U.S. Joins the 100% Club

Addison Wiggin – August 4, 2011

  • Crossover point: National debt now larger than U.S. economic output.
  • Piling on: After Russia’s “parasite” comment, China describes debt with “incendiary” analogy
  • Stocks crater while gold pushes higher into record territory: The chart that points to $2,000 by year-end
  • Proven painkiller… No prescription needed, ample profit opportunity
  • Japan eases… Tooth fairy downsizes… Reader inquires about why China hasn’t cut off our credit card already…

   Yesterday, we identified one “crossover point” putting the United States debt track on the route to Greece… today she crossed.

With the debt ceiling officially raised Tuesday afternoon, the U.S. Treasury promptly burned through $238 billion. And with that, the U.S. government debt-to-GDP ratio topped 100%.

Greece is officially 140% after their last bailout. But at $14.5 trillion in debt on $14.3 trillion GDP… the U.S. is now on par with Italy and Belgium for slogging, debt-laden and moribund economies.

Fine company, indeed. At least they make good chocolates.

   What’s more entertaining? All that hand-wringing last week could be for naught.

The increase in the debt ceiling will come in three stages. The first one, $400 billion, is supposed to be good through next month. Treasury blew 60% of it yesterday.

Presumably, the Treasury paid back a few “payday” loans to the federal pension funds. They’d borrowed from their own loan sharks — and used other dual-entry accounting devices — to keep the public figures below the “debt ceiling” since mid-May.

Poof! Just like that, they’ve only got $162 billion left before the next raise kicks in, on or around Oct. 1.

Heh… if you pay estimated taxes, we assure you someone at Treasury hopes you send in the check long before it’s due Sept. 15. And that you check the box sending extra money for the debt, a lot of it.

   “The months-long tug of war between Democrats and Republicans… failed to defuse Washington’s debt bomb,” reads a caustic commentary from the U.S.’ largest bankers’ official news agency, Xinhua, “only delaying an immediate detonation by making the fuse an inch longer.”

There was also a delicious line about a “madcap farce of brinkmanship.”

“Large fluctuations and uncertainty in the U.S. Treasury bond market,” People’s Bank of China governor Zhou Xiaochuan said, choosing his words a little more delicately, “will affect the stability of international monetary and financial systems, which will hurt the global economic recovery.

“China hopes the U.S. administration and Congress would take responsible policy measures to handle its debt issue.”


Delicate words. Perhaps, Russian Prime Minister Putin simply beat him to the punch when he called the United States a “parasite”.

What happened, we couldn’t help but wonder this morning, to the days when Ben Bernanke asserted it was the U.S.’ “duty to consume the world’s glut of savings”?

   “Our lenders’ confidence in our ability to pay our credit card bill is already wavering,” we said in our updated forecast — issued before the statements from Russia and China. The debt ceiling debate, let alone the final agreement, has done very little to assure them.

China has trimmed its Treasury holdings by $15.5 billion in a seven-month span.

The day the U.S. will not be able to borrow its way into oblivion anymore looms. If you haven’t seen our forecast, and its accompanying five-part action plan, you need to check it out now.

   After a pause yesterday, stocks have resumed the relentless slide they began two weeks ago today. There’s no specific news today. Now it’s just generalized fear — enough to send the Dow down more than 300 points as of this writing.

With today’s drop, both the Dow and the S&P are down more than 10% from the April 29 high. They’re now in official “correction” territory.

We had expected the sell-off to begin in the late weeks of June preceding the end of QE2… but the debt ceiling debate put things on hold until it become painfully obvious (once again) that power, politics and payouts were more important to the ninnies in Washington than the future of the country and its citizens.

   Volatility is up, too. The VIX is pushing 28.5, close to the highs it reached right after the Japanese earthquake.

   Tomorrow the Labor Department issues the monthly unemployment figures. The consensus guess is 75,000 new jobs created in July, leaving the “official” unemployment rate at 9.2%. Any violation of these expectations could create a violent swing in either direction.

   With stocks getting beat up for a 10th straight day, the “safety trade” is on. The dollar, Treasuries… and gold… are all up.

The dollar index is up nearly 1.5% today, to 75.

In part that’s because the Bank of Japan intervened overnight to slow the rise of the yen.

The BoJ first injected $126 billion worth of yen into the market. Then followed up with a massive dose of monetary stimulus, “double the amount pledged after the March 11 earthquake,” says Chris Gaffney of EverBank World Markets.

“The BoJ intervention had the desired impact,” Chris continues, “as the yen weakened to 80 for the first time since mid July. This 4% move versus the U.S. dollar was the largest one-day drop since 2008.”

Japan’s moves come a day after Switzerland carried out its own “intervention” intended to weaken the Swiss franc. Combined, the yen and the Swiss franc make up nearly 17% of the dollar index.

[Ed. Note: Strategic Currency Trader readers snagged 300% gains in three days this morning on a rising-yen play. In the one-of-a-kind market tracked by Abe Cofnas, new opportunities present themselves every Monday morning. You can be on board for the next round by following this link.]

   Like the greenback, Treasuries are getting a boost. The yield on a 10-year note is down to 2.49% this morning — a level last seen nine months ago.

   Gold jumped another $20 this morning. At last check, the spot price was pushing a historic $1,680.

“Over the past 10 years,” says U.S. Global Investors chief Frank Holmes, “gold’s normal volatility has been about 15%, so we’ve seen nearly a year’s worth of price movement in just 34 days!

“Does this mean we’re due for a correction? Possibly. Gold could easily correct 5-10%, but given today’s current environment, I don’t think that’s what the crystal ball reflects. Gold markets are clearly being affected by the Fear Trade.”

