406: US Bond Market Collapse and its Ramifications
2008 Private Sector Financial Crisis: 2008 was not a real collapse – it was a banking financial private sector crisis – just one symptom of an overall long slow US collapse. The big mistake was to bail out all the failed banks by governments that translated this bad debt to the public sector at sovereign government level. Essentially the banks were nationalised. The US debt is now so gigantic that there will be a time, sometime between 6 months and 6 years from now, when the US will either have to default on it's $15 Trillion debt, or create so much printed money that hyper-inflation occurs and the value of the dollar crashes - or something in the middle, a partial form of default with high inflation - to inflate the debts away. If only the government could hold themselves back a bit – the problem is that the next big crisis will now be the mother of all crises at US government level.
US Bond Collapse: The trigger will be the US bond market collapse. There will be a US currency crisis eventually – the dollar will lose a tremendous amount of it’s value. Just image the dollar declining to 20% of its value compared to today – when foreign investors desert the bond markets? Everyone in the US complains about $3/gallon gasoline. But this would make gasoline more like $10/gallon or more. Just image the impact this would have on US living standards, employment, mobility and inflation of all goods and services.
Further US Housing Crisis: When interest rates finally have to rise as the dollar declines and inflation takes off, the US house prices will decline further and more foreclosures will take place.
$3 Trillion Wasted: The $3 Trillion of printed money since late 2008 has been squandered propping up failed banks. Most are little more than zombie banks now. Very little of this money has found its way to US private enterprises to create new jobs – possibly as little as 1% (or 1 cent in the dollar). Instead, the money has been used to create temporary profits as banks lend at 6+% and get the cheap money for 0.5% - and a consequence is that bankers bonuses are again at record highs. A lot of the money has found its way into propping up the US stock market, and invested in oil and commodities as a hedge against inflation that this wall of money is projected to create. A lot of the money has been parked overseas in offshore accounts or invested overseas – it’s found it’s way to Europe, Asia and Africa and helped create small bubbles around the globe. This is the key reason why this Keynesian effort to boost employment failed. It’s not until the money gets to private manufacturing enterprises to boost local US productivity and reduce imports will it create real US wealth. Some of the money has been wasted on public sector spending projects (called investment by liberal-socialist economists) – employing half a million people to perform a census survey is a classic example. The very place it was meant to help was US real estate prices - and this seems to be the last place the money has ended up. Certainly everything but real estate prices are going up! The Fed's policy intervention and direction has been a disaster. They only know how to print money. Based on a failed academic Keynsian model of doing good.
Rolling Debts At Higher Rates: As US debts are rolled over at higher interest rates, the Fed will be forced to print more money to pay for the debt repayments – and this will cause further dollar weakness and higher inflation. President Barack Obama and Ben Bernake are trying to keep the show on the road – kick the can down the road - until end 2012 - until after the next general election. But this will only create a bigger collapse. Meanwhile the Europeans and many other countries print money. It all points to very high inflation and declining living standards in the west.
Dollar Collapse: When the dollar plunges, all US prices will rise sharply – for example all imported goods like energy and electronics. But even home produced goods and services will be rise sharply as input price sky-rocket. When confidence in the dollar crashes, China, Europe, Japan and Canada will dump their dollars and try and buy up as many assets as they can in a short space of time with these dollars with deflating value. This will lead to a terrible inflationary spike when it sets itself into motion. Then the Fed will need to chase the tail of inflation with higher interest rates. But it is likely to trail too slowly behind the curve based on their previous track record – and hence people's savings on an inflation adjusted basis will decline sharply. When this happens, savers will also want to dump their dollars and buy assets of any shape or form since there will be no incentive to hold their dollars. This is when gold and silver prices will sky-rocket. Savers will finally wake-up to the fact that even with inflation, the interest rates are set lower than inflation and their savings would be further destroyed unless they switched to real money – gold and silver.
People Start Leaving: It will be like a giant re-possession – the US will be selling its assets to China and other countries - including their shale gas and shale oil reserves. The rich and middle class US educated people will want to leave. The US government may try and put controls in place to prevent people leaving, but essentially the US is a country of 350 million immigrants and if regulations increase further, opportunities die away, unemployment rises and taxes rise – with massive inflation, the smartest richest and most talented will start leaving in droves. Just like they did in Ireland in the 1960s and Mexico in the 1980s. It’s already started to happen.
Confidence Lacking: At the moment, confidence in the economic policies of the US government has dropped very low and this is one of the key reasons investment in the private sector is so sluggish – these investors have parked their money on the sidelines, are watching the bond markets and are positioning themselves to bail out of US assets and move investments abroad.
Elections: We think the Democrats will just about keep their heads above water until the end of 2012 as the Fed accelerates printing money and things wobble like crazy. They will probably just do enough to get back into power. This is likely to be the final straw as US economic confidence disappears end 2012 and the real crisis begins. Most likely immediately after the election, confidence will plunge and the dollar will start to collapse shortly after. If the Republicans get into power, it will take a decade to repair the damage – so don’t expect confidence to return in any scenario for many years. Gold prices are likely to rise higher under the Democrats than under the Republicans, along with taxes and inflation.
Private to Sovereign: If you consider that the 2008 financial crisis spread firstly at sovereign level to Iceland, then to Greece, Portugal, Ireland, and now Italy – with affects felt in France and the UK, you can see it’s rising up the food chain on a monthly and annual basis. Eventually it will get to US and Germany govenment level - this will then start affecting China. But because the US has 25% of global GDP, no-one can bail them out. Not China, not Europe. It’s too big to bail. It’s not too big to fail though.
