Economic Analysis:
Doomed by a Sea of Debt

Just about a year ago, when the debt crisis hit Greece, the uncertainty in Europe caused investors to run to the security of the U.S. dollar and U.S. Treasuries. But now, despite what is happening in Japan, despite the civil unrest in the Middle East, the U.S. is no longer the safe haven it was last spring. What is happening and why?Something is terribly wrong in America today.

Just about a year ago, when the debt crisis hit Greece, the uncertainty in Europe caused investors to run to the security of the U.S. dollar and U.S. Treasuries. But now, despite what is happening in Japan, despite the civil unrest in the Middle East, the U.S. is no longer the safe haven it was last spring.

On Friday morning of last week, I posted a chart of the U.S. dollar, warning that the greenback was getting close to breaking below a record low against a basket of currencies of the most industrialized countries. By the end of currency trading Friday, the U.S. was less than a penny away from that new record low. Scary stuff.

Look at a long-term chart of the U.S. dollar index (type “$usd” into any Internet stock charting service, like stockwatch.com or stockcharts.com) and you will see that the U.S. dollar has fallen from a level of 120 in 2001 to 75.6 at Friday’s close—a drop of 37% in 10 years. During the same period, the price of gold bullion has risen by 10 times that, 370%.

Advertisement

The U.S. dollar is close to breaking down. The U.S. 10-year Treasury has only experienced a minor rally since the crises in Japan and the Middle East started. This tells me that U.S. Treasury bonds are no longer the safe haven they were just a year ago. By the end of this year, if the Fed does not raise short-term interest rates, I’m predicting that the 10-year Treasury will yield around four percent (presently 3.27%).

What’s causing the weakness in the U.S. dollar and U.S. Treasuries? Two things: too much debt; and the risk of U.S. inflation. Today, let’s deal with the debt crisis.

The U.S. will soon reach the point where its national debt is equal to its annual GDP (we might already be there). The last time this happened was at the end of World War II, 65 years ago. But after World War II, the U.S. became the undisputed world superpower. American manufacturing went into full gear, the industrial revolution went ahead full steam, and America boomed.

What will cause the U.S. to reduce its debt from 100% of annual GDP this time? I doubt it will be the Internet and, unfortunately, that’s all we have going on in America today.

John Lipsky, the first deputy managing director of the International Monetary Fund, warned this weekend that the mounting debt of the world’s most developed countries risks a fiscal crisis. According to Lipsky, long-term bond yields will jump 100 to 150 basis points unless industrialized countries get their debt under control.

Debt in this country is a very serious problem. Gold is screaming, “There is trouble ahead!” But, as usual, the politicians are not listening. From what I can figure, the U.S. Tomahak rain shower in Libya this week just added about another $200 million to our debt. But really, is anyone in government really listening?

Michael’s Personal Notes:

It’s with sadness that we look at figures from the U.S. Department of Agriculture and see that 44.1 million Americans are using food stamps. While reports state that the increased use of food stamps is due to easier access to the stamps by Americans, we can’t escape the fact that 13% of the U.S. population is on some form of food stamps.

Really, what has this country come down to? We have the fat cats on Wall Street taking in bonuses in the hundreds-of-thousands-of-dollars this year and we have 44.1 million Americans with such low incomes that they qualify for food stamps.

Talking about the civil unrest in the Middle East, when will the civil unrest hit the streets of America? Oh, I forgot, it won’t. We have Hollywood. Everyone’s fixated on what Charlie Sheen will do next, what Howard Stern will say next and the next episode of “Jersey Shore.”

In Roman times, that government had a brilliant plan that worked for years. Each weekend, they would take their citizens to the Coliseum to see men fight tigers and lions. It took the citizens’ minds off the deteriorating state of the Roman Empire and the spectators got to watch the games for free.

Unfortunately, in America, the 44.1 million Americans on food stamps need to pay cable fees to watch Hollywood.

Where the Market Stands: Where it’s Headed:

The Dow Jones Industrials opens this week up 2.4% for 2011. Since March of 2009, I have been saying that we are in bear market rally. I continue with that opinion today. While stocks still have room on the upside, the easy money in this rally has been made. I simply believe that the bear market is not over and I expect stocks to give a further push higher before the bear moves stock prices back down.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.