Debt and Delusions – Part Two

This article was written for Miles Franklin by Gary Christenson. Part one is available here.

The problem with debt is the creditor expects to be repaid.

Sovereign debt will be “rolled over,” never extinguished, and repaid with new debt. We delude ourselves and pretend total debt will increase forever (it can’t). That explains global debt exceeding $230 trillion today and official U.S. government debt over $21 trillion, with unfunded liabilities adding another $100 – $200 trillion. There are two choices.

Behind Door # 1 lives the default dragon. The consequences of releasing the default dragon upon the financial world are frightening and difficult to comprehend. What happens if the U.S. government says the following in circumspect language?

“Sorry. We lied. We had no intention of paying you. You were foolish to trust our promises. The courts will handle your bankruptcy. Good luck with your other investments.”

The fallout would be unbelievable—on a global scale. Assume it will NOT happen.

Behind Door # 2 lives the Inflation Monster. Suppose the Treasury issued new 10 year notes and found no buyers at 3%, or 4%, or even 5%, which sounds unthinkable, but 5% is low based on decades of history.

Enter the Federal Reserve! We hear the musical theme from the approaching shark in “Jaws” as we watch in terror. The Fed monetizes a few trillion dollars of government paper as quickly as a politician issues a denial.

The Fed will monetize U.S. government debt, as they bailed out the bankers after the banker induced crash of 2008.

Expect their balance sheet to increase, regardless of distracting nonsense from Keynesian economists. During the next crisis the Fed will buy $trillions in debt to “fund” U.S. government budget deficits.

From David Stockman

“And this time it’s truly not hard to see the great bond market “yield shock” coming down the pike. That is to say, when $1.8 trillion of supply—$1.2 trillion new debt from the US treasury and $600 billion of old debt to be dumped by the Fed—hits the bond pits in FY 2019, the markets will definitely clear or perhaps “clear-out” is a better word.”

Buying government debt, or the Treasury “printing” dollars, is reminiscent of Zimbabwe, Argentina, and banana republics. Gold and silver fared well during their memorable inflations.

CONSEQUENCES:

  • Deficits explode and the Fed must “print” and buy much of the new debt.
  • Total debt jumps from $21 trillion to $25 and $30 trillion in a few years. Interest rates ratchet up to 5% or higher, which means interest payments on the national debt reach $1.2 to $1.5 trillion per year, up from $0.5 trillion now.
  • Oops! The Fed must create another $trillion in debt to monetize the interest expenditures.
  • Sovereign governments, hedge funds, pension funds, and individuals realize the “runaway train” of debt is approaching the end of the line. They protect their assets and remove dollars from their portfolio. They see that already weak dollars will devalue more rapidly in coming years.
  • Those scared dollars search for safety. Many will realize that five millenniums of history show gold and silver are reliable stores of value.
  • Prices for gold and silver prices skyrocket from dollar devaluation and increased demand. (China and Russia appreciate the boost to their economies because they hoarded gold instead of dodgy debt-based paper assets.)
  • Congress, after much public outcry, demands the Treasury audit Fort Knox gold and is disappointed, because Treasury says “No!” or because the audit discovers… disappointing news.
  • A cup of coffee at Starbucks, now $2, sells for $5, or $10 or more.
  • Gasoline costs… we don’t want to think about it.
  • The list is long. The 1970s could look like a minor annoyance compared to the inflation created by the monetization of sovereign debt in coming years.
  • Gold will reach Jim Rickard’s target of $10,000 or more. Silver will rise farther and faster than gold.

WHAT OTHERS SAY ABOUT DEBT:

Paul Tudor Jones via Zerohedge:

“…legendary trader Paul Tudor Jones argues that US inflation is set to accelerate sharply, making bonds a very poor investment…”

James Rickards in Strategic Intelligence (subscription)

“It is true that the U.S. will never default on its debt because it can simply print the money to pay it off. Still, this does not mean the money will be worth much when the time comes. And the time is coming fast.”

“The U.S. debt-to-GDP ratio is approaching the point at which it cannot expand much further, at least not in real terms without inducing a crisis of confidence. Inflation is the only solution, so inflation it will be.”

Bill Holter for Miles Franklin:

“Without the ability to borrow new funds, or the ability to create dollars that are accepted for the import of real goods, the U.S. would be completely cooked. The result would have been and will be… much higher interest rates and far lower exchange rate (purchasing) powers.”

