Why surging gold prices can only mean trouble
Can you still buy a sports car for $10,000? We bought our first real automobile for $78. It was a 鈥�37 Plymouth. Beautiful car. All original. And it ran well鈥or a while. We were only 16. We didn鈥檛 have a driver鈥檚 license yet, but we were getting ready.
Then, the first real, roadworthy automobile we bought 鈥� at 17 years old 鈥� was a 鈥�61 MGA. Remember those? A little British sports car. A two-seater. What fun we had with that! We would play hooky from school, for example, and drive down to Chesapeake Beach. Or, we drove into Washington, DC, where we claimed to be over the legal drinking age and nobody asked any questions anyway. Or, sometimes we just drove around with the top down.
Back in those days there was very little traffic on the roads of Southern Maryland. You could drive where you wanted. Then, you could stop by the side of the road and explore the woods鈥r drive to some empty beach along the Chesapeake鈥�
What a great time it was to be young, white, and pretend to be over 21! Maybe it was a great time to be young and black, too. We don鈥檛 know.
One of our friends at the time was a black girl named Ruby. Segregation had ended just a few years before. Blacks and whites did not mix socially. But we鈥檇 put the top down on the car and drive around together. There wasn鈥檛 anywhere to go, really. And nothing much to do. But on a nice day, it was a delight just to be out and about in the little red sports car. People would stare and shake their heads鈥� A white boy with a black girl? It just didn鈥檛 seem right!
Whatever happened to Ruby? We don鈥檛 know鈥� Maybe she鈥檒l read this and we鈥檒l hear from her.
Why are we reminiscing? Well, that little sports car only cost us $200.
Too bad we didn鈥檛 put it in a barn somewhere and hold onto it. Today, it would be worth thousands.
You can鈥檛 buy an MGA for $200 dollars today, partly because they are collectors鈥� items and partly because the dollar ain鈥檛 what it used to be.
Why ain鈥檛 the dollar what it used to be?
Don鈥檛 ask silly questions. You know perfectly well.
Because it鈥檚 just paper. And in The Wall Street Journal yesterday was the harbinger of something big. A guest editorial suggested that the US return to the gold standard!
The stock market went up 148 points yesterday. Gold went up even more 鈥� $22. Stocks have gone nowhere in the last 11 years. Gold is at an all-time high.
And now gold goes up on 鈥榞ood鈥� news and on 鈥榖ad鈥� news. Inflation? Gold goes up. Deflation? Gold goes up. When stocks go up鈥old goes up more. When stocks go down, gold goes up anyway.
Why? The gold market is anticipating a blow-up in the world鈥檚 monetary system.
We see it coming too. We鈥檝e already seen what happens when a small country runs up too much debt. Investors get worried. Interest rates rise. The country can no longer borrow to cover its deficits鈥r to pay its past loans. Disaster.
But the Greek situation is not very different from the situation in dozens of other countries 鈥� including Portugal, Spain, Italy, Britain and the USA.
America is unique鈥nd just the same. It is already so deep in debt that even if you taxed 100% of Americans鈥� income, the resulting take wouldn鈥檛 be enough to cover the deficit (people would earn less). And if you cut the Pentagon budget by 100%鈥ou鈥檇 still have a deficit too.
It would take a remarkable act of political courage and discipline to put the US back on the path towards sound public finances. Do you see that happening? We don鈥檛.
Instead, what we see are more deficits 鈥� from here to kingdom come.
Already, the US national debt (to say nothing about the unfunded liabilities and future debts already in the pipeline) is approaching 100% of GDP. (Greece is at 120% of GDP鈥oon to be 150%).
At 100% of GDP, the economy must grow at least at the same rate as the interest charge on the debt 鈥� or the debt will get larger and larger. In other words, if you paid 5% on the debt鈥nd the rate of GDP growth were 5%鈥hen, if you devoted all the additional growth to paying the interest on the debt, you鈥檇 stay in the same place!
The last measure of growth in the US was 3.2%鈥robably declining. (We鈥檒l set aside the important question as to whether this growth is real or fiction.) But long-term borrowing costs for the feds are headed to 5%. And as investors lose confidence in America鈥檚 ability to pay鈥r its willingness (or ability) to keep the dollar from falling in value鈥he carrying cost on debt grows.
It is probably too late already. We are probably past the point of no return, as economists Rogoff and Reinhart insist.
In our view, the US could still save itself IF it could make an extraordinary commitment to budget cutting. But we won鈥檛 hold our breath.
Instead, we鈥檒l buy more gold.
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