Gold and the Empire of Debt (December 6, 2006)
The recent weakness in the dollar and the resulting strength of gold masks a larger reality: gold is rising against all major currencies. Frequent contributor Harun I. kindly sent over charts depicting this; Here are the charts for the euro, the yen and the currency generally held in esteem as a placeholder of reliable value, the Swiss franc:
Related charts showing gold breaking out against major currencies can be found in Gold Leaves the Major Currencies in the Dust (12/4/06)
What do these charts reveal? For one, a profound distrust of the global Empire of Debt. We hear a lot about the American Empire, American hegemony, U.S. hyperpower. etc. etc. But the real Empire is that of Debt, and its full partners include the oil-exporting states, Euroland, Japan, and China--virtually all the big trading players.
How does the Empire of Debt work? We all know the basics: the U.S. buys virtually the entire world's exports (surplus products) and funds this $2 trillion buying spree by borrowing money from those nations with enormous trade surpluses with the U.S.: Japan, China and the oil-exporting nations. Rather than invest/dump/mis-allocate (depending on your point of view) these gigantic sums in their own economies, these players recycle their surpluses into U.S. Treasuries, in effect keeping interest rates artificially low so U.S. consumers can continue to buy oil and non-U.S. goods with borrowed money. (Note that virtually every trading block and nation runs a surpus with the U.S.--including Canada and Korea.)
How dependent are the non-U.S. players on the U.S.? Very. If the U.S. "hegemon" (a favorite Chinese synonym for Empire) dried up and blew away, 25% of the demand for oil would vanish, pushing prices for crude to $10 or lower. The Gulf oil states and Russia either did go bankrupt or nearly went bankrupt in 1998 when oil was $10 a barrel, and that experience makes them diehard participants in the Empire of Debt. Japan, China, Euroland, Canada, Mexico and Korea, just to name a few, would all descend into instant recession with virtually no hope of a turnaround if their massive exports to the U.S. suddenly stopped.
So what's wrong with the Empire of Debt? We all know something is fundamentally unstable about this ever-rising load of debt on the U.S. government and consumers, and the equally fast-rising accumulation of surpluses in oil-exporting nation, China and Japan. It is a deeply flawed model, and we all know the result of this "cheap money" stupendous global liquidity has been the expansion of a global property bubble of unprecedented proportions.
Astute contributor John B. recently sent in a comment which I think perfectly captures the sense that a meltdown of this tremendously out-of-balance system cannot be far away. Although he send this regarding my recent entry on market manipulation, I believe it describes the precarious nature of the global Empire of Debt as well as the "Emperor has no clothes" U.S. equity markets:
As I watch the market rally further today, I sit back and wonder if the rest of the world is just doing meth or has everyone else turned into a pod person. As you mention below it is rather unbelievable how the press and everyone else just accepts that the enormous supply of unsold houses will be sold. It takes years for a housing boom to bottom out. I see where foreclosures in numbers (not percent) have hit an all time high in Denver and also see similar statistics for Dallas and these are not even bubble areas. This is still overhang from the telecom boom in the late 90's. It shows how long the housing bust can drag on.Well said, John. I believe the rise of gold against all major currencies signals a widespread distrust that the Empire of Debt can sustain itself much longer.
For more on this subject and a wide array of other topics, please visit my weblog.
copyright © 2006 Charles Hugh Smith. All rights reserved in all media.
I would be honored if you linked this wEssay to your site, or printed a copy for your own use.