A Warning Ignored

by Addison Wiggin – March 18, 2011

  • The warning hardly anyone heard: What it means when Uncle Sam’s credit card rate suddenly doubles
  • Echoes of a more distant warning ignored… But it’s not too late to heed the call
  • Oil up, then down… Why we’re still not out of the Middle East woods, despite the Libya cease-fire
  • Yen responds as intended to first G7 currency intervention in 10 years… delivering a stunning 48-hour profit
  • The £10 taunt… One more step down the road to "off with their heads"

“These are the good old days with respect to interest costs,” declared James Grant before the House Subcommittee on Domestic Monetary Policy yesterday.

The bespectacled and bow tied editor of Grant’s Interest Rate Observer brought a sobering message to Washington, D.C., yesterday: Uncle Sam’s credit card rate is about to get jacked up.

The U.S. Treasury got off easy in fiscal 2010 — forking over $413 billion in interest. That’s less than 5% of the total budget. Click on the Wikipedia pie chart; it’s the brown section on the left.

Click on image to enlarge.

For every $1 that Uncle Sam spends today, he currently borrows 43 cents. What happens when bond traders start to get spooked about ol’ Sam’s ability to pay it back?

Interest rates will rise.

In the early 1980s, then-Fed chair Paul Volcker had to chase them all the way up to 18%… just to raise the money the government needed to keep its doors open.

Today, traders don't even have to get spooked to a fraction of that level.

If interest rates merely regress to the historic mean, "debt service nearly doubles," says investment banker Lewis Lehrman, who also ventured to the belly of the beast yesterday to testify before Congress.

Indeed, using the back of a napkin and projections released by the Treasury Borrowing Advisory Committee on Feb. 1, 2011, we can see that rates on the 10-year Treasury note need only rise from today's 3.27% to 5.3% before the debt service figure jumps from today's $413 billion to $800 billion by 2020.

"All of the talk about cutting a hundred billion" this spring would be for naught, says Lehrman. That $100 billion would be consumed four times over just to pay off interest on the debt. (For the record, the $100 billion in question was already debated down to $67 billion on the House floor.)

Something has to give.

But what? All five of the bigger slices of the pie are considered “untouchable.”

>Forget 5% of total budget. With tax revenue running at roughly $2 trillion a year, 40% of the budget would go to debt service. A rise of 2% in interest rates and Uncle Sam would be even broker than he already is… instantly.

What will government be able to do then?

That’s a critical conundrum to consider if you're a lawmaker in Washington, right? You'd think anyway. Too bad no one showed up at the hearing.

The House Subcommittee on Domestic Monetary Policy has 14 members. In this wide shot of the hearing room, we count no more than four who attended the hearing at which Grant and Lehrman testified.

One of them was the chairman of the subcommittee, Dr. Ron Paul, who had extended them the invitation.

Granted, members of Congress don't have to be in the chamber to hear debate. If they choose, they can pick it up on closed-circuit TV in their offices. But somehow, we have a hard time imaging 431 members of Congress glued to their screens over a subcommittee hearing on monetary policy.

We've heard rumors, too, that Democrats in the House pulled a "Wisconsin" and boycotted the proceeding altogether. The government we deserve, people… the government we deserve.

In any case, the proceeding was interrupted so few times the members in attendance were able to take part in a floor vote far more vital to the nation's future: they pulled $56 million in federal funds from National Public Radio (NPR).

Woohoo… $56 million. That's 1.24% of the deficit the federal government rang up yesterday alone. Which would be laughable if, in fact, it was being cut… but it's not. It's merely getting yanked from NPR and given to Public Radio International (PRI) and individual stations that produce programming.

Farcical, isn't it? As we were saying yesterday, Dr. Paul and Lew Lehrman got a similar brushoff 30 years ago. That farce was known as the U.S. Gold Commission, a panel appointed by President Reagan to look into a return of the gold standard a few short years after the Bretton Woods exchange rate system had been dismantled under the Nixon administration.

“The commission only came into existence in the first place as a payoff to certain ‘gold bugs’ in the Republican Party in those years,” writes Lew Rockwell in the forward to the new edition of a little volume called The Case for Gold. “But it wasn’t created to institute a gold standard. It was created to bury the idea once and for all.”

The commission’s chairman — and the establishment’s designated gravedigger — was the new Treasury secretary, Donald Regan, fresh from a 35-year career at Merrill Lynch.

Click on image to enlarge.

But Ron Paul, one of the commission’s 17 members, refused to let the burial proceed quietly. He authored a “minority report,” and got one other member — the aforementioned Lewis Lehrman — to sign on. The report was published in book form, under the title The Case for Gold, in 1983… and then was promptly forgotten.