“If monetizing one’s debt was the road to financial and economic nirvana, there would be no recessions, no wars, no poverty… Outright monetization has been tried thousands of times in the past, never worked and always ended in disaster. Just because the rest of the world went along with it for a short while this time does not mean it will end any differently.”

James Rickards via Zerohedge:

“A full-scale trade war is now upon us. It will shake markets and be a major headwind for world growth. It will get ugly fast and the world economy will be collateral damage.”

“Next comes the shooting war with North Korea, which will inevitably draw in Russia, China, South Korea and Japan. This will be tantamount to World War III.”

From Lindsey Graham (R-SC) via Zerohedge and CNN:

“All the damage that would come from a war would be worth it in terms of long-term stability and national security.”

“If there’s going to be a war to stop [Kim Jong-un], it will be over there. If thousands die, they’re going to die over there. They’re not going to die here.”

[Thank you for the humanitarian perspective…]

From Phoenix Capital:

“Put simply, if the choice is:

1.  Let stocks drop and deal with complaints from Wall Street

or

2.   Let the bond bubble blow up, destabilizing the entire financial system and rendering most governments insolvent…

Central Banks are going to opt for #1 Every. Single. Time.”

CONCLUSIONS:

  • The choices are default (unthinkable) or inflation.
  • Central banks, politicians and governments will choose inflation and weaken the dollar.
  • Monetization of huge budget deficits is coming. Expansion of old wars and beginning new wars will accelerate the dollar’s decline.
  • Higher interest rates have arrived and more QE is on the horizon.
  • Expect much higher gold and silver prices as fiat currencies descend toward their intrinsic value.

The alternative to the above requires balanced budgets, honest money and accounting, banking reform and much more that will not happen, so plan on a weaker dollar and consumer price inflation.

We hope politicians will avoid wars, global inflation, hyper-inflation and other craziness, but politicians are paid to support special interests………. Regardless, our world will create surprises, some not so good.

Financial preparation with silver and gold is necessary.

Call Miles Franklin at 1-800-822-8080 or Why Not Gold. Silver is undervalued.

Gary Christenson

7 thoughts on “Debt and Delusions – Part Two

  1. Adding new debt to old debt is limited by the level of prevailing interest rates. Total government debt times prevailing interest rate is the minimum debt service the government must be able to pay with current tax collections. There are two ways two increase that limit:
    1) Increase amount of taxes collected. That can be done only to a certain extent before the economy stalls.
    2) Decrease level of prevailing interest rates by a factor of 10. Can be easily done as demonstrated by QE policies implemented during the past decade. Instead of 5%, bond investors have to learn to live on a coupon of 0.5% per year. That immediately allows the government to increase the serviceable debt level by a factor of 10. Decreasing the interest rate once again from 0.5% to 0.05% allows the government to increase the debt level once again by a factor of 10. Theoretically, this game can be played forever, at each stage decreasing the interest rate by a factor of 10 and increasing the total debt level by a factor of 10.

    How far this game can be played, nobody can predict with certainty. At some point in time, the credit of the government will be negatively affected and people will prefer to hold cash instead of investing it into government debt. But even this situation is not totally hopeless, as the example of financing WWII shows. During the war campaign, everybody was forced to invest into government bonds.

    When a crisis develops, a new paper currency will be introduced and the old debt will be devalued by orders of magnitude. Debts will never be eliminated because debt is the glue which holds modern society together. Debt gives value to irredeemable currency. Society will never return again to a gold standard. The reason is simple: The world population is too large. Currencies need to be elastic in order for the political class to maintain its power. It is the debt which forces people to go to work every day.

    Gold and silver will always be suppressed, but not too much. They will always trade slightly above the cost of mining these metals. The ultimate source of the power of government is not the stability of its currency. It is the ability to exercise violence on an unprecented level. Modern wars were made possible by fiat currencies. On a gold standard, governments would not be able to finance wars as easily as they can do it today under a pure fiat standard.


  2. The Feds motto is “Reallocate or Die!” The money for the grand infrastructure spending project and servicing existing debt has to come from somewhere, and raising taxes on strapped consumers is not an option. Look at all that stock market money. Oh boy, let’s get us some of that. Thank you Wall Street. The myth of the Fed put on the markets will be very painful when it bursts.


