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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.)
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
{ 24 comments }
By contrast the Australian market is up 50% in 11 years, down 29% from the 2007 peak and up just 57% from the March 2009 low, That is because the A$ has gone up 73% in actual value since March 2009. It means the Australian share market, including dividends, ironically and technically has delivered a 200% return since March 2009 to foreign investors, at an annual rate of return of 56%
Since I retired from an active role as an environmentalist in 2004 I have spent countless hours reading financial info – generally the contrarian journalism that has been 100% more correct than the mainstream “buy buy buy” variety. I never doubted my resolution NOT to buy Earth damaging stocks eg Coal & Oil – when the Financial advisors said “take advantage of tripling global demand before everyone else catches on”. But I could never find a stock that met my criteria!!! Whilst my capital has diminished by 5% on face value as I tried to subsist and maintain my assets on relatively low long term deposit bank rates, the increase in the value of A$ has compensated theoretically by adding 73% o value to my diminishing capital – although the face value numbers remain constant. The overall deflation in the value of paper money, and concomitant inflation in the cost of living which is an inevitable product of our financial system – based on interest creating new capital that is inherently only worth the numbers less the compound interest paid – is inevitable. However, the major contributing factor in all this is the decline in value of the US$ – which will have imponderable effects on the world economy.
I begin to subscribe to the philosophy of Prosperity WITHOUT Growth – after all any child can tell you there are only so many candies that a glass jar can contain. How I would welcome some comment on this theme from members of the excellent Weiss team!
The buck may have gone down 25% or so from when someone rated it as 100. but most prices haven’t risen 25% — yet. There’s a delay factor. But, at some point, the prices will catch up with the real drop in value; then the delay factor will turn into an anticipation factor — prices will begin to rise faster than the real value of the buck falls. That’s when inflation will begin to run away in earnest. When will that happen? Maybe a few years from now — maybe even later this year. The only thing certain is that with what is really a counterfit currency, it will happen.
Thank you Martin. Your wise advice is invaluable. Of all the talk & noise from the financial world, your voice is the one I trust the most.
Nate Miller
Melbourne Florida
Back in the day,and yes even today the U.S. gives more foreign aid than any country in history. Rebuilding Europe & Japan, financing and outright granting aid for South American countries. As you know Martin many of wich were defaulted on. Not posible to want or expect any repayment. One can only hope that if this country survives economic catastrophy, that it will gain leadership, that will remember & put AMERICA FIRST. And let the rest of the world leach off the new economic powers.
I hate to contradict Greg but it is a historical fact that the United Kingdom, which bore by far the major brunt of the axis forces, finished paying off the US last year for the supplies and essential survival goods which were required to stop the axis advance. Though USA played a major part in the fight against the Nazis it should not be seen as philanthropy. A major part of the growth in USA during the 20th century was funded by the payments which governments were still having to make to USA. So please don’t keep repeating this crap. The military industrial complex made vast profits throughout the century.
I used to bring silver dollars home from my father’s store when they bought a dollar’s worth of merchandise in 1958. They weren’t much used because they were “inconvenient” to carry as opposed to Silver Certificates which was the paper money at that time. Is that Inflation or “Progress”? These guys never stop of their own accord, Dimicrat or Repub they march to the same financial drummer.
For example: Repubs will never get rid of Obamacare; they will “reform” it, then the Dimicrats will “adjust” it until you get single payer government care, womb to tomb. I left the word “health” out of government care deliberately.
The very term “debt ceiling” is just another hypocrisy. It’s a ceiling only when we’re not close to it. As soon as we get near it, they just move it higher, to maintain the fantasy of a ceiling without having to recognize any actual limits. There is no actual ceiling, and never has been. I wish Weiss and others would stop using the term debt ceiling at all, because even just using the term tends to give legitimacy to what is fundamentally just words without meaning. How about “debt non-ceiling”? Thanks — Eugene K.
China uses a totally fiat currency too.There is lots of buying of gold and silver by Chinese,as they suffer high inflation.Dishonesty always returns negative results in the long run and a dishonest currency is no different.Unfortunately, most Americans chose this mess when they decided they could get something for nothing through govt.They would rather continue with a bad system than change it and risk their welfare benefits going away.
Is it possible that I’m the only one out here who would have liked to print out Martin’s essay today? But it can’t be done ! I click on the “print” icon at the top of the page and my printer pushes out page 1 AND THAT’S ALL ! ! OK. I copy the rest, paste it into Notepad and print it out. But I shouldn’t have to jump through those hoops and I lose ‘the graphics. You must have an IT guy who could fix this in a trice. So why don’t you?…….Alan
I had no problem printing out the nicely written essay by clicking on the print icon.
jrj,
dat mean china gona crash?
Hey GenEarly!
In 1964 in San Antonio Texas there were gas station “wars” where one small chain would try to douse the other with low or even below cost gasoline gallons. The idea was to drive the other guy out of business with cut rate or cut throat pricing. Normally the price for a gallon was 20 cents. These “gas wars” would see the price drop to 15 or even 14 cents per gallon.
In 1965 the treasury introduced “sandwich” or nickel and copper coins. Two of those 1965 sandwich dimes will only get you a squirt of gasoline here in Los Angeles. But the bullion value of two 1964 dimes is as of this minute is (spot for 0.0723 ounces is $3.35) $6.70.
In the 1970’s all other commodities were racing ahead of the price of a barrel of oil or “leading” oil. That is what is happening today. A gallon of gasoline IS GOING to be $6.70 very soon.
