James Turk on Gold, Financial Crisis

Investors across the world now seem to be taking refuge in US government treasuries. Is that a safe thing to do?

No, for several reasons. First, interest rates on long-term paper in the US are starting to rise, so the price of government T-notes and T-bonds will likely fall from here. More worrying though is the risk of a US default.

The US government owes over $110 trillion, when aggregating all of its commitments. It is very over-indebted, and the price of default insurance is rising because the market perceives a growing risk of default.

Also, it is likely the US government will need to borrow $2.5 trillion this year because its revenues will decline as the economy weakens and it's spending rises as a result of the weakening economy, which brings up another worrying point. The Federal Reserve will need to monetise much of this debt, which will further debase the dollar and cause more inflation.

The only solution the US government seems to have for all the financial troubles is borrowing more and throwing them at the problems. It also wants its citizens to borrow more...

It is not going to work. Too much debt is the problem. We had the boom, and now we are getting the inevitable bust. Because debt is the problem, it is impossible for more debt to also be the solution.

The US government is terribly misguided. Fortunately, people know better. They have therefore cut back on spending and increased savings in order to help prepare for the tough times the US - and indeed, much of the world - is facing in the months ahead.

On the Gold Standard:

You seem to be a great believer in the Gold Standard. What are the advantages of a currency system based on the Gold Standard?

Gold is indeed the standard. It always has been and always will be. It is the numeraire by which all goods and services are measured because gold is money. The advantage of the classical gold standard is that it provides an external discipline on the creation of currency.

If too much currency is created by bank lending and the government printing press, the economy heats up, and the currency becomes overvalued. So gold leaves the country for other countries and other currencies where it can purchase more.

The classical gold standard provides a very natural mechanism that controls the expansion of credit, and therefore the value of currencies. The big imbalances today in world trade occur simply because there is no mechanism to bring order and balance to world trade.

The huge sovereign wealth funds amassed today by many countries could never have happened under the classical gold standard.