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The prospect of the United States defaulting on its debt is not just likely. It's inevitable, and imminent.

The regulatory black holes into which sanity and reason disappear on a daily basis are soon to collapse under the mass of their sheer size. The circle jerk going on among G7 governments has to end – the steady advance of gold, even in the face of a managed price, exposes the real value of the U.S. dollar, as opposed to its apparent value expressed in the dollar index.

Is 2009 the year that the United States formally defaults? And with that, will the dollar collapse be rolled back ten for one or more?

There are a lot of reasons to support that theory. To Wall Street economists, such an event is heresy and therefore unthinkable. Yet Wall Street is the very La-la-land that bred the idea of a perpetually indebted nation in the first place.

Number one among the indicators favoring this scenario is what is happening in the U.S. Treasuries auction market.

Last Thursday, an $30 billion auction in five-year notes failed to stir the interest of traditional primary dealers. The auction itself was saved by an anonymous “indirect” bid.

Buyers are discouraged by the prospect of what is expected to amount to $2 trillion total issuance for the full year of 2009. The further out the maturities on notes, the more bearish the sentiment towards them. The only way to entice buyers is through the increase in yields.

But with yields at 1.82 per cent, five-year notes were met with a demand for 1.98 times the amount offered - the lowest bid-to-cover ratio since September. A sell-off in treasuries began in earnest upon the conclusion of that auction.

The U.S. Federal Reserve suggested last week that it was going to step up its treasury-buying activity, and the mainstream media interprets this as a form of market support. What it actually is evidence of growing anxiety and desperation on the part of the Fed as the realization dawns that demand for treasuries is progressively evaporating.

The increased demand for gold as an investment witnessed throughout the last two weeks that has pushed gold to a 4 month high is further evidence that investors across the board are gravitating more towards gold and away from U.S. debt.

So what is the catalyzing event that will precipitate outright capitulation?

I think the spin-controlled version of events will make the collapse of the derivatives market the red herring that facilitates the aw-shucks-we-have-no-choice shoe-gazing moment possible, and that’s exactly the parachute the government needs to retain a veneer of credibility - at least in its own delusional mirror.

The announcement that the CFTC was about to become the target of a regulatory overhaul supports this theory. Consistent with his unfortunate proclivity to hiring foxes to guard chickens, Barack Obama’s choice for CFTC commissioner Gary Gensler was the undersecretary of the U.S. Treasury when the Commodity Futures Modernization Act of 2000 was passed, and is one of its architects. This was the piece of legislation that was put forth to appease the opposition to “dark market” trading in certain OTC derivatives first noisily derided by CFTC commissioner Brooksley Born in 1998.

Ignoring Born’s admonishments with this act, it exempted credit default swaps (CDO’s) from regulation, resulting in the somewhere between 58 and 300 trillion dollars in value presently under threat if the positions were to be unwound. Because of their unregulated status, counterparties in the largest transactions can simply “roll forward” contracts, instead of the losing party in the transaction covering their loss with a transfer of money. It is this massive “nominal” value that could be the Achilles heel of what’s left of the U.S. banking system, and by extension, the U.S. dollar.

I don’t arrive at this conclusion because I like making catastrophic outlandish predictions. Its merely the result of following certain logical paths to their most likely outcome based on what has happened in the past.

In discussions on this topic with editors of top tier financial publications, such speculation is dismissed out of hand, and the argument to refute the likelihood of such outcomes is never brought forward.

Gold exchange traded funds (ETFs) are now the largest holders of physical gold, and as a proxy for investors who don’t want to be encumbered with taking delivery of the physical, provide a simple way to participate in the gold market.

United States citizens should bear in mind, however, that should the banking system be brought down completely by the collapse of the futures market, proxies for gold such as ETF’s and bullion funds could theoretically be targeted by a government desperate for possession of value. The risk from security in holding physical bullion is matched by the risk of confiscation by government in these volatile times. Don’t forget, the government confiscated and outlawed private ownership of gold in 1933 in support of an ill-conceived gold standard, which to some extent, was that era’s spin to halt the flight of gold (and real value) from U.S. soil.

Don’t think for a minute such drastic events are outside the realm of possibility. If somebody had told you in 1998 that a bunch of angry crazy pseudo-Muslims were going to fly jetliners into the World Trade Center, what would you have said?

