I’ve warned people for at least five years that the national debt is too great to ever be repaid in full. That fact is my principle reason for advocating ownership of gold. I don’t advocate gold because it’s metal, yellow or shiny. I advocate gold because the fiat dollar must die, and the national debt will contribute to, and probably cause, that death. In the midst of that trauma, gold should become incredibly valuable.
Over the past five years, I’ve warned that “what can’t be paid, won’t be paid” and therefore, either by secretive inflation or by open repudiation most of the national debt (80 to 90%, in my opinion) will never be repaid in full. And I’ve warned of the incredible danger inherent in repudiation of such an enormous national debt.
That danger is seen in the fact that one man’s debt is another man’s asset. I.e., in return for borrowing $100,000, the borrower signs a note (paper debt-instrument) to the lender wherein he promises to repay $100,000 (plus interest). The lender and the banking system treat that note as an asset—even though it’s really just a promise to pay. If you ask the lender for his net worth, he’ll include the $100,000 note as part of his assets.
And therein lies the danger in repudiating a debt. If the borrower can’t pay the debt, it’s not just the debt that disappears—the correlative note, the “paper asset,” also disappears.
Thus, if the national debt is $17 trillion, that means some unknown number of creditors are holding $17 trillion in paper bonds/notes and treating them as paper assets. Some of those paper notes are used as assets in pension funds, other to secure loans to build more homes, shopping centers, start new businesses, etc. So, if, say, $10 trillion of the national debt was repudiated by inflation or by open repudiation, it wouldn’t just destroy $10 trillion in debt—it would also necessarily destroy $10 trillion in paper assets.
The economy can function just fine without $10 trillion in debt, but it can’t survive the loss of $10 trillion in paper assets.
To repudiate the debt is to destroy the correlative paper asset.
That’s the enormous danger in a national debt that’s too big to ever be repaid in full. When the day inevitably arrives that some substantial portion of that debt is repudiated, that will also cause the loss of an equivalent amount of paper assets. If enough of the national debt is repudiated, the resulting loss of paper assets could collapse the economy.
If the economy collapses, I presume that the fiat dollar will at least lose much of its value and will probably also collapse.
Some people would deny that presumption based on the fact that during the Great Depression “cash was king”. I.e., as prices fell, the value of the US dollar increased (deflation). The US dollar became more valuable during the deflation of the Great Depression.
I, however, note that that the “cash” that was “king” during the Great Depression was backed by gold until A.D. 1933 when President Roosevelt removed gold from domestic circulation, and backed by silver throughout the entire Great Depression. Thus, the “cash” that was “king” during the Great Depression was not a fiat currency (as we have today) but was always, ultimately, gold or silver.
This suggests that if we go into a “Greater Depression,” “cash will (again) be king”–but that “cash” won’t be paper, fiat dollars. Instead, the “cash that will be king” will be gold and silver coin. The paper, fiat dollar will be subject to hyper-inflation and will lose value (purchasing power). The gold and silver will be subject to deflation and will gain in purchasing power.
Nevertheless, for the moment and much to my surprise, the fiat dollar is deflating and rising in value. I doubt that that deflation can be sustained–but, as measured on the US Dollar Index (US$X), evidence of deflation appears to be rising.
• The UK Telegraph recently discussed the consequences of massive global debt in, “Mass default looms as world sinks beneath a sea of debt.” Excerpts from that article include:
“Global debt is still rising strongly, crimping growth and threatening defaults around the world.
“The UK and US economies may be on the mend at last, but that’s not the pattern elsewhere. On a global level, growth is being steadily drowned under a rising tide of debt, threatening renewed financial crisis, a continued squeeze to living standards, and eventual mass default.
“This is the conclusion of the latest “Geneva Report”, . . . [which] points out that . . . . Contrary to widely held assumptions, the world has not yet begun to de-lever. [repay and reduce existing debt]. In fact global debt-to-GDP—public and private non-financial debt—is still growing, breaking new highs by the month.
