Debasement, Debt, and Financial Disarray

[bullionfk 10]

Big power and big responsibilities are nothing new for government. They are invested with the responsibilities to keep the engines in the machine running, and when they stall out, they need to kick start things again. Since the financial meltdown began circa 2008, there have been efforts to light a fire under the global economy. Unfortunately, it doesn’t seem to be getting us anything but more debt, debasement, and a whopping financial mess.

 

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

 

Debasement isn’t an old trick. Emperors and kings used to do it with metal coins. Melt down gold and silver coins, add another cheaper metal like copper, and make fresh coins and more of them. Romans did it. The Tudor dynasty in England did it. Henry the Eighth was even known as Old Coppernose because the silver would wear off the high points on his coin – specifically his nose – revealing the base metal underneath. The reasoning behind the debasement of coinage was simple – it made more money. It made money for England to fight wars in Scotland and France just as it had made Rome more coin to fight wars or in times of uncertainty centuries earlier.

 

The weakening of gold and silver coins could have happened all at once or slowly depending on the condition of the country in question. The perversion of the precious metal coins was often linked to the financial well-being or strength of the nation. It could also depend on how limited the access was to metals, but seems to be inexorably linked to problems with state finances. Sound familiar?

 

Right now, several western nations are battling their own financial weaknesses. The slowdown in global growth took a big chunk out of the gross domestic product for many nations. That threw balance sheets into turmoil. The fat years spoiled us for the lean ones, and now everyone is trying to get things to tally correctly. Only it has become even more difficult since they are trying to wrestle other financial demons besides debt namely the inflation that comes on the heels of currency debasement.

 

The problem stems from so many banks adding more money to the system with multiple efforts at stimulus. Paper currencies have become devalued and that is leading the inflation charge. Central banks would normally implement a series of interest rate increases to try to control it, but that comes with its own risks. The low interest rates set by many banks at present are seen as a lynchpin for recovery. Raise them and you risk the whole thing coming down. Leave them as they are and consumers feel additional pain at the gas pump and the grocery store. Consumers who have to shell out more for life’s basics are potentially going to keep a steady hold of the savings they can, which can also unravel the pseudo-recovery. Throw in prolonged unemployment, underemployment, and just plain insecure employment, and you have a laundry list of things that can keep retail and home sales in check.

 

Summary

 

It was bad enough to know how little precious metal actually backed the US dollar and other foreign currencies. Now, the fallout from the credit crisis and housing disasters has led to a larger flood of additional funding from governments trying to re-ignite economic growth. To top it off, the current debt problems might amount to those currencies amounting to lots of money with nothing but vapors behind every piece of paper. If the credit ratings start to come down (or continue to be lowered, in the case of a few places in Europe) then then there is every reason to believe the US dollar will be devalued again. The bad news for investors is that there appears to be fewer places to perform a flight to quality. Precious metals are becoming more than just a port in the storm. Gold and silver are starting to look like the final place where people can aim to find some kind of asset preservation as all the old rules are broken. Bullion is serving as a potential inflation hedge following extreme currency debasement. It is also offering a hard alternative while so many nations come undone at the seams and fight to balance their ledgers. Gold has hit fresh highs, and doesn’t seem to be offering any signs of stopping, save a few profit takers here and there. Are gold and silver the alternative investments right now? You better believe it. Unlike the ancient ages of empires and kings, today’s precious metals markets can’t be melted down and debased as easily as other things can, making them all the more valuable in the current mess.

 

Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.