The Economic Outlook 2011 (Precious Metals)
For endless months we have stressed the death of the dollar, and it seems the mainstream press has certainly taken up that mantra recently, talking about currency wars, currency crisis, and emergency “sessions” or meetings taking place all over the globe. In fact, we sent out a piece from the MSM (mainstream media) about China and Russia agreeing to do business in each other’s currency instead of using the U.S. dollar.
The never-ending debate revolves around inflation and deflation, but to our thinking the discussion could revolve around default. When a debt becomes too cumbersome a default is inevitable. For example, if you borrow “money” for a house purchase and lose your job and cannot afford the payments (debt service) you have defaulted on the debt. In the worst-case scenario, a sum is borrowed, no payment is made, and a total default takes place. In simple language, the money is borrowed and never paid back. There is also a partial default, where perhaps a third party will come in and pay 20 cents on the dollar to extinguish the debt.
It is no different for a nation state, and this has taken place in recent history, so the idea of a government default is valid. The inflation argument maintains that governments or specifically the U.S. government or the “Euroland” government (there is no euro government just a currency) will continue to make good on their debt obligations. In fact, this is the basic premise we have offered from the beginning—we are nearly certain that governments will do everything in their power to keep inflating (printing) to prevent a default.
This has been the case with QE2 and other efforts so far on the part of the U.S. and other nations around the world. The problem is that by continuing the game they too are defaulting. What are we discussing? Look at the end point where the currency—the euro or U.S. dollar—becomes worthless (worth = zero). You as a lender (you bought T-bills or T-notes, or T-Bonds) are “repaid” but were actually defaulted upon because the payment you received was the same as if you received no payment at all. To our thinking, an outright default is more honest because you know that your holdings devalue immediately. Whereas in keeping a time obligation, you are stuck guessing and hoping things will get better in the future.
This is the dilemma faced by the world. Those in the know can do the math; it is currently impossible to pay back what is borrowed and maintain all the current services provided by the modern state. So, currency destruction continues, while the chances of any economy being able to grow their way out of this problem become dim indeed.
However, the velocity of money is still low enough so as not to concern the debt markets greatly. This means that currency destruction is not a function of how much debt exists; more than enough debt (that cannot be paid back) exists currently without adding a penny more in interest, but at what rate is the debt exchanged (velocity) for money. In other words, as long as China, Japan, and other holders of U.S. bonds are willing to hold, the problem can be delayed, but once the sale of new debt becomes impossible (currently this is close to the case) and the Federal Reserve is buying the new debt offered by the U.S. Government, the game is getting closer to the end.
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