As I warned investors regarding the zero hour debt problem in July 2012, today we find out that GDP has actually reached the 0% growth rate while debt growth is increasing at a rapid pace. Real GDP in the U.S. has decreased 0.1% in the fourth quarter of 2012 to a mere $15.8 trillion, while debt has grown 2.4% to $16.4 trillion.
As you can see in Chart 1, the ratio between nominal GDP growth and total national debt growth has touched the zero line, which means that additional debt growth is not stimulating the economy anymore. We really are reaching the end game here and will see a parabolic increase in debt.
Furthermore, GDP is not what it was a few years ago. The most important part of GDP and the best indicator of a strong economy is the section on "exports." The report shows that exports declined 5.7% in the fourth quarter of 2012. On the other hand, the unhealthy part of GDP -- namely consumption -- has increased 2.2% in the fourth quarter of 2012. So the U.S. is walking an economic path of consumption instead of production. Moreover, defense spending has dramatically declined 22.2%, and a part of that is due to the debt ceiling, which was reached in mid-December 2012. As a matter of fact, we already see the effects of the decrease in defense spending at the Pentagon, where 6% of the workforce has been slashed and more budget cuts are to come after March 2013, possibly with the implementation of furloughs.
The GDP numbers of today are very significant, as it introduces the start of a period of hyperinflation. The gold market reacted as predicted on the GDP numbers, with an immediate rise of 1% when the news was released (Chart 2). On top of that, a very renowned investor in the precious metals business, James Turk, recently stated that he expects a 100% probability of hyperinflation in the U.S.:
The politicians have finally done it, Eric. The House passed a debt ceiling bill that throws away the last semblance of any discipline on federal spending. It is now all but certain now that the dollar is headed for hyperinflation, assuming the Senate and then the President go along with the measure passed by the House a few days ago, and the indications are that they will.
|(click to enlarge)|
|Chart 2: Gold Price|
Basically, there will not be any limit anymore to the debt ceiling, and I already stated that the debt will never be repaid here. As the debt goes higher and higher, without a significant rise in GDP, the Federal Reserve will need to monetize the debt, which in turn creates a huge amount of inflation. Just a week ago, the Federal Reserve balance sheet has reached $3 trillion (Chart 3). This balance sheet is expected to rise 30% in the next year, which means a U.S. dollar devaluation of 30% against real assets.
|Chart 3: Federal Reserve Balance Sheet|
With this devaluation in the U.S. dollar it is increasingly obvious that U.S. treasuries are an asset to avoid at all costs. Yesterday, the 10-year treasury yield had reached a nine-month high of 2% and is climbing as we speak (Chart 4).
Gold, on the other hand, is going into bullish territory. I pointed out in a recent post that the price of bitcoin has reached all time highs, and I predict that the gold price will reach $1,800/ounce in the short term based on the correlation between the bitcoin price and the gold price (Chart 5). The bitcoin is a digital currency that is used outside of the usual currency system, so it should track the gold price very closely.
|(click to enlarge)|
|Chart 5: Bitcoin Price|
Another sign of rising inflation is the increasingly positive prospects in the copper market, which I explained here. The contango report for copper shows an immediate short-term rise in copper price, and this will spur a boost in stock prices as we know that the copper price always correlates to stocks.
I encourage investors to back away from U.S. treasuries (TLT) and invest in precious metals or equities, as this is the only way to protect themselves against a massive U.S. dollar devaluation to come in the next few months. The evidence suggests that the zero hour debt line has been reached. Get out of the U.S. dollar (UDN) and buy physical gold (PHYS) before it's too late.