“[E]ven developed market economies have struggled to make progress, with rising public debt [economic stimulus] cancelling out any headway being made in reducing household and corporate indebtedness.
“The only way the world can keep growing . . . is by piling on debt. . . . When rising asset prices are merely the flip side of rising levels of debt, it becomes highly problematic.”
“Problematic,” my butt. The more accurate descriptive term is “catastrophic”.
The author of the Telegraph article seems unnerved by the growing recognition that “asset prices” are merely the “flip side” and equivalent of rising debt.
If so, he may be beginning to sense what I’ve warned of for five years: 1) The national debt, the world debt, debt in general, can’t be paid in full; and, 2) when our excessive debt is inevitably repudiated, an equivalent sum of paper assets will also instantly turn out to be worthless. The economy will be collapsed by the loss of paper assets.
(And the world, incidentally, will then stampede in search of any kind of “asset” that’s not made of paper or electronic digits. The price of gold should skyrocket.)
“Eventually, it dawns on the creditors that the debtors cannot keep up with the payments. That’s when you get a financial crisis.”
When the world finally realizes that: 1) the debt can’t be paid; 2) the debt won’t be paid; 3) the paper-debt instruments are largely worthless; 4) the whole debt-based monetary system will collapse; then, 5) the world will panic as it searches for tangible assets like gold.
“Historically, big debt overhangs have tended to be dealt with via inflation and currency adjustment, the natural, market based way of haircutting creditors.”
“Haircutting creditors” is just a fun way to describe the kind of robbery that’s been committed for decades by our government and Federal Reserve.
Who’s being robbed? Creditors.
Who are the creditors? Anyone who’s saved any portion of their wealth.
That savings might be in a bank account, pension fund, So-So Security, stocks, bonds, etc.. But if that savings is denominated in fiat dollars, government intentionally robs those creditors (and thereby reduces the national debt) by means of inflation.
But here’s the problem:
“There is no sign of the inflation you might expect after such an unprecedented phase of central bank money printing.”
Dahyam! Even after trying to “stimulate” the US and global economies by injecting trillions of dollars’ worth of fiat currency, inflation has not caught on to a degree sufficient to repudiate a significant amount of the national debt.
Without a sufficient inflation, the national debt won’t be sufficiently (but secretly) repudiated.
Implication? The unpayable national debt will have to be openly and publicly repudiated. That’s when the public finally gets wise, and the whole fiat-monetary/Ponzi scheme implodes.
“[I]n conditions where excessive debt cannot be worked off [paid or repudiated] through growth, restraint [in government spending] and inflation, adjustment [open repudiation of debt] will eventually be forced much more divisively through default.”
In other words, if government can’t cause enough inflation to repudiate enough of the existing national debt, that debt will inevitably be repudiated by an outright “default” when government is forced to publicly admit that it can’t pay its bills, is insolvent and openly bankrupt.
That’s when the stuff hits the fan.
With inflation, the “day of the stuff” can be postponed. Without sufficient inflation, the “day of the stuff” approaches more rapidly.
With deflation (increasing value of the fiat dollar and thereby the size of the national debt) the “day of the stuff” approaches more rapidly.
• Deflation, incidentally, is normally hallmark of economy depression.
For the past twelve weeks, the value of the fiat dollar—as measured on the US Dollar Index (US$X)—has been rising steadily and surprisingly.
During that same twelve weeks, the price of gold has been falling steadily and surprisingly. In fact, the falling price of gold has been so disturbing that many former “goldbugs” are losing faith in that metal.
During the week of September 26th to October 3rd, the US$X rose 1.02 points from 85.62 to 86.64. That means the perceived value (purchasing power) of the fiat dollar rose by 1.19%. That’s evidence of deflation.
1.19% deflation might not sound like much. But the significance is huge.
The “official” national debt is currently about $17.83 trillion. Thanks to deflation, the value or purchasing power of those dollars just rose by 1.19%. That means the true size (purchasing power) of the “official” national debt increased by about $212 billion. In one week.
