An explosion in the price of gold is the worst thing we can conceive. It means a growing loss of faith in the financial system is happening around our heads. Heads we have buried. There is an eerie sense upon the world today. But it is not a new one. For those of us who a few years back, saw the subprime mess about to descend upon us, the worst was that no one wanted to hear. We have been down this road before.

Why won’t people listen?

Way back then I became a subprime bore, telling and writing of the coming collapse. It made me no friends and nearly lost me some close ones. No one wanted to know. Today, again, to quote Ian Anderson, of Jethro Tull: “My words however are like silence, your deafness a shout.”

There is no penetrating the long black veil that has fallen on the city by Denial.

Save up to 50% on a year of Crikey

Choose what you pay, from $99.

Sign up now

There is no way warnings will get through.

Thousands on the internet discuss the next stage of the financial calamity with outrage leavened with ghoulish. They are the same souls who were screaming, or laughing, during the high-jinx days of subprime.

Months ago I began writing of gold’s coming explosion. Months ago I bellowed that a new currency-based financial crisis was upon us. As I had with absolute confidence predict subprime, as early as 2006, and had called the credit crisis in July 2007, I foolishly believed that next time people would listen. I take no pleasure being right about gold. Its march, ignored by most of the media until the past few days, is the ultimate canary in the coal mine. A barometer, or thermometer of the state of paper currencies and of terrible things to come. To us all. For while the problems might be centred in the US, there can be no decoupling from the world financial system. In the long run we are all in this together.

A few days ago I quoted the US Mortgage Brokers’ Association saying that 10% of US home carrying mortgages were delinquent. I stand corrected. Sort of.  If one includes the existing foreclosures we get to 14.4%.

Unemployment is jokingly placed at 10.2%. Even if that were true it would be bad enough. But all other indicators point to, consistently, 17% and 18%. And, as this column observed at the weekend, another 25% of US jobs can be exported. If they can be they will be. US unemployment will not recover outside a complete restructuring of the US and world economy.

And this is where we all come in.

More job losses mean more home foreclosures mean more bank failures mean more money printed to keep the zombie Too Big To Fail banks from doing just that.

Thus the currency is further diminished as it the nation and as the rest of the West follows the US. There is no place to hide.

As Zero Hedge reflected this morning: “The dollar in your pocket is now entirely backed only by worthless, rapidly devaluing and subsidised housing.”

Bill Bonner, at Daily Reckoning, wrote this morning:

“It’s a depression because of the nature of the work it has to do. It (it being the bear) has to clean up three decades’ worth of filthy balance sheets. It has to wipe away trillions in trashy consumer debt. It has to defuse trillions more of Wall Street’s debt bombs. It has to wash out billions … maybe trillions … worth of bad decisions — houses that are too big, too expensive, too grandiose for their buyers … shopping malls with far too much retail space for the new, thrifty customers … businesses geared up to produce goods and services for millions of people who can no longer afford them.

“When will the depression be over? When the work is done.

“But wait … the world’s governments piling up trash faster than the depression can haul it away. And here comes the next mega-crisis!”

And, under the title “Could sovereign debt be the new subprime?” Gillian Tett, deputy editor of the Financial Times yesterday cited a “solemn note” by Claudio Borio, head of research at the Bank for International Settlements.

The BIS has been ahead of the curve of late as it prepares to take over the US Fed’s role and become the master of the Western financial system and is not given to cheer leading the profound folly of Too Big To Fail banks. Borio warned that modern financial policymakers are “driving while just looking in the rear-view mirror”. This the exact expression I used last week, suggesting Western finance officials have focused so much on past risks that they fail to spot new dangers.

So policymakers, Borio warned, create distortions that pave the way for the next disaster. Just such an unintended consequence could now be festering in the banking sector, as its balance sheets are increasingly stuffed with government bonds.

Tett: “These days, there is a near-unanimous belief among Western regulators that one way to prevent a repeat of the 2007-08 crisis is to stop banks taking crazy risks with subprime mortgage bonds or complex instruments such as collateralised debt obligations (CDOs).”

Sovereign debt is also widely presumed to be ultra-safe; so safe that the yield on government bonds is known as the “risk-free rate”. Government debt has soared to levels not seen in peace time for centuries, if ever, in many countries, not least the US and UK. Fiscal deficits are swelling across the Western world and the temptation is a race to the bottom with nations — with the reserve currency in the fore — deliberately and consciously debasing their currencies by printing money and stoking inflation as the last gasp in a morally bankrupt policy designed to put of the day of reckoning. Naturally bonds are “risk free”. So were subprime loans. OK, there is a huge difference except in one profound matter. Nothing is risk free and sovereign debt is eminently risky.

Major industrialised countries will need to sell more than $US12,000 billion ($A13,000 billion) worth of government bonds this year and next to fund their fiscal hole. This is a rise of at least a third, or $US4000 billion, in just two years.

“So I, for one,” writes Tett, “fervently hope that those banks holding government bonds are being cautious enough to hedge themselves against any future crash in their price; so too, for those holding quasi-government instruments, such as agency bonds … for if they do, those ‘safe’ government bonds might start to look considerably less secure — not just to bankers, but to everybody.

“Actually, the banks are loading up on treasuries as a ‘sure bet’ of transfer of wealth from the taxpayer to plug the holes of the banks. Get money from the Fed at near zero interest rate and lend it to the government at anywhere from 2% to 4% depending on the maturity of the treasuries. This is the best ‘carry trade’ you can have as you don’t even have to cover currency fluctuations!”

And finally the Financial Times on Sunday wrote: “The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.”

The volume of activity in sovereign credit default swaps — which measure the cost to insure against bond defaults — linked to the US, UK and Japan has doubled in the past year because of concerns about their public finances.

CDS volumes for Italy, which has one of the highest debt burdens of the developed economies, are now the highest for an individual country, according to the Depository Trust & Clearing Corp.

In contrast, the outstanding CDS volume linked to emerging nations such as Russia, Brazil, Ukraine and Indonesia has been flat or fallen in the past 12 months as investors have become less interested in trading the risks of those countries …

And, on a slightly different note, a return to the theme of last week, Germany’s new finance minister Wolfgang Schauble, a political veteran who took over the German finance ministry after Angela Merkel began her second term as chancellor, echoed Chinese warnings about the growing threat of fresh global asset price bubbles, fuelled by low US interest rates and a weak dollar.

His comments highlight official concern in Europe that the risk of further financial market turbulence has been exacerbated by the exceptional steps taken by central banks and governments to combat the crisis.

Liu Mingkang, China’s banking regulator, criticised the US Federal Reserve for fuelling the “dollar carry-trade”, in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad.

Schauble said it would be “naive” to assume the next asset price bubble would take the same guise as the last.

He said: “More likely today is a scenario in which excess liquidity globally creates a new (sort of) asset market bubble.”

He added: “That low interest rate currencies such as the US dollar are increasingly being used as a basis for currency carry trades should give pause for thought. If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets.”

From subprime to sovereign in just three years.

Our media landscape is amongst the most concentrated in the democratic world. Big media businesses are marred by big media interests. If you want the full, untainted picture on important issues — our environment, corruption, political competence, our culture, our economy — Crikey is required reading.

I am a private person that takes online privacy very seriously but I wanted to contribute my words to this campaign as I genuinely believe that we will improve as a country if more people read publications such as Crikey.

Sydney, NSW

Join now and save up to 50%

Subscribe before June 30 and choose what you pay for a year of Crikey.

Save up to 50%