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Get Ready for the Next Financial Crisis …

… says Daniel Arbess, CEO of Xeriorn Investments, in a recent Wall Street Journal op-ed.  The essence of his article is that debt crises take place when markets underwrite and buy too much bad debt and that the fixes for the 2008 World Financial Crisis (WFC) was the piling on of still more debt.

The problem is compounded because the bulk of $21.5 trillion of Treasury debt has to be refinanced in the next eight years in a rising interest rate environment. This will add billions to taxpayers’ cost of carrying the debt.

Arbess writes, “The 2008 crisis was clearly visible before it struck. So is the next one.” “… America’s broken political system failed miserably to reduce debt.  Instead they substantially increased, nationalized and redistributed it — from household mortgages to sovereign, corporate and consumer balance sheets.”  In doing so, the Fed bought $4 trillion in debt with money created out of thin air.

Since the WFC, “total global debt (sovereign, corporate and household) has spiked nearly 75%.  This includes a doubling of sovereign debt, from $29 trillion to $60 trillion.  Total corporate debt increased by 78% over the same decade to $66 trillion.”

In the nonfinancial market, “bonds outstanding are up 172% from $4.3 trillion to $11.7 trillion” and “40% of U.S. companies are rated one notch above ‘junk’ or lower.”

In addition to all this outstanding debt, the US has unfunded liabilities in excess of $100 trillion, much of which is coming due as 10,000 baby boomers turn 65 daily.

Arbess concluded with “When credit turns, stocks have never been far behind.  The longest-ever bull market may be closer to ending than we think — and that could be the least of our problems.”

In 2008, the WFC ignited a firestorm of gold and silver buying and resulted in gold hitting $1900 and silver $50 in 2011, one of the strongest precious metals bull markets ever.  When the malinvestments (mistakes) made during this debt binge are exposed, I see prices breaching the 2011’s highs.

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