Thus, the national debt has increased by $670 per person. That means you, ladies and gentlemen, each sank $670 deeper into debt than you were a week ago. If you have a family of four, your family’s “fair share” of the national debt just rose by $2,675. In one week.
However, if (as per John Williams, shadowstats.com) the actual national debt is about $90 trillion, last week’s deflation increased your personal share of the national debt by about $3,400. The average family of four just fell another $13,500 deeper into debt. In one week.
If the actual national debt (including unfunded liabilities) is over $200 trillion (as claimed by the Congressional Budget Office) then your personal share of the national debt just grew by $7,500—and a family of four’s fair share of the national debt increase by almost $30,000. In one week.
The point I’m trying to make is that as US$X rises, the perceived value (purchasing power) of the dollar also rises—and so does the value of the national debt.
Inflation allows us to reduce and tolerate the national debt.
Deflation can increase all debt and bankrupt all debtors. Deflation forces debtors (including the US gov-co) to admit that they’re insolvent, that they can’t pay their debts, and that the correlative paper-debt instruments are worthless.
As I’ve already explained, the national debt is too great to ever be paid in full or even substantially. As deflation increases the value (purchasing power) of that debt, the debt becomes increasingly unpayable.
Deflation slows the economy and reduces tax revenues. As tax revenues fall, government is less able to pay existing debts.
Worse, knowing the gov-co can’t even repay its current debts in full, potential lenders will be less likely to lend more to gov-co. As the gov-co is less able to borrow more, the gov-co will be less able to spend the sums that have tended to hold the economy together for the past six years. As gov-co’s tax revenues and ability to borrow are increasingly restricted, gov-co will have to cut spending. They might cut military spending, they might cut entitlements, they might cut pensions, wages or services. But sooner or later they will cut some of the current payments being made on the national debt.
That tells me that, if deflation is allowed to persist, the day of reckoning is drawing closer when government will be forced to admit that it can’t pay the national debt. When that day arrives, the price of US bonds will plummet, the perceived value of the US dollar will fall—and the price of gold will jump.
• If government can’t repudiate much of the national debt by reinstating significant inflation, government will soon have to openly repudiate at least part of the national debt.
I presume that when any significant repudiation of the national debt takes place, confidence in all paper debt instruments denominated in fiat dollars will fall dramatically.
Perhaps my presumption is valid. Perhaps not.
But if my presumption is true to any extent, to the same extent, those of you holding your wealth in any form of paper debt instruments (not just US bonds, but also stocks, pension funds, savings accounts, etc.) that are denominated in fiat dollars are going to lose your assets.
Although the following conclusion may sound like sophistry, it still strikes me as possible and even probable that as the dollar’s perceived value on the USDX is currently increasing, so is the real size of the national debt. Thus, it appears that the dollar’s rise on the USDX (deflation) should be hastening the day of the fiat dollar’s default and even demise. A default in the national debt should cause the value of the fiat dollar to collapse and the price and value of gold to soar.
Much to my surprise, I find myself arguing the seemingly paradoxical conclusion that a rising value for the fiat dollar on the US$X (and the correlative fall in the price of gold) makes ownership of gold more necessary and more rational.
That’s right—as crazy as it sounds, I’m actually arguing that the current dollar deflation and correlative fall in the price of gold are reasons to buy more gold.
Not because the price of gold is, for now, going up. It’s not. The price of gold has, most recently, been falling for two or three months.
But because the value of the fiat dollar is rising and making a repudiation of government debt increasingly likely and imminent. If and when the national debt is repudiated, the US dollar’s value will fall like a stone and the value/purchasing power of gold will soar.
• If the previous argument is valid, government is caught between the “rock” of repudiating the national debt subtly by means of inflation and the “hard place” of being forced by deflation to openly admit that it can’t pay the entire national debt.
Either way, the value of the fiat dollar must fall and the price and value of gold should rise.
Conclusion? No matter which way government turns—to more inflation, or to more deflation—the price and/or value of gold must rise significantly.
When? Don’t know.
But deflation continues, I suspect the answer may be “soon”.