Gold, Paper, and a Train Wreck
November 15th, 2012
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Begin with a few facts and assumptions and follow the logic:
- Gold has been a store of wealth for more than 3,000 years. Silver has been used as money in most countries of the world. Both are still valuable.
- All unbacked paper money eventually reverts to its intrinsic value of zero. Throughout history, there have been no exceptions to this statement. The worldâs current experiment with unbacked paper money is only 41 years old and looking rather strained.
- A person, business, or government cannot increase their indebtedness forever by spending in excess of revenues. This seems self-evident. Eventually, the person, business, or government will become unable to find anyone willing to lend under those circumstances. âDeficits donât matterâ is nonsense.
- âIf something cannot go on forever, it will stop.â This is Steinâs Law and seems obvious, but we often act as if we donât believe it.
- Politicians and governments will do everything possible to retain current power, even if it is destructive in the long term.
My belief is that most people will agree with these simple and straight-forward statements.
We know that the United States (and the rest of the world) uses an unbacked paper currency which has lost perhaps 90% of its value in the last 40 years. We know that the official US government debt exceeds $16 Trillion and is growing rapidly â approximately 12% per year for the past five years. We also know that theÂ present valueÂ of unfunded obligations of the US government for Social Security, Medicare, Medicaid, military pensions, and other commitments is $100 Trillion to $220 Trillion depending upon who is counting. It does not matter which calculation is correct since it is impossible for the US government to fund and pay either present value estimate.
The current debt exceeds $16 Trillion and will increase at current growth rates to about $25 Trillion in another four years. Interest rates on the national debt are historically low because the Federal Reserve continues to âprint moneyâ and then makes huge purchases of government bonds. Assume a modest 5% interest rate on $25 Trillion of national debt in 2016. Do you believe that our economy can generate $1.25 Trillion in annual taxes just to pay the interest on the debt? How about funding a 6% interest rate on $35 â $45 Trillion in national debt by the year 2020? The interest payments would be about $2.4 Trillion â approximately the entire revenue for the government in 2012. âIf something cannot go on forever, it will stop.â
Our politicians will probably address the budgetary problem, as created by them, by taking the easiest way out, by angering the least number of voters, stalling, blaming others, appointing committees, and by concealing the problems and consequences as best they can. Possibilities include: printing $Trillions and blaming the resulting inflation on a convenient scapegoat, defaulting on all debt owed to foreigners, means-testing Social Security, Medicare, and other programs, forcing pension funds and IRAâs to buy T-Bonds, higher taxes, higher inflation, and reduced military spending. Many more creative suggestions will be set forth, but they probably will not include balanced budgets, fiscal sanity, or debt repudiation.
If paper money eventually declines in value to nearly zero, the national debt is never repaid, government will continue to borrow and spend in excess of revenues, and this process can be extended for only a few more years, what should we expect?
- Assume the dollar will decline in value against all commodities. Food, energy, metals, and practically everything you need for survival will substantially increase in price. Jim Sinclair calls this âcurrency induced cost-push inflation.â
- Assume that government guarantees, programs, and promises will be changed, reduced, eliminated, or devalued. How much good is receiving Social Security income if your monthly benefit purchases only seven loaves of bread, a few fishes, and a tank of gasoline?
- Assume that taxes will increase and our standard of living will decrease.
- Assume that most paper wealth in the form of debt instruments, T-Bonds, T-Notes, state government bonds, and corporate debt will substantially decline in value and purchasing power.
- Assume that gold re-enters the global monetary system in some form,Â not because politicians and central bankers want it, but because they are forced to include gold in order to create a credible monetary system that will inspire confidence in the new currency.
This begs the question, how do you prepare? Perhaps we should cash out all paper investments, buy gold, and hunker down on rural farmland. This will not work for most people. Further, while most people know much is wrong in our economy, they are not ready to abandon their current lifestyle. The problem is that by the time it becomes clear that economic disaster is upon us, it will be too late for most people to protect themselves.Â A partial solution is simply to buy physical gold and silver â NOW!
People riding a runaway train can party and remain oblivious to the fact that the train is about to crash into a huge obstacle. Our runaway financial train is about to destroy the status quo as it crashes into the obstacle of mathematical consequences â the inevitable financial train wreck. âIf something cannot go on forever, it will stop.â
When will the collision/collapse occur in the United States? Jim Sinclair, one of the premier financial intellects of our time, thinks we may have until perhaps 2015 â 2017 before the collision. He recommends physical gold bullion â in your possession or perhaps stored in a secure private storage facility. I think silver coins and bullion stored in a secure and private facility are also a wise investment.
But because we donât know when the crash will occur, it makes far better sense to prepare now, even if early, than to wait and hope. If all of these potential disasters miraculously disappear and our financial world continues as it has, preparation will be, at worst, inexpensive insurance. âBuy that insuranceâ while you still can.
ReadÂ $4,000 Gold! Yes, But When?
ReadÂ We Have Been Warned!
Are you prepared? Do you have enough financial insurance â physical gold and silver?
aka Deviant Investor
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Contributed by Deviant Investor of Deviant Investor.
About Deviant Investor: I am a retired accountant who has 30 years of experience following markets, investing, and trading both futures and stocks. I have made and lost money during my investing career, and those successes and losses have taught me much about markets, timing, risk, inflation, and crashes. I currently invest for the long term, and I swing trade (in a trade from one to four weeks) stocks and ETFs. I offer opinions and commentary, but not investment advice.
Years ago I did graduate work in physics (all but dissertation), so I strongly believe in data, analysis, objective facts, and rational decisions based on hard data. I currently live in Texas.
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