Economic Slow-down Bullish For Precious Metals

It is infuriating to precious metals investors to watch the community of zombie-economists continuing to make the same mistake, month after month, year after year (and once again today) with a very simple economic dynamic. As our economies slow down (and very possibly crash), it is inevitable that inflationary pressures will worsen – not ease. This is a function of extremely simple arithmetic, and thus should be understandable even to an economist.

We start with the fact that few Western economies (and none of the larger ones) are solvent. What this means is that an economic slow-down does not imply mere deflation. It implies debt default. While we could plug in virtually any Western economy to demonstrate this principle, two current examples should suffice: Greece and the UK.
Greece is obviously the most blatant example of Western insolvency. However, what has taken place in Greece directly implies that all major Western economies are hopelessly insolvent.

Greece has now (supposedly) benefitted from two official rescues, not to mention numerous minor operations to try to stabilize its fraud-sabotaged debt market. In the last, futile bail-out bond investors had a 75% haircut imposed upon them[URL:, with the option being to turn down the “offer” – and end up with a 100% loss. In other words, Greece has just suffered a near-total default.
Yet mere days after this latest Final Solution to the Greek debt crisis, here is what the bankers were saying:
The restructuring deal doesn’t do anything to put Greece on a sustainable path. A third bailout will become necessary.
Let me repeat this, so there can be no confusion about what this directly implies. Even after lighting a match to 75% of Greece’s national debt, the banking community isn’t remotely convinced that Greece is solvent, reflected by them maintaining their “junk” rating on Greece’s debt.

If Greece is still insolvent sitting with only 25% of its debt-load, what does that say about all of the other Western economies being crushed under the weight of 100% debt-loads? It’s very simple. Any nation which was less than four times as “solvent” as Greece prior to its default is now less solvent than Greece today. That is not an opinion. That is arithmetic.
Are there any Western nations that were (or at least might have been) more than four times more solvent than Greece? Yes, but the list is short enough to mention them all: Denmark, Norway, Sweden, Switzerland, and perhaps Canada. Apart from Canada, they are all small economies. However, with Canada’s current government producing nothing but record-deficits, its inclusion on that list is highly dubious.

Again, this is not a matter of opinion but rather a simple statement of arithmetic. Looking at the list of all nations ranked by debt-to-GDP ratios, Greece used to be 5th worst on that list, and worst in Europe with a debt-to-GDP ratio of 144%. However, when we slash that debt by 75%, suddenly Greece has the best debt-to-GDP ratio in all of Europe.
Obviously Greece should not suddenly be regarded as the most solvent economy in Europe. It’s economic dynamics still leave it with structurally unsustainable deficits. However, the exact same argument could be used regarding Canada, which now has a higher debt-to-GDP ratio than Greece, record deficits, and a government making zero effort to bring the spiraling debt back under control.

Note that this residual insolvency of Greece’s economy despite a 75% default is the product of the Friedman Austerity inflicted upon that economy. Since Day 1 of that failed experiment, every measurement of Greece’s economy along the way has been below expectations. Clearly, rather than making things better, Greek austerity only made that economy less solvent.
Once again, I don’t have to rely upon my own naked opinion here, but can point to empirical evidence. In the case of the UK, we have another Western nation with a farcical “AAA” credit rating, implying that the UK is as solvent as any nation in Europe. This begs the question: if the UK is solvent, then why are its deficits getting larger as it attempts to tighten its belt?
Let me back-track for a moment here. Since defining solvency is a very slippery task, let us create a simple, practical definition – tautological in nature. A solvent nation is one who upon expending maximum effort is able to bring its finances under control, eventually leading to a balanced budget.
While we may have difficulty defining solvency, defining insolvency is much simpler. Any nation which is incapable of ever balancing its budget is insolvent, since the only possible mathematical fate for all such debtors is bankruptcy. Now let us return to the UK.

The current UK government has made it clear to its own population and markets that it is making maximum effort to control its gargantuan deficit, which is proportionately larger than those of Germany, France, or even perennial debt-sinner Italy. What is the result of this maximum effort?
The UK just reported the largest deficit for the month of February in its entire history, nearly double the deficit it reported one year ago. In other words, not only is Friedman Austerity failing in the UK as well, it’s clearly making things much, much worse – just as it did in Greece. Once again this begs an obvious question: if “austerity” leads to debt-default even when the other nations around you are still spending and (supposedly) still growing, how will these austerity-plagued economies fare when the other profligate Western debt-sinners start to tighten their belts too?

via: Bullion Bulls Canada

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