Fast-forward 28 more years and the responsibility for keeping the meme alive falls in your hands. In conjunction with the Ludwig von Mises Institute, we're reissuing this “lost” classic… and we want to give it to you for free.

Frightening, really — once you crack the tome, you'll see it's more timely now than ever. It forecasts gold as high as $15,000… but reveals why even the steadfast gold investor won’t cheer the day it happens. You can claim a free copy… but only for the next 19 days. Here’s where you can take advantage.

Oil has been on a roller coaster the last 24 hours. It pushed past $103 last night after the U.N. Security Council voted to impose a “no-fly zone” on Col. Gaddafi’s government in Libya, along with approving “all necessary measures” to protect civilians there.

This morning, Libya’s foreign minister declared an immediate cease-fire and an end to all military operations, “to protect civilians.” Crude promptly fell below $101.

We’ll see what happens over the weekend. Still, oil remains above $100, because Libya isn’t the only Middle East flash point.

The Sunni monarchy in Bahrain has arrested at least seven leaders of the Shia opposition. Word is they’ll be charged with “inciting murder” for their role in planning the protests that have swept the island nation in recent weeks.

Bahrain sits right between Sunni Saudi Arabia and Shia Iran, and it’s home to the U.S. Fifth Fleet. Earlier this week, Saudi Arabia sent in troops to suppress the demonstrations.

“There is growing anger in the Shia community, estimated to number at least 250 million worldwide,” reports Patrick Cockburn in the London Independent, “at the intervention of troops from Saudi Arabia and United Arab Emirates in Bahrain to help repress the Shia majority that has been demanding political and civil rights.

“The Gulf monarchies” such as Saudi Arabia “along with Jordan, Egypt and other Sunni Arab states, have always been paranoid about a Shia threat. This paranoia has grown deeper since the Shia majority in Iraq has taken power after the overthrow of Saddam Hussein.”

With each passing day, Byron King’s “New War” scenario is becoming front-page news. There’s still time to protect your portfolio before a spark sends oil zooming past $200 a barrel. You can begin your action plan here.

For the first time in over a decade, the G-7 countries are acting as one to intervene in the currency markets. Their aim: to weaken the yen.

The yen hit an all-time high against the dollar this week in the wake of the earthquake-tsunami-nuclear disaster. So the Federal Reserve, the European Central Bank and Canada’s central bank all proceeded to dump yen overnight.

Before that operation began, the yen traded at a little over 79 to the dollar. This morning, it’s nearly 82.

This is the first coordinated G-7 intervention in currencies since September 2000, when they stepped in to prop up a sickly euro.

Japan’s main stock index, the Nikkei, popped 2.7% today in response.

[Ed. Note: That move also means by the time you read this, subscribers of Strategic Currency Trader will have bagged a 200% gain in less than 48 hours. “The Bank of Japan is not likely to let the yen stay at historical strength,” Abe Cofnas wrote in a special alert Wednesday night. To learn more about Abe’s one-of-a-kind recommendations that play out in a week or less, look here.]

The good vibes from Japan spread westward, the Euro Stoxx 50 index rising nearly 1.5% as we write. And the Dow opened up 135 points.

There are no economic data for U.S. stock traders to react to today, but it is a quadruple witching day — one of four each year when stock options, stock futures, index options and index futures all expire.

Strange things can happen on these days, so we have an eye out.

Unlike oil, the precious metals are holding onto gains made last night after the U.N. Security Council’s Libya vote. Gold is pushing $1,420, and silver is back above $35.

“From the look of the markets right now," advises Vancouver favorite Rick Rule, the gold sold off earlier this week "got soaked up very, very handily. I suspect you are seeing a continuing pattern of gold going from relatively weak hands to relatively strong hands, which, to me, is very bullish.”

The way politics, the markets and the economy are shaping up this year, our investment symposium in Vancouver, July 26-29, 2011, is going to be even more "must-attend" than ever. We haven't even sent out a formal invitation to our Reserve members yet and we're already more than half full. Best to get your seats now. Call Barb Perriello at (800) 926-6575 and let her know Addison said you must have your own seat near the front.

From our rapidly growing “let them eat cake” file, we have this item from London: Deutsche Bank has suspended an employee for taunting protesters from his office.

Or maybe it was for being caught taunting protesters.

That appears to be a £10 note he was waving. Judging by TV footage, he was also mouthing “get a job.”

The protesters were upset about cuts to the National Health Service. “It was shocking to see people acting in this way when we passed the bank,” a union leader told the Daily Mirror. “If it wasn't for the greed of bankers, the economy wouldn't be in such a mess, and there's a good chance the NHS wouldn't have to be making such devastating cuts.”

