We have been warning for more than a year that the U.S. government soon will be confronted by a liquidity crisis and be forced to devalue the U.S. dollar by 50 percent or more.
We’ve been running our Treasury like a banana republic, and soon we’ll have the debt and a currency crisis worthy of a banana republic.
To very briefly summarize the problem, the U.S. Treasury has moved its obligations “down the curve” – meaning most of its debts will come due in a very short amount of time. This reduces the carrying costs of our obligations, but leaves us vulnerable to disaster if our creditors decide not to “roll over” our obligations.
I estimate the Treasury will need to borrow at least $3 trillion in 2010 to cover our current deficit (which will likely be more than $1.5 trillion) and repay older debts coming due. In total, the Treasury must find a way to refinance more than half our total debt in the next four years – while at the same time fund record annual deficits that now exceed 10 percent of GDP.
I don’t believe these debts will be repaid or refinanced. In fact, I don’t believe it’s even remotely possible. Our largest creditor, China, buys around $600 billion in Treasury obligations each year. The rest of our creditors buy another $250 billion or so. Americans, in total, save about 5 percent of GDP – or around $500 billion.
So assuming demand remains robust for our debt obligations and every penny of our domestic savings are invested in Treasuries, we could borrow up to around $1.4 trillion each year – at the very most. Currently, our annual deficits exceed this amount. Meanwhile, we’ve got to find a way to repay or refinance more than $4 trillion in the next three years. It can’t be done. And that’s why the Fed has bought more than $300 billion of Treasury securities in the past year.
Now, if inflation heats up (and it will as more and more of our debt is “monetized”by the Fed) what are the chances our creditors will either demand much higher interest rates (which we can’t afford) or simply abandon the Treasury market? Some people say there’s no chance our creditors will abandon us. Really? What does America export that they can’t live without? Hollywood movies? Ha, ha, ha…
To me, it’s a dumb question. It’s already been decided. Our creditors aren’t going to abandon the dollar – they already have. Central banks were net buyers of gold last year for the first time since the end of Bretton Woods in 1971.
And here’s another question to ponder… The government recently announced it would offer the largest amount of so-called TIPS bonds ever – $10 billion worth. These bonds offer full protection from inflation. After this auction, the TIPS market will reach $600 billion in size, or a little less than 10 percent of the entire Treasury bond market. Are our foreign creditors more worried about runaway inflation than they’re letting on in the press?
I can tell you this for certain: In the entire history of phony paper money, runaway government spending, progressive taxation, and inflation, you can’t find a single honest minister of finance. You will know the government is lying to you about the fate of our currency because their lips will be moving.
In my latest Porter Stansberry Investment Advisory’s “The Only Trend that Matters in the Next Decade,” I tell readers my two favorite ways to profit from lying politicians. I recommend one long and one short trade… I expect both to steadily outperform the market for many years. If you haven’t already made these two trades the backbone of your portfolio, you’re missing out on a huge profit opportunity.