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Eric Sprott: The Solution…Is The Problem, Part II

Tyler Durden's picture


From Eric Sprott & Etienne Bordeleau

The Solution…is the Problem, Part II

When we wrote Part I of this paper in June 2009, the total U.S. public debt was just north of $10 trillion. Since then, that figure has increased by more than 50% to almost $16 trillion, thanks largely to unprecedented levels of government intervention.

Once the exclusive domain of central bankers and policy makers, acronyms such as QE, LTRO, SMP, TWIST, TARP, TALF have found their way into the mainstream. With the aim of providing stimulus to the economy, central planners of all stripes have both increased spending and reduced taxes in most rich countries. But do these fiscal and monetary measures really increase economic activity or do they have other perverse effects?

In today’s overleveraged world, greater deficits and government spending, financed by an expansion of public debt and the monetary base (“the printing press”), are not the answer to our economic woes. In fact, these policies have been proven to have a negative impact on growth.

While it hasn’t received much attention in recent years, a wide body of economic theory suggests that government policies and their size relative to the total economy can have a significant detrimental impact on economic growth. A recent paper from the Stockholm Research Institute of Industrial Economics compiles evidence from numerous empirical studies and finds that, for rich countries, there is overwhelming evidence of a negative relationship between a large government (either through taxes and/or spending as a share of GDP) and economic growth.1 All else being equal, countries where government plays a large role in the economy tend to experience lower GDP growth.

Of course, correlation does not imply causation. While the literature is not definitive on causation, it still provides strong evidence that more taxes and government spending as a share of GDP (except for productive investments such as education) is associated with lower growth.

One exception to these findings is the experience of Scandinavian countries. They have both high taxes and high government spending as a share of GDP but have experienced relatively rapid growth over the past 20 years. However, a significant share of their spending goes to education, which has been found to foster growth. They also counterbalance the large role of the state with very liberal, pro-market reforms and low levels of public debt.2

Debt overhang and economic growth

Even if one believes that temporary Keynesian-type fiscal stimulus, in the form of tax breaks and increased government spending, can spur growth in the short-term, these actions inevitably lead to larger deficits and higher government debt (see July 2010 Markets at a Glance, “Fooled By Stimulus”). As Figures 1 and 2 below show, the U.S. Federal Government deficit and debt levels are already at their highest levels since the end of World War II and the scope of future stimulus appears to be rather limited. According to our projections (which assume there will be no fiscal cliff), the U.S. federal debt will increase significantly as the deficit remains sustained and elevated. For many European countries the situation is even worse.



Source: The White House: Office of Management and Budget (OMB) and Sprott Calculations
*For reasons discussed in May 2009 Markets at a Glance The Solution … is the Problem, Part 1, we show total federal debt subject to the debt ceiling.


High levels of debt, or debt overhangs, cause more problems. Recent work by Carmen Reinhart and Kenneth Rogoff (Harvard University) demonstrates that banking crises are strongly associated with large increases in government indebtedness, long periods of unemployment and, ultimately, some form of default. They identify a threshold of 90% debt-to-GDP as the trigger to a debt crisis.3 As shown in Figure 2, the U.S. has already passed that threshold.

The historical evidence shows that countries with large governments and high levels of debt have on average, achieved lower economic growth. Given the already high level of debt and deficits in most developed countries, it is doubtful that increased fiscal stimulus will really help the recovery. It’s clear that debt is the problem and the solution does not lie in piling on even more of it. The current debt situation, coupled with the increasing lack of transparency of politically motivated regulations and interventions, leaves little room for a healthy deleveraging of our economies. Here is what central planners have in mind.

Debt overhang resolution and implications for the future

Througout history, high debt-to-GDP ratios have been resolved through five channels:4

  1. Economic growth
  2. Austerity
  3. Defaults
  4. Sudden bursts of inflation
  5. Steady financial repression and inflation


Clearly, number one and two are not working right now and, in some European countries, are actually negatively reinforcing each other. The U.S. is facing its homegrown fiscal cliff and political polarization makes its resolution doubtful. Number three seems politically unacceptable for rich, developed nations, which see default as the realm of developing countries. Sudden bursts of inflation are hard to contain and work only so many times as investors, assuming a normal bond market, demand higher interest rates to compensate for inflation risk. Moreover, with interest rates already, at zero it seems that we are left with number five: steady financial repression and inflation. This terminology was first introduced in the early 1970s by Edward Shaw and Ronald McKinnon, both from Stanford University.5

They define financial repression as:

  • Explicit or indirect caps or ceilings on interest rates
  • The creation and maintenance of a captive domestic audience (i.e.: forced holdings of government debt by financial institutions and pension funds)
  • Direct ownership of financial institutions and/or entry restriction in the financial industry (i.e.: China, India)

We are clearly living through a period of financial repression. The symptoms include:

  • Artificially low interest rates in most of the G20 countries and commitments to keep them low for long periods of time combined with inflation, which results in negative real interest rates
  • Large expansion of central banks’ balance sheets through the purchase of government bonds
  • Basel III liquidity rules which force banks to hold more government debt on their balance sheets6,
  • Newly nationalized banks in many countries (UK, Ireland, Spain, etc.), which have drastically increased their holdings of government debt
  • and it will bet worse...

Figure 3 below shows that financial repression can be observed within the holdings of U.S. financial institutions and pension funds, which have steadily increased their holdings of U.S. Treasuries since 2009.