US Endemic Problems: Essentially, we believe the USA has the following endemic problems that show no sign of being rectified:
· Over-regulation by a central government that is far too large - and getting proportionally larger
· Rising taxes – too high for private investment
· Expanding public sector – totally unsustainable
· Long term unemployment and under-employment
· $15 Trillion debt that is too large – 100% of GDP
· The US debt is projected to increase to $22 Trillion by 2020 – but this is based on an assumption that GDP growth will be 4% above inflation (we think this is impossible - for example, unlikely the 1990s when bold new innovations like the internet, PCs, cell phones improved productivity, we see no such new technology on the horizon end 2011)
· Annual deficit that is too large – 10% of GDP
· No debt or spending reduction plans – a meagre deferred $30 Billion automatic spending cut per annum is just a drop in the ocean (1/20th of the annual cost of US crude oil)
· Too many guns – in case of civil disorder – the downside is bleak
· A socialist government that has part nationalised banks – banks are bankrupt and only able to continue because of Fed interest rates set at 0.5% whilst banks lend at 5%
· The US borrows 40% of its spending requirements – for every $1 Billion is spends, it borrow $400 mln
· A 6% interest rate on $15 Trillion would mean all tax receipts would be used to make annual debt repayments
· Medicare bills are far too large - $6500/person/per annum
· Military spending is far too high - $1500/person/per annum
· Oil import costs are far too high - $1500/person/per annum
· Gigantic exposure to a $85 Trillion bond market that will eventually collapse – causing interest rates to sky-rocket
· Not enough productivity growth to stimulate real GDP growth and repay debts
· Underlying inflation that is not being properly measured – inflation is probably already 8-10% whilst official figure show ~3.5%
· Private US industry has about $2 Trillion sitting on the sidelines (Apple has ~$60 Billion alone) – confidence is so low that these companies choose not to invest the cash in the USA
· A government and Fed run by politicians and academics are propping up failed banks – leaders are in denial
· The only thing keeping the whole show on the road is the “historic” reputation of the US dollar as the global reserve currency – when this wanes with every bout of printed money coinciding with China's rise in economic power – there will become a tipping point when international investors no longer seek the dollar as a so called “safe haven” – at this point the US bond market bubble will collapse
Gold and Silver Skyrocket: International and US investors will dive into gold and silver as safe heavens as the dollar crashes and all prices go through the roof. We are 90% sure this will happen. This is why we continue to warn against low interest rates in the USA, the bond market bubble and inflation – and give guidance to serious investors to buy gold, silver, oil and physical assets to protect against combined inflation (goods and services) and deflation (real terms property prices). Anyone that says gold is a bubble is a joker – when was the last time you found anyone that has actually bought gold or silver? If you don’t know anyone that owns it – even the hedge funds – how can it be a bubble?
Debt Bubble Pops: The debt bubble will come to an end some day between 6 months and 6 years - and yes, we all know people with huge debts. This will coincide with a final commodities blow—off bubble as the bond market collapses, inflation takes off and western currencies collapse. Gold and silver will go through the roof, before finally crashing themselves.
End Game: At the end of the day, the people holding gold and silver will be the ones who can then use this to purchase cheap assets after the final collapse period.
% Tonnes Trillion $ 18 30000 1.2 18 30000 1.2 12 20000 0.8 52 86000 3.8 100 166000 7
Global Gold Reserves Market vs US Bond Market and Debt
Official Reserves Central Banks
GFMS Source: $ based on $40 mln per tonne
Size of US Bond Market $85 Trillion
Size of US Debt $15 Trillion
Size of US Deficit $1.5 Trillion per annum
New Money Printing in the next 18 months $2 Trill
Silver Market (global) $0.03 Trillion
Collapse Through Economic Mismanagement: We hope this will not happen of course because of the economic hardship, high unemployment and strife that it will create. But essentially, the economic policy mismanagement by the US government will lead the US down this road, and we are merely giving guidance to private investors to warn them of this – and highlight the only remaining opportunities out there to protect your wealth from the printed fiat money tidal wave about to hit around the globe as the $85 Trillion US bond market fails. People will eventually dump their dollars for any asset they can get their hands on driving dollar prices through the roof and gold and silver prices with it. It started with a short bout of deflation and will end in very high inflation before the final collapse.
Mainstream Views: So why don’t you hear about hyper-inflation and the approaching bond collapse in the mainstream media? It’s because most major players are CEOs of large financial institutions and entities or politicians – they don’t want to scare the market and they want to keep their jobs. There are a few big independent investors out there that tell the truth objectively – but they are considered fringe, scare-mongers or even crazy. You can of course make up your own mind. If you have any major doubts on our track record for predictions, check out our annual predictions and look-backs from the last five years.
356: 2011 Prediction (and 2010 look-back)
301: 2010 Prediction (and 2009 look-back)
Banks Have Failed: Another reason for holding gold and silver is that if banks fail, ATMs don’t work and one needs to buy goods or services, one can use silver and gold coins to barter. In a proper financial collapse, banks close, people cannot get savings out, currents accounts are frozen – and savings are lost or disappear. There are no guarantees. If hyper-inflation hits, then no-one will be accepting the fiat US dollar – or if they do, they will want far more for their services – and gold/silver will be a way to maximise purchasing power at minimum cost. It could eventually be the only form of real money that people accept. In this scenario, people trade using barter, silver and gold. At least there are not taxes to be paid.
Central Projection: We stick to our base case projection that gold will hit about $6500/ounce (from $1600/ounce) and silver will hit $400/ounce (from $30/ounce) sometime in the next 6 months to 6 years at the top of the commodities blow-off bubble. But don’t expect it to go up in a straight line. And you need to be prepared to chas-out at the correct level. Happy investing.