An American Concept: Crushing Debt

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by David Galland: Fact
vs. Fiction on Today's Economy

 

 
 

Commenting
on the European crisis – because this has gone well past being
one that can be termed “Greek” – the New York
Times cited a senior U.S. official on the significant role the
U.S., including Obama himself, played in getting Europe’s leadership
to agree to a bailout approaching one trillion. One particularly
telling quote…

The U.S.
officials began talking to their counterparts about an American
concept: overwhelming force. “It’s all about psychology,”
said the senior official.

Funny how these
things work, isn’t it? In response to its own debt crisis,
the U.S. mirrors the failed Japanese experiment in quantitative
easing, except that we look to “fix” the flaw in that
experiment with the overwhelming force of trillions upon trillions
of unsupported spending, in the process making the idea of unleashing
a money flood an “American concept.” Europe, desperate
and without the advantage of the time needed to witness the ultimate
consequences of the latest American concept, agreed to a money flood
of its own… with the result that it, too, plans on taking on
nearly a trillion dollars in new debt.

Now, the funny
thing is that the way this latest bailout is structured calls for
the European Central Bank to try and sell over $500 billion in new
bonds offered by what is being termed a special purpose entity,
whose bonds will be backed by the European member states –
Greece, Portugal, Spain, and all the other PIIGS included. The rest
of the money will be delivered by the IMF (17% of whose funding
comes as a transfer out of U.S. taxpayers’ pockets).

Will the new
special purpose bonds prove popular with investors? Or will they
prove unpopular, requiring higher and higher interest rates? What
happens then?

And who is
going to buy all these bonds, given the energetic selling going
on by the U.S. Treasury?

When you strip
away all the psychology that senior officialdom seems to think is
what really counts, you have a bunch of sovereign deadbeats attempting
to impress by moving into a really nice new mansion – maybe
even in Brooklyn Heights – hoping to cover the mortgage with
a “no (real) money down” liar loan.

Do you want
to own a piece of that loan? Because soon, thanks to the American
concept and the new special purpose entity being cobbled together
in Europe for the sole purpose of spitting out yet more debt, you’ll
be able to buy up all of the stuff you want. Meanwhile, here’s
what you’re actually buying…

Note, as bad
as those numbers are, and they are bad, they don’t take into
account unfunded liabilities – you know, little things like
Social Security and Medicare. Throw those into the mix, and the
picture gets a lot darker.

And what does
Mr. Market really think about these numbers? As you can see from
the table below, gold is starting to trade up against all the fiat
currencies… just as we have been expecting it would.

Commenting
on the situation, Casey Research CEO Olivier Garret had this to
say…

Another thing
that can’t last is interest rates going down as debt goes up significantly.
We are in for a fun ride, better buckle up. By the way, Greece
is not that much worse than most developed countries when it comes
to debt-to-GDP ratio; no wonder that Obama and the European leaders
tried to do something before the market got spooked too much.

I sometimes
feel like a broken record (for our younger readers, that is a reference
to solid vinyl discs with grooves in them that, when run over with
a needle, would create sound… when scratched or “broken,”
the record would repeat the same notes over and over) in my dire
prognostications about just how wrong-headed it is what now passes
for fiscal and monetary policy.

You can’t
cure debt with more debt. And if you can produce the stuff in unlimited
quantities, then it’s not money – that is, not if your
definition of money is something you can use to efficiently hold
and transfer wealth.

No wonder the
big money traders are beginning to recall gold’s historical
role as money.

Europeans are
starting to get the picture – many precious metals sellers
in Europe are now finding themselves out of stock – but most
Americans are still woefully clueless when it comes to the safe-haven
value of gold. And timing can be most important. Read our FREE report
How
Do I Know When to Buy?

Click here to get it now.

David Galland
is the managing editor of Casey
Research
.

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