When the Public Sector Debt Bubble Blows Up

What’s ahead for 2012?

We gave you a hunch yesterday. The price of gold will probably go nowhere this year.

We have a feeling that 2012 is not going to be a great year for money you get from the ground. Oddly, it will probably be a better year for the money you get from trees.

How is that possible? We all know paper money is going to be worthless. Yes…dear reader…but not necessarily in 2012. It’s just part of the curious way Mr. Market does business…and a feature of his nasty habit of ruining as many investors as possible.

Look, it’s pretty simple. The private sector debt bubble blew up in 2008. The public sector debt bubble will blow up too. Maybe in 2012. Most likely not for a while longer. But when US debt begins to blow up, the feds will come in with everything they’ve got trying to stop it.

And all they’ve got is a printing press. Ben Bernanke:

…the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation…

Positive inflation is the feds‘ answer to a debt blow-up. They have no other answer… When bond buyers refuse to roll over US debt at reasonable rates, the Fed will use its printing press. The resulting “positive” inflation will blow up the world’s monetary system as well as government debt. Gold will be the about the only money left.

So, we should just buy gold…and avoid US dollar-denominated debt, right?

Hold on. Mr. Market doesn’t make it that easy. Our guess is that he’s going to lure trillions more dollars into the US debt market…and then blow the whole thing sky high.

Just look what happened last year. Bloomberg tells us that stocks worldwide lost 12% of their value. But bonds actually went up…about 6%. And there’s a good chance that the same thing could happen in 2012. Stocks down. Bonds up.

Stocks won’t be cheap until they are about half today’s prices. So they have a long way to go.

When stocks go down, investors will go into the US bond market looking for shelter. This will drive down yields and drive up prices. And bonds – judging from Japan’s example – can keep edging upward for a long time. Especially now that everyone thinks US debt is 100% safe.

And the worse things get, the more people want the safety of US Treasury debt. That was the lesson of 2011.

Like people buying houses in 2005…investors will buy bonds and think they are geniuses – for a while.

The feds are already running into the limits of their ability to borrow. Here’s the Bloomberg story:

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the US’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the US struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the US’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

Borrowing costs for G-7 nations will rise as much as 39 percent from 2011, based on forecasts of 10-year government bond yields by economists and strategists surveyed by Bloomberg in separate surveys. China’s 10-year yields may remain little changed, while India’s are projected to fall to 8.02 percent from 8.36 percent. The survey doesn’t include estimates for Russia and Brazil.

The world’s economic knees are beginning to buckle. Higher borrowing costs reduce the fiscal support governments can give to their economies. “Austerity” becomes less of a choice and more of a necessity. Europe is already in recession. America is probably not far behind.

The feds may have to turn to the printing press sooner than we thought.


Bill Bonner

for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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Earl Mardle
Bill. Again with the printing press stuff. “…the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so” Please explain. How does the US “print” this money? It has to borrow it into existence, from the privately held Fed. And if it, as you suggest, “credibly threatened” to do so, it would get a very harsh lesson from the bond markets in short… Read more »
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