Puru & The Rock

Puru Saxena presents his forecast:

"The developed nations are over-extended, their debt levels are ballooning and their governments are creating copious amounts of money. Put simply, most industrialised nations are now caught between a rock and a hard place. After years of excesses, the developed world is slowly beginning to realise that you cannot continue to live beyond your means and spend your way to prosperity. Today, US national debt stands just north of US$12 trillion, its fiscal deficit for this year alone should come in around US$1.6 trillion and the nation faces mind-boggling deficits for as far as the eye can see. Furthermore, demand for US government debt has begun to wane and this implies that the Federal Reserve will have to resort to creating even more money over the following years. Make no mistake; the US cannot afford higher interest-rates and in order to keep a lid on the government bond yields, we are convinced that the Federal Reserve will resort to debt monetisation. In other words, the central bank will create new dollars in order to fund the deficits. Needless to say, this money-creation will be extremely dilutive and end up undermining the viability of the world’s reserve currency. If our assessment is correct, within the course of this decade, the interest-payments on the existing government debt will become so large that the US Treasury will need to issue new debt just so that it can keep paying interest on its outstanding debt. When that happens, you be sure that foreigners will not be eager buyers of US government debt. Therefore, the Federal Reserve will have to create additional money, just to keep the Ponzi-scheme going. And when all else fails, the US will simply debase its currency, thereby repaying its creditors in significantly depreciated dollars. Although our prognosis may sound far-fetched, we want to remind you that throughout history, currency debasement has been the norm rather than the exception. Let us put it simply, the US is now left with three options:
•Sovereign default (unimaginable)
•Severe economic contraction (unlikely)
•Currency debasement (most probable)"

The entire article:
http://financialsense.com/editorials/saxena/2010/0407.html

What's Another 2 Trillion To The Great Grandchildren?

Was anybody surprised that we just mysteriously spent another $2 trillion. As my neighbor said last night, "we have now spent our great grandchildren's money!". There is no way for this to end pretty my friends.

The NY Times reports:
http://www.nytimes.com/2009/08/26/business/economy/26deficit.html?bl&ex=1251432000&en=7d1bba04578a733a&ei=5087%0A

Check's In The Mail

As posted prior, our individual states are one level of Sierpinski's Triangle. California IOU's mean that "the check's in the mail".

The BBC reports:
"It is the latest sign of the fiscal crisis that is spreading across the nation as the recession has had a dramatic effect on state spending. The state of California, with a GDP larger than most countries, has been among the hardest hit. On Wednesday, it said it would start issuing IOUs rather than cash payments to its creditors after the state legislature failed to agree a budget deal."

"The 50 US states play a much more important role in the US system than local authorities do in a European context. Together they make up about one-third of all public spending, or 10% of US GDP. Detroit is to close 23 schools and lay off 600 teachers. Most spending on schools, roads and welfare support is made at the state level. And the states also have an important constraint that the Federal government does not - they have nearly all passed laws in the past 20 years requiring them to have a balanced budget, and forbidding them to borrow money to pay for current spending."

"This has hit them very hard as the US recession starts to bite. States rely on sales taxes and property taxes at the local level to fund much of their spending. These revenues have plunged as the economy has gone into freefall. At the same time, they have faced higher bills to pay for the casualties of the recession. California dreaming California, the biggest and richest state in the US, has been particularly hard-hit. It has an unemployment rate of 11.5%, well above the US average, and has been at the centre of the sub-prime mortgage crisis, with more properties foreclosed than in any other state."

"Several of its biggest banks, including IndyMac, have been taken over by the federal government, and its manufacturing sector has been hard-hit by the crisis. It also has more poor people and immigrants than other states. So California faces a $26bn (£15bn) deficit on its general budget of $96bn. But it is not alone."

"According to the Center for Budget and Policy Priorities (CBPP), a Washington think tank, 48 of the 50 states are facing budget deficits this year, with a total deficit of $166bn, or 24% of their budgets. And it projects an aggregate deficit of $311bn by 2011."

Puplava's Prediction at The Inflection Point

from financialsense.com
We are now at an historic inflection point in history—with no turning back the clocks. Had our political leaders from Reagan and Clinton to Bush I and II been more fiscally responsible, we wouldn’t be facing the largest monetary storm in history. That monetary storm lies directly in front of us. Bernanke and Greenspan may summarily dismiss high oil prices, but for most of us who live in the real world, higher energy costs are going to be inflationary. Investors need to start preparing for $100 oil. Higher oil prices will eventually permeate all aspects of economic life, driving the costs of basic necessities higher. In the future you may be able to buy a flat screen TV, DVD player or personal computer at a cheaper price, but the cost of everything else will be rising. The things that you need in everyday life will all be going up: your grocery bill, your utilities, the gasoline that powers your car, visits to your doctor or dentists, tuition, and lastly, taxes.

The economy will vacillate between periods of deflation and inflation, with each recession bringing forth a temporary reprieve from what will be an inexorable rise in the general rate of inflation. Eventually wars, deficit spending, a rising mountain of debt, and peak oil will lead towards hyperinflation in the United States.

Already, the U.S. is exhibiting many of the pre-hyperinflationary conditions that are so prevalent in many South American and Eurasian economies. Evidence points to several factors that will lead us there:
Large budget deficits
Deteriorating international trade balances
An eroding international currency
Eroding financial confidence
Growing protectionism
An expanding war on terrorism and the need for security
Growing entitlements

Whether the U.S. experiences hyperinflation or simply higher inflation rates will be dependent on the political will of its leaders to rein in spending and bring its fiscal imbalances into order. At this point, it appears hopeless with over $51 trillion in unfunded Social Security, Medicare, and pension liabilities now growing at over $2 trillion a year. History teaches us that debt imbalances of this magnitude are always inflated away.

An expanding money supply, abundant credit, and negative interest rates are inherently inflationary. When investors realize that they can borrow money at next to nothing rates and invest that money in hard assets and get an immediate return, the demand for such assets rises. This leads to higher prices, asset bubbles or inflation. This is what is going on now in the financial markets, the real estate market, and in the commodity markets. A flood of money and credit throughout the world is driving asset bubbles and inflation. Central banks can create money and credit, but they are unable to direct where that money flows. One of the chief characteristics of inflationary cycles is asset bubbles. First, it was stocks in the 1990s. Then, it was real estate and mortgages in this new century. It is now working its way through to the commodity markets. The new bull market in commodities will dominate the financial markets the balance of this decade and the next.

As debt levels rise in the U.S. at unprecedented levels, the Fed will increasingly become impotent. Unlike Volcker in 1979, today’s U.S. economy is far more debt laden. Because of this huge debt overhang and the huge asset bubbles that support it, the Fed’s options are limited. The Fed simply can’t afford to raise rates in the same decisive and single-minded way that Volcker did during 1979-1982. The Fed’s new mantra is "measured." This means that real interest rates will remain negative for a long period of time.

No matter how high inflation finally gets, it is abundantly clear that the financial markets are undergoing a paradigm shift from a bull market in paper to a bull market in commodities or "things" as I like to call them. Investors will need to focus on a different class of assets. Real assets are going to be the big winners in this new emerging bull market. Commodities are becoming "The Next Big Thing." Precious metals, base metals, energy, water, and food are where the next fortunes are going to be made. Precious metals have, will, and are going to lead this new bull market. It is in regard to precious metals that I devote the remainder of this essay.