Source: Federal Reserve Flow of Funds

It’s clear that governments are preparing for more. A key component to erasing government debt through inflation is extending the duration (maturity) of one’s outstanding bonds. In a normal bond market, negative real interest rates make it difficult to roll over short-term debt at low borrowing rates (although financial repression and captive financial institutions certainly help to keep rates lower than they normally would be). Due to this tendency for short-term rates to rise with inflation, however, it is in the best interests of highly-indebted countries to issue the majority of their bonds at the long end of the yield curve. As Figure 4 shows, the US Treasury is proactively planning to increase the maturity of its outstanding debt (green line) in order to maximize its benefit from inflation erosion. In other words, they are capitalizing on the current flight to safety to set the stage for further financial repression down the road. The same is true for the U.K., which benefits from one of the longest weighted-average maturity of debt in the developed world. For Eurozone countries to do away with their current debt overhang they will either have to default (the least preferred option for political reasons) or use the good old combination of steady inflation and financial repression (feared by the Germans and the ECB central planners).

Source: U.S. Treasury Office of Debt Management, Fiscal Year 2012 Q1 Report


On both sides of the Atlantic, the largest contributors to the current crisis are excessive debt and spending. We are now at a point where additional government stimulus measures will have negligible, if not detrimental effects on the economy and long-term growth. Debt has to be reduced, not increased by more deficits. Central planners have demonstrated that they don’t have the discipline to implement the Keynesian model of surplus in good times in order to finance deficits in bad times. We have now reached the limit of indebtedness and need to muddle through a painful but necessary deleveraging.

The politically favoured option of financial repression and negative real interest rates has important implications. Negative real interest rates are basically a thinly disguised tax on savers and a subsidy to profligate borrowers. By definition, taxes distort incentives and, as discussed earlier, discourage savings. Also, financial institutions, which are traditionally supposed to funnel savings towards productive investments, are restrained from doing so because a large share of their balance sheets is encumbered by government securities. The same is true for pension funds, which instead of holding corporate paper or shares, now hold an ever growing share of public debt. Pensioners, who are also savers, get hurt in the process.

The current misconception that our economic salvation lies with more stimulus is both treacherous and self-defeating. As long as we continue down this path, the “solution” will continue to be the problem. There is no miracle cure to our current woes and recent proposals by central planners risk worsening the economic outlook for decades to come.


1 Bergh, A., Henrekson, M. (2011): “Government Size and Growth: A Survey and Interpretation of the Evidence”, Research Institute of Industrial Economics, IFN Working Paper No. 858, April 2011.
2 Bergh, A., Karlsson, M., (2010): “Government Size and Growth: Accounting for Economic Freedom and Globalization”, Public Choice 142 (1–2): 195–213.
Reinhart, C., Rogoff, K. (2010): “From Financial Crash to Debt Crisis”, National Bureau of Economic Research, NBER Working Paper #15795, March 2010. Reinhart, C., Rogoff, K. (2011): “A Decade of Debt”, National Bureau of Economic Research, NBER Working Paper #16827, February 2011. Reinhart, C., (2012): “A Series of Unfortunate Events: Common Sequencing Patterns in Financial Crises”, National Bureau of Economic Research ,NBER Working Paper #17941, March 2012.
4 Reinhart, C., Sbrancia, B. (2011): “The Liquidation of Government Debt”, Bank of International Settlements – Monetary and Economic Department, BIS Working Paper #363, November 2011. Reinhart, C., Reinhart, V., Rogoff, K. (2012): “Debt Overhangs: Past and Present”, National Bureau of Economic Research ,NBER Working Paper #18015, April 2012.
5 McKinnon, R., (1973): “Money and Capital in Economic Development”, Washington DC: Brookings Institute. Shaw, E., (1973): “Financial Deepening in Economic Development”, New York: Oxford University Press.
6 Bordeleau, E., Graham, C., (2010): “The Impact of Liquidity on Bank Profitability”, Bank of Canada Working Paper, WP#2010-38, December 2010.

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Fri, 08/10/2012 - 21:48 | 2696026 grunk
grunk's picture


Fri, 08/10/2012 - 21:54 | 2696035 Western
Western's picture



how about saying something helpful, or nothing at all?


perfect example of the ADHD, dumbed down, instant gratification society.


as an aside (the useful part of my post) -> buy gold, buy silver, rid yourself of your ego and face the new paradigm with an open heart.

Fri, 08/10/2012 - 22:26 | 2696126 Desert Irish
Desert Irish's picture

Don't worry Erics got your back.......90% down quarter over quarter....... as long as your buying his silver fund everything will be fine...or not. Timminco anyone....

Fri, 08/10/2012 - 23:07 | 2696218 Michael
Michael's picture

Revenge votes for Obama is the solution. Black balling Dr Ron Paul was not a smart move this time.

No self respecting Ron Paul supporter will vote for Mitt Romney since he is a wholly owned subsidiary of the Rothschild's and Rockefeller banksters just as Obama is.

Many millions of Ron Paul supporters like me will be voting directly for Obama in November in a political strategy so we can get a real Liberty candidate on the ballot in 2016.

If you don't like Obama next year, then impeach him for illegally attacking Libya, gun running fast and furious, and being disqualified for his forged birth certificate.

Fox news is an infomercial for the republicans and the GOP. MSNBC is an infomercial for the democrats, and ABC, NBC, CBS, CNN is left leaning, brainwashing, social engineering scum. Try not to get your news from them.

Fri, 08/10/2012 - 23:25 | 2696265 Desert Irish
Desert Irish's picture

okay we went from dissing Eric Sprott and now we are meant to vote Obama? in defense of Ron Paul? so Romney can't win? So we can ultimately impeach Barry? There"s half a bottle of scotch I have yet to drink to understand the above....

