The Great Deleveraging

Leverage is Debt.

You're going to hear a lot about de-leveraging over the next several months and years. We've been building debt into our system over the last forty years to the point where the activity on Wall Street is now devoted primarily to the production and dissemination of debt. Four times as much as the production and dissemination of equity.

You know all the figures about personal, corporate and government debt. You know that total debt to equity in the United States is about 350 percent. (not counting unfunded liabilities).

You know that the figures in Europe and Japan are the same. Nobody knows the figures in China, but it's reasonable to assume they're not far off.

Everybody knows this is unsustainable. And the dirty little secret about this is that in reducing debt we reduce our ability to produce GDP. It takes now in the developed world between 4-6 dollars of debt to produce a dollar of GDP. So when you reduce debt you reduce GDP too, thus the debt to GDP ration doesn't budge.

Get it?

That alternative is to "Grow our way out." But if it takes 5 dollars of debt to produce a dollar of GDP then Grow Our Way Out means taking on a lot more debt.

Get it?

It's a problem with no solution, except this:

We must vastly restructure the economy of the developed world.

How? We must let debt ridden institutions DEFAULT and start over.

But we won't. Why? Because then markets of the world would drop to their intrinsic value - as opposed to their Fantasy Gambling Value based on wishful P/E's and Mark to Model values.

And hundreds of trillions of wealth would be wiped out.

What's the alternative? Kicking the Can Down the Road. Which means printing ever more debt to throw at the problem.

But De-leveraging is taking place without the consent of the world's governments and central banks. Because the global markets - as managed and manipulated as they are - are still so vast that the Primary Trend over time asserts itself - and they move ineluctably towards their intrinsic value.

Governments will fight this tooth and nail by creating ever more debt and forcing it down the throats of the markets.

And the markets will slowly (hopefully) continue to vomit this debt back up. (de-lever.)

In both scenarios gold does better than any other asset. In the only likely scenario gold does best.