Gold market and America鈥檚 triple-A facade
Yesterday鈥檚 big news wasn鈥檛 really news at all. Standard and Poor鈥檚 finally found the nerve to state openly what the rest of the world already knew: the Emperor is naked.
The esteemed ratings service announced that America risks losing its triple-A credit rating. 鈥淲e believe,鈥� said S&P, 鈥渢here is at least a one-in-three likelihood that we could lower our long-term rating on the US within two years.鈥�
Officially, America remains the world鈥檚 preeminent triple-A credit. Unofficially, America鈥檚 triple-A credit is a financial Potemkin Village. It is all fa莽ade. The US lost its triple-A credentials years ago, but the rating keeps hanging around 鈥� a function of tradition, decorum, politics and complacency.
Behind America鈥檚 triple-A fa莽ade, its creditworthiness steadily deteriorates.
The budget surpluses of the second Clinton Administration yielded to the $300 billion deficits of the Bush Administration, which gave way to the mind-blowing $1 trillion deficits of the Obama Administration. In the process, America has amassed debts that approach 100% of GDP, while also piling up future obligations that would amount to about 500% of GDP. Both of these debt numbers are only a rounding error away from Greece鈥檚 debt-to-GDP levels.
Greece, as you may recall, is the non-triple-A rated country on the verge of declaring bankruptcy. S&P considers Greece a 鈥渏unk鈥� credit 鈥� branding the debt-strapped nation with a BB- rating. Greece, with a debt-to-GDP of about 150%, clearly deserves its BB- rating. But that鈥檚 why the US, with debt-to-GDP approaching 100%, does not deserve its triple-A rating.
Why are the heavily indebted Greeks a junk credit while the heavily indebted Americans remain a triple-A credit?
Hard to say exactly. But one very important difference comes to mind. The Greeks cannot print the euros they need to repay their debts, but Americans can, and do, print the dollars they need to repay their debts. A second important difference also comes to mind: Standard & Poor鈥檚 is not a Greek company; it is an American one.
As such, S&P鈥檚 announcement yesterday began patriotically:
鈥淥ur ratings on the US rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar鈥檚 preeminent place among world currencies.鈥�
After saluting the stars and stripes, however, S&P continued:
鈥淎lthough we believe these strengths currently outweigh what we consider to be the US鈥檚 meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the 鈥楢AA鈥� level.鈥�
Translation: America is broke.
But you don鈥檛 have to rely on S&P鈥檚 judgment to realize America鈥檚 finances are on a slippery slope. The precious metals markets have been rendering this verdict for several years already. Gold touched another new all-time high yesterday. The dollar鈥檚 feeble price trajectory has also been telling the world that America鈥檚 finances are broken.
While the dollar remains the world鈥檚 reserve currency, it is not acting like it. The dollar鈥檚 value has been dropping against just about everything. Really. Everything. Would you believe that the top-performing currency of 2011 is the Paraguayan Guarani? And that鈥檚 not all; the next best performing currencies are the Mauritian Rupee, Hungarian Florint, Czech Koruna, Russian Ruble and Colombian Peso.
This is not a joke. Not only are these currencies atop the leader board for 2011, but each of them has also appreciated at least 25% against the US dollar during the last two years. The Colombian peso is up 44%!
To be sure, the Colombian Peso is not about to become the world鈥檚 reserve currency. But in a world in which the actual reserve currency has become as reliable as Scottish sunshine, even the Paraguayan Guarani becomes a plausible store of value. Nothing against the Guarani, but if the dollar鈥檚 descent gathers steam, we鈥檇 rather be holding gold and silver.
In an earlier era, when a dollar bill still commanded respect around the globe, Warren Buffett scorned gold as an investment of 鈥渘o utility.鈥�
鈥淕old,鈥� he said, 鈥済ets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.鈥�
The Martians are not scratching their heads any longer. Gold鈥檚 utility becomes evident every time a government becomes profligate. Therefore, now that gold is rising briskly in value 鈥� and Berkshire Hathaway鈥檚 stock isn鈥檛 鈥� deciding where to bury one鈥檚 gold is becoming an increasingly important question.
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