Ponzi Scheme of the Fed Printing and Government Spending; How Long It Will Go On

gold bullionThe U.S. government registered a budget deficit of $98.0 billion for the month of July. Total revenues received by the government in the month accounted for $200 billion, and it spent $298 billion. (Source: Department of the Treasury, Bureau of Fiscal Service, August 12, 2013.)

So far in the government’s fiscal year, which began in October of 2012, the U.S. government has incurred a budget deficit of $607 billion. In addition, it received $2.28 trillion and spent $2.89 trillion.

While politicians will certainly try to spin the declining budget deficit into something good, we continue to move into unchartered waters. Let me explain.

When a government registers a budget deficit, it has to come up with money to pay for its expenses. Usually, to fund its expenses, it goes out and issues bonds, thus increasing the national debt. At this point, this process has become problematic for the U.S. economy.

Over the past four years, our national debt has skyrocketed to an unprecedented level due to multiple years of trillion-dollar budget deficits. We are the nation with the highest nominal national debt.

The four risks to a ballooning budget deficit…

So far in the fiscal year, October 2012 to July 2013, the U.S. government has paid interest of little more than $370 billion on the debt it has issued. This amount has increased almost 15% from the same period in the last fiscal year, when it was $322 billion. For the entire fiscal year, the government expects to pay interest of $414 billion.

But we all know interest rates are rising. This morning, the 10-year U.S. Treasury yields 2.71%. Last year at this time, the yield was only 1.73%.  Interest rates on the bellwether U.S. Treasury have jumped 57% in 12 months! The government’s interest expenses over the next few years could double; sending its budget deficit sky-high.

Next, we have U.S. cities and states struggling to pay their bills. Detroit going bankrupt is just the tip of the iceberg. Will the federal government need to bail out these cash-strapped “sub” governments? When push comes to shove and civil unrest comes into play, the government may have no choice but to bail out cities and states that can’t pay their bills, again pushing up its budget deficit.

Finally, the student debt time bomb is a real threat. For the first time in history, student debt, much of it government-guaranteed loans, has surpassed $1.0 trillion, and students are struggling to make their payments. At what point will the government bite the bullet on student loans and just include those losses in its budget deficit?

I could add in natural catastrophes, the postal service, the cost of ObamaCare, antiquated infrastructure and more government expenses in the pipeline, but I’ll just stop here.

Comparing our debt to our gross domestic product (GDP), our national debt currently sits at about 105% of GDP. (But have no fear; the Japanese debt-to-GDP is 205%, so we have a long way to go before the Ponzi scheme really blows up.)

The only problem—at what point do our creditors say enough is enough and demand higher interest rates on U.S. bonds? Well, that’s not a problem as long as the Federal Reserve keeps printing new money and giving it to the government.

But more money in the system causes inflation, hurts the stability of the currency, and kills the buying power of the consumer. This Ponzi scheme of the Federal Reserve printing money and giving to the government to pay its bills will eventually end very, very badly.

Michael’s Personal Notes:

Back in 2011, when the price of gold bullion was marching towards the $2,000-per-ounce mark, it was becoming difficult for the average investor to get into the “gold game” without paying a high price. Since the beginning of this year, we have seen gold bullion prices come down and we are seeing investors running to buy the precious metal.

I have written many times in these pages how demand for gold bullion here in the U.S. is strong, especially when we look at rising sales from the U.S. Mint. But this is only part of the picture. When we look at what’s happening in the biggest gold bullion-consuming countries, we can really get a feel for gold bullion demand.

According to the Chinese Gold Association, 706 tonnes of gold bullion were consumed by the Chinese economy in the first half of this year. In the same period a year ago, consumption of the precious metal in the second biggest gold bullion-consuming nation was only 460 tonnes. (Source: Reuters, August 12, 2013.)

In India, despite the efforts of the country’s central bank and the government to reduce gold bullion consumption, the official numbers state that imports of the precious metal increased to $2.9 billion in July from $2.45 billion in June. (Source: Reuters, August 12, 2013.)

The demand for gold bullion in India is so extreme that it’s at a point where it is causing a boom in imports of the precious metal into neighboring countries like Pakistan. Imports into that country increased 386% in the first half of the year.

Looking at the technical side as shown on the chart below, there is bullish sentiment in the precious metal’s price. Gold bullion looks to have support at the $1,275-per-ounce level. At the same time, for the first time since late July, gold bullion prices have closed above their 50-day moving average.

Gold Spot Price Chart

Chart Courtesy of StockCharts.com

The prospect of a higher gold bullion price is strong, and continues to gain strength. With that said, I see great opportunities in the gold mining sector. The risk/reward ratio for investing in well-managed gold mining companies is much better than overall market risk.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in Profit Confidential, October 6, 2008. From October 6, 2008 to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.