A Primer: Sovereign Debt Defaults = Social Unrest + Much Higher Gold Prices

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The magnitude
of current private and government debt, coupled with massive unfunded
contingent liabilities for promises of future services to their
citizens, will prove to be impossible for many nations to fund.
Massive inflation in the money supply will become the preferred
vehicle to deflect the default monster and will result in vastly
devalued currencies and price inflation as a prelude to default.
Such action will be a desperate attempt to buy time to stave off
the inevitable and will result in social unrest caused by persons
whose comfortable lifestyle and elevated standard of living is about
to disintegrate before their very eyes.

Debt’ was once only a phrase found in the arcane prose of economists
writing in academic journals. Internet blogs started carrying commentary
on the subject after the near-death experience of many large banks
but only in the last few months has the mainstream media tuned into
the issue of sovereign debt. Quite simply, they could not ignore
the omnipresent financial clouds any longer.

What is
‘Sovereign’ Debt?

In its simplest
form, ‘sovereign’ debt means ‘government’ debt, the financial debt
of a country. It usually also means the accumulated debts of government
sub-entities such as states, provinces, municipalities, agencies,
boards and commissions for which the senior government is ultimately

While existing
government debt is the problem for today, contingent liabilities
for promises of future services to its citizens dramatically complicates
the current debt problem. Unfunded future liabilities are obligations
which represent the one ton gorilla peering through the front window
of many nations.

What does
Debt ‘Default’ Mean?

‘Default’ is
a word similar to the word ‘bankrupt’ when referring to the
inability of a private individual, business or institution to meet
its financial obligations. When debt is unable to be repaid, a formal
declaration of this fact triggers a bankruptcy in a court of law.
In the case of government, the inability to pay its accumulated
debt from past spending, because it can’t raise adequate taxes or
borrow additional funds, means that the government has become insolvent
forcing a formal default on its debt.

Which Countries
are Most Likely to Default?

According to
the Maastricht Treaty which sets the terms of compliance for the
sixteen member nations of the Euro currency club, annual deficits
are limited to 3% of GDP. Of the 27 European Union member states,
according to the IMF and the Global Financial Stability Report of
April 2010, only 5 countries (Luxembourg, Finland, Denmark, Sweden
and Bulgaria) are below that ceiling. Even worse, of the 22 that
do not comply, 14 have a ratio that is more than twice the established
and agreed upon limit. Indeed, the EU-27 as a whole, posts a huge
6.9% budget deficit-to-GDP ratio which is expected to increase in
2010 to 7.5% matching Japan’s at 7.5% but paling in comparison with
the U.S.’s deficit-to-GDP of 9.2%! For the record, Canada’s stands
at 3.0% and Sweden’s is only 0.8%!

the rest of the article

3, 2010

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