$20 Trillion in Debt, Financial Repression, and Gold's Blast-off

Mon, Mar 7, 2016 - 4:27pm

Thoughts from our recent "On the Record" podcast with Jim Puplava, Chief Investment Strategist at PFS Group, which you can listen to in full at Financial Sense Newshour here or on iTunes here.

Why hasn't there been much discussion of the continually growing size of the US debt, which is quickly closing in on $20 trillion, by political candidates or the media? Is it simply being ignored?

Yes, it is being ignored for now and politicians will continue to remain out of touch with reality by making empty promises until they are forced to deal with the problem. One thing that is buying them time is interest rates. Even though government debt continues to climb, by using financial repression they are able to service it at cheaper rates. In 2008, the government spent $450 billion on interest expense on the debt, which was $10 trillion. Fast forward to where we are today (to the end of the government's fiscal year ending in 2015) and the interest expense on the national debt has fallen by $50 billion even though the national debt has gone up by $9 trillion. How does that happen? Because interest rates have fallen and are being kept at a very low level. To put things in perspective, for every 1% increase in interest rates, the interest expense goes up by $200 billion. If we were to normalize interest rates from 2% to 5%, which is more of the norm over the last four or five decades, the interest expense would be $1 trillion, or $600 billion more than what we are spending today. So as long as interest rates remain low and the economy is still growing, albeit slowly, politicians have time to wish this problem away. Once interest rates increase to normal levels, which may not happen for quite some time, or the economy goes back into recession, politicians will be forced to deal with this problem by enacting major entitlement reform, which is the last thing they want to do.

You've been a longtime proponent of dividend-paying stocks, especially during this current market cycle as the Fed lowered interest rates down to zero. Do you still think dividend-paying stocks are a good place to be?

The answer to this question—and how it relates to investment strategy—is closely related to what we just spoke about. Given the immense size of the national debt, it is very likely that interest rates are going to remain low for much longer than investors anticipate as the government implements financial repression. Financial repression is a way in which high debt levels are gradually inflated away while keeping interest rates artificially low for long periods of time. Not only have we done this in the past but Japan has had 0% interest rates for around two decades. So, from our vantage point, we think interest rates are going to remain low for years to come—maybe up to another decade if we use Japan as an example—and that high-quality dividend paying stocks should still be considered a core asset in one's overall investment portfolio.

Starting in the early 2000s, you argued quite extensively that commodities and precious metals were "The Next Big Thing" (see here). After peaking in 2011 however, your focus slowly began to shift more towards dividend- paying stocks as the next successful long-term investment theme, as we just discussed. However, given the recent strong breakout in metals and mining shares, do you see life returning back to this neglected sector after four or five years?

I really think as our technician Tom McClellan said in our recent interview with him that whenever something breaks out of a long-term downtrend as gold has now done it is signifying a major change in sentiment. And I think that sea-change in sentiment is related to what Martin Armstrong has said on our show many times that we are seeing an inflection point in the confidence people have in government. According to Armstrong's cycle work, confidence actually peaked in October of last year and investors are now starting to question the efficacy of monetary policy. What's important to understand is that the price of gold trades very little on supply and demand fundamentals—how much is mined vs. how much of it is being bought, etc. It's really about the value of money and confidence in purchasing power, which seemed to reach a recent tipping point when the world's third largest economy, Japan, threw in the towel and joined Europe in adopting negative interest rates in late January of this year. So, I think that's what the gold market is starting to sniff out and, in that case, we may be finally entering a favorable environment for gold as Felix Zulauf, Jeff Christian, and other notable experts on our show were expecting to take place in 2016.

Listen to this full hour-long podcast with Jim Puplava by clicking here. For a complete archive of our broadcasts and podcast interviews on finance, economics, and the market, visit our Newshour page here or iTunes page here. Subscribe to our weekly premium podcast by clicking here.

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