A moment of truth approaches with a force and momentum of real significance to all.
Normally we don't discuss economic issues but a quick historical review might be useful first before we move on. This all ties in together, as you will see.
During the last surge in gold and silver in 1980, the economics of that time were far better then now.
- In 1980, current debt as a percentage of GDP was 33.4% but now is near 100%. In effect, the total current debt equals the total product of all goods and services. What could go wrong there?
- In September 1981, the US debt ceiling was raised to one trillion dollars for the first time in history. Interest rates were high. As of last month, the total public debt for the US was $14.32 trillion, not counting future unfunded liabilities and interest rates are very low. How is this possible?
- The only good news is the net worth of the US and its economic sectors has remained relatively consistent over time and is currently about 5 times GDP, primarily due to inflationary money supply effects.
So what good is a positive net worth if there is no way to effectively pay for liabilities contained in that net worth figure? This financial boat will not float anymore than the Titanic.
Current conditions
The total debt is currently increasing by over 4 billion dollars every single day. The US currently has to borrow about .41 cents of every single dollar that it spends. What happens when it becomes .51 cents? Do we then have a minority interest?
The annual government deficit or surplus refers to the cash difference between government receipts and spending. The difference between annual receipts and spending was a -1.7 trillion in 2010 or about 12% of GDP.
The Math is Quite Simple
Living within ones means is a concept that needs to be imported and adopted. The problem is not income but spending. Cutting spending is not a likely end result because that involves loss of political power.
Assets must exceed liabilities and income must exceed expenses or one is bankrupt. This math is quite simple and knows no political affiliation.
A Bottom Line Analogy
A train is going uphill to a construction site loaded with heavy steel. At numerous points, the train stops to load additional steel from different suppliers. About halfway up the mountain, the train engine is unable to pull the train cars any further and starts to spin its wheels. Unless some unnecessary supplies are unloaded, the train will not make it to the top of the hill. This simple procedure is not done.
Eventually, the train begins its slide back down the mountain around a curve, derails and falls into a deep gorge (depression). Now you have the added cost of the disaster, repairs, plus the replacement cost of lost supplies. An inflationary depression is the result and more debt has been added.
In human nature too, nothing is ever done until a problem becomes visible. No one changes their behavior until hitting the brick wall of reality. The same goes for financial standards of solvency.
Critical Mass
One of the greatest sources of remaining cash and wealth is in the stock market, IRAs, 401ks, ETF’s, etc.
Barring a financial conversion process, where does the US find a source to fund its expenses, deficit and the liabilities and keep the financial shell game going with low interest rates? Printing money is usually the final resort of bankrupt governments and that has already been done. From the Feds perspective, it really gets bad press too and makes them look desperate. By canceling that program, they appear to look strong and in control but those outlooks are illusionary.
The US Treasury now conducts more than 200 sales of debt by auction every year with declining purchases of that debt by virtually every other country as well as various institutions except for short term treasuries.
So where is the money going to come from to finance the deficit and pay the interest and principal long term? How does one create financial conditions that will induce a person to move from the relative safety on one monetary vehicle for another government “guaranteed” financial vehicle, fund the government and postpone the day of reckoning?
We just experienced a huge decline in the S&P500 when many piled into treasuries for safety. How many financial issues, wars and assorted other upcoming crises are needed to finance the deficit? Will leave that answer to your imagination.
Force and Momentum
Sir Isaac Newton was the first person to mathematically express the relationship between force and momentum in the setting of his law of universal gravitation. This law “states that every point mass in the universe attracts every other point mass with a force that is directly proportional to the product of their masses and inversely proportional to the square of the distance between them”. While his formulae dealt with physical objects, systems and their behavior, the total concept also apples to economic and financial issues in terms of force and momentum.
Price inflation has clearly been understated by governments using hedonic substitution measurements that mask true change. In addition one could buy, for example, a 6 oz can of tuna last year at a certain price and this year buy the same tuna can with only 5 oz at the same price. This kind of hidden price increase is not recorded in price measurements and is widespread.
- Regrettably, total world debt is increasing relentlessly upward but now is accelerating as the printed paper money supply increases to pay for it.
- In the US, 15% or more residential housing units are vacant. Downward price momentum is evident here.
- There are numerous other examples of the forces of momentum, either upward or downward, in this economic environment. All spell trouble.
The Tide that Turns
- Gold prices are increasing in numerous other currencies with many recently making new all time highs. This is while each country attempts to maintain currency stability in order to retain economic viability.
- The price of gold and silver now require shorter time periods to move from one new level to the next higher one. What does that say about current economic, financial and debt conditions and their velocity?
Gold and silver bullion prices have done well this year while gold/silver stocks have not. This is reflected in the XAU/Gold ratio here which demonstrates values in the early 2009 period at much lower gold and silver prices. Further insights by Trader Dan Norcini on this subject can be located here.
It is my opinion we are in the area of Part 2 of the downturn that first occurred in 2008. If the assessment is valid, this second potential major bottom should end at a higher level than in 2008 and provide a very significant secondary base. As this critical window completes, the ratio’s performance should considerably improve over the next year and result in truly outstanding results for all participants. Additional important analysis on gold/silver, S&P500 and other financial sectors can be reviewed here.
With one of the best trading months of the year just around the corner and seasonality factors favorable, it would be wise to consider the many undervalued candidates in this area while the tide turns in your favor.
