A couple of days ago, the FTSE 100 index rose by about 2% and gold reached a new high. In addition, the economy shrank by only 0.3%, compared to the experts’ predictions of 0.4% and the banks had a Supreme Court judgement in their favour. So why the continuing uneasy feeling?
Next year, interest rates are going to rise and that means that borrowers, both corporate and personal will begin to have difficulty in repaying their loans. This means another wave of write-downs for the banking sector and they could be as huge as last year’s write-downs. Plus it could mean a huge wave of foreclosures on borrowers who can’t afford the new, higher monthly repayments.
The Gross Domestic Product may well rise in the short-term but the ability for business and taxpayers to service a debt does not depend on a rising GDP figure. It depends on income. That’s why the high unemployment rate is very bad news for the housing market and for the banks — again.
It’s still too early for the mortgage reset problem to derail the banking system and stop the economic rebound in its tracks, so there will be more days like today when the FTSE has a healthy “Bounce” and all appears well and on the up.
Nevertheless, the looming debt problem does explain the Treasury’s and the Bank of England’s apparent reluctance to return to a more normal monetary policy. In addition, the Treasury and the Bank of England have completely abandoned any semblance of fiscal discipline. Consequently, the United Kingdom is running an ever-larger budget deficit.
As interest rates rise, absolute debt levels will climb ever-higher and spiral upwards. In plain English, we’re going to be dedicating a larger and larger share of the United Kingdom’s budget or income to pay interest on debt. That applies to both the government and the taxpayer. That will inevitably result in higher taxation and a watering-down of public services.
As a nation, we are in hock as never before and currently it looks as if the government has no intention of changing that fact. Their “wait and see” policies are extremely dangerous because both the actual and hidden costs of our debt are rising every day.
It looks as if the Bank of England and the government are expecting another major “dip” in the economy because they know that their current economic policies make another dip almost inevitable. That is why there is the occasional mention of a “double dip” recession. We’ve had the first one and now we’re awaiting the next one.
So why is the price of gold currently going through the roof? It’s because gold has always been THE insurance against the follies of government, especially against inflation. Gold speculators are expecting inflation. Hence the mad scramble for gold.
In the past, the majority of monetary regimes were based on money backed by gold and silver. Silver is no longer a precious metal and gold is only backing the currency of a few countries.
If central banks around the world fail to remove the emergency stimuli before their current measures translate into inflation, ALL currencies will fall in value relative to hard, tangible assets like gold. That is when we will have global inflation.
Big spikes in inflation have always had one major characteristic - a strongly rising budget deficit mainly financed by monetising government debt. That characreristic is present today, and not just in the United Kingdom but globally. Monetising debt means turning something into money. In our case, the government “issues” debt in order to finance its spending – for instance on buying worthless bank assets. The Bank of England then buys that debt by printing money.
Most of the the world is using money based solely on promises and faith. Hence the constant repetition of the word “confidence” – it is not confidence based on assets or REAL money but on hope.
When the financial crisis hit in 2007/08, governments all over the world reacted the same way: They started a debt binge accompanied by an extremely lax monetary policy. Central banks such as the Bank of England monetised government debt. That was the birth of modern “quantitative easing.”
These are the very same policies (debt and printing ever-increasing amounts of money) that were present during every large jump in inflation in history and these policies are the fundamental drivers behind the advance in the price of gold.
As long as there is no major fiscal and monetary policy change, inflation will heat up and gold’s bull market will continue.
Hence the uneasiness whilst enjoying the sunshine of what looks like a mini-boom.
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