Gold is amazing. It’s been very strong, hitting record highs last week. Its bullish price action means investors and governments know it’s time to be in safe assets. The result is, gold continues to benefit as the world’s #1 safe haven.

GOLD IS MONEY

We’re also seeing first hand gold’s role in the monetary system. Few people understand gold’s importance over other forms of wealth but if there was ever a doubt, it’s been erased by gold’s reaction to ongoing financial developments.

Gold is money. Most governments regard gold as a monetary instrument, and it has been the international currency for thousands of years.

BIG PICTURE: Gold is best

Considering the big picture, there’s no doubt gold is the best investment. The mega trend changed when the new century began. A clear shift away from paper assets (like stocks) and into tangibles (like gold) took place and a new era began. It wasn’t obvious to the average investor because mega trends take lots of time for investor’s mentality to gradually change.

Even though gold’s current rise is already in its tenth bullish year, the trends are still solidly in gold’s favor. These mega trends say… stay the course… stay with gold and gold related investments.

Mega bull markets also take time to run their course and this time will unlikely be an exception. Bull markets tend to end in euphoria, when everyone’s invested and they can’t get enough of it. Gold is far from this.

Comparing the current 10 year gold run to the 12 years leading up to the 2000 tech explosion in the stock market, and gold’s bull market in the 1970s, you can see that gold’s rise is still tame (see Chart 1). A bubble is still well into the future.

DEMAND GROWING AROUND THE WORLD

Demand for gold and silver grew even more last month. Gold sales to Europe from the Perth Mint, for instance, soared as the Greek debt crisis triggered a flight to gold. The U.S. Mint also had a busy month, selling record amounts of gold and silver.

The Chinese and Indians were also buyers. China’s gold bar sales doubled, while India’s gold demand soared almost 700% in the first quarter.

According to the World Gold Council, the outlook for gold remains strong for the rest of 2010, both from investment and jewelry demand.

BEST CERTAINTY

We’ve been watching the markets and observing their behavior every day for 34 years. It has given us a good idea as to how they interact, what moves them and when it’s the best time to buy and sell. We’ve made mistakes, but overall our record has been pretty good.

During this time, we’ve of course seen that things change and the markets change in reaction. There are many examples we could provide, but one that comes to mind was gold in the 1970s.

It soared due to rising inflation, rising interest rates and a falling dollar. Also in the mix was economic and political uncertainty like Watergate, the oil embargo, geopolitical problems with Russia invading Afghanistan and the start of the Iraq-Iran war. That 10 year period was packed full of uncertainty.

And uncertainty is again at the forefront. The current global environment is more intense and serious, which is keeping gold up. Gold is the best certainty during times of uncertainty. And the way the world is going, uncertainty will be with us for a long time.

TIMING THE BULL MARKET

Gold hasn’t given us much of a chance to buy on weakness (see Chart 2). When you see that gold gained nearly 25% in 2009, and it’s up 12½% so far this year, it’s a good reason why buying new positions gradually by averaging in is a good strategy.

For now, gold has been in an intermediate rise we call “C” for about 13 months. It’s lasted longer than normal but by reaching a record high gold is telling us that the bull market is very strong and it’s headed higher.

KEEP AN EYE ON…

We’ll see how far gold takes us this time around, probably to near $1300 or higher. Summer months, however, tend to be seasonally slow months for gold. On the downside, watch $1170 as gold will remain in a strong 2010 rise above this level.

–

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com

In the last decade, Gold Stock Analyst Editor John Doody has seen his top-listed equities skyrocket a combined 1,000%, including an eye-popping 130% in 2009. John’s tried and true methods have little to do with luck; this student of the gold business rarely fails to find value at any gold price. Subscribers pay a lot for his knowledge and expertise in the Gold Stock Analyst; but in this exclusive interview with The Gold Report, you get a few of his favorites Doody-free.

