Spiraling Debts, Hedge your bets !
The G20 meeting in Toronto, in late June 2010, has seen Timothy Geithner, US secretary of the treasury, criticize Europe for adopting a policy of spending restraint in face of ballooning deficits. Mr. Geithner is part of an administration which, similarly to the prior Bush administration, seem to believe that liabilities can be created at infinitum without noticeable consequences.
The USA was once the largest creditor nation in the world but, over the last 5 decades, it has become the world’s largest debtor nation. It would be accurate to claim that much of the USA's recent prosperity has been paid for by borrowed money. The administration's expectation seems to be that this borrowing can continue and be expanded indefinitely.
Fiscally the USA is not that far removed from Greece, both in terms if deficits (9.8% vs 11:8 %) and official total debts (98% vs 113%). See Fiscal comparison: USA vs. Greece
Yet the above debt numbers grossly understate the true debt as they exclude government unfunded liabilities (consisting primarily of pensions and medical obligations) , bailout TARP funds, and the 5 trillion Fannie and Freddie Mae subprime guarantees which are all kept off the official debt balance sheet.
Furthermore US deficits and total debt are set increase at a faster and faster rate as the US baby boomers reach the 65 year retirement age and turn from workers (paying into the system) into retirees (taking money from the system). Unlike Singapore’s self funding CPF system the USA unfunded liabilities are truly unfunded and will require many times more debt to finance than the current 13 trillion debt.
It already seems a certainty that the USA will never be able to pay off its debt, nor is there any political will to do so. Even using conservative estimates of the US unfunded liabilities and bailout returns the average public debt per US worker is now well over 400,000 USD (see our article earlier this year White House to paint grim fiscal picture).
Eventually creditor countries and investors will become reluctant to lend money to the USA at current low interest rates. Sooner or later a larger risk premium will be demanded. Given the spiraling debt, the increasing demands to pay out unfunded liabilities and the unavoidable increase in debt servicing costs we are poised for a “perfect storm currency crisis" sometime in this decade.
Like most similar cases throughout history the USA will likely pay it's debt by issuing more debts as it is the politically easiest path. Over the long term these policies will continue to undermine the US Dollar and everybody who owns it.
With the USD being a fundamentally flawed currency, many European countries having dreadful fiscal situations and the Japanese yen facing massive public debts (200%+) and a rapidly aging population it is, in our view, a certainty that wealth will flow into precious metals.
Used as a store of value and money for over 2500 years both physical Gold and Silver have been the traditional store of value with the unique advantage of being a finite resource which cannot be generated at will out of thin air. It is the currency of last resort that is universally accepted and it’s buying power per pure ounce has endured throughout the ages.
Physical Gold and Silver might not generate interest payments as a bonds do, however the real question is whether such interest payments can make up for the loss of buying power that fiat currencies experience, and will experience in the coming decade.
Ultimately it all boils down to confidence. Today the US dollar is backed only by the “Full Faith and Credit of the United States”*, as confidence is lost precious metals will soar as they are the most obvious liquid alternative to fiat currency,
Hedge your bets with precious metals !
By G. Gregersen
*Note: It might come as a surprise, but until 1968 the US treasury actually issued US Dollars which were backed and fully redeemable for Silver. These 1 dollar notes were also called Silver Certificates. When the value of Silver started to exceed the nominal paper value in the mid-sixties the redemption to silver was stopped / defaulted upon. Over the subsequent 40 years the huge governmental silver reserves were sold off, mostly to industry which forever consumed the silver. Since 1968 all US currency is now issued by the Federal reserve and is backed only by the “Full Faith and Credit of the United States”
<Sample Silver Certificate - series 1957>
Disclaimer: The author owns physical silver and gold and will be accumulating more silver as a long term investment. It is the author’s belief that a systematic decline of confidence in the USD and US bonds will cause large amounts of funds to flow into traditional forms of money which cannot be arbitrarily printed (physical gold and silver bullion as opposed to paper derivatives). The author is not a registered investment advisor or stock broker / dealer. Nothing herein constitutes investment, legal, accounting or tax advice and any communications are for informational and entertainment purposes only.