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This article has 189 comments:

  •  
    Interesting. Did the government nationalize any mines in the 30's? How did Newmont and other mines sell at market prices? Or did they?
    Feb 03 05:58 AM | Link | Reply
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    "Necessity knows no law." So They might do it.
    Feb 03 06:22 AM | Link | Reply
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    Whenever I read the headline of a book or article forecasting an extreme event I typically pass it by. However, in this case the article is short and I read it. Aside from the fact that Mr. West does not discuss possible consequences of the extreme event he suggests possible - perhaps including the pawing of the ground and snorting by at least one of the four horses of the Apocalypse as foreign holders of U.S. treasury bills take a serious bath - Mr. West has caused me to focus even harder than I have been on my own investment mix. I am grateful to him for that.
    Feb 03 07:29 AM | Link | Reply
  •  
    Without taking sides on the issue of the possibility of default, I'd like to add this recommendation for this article: the caterwauling from the deflationists and radical dollar bugs centers on the impossibility of US default and the US dollar's "King of the Fiat Sewer" status. Completely ignored, and never discussed, are the very real, sizable and measurable impacts of reduced tax revenues caused by the "recession" and the prospects for actually repaying US debt absent inflation.

    There are no such prospects. US debt continued to rise in "good" times, but now, somehow, facing an epic economic slowdown, the US will be able to radically INCREASE borrowing and in this manner grow our way out of debt. In my opinion, taking and supporting such a position requires either an IQ of 70 or a suspension of disbelief. It does not matter if the US Dollar is the best of the turds in the sewer. If there are no prospects for debt repayment, the dollar is toast, and the Treasury market along with it.

    I can never imagine making a timing call, and this article alludes to the reason: this government is liable to do anything, absolutely anything, to hold onto the reins of power. It has already demonstrated clearly its willingness to pick winners and losers and steal from taxpayers to enrich its partisans. In such an environment, anything is possible and nothing should surprise.

    Just my opinion / not investment advice.
    Feb 03 07:53 AM | Link | Reply
  •  
    Although I certainly agree with the possibility of some degree of a US default, if I took Seeking Alpha's articles to heart i'd be sitting on top of a chest full of bullion with my shotgun waiting to "time" the burst of the dollar bubble. The value of a fiat currency is based solely on belief. Given the level of which the world's financial system believes in and depends on the dollar and the amount of tools and resources the US and other Govs have at their disposal to manipulate currencies and economies I don't see the world abandoning their belief in the greenback in the near term. That is, not without a suitable replacement and a central issuing/governing authority for us to allocate our pent up belief.
    Feb 03 08:42 AM | Link | Reply
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    As unlikely as it may sound, this article make sense, if there is not a sharp turn in America's way of doing business, a drastic change in citizen's financial behavior, and a socialist like (still within the democratic spirit) scheme of regulation then there will be no way back to sanity. Whoever addresses the amazing growth of the economy (out of proportion) in the last decade forgets that it was made out of a bubble with a non-existing equity in citizen's hands, an unprecendent Government spending with borrowed money plus lack of oversight on the greedy, yet rich, Wall Street gurus. I'm not versed in financial stuff but all I've seen so far is people talking about losing money what was never there in the first place (i.e. home equity) feeling sad because they lost material things like car, boats, planes etc that they could have never afforded, if there wasn't for the imaginary wealth that allowed access to easy money and worse that that investing in overvalued companies (read DJIA) because a clown said on TV that DJIA at 14.000 was a good buy. I did not lose money in this hecatombe I just felt emotional for the millions of Americans that are going to suffer without having been active players in this joke and it's not only Americans, the whole world feels the pain that Wall Street inflicted on them. Sorry about this long comment, going back to the Article, the author did a good job, don't bet on the dollar anymore and I'm talking about dollar reversing its strength as soon as Feb 5 2009, as far a treasuries the big sell of is coming, that is a matter of time, as it was the sell-off in the Stock Market, it took a year to get awful and only the ones who took the lead selling at the first sign of market illness (August 2007) were not harmed.
    Feb 03 09:52 AM | Link | Reply
  •  
    With the financial markets desperate for gov't bonds, the US gov't wouldn't have to default..it could 'merely' ROLL over the debt as it comes due, to 100 year treasury bonds. Given the increase lifespan humans will have as medical breakthroughs proceed apace, this would make alot of sense. Raise the retirement/social security eligibility age in stages up to 70, 75, 80, as is appropriate; and most of the government's unfunded liabilities would disappear.

    cyclingscholar
    Feb 03 09:55 AM | Link | Reply
  •  
    We do have a really stupid government but this outcome is truly an extreme view. The idiots on Wall St. need to be replaced with some new ones----also---the goverment can cancel CDOs and Swaps any time it chooses-----the liability/asset structure can be wiped away with the stroke of a pen if DC chooses to. The average guy could give a shit!
    Feb 03 10:09 AM | Link | Reply
  •  
    ..."The prospect of the United States defaulting on its debt is not just likely. It's inevitable, and imminent."...well, is that any less true for any other large government?...and if they default, will THEIR currencies collapse?...well, gee, if everybodies' currencies collapse at the same time then maybe they'll all just end up equal and it won't matter anymore...but no doubt the gold bugs would then start caterwauling about exploding dollar appreciation causing economic armageddon.

