Tuesday, December 22, 2009

Day 3: Losing Confidence In Paper

We live in a world today where all currencies around the world are backed by nothing. This is the first time in history that this experiment has taken place.

Currencies today are not valued against a tangible item, they are valued against each other. So while some weeks one currency may rise in value and other weeks fall in value, against their counterparts all currencies are losing value simultaneously.

Except One.

We received word close to two months ago that Dubai was in a debt crisis and most likely would have to default on a large portion of their sovereign debt without a bail out from neighbor Abu Dhabi. (They got the bail out)

Since then investors have essentially "woken up" to the possibility that it's not only states and corporations that can fail, but countries as well.

The Dubai news has recently calmed, and all eyes have turned toward the country of Greece which is suffering a fiscal meltdown. Greece is a fascinating story to watch because it is interlinked within the multi-country currency: The Euro.

Two of the major rating institutions have recently downgraded the government debt of Greece to BBB status. If Moody's, the last of the three rating agencies, were to downgrade the debt to BBB status it would cause a massive tremor in the world financial markets.

A BBB rating from all three institutions would then prohibit the European Union from stepping in and bailing out their sister country.

This would equal swift default from a large portion of their debt in the coming year. The implications of this in the currency markets would be staggering.

A similar scenario happened last fall when a company named AIG was downgraded by the three ratings agencies. You probably have heard that story.

Greece is not alone with debt problems. Many other small countries such as Lativia may soon follow if the first domino were to follow.

No country in the world, however, has fiscal problems that compare to the United States. We are so far beyond insolvency that it is almost laughable.

So why are we not hearing about a US default? Because we have a printing press and Greece does not. As I have discussed in great detail, Bernanke was a major buyer of United States government debt during 2009 and will continue to be as we move forward.

This global crisis has opened many investor's eyes to the problems associated with these paper currencies.

Only a few weeks ago, Dubai debt traded at 110 meaning investors priced it as if there was less than 0% chance that it would fail. Less than 2 weeks later the debt traded at 65 in the open market.

That is how quickly things can change. That is how quickly things will change as we move forward.

Gold has no counter party risk, meaning there is no one you rely on to pay you when its time to get your money back. As simple as this sounds, it will soon become its greatest attribute.

No comments:

Post a Comment