Seeking Alpha

These 3 Trends Lead To Economic Disaster

Includes: GLD, SLV
by: Shaun Connell
Shaun Connell
Long-term horizon, bonds, dividend growth investing, tech

I love gold. I buy more every month and have since I started investing. Same with silver. I have no intentions on ever stopping until retirement. Of course, some people think this must mean I'm a "gold bug."

Gold is an alternative currency that sometimes trades like a typical commodity. It suffers from slight identity crises because the governments of the world have waged war on it as a type of money. They've passed legal tender laws, tax it like a collectible and not capital gains and other attacks.

But unfortunately for the leaders of the world economic system, they can't tell the principles of economics to scram, so gold keeps marching on.

Right now, there are three economic trends that show how insane the world economic system is, and give us signs of incredible trouble ahead. It's not just possible -- it's inevitable.

1. Debt, Debt, and More Debt

One of the fundamental aspects of money is that it is to be a type of extinguisher of all debts. Money that doesn't extinguish debts misses the point, and can only exist by nature of government coercion -- a type of, essentially, theft on a macro-economic level.

If you go to the store and buy some food, you create a debt that is instantly paid off (cash) or transferred (credit cards, good checks, etc.).

Right now, we have paper money without any correlated physical asset to back it, which is essentially a huge transfer of debts with no real extinguisher of said debts. Ever. You can't redeem money for anything. It's "backed" by the fluffy feelings (full faith and credit) of the Fed.

The consequences of this are severe. Balance sheets -- overall -- are naturally negative. Debt is created by nature of the system -- in fact, that's the point.

Because of the nature of the system, the people who end up paying the "debts" end up being people paying with inevitable consequence of artificial (fiat) debt-currency: inflation and capital destruction.

But that's not all. Inflation happens gradually, sure, but so does the growing debt. But the problem in our constantly manipulated economy is that the debt burden doesn't respond directly to the inflationary decrease of that burden.

In fact, every new dollar in debt still requires interest over time, even though the actual impact of that dollar is mitigated. Over time, this is an insane transfer of wealth -- as well as massive amounts of capital destruction. Eventually, this debt must be paid, and unfortunately, we won't be paying it with more debt notes.

Want proof of this? Just look at the marginal productivity of debt. In the 50s, every new dollar in debt created $3 for the GDP. Eventually, it fell to less than 1-to-1, meaning every dollar in debt creates less of an increase to the GDP. This is a horrifying trend, because it only ends one way -- a deflationary crash, or some sort of massive defaulting that creates a crash.

If all debts were suddenly 100x larger, the world economy wouldn't be equally increased -- it would only be partially increased. This is incredibly destructive, and that's the only course our monetary system points. We don't have any extinguisher of debts other than recession/deflation. This won't end well.

2. Capital Destruction and Malinvestment

Our entire economic system is based on encouraging short-term consumption with long-term capital destruction. I've already written about how falling interest rates destroy capital.

At the same time, I've also talked about how the misunderstanding of pricing is the foundation of most of our economic woes.

The entire monetary system exists in a way to destroy capital while mis-allocating the capital that does exists. In China, you can see hilarious examples of this right down to hundreds of millions of poor people living in the same country that has empty cities. It doesn't make sense.

In America, you see a housing bubble, a popping real estate bubble, and now a bond bubble.

Bubble economics end with a bust. And if we remember the above trends, we know that our ability to "fight off" bubbles with more bubbles gets less and less likely.

3. Consumerism as a Religion

Consumerism has become our national religion, glorified in some economic circles as the motor of the economy as opposed to increased incomes, savings, and long-term investments.

We have people who expect to live 4+ years in college and want the government to pay for it, regardless of the economics. We have 1-out-of-7 people on food stamps. We have people expecting a retirement in their 60s even while life expectancy is exploding. We have people expecting the government to pay for their medical bills. Every major "need" is becoming increasingly regulated and subsidized, leading to huge problems and massive prices and debts.

During all of this time, we also are having a productivity crisis. Many people are going to college but aren't learning economically productive skills, leaving them with big debt and little recourse. There will be hell to pay.

This doesn't necessarily mean that potential for productivity isn't there -- just that our labor market (along with most of the economy) is structurally flawed because of malinvestment via manipulated pricing.

It's now to the point where economic consequences of economic choices are almost ignored, especially when it comes to education. When people spend tens of thousands of dollars acquiring a degree that isn't that productive, that's capital being taken away from something that could be productive for them -- even if it's something basic, like a down payment on a house.

This trend is only going to get worse as every new generation grows up expecting more as a "necessity" that should be paid with government or a credit card. It's not sustainable. The end result is catastrophe.

Why These Trends Say "Buy Gold"

I've written in the past that I don't believe hyperinflation is the scary thing we should worry about right now. It could be, but it's not right now. Hyperdeflation is. When you have a system based on leverage, the big fear is that at some point people won't pay -- kind of like what happened in the subprime mortgage crisis.

I've written about hyperinflation in America in the past, and I'll write more in the future. Suffice it to say that most of the hyperinflation arguments misunderstand the nature of our monetary structure, and often assume the quantity theory of money -- a theory that has been disproved so many times it's almost embarrassing.

Does this mean gold will crash? Not necessarily at all. In a hyperdeflation -- or hyperinflation -- scenario, gold will likely be remonetized for good. This means you'll want to own gold -- a lot of it. As cash dries up, the ones holding the most cash -- old-school gold bullion -- will be the winners. I do, of course, hope we can figure something out before this is all necessary. But I doubt we will.

And that's why I buy more gold and silver every month, and plan on doing that indefinitely. It's not about short-term profits -- it's about investing for security and inevitable profits that come with a huge price.

Hyperinflation, high inflation, hyperdeflation, high deflation -- regardless of what happens, it'll all be the result of a monetary crisis. They'll simply be the symptoms of what truly ails us, and the only antidote that we know of is gold. I can't imagine a stronger reason to keep buying gold going forward than this.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.I own physical gold and silver and buy regularly.