Monday, August 1, 2011

OK, We Have A Debt-Limit Deal. Now What?

The whole world was expecting gold and silver to get hammered today.  First thing this morning  I actually covered the bullion hedge we had put on last week because I thought that the market had already priced in a debt-deal metals hit.  Of course, the bullion banks tried to hammer the metals the second they opened up yesterday in the very thin Sunday afternoon globex electronic market.  Looks like their plan backfired...

So now the Government basically has a blank check to spend another $2.4 trillion in excess of the revenues the Government takes in over the next 17 months.  I just LOVE that fact the terms of the deal include extending the debt-limit term until AFTER the 2012 election and NONE of the so-called "spending cuts" kick-in until 2013.  In fact, most of the "cuts" are back-end loaded, meaning the $917 billion of the hard-coded spending cuts happen over a 10-year term and another supposed $1.5 trillion cuts - which aren't even mandatory at this point - will be explored by some b.s. Congressional committee. 

This whole situation is so absurd that all you can do is laugh your ass at off how ridiculous our system has become.  We have supposedly well-educated men acting like complete juvenile morons.  $917 billion in spending "cuts" against a budget that is running at close to a $2 trillion deficit annually now?  Is this some kind of joke? 

Let's make one thing clear:  the revenue projections by all these economic and accounting Einsteins in DC make the assumption that economy will not go into recession and will actually grow.  I would argue that we never truly came out of a recession.  That notwithstanding, the economy is getting hit hard right now and there's no way in hell that the revenue assumptions underlying the genius math by our Government will come even close to what is being projected.  This means even bigger deficits going forward.  And how many of you out there actually believe that the Government will ever truly cut spending?

The even bigger problem in my mind is, "who is going to lend this extra $2.4 trillion to the Government?"  Has anyone in Congress - or has Obama - even asked this question?  Seriously.  We know that some our largest lenders, like the Chinese, are starting to be openly critical of the U.S. fiscal policy and have already started to reduce their Treasury holdings and purchases.  I wouldn't touch a Treasury bond anymore than I would invest in a Goldman Sachs mortgage-backed deal or a JP Morgan-underwritten municipal bond.  So where is the $2.4 trillion needed to finance the additional Treasury issuance going to come from?  (Hint:  money falling from helicopters).

The Truth of the matter is that the only way to try and solve our fiscal and economic problems is to take a chain-saw to the entire Government, including - and especially - defense spending, social security, medicare and welfare.  This country has been living far too long on borrowed wealth and broken promises and the day of reckoning is getting closer.  Nearly everyone except the truly wealthy (those wealthy enough to own their own Congressman or Senator) are going to have to get used to a substantially lower standard of living.  It's going to happen whether we want it to or not.  Sure, the Government can attempt to raise revenues by raising taxes across the board, but the wealthy elite will find more ways to dodge that bullet and raising taxes on a shrinking labor force will only serve to further depress the economy, thereby causing an even further decline in revenues..

If our policy leaders really want to fix this mess, they have to start first with a massive devaluation of the dollar, which will enable the Government and the Federal Reserve to engineer a balance sheet "do over."  That will also stimulate the re-building of our industrial base - by making U.S. produced goods price-competitive globally - and incentivize real capital formation - by creating substantially higher short term interest rates thereby attracting real investment capital.

In the meantime, and given that the solution outlined above will never occur, anyone who wants to cushion the blow from the eventual collapse and hyperinflation that is coming - sooner or later - should continue accumulating physical gold and silver - not ETFs - and mining stocks.  The physical metal preserves what you got and the mining stocks will give you a shot at outperforming inflation.


  1. Dave, Interested to know if you buy into my line of thinking on this:

    One thing I'm not too worried about is getting the debt financed. As long as we run these massive trade deficits those dollars have to go somewhere and they'll eventually end up back in Treasuries. Even if the Chinese do something smart and use those trade deficit dollars to buy gold, mining companies, etc., that just means someone else will have those dollars to invest. I don't think there's another market big enough to soak up those dollars.

    So I agree the debt will be financed with fresh money, but most of those dollars will be created to finance the trade deficit, then recycled back into Treasuries. Same problem at the end - hyperinflation.

  2. Dave: we all should know that the projected budgets are full of, err, erroneous assumptions even those disclosed in long documents. Give kudos to CBO in that on the first page of its January 2011 release of 10 year budget -which showed huge deficits even with huge tax revenue increases--the CBO said unless policy assumptions are changed deficits would be much higher--but I doubt it was widely read in DC, nor did they care to read something like that.

    That report assumed high GDP growth and already we are missing by a mile (and you know how compounding, or lack thereof affects future numbers).

    also in that report, tax increases were front-loaded and spending cuts were not considered.

    And when will they stop fluffing up savings to be counted as 10 year savings when in same breath they talk about debt ceiling increase as one year (or now 16 months).

    Lets see--adding 2.5 trillion in debt while saving maybe 3 trillion over 10 years back end loaded.

    This all makes it easy for us to hold gold and silver and bet against the US

  3. (Dave)

    To an extent those dollars will flow back into Treasuries, but at some point the Chinese will stop accepting dollars altogether. They are already trading with Russia in rubles, with many Asian coutries in local currencies and now with Iran - one of China's largest oil suppliers - in yuan and rials.

  4. (Dave)

    Also, the trade deficit we're running in dollars isn't even close to being large enough to cover the deficits and Treasury issuance.

  5. Agree if China stops taking dollars the game is over! Good point about the trade deficit being smaller than the deficit...however, I think foreign holders "only" own about 1/3 of the total debt so a large amount is already being financed internally with a lot of help from the Fed. Anyhow, I don't know where the endpoint is on getting the debt financed, but they'll probably just keep kicking the can for a few more years until the whole thing implodes.

  6. Gold Coins Selling Out in Lisbon on Big Bets

  7. How does creating more debt solve the debt problem?

    Dont worry, exponential compounding interest will take its effect within 12 months.

    $75 silver by New years day?

  8. Purewater said:
    "those dollars have to go somewhere and they'll eventually end up back in Treasuries."

    What if those dollars end up buying gold and silver?

  9. Generally I agree with you, but taking a chainsaw to Soc. Security, and to Medicare to some degree, is theft. People have paid for Soc. Security with high taxes. We may dislike the whole idea of national insurance, but that doesn't give us the right to make off with people's contributions.