The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- As our economies slow down, it is inevitable that inflationary pressures will worsen -- not ease. This is a function of extremely simple arithmetic.
We start with the fact that few Western economies (and none of the larger ones)
are solvent. What this means is that an economic slowdown does not imply mere deflation. It implies debt default. While we could plug in virtually any Western economy to demonstrate this principle, two current examples should suffice: Greece and the U.K.
Greece is obviously the most blatant example of Western insolvency. However, what has taken place in Greece directly implies that all major Western economies are hopelessly insolvent.
Greece has now benefitted from two official rescues, not to mention numerous minor operations to try to stabilize its debt market. In the last futile bailout, bond investors had a
75% haircut imposed upon them, with the option being to turn down the "offer" -- and end up with a 100% loss. In other words, Greece has just suffered a near-total default.
Yet mere days after this latest final solution to the Greek debt crisis, here is what
the bankers were saying:
The restructuring deal doesn't do anything to put Greece on a sustainable path. A third bailout will become necessary.
Let me repeat this, so there can be no confusion about what this directly implies. Even after lighting a match to 75% of Greece's national debt, the banking community isn't remotely convinced that Greece is solvent, reflected by them maintaining their "junk" rating on Greece's debt.
If Greece is still insolvent sitting with only 25% of its debt load, what does that say about all of the other Western economies being crushed under the weight of 100% debt loads? It's very simple. Any nation which was less than four times as "solvent" as Greece prior to its default is now less solvent than Greece today. That is not an opinion. That is arithmetic.
Are there any Western nations that were (or at least might have been) more than four times more solvent than Greece? Yes, but
the list is short enough to mention them all: Denmark, Norway, Sweden, Switzerland, and perhaps Canada. Apart from Canada, they are all small economies. However, with Canada's current government producing nothing but record deficits, its inclusion on that list is highly dubious.
Again, this is not a matter of opinion but rather a simple statement of arithmetic. Looking at the
list of all nations ranked by debt-to-GDP ratios, Greece used to be fifth worst on that list, and worst in Europe with a debt-to-GDP ratio of 144%. However, when we slash that debt by 75%, suddenly Greece has the best debt-to-GDP ratio in all of Europe.
Obviously Greece should not suddenly be regarded as the most solvent economy in Europe. Its economic dynamics still leave it with structurally unsustainable deficits. However, the exact same argument could be used regarding Canada, which now has a higher debt-to-GDP ratio than Greece, record deficits, and a government making zero effort to bring the spiraling debt back under control.
Note that this residual insolvency of Greece's economy despite a 75% default is the product of the
Friedman Austerity inflicted upon that economy. Since day one of that failed experiment, every measurement of Greece's economy along the way has been below expectations. Clearly, rather than making things better, Greek austerity only made that economy less solvent.
Once again, I don't have to rely upon my own naked opinion here, but can point to empirical evidence. In the case of the U.K., we have another Western nation with a farcical "AAA" credit rating, implying that the U.K. is as solvent as any nation in Europe. This begs the question: if the U.K. is solvent, then why are its deficits getting larger as it attempts to tighten its belt?
Let me back-track for a moment here. Since defining solvency is a very slippery task, let us create a simple, practical definition. A solvent nation is one that upon expending maximum effort is able to bring its finances under control, eventually leading to a balanced budget.
Although we may have difficulty defining solvency, defining insolvency is much simpler. Any nation which is incapable of ever balancing its budget is insolvent, since the only possible mathematical fate for all such debtors is bankruptcy. Now let us return to the U.K.
The current U.K. government has made it clear to its own population and markets that it is
making maximum effort to control its gargantuan deficit, which is proportionately larger than those of Germany, France, or even Italy. What is the result of this maximum effort?
The U.K. just reported the
largest deficit for the month of February in its entire history, nearly double the deficit it reported one year ago. In other words, not only is Friedman Austerity failing in the U.K. as well, it's clearly making things much, much worse -- just as it did in Greece. Once again this begs an obvious question: if "austerity" leads to debt default even when the other nations around you are still spending and (supposedly) still growing, how will these austerity-plagued economies fare when the other profligate Western debt-sinners start to tighten their belts, too?
Even the debt default of the tiny economy of Greece (representing less than 1% of Western GDP along with Japan) threatened to cause all of these debt dominoes to topple. Along with this, the derivatives market would instantly implode.
This means a similar default event for an economy the size of the U.K. guarantees the complete collapse of the banksters' entire paper empire. Yet when the U.K.'s best efforts at deficit-control result in a doubling of deficits, even the conveniently blind ratings agencies will not be able to maintain the U.K.'s "AAA" sham much longer.
The moment that the U.K. loses that credit rating, it becomes the next Greece. Loss of that debt rating means soaring interest rates and interest payments, increasing the size of the deficits still further. This instantly puts the U.K. into the same death-spiral as Greece, where higher interest rates makes it less solvent, which causes the credit rating to erode further, which causes still higher interest rates. Debt default is the only possible ending.
