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Gold and Silver - the usual commentators- we need new ones

Commodities / Gold and Silver 2011 Apr 06, 2011 - 11:20 AM GMT

By: Richard_Hartley


Best Financial Markets Analysis ArticleWhen it comes to wider commentary on gold and silver it is still restricted to the financial press. The 'public' are yet unaware of the massive inflation that is going to hit them. That's why we are not in precious metals bubble. Nobody is talking about the huge rise in prices... except the usual commentators.

Central banks are in a fix. They can't raise interest rates in case they choke off any recovery. They have to either keep spending and accept inflation through currency depreciation or cut expenditure to bring debt under control.

The choices are not pretty. As each Government follows it's own agenda we will see, only after the next great depression, who made the right decisions. The situation as it is, looks horrible. More and more people are starting to understand the problem and are now cutting back on their own expenditures in preparation for the squeeze in the economy and on their finances.

This of course becomes a self fulfilling prophecy of economic shrinkage. I have written about this before and believe me any manufacturing or service company (outside food and energy) that is not planning for lower production is kidding themselves.
Sentiment will change and eventually we will see the same masses of people spend again once debt is paid down. I can't see this happening though for a very long time. I believe we are at the start of a ten year cycle of paying down debt and the resultant contraction in consumer spending. This will be combined with inflation hence the dramatic squeeze to come. 

Everyone has their aspirations and I have a daughter who is in her final year of University next year. It is refreshing to hear her planning her future and what she wants to achieve, where she wants to live and  the timescales that she is working to. She is lucky I believe to be hitting the market place in 12  rather than 24 months from now. She will have a chance to establish herself somewhere before new jobs dry up.

In previous recessions unemployment figures were more transparent. Governments and central banks could paper over the cracks and often borrow on world markets to fulfil funding needs. When the world is in depression there is nobody left to borrow from. The last world depression was in the 1930s and then, not so long ago, it took a world war to bring the economy out of the crisis.  Huge increases in manufacturing capacity were created on the back of the war machine. The UK final war debt payment was paid back to the US and Canada in 2007 sixty-two years after the end of the war. In total the debt was $4.34 billion  at a 2% interest rate. It was repaid 6 years late due to financial difficulties in the UK in 1956, 1957, 1964, 1965, 1968 and 1976.  It took 57 years repay though starting in 1950 when the debt structure was agreed upon.! Germany finished paying WW1 reparations on October the 3rd 2010. $22 billion. 

This brings us neatly onto defaults and suspension of debt. These were defined debts which was transparent and a repayment schedule was set.

Of course there are now no more wars for western countries, just conflicts. How much more palatable terminology makes things.

It takes a long time for the jobless figures to work through into any economy and like the US many countries and regions have injected massive liquidity to cover the cracks. The hope being that a (consumer) recovery would take place and liquidity will be withdrawn. This has been a jobless recovery on the back of that liquidity. Do you keep going and inject more money into the economy? Most countries have no choice but to cut and tighten unless they are prepared to see inflation. And yet still inflation is going to hit them.

The US economy with it's privileged position of having the US dollar has no alternative but to keep the printing presses rolling. The previous buyers of bonds, the Chinese, have stopped. The largest private holder US debt, PIMCO has sold it. No one is in the market to buy the US debt when it comes to be rolled over, so instead through primary dealers (who get huge commissions on each deal, even on rollover, hey free money!) are buying the debt financed by the Fed. Buying your own debt. The US has no alternative except default. This will be inflationary default. It is estimated that the US shopping basket will double in cost by the end of 2011.

This is not good news for the rest of the world as most commodities are paid for in dollars. Unfortunately the rest of the world will see the same increases and the poorest (in any country) will be hurt the most as the weighting of food and energy as a percentage of spend is so much more. So at a time when the rest of the world has to tighten The US is defaulting on it's debt through inflation which is further going to squeeze the 'coping classes' (working classes) just at a time when they want yo pay down their debt .

As with Iceland are we going to see debt default as a way out?. The US defaults through inflation. This in turn sends Gold and Silver to new levels. The debt reduces as a percentage of GDP. This of course is assuming that the default is handled in an orderly fashion. Of course The Federal Reserve must know what's it's doing. These are smart people.

Finance was always interconnected worldwide and now even more so. The stakes and risks are much higher than they were and outside the control of any Sovereign state.

After hyperinflation in 1923 in the Weimar Republic The US lent money to Germany to help it rebuild it's economy by financing it's banks who subsequently lent money to Manufacturing companies.  Just as the US has done recently this gave the economy liquidity. The 1929 Wall Street crash changed all that and Germany was given 90 days to repay it's debt as America needed the money. This caused banks in Germany to stop lending and saw unemployment increase ten fold in 6 years. The Nazi's made the most of it.
This though was a structured, transparent debt with very intention of repayment being made.

Just like in 1929 the squeeze is now on. In the US there are 171 banks on the brink of insolvency where a $1000 is the difference between success and failure. Further deleveraging through defaults on loans would be catastrophic.
And therein lies the problem worldwide. An over leveraged world exists throughout business, governments and society. Most people have realized the need to pay down these debts. Others (governments) will find it impossible and default either directly or through stealth inflation.
Some countries unlike the US are unable to devalue their currencies. Any country in the Euro is a potential direct defaulter. As the squeeze takes place and tax revenues shrink there will be either a move towards a true Euro Bond market underwritten by Germany and France or and most probably a direct default will occur.

Any one of a list of 7 Euro countries could default at anytime if politically they capitulated to the power of their people driven to economic despair. The devaluation of the dollar and the effects that is having on the world is increasing  the numbers of 'have nots' towards the political tipping point.

We already live in a fragile world that is stressed financially. Any one or series of defaults or events could push the financial world into a tailspin. 2008 was good practice for coping with even greater issues.

How many of todays Sovereign debts are transparent structured debts with every intention of repayment? The politicians might say so but do the markets?  I think not.

The reality is that it takes a long time to pay back real debt, rather than roll it over or inflate it away as the examples above show. There is something about the debt of today that makes you feel you are living in a world of 'make believe' .

A few people have broken free from the debt slavery and realized it cannot continue. We now see the rises in Gold and Silver as an early indicator of what is to come. The prices are set to soar.  When the masses realize that they are being conned they will either be able to join the party or if unable to afford it, revolt.

Richard Hartley

I started taking an interest in Gold and Silver in 2005. My background was IT and I needed a new hobby. Today it has become much more than that and I started Spartacus News following encouragement from Friends who I had helped understand more about investing and gold and silver. This remains today my prime interest.

© 2011 Copyright Richard Hartley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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