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Friday, July 29, 2011

Charge It....

by Norm Arychuk Debt Capital Markets, Toronto

There has been much said about the debt ceiling in the U.S. I have heard some good ones that are worth sharing:

“You mean that the government can approve a budget for spending and then decide later if they want to actually pay for it. Rather odd don’t you think?”

“The debt ceiling in the U.S. is akin to loading up your Visa card and then deciding later if you actually want to pay it or not.”

“Is the U.S. economy going to be the next Japan?”

As the deadline to raise the ceiling approaches, the fear is not necessarily that Congress will not allow for more borrowing, but rather that there will not be significant enough budgetary amendments to satisfy the holders of U.S. Treasuries, and of course the rating agencies. Maybe it is time that the U.S. recognizes that it is not the undisputed financial powerhouse that it once was. Many nations have been taken down a peg or two as a result of not only the financial crisis, but a long history of living on borrowings that are not sustainable. There has been incredible pain felt in the U.S., hopefully it has been enough.

Gold. From 1833 through 1919 it had a price variance of about a buck, hovering around the $18 - $19 range. From 1920 to 1971, it experienced a price doubling from $20 – to $40. 1972 and 1973 contributed sufficiently to see a price of $100. By 1979 it hit $500. In 2010, it finally broke through the $1,000 threshold and now stands near $1600, only a year later. There are predictions that it will hit $2011 by the end of 2011. This acceleration of price demonstrates the general lack of confidence in many ways, in the ability of the governments to manage fiscal policy in tune with growth. Is it too late to buy gold?

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