Economic Slowdown Bullish for Precious Metals
NEW YORK ( Bullion Bulls Canada ) -- As our economies slow down, it is inevitable that inflationary pressures will worsen -- not ease. This is a function of extremely simple arithmetic.
We start with the fact that few Western economies (and none of the larger ones) are solvent. What this means is that an economic slowdown does not imply mere deflation. It implies debt default. While we could plug in virtually any Western economy to demonstrate this principle, two current examples should suffice: Greece and the U.K.
Greece is obviously the most blatant example of Western insolvency. However, what has taken place in Greece directly implies that all major Western economies are hopelessly insolvent.
Greece has now benefitted from two official rescues, not to mention numerous minor operations to try to stabilize its debt market. In the last futile bailout, bond investors had a 75% haircut imposed upon them, with the option being to turn down the "offer" -- and end up with a 100% loss. In other words, Greece has just suffered a near-total default.
Yet mere days after this latest final solution to the Greek debt crisis, here is what the bankers were saying:
The restructuring deal doesn't do anything to put Greece on a sustainable path. A third bailout will become necessary.
Let me repeat this, so there can be no confusion about what this directly implies. Even after lighting a match to 75% of Greece's national debt, the banking community isn't remotely convinced that Greece is solvent, reflected by them maintaining their "junk" rating on Greece's debt.
If Greece is still insolvent sitting with only 25% of its debt load, what does that say about all of the other Western economies being crushed under the weight of 100% debt loads? It's very simple. Any nation which was less than four times as "solvent" as Greece prior to its default is now less solvent than Greece today. That is not an opinion. That is arithmetic.
Are there any Western nations that were (or at least might have been) more than four times more solvent than Greece? Yes, but the list is short enough to mention them all: Denmark, Norway, Sweden, Switzerland, and perhaps Canada. Apart from Canada, they are all small economies. However, with Canada's current government producing nothing but record deficits, its inclusion on that list is highly dubious.
Again, this is not a matter of opinion but rather a simple statement of arithmetic. Looking at the list of all nations ranked by debt-to-GDP ratios, Greece used to be fifth worst on that list, and worst in Europe with a debt-to-GDP ratio of 144%. However, when we slash that debt by 75%, suddenly Greece has the best debt-to-GDP ratio in all of Europe.