Swept Up Into an Inflation Tornado

Precisely two weeks from today, on May 16, 2011, the U.S. government will exhaust its power to borrow money.

That’s the official estimate of when the U.S. Treasury bumps up into its debt ceiling … runs out of funds … and is forbidden by law to borrow a penny more.

But in the murky world of government financing, official deadlines are one thing; the real, drop-dead deadlines are another.

The reason: To postpone that day of reckoning, Secretary Geithner can shuffle some funds around, put a few creditors on hold temporarily, and keep the government running for a few more weeks — until July 8.

Then, after that date, says Geithner, it would be curtains: The U.S. would default on its maturing debts.

This Is Beyond Crazy!

Yes, we know. It’s nearly all political posturing.

But if Democrats and Republicans want to play a game of chicken on the edge of a cliff — or Russian roulette with live bullets — they should at least do it with their own money and their own financial hides at stake. Not ours!

What irks us even more, however, is their hidden agenda —

• to do everything in their power to gut the dollar …
• so they can pay back creditors with cheaper money, and …
• keep the party going regardless of some very nasty consequences!

Look. Those consequences are not some distant cloud on the far horizon. They are striking right now! Indeed …

After barely escaping a monstrous deflationary quake just two years ago, the United States has now swung 180 degrees in the opposite direction … and is about to be swept up into an inflation tornado.

Already, the U.S. dollar is collapsing, within a hair of its lowest lows of all time. And already, gold has flown past the $1,500-per-ounce level, propelled by spreading fear of paper money. But if you think that’s dramatic, consider this shocking comparison:

• In 1980, inflation soared to 13.5 percent. But the fiscal challenges back then were miniscule compared to todays.
• In 1980, the deficit equaled 2.7 percent of this country’s gross domestic product. Today’s annual deficits have been hovering near 10 percent of GDP — more than three times more.
• Also in 1980, the total national debt was a mere $900 billion. Now it’s over $14 trillion, 15 times greater!
• The 1980 deficit was only $73.8 billion. Today, it’s $1.6 trillion, nearly 22 times more.

Moreover, compared to 1980, our reliance on foreign investors for deficit financing has nearly tripled … our money-printing presses are out of control … and our influence over foreign governments — whom we’re counting on to accept our debts — is a shadow of its former self.

It’s nearly a perfect recipe for another dollar collapse and, closely on its heels, rip-roaring inflation.

Why Is It That Many Fellow
Americans Still Don’t Get It?

Maybe it’s because they haven’t lived in a country where the currency was chronically ill. I have.

Over a half century ago, my father decided he wanted to buy a second home in the tropics. He dreamed of going there to escape Wall Street winters, write quietly, and contemplate the world economy from afar.

Finally, in 1952, after three years of searching — in Costa Rica, Colombia, and Cuba — he found his dream retreat, thousands of miles to the south, in the central highlands of Brazil.

Its name was Três Ranchos, a farm with a fast running brook and a patch of virgin forest.

A few miles to the north, near the village of Curumbá, a distant tributary of the Amazon tumbled into a pristine waterfall from multiple directions, like a miniature Niagara.

A few miles still beyond was an open, largely uninhabited plateau, which, years later, would be transformed into a bustling super-modern capital city — the cost of which would drive Brazilian inflation into triple digits.

I remember the plateau vividly … and also the hand-written, misspelled sign posted seemingly in the middle of nowhere: “Future ‘cite’ of Brasilia.”

Two other American families had also discovered this remote paradise. Janet Gaynor (“A Star Is Born,” 1937) lived nearby. So did Mary Martin (“Peter Pan,” 1954), along with her son, Larry Hagman (“I Dream of Jeannie” and “Dallas”).

But Broadway and Hollywood glitter meant nothing to me. I was too busy with my favorite activities — exploring the forest and collecting Brazilian coins. Actually, the former activity wasn’t nearly as dangerous as you might think. Collecting Brazilian coins, however, was another matter entirely.

Even though time went by slowly for me, I could tell my coins were losing value quickly.

I knew because many of them were “reis” (kings) — the previous Brazilian currency. I couldn’t buy a darn thing with them! They didn’t even have collector’s value. In fact, it took one thousand of the old reis to make just one cruzeiro, Brazil’s new currency at that time.

One day, I tossed some of my coins into the brook and, in retrospect, it probably wasn’t such a bad decision.

In the years that followed, Brazil suffered a whole series of 1,000-to-1 currency conversions — from the old cruzeiro to the new cruzeiro … to the cruzado … back to the cruzeiro … and more. Each time, anyone collecting, saving, or investing in the previous currency would have been wiped out, their wealth decimated.

Five decades later, Dad and I sat down to figure out how much my old rei might be worth right now. The answer: one quadrillionth of Brazil’s currency today.

After we had counted all the zeros, Dad smiled and said: “Fortunately, you’re not so careless with the nickels and dimes you saved in American money.”

Today, however, that’s not the case. Accumulating U.S. dollars is no longer a great way to save anymore.

The Unfathomable Risk
Our Leaders Are Taking

The damage that’s been done to the underpinnings of our dollar today remind me of the damage that was done to Brazil, with its many currencies over the years.

I have been back to Brazil more than 40 times. I know almost every region. And I can tell you flatly: The historical roles of the United States and Brazil have inverted!

Years ago, Brazil’s economy was forever at the mercy of foreign capital — from major banks, big corporate investors, the International Monetary Fund, and others. The country continually ran deficits and almost always needed money from abroad to stay afloat.

The United States, in its heyday, was the opposite. It was America that provided the primary source of capital throughout the world. It was America that owned big stakes in foreign economies. We didn’t need their capital to sustain us. They needed ours.

Today, our leaders are taking a huge, unfathomable risk with the dollar and our destiny as a nation. Today, like a Third World country of yesteryear, we are the ones who depend so heavily on foreign capital.

With our massive deficits, we must go, hat in hand, asking for money from central banks and investors in Asia, Europe, and even Latin America.

With our massive trade deficits, spending more on imports than we earn on exports, we run back for still more money from citizens of Asian, Europe, and Latin America.

And now, after thousands of such trips and billions of such transactions, we are approaching our final Day of Reckoning.

Amazing how much has changed in just one generation, isn’t it?

Don’t our leaders see how dangerous this is? Don’t they see the consequences of their complacency?

This is why we have issued our new Weiss Sovereign Debt Ratings. This is why we have rated the United States Government a “C,” two notches above junk.

And it’s also apparently why it has generated such an immediate press media and controversy. (See, for example, Wall Street Journal online, shown above.)

Our recommendation:

• If you own medium- or long-term government notes and bonds, dump them immediately.
• If you have your cash in short-term U.S. Treasury bills, bank CDs, or money markets, be sure to surround them with investments that go up when the U.S. dollar falls.
• And if you wish to profit from this crisis, consider adding still further to those contra-dollar investments.
• Most important, get ready for the coming turmoil in global markets — caused by the Federal Reserve’s follies and Washington’s inaction.

Good luck and God bless!

Martin