Fri, 08/10/2012 - 23:47 | 2696312 Michael
Michael's picture

You forgot revenge on the MSM and the GOP?, but yeah, that's about right.

Sat, 08/11/2012 - 00:28 | 2696359 The Big Ching-aso
The Big Ching-aso's picture



We are reaching maximum pooch screwdom.

Sat, 08/11/2012 - 09:30 | 2696878 Pladizow
Pladizow's picture

Is your TV on?

Does your internet work?

Are there UN troops in your neighborhood?

Is there food at the suppermarket?

Is there gas at the station?

Are you in a FEMA camp?

Is the dollar still the global reserve currency?

Sat, 08/11/2012 - 21:54 | 2698116 boogerbently
Sat, 08/11/2012 - 00:49 | 2696390 indygo55
indygo55's picture

Really? What brand and where do you live. I have the soda.

Sat, 08/11/2012 - 11:47 | 2697305 monad
monad's picture

Soda with scotch? Thats like ketchup on macaroni and cheese. Do you put soda in wine?  Next time try sipping it, ice only. If its too strong wait for the ice to melt... See, this is what globalization does. You present a bunch of consumers with the finest pleasures your culture has developed over centuries, but without instructions - and would they even read them if you did - and they do things like this.

Sure you put brandy in the bong, but only if its dirt weed. A man's got to know his limitations...

Sat, 08/11/2012 - 00:57 | 2696393 Doña K
Doña K's picture

To Desert Irish

Maybe the concept is hard to understand for some, but it seems that the republicans are not getting the message or they do get the message but they are also puppets.

Either way, Obummer's reelection will cause the system to malfunction and bring a reset. Mathematically speaking, there is no solution as Sprott's thesis describes without a reset.

Here is a perfect opportunity to prove once and for all that Keynesian theory does not work beyond certain point. The world at this moment is upside down. As Carlos Castaneda wrote in the book "A separate reality" which involved consuming funny mushrooms.

Put all ideologies aside and think a la "tabula rasa". All of you would realize that the events and the course of action of the central planners, the reporting by the MSM and the actions and decisions by the judicial system does not make sense no matter how you look at it.

Metaphorically speaking, let the patient die a dignified death, instead of chemotherapy until the insurance payments run out. BASTARDS!

Sat, 08/11/2012 - 02:06 | 2696500 cranky-old-geezer
cranky-old-geezer's picture



Obummer's reelection will cause the system to malfunction and bring a reset.

There is no "reset" coming regardless of whom is elected.

"Reset" would follow default, but there will be no default.

Sprott and others still don't see the big picture.  America is on a direct path to currency collapse from endless printing to fund more and more debt so Obama or Romney or whomever can keep the farce going a few more years.

When government spending is the only growing part of GDP, and increasing spending is funded by increasing borrowing funded with more printed money, it's an end-game situation leading to currency collapse.

Germany may eventually say "no more" and prevent ECB from printing the Euro to worthlessness.

There is no such possibility in America. There is no one to stop the Fed from printing all the dollars the government wants to borrow.  Federal debt could grow to $30 trillion, $40 trillion, etc. 

By then the dollar will be pretty much worthless and other nations will abandon it, perhaps making the Euro the new world reserve currency, maybe some other currency not being printed to oblivion.

No, there will be no "reset".   There will be currency collapse.  Dollars and dollar-based assets will be worthless, America will sink into chaos, and that's it for America.


Sat, 08/11/2012 - 04:30 | 2696585 old naughty
old naughty's picture

IMHO, the reset is not for one country.

TPTB has no interests in national interests. They simply want to put in place a world .gov. That in itself is the reset, planned.

Perhaps the trigger will be the collapse of usd, perhaps something else. But it will come.

Sat, 08/11/2012 - 06:20 | 2696628 francis_sawyer
francis_sawyer's picture

It's hard to deny that a "one world government" scenario is the type that the controlling banking interests would like to engineer, but riddle me this...

Assuming even the Eurocrats & whatever treasonous Viceroy that Israel decides to install in Washington are in bed together, how can "one world government" ever possibly be anything but a joke without Putin, the Chi-Coms, Iran, or even Chavez & Venezuela on board?... (I can see it now... "Yes ~ WE'RE the self described ONE WORLD GOVERNMENT, and all you others who have most of the people & sit on most of the resources are just residents on the planet"... Pretty silly if you ask me...

Why would the Russians, Chinese, or any of the above mentioned even think about abandoning what they already have in place for an arguably diminished role at the table, when all they basically have to do is play a waiting game & watch the west implode?

Visigoths II

You can't conquer by force, or proxy... You do it by starvation & destitution...

Sat, 08/11/2012 - 10:37 | 2697049 gorillaonyourback
gorillaonyourback's picture

You think the inbred elite rothschilds, queen, et al are sane? They will still try

Sat, 08/11/2012 - 11:59 | 2697344 DeadFred
DeadFred's picture

People who are at the top of the pyramid don't have the same motivations as those further down. Having enough to make it through life is a given so all choices are based on ego issues; will this give me bragging rights at the get together, will I win the game of dominance over my competitor. When decisions are based solely on such factors it's hard more grounded people to comprehend the mindset. It's pretty tough to grow up in a familiy of sociopaths and not end up either neurotic or sociopathic yourself. Neurotic is the healthier path if you have the choice.

Sat, 08/11/2012 - 08:08 | 2696715 James-Morrison
James-Morrison's picture

Reset is definitely a digital age concept, like alt-ctrl-del.
What is most likely with Obaaahma (the Sheeple's choice) is more like an infinite loop.

