The Political Dynamic in Italy Could be Good for Gold
Italy’sdebt to GDP ratio is amongst the highest in the world. As the newgovernment in Italy seeks to stimulate growth through increased borrowing,gold’s attractiveness as an asset which is not replicable and is no one’sliability will become more apparent.
Italiansrecently elected “protest parties” M5S and La Lega, largely due to economichardship in the country. Since the 2008 financial crisis, unemploymenthas risen while total GDP and per capita incomes have stagnated.
Totaldebt to GDP has increased in Italy despite the fact that the government hasbeen running a primary budget surplus for the past seven years as governmentexpenditures have declined.
NewItalian prime minister Giuseppe Conte stated that the way for Italy to reduceits debt is through “growth and not austerity.” Mr. Conte’s statement implies that Italy will likely seek to sparkgrowth by reducing taxes and increasing government spending. In fact, twopolicies floated by Italian government coalition members are a flat tax anduniversal income.
Ifthe Italian government embarks on such policy measures and debt grows fasterthan GDP, yields on Italian debt are likely to rise as lenders demand a higherreturn for lending to a more indebted counterparty. If rates rise to thedegree that future borrowing is imperiled, and the new government faces a riskthat it won’t be able to implement its plan, it faces three choices:
1. Give up on itsplan.
2. Give up on theeuro (repudiate its debt).
3. Rely on the ECB tokeep interest rates on its debt low by buying bonds with newly created money.
TheItalian government is in a bind as it seeks to grow while having to endure theburden of a $2.6 trillion debt load. Italy’s bind might become Europe’sas rising Italian bond yields force the European government to choose betweenprinting money or allowing Italy to repudiate its debt and leave the commoncurrency.
Italy’sdebt problem is a microcosm of an over-indebted world. If (when) otherworld economies start to slow, similar choices to Italy’s will have to bemade. Either print money to buy bonds and keep rates low, or default ondebt. In either scenario, gold will regain its shine as the asset whichcannot be replicated at will and which carries no risk of counterpartydefault.
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By Christopher ManciniContributing tokitco.com
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