The Gold Report: We’re about 1.5 years into the Obama administration’s multi-trillion dollar bailouts and expansion of the Fed balance sheet to $2.3 trillion from about $800 billion. What are your thoughts on that?

John Doody: I think it’s a bailout that continues with $1 trillion-a-year deficits as far as the eye can see. There’s no end to it; unless we get some significant tax increases and/or spending cuts, there’s no hope to ever to pay down the debt. The best hope is to get the economy growing faster than the debt so that, as a percentage of GDP, the debt level shrinks.

TGR: Do you agree with the administration’s fiscal policies?

JD: Oh, yeah. I really don’t know where we’d be if we didn’t undertake all these remedies from the Treasury side on the deficit side, as well as the Federal Reserve side. The mess that this economy was in as a result of the Wall Street and housing collapse continues. You go by a strip mall here in South Florida with 10 stores, and at least one or two are empty. Almost 10% of workers are still without jobs. I was surprised to read that about 11% of all prime mortgages—these are the best mortgages—are either in foreclosure or delinquency. People are hurting.

TGR: How do you see all of this affecting the gold market?

JD: Everything that’s being done creates inflation. You don’t really care if somebody gives you a $1,000 government bond as payment for a debt or $1,000 cash. They’re equivalent. We’re creating a tremendous amount of money trying to get the pump primed to get the economy moving, but it’s obviously a very difficult task.

TGR: You mentioned inflation and, in your last interview with The Gold Report, you said: “Bernanke and the Fed are pursuing a loose monetary policy with a 0% interest rate. There’s actually no way we cannot end up in inflation.” We’re starting to see signs of it now. How is gold going to act in an inflationary environment and, perhaps, even in a hyperinflationary environment?

JD: Gold’s going up now; it’s going to go up more. One of the uses of gold is to protect your purchasing power from inflation, and it’s done a damn good job! It always drives me crazy when these talking heads on TV talk about gold now vs. $850 in 1980. They say, “Oh, look where it’s gone!” It’s gone nowhere. That was a one-day high. The next day the gold price was $738. More important is to look at the gold price from when it was set free in 1968. It was fixed at $35 for over 30 years. If you just took that $35 from March ‘68, and I did in a recent issue of the Gold Stock Analyst, and adjusted it by the Consumer Price Index (CPI), gold would have grown from $35 to about $225. That’s your inflation protection; everything above $225 all the way up to the current price and the next $1,000—that’s all investment gains. From ‘68 to the present, gold had had an 8.6% compound annual growth rate that was 4.4% above the inflation rate for the period.

TGR: But you hold gold equities, and you don’t hold bullion. In the last market crash, everything crashed—even the gold equities.

JD: That’s true. The reason that I hold gold equities is because you get better leverage to the gold price. We always have to remember that while the stocks are derivatives of gold, they are stocks first. If the buyers disappear for stocks, they disappear for gold stocks too. But when they come back, they come back with a vengeance. In 2009, the gold price was up 28% and the XAU was up 37% but the Gold Stock Analyst’s Top 10 was up 130%. That’s the leverage you can get from owning the right stocks.

TGR: Congratulations on being up 130%.

JD: We’re up 1,000% for the last decade.

TGR: That’s impressive.

JD: Investors in exploration stocks got killed in the 2008 crash. There were no fundamentals underneath those stocks. All the stocks I cover are producers or very near producers. We know there’s something there, so we’re not just arm waving over some drill results. That’s one of the things that makes Gold Stock Analyst unique: We don’t cover the exploration stocks because I’m not a geologist. I can’t interpret drill results. I want data. I want data that you can analyze and that’s productions and reserves.

TGR: In a recent issue of Gold Stock Analyst you said: “As we’re in a bull market underpinned by negative real interest rates, loose monetary policies and exploding government deficits, it’s best to keep riding the bull and don’t let it throw you off.” How high can the bull ride through the end of 2011?

