The future will be increased volatility

With a possible default looming for Dubai, we have, with surprising rapidity, come to the next stop on our journey to Monetary Hell: Sovereign Debt Default.

The story so far has been: (1) private consumption collapses under the weight of unsustainable accumulation of debt, as banks systematically tried to indebt every sentient being, only to find everyone went belly up at the same time (2) banks run to govt for bailouts (3) TBTF banks get bailouts, but indebt govts (4) govt budgets deficit soar due to (a) bank bailouts (b) collapsing revenues (c) increased spending on social welfare due to the spike in unemployment.

Next stop: (5) a massive spike in interest rates FOR SOME MARGINAL PLAYERS due to the flood of govt bonds onto the market, causing bond prices to collapse and yields to soar.  Let’s call this “Who will be the next Iceland?”

Step (5) has been delayed by govts printing up $s and buying their own bonds (particularly in the US).  See this graph:

The US can do this for longer than anyone else, because they borrow in their own currency.  The marginal players don’t and so they will be the next shoe to drop.

From the heart of the British Establishment publication, the Financial Times:

Markets will not soon return to the panic of September 2008: the financial sector now has state backstops. But, because of these guarantees, fearful investors have started to worry about how safe sovereign debt is. Investors are growing nervous about Greece and Ireland, in particular.

Precisely.  Sovereign debt default is the next logical step in this spiral down to gold. 

Picture a beggar on a busy street shamelessly going from stranger to stranger begging for a dollar.  Once one person has been rejected, without a second thought, the shameless beggar goes in for another attack on another mark.

Banks – ironically – are very similar.  They are shameless.  They obsess about money and finding the next $, no matter where it comes from.  They are desperate.

So banks have gone from prime, to sub-prime, to each other, and finally (and most shamelessly of all) to government.

What happens when government fails them?

The high-class “beggars” will go to gold.

Yes, I am aware of the recent negative correlation between crises and the gold price (gold went down on the Dubai news for example).  But the US Mint has suspended sales of some coins and gold and silver are in physical short supply.  You can paint a picture in the paper markets, but real physical demand is telling us something different.

At some point gold will simply be unavailable at any price.  Its price will be “precisely” (ha ha ha!) infinity.

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