Monday, December 27, 2010

Risk on / Risk off

People ask me all the time if the U.S. is in such bad shape and things get worse, why will the dollar and gold do well.  I then whip out this chart and explain to them that as things get bad people need to sell things that are electronically invented and / or are leveraged and buy something that has less debt or leverage associated with it, or in the case of gold no debt associated with it.Inverted_pyramid_2010-12-26_1542
To illustrate how much debt worldwide is out there against real capital, look at the following chart.

The annotations are mine from government websites.  There is approximately $5 trillion in cash and gold supporting $290 Trillion in assets.  That is some nasty leverage.  The world governments are trying to add $2 trillion in capital to the foundation.  This is grossly inadequate.  The world's asset base simply declines by 3% and we are insolvent again.
As anyone who owns a business or truly invests in capital assets, you value these assets on the discounted income they generate, and as government spending takes over private spending to increase this capital base, it is inefficient and slows velocity that can generate income, and increasing taxation does the same.  So bottom line, the income supporting these assets are suspect and after a next flirt with high inflation we collapse into a debt destruction spiral.  Happy New Year.

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