Sat, 08/11/2012 - 10:35 | 2697043 grid-b-gone
grid-b-gone's picture

The yen would probably collapse first, even before the euro.

Once that first major currency implodes, that is the dollar's fair warning. That last chance will probably be wasted because the immediate result will be that the U.S. dollar will, by default, temporarily strengthen.

Our leadership void leaves the solution to the market.

Then again, we as voters deserve it for electing those who use our own money to buy our votes with destructive, unaffordable promises.

As individuals, we need to think like the early settlers. Only those close to the power centers could depend upon federal help. If you live in today's economic equivalent of the wilderness, your fate is more closely tied to your own preparation and resourcefulness.

I'm not talking bug-out, although I don't completely dismiss the possibility, but rather personal debt elimination, living below one's means, and having large margins of safety in scenarios I never thought would be necessary to consider.

Sat, 08/11/2012 - 02:02 | 2696498 JOYFUL
JOYFUL's picture

the notion that yur vote could have some kind of impact upon the scripted outcome of the November theatrical event is so naive as to make one wonder if yur whole thesis is written tongue in cheek?!??! is the idea that there would be need of a repeat of this forthcoming curtain closer in 2016.

There's only one kind of vote that counts at this late stage, and that one is performed with the feet...not hands. Merikans seem to have retreated into a pyschological cocoon, wrapped in comforting wooly notions of what fantasy outcome awaits them other than their processing into FEMA facilities, after the collapsing of the dollar and bankrupting of personal savings. 

It's as clear as day that this is the only future which awaits the sadly befuddled denizens of the fallen Republic, and those who refuse to stand by as spectators to their own enslavement will grasp the wisdom of conducting an organized retreat in order to live and fight another day, on the ground of one's choosing.

There is no perimeter left to defend within the Euromerikan prison zone. Resistance will occur from the margins of Empire. End of transmission.

Sat, 08/11/2012 - 07:38 | 2696678 Birddog
Birddog's picture

I think if your Libertarian minded, why not vote Gary Johnson.

Sat, 08/11/2012 - 11:34 | 2697269 Landrew
Landrew's picture

Why not write in Ron Pual? 

Sat, 08/11/2012 - 04:48 | 2696594 Bay of Pigs
Bay of Pigs's picture

Who the fuck is this stupid asshole?

Sat, 08/11/2012 - 01:02 | 2696420 shovelhead
shovelhead's picture


Can we have a Twilight Zone prize for this post?

Hyper egotist says lose ego. Extra points for open heart 'paradigm'.

Learning to play Kumbaya on a ukelele ought to do it.

Sat, 08/11/2012 - 10:00 | 2696938 samcontrol
samcontrol's picture

hey , kind of tired of adhd comments as the insult a la mode.

 Do some homework on sucessfull people with adhd, name me 5 !

If / when we crash gold will dive ,, silver more , only then will they be a good investment again.  SO ,, you get rid of the ego and realize you may be wrong on alot of things and that goes for the monkeys' 24 green arrows.


Sun, 08/12/2012 - 00:50 | 2698317 Western
Western's picture

fuck you.

Sun, 08/12/2012 - 12:47 | 2698799 samcontrol
samcontrol's picture

ok, gl if you disagree dipstick.

Sat, 08/11/2012 - 15:03 | 2697640 Silver Bug
Silver Bug's picture

Once again, ANOTHER block buster piece by Eric Sprott. This man is a shining example of a epic Gold and Silver vigilante.

Fri, 08/10/2012 - 22:03 | 2696065 Eireann go Brach
Eireann go Brach's picture

By the time Obama is done with us, he will leave office with $120 Trillion in debt, have EBT cards for every man woman and child in America, have money printing machines at 7-11, and will still claim "I did not do this"!

Sat, 08/11/2012 - 11:37 | 2697274 grid-b-gone
grid-b-gone's picture

Obama has never demonstrated much aptitude for personal finance. Even with two Harvard graduates in his young family, it took the windfall of book sales for him to finally succeed financially.

He just does not seem to understand that the public-sector is overhead and it's private sector activity that creates the wealth of a nation. 

Unfortunately, the Romney-Ryan ticket is so blatently pro-wealth that they would likely squeeze out the middle class as effectively as the pro-government Obama administration has.    

Fri, 08/10/2012 - 22:03 | 2696067 mick68
mick68's picture


It is not a debt "ceiling," it's a debt target.

Sat, 08/11/2012 - 02:22 | 2696514 Peter Pan
Peter Pan's picture

And here I was thinking that the problem is the problem.

Fri, 08/10/2012 - 21:50 | 2696032 Western
Western's picture

Eric Sprott knows wtf is up.


Deadliest pen on the internet.

Fri, 08/10/2012 - 21:55 | 2696042 Robot Traders Mom
Robot Traders Mom's picture

"Deadliest pen on the internet."


Al Gore invented the internet pen, as well as the interwebs in general. Friday Fun Fact :)

Fri, 08/10/2012 - 22:43 | 2696168 AssFire
AssFire's picture

Later it was learned He did not build it.

Sat, 08/11/2012 - 18:59 | 2697961 mkhs
mkhs's picture

But he played a part in Reinventing Crony Capitalism

Sat, 08/11/2012 - 00:46 | 2696162 AssFire
AssFire's picture

Love the Sprott.

The medicine will become the poison.

Sat, 08/11/2012 - 07:49 | 2696688 fockewulf190
fockewulf190's picture

I like Eric, and what he writes is on the money, but Jim Grant gets the award in my opinion.

