What Ireland's Bailout Means for Commodities

Includes: CRB, GLD, SLV
by: Kevin McElroy

Ireland will never be able to afford to pay back the debt it owes. Its debt problems are but a microcosm of much of the rest of the western world. What is playing out in Ireland today will one day soon play out here across the pond in the United States.

So we should pay close attention, because for reasons I will reveal below, the scenario is hugely bullish for commodities of nearly every stripe.

To sum up Ireland’s problems, it recently received a bailout from its chums in the European Union so that the country would avoid default on the many and sundry debt obligations already under its belt. The recent bailout adds another $115 billion to the already $867 billion they owe, bringing the grand total to $982 billion.

Here in the land of $13 trillion debt loads, anything without a T in front of it starts to sound pretty insignificant. But Ireland’s Gross Domestic Product rings in at a smidge above $200 billion per annum. Which means that they would need to capture in taxes the entirety of all production for five straight years in order to pay back their debt. I don’t have to tell you that even the most progressively taxed nations struggle to capture even half of GDP on a consistent basis.

So even if Ireland is capable of matching Denmark’s 49%-50% taxed-share of GDP, it would take ten years for Ireland to pay back its debt.

The problem, of course, is that most of Ireland’s debt obligations come due in the three to seven year range. These problems are compounded by Ireland’s own admission that it will continue to run deficits in the coming years, which will add to its debt load.

If that wasn’t enough, the EU announced that any further debt problems in Ireland will likely result in default for privately held Irish bonds. So, outright default is not just a phrase being whispered in fringe circles. It’s a policy option for central bankers in Europe.

In response to this bailout news, on Friday, Irish 10-year bonds rose to a record high 9.2%.

I like to think of these European debt problems as a look into our own future here in the United States. I think we can reasonably expect the word "default" to sneak into the vocabulary of Treasury bond investors. Our debt load is fast approaching levels seen in Ireland. We have no plans to reduce our deficit.

In fact, the White House deficit reduction commission recently announced plans what would actually increase our deficit. And unlike Ireland, we don’t have a group of member states much larger than us that will guarantee our debts. The buck stops with us. Colorado can’t bailout California. North Dakota can’t bailout New York.

And right now, 10-year Treasuries are yielding record lows. That can’t last forever. It won’t. I think we’ll see 9% yields (and higher) on our 10-year debt sometime in the next few years.

In the meantime, buying commodities is somewhat of a no-brainer. As long as interest rates are lagging the real price of holding dollars, gold and silver will remain attractive for protecting capital.

And with euro weakness bolstering the dollar in the short-term, there is downward pressure on commodities. Use this bad news from Europe as an opportunity to use your relatively strong dollars to buy physical gold and silver as well as relevant securities.

Disclosure: Author long gold and silver