Gold in recovery mode, emerging nation problems raise developed country contagion worries

Gold is in recovery mode in today’s early going – up $5 on the day at $1197 – as the markets attempt to gauge the extent and depth of the contagion spreading through emerging markets from Asia, South America, Africa and Europe’s soft under-belly. Financial Times even lists China among the countries analysts are monitoring for deeper problems.

That same article exposes what many see as the greatest source of vulnerability in this developing crisis: “The rise in the US dollar since April,” says FT, “has exacerbated troubles in several emerging economies with the amount of dollar-denominated debt they have more than doubling to $3.7tn over the past decade, according to the Bank for International Settlements.” That level of debt warns of a very large problem that is not going to be easily swept under the financial markets’ carpet as one country after the other tumbles into crisis.

So what happens when the debt repayments come due and these countries declare the lack of resources to meet their obligations? The IMF does not have the resources to engineer a emerging country bailout at the level that might be required. Where will emerging countries go for relief? Or do they simply default – in which case the crisis rolls unimpeded into New York, London, Frankfurt and financial centers beyond.

Please see: Emerging market sell-off spreads beyond Turkey and Argentina / Financial Times / 9-5-2018

Quote of the Day
“We have been in a state of stagnation since 2008. We’re moving towards stagflation. It feels good right now but it’s a false dawn.” – Alan Greenspan, May, 2018

Chart of the Day

Chart courtesy of VisualCapitalist.com

Chart note: In a note accompanying this chart Visual Capitalist notes that ” If you add up all the money that national governments have borrowed, it tallies to a hefty $63 trillion. In an ideal situation, governments are just borrowing this money to cover short-term budget deficits or to finance mission critical projects. However, around the globe, countries have taken to the idea of running constant deficits as the normal course of business, and too much accumulation of debt is not healthy for countries or the global economy as a whole.”

Too, we should not ignore the interlocking nature of global debt – a vulnerability that became all too evident during the last financial crisis and its aftermath. The emerging country debt and currency disaster now unflolding across the globe has its antecedents in that crisis. Cheap money, widespread bailouts, more reckless borrowing and a wobbly repayment structure – all threaten to come home to roost as a disinflationary crisis (like 2008), a long-anticipated surge in global inflation, or as Alan Greenspan suggests in our Quote of the Day, as stagflation, a combination of the slow growth and inflation. Greenspan advocates owning gold as a precautionary measure.

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