Economic Advent Reloaded

Today is the 16th day of Advent.

The word Advent (From The Free Dictionary) means:

1. The coming or arrival, especially of something extremely important: the advent of the computer.

2. a. The liturgical period preceding Christmas, beginning in Western churches on the fourth Sunday before Christmas and in Eastern churches in mid-November, and observed by many Christians as a season of prayer, fasting, and penitence.

In my view, we will soon reach an Economic Advent.

We need to make preparations for this event.

The explosion of the money supply and debt by central bankers around the globe is setting up a scenario of unintended consequences for the citizens of North America, Europe and Japan.

To get some perspective on just how much debt has accumulated consider this graph from the "Daily Reckoning".

As we can see, gold, the most accepted currency for the last five thousand years, has been dwarfed in value by the cumulative amount of global bailout debts by a factor of 4. These sovereign debts, accumulated by governments to be paid for from future earnings, are now so large, that the probability of repayment is approaching zero.

Clearly, the bad debts of governments also need to be eliminated as the point of insolvency is reached. However, with a fiat currency, there is strong motivation to simply print the currency required rather than choose austerity measures.

The implication for gold and other precious metals could be tremendously bullish.
If we accept that gold is in fact a defacto currency, the present price levels of nearly $1400 per ounce may seem cheap. The money supply must be sufficiently large to retire debt outstanding at some point in the future. A money supply that is one quarter the size of the debt is clearly inadequate. Does this imply gold at $4000 per ounce is possible or even likely? In my view, as the printing presses around the globe fire up to full capacity, gold will shoot up to extremely high levels.

The Economic Advent I anticipate, is that soon, economists, citizens, and government officials will realize that they can not continue to supply the economy with more debt. Or to restate it, we can not borrow our way out of debt. The deflationary implications are enormous. A substantial stock market correction is likely. A flight to the safety of currency and gold is probable.

A realization that governments have promised pensions, "free" medical care, and other goodies that are so far beyond the ability to pay for them through taxation will occur. Citizens will understand that unfunded liabilities are just that - unfunded and unaffordable. An awakening will occur that we must look after our own needs rather than look to some semi-divine government to provide.

The time-line of this Advent I anticipate will be soon after March 18, 2011 for reasons I will explain within two weeks.

We have addressed the preparations that can be made in previous postings.

Strategies Part 1

Strategies Part 2

Strategies Part 3

Where Oh Where Has Our Recovery Gone

Strategies Part 5

Strategies Part 6