By Tim Price
Sovereign Man
Despite nearly $17 trillion reasons, there are investors stupid enough to
believe that debt issued by the world’s largest debtor country (i.e. US Treasuries)
should be treated as a risk-free asset.
This is even more
astounding given that the possibility of formal default is only a matter of
days away.
Treasury bond defenders
will no doubt point out that in a fiat currency world where the central bank
has the freedom to print ex nihilo money to its heart’s
content, the very idea of default is absurd.
But that is to confuse
nominal returns with real ones.
Yes, the Fed can expand
its balance sheet indefinitely beyond the $3 trillion they have already conjured
out of nowhere. The world need not fear a shortage of dollars.
But in real terms, that’s
precisely the point. The Fed can control the supply of dollars, but it cannot
control their value on the foreign exchanges.
The only reason that US
QE hasn’t led to a dramatic erosion in the value of
the dollar is that every other major economic bloc is up to the same tricks.
This makes the rational analysis of international investments virtually
impossible.
It is also why we own
gold – because it is a currency that cannot be printed by the Fed or anybody
else.
On the topic of gold, the
indefatigable Ronni Stoeferle
of Incrementum in Liechtenstein has published his
latest magisterial gold chartbook.
Set against the
correction in the gold price 1974-1976, the current sell-off (September 2011
– TBD) is nothing new. The question is really whether financial and debt
circumstances today are better than they were in the 1970s.
We would suggest that
debt fundamentals are objectively worse.
Trying to establish a
fair price for gold is obviously difficult, but treating it as a commodity
like any other suggests that the current sell-off is not markedly different
from any previous correction during its bull run:
To cut to the chase, it
makes sense to own gold because currencies are being printed to destruction;
the long-term downtrend in paper money (as expressed in terms of gold)
remains absolutely intact:
And we cannot discuss the
merits of gold as money insurance over the medium term without acknowledging
the scale of the problem in (US) government debt, now closing in on $17
trillion.
Whatever happens in the
absurd and increasingly dangerous debate over raising the US debt ceiling,
the fundamental problem remains throughout the western economic system.
The piper must, at some
point, be paid. And someone must pay him.
As to whom? This is the
foundation of western economic policy, distilled into just four
words: the unborn cannot vote.
Governments have lived
beyond their means for decades and must tighten their belts. Taxes are
certain to rise, and welfare systems certain to contract… especially for
future generations.
Even if western
governments manage to rein in their morbidly obese consumption patterns
without a disorderly market crisis, their legacy will be felt by generations
yet to come.
The debt mountain cannot
and will not resolve itself. And this, again, is why we own gold; because we
think there is a non-trivial chance of a gigantic financial system reset.
