Professional Investment Services

Why This Crisis Still Has a Long Way to Run

When is a cut not a cut?

When it’s an increase.

Sorry to be cryptic, but we laugh when we see presidents, prime ministers and finance ministers talk about ‘austerity’ and ‘slashing budgets’.

Because just like central bank money printing, the markets get excited for about three minutes before they realise what even an idiot can see…

Cut spending isn’t what governments do. For governments, spending only ever goes one way. That’s up.

And that’s why we always turn to one tried and tested asset class in times like these. You know what we’re talking about, but read on anyway…

This morning the papers are going batty on the news that, ‘Spain unveils austerity budget as political turmoil mounts’. So says the Australian newspaper.

According to the Wall Street Journal:


‘The Spanish government presented 13 billion euros ($16 billion) of spending cuts and tax increases for 2013 and said it will place new limits on early retirements as political turmoil heightens investor concerns over Prime Minister Mariano Rajoy’s ability to slash a towering budget deficit and stabilise one of Europe’s largest ailing economies.’


We wish Spain luck. Especially considering the following post to the UK Daily Telegraph‘s blog covering the Spanish budget overnight:


‘Spanish government sees unemployment bottoming out and has predicted an average rate of 24.3pc [per cent] for next year.’


The same blog also reveals:


‘Spanish deficit targets: 6.3pc in 2012, 4.5pc in 2013, 2.8pc in 2014, 1.9pc in 2015.


‘These cuts are aimed at chopping €40bn off Spain’s budget deficit next year.’

Here’s a bit of free advice for Spanish Prime Minister, Mario Rajoy. When your government is announcing welfare cuts, it’s probably best not to be photographed chomping on a cigar in New York:


But before you start getting too excited about so-called spending cuts, and the positive impact it could have on the world economy, just remember this: when governments cut spending, it doesn’t mean they cut spending.

Not as Good as the Treasurer Claims

It was a bit like the smoke and mirrors from Aussie Treasurer, Wayne Swan. Last week he spun the argument that the Aussie federal budget was $661 million better off than predicted.

The mainstream press fell for it hook, line and sinker. What a great Treasurer they said. What a good boy.

What they didn’t focus on (just as the Treasurer hoped), was that last year the government spent $43.7 billion more than it raised in taxes.

To cover the shortfall the government had to issue more bonds…in other words go further into debt. And with commodity prices collapsing, the Aussie budget position is set to get worse.

It’s the same for Spain. Just because it reduces the budget deficit doesn’t mean the economy or debt position is any better. Last year Spain’s budget deficit was 8.5% of GDP, or about €97.8 billion.

So even if Spain cuts spending by €40 billion, it’s still spending €57.8 billion more than it takes in with taxes.

And that’s assuming the Spanish economy doesn’t get worse, which it probably will given the proposed tax increases.

What we’re getting at is this: it’s nearly five years since the world economy started to fall apart.

The US Federal Reserve has virtually admitted that it’s out of ideas. The only solution it’s got is to print money…even though that’s never worked before.

The Eurozone thinks it can fix its spending problems by keeping on spending and creating a bigger debt problem instead.

And China thinks it can stop its economy from crashing by building more roads, buildings and railways…that no-one can afford to use.

And as for all those in the mainstream media who love the Chinese economy, and fall over themselves to praise it, just remember what we’ve said about China for the past four years – it’s a brutal economy and leadership that sees the Chinese people as a means to stay in power and line their own pockets.

How Chinese Infrastructure Projects Work

Take this news story from the New York Daily News that you won’t read in the compliant, China-loving Aussie press:


‘Stomach-churning photos have surfaced allegedly showing the moment a Chinese protester was crushed by a steamroller while trying to stop government officials from relocating his village to make way for a commercial development.


‘A local government official allegedly ordered the trucks forward, and the man was flattened beneath one six-wheeled hulking behemoth, the report said.’

How are you enjoying your iPhone now? And anything else that’s ‘Made in China’.

All this tells us that those in power are getting desperate. They’ll do anything to make sure the economy doesn’t collapse on their watch.

That means pretending to cut budgets while increasing debts, it means printing money as a last resort, and it means crushing people to death in order to erect a new building paid for with government stimulus money.

Add all this together and it should explain why one particular ‘fear gauge’ (gold) is rocketing back towards record levels.

Even mainstream analysts are getting back on board the gold bandwagon. In the old days (five years ago) we would have worried about the mainstream backing gold. We would have seen it as a sign of a market top.

But not now.

The Best Way to Protect Your Wealth

Now the economy is so bad, the mainstream is finally waking up to reality. As the New York Post reports:


‘Gold has had a good summer, rising more than 9 percent, but that move may be just the start, according to a bullish Citi precious metal analyst.


‘Tom Fitzpatrick believes autumn will be golden in the beginning of a run-up that he says will culminate with the yellow metal hitting $2,500 an ounce in the first quarter of next year. The price now stands at $1,736.’

That report is actually two weeks old. Today gold is at USD$1,776.

But despite the recent gold rally, we’re still happy buyers. And we’ll stay a happy buyer until governments and central bankers understand the solution to the current financial mess isn’t to print money, go into debt, or raise taxes.

Unfortunately, that day appears to be a long way off. We’ll give you more reasons to buy gold in tomorrow’s Money Weekend.