Within the next 12 months, the US Treasury will have to refinance $2 trillion in short-term debt. Add to that an estimated $1.5 trillion in additional deficit spending. This amounts to a staggering $3.5 trillion of government bonds that will have to be sold all in just one year. That’s equal to 30% of our GDP.
It is commonly accepted that a government is in danger of default when their currency reserves are less than 100% of their short-term foreign debt. Alan Greenspan co-authored an academic paper along with Pablo Guidotti that came to this conclusion. It’s simple. If you can’t pay off your debts within one year you are a poor credit risk.
The problem is that we no longer finance our debts domestically. 44% of our debt is financed by foreign governments, central banks and investors. That means we owe foreign creditors a minimum of $880 billion in the next 12 months and that is far greater than our reserves.
Total domestic savings in the US run around $600 billion. If all of this were used to buy US Treasury debt we would still fall $3 trillion short. At some point, sooner than later, our creditors will come to the conclusion that gold is safer than US Treasuries whose value is diminishing slowly.
Knowing this, is there any way that the dollar and the bond market can hold up? I think not. Betting against the bond market and the dollar is easy. Buy gold and silver. Our creditors are. The physical market is on fire in the Far East, the Mid East and in Russia. Deals are being struck by the Chinese, the Indians and the Russians to consummate trade and to purchase oil in currencies other than the US dollar.
In this environment, one with no-way-out, anyone who seriously believes that the bull market in gold is over is not looking at the cold hard facts. The Fed must monetize, directly or indirectly via swaps, up to $3 trillion in the next 12 months. 2011 will be a volatile year but a very strong year for gold and silver.
It’s not just the Treasury bonds that are of concern. Porter Stansberry recently said, “Right now we have a situation where the muni bond market in the U.S. is crashing. Muni bonds are falling 2% or 3% every week. These bonds shouldn’t decline at all. People have long thought of the muni bond market as the safest place in the bond market for retirees’ money. Well, now it’s in freefall. Normally, if you took money out of the muni bond market, you’d put it in the Treasury bond market. That’s the only thing that’s even safer. But both markets now are in decline. People are selling both muni bonds and Treasury bonds at the same time. That’s a sign of a major problem in the fixed income markets. And, because the U.S. bond markets are the largest securities markets in the world; that means we’re in the midst of a major, major financial crisis. I don’t really think people realize it yet.”
“When I talk to people, when I talk to news commentators, when I do interviews, when I talk to investors, when I go to investment conferences, when I talk to very well-known hedge fund managers. . .all of these people have some idea that things are going wrong. Lots of them say they’re worried about being on the verge of a big crisis. I think we’re in one. So, I ask them, rhetorically, what they have to see in the markets before they realize the crisis is underway?”
“How high does the price of gold have to go? How far do Treasury bonds and muni bonds have to fall? How far does the dollar have to decline on a trade-weighted basis? How high does unemployment have to go? How big do the fiscal deficits have to grow? They don’t have any answers to those questions because all of the thresholds have been violated already. Two years ago, no one would’ve thought it possible for the muni bond market and the Treasury bond market to both fall as much as they have fallen in the last six weeks at the same time. That just didn’t happen ever before.”
“When you’re dealing with a bankrupt sovereign- like the U.S. government-you’re dealing with a very powerful wounded bear. You have to be very careful because you can’t know what the beast is going to do. You have to balance against both the risks of the ongoing inflation and the risks of a government reaction to the falling value of the dollar. If you put 50% of your portfolio in very short-term Treasury bonds, like one-year Treasury bonds, and the other 50% in gold, you’ve really set up a perfectly hedged position. You’ve gone to a very liquid position where you could hold on to what you’ve got safely. If the dollar falls, you’re protected. If the government acts to reduce the price of gold, you’re hedged. No matter what happens, you’ll have liquidity and there’s very little chance of losing purchasing power.”
In February of 2010. Congress passes legislation to increase the debt ceiling to $14.29 trillion. Try to visualize what that means. Picture a stack of $100 bills, one on top of each other, rising 9,721 miles straight up. Or, think of 1,767 mountains of $100 bills the size of Mount Everest resting one on top of another.
This cannot be solved by raising taxes. If the government taxes every American 100% of their entire yearly income we still couldn’t pay off our $14.29 trillion debt. The interest on the debt, which is compounding, costs US taxpayers $1.13 billion every day for a total of $413 billion last year.
Since we can’t balance the budget, this problem is growing and there can be only one resolution for this. The dollar will be sacrificed to inflation or hyperinflation. It could start in 2011.
Gary Gibson (Whiskey & Gunpowder) discusses this in more detail later in today’s daily.