    Feb 03 10:11 AM | Link | Reply
  •  
    This storm has already passed and the dollar has necessarily survived. When the world was reassembled in Bretton Woods (1944) the dollar was linked to gold, now it will replace gold. American capitalism has won the world and contracts or not, America will not fall as its leader. The consequences of our failure would cast the world backward 20 years. The world IS supporting the US dollar even though we solemly swear our presses will run round the clock; it's the value of the franchise. Gold is supported by a public frightened into thinking this will result in a complete meltdown (again). Markets are ever-more a fleecing ground, just like the good old pre SEC days. My guess is central banks are selling as gold is moving away from being a monetary instrument.

    ps. Nice methapors
    Feb 03 10:20 AM | Link | Reply
  •  
    Hi James:

    Remember me? You brought my attention to CSI.to even though I did not buy. But have you given some thoughts to precious metal palladium? You must read this:

    stockology.blogspot.co...

    Are you still sticking to your call on CSI.to?
    Feb 03 10:24 AM | Link | Reply
  •  
    The fundamental trends I believe point to a failing bond market and an attendant loss of faith in the dollar. I have been laying out these arguments for some time for my readers. All of this could lead to the default scenario mentioned above. The difficulty has always been - "who's currency becomes the new reserve of choice?" We cannot consider a dollar collapse and US debt default and assume that all other currencies remain fiat currencies. Imagine what would happen if another nation, say China, converted to a gold standard as the US dollar begins to slide. I am not saying that will happen rather that some unimagined event could occur that changes the dynamic radically.

    Mr. West's points on gold and asset seizures are bang on as well. If you are playing in the gold market with a view to preserving your wealth you better have criteria in-place on when you convert from paper to something physical and how you ensure that physical thing isn't a confiscation target. Physical gold held in a vault in the US is problematic. Some outfits are offering off-shore purchase and storage in a transparent way. I don't have a good strategy for this yet.

    I would like to see crisping-up of what "imminent" means. This year, next year,...?

    Feb 03 10:31 AM | Link | Reply
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    cycling scholar, How many people are really capable of being productive at those ages? Expecting them to have an important positive inpact on our economy, and I am one of the retired myself and can feel the difference in my physical and mental capacities, is I believe not a pratical solutition.
    Feb 03 10:59 AM | Link | Reply
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    Kelm: that sums it up.

    Imminent keeps cropping up every month. Ever since Oil broke above $40, an Imminent collapse was in the wings.

    Imminent=eventually. IMO
    Feb 03 11:03 AM | Link | Reply
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    David Roskoph, I don't think the storm has passed, and yes gold is driven higher by public fear, what other emotion would make sense in the current enviironment of mistrust that now exist?
    Feb 03 11:06 AM | Link | Reply
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    Under the actual market conditions, inminence means getting out before (before enough) the big ones do as it happened with the DOW. When things got awful last year, the big ones were already preparing themselves since October 2007.
    Fear beats greed in the current environment. I don't bet on a USD total collapse as the financial meldowm became a global issue but moving investments away from USD towards Gold, for example, does not mean the world abandoned the USD, it means USD at 1.50 and that is fine, oil price will rise atracting speculative investment, talks of defaltion will then fade overshadowed by rising prices, oil producers will get more money and reinvest in the USA as a result, and confidence will prudently but steadily get back to investors, consumers and therefore the industry, we will be 10 years back in history but still alive to write a new chapter about the history-making USA as long as we don't forget the lesson (always happens). The time frame may easily be 2 years. I do bet though in a EUR/USD at 1.50 and Gold at USD 1200 by mid May 2009 and it does not mean the USA has been abandoned by the world. That's what I think commentators mean.
    Feb 03 11:08 AM | Link | Reply
  •  
    This is a great article and people need to wake up to the fact that the Federal Reserve and the US Treasury are debasing our dollar at the most alarming rate in history. Can anyone provide a real answer regarding how we can avoid hyper-inflation at some point in the near future?