  3. Not much to say. The truth hurts and will become down right painful soon! There is a place for all the politicians who have raped, and pillaged this country called America while lining their pockets with our tax dollars. God have mercy on their souls.
    Gary D



  4. I see a third door – the deflationary monster. The dollar represents a unit of debt. So a collapse of debt would see a contraction in the money supply, a rise in the purchasing power of the dollar and a rise in interest rates. The rise in interest rates reflects the higher risks of owning debt. As long as the dollar is the world’s base currency, it can’t lose it’s purchasing power against other currencies in a deflationary economy.

    I believe the Federal Reserve has lost its power to weaken the dollar. The federal government may not technically default. But everywhere else, there is no stopping the defaults as every default sets off several more.

    I think we are going to see stampede out of debt assets by defaults and a shifting into safe assets like gold and silver. The stock market also has the potential to be a safe haven asset. A debt denominated in dollars is a liability. A dollar owned is an asset.

    Whichever scenario is correct, there was never a worse time to be owing or owning debt. It is the best time to be owning gold and silver. On that we can agree.


  5. One must remember that $10 trillion went missing at the Pentagon in 2017…
    we MUST presume that some of those trillions are holding 10 year bonds
    @ 5/100ths below the psychological 3% blow off point… there were
    (3) major mystery derivatives asset interruptions while 3% was crossed,
    and then was pulled back from the brink by billions a day in phantom bond purchases.

    https://www.foxbusiness.com/markets/amazon-google-trading-suspended-on-nyse-proceeding-elsewhere

    https://www.independent.ie/business/personal-finance/ulster-bank-says-problem-with-accounts-was-a-result-of-human-error-and-is-now-resolved-36842592.html

    https://gizadeathstar.com/2018/05/in-praise-of-analogue-montreal-and-toronto-stock-exchanges-shut-down-last-friday/

    All the while, precious metals are being ignored like a bar room tramp with Herpes.

    Any one who isn’t delegating a percentage to hard assets is off the scale stupid !

    I’m reminded of a fictional story from 10 years back, about an air traffic control
    crisis in NY , as 747’s filled to capacity were landing to return Jewish counterfeit…
    of course that’s just a euphemism, it’s all digital, and will happen in milliseconds
    when the Boyz from Mt. Sinai decide it’s time to pull the plug, and stop the world.
    The best possible news will be , the world recovers… the worst , and most likely
    new will be , 95% of brain-dead Americans will just keep doing what they’ve been doing ….
    waiting to collect on their Jesus L.L.C. insurance policy, and ridiculing the few
    of us who still try to preserve our lives , integrity, and nation.


  6. The can has been kicked just About as far down the road as there is room to kick it. Wall Sreet is loading its wagon with our stolen wealth. Short of an honest reckoning with reality, prosecution of the thieves, confiscation of the loot, and a complete restructure of the economy, the above scenario is essentially correct. While the war is more likely to be over Iran, what the scenario leaves out is the likelihood of massive “civil unrest.” The Masters of the Universe, as they call themselves, have planned for this and eagerly await the pitiful proletariat with a draconian martial law, a militarized local Gestapo, with awe inspiring weapons of populace control and destruction, and massive FEMA “internment” facilities, which can put to shame the gulags and concentration camps of their Russian and NAZI mentors.

    It’s quite a price I pay for the failure to keep our republic.

    While the camps await and could be immediately be put to good use if we were to suddenly to awaken, realize that our frog is nearly boiled, and round up the responsible crimnals, history predicts this is unlikely to happen. The violence and desruction generally must happen first.

    History also says that these folks always lose. They know how to bully and destroy, but have no understanding that reason, justice, equality and civility are the qualities necessary for sustainable civilization. In the end, in their own simple mindedness and brutality weakens and destroys them from within, until their madness is isolated by the body politic and eliminated by the social immune system, which has been roused to produce antibodies necessary to remove the cancerous insanity the Masters have induced into the social order.

    After the fever breaks and the body has puged it’s pathogens and healed the damages from their toxins, I pray that our Better Angels will institue and maintain the long lasting and homeostatic republic, which was originally intended. Realistically, however history also tells me that this is a process which involves a great deal of time and tribulation. The removal of sociopathy and a path to peace with prosperity are not likely to happen in my lifetime, or yours.


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