Years ago, we published an investment report on how Alan Greenspan and the government had a secret plan to devalue the U.S. dollar to make the ever-rising national debt of the U.S. more palatable. Was it really a secret plan?
I’ll never know. But if we look at the policies of President Obama’s administration and the current Fed chairman, coupled with the fact that selling U.S. Treasuries has never been so easy, one has to say that this “plan” is being played out quite well.
The government itself says that our national debt is $13.0 trillion, headed to $20.0 trillion by the end of this decade. I read one report yesterday that pegs our off-balance sheet debt (debt not on the books of the U.S. government), which includes old-age security, welfare, pension benefits for government employees, and other future government obligations, at over $100 trillion.
U.S. Treasuries are flying off the shelf, and we are very lucky as a country that we do not have to pay onerous interest charges on the debt we are issuing. In fact, people buying U.S. T-bills are basically not receiving a return at all, if you can call 0.15% on a three-month T-bill a return on investment. Investors are flocking to U.S. Treasuries for security purposes…they know the U.S. government will pay them back.
A chart of the U.S. dollar compared to a basket of the world’s most popular currencies tells the true story. The U.S. dollar has been declining for years against other world currencies.
So, the fool foreigners financing our debt through the purchase of U.S. Treasuries are not only receiving meager interest payments on their money, but they are also seeing less capital coming back when these T-bills mature, as the U.S. dollar keeps declining in value against most other world currencies.
Hence, the secret plan is working very well. We’re piling on debt to save and jump start the economy, knowing that, in the years ahead, as investors eventually shun U.S. Treasuries, our debt obligations will be “easier” and less costly to actually repay.
Here’s an example:
A Canadian institution bought U.S. T-bills several years ago, when it cost $1.20 Canadian to buy one U.S. dollar. Today, when that T-bill matures, the Canadian institution only gets back $1.04 U.S. per Canadian dollar invested, because the Canadian dollar has risen in value (like most currencies) against the U.S. dollar through the years. Regardless of whether this is planned or not, it’s very smart on the part of our government.
Every country wants a cheaper currency, because it makes debt repayments more palatable while lowering the cost of exports, the latter being something domestic manufacturers welcome with open arms. The U.S. is winning “the war of the declining currency.”
But, as the U.S. dollar continues to fall against other world currencies, only one currency is really benefiting, and that currency is not a fiat currency like the yen, yuan, or euro. That currency is gold.
The writing is on the wall: raise as much money as possible to finance our debt, and drop the value of the U.S. dollar to make those debt repayments “cheaper.” Gold benefits under such a scenario, because gold is sold principally in U.S. dollars. Is it any wonder the gold mining stocks are the only stocks rising these days?
Michael’s Personal Comments:
Investors are waking up this morning to a Dow Jones Industrial Average below the 10,000 level for the first time in weeks. Out of the last six trading sessions, the Dow Jones has been down five of them.
But it’s not just the stock market that has been getting whacked this week. Most commodities are down or flat, the U.S. dollar has taken a beating, and everyone is running to the safety of U.S. Treasuries.
Remember that old song with the lyric, “only fools rush in,” made famous by Elvis? Welcome to the U.S. bond market of 2010 — where fools are rushing in. I would not be a buyer of bonds at this point in the economic cycle. All bubbles burst, and the bond market is not exempt to bubbles.
The stock market is severely oversold and due for a bounce.
Where the Market Stands:
The Dow Jones Industrial Average opens his morning down four percent for 2010. I continue to believe that stocks are trading in the confines of a bear market rally.
The halfway point between the Dow Jones’ multi-year low on March 9, 2009, and its subsequent high earlier this year is approximately 8,850. Hence, for those readers who have written asking when I would consider the bear market rally over, technically speaking, the rally that started in March 2009 will not be over until 8,850 on the Dow Jones is decisively broken.
What He Said:
“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.