JD: First we’ve got to understand what the real interest rate is. That’s the risk-free return on money, such as short-term U.S. Treasuries. The U.S. Treasury can’t default. They can always print more dollars and give them to you. I like to use 90-day T-bills. Or you can use savings-account rates, which are about 0.1%. It’s trivial. If you have in a savings account or in 90-day Treasuries and you start the year with $100, at the end of the year you’re going to end up with $100 plus 0.1% interest. But if inflation is 2%, the money is going to buy you only $98 worth of goods. When real interest rates are negative, and people can’t get positive return on their money by putting it in the bank or risk-free situation, they naturally flock more to gold to protect the purchasing power of their money. Gold has been a sanctuary in monetary crises and inflation for centuries. In the 2000s, Chairman Greenspan lowered the Fed Funds rate to 1% and the inflation rate has generally been higher. That’s why gold has done so well.

TGR: What gold price will we be looking at through the end of this year and 2011?

JD: Well, I’m not a guy who predicts the gold price because my philosophy is I can find value at any gold price. I’m just looking at the next $100 ahead. People who predict $1,500 or $2,000 or $5,000 are foolish because there’s no basis for that. I don’t doubt gold will get to those levels, but I have no idea when. I find undervalued stocks now and profit as Mr. Market discovers them. So, if gold does nothing, we can still profit. If gold goes up, then we’ve got two ways to profit.

TGR: Alright, how long do you think gold’s bull run will last?

JD: I think it’s got a lot longer to run because the negative real interest rate environment is going to run a lot longer. When’s the Fed going to raise interest rates significantly? They can’t raise them now. We’ve got almost 10% of the country unemployed and that much, again, underemployed. So, until the economy gets going, we’re not going to see any real change.

TGR: What about holding bullion vs. equities?

JD: The reason the stocks give you more leverage than physical gold is because all of the ounces are yet to be mined. Typically, a gold mine is going to have 10 times or more reserves in the ground than what they’re producing in the current year. If a company is producing one million ounces a year and the gold price goes up by $1, that dollar falls right to the bottom line. That’s $1 million more in profits. But because they’ve got 10 million ounces still in the ground, those ounces are now worth $10 million more than before. That’s what gives you the leverage that owning bullion just doesn’t give you. If you own bullion and gold goes up $1, your coins are worth $1 more. No big deal.

An Economics Professor for almost two decades, John Doody became interested in gold due to an innate distrust of politicians. In order to serve those that elected them, politicians always try to get nine slices out of an eight slice pizza. How do they do this? They debase the currency via inflationary economic policies. Success with his method of finding undervalued gold mining stocks led Doody to leave teaching and start the Gold Stock Analyst newsletter late in 1994. The newsletter covers only producers or near-producers that have an independent feasibility study validating their reserves are economical to produce.

Streetwise - The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

While a few mainstream outlets are coming around to at least acknowledging gold’s stellar run, most remain skeptical or outright bearish. And the blasphemy they purport is that gold is in a bubble.

Let’s settle it, right now, and shut these naysayers up.

Gold returned 10 (and as much as 14) times your money in the 1970s bull market, and the Nasdaq advanced over 1,900% during its run. Our current gold price is up about 400% (when measured on a daily basis, not monthly as in the chart).

In fact, the Nasdaq gained 182% in the final year of its peak, and gold surged 80% in four weeks during the blow-off top of January 1980. None of this is happening to our current gold price.

Note to doubters: we’ve got a long way to go before we start legitimately using the “bubble” word.

Besides, the fact that these skeptics aren’t buying – and don’t even own any gold in the first place – is further proof we’re not in a bubble. Ever notice none of them claim to own it?

And they definitely need to catch up on world affairs. The World Gold Council (WGC) reported that Russia, Venezuela, the Philippines, and Kazakhstan all bought gold in the first quarter. Central bank sales, meanwhile, remain depressed.

