Bonds Becoming the Graveyard for Dying Currencies
By Craig R. Smith, Chairman, Swiss America
What is happening today in Europe is a perfect example of what occurs when the ability of a debtor to service their debt comes into question.
Italian ten-year bonds have increased 33% in four days, and today the top blew off with an additional 10% increase. Bond rates have moved from under 3% to over 7%. These increases were mild compared to what happened in Greece.
Italy now finds itself with $2 trillion in debt, with the need to borrow more to stay alive, and now they must pay over 7% to get it!
The U.S. will have $15 trillion in debt any day now.
I want you to ask yourself, what would happen if in the United States, where we need to borrow $3.5 billion per day just to survive, interest rates which are now at 2% rose to 4-5% over a one-week period?
You would see a complete meltdown of the U.S. financial system, banks would be frozen in their tracks.
Every U.S. bank would find themselves forced to lend every penny they have to keep the government alive. This would starve the private debt market. The result: corporations would not be able to borrow to finance inventory, payroll, flooring, factoring receivables, etc.
Individuals would not be able to finance auto loans, real estate mortgages or use credit cards. It would bring our 'too-big-to-fail' U.S. economy down to it's knees.
And before you think it can't happen, take a look at major countries like Russia, England, Germany (to name a few) where this has already happened.
Italy is in total chaos today. This scenario is now infolding there right now.
If you look at gold prices in terms of Euro or other foreign currencies, they are up huge today. Only in terms of dollar is gold soft. But this anomaly will be short-lived because the dollar is still viewed as a "safe haven".
The Eurozone is panicked. The world sovereign debt crisis is HERE! It is unfolding right before our eyes.
Over the long-term, gold will be the best place to hide from the devaluation of currencies and equities currently under way.
It had to happen. The central banks have been putting a band aid on a wound that needs major surgery. That surgery will need to be done, sooner or later. Better the former, where there is still a chance. If they wait until later, the scenarios of hyper-inflation will be worldwide, not just country-specific.
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