The debt crisis in Ireland is easing a bit at week’s end. Irish debt prices rose for the first time in 14 days Friday, sending yields on the two-year note down 81 basis points. The situation stabilized after Britain and four other European nations, including France and Germany, issued a joint statement promising to stand behind all of Ireland's debts.
Ahead of a looming budget deadline, the Irish government is working to create a plan to “save 15 billion euros ($20.5 billion) in savings,” Bloomberg reports. A survey conducted by Bloomberg, before this joint statement, shows investors have serious debts that Ireland can avoid default. 51% of respondents in the survey say “they regard a default as likely, compared with 42 percent who say it is unlikely. The ranks of those anticipating an Irish default have tripled since a poll in June,” according to Bloomberg.
The EU and IMF “are going to come to their rescue,” says Michael Pento, senior economist with Euro Pacific Capital. “But, can they bail out Europe, Japan and the U.S.?"
That's the rub, says Pento. The sovereign debt crisis doesn’t end with Ireland or Europe’s other 'PIIGS' - eventually there won't be enough money to bailout out the big boys. As Minyanville's Todd Harrison is fond of saying, "who will rescue the lifeguards?"
U.S., Japan Next In Line?
Japan will likely be next to suffer a bond crisis, Pento tells Aaron in the accompanying clip. “Their savings rate has plummeted from 15% to 2%. Very soon they’re going to have to tap outside sources other than the Japanese to finance their debt," Pento explains. "That’s when interest rates soar and that’s when they become insolvent.”
A close second behind Japan in the race to a debt crisis is the U.S., Pento concludes. "We have negative real interest rates, inflation that is growing, debt that is soaring, and a dollar that is chronically weak." That equation adds up to U.S. debt situation that is "untenable."
Still, investors who have made similar dire predictions over the last two-plus decades have been burnt shorting the government debt of Japan and the U.S., as Aaron points out and Pento concedes. “I’ve been calling for a bond bubble for about a year. And, I’ve been wrong,” he says. “It just means when the bubble bursts, it will be a catastrophe."
Until that "catastrophe" Pento’s advice is simple: avoid sovereign debt and keep buying gold. As long as interest rates are artificially low, Pento says, gold prices will continue to hit new records.