Russian President Medvedev won’t quit his quest to move international reserve assets away from the dollar. And his country’s central bank is backing up his words; it increased its gold reserves by $1.8 billion and decreased its currency reserves by $6.6 billion so far this year.

China, the world’s largest gold producer, already buys all the gold produced within its country. But the WGC recently forecasted that overall gold consumption in China could double in the coming decade, a demand that production certainly won’t be able to match.

The Iran/Israel showdown appears closer almost every week. As further evidence that each side is preparing for conflict, Saudi Arabia recently agreed to permit Israel to use a narrow corridor of its airspace to shorten the distance for a bombing run on Iran – all done with the agreement of the U.S government. Simultaneously, the UN Security Council imposed a new round of sanctions on Tehran. Nobody appears to be backing down.

And the current run in gold is with no inflation. Core CPI has fallen to the lowest level since the mid-1960s – but what happens when inflation does set in? And what if it’s as bad or worse as the 14% rate we got in the ‘70s? Sure, deflation is the immediate concern, but with a U.S. federal debt of $13 trillion, unfunded future liabilities exceeding $50 trillion, and a current budget deficit of over 10% of GDP, a massive debasement of the dollar is virtually ensured, triggering an onslaught of inflation. It’s coming.

With all these concerns, these guys don’t want to own gold?

Bubble, schmubble. Stocks are vulnerable, bonds are toast, currencies are fiat. Other than cash, where are you going to put money right now?

Gold could correct, of course, and I frankly hope it does. I’m not counting on it, though. The price is just as likely to head the other direction. But if it does temporarily fall, while the bubble-heads are smirking, I’ll be buying.

Someday I think we’ll be reversing roles.

—-

How far could gold and silver fall? And precious metal stocks? Check out our annual Summer Buying Guide in the current issue of Casey’s Gold & Resource Report, which identifies buy zones for all our recommendations. You can try it risk free here…

– Posted Monday, 14 June 2010 | Digg This Article | Share this article | Source: GoldSeek.com

By Andrew Mickey, Q1 Publishing

“I don’t fully understand movements in the gold price…”

That’s what Fed Chairman Ben Bernanke admitted this week. But if he were to look at what’s actually going on and every move he has made since 2008, he would understand the price of gold and see where it’s going next.

The Next Move for Gold

There’s no doubt the financial world is facing a lot of uncertainty. The failure of the Euro experiment, ballooning government debts and deficits, and a general economic malaise have all sent investors running into the perceived safety of corporate and government bonds (they seem safe now, but rising interest rates will destroy their value).

This flight to safety has actually been the greatest catalyst for gold prices. Investors piling money into bonds have kept long-term interest rates very low and Bernanke has kept short-term interest rates near zero. And low rates have been driving gold prices higher.

In the “Real” Reason it’s Too Early to Bet Against Gold we wrote:

The main driver for gold prices is real interest rates.

Real interest rates are calculated by taking the nominal rate of interest (what is actually paid) and subtracting inflation.

Right now real interest rates are negative. They’re below zero. And the impact of negative real interest rates is always the same, asset bubble.

And when there’s no predominant “story” like the Internet is going to change the world, China will take over the world, or the world is running out of oil, investment dollars inevitably turn to gold.

One Trend to Make Your Friend

Despite Bernanke’s confusion, this is what we’re seeing play out right now.

The chart below shows gold compared to the yield on the benchmark 10-year U.S. Treasury bond:

There’s a clear correlation over the long run: interest rates down, gold up.

And this trend isn’t about to change anytime soon.

Bernanke’s Bind

There’s just no politically feasible way out in the short-term. All of the stimulus money, welfare/unemployment spending, and other efforts to delay the inevitable debt liquidation have put Bernanke in a bind.

He has two options. He can keep interest rates low, allow the economy to trudge along dipping in and out of recession, and keep investors buying bonds. Or he can raise rates and induce a Volker-style recession to eliminate the capital misallocations.