It is a market fraud of the highest order when Greece, with the lowest debt-to-GDP ratio in Europe is still regarded as a "junk debt" market -- and a certainty to default again. Meanwhile, the U.K. has a debt-to-GDP ratio double that of Greece, just recorded the worst February deficit in its history, and enjoys "AAA" rating.
To this point, I haven't even mentioned the United States. The U.S. has the world's largest debt (even the "official" one), the world's largest deficit, and it has made no effort to bring either one under control. Meanwhile, unofficially it hides obligations amounting to roughly seven times its official debt -- and nearly double the size of the entire global economy. It was for these reasons (and many others) that I previously concluded the U.S. economy is
more insolvent than that of Greece , and that was before the 75% write-down of Greek debt.
One by one, all of the debt-sinners (the U.K., Ireland, Portugal, Spain, Italy, Japan, France, Canada and the U.S.) have a choice:
print and spend (like the U.S. and Canada), or
shrink and default (like Greece and the U.K. ). Choosing the road of printing and spending is so simple even the economists can understand it: exponential money printing causes all of these currencies to go to zero, igniting hyperinflation. In that scenario, prices for most hard assets soar into the stratosphere,
led by precious metals.
The shrink and default scenario is slightly more complex, and thus utterly incomprehensible to almost all economists. As Friedman Austerity causes these economies to shrink so fast that deficits increase despite this sadistic belt-tightening, these failed economies quickly come to a crossroads -- like Greece.
There is either a realization of hopeless insolvency, followed quickly by a debt default; or there is more willful blindness. In the latter case, the debts/deficits mushroom still higher, then that realization occurs, then there is an even bigger debt default. The only theoretical alternative to that scenario (for nations with their own printing presses) is to suddenly reverse to print-and-spend mode. However, so close to debt default, all that such a desperation measure implies is substituting (even more devastating) hyperinflation in lieu of a default.
All roads lead to (at best) a default on $10's of trillions of worthless bonds -- counting only the U.S., U.K., and Japan -- and at worst hyperinflation.
Boiled down to four words: paper goes to zero.
Then there is the fantasy world in which the economists dwell. In that world, when they see shrinking economies, all they are genetically capable of seeing is "deflation" (i.e. falling prices). However, part of the reason why Friedman Austerity quickly destroyed the economy of Greece, and will soon do so to the U.K. (et al) is that you can't have falling prices while money printing increases exponentially.
What the government of the U.K. conveniently leaves out while calling itself a "deficit fighter" is that U.K. money printing
remains at all-time highs. Obviously when you have a zero growth economy while money printing continues at an annual rate of 10+% then prices will continue to soar -- as they did in Greece, and are doing in the U.K.
Put aside inflation statistics. Anyone who eats food on a regular basis knows that food inflation is running at between 10% and 20% per year. And since the poor and working poor (now vast majorities in our populations) can afford little other than food, they become poorer by 10% to 20% per year -- as this economic sadism accomplishes nothing except reducing all ordinary people to serfs.
There is no mathematically feasible scenario where an economic slowdown (even another "crash") would/could lead to falling prices. Every scenario ends with either a downward spiral into debt default (while prices keep rising), or the cowardly escape of the printing press -- and inevitable hyperinflation. Note that in a crash scenario (as we saw in 2008), deficits explode, money printing explodes, and prices go up, not down for basic necessities.
Speaking of basic necessities, are we to believe that the holders of those $10's of trillions of bonds are just going to sit there with their worthless paper -- like captains going down with their ship -- and passively absorb 75% (or 100%) losses? Or, are bond holders more likely to act like rats deserting a sinking ship, and seek to flee into an asset class which they know will not (and cannot) go to zero?
Call me a cynic, but I envision most of the bond parasites as falling into that latter category. Thus, if we do not see our governments pull back from the abyss of debt default (and choose suicide by hyperinflation instead); then quite obviously we will see an unprecedented exodus (i.e. mass panic) in Western bond markets.
precious metals price-suppression has minimized the values of the world's only truly safe assets (gold and silver), and thus the size of the sector itself. The attempt by bond holders to flee into the sanctuary of the precious metals market can be thought of as the world's largest herd of elephants seeking to squeeze through the eye of a needle. However, the fact that few elephants could save themselves in this manner will not stop many from trying. The collapse of the bond market implies the
explosion of the gold and silver markets.
After two years of devastating Friedman Austerity, it's now too late for the people of Greece. Those ordinary people who held euros which have plummeted in value rather than gold and silver (which have soared in value) have now been reduced to
Third World peasants.
It's still not too late for many ordinary people in other Western economies. Flee the financial destruction and economic slavery guaranteed to the holders of the bankers' paper. Seek the 5,000-year security of gold and silver.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.