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Saturday, August 25, 2012

GOLD loves Negative real rates - How about Negative nominal rates?

On July 18th, 2012, the German government sold US$5.13 billion worth of 2-year bonds at an average yield of -0.06%.

 Please note the negative symbol in front of that yield number.

What this means is that the German government was able to borrow money for less than nothing.

When those specific bonds expire in two years’ time, the German government will pay back the original $5.13 billion minus 0.06%.

Welcome to the new normal.

Germany is not alone. Over the past six months, the countries of Netherlands, Switzerland and France have also issued short-term government debt at negative yields.

Meanwhile here in the US the Government is borrowing money for two years at .28 percent.  

While according to metrics used by the US Government in 1980, annual consumer inflation is running at 7 percent.

Yeah, I know, we have vicious asset deflation which is far more pernicious than consumer inflation.  If you have assets.  If you're middle class: - uh oh.  Not to mention your pension: the SP 500 aggregate pension is now running a 700 Billion dollar deficit, while Public Pensions are running a 2 trillion dollar deficit.

This first world borrowing cost is the  sole relevant metric that shows the first world is in a massive economic depression.

It doesn't feel that way yet, because the US and EU governments have been mortgaging the future with massive debt for 40 years, and we're all the beneficiaries.  Our children will all bear the burden of our incalculable greed.  Here in the US it all started with Reagan; the man who engineered the greatest debt party in the history of the world.

And now it's over.

And what are the solutions being offered by ROMBAMA?

Well Rombama 1 wants to raise my taxes to give himself a tax break.  He boasts that he only pays 13 percent while he makes 130 million a year.  That's his entire plan - which will significantly increase the deficit.  Oh, yeah, he also wants to close planned parenthood and PBS and the department of Education.  That will cut .00000000000000001 from the budget.  Oh yeah, he wants to close down Rombama 1's health care plan and start over.  That will do exactly nothing for the budget.

And Rombama 2?  He wants to continue doing exactly nothing but print his way out of debt.  Which means borrow his way out of debt.  That will add to the deficit.

So what will change over the next 4 years?

Nothing - except all the debt will get much larger.  

Especially because the central banks fear asset deflation and are willing to create infinite consumer inflation in order to fight it.  And that mean negative real rates - and now negative nominal rates out into infinity. 

Now, let me make one thing clear: I don't love gold.  I started buying it 10 years ago because a massive debt crisis seemed inevitable.  I'm still buying it because the massive debt crisis is getting worse.


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