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By Ronald-Peter Stoferle, Incrementum AG Liechtenstein

May 18 (King World News) - The Seeds For A Much Bigger Crisis Have Now Been Sown


Taking out new debt seems to have an increasingly counterproductive effect. It seems as if the marginal return on GDP per additional unit of debt is gradually declining. This means that economic output cannot any longer be stimulated by taking out additional debt. As soon as the dose of debt cannot be stepped up anymore or as if 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....


Continue reading the Ronald Stoferle piece below...  




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Excessive debt causes the room available to the government to shrink, because debt service eats up a growing portion of public spending. David Hume described this scenario in his 1752 essay “Public Credit.” Excessive debt leads governments to pawn their future revenues and to lapse into 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 percent of the federal budget. This means that only a quarter of tax revenues provide room to maneuver.


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


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 have recently seen some sideways consolidation, but if this pattern continued, the United States would be faced with a total credit market debt of $107 billion in 2012.




“Problems cannot be solved by the same rationale that created them.” Albert Einstein


Therefore, we believe that financial repression will continue to crop up in many shapes and sizes and gain in importance over the coming years. However, the long- term costs of missing efforts made toward consolidating national finances will be substantial. While the artificially low bond yields in the short run suggest that the saving measures are on course, this has mainly been achieved by market interventions. Therefore we regard the gradual transfer of assets -- a rather euphemistic term for gradual expropriation -- as a disastrous strategy in the long run. None of the previous problems of misallocation is resolved, but instead redistribution takes place (in the beginning mostly invisibly) and problems are dragged out, having to be addressed later. As the dependence on these measures rises, so does the collateral damage to be expected later, and the seeds for an even bigger crisis have been sown.


Conclusion


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 be achieved only by structural reforms in the spending department. According to Schlesinger, saving is tantamount to holding back on consumption in the present so as 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.


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




IMPORTANT - KWN has more interviews being released today.


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The audio interviews with Stephen Leeb, William Kaye, Bill Fleckenstein, Andrew Maguire, Eric Sprott, Art Cashin, Rick Rule, Dr. Paul Craig Roberts,  Felix Zulauf, James Turk, Victor Sperandeo, and Dr. Philipa Malmgren are available now. Other recent KWN interviews include Dr. Marc Faber and Jim Grant -- to listen CLICK HERE.


Eric King

KingWorldNews.com

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