Fri, 08/10/2012 - 21:51 | 2696036 Robot Traders Mom
Robot Traders Mom's picture

Smile Sprott, the Feds have you under TrapWire surveillance!

Fri, 08/10/2012 - 21:55 | 2696044 Yen Cross
Yen Cross's picture

 Can someone put together a Sprott - Trimtabs "Bingo parlor"?   I like those odds, and the Fish won't be from Fukishima!

  Invisable ink will be confiscated at the door!

Fri, 08/10/2012 - 22:00 | 2696055 Bohm Squad
Bohm Squad's picture

Good article.  It occurs to me those unwilling to reinvest in short-term fixed assets may add to inflationary pressures as their cash is put to work elsewhere.  I hadn't thought of the fixed asset market as a stimuli for such effects before.


Fri, 08/10/2012 - 22:03 | 2696068 Top_Kill
Top_Kill's picture

I was expecting him to stay that the Phys and Pslv were involved in a tragic boating accident.

Fri, 08/10/2012 - 22:18 | 2696113 Yen Cross
Yen Cross's picture

 Ok , Junkmeister?  Everything Sprott says is postfacto'. I agree 100%

 Sprott is simply using multiple references, to reinforce the market movements based on history!

Fri, 08/10/2012 - 22:18 | 2696114 disabledvet
disabledvet's picture

eh. in the USA the problem is easily solved by letting energy prices "reset" to dramatically higher levels as was done after WWII. the problem is not with "more stimulus" either...we have so much "stimulus" right now it's really an abortion of the English language to say what we have right now is an economy. the problem is the inability of politicians to deal with the entitlement monster they've created...although in the EZ the problem is being dealt with by simply eliminating the bulk of the benefit checks outside of Germany. Hence trying to argue "this is about getting debt down" simply brings into relief the true enormity of the task at hand. clearly for State government to survive "there needs to be a MASSIVE price increase." Oil is the easiest target since the USA still has billions of barrels of it...and in "spiking it" in effect the USA is only making itself more wealthy. won't be fair or equitable who get's "the Lion's share" of such a policy...but at least it's do-able, and if you don't like it "buy a friggin' Chevy Volt" like the Government has told us to do. if we don't go this route but instead "go all in on a Goldman Parachute" as is being done currently "the reset could be violent" as clearly when prices start moderating "that trillion dollar deficit suddenly becomes a true trillion dollar deficit." You don't expect that thing to be repaid "through the sweat of the brow" do you?

Sat, 08/11/2012 - 01:45 | 2696477 Sabibaby
Sabibaby's picture

Surely you jest! I'm sure high energy problems will solve the USA's problems.... 

Fri, 08/10/2012 - 22:22 | 2696120 luna_man
luna_man's picture



Reads like, some of the natives are getting a little-bit restless...Anyway, keep them hits a coming...MY MAIN MAN!

Fri, 08/10/2012 - 22:23 | 2696122 analyzer_66
analyzer_66's picture

No, instead Obama will claim "I didn't build that"

Fri, 08/10/2012 - 22:24 | 2696124 buzzsaw99
buzzsaw99's picture

More inside the box thinking.

Fri, 08/10/2012 - 22:26 | 2696125 davey
davey's picture

Time to leave

Sat, 08/11/2012 - 02:27 | 2696519 Peter Pan
Peter Pan's picture

The problem is one that is far greater than the debt. Debt you can write off and start anew. The greater problems are the expectations of people in relation to retirement and medical funding which clearly cannot be funded even if there was no debt. This is further exacerbated by the government wanting to maintain a military budget as if it is going to take on all the aliens in the universe.

Sat, 08/11/2012 - 11:47 | 2697307 PiratePawpaw
PiratePawpaw's picture

" lower case t?!......time to go?"

Fri, 08/10/2012 - 22:31 | 2696139 Caviar Emptor
Caviar Emptor's picture

Biflation bites. The economy is pinched from both too much, and too little of everything. You all know what there's too little of. But the one-trick pony Fed (and global CBs) thinks that the solution is to flood the world with too much [fiat]. Only trouble is that has both an anticipated and a paradoxical effect: the cash goes down the path of least resistance and raises the price of immediate necessities ( for both individuals and business). That further depresses margins, the value of cash itself and the demand for jobs. It also depresses the need for innovation, competition and inventiveness. 

Fri, 08/10/2012 - 22:37 | 2696154 Atomizer
Atomizer's picture

Alrighty Eric Sprott, now that you have recapped what 90% know. What's your fucking solution?

Sat, 08/11/2012 - 01:09 | 2696429 Doña K
Doña K's picture

You did not read the article. There is no solution.

Kick the can down the road and when the hockey stick goes vertical, there will be an automatic "TILT". The higher it goes, the more banksters and politicians will be lynched, more famine and more violence. Simple math.

Sat, 08/11/2012 - 04:53 | 2696596 Bay of Pigs
Bay of Pigs's picture

That is awesome+

Sat, 08/11/2012 - 17:32 | 2697863 Atomizer
Atomizer's picture

Doña K 



There’s a solution, sometimes it's hard to face the truth. You live in an era of fiction vs. reality. Only you can sort out personal clarity.


Fri, 08/10/2012 - 22:41 | 2696163 vinu02
vinu02's picture Disconnect continues For the week, S&P500 is up 14.88 (1.07%) and VIX is down 7%. UVXY, TVIX, VXX dead for the week

Fri, 08/10/2012 - 22:42 | 2696164 silverdragon
silverdragon's picture

It may be a good time to buy some physical silver.

