One for the record books!
Right up until a last minute deal yesterday, the US Congress was threatening a default; the first default by a major economy since Adolf Hitler’s Germany declared that it would not pay its bills. That was in 1933.
You’d think this would have investors sweating, right? You’d expect that they’d be nervously guessing about which way it would go, bidding stocks up one minute and letting them fall the next.
Nope. The volatility index – the VIX – shows the market has been surprisingly calm.
And yesterday, the Dow was up 205 points. Gold rose modestly too –$9. The VIX is low.
What does it mean?
Well, it implies that no one ever took the threat of default very seriously. Everyone expected a last-minute deal. When the chips are down, they believed, the pols will get their act together. One way or another, they’ll shake hands, and continue marching, arm in arm – towards a real debt catastrophe!
Except that hardly anyone sees a catastrophe coming. The gold price is probably the best measure of that. And gold has been on a losing streak for nearly three years.
Never before in history have so many central bankers worked so hard to degrade the world’s money. And never before have they failed on such a grand scale. Not only have consumer prices not yet broken out to the upside, the consumer price index (CPI) has actually tended to drift down.
How can this possibly end, but badly?
“I don’t know what will happen”, said our favourite economist in Buenos Aires. Rob Marstrand is the chief economic strategist at our very own Bonner Family Office. Living in Argentina has turned him into a connoisseur of financial disasters. And now, he sees one coming.
Bill Bonner on markets, economics & the madness of crowds
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“I don’t know what, and I don’t know when. But I make sure I have a few gold coins on hand, just in case.”
But that’s the strange thing. Whether the world faces an imminent monetary collapse or not, we don’t know. But it certainly faces something. And it’s not likely to be pleasant. The advanced economies are heavily in debt – more heavily than at any time in history. All their economies are having trouble growing, adding jobs and boosting wages. All face social welfare bills that – given reasonable assumptions – they will be unable to pay. All have ageing, dependent populations who will resist cutbacks. And all now rely on some form of manipulation by the central bankers in order to keep the party going.
By the way, the problem has little to do with stubborn Republicans, the Tea Party, continuing resolutions, debt ceilings, or bi-partisan cooperation. The problem is spending, and its inevitable toxic waste product – debt. Every year, the feds spend about $1.2trn more than they collect in taxes. That is reported in the press as a ‘deficit’ equal to 7% of GDP. But it’s better understood as a deficit of nearly 50% of revenues.
Over the last five years, deficits have added more than $5trn to America’s debt. Suppressed interest rates have probably added another $2.5trn to the nation’s private debts (the number is not calculable, this is just a wild guess). And now, under the leadership of arch-meddler Janet Yellen, the Fed is prepared to do even more.
And without it, the economy as we know it will fall apart.
Yet, even with these facts staring him in the face, the typical fellow has no insurance. He has no vegetable garden. He has no wood stove, with a stack of wood behind the house. Most important, he has no gold coins.
Again, we don’t know what will happen. But the odds of a major breakdown in the financial system must be greater than zero. And yet, there is nearly zero interest in the one and only sure protection – gold.
One for the history books.
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