When Debt Goes Poof!

April 13, 2010

By Jim Deeds

While nay-sayers continue to warn of a stock market crash, the world’s bond markets are truly the center of financial alchemy and wishful thinking. Many times greater in size than all of the world’s stock markets combined, and much more dependent upon “perception is reality” than even the dot-com stock markets of the ’90s, bond markets are an accident waiting to happen. When bond markets go poof, savings, pensions, and our entire monetary system (paper money, computerized printouts and credit instruments backed entirely by debt) go poof too.

The reaction to a bond/debt “poof” in our world of instant communications will be spontaneous. All at once, the rush to trade worthless debt/paper for “something real” will be on. Chinese will try to exchange Yuan for rice, Swiss will try to trade marks for gold, Americans will try to unload dollars and treasuries for oil, and undoubtedly Afghans will try to trade their paper money hoard received from opium for guns. Everyone will have their preferences for “something real” as the race to unload fiat currencies (backed by debt/bonds) intensifies in a moment-to-moment, life-or-death mob-rush.

And surprise! As a last resort while the bank doors are still open and the computers still hum, lots of people worldwide will perform a quick electronic transfer from their bank accounts to the stock markets and the “stock they trust most” to survive the financial meltdown. Stock markets will go up!

The world’s financial and monetary thermometer – gold – will jump in price from the previous day’s close of $4,735 and ounce to $15,000 an ounce. The only problem? No physical gold will be offered (available) even at $15,000. Physical gold, worldwide, will go into hiding, so the only other realistic option will be buying a gold or silver mining stock as quickly as possible.

Is this only a dream? Do only “gold bugs” have this nightmare? Can the exponential issuance of debt really go on forever as the promised pay-back in the future allows us to get “somethin’ for nothin’” today? Can an asset really turn into a liability? Will our home, our army, and our college education quickly become a rapidly shrinking asset when compared to the debt we incurred in acquiring them?

Time will tell, but it’s already started!

Back to the bond market. Today in America, the game is already on again as government, regulators, bankers, and bucket shops on Wall Street are creating new forms of pre-fabricated debt-on-demand. And the high-stakes leverage game is on again with bankers, Wall Street bucket shops, and “world-class” hedge funds to see who can pile higher and higher layers of junk bonds, structured debt, and munis into their highly leveraged get-rich-quick structured portfolios.

Moreover, as long as Timmy Geithner and Helicopter Ben keep providing explosively low interest rates and ever-expanding new money supply with the phoniest bank accounting rules in history, the game is on in a very big way – bigger and better than in 2007-2009. The answer to any dollar/debt problem for government is always the same – just add more zeros!

But when the last speculative bond player is leveraged 100-to-1 with his portfolio again supposedly insured by an obscure section of the world’s new quadrillion dollar derivatives market, we still have to ask, “What happens when you start to see the day-to-day T-bill interest rates drift higher as the 30-year T-Bond rate screams higher? What happens when U.S. government debt buyers fear our growing debt and ask for higher interest rates before they will lend us money?”

If a speculator is leveraged 100-to-1, a 1% drop in the price of a bond wipes out the entire equity in his account. Is he insured, or is this the beginning of a debt crisis even bigger than 2007-2009? Outside the huge array of government and Wall Street bucket shop financial assets now trading worldwide, physical gold is the only recognized financial monetary asset that is “un-hedged”, un-leveraged, and un-encumbered by someone else’s debt.

Latest statistics (Forbes) say only 5% of American people own any physical gold. And in China – the world’s largest nation – currently 2% of annual personal income goes into physical gold.

Is this the top of a bubble? No, only the beginning of a new historical bull market for the only new trusted money – gold.