If the economy is recovering, why is gold still rallying?
Gold Rallies Against the Sovereign Debt Crisis
What a great town! Buenos Aires. We love it here.
Why?
Because it shows how you can completely foul up a major economy鈥nd still enjoy a great steak dinner with a good bottle of wine.
Not only that, the weather is nice and the women are pretty. Who cares about GDP, debt, monetary policy and good governance?
Argentina is probably the best place in the world from which to contemplate the world鈥檚 financial future. Huge errors now being made by the US and most other governments are bound to lead to huge trouble. In other words, they鈥檙e bound to lead to the pampas, where the gauchos have been there, and seen that鈥ore than once!
On Friday, US stocks rose. The Dow went up 70 points. Gold rose too 鈥� up 9 dollars. It looks to us as though the bull market in gold has resumed. The yellow metal could soon scale the $1,200 mark鈥nd challenge its all-time high.
Why is gold moving up? Gold is usually what you buy when you suspect that financial policymakers are making mistakes. But what mistake are they making? The 鈥榬ecovery鈥� is a huge success; everybody says so. On Monday, the papers reported Larry Summers鈥� remark; he said the recovery had reached 鈥渆scape velocity.鈥� And on Thursday Ben Bernanke congratulated himself publicly for having saved the world from a deep, dark depression. The central bankers and finance ministers know what they are doing, don鈥檛 they?
Apparently, gold doesn鈥檛 think so.
And last week, the Bank of International Settlements agreed.
鈥淭he Bank for International Settlements does not mince words,鈥� says a report in The Telegraph. 鈥淪overeign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis鈥︹��
The problem is coming to the 鈥渂oiling point,鈥� said the report.
The risk is an 鈥渁brupt rise in government bond yields鈥� as investors choke on a surfeit of public debt. 鈥淏ond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decade. We take a longer and less benign view of current developments,鈥� said the study, entitled 鈥淭he Future of Public Debt鈥�, by the bank鈥檚 chief economist Stephen Cecchetti.
鈥淭he question is when markets will start putting pressure on governments, not if. When will investors start demanding a much higher compensation for holding increasingly large amounts of public debt? In some countries, unstable debt dynamics 鈥� in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels 鈥� are already clearly on the horizon.鈥�
The BIS, in charge of monitoring global capital flows, said public debt has risen by 20pc to 30pc of GDP across the advanced economies over the last three years. Semi-permanent structural deficits have taken root. 鈥淐urrent fiscal policy is unsustainable in every country (in its study). Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding.鈥�
Historical data shows that once public debts near 100pc of GDP they act as a ball and chain on wealth creation.
If countries do not retrench quickly, they will create a market fear of 鈥渕onetization鈥� that becomes self-fulfilling. 鈥淢onetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank鈥�, it said.
Some states may be tempted to carry out a creeping default by stoking inflation. 鈥淭he payoff to do this rises the bigger the debt, the longer its average maturity, the bigger the fraction held by foreigners.鈥� The BIS said the danger that any government would consciously take this path is 鈥渘ot insignificant鈥� in the longer run.
------------------------------
海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
