By David Disraeli
Like a physical earthquake, a financial earthquake is the violent shaking of our financial system caused by a series of events. Prognosticators of various ilks are predicting everything from a collapse of the dollar to a bankruptcy of the United States, martial law and ultimately the loss of our sovereignty by another country.
I personally have been following the financial markets for almost 25 years and I am certain that a major financial event is looming that will affect everyone in the country. What I can not say is exactly how this event will manifest, when it will happen, how long it will last.
I am not a gloom and doom financial adviser, nor have I ever been a gold bug. I have listened to various gloom and doom types during my whole career and largely ignored them. However we find ourselves at this present moment in a situation different from anytime in the past. There are two main catalysts that have created the environment ripe for disaster and a host of smaller catalysts in place as well. There are thousands of websites you can go to for more information – and lots of misinformation. My hope is to create a sensible overview of what is happening t our financial systems and a few reasonable suggestions on what to do now.
There are three dynamics converging on us right now, any of which could cause a crises
1. Obvious to anyone old enough to read, the total debt of the U.S. Government has risen to astronomical numbers – $14 trillion. ( see the U.S. Debt Clock )The interest on this debt is also astronomical. How are we going to pay the interest and principal on this debt? No one has an answer. Worse – the US debt does count future Medicare liabilities, social security, veterans benefits and much more. The actual total liabilities of the government are so high, most people don’t believe it. I have heard numbers as high as $100 Trillion.
2. The second most obvious problem is our budget deficit. Everyone knows some one who spends more than they earn and we all know the eventual outcome. According to the Congressional Budget Office, we are spending $1 trillion more that we take in each year.
3. Fully 1/3 of our debt is owned by foreign governments – governments that may not always be friendly towards us. China is the largest owning just over 11% followed Japan. see http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
The Real Problem
Whether you believe or don’t believe these government numbers, you cannot ignore the increase in commodities, especially food products and precious metals. Gold has gone from $600/oz to $1500/oz in five years. Oats have more than doubled in the last two years. The list goes on. It is clear that any people around the world would rather own gold and silver than dollars.
What is going to happen if we keep printing money? The technical term for this is “quantitative easing” or as Bernanke put it “its like dropping cash out of a helicopter”. One third of our debt is owned by foreign governments. What if they decided to sell their dollars, or just stop buying them? A massive drop in the dollar seems inevitable. There is simply nothing backing the money being created when we issue treasury bonds.
Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt representing one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold. Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be created out of thin air.
If the dollar is losing buying power, why don’t we have more inflation? The CPI is the government’s official inflation indicator, but it has long be argued that it does not accurately represent what is going on with prices. The best indicator is what you and spend out money on – like gas,food, and utilities.
The bottom line is we are creating money out of nothing, foreign investors are savvy to it and a collapse of the dollar is imminent. So what should you do? Read this blog and come back regularly.