Sat, 08/11/2012 - 08:26 | 2696752 css1971
css1971's picture

Nope. It isn't.

The gold/silver ratio is still only 57. Talk to me when it gets above 60 and preferably 70-80. Then is a good time to buy silver.

Sat, 08/11/2012 - 11:56 | 2697335 PiratePawpaw
PiratePawpaw's picture

If you think silver is over-priced at 57/1, and a buy at 60/1; what pray tell do you think is a fair ratio?


Personally, I think silver is a buy at anything over 40/1. IF I ever see silver at less than 20/1 I will think about trading it for phys gold. But for now I think silver is the undepriced, and am happy to hold it.

There is historical support for levels of 8/1, 16/1, 20/1, and 35/1. Upon what do you base your notions of 60-80/1?

Sat, 08/11/2012 - 18:29 | 2697928 AustriAnnie
AustriAnnie's picture

Is it more important to focus on the ratio of gold/silver?

Or to focus on the ratio of gold & silver, to everything else?


Fri, 08/10/2012 - 22:45 | 2696173 Ass to Mouth
Ass to Mouth's picture

Eric always makes a great case for the US dollar but obviously concludes that we should be buying silver and silver mining equities.

Fri, 08/10/2012 - 22:54 | 2696189 tradewithdave
tradewithdave's picture

Don't fight the fed, don't fight the tape. 

Fri, 08/10/2012 - 22:54 | 2696190 walcott
walcott's picture

no shit Shersprott.

Fri, 08/10/2012 - 23:03 | 2696191 pamriallc
pamriallc's picture

There has never been in history a cure for currency debasement. Unless you are in control of the government someone is bound to mess it up for you. The only long term cure is personal savings in the form of stocks, gold, silver, real property and business ownership. That takes a ton of work, and it takes planning and a pledge to remain largely free from debt. This has worked, despite all currently stated problems, for all of human history. A certain amount of "off grid" savings in gems and other trinkets, collectibles, and art has been a part of this program as well. Mission accomplished.

Fri, 08/10/2012 - 23:19 | 2696257 dunce
dunce's picture

Your comment is near to my biography, 55 years of work, saving, investing, and planning while eschewing debt.

Sat, 08/11/2012 - 05:07 | 2696600 _underscore
_underscore's picture

Mine too. I'm not sure why there's any controversy about this at all (esp. the snidey comments about Mr Sprott from some). The over-consumption has to be 'paid' for somehow - or at least the nominal figures in the debit/credit columns have to match. The extra real GDP will be impossible to achieve, so the currency purchasing power will be adjusted until real GDP will cover the debt, nominally.

I don't see a winner currency in this, with the $, so with the Euro, Renminbi, Yen, £ etc.  - no country could work if not in lock-step with a depreciating reserve currency. On that topic, 'reserve currency' - who would want that poisoned chalice?  Much as the BRICs (primarily the Chinese) are touted as being the next RC locus, I'm not sure any of them would want the pressures & temptations associated with it.

As per the above posters, debt-freeness coupled with PMs, wholly-owned real estate & a useful skill are a good starting point for the average punter.

Sat, 08/11/2012 - 08:32 | 2696766 traderjoe
traderjoe's picture

Shawn, are you still pimping your firm here on ZH? Last I remember, you were telling ppl to buy BAC for the healthy 'book value'. It seems you've progressed a bit in your thinking. But still shilling your firm, under a thin veil...

Sat, 08/11/2012 - 11:02 | 2697144 grid-b-gone
grid-b-gone's picture

Just recently, I see anecdotal signs that this view is catching on.

One neighbor who really doesn't need to, just became a single-vehicle family. 

Another, with a "safe" public pension, has decided to pay off the mortgage they formerly thought they would leave for their ececutor to deal with.

They are still not very concerned about their own situations, but want to be in a better position to help other family members. 

Fri, 08/10/2012 - 23:11 | 2696236 dunce
dunce's picture

Rather than a thinly disguised tax on savers i look at negative interest rates as a wealth tax. It is pernicious in that people like my sister that have been savers and depended on the interest on their CDs are seeing their nest egg depleted and can not go back to work to build it back up. Stock market investing is not a real option for someone in their 70s to learn or risk. I do it, but i have been doing it for 50 years.

Fri, 08/10/2012 - 23:30 | 2696279 Abrick
Abrick's picture

People in their 70's who couldn't foresee that the world, as represented to them, had it coming. As do the Gen Y'ers who may never experience raises, social programs, welfare, etc... The idea that the boomers are the only ones who deserve pity is fucking retarded. Your moniker describes you well.

Fri, 08/10/2012 - 23:50 | 2696320 GoldenTool
GoldenTool's picture

This is the one out, as I see it for the fed, that makes sense.  All around inflation while taxing, negative interest, wealth and fixed income, then inflate wages as boomers retire out of the system.  All of a sudden all those expensive fed, state and local pensions are looking like the mean income for someone working and the debt overhead doesn't seem as bad either.  This will be a hugely painfull process, with tricky tricky timing, but more possible then anything else I've seen yet as an out.  Other then war or plague that is...


"Do unto others."

Sat, 08/11/2012 - 11:18 | 2697203 grid-b-gone
grid-b-gone's picture

She can always skip the banks and make private loans to solvent, responsible family members. She'll get a higher rate and family members will probably get a better deal than at a bank. 

One of the reasons banks grew is that they were an impartial third-party who could evaluate risk professionally and provide that "arm's length" transaction function so family members could avoid the nastiness of collecting in slow-pay and bad debt situations.

