Gold News

Gold vs. Debt

"If the US keeps printing money, it will create inflation," says China...

the transcript of our "Australia in the Red" DVD over some sashimi and a beer last night, I highlighted this passage from Dr. Steve Keen, writes Dan Denning in the Australian Daily Reckoning.

"We are told that for example debt doesn't matter because if a company takes out a certain level of debt, say a very low level of 10% debt to equity, and that's irrelevant to the company's value because the person buying shares in that company can take out 90% debt to equity ratio."

"Therefore you're told the Modigliani-Miller proposition, after the two morons who got the Nobel prize for it, was that the level of debt that a company takes out does not affect its value. And those sorts of propositions are strewn through conventional economic theory, and of course people like Alan Greenspan and Ben Bernanke are experts in that very same theory."

See? Bernanke...Greenspan...morons, all of them!

Debt does matter. And so do deficits. Just this morning we read that US President Barack Obama will ask the Senate to lift America's statutory debt limit to $13 trillion. It's at $12.1 trillion at the moment. The lower legislative body of the Congress, the US House of Representatives, passed a measure lifting the debt ceiling earlier this year. But it used a parliamentary trick to do it in a manner which did not require a roll call vote. No jack asses had to go on the record.

The Senate is different. There are just 100 of the grumpy old men and women. And to increase the debt ceiling to accommodate annual deficits of over $1 trillion for the next ten years (it's $1.6 trillion this year) the Senator will have to go on record. Spending other people's money is generally easy (and probably kind of fun). But not when you have to publicly commit to it and "own" the debt. No one wants to own it, even though everyone wants to benefit politically from the spending (sound familiar?).

The investment fallout from the record US debt and deficits is continued pressure on the Dollar and $1,000 Gold. Old yeller metal dragged itself up $2.50 in the futures markets to close over the $1,000 in New York trading last night. Gold has done this despite a 50% rally in stocks. We reckon once the punters catch a little gold fever – which they will if it can hold the line at $1,000 for a few days – higher highs will soon follow.

And let's not forget large owners of Dollar-denominated assets like stocks and US Treasury bonds. Do you reckon they're getting a touch nervous? Cheng Siwei, a Chinese official attending a conference at Lake Como in Italy, said he was worried about the Fed's indefinite policy of credit easing.

"If they keep printing money to buy bonds it will lead to inflation," Chen said. "And after a year or two the Dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies...Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets."

Ready to Buy  Gold...?

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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