Oy. We’re no fans of nationalized medicine… and you no doubt caught a whiff of what we think about public unions during the week before we traveled to Colombia… but this Deutsche/Douche banker seems clearly out to lunch… and all too closely aligned with New York Fed chief William Dudley, he of “let them eat iPads” fame.

We don’t know where this is all going, but we're confident it will end badly. Best be prepared.

“I was pondering the statistics cited in Wednesday’s 5,” a reader writes, “about the percentage of workers that have less that $25,000 saved for retirement. It seems to me these are ‘point’ statistics that, while fascinating, do not provide much in the way of depth. The distribution of savings by age of workers, for instance, might give insight into the workers’ circumstances and how grim their outlook might be.

“Over the last decade or so, there have been reports here and there suggesting that boomers, as a group, have very little in the way of retirement savings. This begs the historical question of how the boomers compare with savings rates and amounts of previous generations.

"Are the boomers different, or does every aging population cohort face the future with limited resources?”

“What the boomers want, the boomers have received,” another reader chimes in, “and that has been true since they were little kids. Wonderful new elementary schools were built for them (and later sold as surplus real estate); next, the feds started financing college dorms for the first time.

“When the boomer women looked cute in really short skirts, all women more or less had to wear them, because that was the style available. When they bought their first houses, real estate went up. While they saved for their second houses, real estate stayed flat, but the stock market rose until they bought their McMansions. At that time, taxes on quick real estate turnover were reduced. And so on.

“I have predicted for years that we would have big inflation when they entered retirement, because they desire and expect immediate rewards. Getting a lot of interest on their (modest) savings will be to their short-term advantage, and they don't think long term; society has always provided.

“My ‘boomer theory of investing’ has served me well.”

The 5: We didn’t use the word “boomer” in describing the low level of retirement savings. The survey we cited, indeed, made no distinction among age groups. Still, it's easy to draw the connection.

A different survey conducted late last year found 25% of boomers have no retirement savings and 26% have no savings outside a retirement account. What are they counting on? Few of them will collect a defined-benefit pension as their parents did.

That leaves Social Security… which went into the red six months ago and will likely never get out of it. It makes our own ideas about retirement income even more urgent. You can explore them here.

"It seems that financial markets are built on stupidity," writes another reader, catching on, "A country (Japan) has a large earthquake, tsunami and nuke disaster, so their currency rises in value?

"The world is full of idiots. Maybe we should drop a nuke on ourselves in the U.S. for a strong dollar."

“Your comment that the Japanese want a weak yen because a strong yen hurts their exports seems wrong.

“Japan will want to be importing all sorts of stuff to brace up its damaged country. Exports will be considerably less important than imports. As well, Japan holds large amounts of in dollar securities, so it can cash those in for dollars as it chooses.

"Japan should seek a strong yen.”

The 5: "Should" or "shouldn't"… ministers from all the G-7 nations disagree with you.

“Byron King was, indeed, honored to be invited to observe the 'Ceremony of the Keys',” writes a World War II veteran. "I enjoyed reading his version of the event. Traditions such as this are what keep history alive.

“Here in America, we have a similar daily ceremony — the regular 'Changing of the Guard' at Arlington National Cemetery. This too, is an impressive ceremony, as is watching those very special young men who guard the Tomb of the Unknowns.

“There are those who would write off these rich ceremonies as being a waste of time and money. They are doing all they can to change our history — we must not let that happen.”

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S.: In recounting the sorry history of the Gold Commission appointed by President Reagan, we recall this passage from the late Robert Novak’s 2007 autobiography. Novak had a curious conversation with the president in 1986:

“I asked Reagan: ‘What ever happened to the gold standard? I thought you supported it.’

“‘Well,’ the president began and then paused (a ploy he frequently used to collect his thoughts), ‘I still do support the gold standard, but – ’ At that point, Reagan was interrupted by his chief of staff. ‘Now, Mr. President,’ said Don Regan, ‘we don't want to get bogged down talking about the gold standard.’

“‘You see?’ the president said to me, with palms uplifted in mock futility. ‘They just won't let me have my way.’”

For all we know, Mr. Reagan ended up reading The Case for Gold – Ron Paul’s “minority report” of the commission — to pass the time. Why not?

Here Reagan shows how adept he was at putting the first lady to sleep. All he had to do was whip out The Freeman, the monthly journal of the venerable Foundation for Economic Education, et voila… quiet time on the return flight from Washington to Rancho del Cielo in California.

You have a chance to read Dr. Paul's “lost” classic… even own a copy free of charge… but now through Wednesday, April 6 only. Details on this one-of-a-kind offer are right here.


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