The Political Dynamic in Italy Could be Good for Gold
The Political Dynamic in Italy Could be Good for Gold Christopher Mancini Friday June 22, 2018 14:12
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Italyâs debt to GDP ratio is amongst the highest in the world. As the new government in Italy seeks to stimulate growth through increased borrowing, goldâs attractiveness as an asset which is not replicable and is no oneâs liability will become more apparent.
Italians recently elected âprotest partiesâ M5S and La Lega, largely due to economic hardship in the country. Since the 2008 financial crisis, unemployment has risen while total GDP and per capita incomes have stagnated.
Total debt to GDP has increased in Italy despite the fact that the government has been running a primary budget surplus for the past seven years as government expenditures have declined.
New Italian prime minister Giuseppe Conte stated that the way for Italy to reduce its debt is through âgrowth and not austerity.â Mr. Conteâs statement implies that Italy will likely seek to spark growth by reducing taxes and increasing government spending. In fact, two policies floated by Italian government coalition members are a flat tax and universal income.
If the Italian government embarks on such policy measures and debt grows faster than GDP, yields on Italian debt are likely to rise as lenders demand a highe r return for lending to a more indebted counterparty. If rates rise to the degree that future borrowing is imperiled, and the new government faces a risk that it wonât be able to implement its plan, it faces three choices:
1. Give up on its plan.
2. Give up on the euro (repudiate its debt).
3. Rely on the ECB to keep interest rates on its debt low by buying bonds with newly created money.
The Italian government is in a bind as it seeks to grow while having to endure the burden of a $2.6 trillion debt load. Italyâs bind might become Europeâs as rising Italian bond yields force the European government to choose between printing money or allowing Italy to repudiate its debt and leave the common currency.
Italyâs debt problem is a microcosm of an over-indebted world. If (when) other world economies start to slow, similar choices to Italyâs will have to be made. Either print money to buy bonds and keep rates low, or de fault on debt. In either scenario, gold will regain its shine as the asset which cannot be replicated at will and which carries no risk of counterparty default.
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C ontributing to kitco.comFollow @KitcoNewsNOW CMancini@gabelli.com www.gabelli.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Me tals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.Source: Google News Italy | Netizen 24 Italy