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The Outstanding Public
Debt as of 27 Mar 2009 at 05:50:04 AM EST is:
U.S. National Debt
Clock
Last week, Bernanke
announced that the Federal Reserve would buy $300
billion worth of U.S. Treasuries and another $700
billion worth of government-agency mortgage debt. In
order to finance these purchases, the Federal
Reserve would simply produce this money out of thin
air.
It is worth
noting, that the Federal Reserve has already dropped
the Fed funds rate to a historically low range of
0-0.25% and now it is desperately trying to use
other unconventional methods (quantitative easing)
to stimulate the economy. In my view, this latest
development of the Federal Reserve monetizing debt
is inflationary and confirmation that the Federal
Reserve wants to debase the U.S. dollar. It is worth
noting that the total debt in the United States now
exceeds $60 trillion, and its economy is around $12
trillion. So, the United States is already bankrupt,
and the only way it can ever hope to repay this
gigantic sum is through monetary inflation and
debasement.
The United States owes
its creditors a gigantic amount of money and a debt
so large that it can never hope of repaying it in
today�s dollars. So, the United States has two
options:
a. Default or
bankruptcy/Depression
b. Monetary inflation
The US still remains the
world�s largest economy and owns the world�s
ubiquitous reserve currency. I think we can pretty
much rule out the possibility of sovereign default.
Therefore, you can bet your bottom dollar that the
United States will try its best to inflate its way
out of trouble.
It is my firm belief
that over the years ahead, the United States, and
all other debt-laden nations will engage in massive
money-creation in order to debase their currencies
and dilute the purchasing power of paper money.
(Note Obama�s call for other nations to pitch in
monetarily) Remember, monetary inflation is a
debtor�s best friend, as it makes the debt easier to
service and repay.
On the other hand,
monetary inflation goes against the interests of
savers and creditors. Given the fact that most of
the �developed� nations are up to their eyeballs in
debt, you don�t have to be a genius to figure out
that monetary inflation is our future. At present,
the global economy is dealing with deflationary
forces due to credit contraction in the
private-sector. However, even now, total credit in
the United States is expanding due to rampant
borrowing by the U.S. government. So, I don�t expect
deflation to take hold; rather, I anticipate
accelerating inflation, which has always led to
rising asset and consumer prices.
It is worth noting that
apart from the Federal Reserve, other nations have
also started monetizing their debt. Recently, the
Bank of England announced that it plans to buy
GBP150 billion worth of its government debt by
creating money out of thin air. Needless to say,
such a move is inflationary and terrible for the
health of the British currency.
Now that we have
established that monetary inflation is our future,
let us examine which currencies and assets will
maintain their purchasing power. If history is any
guide, nations that engage in monetary inflation
always diminish the purchasing power of their
currency. So, in the years ahead, we can expect
dominant currencies to depreciate in terms of
purchasing power, but the trouble is that none of
the fundamentally sound nations want a strong
currency either! As the world engages in competitive
currency devaluations, I expect all the currencies
in the world to lose significant purchasing power
against hard assets. Therefore, in the years ahead,
precious metals and other commodities with intrinsic
value should appreciate considerably. Even the
values of fundamentally sound businesses with clean
balance sheets should skyrocket as a result of
inflation.
Last week, in the
aftermath of the latest announcement by the Federal
Reserve, we have seen significant strength in
precious metals, crude oil and grains. Conversely,
we have seen a huge decline in the U.S. dollar. If
the Federal Reserve continues on this inflationary
path, we can expect a resumption of the commodities
bull-market and renewed weakness in the U.S. dollar.
America�s trade deficit with China has made the
Chinese the main buyer of American debt. Reuters
reported the concerns of Chinese Premier Wen Jiabao.
To recap: high deficits mean eventually the
government has no way to pay back its debt except by
using inflation to wipe it out. The expectation of
inflation becomes self-fulfilling. And the prospect
of US inflation will cause a loss of confidence in
the dollar, a one-time hit as it loses its reserve
currency status, and in turn will increase prices to
American consumers and business as it costs more in
dollars to buy ever more expensive imports.
Contrary to popular
opinion, I am of the view that most commodities and
stock markets have seen the lows for the entire bear
market and we may be in the early stages of a new
cyclical bull market that could last for a few
years. At the current levels, energy looks extremely
attractive and should prove to be a fantastic
long-term investment. After years of extensive
research, I am convinced that the world�s oil
production is peaking and we are likely to see much
higher energy prices in the future. So, investors
may want to add to their positions in upstream
oil/gas companies and the energy service stocks.
Finally, we believe there will soon be a Gold,
Silver and Agriculture boom that will make the
dot.com and real estate booms look tiny in
comparison.
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