That’s Frank’s term for things like the debt ceiling madness and weak U.S. economic figures. Meanwhile, the “Love Trade” is getting into swing this week with the Muslim holy month of Ramadan, frequently spurring gold purchases for gifts.

[Ed note. Frank shared a host of other insights about gold last week during our symposium in Vancouver — where he’s always one of the most popular. There’s still time to sign up for the audio of all 27 talks in the main hall, and a handy summary of all the investment recommendations revealed during the “breakout sessions.” Here’s where to go to assure yourself the earliest possible delivery.]

   “Gold at $2,000 by the end of the year is not a certainty,” writes the Telegraph’s Gary White, “but everything is now in place to make it happen.”

Citing the chart we showed you on July 25, Mr. White points out that with the debt ceiling increasing by as much as $1.5 trillion before year-end, gold could easily ride right alongside it:

“Gold is a hedge against the debasement of currencies and rampant inflation,” White writes following the date back three decades, “all of these problems are now getting worse. The case for gold has never been stronger.”

Interesting choice of both words and timing. Three decades ago Rep. Ron Paul penned The Case For Gold — an underground history of the metal and its relationship to the dollar throughout the Republic’s history. The report was a minority opinion of the Gold Commission called for by then-president Ronald Reagan.

Despite the commission’s finding — that the gold standard was a relic of history — Dr. Paul and his co-author Lew Lehrman forecast rising inflation, taxes, deficits and unemployment should the government refuse to ensure a sound backing to the currency. Alas, the hen’s are on their way home to roost…

We’ve recently republished Dr. Paul’s “lost gold bible” through our new Laissez Faire Books acquisition… and still have a few copies of the reissue in stock. If you’d like one, here’s how to get it free.

   More research is pouring in on the “nutraceutical” Patrick Cox has been crowing about of late — a compound derived from tobacco that’s not subject to FDA regulation.

It’s already on the market as a smoking cessation product… but its real promise lies in combating the inflammation that comes with nearly every disease of aging — even cancer.

This morning comes a new study supporting the anti-inflammaging thesis: It compares this nutraceutical’s anti-inflammatory properties with those of common painkillers — both over the counter like Advil and prescription like Celebrex.

The results, complied by the Roskamp Institute in Florida, are stunning…

“I don’t blame people,” says Patrick, “for being skeptical about this product. It is nearly unbelievable that a natural alkaloid found in tomatoes, tobacco and bell peppers is better at controlling chronic inflammation than Celebrex, Voltarol, ibuprofen or aspirin. Nevertheless, it is.”

The new research this morning, once again, supports Patrick’s assertion that the maker of this product might well be “the last stock you ever need.” Check out the fruits of Patrick’s research right here.

   Alas, times are tough, even for the Tooth Fairy. Visa recently commissioned a phone survey of more than 1,000 American adults… who revealed how much they leave under their kids’ pillows when they lose a tooth.

Last year, the national average was $3. This year, it’s $2.60 — a 13% decrease.

Not worth what they used to be

Differences across the United States were striking. In Eastern states, the drop was a much steeper 38%, from $3.40 to $2.10. In the South, the drop was 21%, to $2.60. The Midwest and West were fairly stable.

Last year, 6% of kids didn’t get any money under their pillow. This year it’s up to 10%.

On your behalf, we’re writing to our congressman as soon as we finish The 5 to ask for a Tooth Fairy Subsidy to rectify this dreadful injustice.

   “I’ve heard this type of thing over and over,” writes a reader who caught our flippant remark about the day China decides to pull Uncle Sam’s credit card.

“I have yet,” the reader goes on, “to hear an explanation as to why… why indeed do they continue to purchase U.S. Treasuries? Can you provide some insight as to why they are currently buying?

“I can certainly see why they would stop buying, but have no idea why they are buying currently.”

The 5: For the moment, China still needs foreign customers, for our purposes mostly in the United States, to buy their goods… so it’s in China’s interest to “recycle” the dollars we send them in the form of Treasury purchases. So they buy U.S. debt at auction.

Likewise, since the end of World War II, the U.S. has been printing the world’s “reserve currency”: the U.S. dollar, as a unit of trade and a place to store wealth. That system has worked, and would continue to work if the dollar was backed by something other than the “full faith and credit” of the U.S. government. Or… if the U.S. government ran a tight ship and lived up to the honor.

On Monday, the manufacturing numbers from China showed new orders were up, and they were driven mostly by domestic demand — not exports. We suspect the day is arriving when China can produce and consume goods in their domestic economy and/or trade with developing nation’s ex-U.S./Europe to the degree that neither the U.S. economy nor the U.S. dollar will be the lynchpin of the global economy. In which case, China’s dependence on dollars and U.S. Treasuries will wane… further.

“We’re never going to default,” we cited David Walker, former comptroller general of the country yesterday, on the day the national “credit card” gets yanked, “because we can print money. At the same point in time, we have serious interest rate risk, we have serious currency risk, we have serious inflation risk over time. If it happens, it will be sudden and it will be very painful.”

You’ll want to be ready when that day arrives. We help you get started here.


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. Whoops, gold ended up taking it on the chin along with everything else once we got done penning this issue. But at $1,650, it’s still higher than it was at any time before… well, Monday.

“Gold is falling because of its inherent strength,” says Byron King in a comment you might run across at MarketWatch before day’s end.

“The rest of the markets are getting clobbered, and people are getting margin calls. They have to sell what they can, to raise funds now. So they sell gold, which is up and has a very liquid market. To the extent that gold prices fall, they won’t fall far… and other strong hands will step in to pick up the pieces.”

Will you be among them? Byron lays out nine ways to grab the gold bull by the horns in this presentation.


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