By Ronald-Peter Stoferle, Incrementum AG Lichtenstein

December 19 (King World News) - Excessive Structural Debt Suggests Further Increase Of The Gold Price

Even if market participants are currently focused on the debt problem within the Eurozone and its peripheral countries, the situation in the UK, the US and Japan seems to be just as precarious.  The Western world and Japan have amassed the highest level of debt ever in times of peace – although the demographic outlook is dire.  The following chart shows the Total Federal Debt in the USA since the end of the Bretton Woods Agreement in 1971.

Taking out new debt seems to have an increasingly counterproductive effect....

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It seems as if the marginal return on GDP per additional unit of debt were gradually declining.  This means that economic output cannot be stimulated by taking out additional debt any longer.  As soon as the dose of debt cannot be stepped up accordingly anymore or indeed this course of treatment has to be discontinued altogether, the withdrawal effects will be painful.  Gold should come out of this situation on the winning side.

“The future is purchased by the present.” Samuel Johnson

Excessive debt causes the room available to the government to shrink, because the amount of debt service eats up an ever-growing portion of public spending.  David Hume already described this scenario in his essay “Public Credit” (1752):  Excessive debt leads governments to pawn their future revenues and to lapse into a state of faintness and incapacitation A number of concrete examples substantiate this notion: in Germany, the three cost segments of social benefits, public sector pay, and interest and redemption of debt account for almost 75% of the federal budget.  This means that only a quarter of tax revenues provide room to manoeuvre.

“The greatest shortcoming of the human race is our inability to understand the exponential function.” Albert Bartlett

As is the case for every trend, the dynamics seem to accelerate towards the end.

Dimensions change quickly:  at the end of the previous large gold bull market in 1980, US government debt exceeded $1,000 billion for the first time in history.  Today public debt amounts to $17,000 billion.  The following chart shows the increase in dynamics.  Public debt today is more than 5,000 times that of 1913, when the Federal Reserve was established.  On the following chart we can see that “total credit market debt owed” would double every decade.  We are currently seeing some sideways consolidation, but if this pattern continued, the USA would be faced with a total debt of $107,116 billion in 2021.


A wrong diagnosis of causes leads to wrong solutions.  The systemic problem is not low tax revenue, but excessive spending.  Additional tax hikes will never consolidate the public budgets in the long run.  This can only be achieved by structural reforms in the spending department.  According to Schlesinger saving is tantamount to holding back on consumption in the present in order to be able to consume more in the future.  The opposite is true for credit, where today’s benefit is bought with tomorrow’s shortcoming.

Although we are currently faced with the highest level of public debt in times of peace, a far-reaching consolidation of public budgets does not seem to be up for discussion.  The required grave cutbacks are being postponed, and the policy of “muddling through” is cheerfully continued.  The longer structural and far-reaching reforms are postponed, the more substantial will be the need for adjustment and thus the greater the burden on future generations.  According to the Austrians, every act of consumption has to be preceded by production first. “Debt is nothing but consumption brought forward which will then not take place in the future.”  There does not seem to be a painless therapy for these problems.  We believe that gold is an effective medicine.

Therefore we expect interest rates to be kept low for an extensive period of time, with the Fed remaining expansive.  This is one of the strongest arguments in favour of a continued low or indeed negative level of real interest rates and thus for a rising gold price.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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