Bill Bonner

What a great town! Buenos Aires. We love it here.

Why?

Because it shows how you can completely foul up a major economy…and still enjoy a great steak dinner with a good bottle of wine.

Not only that, the weather is nice and the women are pretty. Who cares about GDP, debt, monetary policy and good governance?

Argentina is probably the best place in the world from which to contemplate the world’s financial future. Huge errors now being made by the US and most other governments are bound to lead to huge trouble. In other words, they’re bound to lead to the pampas, where the gauchos have been there, and seen that…more than once!

On Friday, US stocks rose. The Dow went up 70 points. Gold rose too – up 9 dollars. It looks to us as though the bull market in gold has resumed. The yellow metal could soon scale the $1,200 mark…and challenge its all-time high.

Why is gold moving up? Gold is usually what you buy when you suspect that financial policymakers are making mistakes. But what mistake are they making? The ‘recovery’ is a huge success; everybody says so. On Monday, the papers reported Larry Summers’ remark; he said the recovery had reached “escape velocity.” And on Thursday Ben Bernanke congratulated himself publicly for having saved the world from a deep, dark depression. The central bankers and finance ministers know what they are doing, don’t they?

Apparently, gold doesn’t think so.

And last week, the Bank of International Settlements agreed.

“The Bank for International Settlements does not mince words,” says a report in The Telegraph. “Sovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis…”

The problem is coming to the “boiling point,’ said the report.

Ambrose Evans-Pritchard:

The risk is an “abrupt rise in government bond yields” as investors choke on a surfeit of public debt. “Bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decade. We take a longer and less benign view of current developments,” said the study, entitled “The Future of Public Debt”, by the bank’s chief economist Stephen Cecchetti.

“The question is when markets will start putting pressure on governments, not if. When will investors start demanding a much higher compensation for holding increasingly large amounts of public debt? In some countries, unstable debt dynamics – in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels – are already clearly on the horizon.”

The BIS, in charge of monitoring global capital flows, said public debt has risen by 20pc to 30pc of GDP across the advanced economies over the last three years. Semi-permanent structural deficits have taken root. “Current fiscal policy is unsustainable in every country (in its study). Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding.”

Historical data shows that once public debts near 100pc of GDP they act as a ball and chain on wealth creation.

If countries do not retrench quickly, they will create a market fear of “monetization” that becomes self-fulfilling. “Monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank”, it said.

Some states may be tempted to carry out a creeping default by stoking inflation. “The payoff to do this rises the bigger the debt, the longer its average maturity, the bigger the fraction held by foreigners.” The BIS said the danger that any government would consciously take this path is “not insignificant” in the longer run.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • Harry

    Dow closing above 11,000
    S&P closing near 1200
    Apple closing at another all time high

    Life is great in my world. I never dreamed I could make this much money in the market. And, had you all listened to me way back when, you too would be doing quite well.

    But we’re far from pausing this rally. On the contrary, earnings season kicks off today and we’re going to see and hear strong economic numbers from major player.

    Life will continue to be great…for me and those smart enough to be tagging along, that is.

  • JRod

    DOW down 12% over the last two years!
    S&P down 11% over the last two years!
    Still able to find suckers paying 23 times earnings for a stock with no dividend!

    Don’t try to tell me you are making money Harry. The only way to make money off of Apple is to sell it. Are you selling it?

  • Harry

    Been holding since 111-115 area. No reason to sell until 300 at which time I’ll lighten up a bit. Should be there by fall.

  • JRod

    Was this the first time it hit 111 or the second time?

    And even if all of this comes about, you are only talking about nearly tripling your money. Followers of BB who are looking at 1150 dollar gold when they bought in at 300 won’t be too impressed by that. And Bill has the courtesy to call it BEFORE the move and not be smug about it.

    It is good that you have apple though. Last week you were talking about how great the earnings were going to be, so when Alcoa came out with a 20 cent loss I wondered if you would mention them.

  • Lost & Found

    You would be more credible if you read the BIS report yourself and then quoting from it instead of letting Evans-Pritchard do the job.

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