Debt Talks Stall, Gold Continues to Rise

I find it very interesting that gold is rising to new heights at the same time our politicians bicker over the debt ceiling like little children. This is a clear vote of no confidence in our politicians. Political showmanship aside, Republicans and Democrats are heatedly debating differences in opinion over spending cuts and tax increases that will be inconsequential in the grand scheme of things. These proposed “reforms” will not stop the freight train headed our way.

Investors are heading for the exit- the cost to insure U.S. debt rose 8% following Moody's announcement that our Aaa rating was in danger. The permabulls who correlate our historically low bond yields with our default risk will realize that their thought processes are backwards. Prices don't necessarily reflect reality; reality reflects reality. Markets crash in part because people carry the erroneous view that markets are efficient. This lulls them to sleep until they receive that inevitable knockout blow that makes them wonder what hit them.

For most people, markets crash out of nowhere; but for detached and observant people, the warning signals of a crash are all over the place. Before the housing collapse, people with no income were receiving 0% down loans from banks. Home prices started rising well above the average historic rate. Average people were buying 2nd, 3rd, and 4th homes. Fraud permeated the entire real estate market. I have no idea why the housing crash was a surprise to anyone.

The same thing is happening right now in regards to U.S. government debt. Foreigners are lending us money well beyond our capacity to repay. Instead of reining in our spending, we come up with the genius scheme of buying our own debt, to hell with the unintended consequences. Rising bond prices seem to confirm that we are taking the right course of action. We are setting ourselves up big-time for a crash.

I'm not exactly sure what will come out of debt talks this week, but I am fairly certain that whatever it is, it will do nothing to solve this debt crisis. We need to look into real long-term tax breaks, not the kind Obama promised in his campaign and failed to deliver on. We need to seriously reconsider if we are allocating our resources correctly. We probably shouldn't be spending all this money on wars when the unemployment rate is 9.2%. There are so many solutions to this crisis that politicians aren't even considering. This late in the game, we need truly creative solutions that go beyond tax increases or spending cuts. Do I think these kind of solutions are coming from U.S. politicians who can't even spell economics? Probably not.

Debt Talks Stall, Gold Continues to Rise is a post from: Expected Returns