The choices are killing the economic “recovery” or eliminating the forming gold bubble.

Regrettably, for long-term focused investors, the short-term, politically viable option of keeping interest rates low and hoping everything works out has been, is, and will be the preferred solution for a long time to come.

The Bubble Nears

There’s no way out of the gold bubble at this point. There has been so much money created, the savings rate has increased so much, and it will be nearly impossible to draw it all back in once credit demand returns and the money multiplier effect gets rolling.

Sure, government debts and deficits are getting all the headlines, fears over the tax increases looming next year kicking off the second dip of a double dip recession, and a general lack of faith in fiat currencies has contributed greatly to gold’s rise, but it’s extremely low interest rates that will keep the gold rally going for years to come.

It’s simple really. Bernanke may not get, but we do. And this situation has bubble written all over it so different rules apply.

Value doesn’t matter, price does. Housing, tech stocks, Asia, oil…they’ve all been the same. The more they went up, the more people wanted them. Gold is no different. No one wanted gold at $300 or $500 an ounce. There has been considerably more interest at $1,000 an ounce. The record run-up to $1250 an ounce has only compounded demand. As the trend continues, gold demand will increase exponentially as it rises to $1500, $2000, and beyond.

Unless you’re expecting a bit of honesty and courage from politicians, buy gold and silver for safety and buy undervalued gold and silver stocks for superior gains. Check out our free gold report (get it here) for where the best values are in gold stocks.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Howard S. Katz
Jun 14, 2010

All aboard, dear gold bugs. The train is slowly picking up speed and is leaving the station. It is your last chance to get aboard at a price reasonably close to $1,000/oz. Now you may not agree that $1,250 is reasonably close to $1,000, but when you see gold at $3,000, then you will agree. From the vantage of $3,000, then $1,000, $1,250 no big deal. The point is to be long of gold.

You have undoubtedly heard the expression, “Fool me once, shame on you. Fool me twice, shame on me.” Well people, (some of) you ought to be ashamed. The paper aristocracy has fooled you again and again and again and is fooling you in the exact same way today. Let us take 3 examples.

In 1982, an economist named Henry Kaufman, and nicknamed “Dr. Doom” by the media, was suddenly on the front page of pretty much every newspaper in the country. He was predicting higher interest rates, lower stock prices and a possible depression. All over the country people rushed to take Dr. Doom’s advice. They had stubbornly held onto their stocks for 16 years, while (from 1966 to 1982) the real value of the DJI dropped by 74%. The selling was so great that, by 1982, the DJI was forced down to a P:E ratio of 6:1. Its price was 780. What a place to sell. Over the next 25 years, the DJI went from 780 to 14,200

First, let us ask, why did the media select the most wrong economist in the country and tell people that he was a brilliant genius? To understand this, you must understand the paper aristocracy.

The paper aristocracy, as the name indicates, are a group of people who benefit from the Government’s issue of paper money (and easing of credit). However, they do more than just benefit. They help to bring it about. They exert a major influence over the government (as the medieval aristocracy did for many centuries).

The issue of paper money and the easing of credit bring benefits to debtors (who get away with paying below free market rates of interest) and harm to savers (who receive below free market rates of interest). They also bring benefits to employers at the expense of lower wages to their employees.

The paper aristocracy first got power in the early part of the 20th century when they created the concept of a depression. If the word had any meaning, a depression would have to be a period when a large majority of the country got poorer. Was this what happened during the period 1929-1933? Not by a long shot.

From 1929-1933, prices in the country fell by about 30%. This made most goods cheaper (because prices were falling more rapidly than wages). As a result, Americans could afford more. For example, from 1930 to 1934 per capita meat consumption rose from 129 lbs. per person to 144 lbs. per person. (At the time, eating meat every day was just changing from a luxury good to one within the means of the average person, and the Republicans bragged in 1928 that they had put “a chicken in every pot.” At the same time, people switched from margarine to butter and also gave more to charity. These are not the behaviors of people who are getting poorer. They are the behaviors of people who are getting richer.