Banks, since the gutting of Glass-Steagall, have largely destroyed the goodwill that made them a convenient alternative to family members making loans to each other. 

There's a glut of attorneys today. Put them to work making personal contracts that benefit those who used to depend on CD income and responsible family members who need and deserve a loan.  

Fri, 08/10/2012 - 23:20 | 2696261 silverdragon
silverdragon's picture

Republicans and Democrats just a one party state.

To actually vote, buy physical silver.

Sat, 08/11/2012 - 05:16 | 2696604 AssFire
AssFire's picture


The candidates and their party affiliations:

(GS) Barrak Obama

(GS) Mitt Romney

Fri, 08/10/2012 - 23:22 | 2696264 Abrick
Abrick's picture

Could one find a better example of "profligate borrower" than the entire financial sector of the western world?

Fri, 08/10/2012 - 23:23 | 2696267 kito
kito's picture

no expansion of debt.....then no growth...simple fact.....

Fri, 08/10/2012 - 23:56 | 2696326 Atomizer
Atomizer's picture



no expansion of debt.....then no growth

QE3 expansion of debt...then 5-10% growth on equities & monumental inflationary distort on economy price index. Simple fact, your collecting pennies on a inflated market. Compare your YOY earnings to your purchasing power at a grocery store/retail clothing store. If you think your making 30,40 or 50% return.. Your delusional . That earned money is being shifted back into the same invisible handler. winks.

 Food for thought.

Sat, 08/11/2012 - 06:35 | 2696638 NidStyles
NidStyles's picture

By growth it's obvious you just mean servitude. 

Sat, 08/11/2012 - 09:19 | 2696851 mendolover
mendolover's picture

From what I can gather, there is expansion of debt, and then there is what we have here which is just plain reckless endangerment.

Fri, 08/10/2012 - 23:24 | 2696269 FRBNYrCROOKS
FRBNYrCROOKS's picture

Is ZH a GSE? 

Fri, 08/10/2012 - 23:40 | 2696293 FRBNYrCROOKS
FRBNYrCROOKS's picture

ZH seems to have inside info! Is ZH a tool of the FRBNY? It seems to be a "shock and awe" giving the pillaged taxpayer a platform to express their disgust? ZH might be a tool of "the man", counter-intellegence? This platform seems to be a perfect platform to collect dissenter profiles? Especially getting censored on Yahoo for saying the words: Jew, false flag, etc....anyone else feel me?

Sat, 08/11/2012 - 16:31 | 2697769 ZeroAvatar
ZeroAvatar's picture

Oh, yeah, I feel ya.  Never trust anyone.  Especially a website.  I enjoy it, but, like you, I have some reservations re: ZH.

Fri, 08/10/2012 - 23:48 | 2696315 GOLDTEETHSILVER...

Follow the yellow brick road...

Sat, 08/11/2012 - 09:11 | 2696839 petolo
petolo's picture

So long and thanks for the fish 

Fri, 08/10/2012 - 23:51 | 2696321 q99x2
q99x2's picture

Bulldoze the financial sector. Except for the GS building in NYC. There we can convert that into a cage free chicken factory to better serve the public.

Fri, 08/10/2012 - 23:55 | 2696324 passwordis
passwordis's picture

 I'm not sure what it is but there is something I don't like about Eric Sprott.. All the other PM pushers are starting to get on my nerves as well. Even guys like James Turk, who I've always liked is rubbing me the wrong way lately. 

  I guess they all seem like salesmen. Even if they believe in what they are selling.. it's just a little to much and I hate all of the price predictions they make and the excuses they make when they turn out to be way off.  If the game is rigged, how can they pretend to know what the price will be next month or in six months?


Sat, 08/11/2012 - 00:44 | 2696378 shovelhead
shovelhead's picture

I agree.

Sell all your metals and buy Groupon.

You'll thank me someday.

Sat, 08/11/2012 - 09:59 | 2696933 passwordis
passwordis's picture

  What an absolutely witty retort. We havent heard that one before on Zerohedge.

Sat, 08/11/2012 - 01:08 | 2696425 TN Jed
TN Jed's picture

How are fundamentals or 100 years of Fed dominance the fault of a metal salesman?  Maybe adjust your expectations and stop projecting your frustrations on the few truthtellers out there.  This is a long time coming and relatively speaking, most of us just got here.  You'll be rewarded as long as you don't lose the plot.

Sat, 08/11/2012 - 09:56 | 2696923 passwordis
passwordis's picture

Maybe adjust your expectations and stop projecting your frustrations on the few truthtellers out there.


Hodyano?  You're like Sigmund Freud smart. Aint ya? 

Sat, 08/11/2012 - 01:46 | 2696479 slewie the pi-rat
slewie the pi-rat's picture

hi eric & etienne

way to nail it, guys


Sat, 08/11/2012 - 03:45 | 2696565 Monk
Monk's picture

There is no solution to a problem that ultimately involves over a quadrillion dollars in unregulated derivatives.


Sat, 08/11/2012 - 06:15 | 2696630 silverdragon
silverdragon's picture

Starve the beast, buy Silver F*ck TPTB.

