"We are also as sure as we can be about anything which has yet to happen that long before the US reaches that projected "debt limit" of $US 12 TRILLION, the US Dollar will cease to exist as a viable world reserve currency."
(Gold This Week - April 18, 2003)
In the late April issue of The Privateer (Number 474 - Published on April 27), we do an in depth analysis of the consequences of the US Treasury's plan (see Gold Last Week) to increase their total borrowings to $US 12 TRILLION over the next decade. If you think that the hubris displayed by the Bush Administration's policy of pre-emptive military action is extreme, it pales into insignificance in comparison to this one.
As many people have now noticed, as it has every day since February 20, the Treasury is still reporting its debt "subject to limit" at $US 6.399975 TRILLION - that's $US 25 million below the debt ceiling of $US 6.4 TRILLION which was set in place on June 28, 2002. In February and March combined, the Treasury reported deficits of $US 155 Billion. It is a safe bet that the Treasury debt by now is WELL above the June 2002 $US 6.4 TRILLION ceiling. Yet no new "ceiling" has been reported and the Treasury has simply stopped reporting on the actual amount of debt.
How long can this continue in a nation which has to borrow $US 1.5 Billion a day to feed its trade deficit habit? How long can it continue in a nation which has stated that its government deficits over the next three years (including 2003) will total just over $US 1 TRILLION? Those are the official figures. The REAL figures, if anyone can find them, are sure to be MUCH higher.
More to the point, how long will investors, both American and foreign, accept such a situation? Foreigners hold (at least) $US 8 TRILLION in $US denominated assets. They are obviously expected to continue to purchase Treasury debt. It is a sure bet that the Treasury does NOT want to sell its new debt domestically, in that direction lie sharply HIGHER US interest rates and an economic and financial debacle of GIGANTIC proportions.
It is a measure of the depth to which rational economic and/or financial analysis has fallen in Washington DC that those who are ramping up the issuance of new credit Dollars refuse to even contemplate any possible adverse effects of their actions. At least, if they do contemplate any, they are sure as hell not talking about them.
Consider the situation at the end of the 1970s, when the US was facing a plummeting Dollar and out of control (by the standards of those days) government deficits. Back then, with Paul Volcker as Chairman, the Fed bit the bullet and decided that the only way to LURE both Americans and foreigners back into the Dollar was to set US interest rates free to find their own level. They did, and US rates promptly spiked skyward to over 20% on the prime rate and almost 14% on the long (30-year) Treasury bond yield.
Note carefully, we said that the Fed saw it as being necessary to "LURE" world investors back into the Dollar. That was over 20 years ago. Now, any form of "persuasion" is given only the most cursory lip service by the Bush Administration. There is no means available to "lure" investors into Dollars - ANY increase in present US rates, let alone an increase sufficient to compensate investors for the risk of a falling currency, would be an instant catastrophe for the US economy.
With no means left to entice investment, the US Administration has put itself into a position where it must use threats or outright compulsion, not merely to keep foreigners buying Dollars and Treasury debt, but to prevent foreigners (and some Americans) from SELLING their present holdings.
Such a situation is dangerous in the extreme. It is also a tragedy of monumental proportions. In the first decade of global fiat currencies, after the Dollar was divorced from Gold in 1971 and currencies "floated" in 1973, discussion and debate about the nature of money was quite high on the investment agenda. This was the era of the pioneering "hard money" advocates - Browne, Blanchard, Dines, Myers, Shultz, Jerome Smith, Ruff et al. Thanks to the efforts of these gentlemen, and many others, there was a quite widespread knowledge about the mechanisms of credit creation, fractional reserve banking, and fiat money creation in general. The discussion ranged across the media and millions either took part or paid attention. The Dollar suffered, and Gold prospered, accordingly.
Now, that precious knowledge is possessed by very few people indeed, either inside or outside the US. As a result, the tragedy stems from the sad fact that most people are totally unprepared for what is coming and literally will not know what has hit them. Ultimately, the power of any nation is directly proportional to the validity and therefore desirability of its currency.
A currency not tied to Gold has long been touted as being "elastic" enough to meet the needs of business. Politicians, we are told, are responsible people who will make sure that if a little too much currency is put into circulation, they will let the elastic snap back at the first opportunity by curtailing their spending and getting their budgets back into surplus. Well, the US has not had a GENUINE budget surplus since 1960. The entire academic rationale behind "modern" fiat money and deficit spending is a tired fairy tale which passed its "use by" date at least 20 years ago.
There is no way to right the modern financial ship except to DRASTICALLY curtail spending. There is no way to perpetuate and increase the POWER of the US in the world except to increase spending, and threaten anyone who refuses to take their "fair share" of the new Dollars so produced with dire consequences. That is the sad situation we all face.
Gold has given the first signs of "recovery" this week. With the fiscal situation in the US now TOTALLY out of control, it is just a matter of time until Gold snaps back, despite any and all attempts to prevent it from going up against the Dollar.