The worst case scenario for the U.S. economy is already playing out in a small country in Europe. Please follow this sequence of events:
Amid a financial crisis, foreigner investors flock to the U.S. Dollar as the best available form of security for money. The yield on U.S. Treasury Bonds falls below one percent, as there is more demand for bonds than government bonds available. Hence, the U.S. Dollar rallies to a two-year high against other world currencies. This is exactly what is happening right now.
The rise in the value of the U.S. dollar against other major foreign currencies and deflating prices around the globe are placing pressure on gold bullion prices. Stocks are falling in price, real estate is falling in price, oil is falling in price, copper, platinum, automobiles — they are all falling in price, which is deflationary. This is placing pressure on gold bullion prices today.
Finally, to stop a repeat of “The Great Depression,” the Federal Reserve and the Secretary of the Treasury make an all-out effort to save the financial system. The U.S. government goes to its first annual trillion-dollar deficit. And the amount of debt the U.S. government has taken on to save the economy balloons to record levels. This is what is happening at the moment.
In the above, we see what’s going on economically. Now what does the future hold?
As foreign investor concern mounts over the amount of debt the U.S. is issuing and accumulating, foreigners become wary of buying American bonds — and the American dollar starts to fall viciously against other world currencies. The U.S. is then forced to raise interest rates to attract foreigners back to its debt securities. his is “The Worst Case Scenario.” (Yesterday, Hungary was the first country to actually raise interest rates. Hungary raised its benchmark interest rate yesterday by three percentage points to prop up its ailing currency.)
Tomorrow, my opinion on what happens to gold bullion prices in “The Worst Case Scenario.”