It is increasingly clear that the arrangements at the center of the world’s monetary system are fraying. On Monday Standard & Poor’s cut its outlook on the credit rating of the United States to negative indicating there is a very real possibility for a downgrade. By Tuesday gold prices topped $1,500 an ounce. Also last Friday China admitted inflation was picking-up steam, as it announced an official annual uptick of 5.4 percent that almost surely understates the true amount. On the European front Moody’s downgraded Ireland’s credit rating last Friday. That action followed earlier comments from Germany’s finance minister that Greece may default on its debts. All of this came despite the world being in the midst of an economic recovery.
There has been a lot of worrying in financial markets over the past few months. In fact quite a long list of looming disasters has been assembled. Will destabilization in the Middle East, especially if unrest reaches Saudi Arabia, send oil prices skyrocketing and the global economy spiraling? Could this wave of unrest spread to China? Will the earthquake in Japan trigger a financial crisis in that country, as more debt is added to an already formidable mountain of debt? Is Bill Gross signaling a debt crisis in the U.S. is eminent, as he pilots the world’s largest bond fund out of U.S. Treasuries? Irrespective of the U.S. Treasury market is a wave of defaults on its way in the municipal bond market? And what about real estate—are we now on our way to a second bottom with prices headed for a 20 percent or greater decline?