“You cannot keep out of trouble by spending more than you earn.”
A few days ago, Dubai World — maker of all things frivolous — announced that it would delay payment on its $59 billion debt. This announcement is what Moody’s called “a de facto default” and it drove markets down around the world.
The Heng Sang was off 4.5%… Greece fell 7%.
Two days later, Dubai said it was just joking. Of course it would pay.
Dubai, the spendthrift younger brother that built a party palace out of a fishing village, is lucky that older brother Abu Dhabi has a US$700 billion nest egg and is inclined to help out.
Doubtless, there will be strings attached… but it looks like the legendary Palm Islands won’t sink — even if they don’t sell at a profit.
Debt Crisis Has Legs
It looks like the debt crisis isn’t over, despite what Wall Street and Washington would have you believe.
Immediately after the Dubai default, newspapers speculated who would be next. Their guesses: Greece, Latvia, Ukraine, Ireland, and perhaps even the U.K and Italy…
Greece is the current whipping boy for the fiscal conservatives in Brussels. The country has been overspending since before it hosted the Olympics to lackluster crowds, and is now on the edge of a negative debt spiral.
The EU is upset because the country’s budget deficit will be more than 12% of GDP this year. That is four times the amount stipulated by the EU.
According to the Wall Street Journal, “Greece’s finance minister came out today and promised that the country wouldn’t default on its loans as the cost of insuring its bonds soared to the highest among the 16 nations that use the euro.”
Of course, that’s what finance ministers always say right before they default.
It Can Happen Here
The current Prime Minister of Greece campaigned on the typical tax-and-spend social programs. But he recently switched gears. He’s announced emergency measures to “save” the economy, and is now talking about “an uphill struggle” to get the economy back on track.
In case you were wondering, the U.S.’s budget deficit is now 13% of GDP. And President Obama is announcing new trillion-dollar programs all the time. Health care… cap-and-trade… expanding wars in Afghanistan… and whatever else is on his happy wish list.
Total public debt in Greece is now 99% of GDP and will rise to 135% of GDP by 2011. Numbers like those mean the country is paying around 50% of income just to pay interest. It’s not good. It does not make people want to lend you money, but rather short your currency, which in turn drives up the amount you have to pay in interest.
Total debt for the U.S. is 90.4% of GDP for 2009 (without adding in unfunded liabilities like Medicare and Social Security.) Next year, the number will be closer to 200%.
The main point here is that Greece is a small country that can — and will — be bailed out by Germany and France. On the positive side, Greece doesn’t own a printing press for euros and can’t inflate their way out of debt. The country must stop digging its hole.
Sadly, the situation is not the same here in the States. The bad news for Americans is that we do own our own printing press, and we have no qualms about using it.
Bye Bye Greenback, I Hardly Knew Ye — U.S. Dollar/ EURO
The current brain trust in charge of the U.S. Economy believes that you can spend your way out of a debt crisis. What the economy needs is a little money to “prime the pump.”
Heck, it worked when Regan did it in the 1980s. And again with Clinton in the 1990s.
- Dot com depression? Feed it money.
- 9/11 bailout? Cut interest rates.
- Real estate earthquake? More money!
Let’s take a look at how well it has worked so far for the current crisis…
Remember a year ago when G.W. Bush sent everyone a $300 check? Cost: $152 billion. Result: Nothing.
Then the TARP gave failing banks $700 billion and, in effect, nationalized them. Result: Biggest-ever bonus for bankers.
And more recently, Obama dreamed up the American Recovery and Reinvestment Act of 2009. We’d build bridges and put America back to work. It would only cost $787 billion. Thus far, the result: No bridges and a 10.2% unemployment — and climbing.
Cash for clunkers? Sold forward inventory at a cost to taxpayers, $8 housing credit? Artificially inflated house prices again at an untold cost to the tax payer.
The upshot of all of this is that the total U.S. Debt now stands at $12,009,454,244,833.79.
Last year, we spent $253 billion in interest to service this debt. By 2019, that interest payment will be $675 billion — that’s the low end of the projection, based on the idea that interest rates will stay low and the economy ramps back up to 5% growth.
A more likely scenario is that interest rates will hit double digits by 2019 and growth will be stifled.
There are only three ways for a country to get out of debt:
Buckle down, cut costs, and increase taxes. This is laughable given the current political climate.
Default. This would mean that we could never borrow again at low rates, and the United States would resemble Argentina. America has never defaulted before; but it’s a possibility if there were a run on the dollar.
Print more money, destroy its value, and thus pay off your debt. Winner, winner, chicken dinner!
Obviously, we are going for answer number three. This will lead to high inflation, coupled with stifling interest rates and large tax increases, to cover ever-decreasing government programs. And alas, given the current political situation… it seems inevitable.
How the Dollar’s Fall Can Make Your Fortune
I’m not here to scold you. I have no illusions that I can change the course of global events. But I can tell you how to make a profit.
These new dollars that are flooding into the system are not staying in the U.S. The smart money knows that the dollar will continue to fall. Hard assets like gold, silver, and foreign stock markets will continue to go up.
One way to play the dollar’s crash is to load up on physical gold. It’s safe. And it’s breaking record highs on a near-daily basis. It hit $1,218 per ounce as I wrote this article.
Until next time,
Editor, Wealth Daily