Sat, 08/11/2012 - 07:53 | 2696691 Heiman Van Rock...
Heiman Van Rockerchild's picture

The Protocols of Zion

The basic premise of the protocols is that the end justifies the means.
 Here is a one page summary…
Goyim(non jews) are mentally inferior to Jews and can’t run their nations properly.  For their sake and ours, we need to abolish their governments and replace them with a single government.  This will take a long time and involve much bloodshed, but it’s for a good cause.  Here’s what we’ll need to do:

    Place our agents and helpers everywhere
    Take control of the media and use it in propaganda for our plans
    Start fights between different races, classes and religions
    Use bribery, threats and blackmail to get our way
    Use Freemasonic Lodges to attract potential public officials
    Appeal to successful people’s egos
    Appoint puppet leaders who can be controlled by blackmail
    Replace royal rule with socialist rule, then communism, then despotism
    Abolish all rights and freedoms, except the right of force by us
    Sacrifice people (including Jews sometimes) when necessary
    Eliminate religion; replace it with science and materialism
    Control the education system to spread deception and destroy intellect
    Rewrite history to our benefit
    Create entertaining distractions
    Corrupt minds with filth and perversion
    Encourage people to spy on one another
    Keep the masses in poverty and perpetual labor
    Take possession of all wealth, property and (especially) gold
    Use gold to manipulate the markets, cause depressions etc.
    Introduce a progressive tax on wealth
    Replace sound investment with speculation
    Make long-term interest-bearing loans to governments
    Give bad advice to governments and everyone else

Eventually the Goyim will be so angry with their governments (because we’ll blame them for the resulting mess) that they’ll gladly have us take over.  We will then appoint a descendant of David to be King of the World, and the remaining Goyim will bow down and sing his praises.  Everyone will live in peace and obedient order under his glorious rule.

Sat, 08/11/2012 - 08:18 | 2696732 Hannibal
Hannibal's picture

Lets face it, we have all been had,.. big time.

Enjoy your life and don't participate in anything evil.


Sat, 08/11/2012 - 09:14 | 2696845 silverdragon
silverdragon's picture

Buy that Physical Silver don't let the trolls convince you otherwise.

Sat, 08/11/2012 - 09:50 | 2696911 grid-b-gone
grid-b-gone's picture

If it is true that " productive investments such as education" are one of the few areas where public spending increases GDP, why filter that money through banks before it gets to universities and colleges?

Instead of giving money to banks at 0% and letting them lend it at 7.9% (after the government takes their 4% origination fee up front), and then having five newly-created entities administer each loan for 10 years after graduation (14-15 yrs total), why not just lend that printed money directly to students at 0%, giving them a better chance to pay it back?

Obviously, it's because middle men contribute much more generously than students.

Sat, 08/11/2012 - 10:12 | 2696968 khakuda
khakuda's picture

What he misses is that sure, the Treasury plans on extending duration of the debt. That would be smart and should have been done already. But, if the Fed is the one buying the long term debt, they haven't extended crap.

It's like a festval of idiots.

Sat, 08/11/2012 - 10:12 | 2696969 khakuda
khakuda's picture

What he misses is that sure, the Treasury plans on extending duration of the debt. That would be smart and should have been done already. But, if the Fed is the one buying the long term debt, they haven't extended crap.

It's like a festval of idiots.

Sat, 08/11/2012 - 11:12 | 2697184 yogibear
yogibear's picture

As long as deficits don't matter they will keep going higher. In this environment math doesn't matter. It's lying and perception. 

Fitch and Moodys goes along with rating junk as AAA. 

At some point the math will matter.


Sat, 08/11/2012 - 11:29 | 2697250 Robot Traders Mom
Robot Traders Mom's picture

I don't want to jack a thread so I'm posting this the next day, but I am shamelessly plugging my news conglom to my fellow ZH'ers. It has been a success so far and has brought a lot of people in to see more of the stories we miss from most sites outside of Zerohedge. Thanks, please don't keep us a secret!


Sat, 08/11/2012 - 15:56 | 2697715 cosmictrainwreck
cosmictrainwreck's picture

THANKS, Mom......yours is a face we can trust, fer shure

Sat, 08/11/2012 - 15:03 | 2697641 Silver Bug
Silver Bug's picture

Once again. Spot on Mr Sprott. Spot on.

Sat, 08/11/2012 - 15:09 | 2697653 gnomon
gnomon's picture

I knew most of you Ron Paul acolytes were Obummer has-beens!  I smell fear in the air this morning from you unrepentant has-beens, fear that maybe somebody with a little character may have become part of the equation for the future.  

If you vote for Obummer, you are voting for the sleaziest, most dishonest, most lawless, most dangerous SOB that has ever occupied the White House, (and that is saying a lot). 

I don't give a damn that neither Obummer or Romney can do much about the train wreck that is coming.  I just want the team with more character at the helm when the train wreck does occur.

Character matters!!!!!!!

(And if you want the Apocalypse Now, go shoot your own family and leave mine out of the picture!).

Sat, 08/11/2012 - 17:36 | 2697868 suckerfishzilla
suckerfishzilla's picture

"We need to muddle through a painful but necessary deleveraging" The whole see-saw is going over the cliff instead looks like to me.

Sat, 08/11/2012 - 20:34 | 2698036 grekko
grekko's picture

Sprott is no dummy.  He knows that with a fiat currency, hyperinflation and death of the fiat is the historical reality.  He hasn't come right out and said it in this article, but he has written about it before.  In this article he is just analyzing the current trend of financial repression and stateing what the pols are going to keep on doing.  Let's face it, he's right.  If the pols actually try to fix the problem, they get voted out of office and the next welfare crew reinstates what the last guys threw out.  So, for us, it's death by 1000 cuts, followed by more bandaids to keep the system going, followed wash, rinse, repeat.   The big reset is comiing, and it scares the hell out of me.  As needed as it is, it will be very violent when welfare checks and SS checks stop coming.  It won't be any better for us working stiffs either as our employers will probably crash as well.

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