William Pesak: '08 Never Went Away

Taking as his cue Ben Bernanke's puzzlement at gold's price rise, Pesak says that gold is rising because the end-game of Keynesianism seems at hand.

Greece’s unraveling was a sobering reality check. It wasn’t that a fiscally irresponsible economy smaller than Iran’s was stumbling. It was how, as in the case of Iceland before it, Greece was cast in the role of canary in the financial coalmine. European banking shares suggest a Greek debt default may be just a matter of time....

It was suddenly clear that the contagion that emanated from the U.S. in 2008 had never really gone away. Greece’s troubles cast a huge shadow over far more important economies, like Spain’s. The idea that the 10th biggest economy, one bigger than Canada’s, might someday renege on debt put an end to hopes for a smooth 2010.

Perhaps the best explanation of these all-too-tangible risks comes from Anthony Crescenzi, a strategist at Pacific Investment Management Co., the world’s largest bond-fund manager. The question is this: As the U.S. is aggressively backing its financial system, who is backing the U.S.?

Thinking back to the darkest days of 2008, few will quibble with government efforts to stave off Armageddon. The promise was that if investors tolerated a surge in debt issuance, capitalism and prosperity would be saved. As fear is returning to the global economy, the worry is that industrialized nations are out of ammunition....

Have nations reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster growth? We’ve known for years that the Group of Seven nations were losing their ability to guide markets. Now, they’re losing hope of shielding economies from them.

'08 was a real watershed, as rules that seemed to work fell apart. Some may remember the joy on Wall Street when the TARP was unveiled. That hope carried the financials through to December, but they took a pummelling in February because Tim Geithner's stress-test proposal for further aid was too vague. The financials didn't sustainably recover until mark-to-market was suspended in early April.

Another rule - that governments have effectively unlimited capacity to cushion any economic shock with only temporarily bad effects - is eroding too. Should the crisis of '10 turn into a disaster in '11, we'll see governments being humbled in a way they haven't been since the 1930s. This time, without any influence from the 'barbarous relic'.