My thanks to Ed Steer's daily newsletter for the following quote from Adam Smith which rings so true in today's economic circumstances as many of the world's nations grapple with what seems to be a totally intractable debt problem: "History shows that once an enormous debt has been incurred by a nation, there are only two ways to solve it: one is simply to declare bankruptcy—repudiate the debt. The other is to inflate the currency and thus to destroy the wealth of the ordinary citizen." With so much owed by so many the only way out, other than by piling debt upon debt and inflating out of it, if indeed that is even possible given how big the debt situation is for most nations, is sovereign bankruptcies and it can't be too long before we see one or more of these.
To an extent one can be thankful for reaching one's twilight years—it is today's youth who, in some countries, are facing a lifetime of unemployment—or at the very best minimum wages—while any state benefits decline to virtually nothing as governments are forced to kill these as a way of reducing debt. Bankruptcy may prove to be the easy way out and it can't be long before some over-indebted nation takes this route. One wouldn't take odds on Greece managing to avoid bankruptcy within the next year, or perhaps the next couple of months, for example. And if Greece does declare bankruptcy then maybe Portugal or Ireland, or Cyprus or a number of other nations could follow suit—perhaps even an economic giant like Spain where youth unemployment is already running at close to 50% .
Indeed this bankruptcy scenario is already happening in a small, but growing, way with several U.S. municipalities filing, or likely about to file, for Chapter 9 bankruptcy with perhaps hundreds more waiting in the wings. Is this the tip of the proverbial iceberg? First the municipalities, then the States and Provinces, then the countries. A number of U.S. States—some with GDPs which dwarf those of countries like Greece and Portugal are known to be in serious financial difficulties. A major Spanish province has just announced it needs bailing out, with another thought to be about to follow. There is talk of Sicily doing the same in Italy. Indeed Britain's Daily Telegraph reported that ten italian cities—including Naples and Palermo—are close to declaring bankruptcy. Is this just the start of a global trend? States and Provinces will likely be bailed out though—just increasing the overall national debt of their sovereigns. Are we in the capitalist system's downward death spiral? The hope is we can muddle through, but what if we can't?
What is surprising, as this scenario becomes more and more evident, is that the traditional safe haven of gold is not proving far more attractive—yet. Money is piling into the US dollar and dollar related bonds even though these are generating negative interest—and from a nation which has the largest debt of them all. Ultimately the U.S. is going to need to write down its debt in some way or another and take one of the Adam Smith routes. For the U.S. to default in any overt manner is too horrendous to contemplate from a global standpoint. It looks like that to inflate its way out of its debt is the only solution—but where would that leave the purchasing power of the once mighty dollar when the U.S. debt level may be as much as $500 trillion if one takes everything into account.
Another famous quote here, attributed to Abraham Lincoln: "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time." Governments the world over—the U.S. Administration is no exception—certainly have been trying to fool all of their people (or almost all) with political spin and massaging of statistics, but how long can this last? If municipalities start going bust around us, awareness of the financial problems facing us all will become more and more apparent and the people will increasingly lose their trust in government and the financial system. Where can they turn?
Gold—and perhaps silver which tends to move in parallel with gold—may provide the answer. It is inbuilt into the psyche from one's mother's knee, even in the West, as THE medium of value which people strive to own and control, which is why its price movements generate so much media coverage, despite there being plenty of other investments which are just as, if not more, volatile. Gold stars and gold medals- all denoting the very top in value or achievement are part and parcel of our everyday lives. We are brought up on childhood fairy tales, many of which revolve around gold and its value and tales of pirate and goblin, or leprechaun if you're Irish, gold and silver. There are so many instances where gold as a store of wealth is being hard-wired into our brains. And perhaps rightly so.
Thus you can't shake gold out of our system and at some stage—this week, next week, next month, next year—who knows exactly when—more and more of the people will stop being fooled by governments and their fiat currencies and move to protect whatever wealth they may have left. And the likely route for this will be by investing in gold—preferably bullion not derivatives—and many would advise taking delivery rather than leaving it with the banks given the whole banking system looks vulnerable in the current sovereign debt scenario.
The "gold is in a bubble" merchants reckon that gold has already had its day, but in this writer's view gold's day is yet to come this year, next year, sometime—but definitely not never! And every increase in sovereign debt brings this time closer. It's a question of how long governments can keep on muddling through by printing more and more money, thus debasing their currencies, and keep the populace on side, as to when this day will actually come. When it does come some respected observers think that gold price growth could be explosive, but in reality one hopes not too much so as this would truly signal global financial Armageddon has arrived. Let's hope and pray some of the prophets of doom have miscalculated, and by some miraculous means we are all guided into a soft landing. But prayer may not be enough.