for decades. It now trades for 30 times that amount. A jump to $5,000 from here is only 5 times.
I agree with you on that. There are many people in denial.
For a long time, I was skeptical of all the gold hawks, but even though they may have commercial motivations, it’s undeniable that they’ve been vindicated.
i.e., the grain of salt I take with gold bug articles has gotten smaller and smaller. The author, however, was an LTCM guy, too. So he’s seen both sides of the fence.
The perfect storm. Jim Jones’ America elected a communist who is pouring gas on the fire.
He’s not only doing everything wrong but to the nth degree.
I’ve never thought the U.S. could go critical—[chaos and riots] but I think it’s coming.
Stock up.
The 1980 peak of $850 would be roughly $2235 in 2010 via “official” (i.e. lower than actual) CPI alone via the BLS Inflation Calculator here http://www.bls.gov/data/inflation_calculator.htm
Inflation numbers more like what we actually see, per SGS here, are roughly 2% higher than BLS numbers in their graph going back to 2001. If we say that “real” inflation is 1% higher than “official” inflation over 32 years, that’s 1.01^^32 = 1.37; the 2% boost would be 1.02^^32 = 1.88. That adjustment itself would boost that $2235 to somewhere in the neighborhood of $3061 to $4200.
So realizing inflation alone gets it more than half of the difference from here to there, before pondering how much more screwed up the monetary system is now than it was in 1980.
“But, when the fan becomes soiled gold can’t be eaten, worn or used to heat your house.”
No, but it sure as heck can be used to back fiat money, and in the long-run that’s just as important.
This set of graphs is a very sobering warning about what is in store for most of the developed world:
oops here’s that SGS link for 2001-2010 (second graph) http://www.shadowstats.com/
and from 1980-2010 http://www.shadowstats.com/alternate_data/inflation-charts Note that the very visible divergence begins in 1983
see also the article on ZeroHedge.com
Bank Of International Settlements Sees US Debt/GDP At Over 400% By 2040
link:
http://www.zerohedge.com/article/bank-international-settlements-sees-us-debtgdp-over-400-2040
link to full PDF of Band of International Settlements report:
http://www.bis.org/publ/work300.pdf?noframes=1
Right. It says on the currency that Kroger's MUST accept it as legal tender, for all debts, public and private. It doesn't say HOW MUCH they can charge, however.
I'd say...HYPERINFLATION here we come. Jimmmy Cawder II, deluxe.
Don’t worry, they are going to use inflation once again to pay of large parts of the debt with cheap dollars.
Buy gold.
Gold and Economic Freedom
by Alan Greenspan (1987)
...
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
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