Rising Debt, Soft Dollar; Gold the Only Protection for Investors

Protection for InvestorsWe’re only into the second month of the U.S. government’s current fiscal year and we’ve already racked up a budget of $179 billion. (Source: U.S. Bureau of Fiscal Service, December 10, 2014.)

When the government incurs a budget deficit, it has to borrow money to pay for its expenses. Over the past few years, due to increased spending, the U.S. national debt has skyrocketed. In fact, our national debt has doubled since September of 2007. (Source: Treasury Direct, last accessed December 12, 2014.)

U.S. Congress has just passed a $1.1-trillion spending bill. (Source: The Wall Street Journal, December 11, 2014.) At the very core, this bill gives the U.S. government permission to further increase its national debt.

When I look at all this, I can’t help but ask: how will this all end? Currently, the U.S. government is borrowing to pay off its interest payments. This year, interest expense for the government is expected to be $453 billion. Of course, this is not sustainable in the long run. And if interest rates start to rise, as the Federal Reserve is forecasting, then watch out: our budget deficits will get even bigger.

Japan’s Consumption Tax

Since we are not running any budget surpluses, the only other way to reduce our national debt is by increasing taxes. But the government can’t raise taxes because, aside from public outcry, our economy can’t handle higher taxes.

Look at what happened in Japan. In April of this year, the Japanese government increased the country’s sales tax. The negative impact on consumption was so great that Japan fell into a recession—for the second time since 2011. (Source: The Globe and Mail, December 7, 2014.)

Higher taxes in the U.S. won’t work either because they, too, will have a negative impact on consumer spending…which accounts for two-thirds of the U.S. gross domestic product (GDP).

The Dollar & Reserve Status

Dear reader, U.S. national debt is a problem with no fix. I’ve written in these pages before how I expect our national debt to rise to $34.0 trillion—just over double where it is today. And as our national debt balloons, the impact on the value of the U.S. dollar compared to the currencies of other industrialized countries will be dramatic.

Don’t be fooled by the recent rally in the U.S. dollar. Our dollar is showing strength because: 1) the Fed is saying it will raise interest rates in 2015 (while other countries are lowering rates); 2) the Fed has stopped printing money (other countries are still printing); and 3) economies in countries like Japan and the eurozone are in contraction mode. Right now, the U.S. dollar is the best of the worst.

I have written in these pages before about how foreign central banks are reducing the amount of U.S. dollars they keep in reserves. They are also starting to trade in local currencies. And if our stock market starts to decline or if our economy gets soft again, I have no doubt the Fed will resort to more money printing (QE4), while ditching the higher interest rate idea.

As our national debt continues to rise and our dollar’s value fades, gold will be the only hedge to protect investors.