Why Won't the Global Debt Crisis Die, and With it Gold?

By: David_Galland

David Galland, Managing Director, Casey Research writes: Back when I had more time, I would occasionally play Oblivion, a video game. A game so addictive, it's been known to contribute to flunking out of colleges and the failure of marriages.

When persevering in a sword fight, your computerized opponents were prone to angrily muttering the phrase "Why won't you die, damn it!"

That phrase pops to mind as I watch the global stock market continue to get hammered, as gold continues to battle the headwinds with impressive tenacity.

So why won't the damn crisis just die - and with it, gold?

It's not my intention to rehash the details of the events leading so many economies to this challenging place. Instead, I'll cut right to the chase by stating my firm opinion that the reason this crisis is so persistent - why it won't die anytime soon, and not without a lot of thrashing about - has to do with the debt at its core.

Earlier today, I was trying to explain the situation in terms appropriate to my son's 13-year-old mind. I put it something like this...

Imagine if you made $12,000 a year working as a counter clerk at the local pizza parlor. Then imagine you had foolishly run up $12,000 in credit card debt, the proceeds of which you had frittered away on consumables that contribute in no substantive way to creating future wealth.

Now, imagine someone was foolish enough to continue lending you money, so that you were able to spend approximately 40% over the amount you earned - or $16,800 in total, some percentage of which was the interest you were paying on your overhanging credit card debt.

Given that set-up, I asked, how could you possibly pay off your debt?

"Get a better job?" He responded.

A good answer, I thought.

But stepping out of the metaphor to the actual players in this drama, the indebted nation-states, how do they get the equivalent of a "better job?" Which is to say, raise revenue?

Only one way, really. And that is to raise taxes. But taxes can only be raised so far before they hit a wall beyond which people simply won't, or can't, pay them. And raising taxes by a sufficient amount to count, in the teeth of an epic downturn, will only further hobble the economy.

For the time being, thanks to all sorts of machinations, the U.S. Treasury is finding lenders willing to buy its debt and keep things afloat.

But now jump back to the pizza counter help and imagine what would happen to his or her finances if (a) the foolish lenders wised up and refused to keep trading good money in exchange for highly suspect IOUs backed by nothing... while simultaneously, (b) the credit card company bumped the interest rate on the debt outstanding from 3% to 10%?

In a nutshell, this is the current set-up of things. While the specifics will vary depending on whether it is the flag of Greece, Spain, Portugal, the UK, the U.S., Japan, etc., which flies over the home turf, the fundamental realities of this being a debt crisis are immutable.

And, as the EU is now learning, intractable. Which is to say, the only way that this crisis will die is if the debt can be reduced to a manageable level.

Given the sheer scale of the debt problem, all the easy ways for that reduction to occur have long ago packed up and left town.

At this point, any real solution will likely involve all of the following:

1) Bond investors being wiped out, or at least suffering serious losses. Tough luck, a non-bond investor might be tempted to think. But before you do, make sure you checked the prospectuses of your money market funds and the paper being held in great piles in the financial institutions where you currently park your money.

2) Inflation. Why pay back $1.00, when you can pay back 50 cents?

3) A wholesale canceling of contracts. Okay, so you thought you were going to collect Social Security in your declining years - think again. And that nice government pension? Oops.

4) Higher taxes across the board. Congress is getting ready to quadruple the federal tax on oil. And the imposition of a VAT in the U.S. is a near certainty, albeit with all manner of politically convenient but ineffective provisions to make it look like the Democrats aren't breaking their pledge to not raise taxes on the middle class.

5) Ultimately, defaults on sovereign paper. Like the indebted pizza jockey, once it begins to be hard to find lenders, and those that you can find are only willing to lend at much steeper rate, all that is left to you is to borrow enough gas to drive down to the nearest office of Dewey, Cheatem & Howe and start the process to declare bankruptcy.

In other words, this crisis is not going to go quietly to its dirt nap. Instead, the end will almost certainly be akin to a Viking funeral with the political equivalent of rape followed by a raging fire on a sinking ship. Riots in the street and a serious degradation in the quality of life of the majority of the citizenry are all but inevitable, followed by a sea change in the political landscape.

Then, and only then, can the world get back to the business of forgetting the lessons learned in order to repeat the cycle all over again.

As for gold, the fact that it has refused to die as the world's only reliable form of money over the last seven millennia should give you the confidence to include it in your portfolio at today's purportedly elevated levels. ----

Jeff Clark, the editor of Casey's Gold and Resource Report, has been saying it for years: Buy physical gold and silver. And if you want even greater gains, invest in solid, undervalued gold producers that can provide leverage of up to 4:1 to gold itself. Read more in our report, here.

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