Today I want to talk to you about the unprecedented debt levels incurred by the sovereign nations around the world, lead by the United States.
We hear a lot about Greece and well we should; the country is bankrupt and is suffering all the consequences of insolvency, including social unrest, government upheaval and default on the bonds.
While we’re not there yet, some are asking, can the same thing can happen herein the United States? Given the huge debt levels incurred by the government at the federal level, not to mention the state levels and some of the municipalities, the answer is ‘ yes’.
So now we have the total public debt in the United States approaching 100% of the GDP, at $15-$16 trillion, increased annually now by $1-$1.5 trillion. That’s the annual budget deficit. Something that tax increases can’t even make a dent in.
Just look at this chart:
The fact is, we have exponentially increasing debt, which can only end badly. Now there is no way that debt will ever be repaid. It’s impossible. If you just do the arithmetic, you could double tax rates and it wouldn’t help, it wouldn’t really make a dent.
You can cut back on programs, but it’s too late. The debt has run away from our ability to repay it.
How will politicians resolve this? How they always do; they will kick the can down the road, so to speak. Because they have no political will, no backbone to act as adults and solve this problem, their only “solution” is to ignore it.
As a consequence, interest rates will go up, driven by double-digit inflation. That is what happens with runaway debt. While no one thinks that we’re looking at high interest rates today, given the Fed’s assurance that rates will remain low for the next couple of years, you can bet that the consequence of all of this debt will be extremely high and unprecedented inflation in the near future. This will then drive up interest rates. That means the value of your dollar and euro are going to continue to decline. The price of milk and bread will be going up soon. It’s already on its way, but it’s going to accelerate.
So what do you do to safeguard your portfolio and the purchasing power of the dollar or the euro? One hedge is to buy precious metals; silver and gold principally. But one of the big problems with buying silver and gold is they are very volatile markets. Say you had bought silver at $50 an ounce not long ago. Well now it’s below $30 an ounce, so you’d be looking at a 40% loss. Who wants to do that?
So one of the best ways you hedge this inflation risk is yes, with precious metals; but you hold the metal. Rather, you must learn how to trade the precious metals. Because as we’ve seen with silver, if you just buy and hold metal, you run the risk of a 40% loss or even more.
If you learn how to trade them, you can have the potential to ride the trend up when it’s going up, like silver when it drove to $50, and then get out after it peaks and go to cash. Then wait for the new uptrend to begin and buy again. That way you can hedge the inflation risk in an intelligent way without incurring additional risk by buying and holding the precious metals.