“But Mr. Katz, what about unemployment? Weren’t a lot of people unemployed in the early 1930s?” This is true, but it is hardly a measure of economic hardship. As prices declined, wages also fell but more slowly. The real buying power of the average man’s wage rose, and he could afford to buy more goods. Since at the height, unemployment hit 25%, then 75% of the nation remained employed and was getting those high real wages.

But even the minority who was unemployed were doing quite well. In those days, Americans were able to save for retirement (not like today when they desperately try to take their retirement out of their house). An average person in the early 1930s received a wage of 40 oz. of gold per year (not quite as much as today). He saved about 15% per year (6 oz. of gold) for a working lifetime of 49 years, giving him a total savings of 294 oz. of gold. Since interest rates averaged 5% over this period, his savings at 5% would multiply by 4.25 over a 49 year working lifetime, giving him a retirement stake of 1249 oz. of gold, enough for a comfortable retirement in any age.

During WWI, the Democrats reduced the value of the dollar in half (a program which Obama is imitating today) The average American working man thus saw his retirement stake fall from 625 oz. of gold to 312.5 oz. during WWI. In 1919, the Republicans adopted a policy of raising the working man back to his original condition by restoring the currency to its pre-WWI value. This policy was called “a good 5¢ cigar” because the idea was that not only cigars but average goods would return to their pre-war level. (5¢ had been the price of a cigar in 1914.) This policy was successful and in 1921 and again in 1929-33, prices in the U.S. fell sharply, reaching their 1914 level in 1933.

This fall in prices doubled the value of the savings of the average person. The average American saw his savings double from 312.5 oz. of gold to 625 oz. So even the minority of Americans who lost their jobs made close to 8 years wages (in a 3 year period) in the form of a more valuable retirement account.

No, the people who were hurt in 1921 and 1929-33 were the employers (who were paying high wages) and the debtors (which are generally the big corporations). The average American was not hurt in (what is falsely called) the Depression. It was only the rich who were hurt, but they could not come out and say this openly. Hence they hired (fraudulent) economists to tell the country that the whole society was getting poor. These fraudulent economists compounded the insanity by telling us that the period of the early 1940s was an economic boom. But the early 1940s was a time when 10 million men were pulled out of the labor force and could not produce wealth. No one could buy a new house or car. (They were not being made.) Food items were rationed, and gasoline was limited to 3 gallons per person. In short, the early 1940s were a depression, but you could not get one of these “economists” to admit this if you put him on a torture rack (which might be a good idea on general principles).

Very well, if the average person benefited in the early 1930s, where did the wealth come from? The answer is simple. As noted, from 1914-1919 the paper aristocracy got richer at the expense of the average person. In a 2-step process (1921 and 1929-33) wealth flowed back from the paper aristocracy to the average American. The decline in the stock market from 380 to 40 dramatically illustrated this flow. In reality, the Republicans were the party of the working man, and the Democrats were the party of big business and Wall Street. In words of one syllable, most of what you have been taught is a lie.

In 1933, the Federal Reserve was given the power to counterfeit money. They used this power to steal from the working people and the savers of the country and give to the paper aristocracy. This was called “getting us out of the Depression.” And that same confidence game went on in 1982 and has been going on ever since.

The second example I want to discuss of the paper aristocracy’s tactic of shouting “depression” occurred in the late 1980s when Ravi Batra wrote a book entitled, “The Great Depression of 1990.” Mr. Batra was not a member of the paper aristocracy, just a simple man who was in way over his head. A member of the paper aristocracy came across the book and saw how useful it could be to them. He invested in it and gave it enormous publicity. As 1990 approached, the fear of a Great Depression swept across the land. Alan Greenspan lowered interest rates from 10% in 1989 to 3% in 1993 to avert this “depression.” The DJI went from 2,500 in 1990 to 11,500 by the end of the decade. Read More…

Steve Saville
email: sas888_hk@yahoo.com
Jun 15, 2010

Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 13th June, 2010.

