An American Concept: Crushing Debt

by David Galland

Recently 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.

May 28, 2010

David Galland is the managing editor of Casey Research.

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