“I am an optimist,” Axel Merk wrote recently. “I’m no conspiracist. I just happen to think the road to hell is paved with good intentions. As a result, I own gold.”
“A government in debt does not have its interests aligned with those of investors,” Merk, president and CIO of Merk Funds, wrote on Wednesday. “As such, an investor interested in a gold-backed currency should create their personal gold standard should they desire one.”
Merk (left) argued that a government with too much debt can try to outgrow it by increasing GDP, thus shrinking the debt-to-GDP ratio; pay it off; restructure; or print more money.
The Eurozone’s austerity experiment is an attempt at the first option. The Eurozone has actually been fairly resilient, even considering weaker countries’ struggle, due to stronger countries’ safe-haven status, Merk wrote. Furthermore, he pointed out that money has been flowing from the core countries to the weaker ones since last August.
Merk described several scenarios where owning gold would be favorable.
Unlike the Eurozone, the United States has been more likely to print more money. Merk noted that in 2008, U.S. Treasuries were the “only asset class that appeared to do well,” but lately have been under pressure. “It begs the question whether the U.S. dollar is the last domino standing,” he said.
Rising interest and entitlement expenses make an impending crisis predictable, Merk wrote, but could be avoided since “comparatively minor changes to entitlements might make the programs sustainable.” Unfortunately, those changes are unlikely to happen due to political gridlock, and increased tax revenue could reduce the “sense of urgency” some people had to make those changes.
Merk said pressure from the bond market was the “only effective tool […] to get policymakers to make the necessary tough decisions.” Unfortunately, with much of our deficit financed by foreigners, if investors abandon bonds, the consequences for the dollar could be severe.