If silver and gold continue to reflect the declining value of the dollar by requiring more and more dollars to buy them, then it is foreseeable that $60 silver and $2000 gold will mean $8.68 per gallon of gasoline by July. The $60 number is coming from traders of the largest jewelry buyer in the world, India.
I enjoyed reading about the historical trauma the Brazilian currency has experienced (I´m and American living in Brazil) and thought you did a nice job talking about devaluation and changing of currencies. It seems that you are trying to extrapolate and hint that possibly the USA is headed down the same path unless it corrects its debt position. None-the-less, there is no mention of the continued divergent nature of the two economies, to mention just one obvious factor: interest rates, a reflection of country risk (i.e. Brazil is an extremely high risk country to do business in even today despite its earned status as an economic power-house leading the BRICS alongside China). A real estate bubble is happening in Brazil right now just as it happened in the USA 3 years ago. Foreign capital comes to Brazil to earn higher returns due to the higher interest rates but, to compensate, the government has increased its cut. You suggest investing in contra-dollar assets but, surely, you cannot be recommending investment in the Brazilian Real knowing it has attained its higher value status in less than the past five years. Most Americans are risk-adverse and are used to investing in their own comfort zone of knowledge. It is more dangerous to recommend investing in foreign assets to the typical American investor who has no experience in a foreign country. If you invest in Brazil, you have to be here, staying on top of market changes in order to react quickly.
If anyone asks me what to invest in, it is whatever you can touch, feel and what you know with diversification. It is a parameter that works in any country. If you do not know Brazil or foreign asset investments, do not do it — the interest rate is always a warning of credit risk.
I am continually amazed at the number of readers who want investment advice from your organization simply because they do not want to to assume the responsibility of their own decision-making process (assume risk). This in and of itself should tell the person to not invest in anything that contains a shred of risk.
I think Dr. Weiss information is pertinent and valid as a benchmark for how the industry thinks about the current economic climate. I think your organization provides credible and intelligent analysis through its reports and informative overviews of investment vehicles, primarily in the USA. But, under no circumstances would I consider the investment advice provided as a fail-safe course of action to take. This is the responsibility of the individual for everyone must assume the risk of their own decisions with their own money. From what I read of your subscribers feedback, they are largely risk adverse hoping for a fast and easy solution. This will never happen.
AMEN…Susan……..Well said…..!!!
Don
Thanks Don. It was nice to read your reply. My email is susan.sabir@financialcenter.com.br in case you want to talk investments anytime.
A dollar bought more than 5 British pounds. Now it buys 1.63 pounds. And despite Britain’s severe economic problems, the dollar continues to fall against the pound.
— A dollar bought more than 6 Swiss francs. Today the dollar stands at a record low against the franc, buying only 0.91.
— A dollar bought almost 9 Australian dollars. Today it buys less than 1!
— A dollar bought more than 4 Canadian dollars. Today it, too, buys less than 1!
As long as ridiculous statements like these appear on your website you will have trouble getting people to believe you
Respectfully
Bill
Stoobz,
You mention the U.k. Can you please supply the entire list?
Dr. Weiss,
I am as concerned about inflation as you. I remember the 1970’s here in the U.S when Volker drove the yield of Treasuries beyond 15%! I invested my IRA in a Mutual Fund which held mostly gold mining stocks and had excellent returns. But,
I fail to understand why you picture the U.S. as going hat in hand to China and the others trying to get them to buy our bonds. Korea just bought $2 billion worth! Why would they do that? Because they fear being priced out of their most important export market. Ditto China. The real issue is what are they doing with Dollar assets that they are acquiring?
What should I do with my Thrift Savings Plan? Seems like it’s destined to become worthless. All that savings for naught…
Susan you make very good points. I believe that Dr. Weiss and his organization give very good advice, but in the final analysis it is up to each person to take personal responsibility for their decisions or lack of them. Its only when you can learn from your mistakes that you can improve your results. If you want someone to give you a fail safe recipe you are going to be sadly disapointed and will join some of the winers on these blogs.
“…their hidden agenda…” is only veiled as non-speak. Behavior belies intention.
A currency is not a store of value it is just a mechanism for exchange. A currency always reflects the “value” (read trust) in the underlying assets supporting the currency. I think one should approach the situation from the standpoint of what is the ideal situation. Just as much as China’s currency can not stay weak (unless manipulated) with all the reserves it carries, the US currency can not sustain its strength with all the debt it owes (unless manipulated). The ideal situation is where the currency is stable (neither strong nor weak) and which supports imports and exports equally. This is where the dollar is headed. A weaker dollar will bring back jobs and manufacturing, in other words start to create meaningful jobs again instead of low paid minimum wage jobs so many people have been forced to accept. There is only one way to a consumer can protect himself and that is to live well within his means. Saying no to the luxury of an expensive big screen tv or V8 truck or unneccesary Iphone app is the way to go
So, should I continue to hold or redeem my matured I-bonds, which have been held since October of ’01? They currently are up 64% from what I paid. I’m mostly concerned about what they will buy, no matter the $ value, when the dollar does its dramatic slide. Any other holders of these beauties out there?
I read an old LA TImes article (2010) about how the oil companies are shutting down refineries due to falling demand to raise gas prices. I had thought the rising prices were due to the falling dollar but now see that it is mendacity by the oil companies that is causing it. Its time to charge a windfall profits tax to cut this federal deficit.