From Greek Debt to Gold Money: Wishful Thinking in the World Economy

05/24/11 Laguna Beach, California – Global investors rediscovered Greece yesterday, which means that they might soon rediscover gold and silver as well.

The state of Utah is ready!

Headlines about the Greek government’s desperate financial condition buffeted financial markets around the globe yesterday, as investors seemed to acknowledge, en masse, “Yes, this situation in Greece is grim.” The Parthenon may be in ruins, but it is a pristine high-rise compared to the Greek government’s balance sheet.

Your editors here at The Daily Reckoning have been mentioning from time to time that the Greeks were sliding toward an inevitable default…or something that closely resembles a default. As early as 15 months ago and as recently as last Friday, we warned that the Greeks would fail to pay their bills, despite receiving a €110 billion bailout from the European Union and the IMF.

But global investors did not seem too troubled by this grim prospect…until yesterday. Greek stocks slumped to another new 14-year low, while Greek bond yields jumped to another new all-time high. The Greek government’s 10-year bond yields a hefty 17%…in theory.

A little to the north of these modern-day Greek ruins, all the major European markets posted losses. Asian markets also fell, while the Dow Jones Industrial Average dropped 131 points to its lowest level in a month.

But the Greeks don’t deserve all the blame for yesterday’s carnage…

According to the newswires, the Romans were responsible for yesterday’s selloff, not the Greeks. Standard & Poor’s downgraded Italy’s finances from “stable” to “negative.”

“Italy’s current growth prospects are weak,” S&P declared, “and the political commitment for productivity-enhancing reforms appears to be faltering. Potential political gridlock could contribute to fiscal slippage. As a result, we believe Italy’s prospects for reducing its general government debt have diminished.”

The mini-panic that ensued knocked the Italian stock market down about 3%, while shaving about 1% off the value of the euro. Meanwhile, gold and silver regained investor interest, as both metals inched higher.

The precious metals probably deserved a bigger rally yesterday, given the gravity of the unfolding sovereign debt problem/crisis. On the other hand, the recent volatility in the silver market may have undermined its “safe haven” allure for the moment.

But if, as we suspect, the fiscal distress in Greece triggers some sort of crisis in Europe and beyond, the precious metals will regain their luster…and then some.

The state of Utah is ready. While the “Beehive State” may not be famous as a trendsetter, it has made a big splash from time to time. Utah’s Mormon settlers, for example, practiced polygamy for decades. But this “plural wives” craze never really caught on nationally.

Now comes Utah with another counter-cultural idea: “plural currencies.” The Utah state legislature is the first in the country to legalize gold and silver coins as currency. (Let’s call it, “ploygmoney.”) The law also will exempt the sale of the coins from state capital gains taxes.

“Earlier this month,” the Associated Press reports, “Minnesota took a step closer to joining Utah in making gold and silver legal tender… North Carolina, Idaho and at least nine other states also have similar bills drafted.

“Making gold and silver coins legal tender sends a strong signal to Congress and the Federal Reserve that their monetary policy is failing,” said Ralph Danker, project director for economics at the Washington, DC-based American Principles in Action, which helped shape Utah’s law. “The dollar should be backed by gold and silver, so we have hard money.”

Ah, yes, but “should be” is not the same thing as “is.” What’s that expression: “If wishes were fishes, the sea would be full”?

We wish the dollar were backed by gold or silver. It isn’t.

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

View articles by Eric Fry

Related Articles:

• May 20, 2011 -- A Glimpse into the Future of the Sovereign Debt Crisis
• May 25, 2011 -- World Currencies React to US and Eurozone Debt Problems
• May 24, 2011 -- The Pain of Restoring Investor Confidence
• May 16, 2011 -- What the IMF Chief’s Arrest Means for the European Debt Crisis
• April 4, 2011 -- Gold and Silver Coins Continue to Make Headlines

 Print This Post