Government Bonds -- the New Junk? (That's the message Gold prices are telling us)

FROM GREECE TO CALIFORNIA TO JAPAN, markets are beginning to worry about what traditionally is deemed a risk-free asset: government debt securities. And that arguably lies behind the rise in the price of gold.

In a provocative analysis, Standard & Poor's finds that gold is reflecting investor skittishness. And those concerns aren't just the usual ones typically associated with demand for the precious metal -- inflation -- but also concerns about the other safe harbor in times of trouble, supposedly risk-free government securities.

The traditional worry about excessive government debt is that it can be inflated away by central-bank money printing. The Federal Reserve can always buy Treasury securities without limit, forestalling any chance of default by the U.S. government. That, however, would involve an expansion of the central bank's balance sheet and, inevitably, produce Weimar-style hyperinflation.

But, at the risk of invoking the most dangerous term in finance and economics, there's something different this time. The governments about whose debts the markets most fret now cannot resort to the printing press.

These are the PIIGS of Europe -- Portugal, Italy, Ireland and Spain -- and most particularly the Hellenic Republic. As part of the European Monetary Union, their adoption of the euro has precluded their past easy out of devaluation.

Now, by contrast, the PIIGS are forced to conform to the monetary orthodoxy of the European Central Bank. And the ECB is doing its best to maintain the tradition of the German Bundesbank under its French president, Jean-Claude Trichet.

Greece, the PIIG whose finances are most suspect, won't get any "special treatment," Trichet vowed Thursday. He made that statement as the cost to insure Greek government debt against default soared even as Athens announced a plan to cut its deficit by 10 billion euros, or roughly $14.5 billion.

The article does not forget the good old US of A when it states :

"Meantime, the other sovereign debtor whose situation evinces real concern is the State of California, which is the seventh- or eighth-largest economy in the world, depending upon whose statistics you cite. As such, it vastly overshadows in importance other dicey sovereign debtors, such as the PIIGs. And like members of the EMU, California can't devalue to reduce its real debt burden.

According to CMA, a unit of the CME Group (CME) that provide data on credit derivatives, California is ranked as No. 10 of the Top 10 default candidates among sovereign debtors, right behind Greece. No. 1 and 2 are Argentina and Venezuela, whose bonds should be rated M for mierda. (That's Spanish I didn't learn in school but on the streets of Washington Heights. If you took French, the comparable term is merde.)

S&P cut its ratings on California general-obligation debt to single-A-minus earlier this week reflecting the Golden State's severe budget deficit projected at $19.9 billion. Moody's already rates California GOs a notch lower, at Baa1, while Fitch Ratings has the bonds two grades lower, at triple-B."

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