As the world enters the second decade after 9/11, we’re hearing more of the same news coming from Washington and the European Union. Stocks sank this morning on fears that Greece is again moving quickly towards default, and that several major French banks could be facing looming credit rating downgrades. Meanwhile in Washington, President Obama is campaigning hard for his new jobs bill, which comes with a price tag just short of half a trillion dollars. With more bad news about European debt, and more spending called for here at home, these reports are starting to sound a bit like a broken record.
House republicans informed the White House this morning that they would be forming committees to consider the points in the President’s jobs plan. Conservatives have been calling for large spending cuts across the board, but there is widespread sentiment that they won’t be able to torpedo the jobs bill without committing political suicide. With the stubborn jobless rate at 9.1%, the only viable solution coming out of Washington is to pull out the check book one more time.
The problem is that the spending simply isn’t working. The multi-trillion dollar series of stimulus packages that have been pumped into the US economy since 2008 have yet to yield the results policy makers have been seeking. Thus it’s no surprise that the latest announcement of the new White House jobs plan caused little reaction from Wall Street. In fact, Bank of America analysts released a report today calling for the S&P 500 to drop another 21% before year end. This report in and of itself is no surprise. What is rather extraordinary is that it follows just two days after the White House’s new stimulus plan was announced. Clearly the markets have little faith that this latest round of medicine will do the trick. It’s not particularly clear that the politicians even believe that the continued spending will have the desired effect. Faced with the choice of spending or doing nothing, they seem to shrug and hit the ATM again and again. They know that having done nothing doesn’t play well come election time.
While Washington has been planning the next cash injection, the EU seems to be sliding ever closer to full blown meltdown. Yields on Greek two-year bonds soared above 60% today in a signal that investors are all but certain that Greece will default in the near future. Bloomberg reported this morning that Germany is readying itself for a full-fledged Greek bankruptcy. This would be the first European Union member to default on debt obligations, but the likelihood is that it will not be the last. Once markets have seen that EU member states no longer have the political will to prop up these failing giants, yields on Spanish, Portuguese and Italian paper are likely to soar, making it that much harder for those countries to meet their mounting obligations. This is the beginning of the contagion that the EU has been fighting for years. It’s looking increasingly likely that the fight is finally coming to an end. It goes to show: They may be able to buy time, but they can’t buy their way out of debt.
The real concern is that the same lesson may be just around the corner for the US. At the moment, yields on US bonds are at near record lows as investors seek shelter from the crisis in Europe. It’s a bit like running out of a burning room and into one that’s filling with smoke. The immediate danger is averted, but the smoke will still kill you. Though the dollar is the safe play at the moment, it’s hard to make an argument that it will maintain that status as the US debt picture spirals further and further out of control. As Washington is showing no signs that our growing debt crisis can be averted, you can bet that sooner or later investors will be looking for a way out of the smoke filled room.
The question then is where will they turn? If the last several years are any indication, gold may be the chief beneficiary when the dollar is no longer seen as a safe play. Gold itself benefits from a complete lack of competition. After all, what other asset simultaneously protects against crisis, inflation, and a failing US dollar? Each time the EU falls a bit further into crisis, and each time the US government spends another dollar it doesn’t have, it simply raises gold’s long term potential. The stage is set for much higher gold prices and though there will be volatility on the way, the markets will win out in the end. After all, we may be able to buy time, but like Greece, we can’t buy our way out of debt.