From the pen of Karin Iten…

Dear Investment Academy Reader,

When the global governments run out of money – or rather, the credibility to keep on printing it with abandon – who is left? Today, our US expert Justice Little answers the question.

Over to you Justice…
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The first domino in the sovereign debt chain has fallen…

Does anyone know how to contact the Inter-Planetary Monetary Fund – the “IPMF”? I’m hoping maybe Alpha Centauri has some spare credit lines we can tap. Because if not, we could be in some seriously deep kimchee here…

Seriously though.

When the government can’t keep printing money – who is left?

Keynesian economists believe that public sector intervention is the key to curing private sector ills. That’s why they were so supportive of the bailouts. In fact, one might argue that “when in doubt, bail them out” sums up half a century of Keynesian thought in just six words. Private sector woes got you down? Let the sovereign entity (i.e. the government) leverage up its balance sheet when times are tough.

Poor Keynes!

Defenders argue that the great man (John Maynard Keynes) never intended for his ideas to be abused this way. As a balance to all that counter-cyclical spending, governments were also supposed to save when times were good… the equivalent of the squirrel storing up acorns for winter, rather than gorging all year round.

But what good is a theory that works on paper, yet utterly falls on its face in practice? This is one of the reasons ivory tower economists are so useless… and so dangerous. They insist on clinging to ideas that appear seaworthy in the textbooks, only to be shipwrecked by human nature in their application to the real world.
 

Consider the above chart, which shows total US debt (public and private) as a percentage of GDP (gross domestic product) dating back 140 years. Note, in particular, the nature of the curve since 1970 or so. It has gone close to vertical since then – starting right about the time Tricky Dick Nixon declared: “We are all Keynesians now.”

Of course, it is not the United States that is in the spotlight at the moment. Europe is. But what is happening in Europe is merely a prelude – an opening act, if you will.

The sovereign debt domino chain

Picture a sovereign debt domino chain. With each domino that falls, the stakes grow successively higher. Greece was just a little domino, they said. Just 2% of Europe’s GDP, they said. But little dominoes can topple bigger dominoes.

After Europe’s unsustainable debt regime wholly implodes – something that is happening right now, as you read this – Japan will likely come next. And then, after that, the Big Kahuna… the United States.

“It’s not rocket surgery,” as the ex-Deutsche bank derivatives trader Boaz Weinstein liked to say. Common sense says that you can only pile up debt for so long before it gets to be a problem. The great Western nations (and Japan) have put off this simple concern for decades, hoping to outrace the consequences of spending more than they saved.

As we can see via Europe – where a trillion-dollar “shock and awe” campaign all but vanished into the morning mist – it’s now less than five minutes to midnight.

 

Europeans flock to gold

In another sign of things to come, gold went parabolic in recent days as European savers panicked. The gold dealers are literally, running out of product.

The Austrian mint has seen its reserves raided by buyers seeking shelter from the euro. Meanwhile, the precious metals online retailer Kronwitter had to take down its website and post a note more or less saying, “due to the enormous number of orders, we have temporarily shut down… if you have already ordered, your coins have been shipped”.

The whole fiat money system is based on faith, and faith has a breaking point. Faith can be strained and stretched and abused for a good length of time. But when the breaking point finally comes, events don’t unfold in the smooth, linear fashion that academic economists are used to.

In recent days, your editor had contact with a businessman from Eastern Europe. He explained how his firm had switched their client billing terms to US dollars only, as the exchange rate risk of the euro had become too great.

And yet, eventually the exporters of the world will find that the dollar isn’t much good either. Nor the Japanese yen for that matter… and the Chinese yuan is still far from ready for primetime.

A shining set of attributes

Those who criticise gold – who still see it as a “barbarous relic” – sniff that the yellow metal is good for almost nothing. You can’t eat it and you can’t earn interest on it. So why mess with it?

Because, quite simply, if gold is good for almost nothing, then the world’s fiat currencies have proven themselves worth less than nothing over time. That is to say, trusting in the faith of paper currency over the ages has been a guaranteed way to become poor.

You have heard the bottom-line attributes: Gold is the only “neutral currency” not subject to a printing press. It’s the only financial asset that doesn’t count as someone else’s liability. In a world where all the major fiat currencies stand at risk of being destroyed, those are attractive attributes indeed.

Warm Regards,
JL