Many governments, including those of the US, Japan, and most euro-zone countries, have made extremely costly promises to provide entitlements to their citizens and to repay their creditors. These promises must be broken, firstly because they cannot be kept and secondly because they should not be kept.

It should be blatantly obvious to anyone with a basic knowledge of finance that the promises cannot be kept. The government of Japan, for example, has amassed liabilities to bondholders amounting to two-times the country’s annual gross domestic product (GDP), and on top of the debt that has already been issued there is an unknown (to us) — but undoubtedly large — quantity of “unfunded” (off-balance-sheet) liabilities associated with various entitlement programs such as social security. Taking another example, within the next 12 months the liability to bondholders amassed by the US federal government will exceed one-times GDP, but when the so-called “unfunded” liabilities are added to the equation it can be seen that the total present value of all US government promises to pay is already more than 5-times GDP. Considering other examples, the debt-related predicaments of the “PIIGS” governments are well known, but less well known is that the governments of both France and Germany have total (on- plus off-balance-sheet) liabilities exceeding 4-times GDP. So, what’s the point of pretending that these liabilities will ever be covered?

There is not only no point pretending, it is dangerous to pretend. It is dangerous because attempting to keep alive the illusion of solvency necessitates theft on an increasing scale, either directly via more taxation or indirectly via more inflation. A case in point is the plan put together by Europe’s political leadership with the aim of preventing the Greek government from immediately defaulting on its debt. This plan involves higher taxes in Greece, the transferring of Greek government obligations from private bondholders to other governments, and debt monetisation (inflation) by the ECB, but leaves the overall debt burden the same. It therefore wastes resources, confiscates savings and reduces economic growth for the sole purpose of delaying the ‘day of reckoning’. Another case in point is the claim made by a famous economist (Joseph Stiglitz) to the effect that the large and rapidly-growing debt burden of the US federal government won’t lead to a default thanks to the government’s ability to print whatever amount of money it needs. It is true that the US government could turn to the printing press (with the help of the Fed), but it is vital to understand that an attempt by the US government to use monetary inflation to cover the bulk of its liabilities would, in effect, be an attempt to surreptitiously transfer tens of trillions of dollars of wealth from the most productive parts of the economy to bondholders and the recipients of entitlements. This type and scale of wealth transfer would destroy the dollar and devastate the economy, all for the sake of maintaining an illusion.

It is argued that the direct default by a government would eliminate that government’s future access to the debt market, which is true. But that would be a huge positive rather than a negative. The world would be a better place if governments were not able to access the debt market. For one, there would be much less chance of war.

It is also argued that government promises must somehow be ‘made good’ because many people have come to depend on these promises. In particular, many people have paid taxes and social security contributions throughout their working lives on the understanding that the government would provide them with certain payments and other benefits after they retired. The problem with this argument is twofold. First and as explained above, it is not possible to make good on the promises. The promises will eventually have to be broken, the only question relates to how much more damage will be done in the period between now and when default is confirmed. Second, a wrong cannot be made right by committing another wrong. To be more specific, while it is certainly wrong that promises were made that could never be kept, this wrong cannot be corrected by stealing more money from savers and current taxpayers.

Some governments now appear to be coming around to the realisation that their debt situations are untenable, and are introducing “austerity measures” in response. However, while such measures could prevent the debt problem from worsening in the short-term they don’t address the main issue, which is that current debt levels are already so high that default or major restructuring is both essential and inevitable.

The bottom line is that the promises made by governments will have to be broken and should be broken, the sooner the better.

###

Steve Saville
email: sas888_hk@yahoo.com
Hong Kong