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LTCM General Counsel On Debt Denial: "There Is Little Time To Avoid Catastrophe And Almost No Exit", Suggests Gold Price Of $5,500



April 11, 2010 – Comments (1)

Another good post that goes along with the ideas in a few of my recent posts. First is the idea of Debt Saturation - That is that ever since the 1970s when government started running massive defecits and not covering those defecits when it had the opportunity (which is a big distincition to how the economy was operated from 1940-1970 where there were cycles of debt generation and then paying down that debt) has resulted in a massive marginal decrease in the utility of that debt. We have now reached the point where new debt not only provides no new economic utility (based on the proportion of debt servicing costs relative to economic production generated by that debt), but have now crossed over the threshold where new debt now has a negative economic impact. Another post of mine talked about how the bond market is responding to this debt (Moving Some Macroeconomic Deck Chairs: The Dollar, Dollar Swaps, Bonds and LIBOR -, and why the macroeconomics are not painting a recovery, but a reaction to the massive Dollar Swaps that were initiated during the Deleveraging crisis of 2008 and subsequently drained (i.e. the "bottom" was not a market driven bottom but a manipulation driven one, which makes it a bounce, not a bottom). The third post More Thoughts on Gold's Massive Bull Market - talks about how gold will react to the macroeconomic setup we find ourselves in, and how the Fed and the Treasury are likely to handle things (since they have stayed on track with a very specfic one-play playbook).


LTCM General Counsel On Debt Denial: "There Is Little Time To Avoid Catastrophe And Almost No Exit", Suggests Gold Price Of $5,500
Submitted by Tyler Durden on 04/09/2010


Recently we posted a terrific interview of Kathryn Welling with LTCM's former General Counsel, James Rickards. The lawyer turned economist, who is now a director of Omnis, posts the following stunner on the implications of the endless sovereign debt glut and the Keynsen abortion that every developed economy has undertaken. As the man who survived (and, well, created) the original market "systemic" event, Rickards should certainly be heard by all those who believe the government can sustain the latest, and by all measures, last iteration of the global reflation Ponzi. Not surprisingly, Rickards is the latest to jump on the fiat alternative bandwagon, seeing gold at $5,500 as a fair price for the precious metal.

Debt Denial, by James Rickards in The Daily Caller

The sovereign debt crisis has crossed a threshold. It’s no longer about economics. It’s about math and a complex system whose dynamics tell us there is little time to avoid catastrophe and almost no exit. Going forward, elections and policies will matter less as the debt plague takes hold and dictates hard outcomes.

It is the case that real debt cannot be repaid through any feasible combination of growth and taxes. We will soon arrive at the point where it cannot be rolled over. Debt includes contingent liabilities as well as bonds. In the U.S., this means social security, healthcare and housing obligations estimated at over $60 trillion. That does not include unfunded pension obligations of the states whose plans use fanciful 8% growth assumptions to limit contributions. Pension debt grows exponentially; a toxic brew of increased benefits, contribution shortfalls and anemic performance.

Even what we call money is debt. Paper money is a contract between citizen and government. As with any contract, it pays to read the fine print. Embossed on each U.S. bill is the phrase “Federal Reserve Note.” Give the Fed credit for full disclosure; these notes are liabilities. If the Fed’s mortgage assets were marked-to-market the Fed itself would be insolvent. In short, it’s all debt. Wealth is illusory if it involves a claim payable in dollars which are but a claim on an insolvent central bank backed only by its ability to print more debt. The situation is worse in the UK, Europe and Japan. The global financial system is a rope of sand.

If this system is illusory, how has it prospered over centuries? The answer is that for many years governments ran surpluses and at times had no debt at all. Growth was robust providing support to the tax base. Governments had the trust of bond markets to rollover maturing obligations. With some fits and starts, tangible wealth creation outpaced debt creation. And until recently paper money was backed by gold at fixed rates of exchange. Today all four legs of the table – surpluses, growth, trust and gold are gone or damaged.

1 Comments – Post Your Own

#1) On April 11, 2010 at 3:15 PM, Varchild2008 (84.61) wrote:

Tie the U.S. Dollar to our Natural Gas Reserves....  Problem solved? 

We are the world's Natural Gas source so much that almost 80% of our heating oil is from Nat Gas here at home.

Nat. Gas prices are extremely low which is indicative of the fact that it will be hundreds of years before the supply reaches a level where GOLD supply is today.

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