    Thanks,
    Feb 03 11:50 AM | Link | Reply
  •  
    I think most of us here are worried about these same things. I would like to hear from anyone who has already found a tangible way to capitalize on these trends, or at least preserve the purchasing power of capital, without using some offshore (or onshore) scammers.
    Feb 03 12:06 PM | Link | Reply
  •  
    It is all part of the plans of the great minds in the US to dominate the world. Who said the devaluation of the US currency is bad for future of the USA.

    Slow down of countires growing in the double digits-Accomplished
    Bring Russia back to earth and Terrorist oil profits to zilch-Accomplished
    Send the entire US bad loans to around the world-Accomplished
    Lower the US dept by cushing the dollar-to be done
    Reflation to increase home prices by factor of 3.-to be done
    Control over the Gold supplies to redominate the world-to be done
    Rich home owners to with over 70 percent equity to start refinincing-to be done......
    Feb 03 12:27 PM | Link | Reply
  •  
    BUY GOLD
    Feb 03 12:43 PM | Link | Reply
  •  
    Another man who reads tea leaves with confidence.

    Feb 03 01:19 PM | Link | Reply
  •  
    Kelm:

    To ensure your physical stockpile of precious metals do not become a confistication target, stick with something that less people have. Stick with silver, palladium and platinum. The total market value of these metals are much smaller than gold so there is no interest for government to come confisticate them. I hoard tellurium BTW:
    stockology.blogspot.co...
    Feb 03 01:29 PM | Link | Reply
  •  
    I have a question. What will happen to the price of gold , if central banks start selling their gold in order to cover their deficits because of all the stimulus packages and TARP programms etc. ?
    Would the price of gold plunge to 100 $ or less ?
    In the real world unlike other metalls gold has no use or value, nobody needs it it is nothing else but a CDO in yellow. Think about it and sell it as long as you get something for it.
    Feb 03 01:31 PM | Link | Reply
  •  
    User 261133,

    Shhhhhhhhhh. You'll anger the gold bugs.
    Feb 03 01:59 PM | Link | Reply
  •  
    Goldfinger lives..somewhere!
    Feb 03 02:44 PM | Link | Reply
  •  
    The best metaphor is "circle jerk". That's exactly what's going on! The problem is that it can continue to go on, seemingly indefinitely. As in human affairs, dysfunctional relationships can be very stable, especially if each side is getting what they want...
    Feb 03 03:45 PM | Link | Reply
  •  
    Wow - US Government formally defaults in 2009 - that's a dire prediction! Also completely unrealistic. Why would the govt. choose default over eventually printing enough worthless money to pay off it's debts after rolling them out in time far enough to put the consequences on future generations.
    The politicians who make these decisions are mostly concerned with covering their asses during their own tenure. They are not going to be willing to take the heat for defaulting on their watch. Wont happen !
    Feb 03 03:50 PM | Link | Reply
  •  
    Jake,
    Unfortunately I have a suggestion. There is one asset class, though few people in their right mind would consider it such, that has shown remarkable year over year increases. Ammunition. Just for plinking purposes, I bought a few hundred rounds for my rifle about a year ago since the place had a decent sale at the time. I paid just under $200, as of yesterday when I saw the exact same product on the same advertiser's site: $900. 350% in one year. I realise it isn't exactly liquid, but it does allow one to hunt or defend if necessary - two qualities that gold does not offer. After seeing that, I checked around some other places and saw similar price moves. Maybe it's the gun freaks doing a little quiet price-gouging, maybe it's fear of the new administration's potential policy shifts in that segment. I dunno. I think I'll consider brass and lead in my precious metal portfolio, at least until all this apocalypse stuff blows over (or lands on my front door...).


    On Feb 03 12:06 PM Jake Berzon wrote:

    > I think most of us here are worried about these same things. I would
    > like to hear from anyone who has already found a tangible way to
    > capitalize on these trends, or at least preserve the purchasing power
    > of capital, without using some offshore (or onshore) scammers.
    Feb 03 03:55 PM | Link | Reply
  •  
    Always remember, what is unfolding before your eyes is a well executed plan. The leading cause of death in the U.S. will soon be starvation.
    Feb 03 04:15 PM | Link | Reply
  •  
    How to avoid Hyper Inflation?

    Very easy, Have everyone else devalue their currencies at the same rate as we are doing.

    The Canadian Dollar was at 1.10 now .82, Pound hit 2.1 now 1.4, Euro was 1.6 now 1.3, Aussie dallar was approaching 1 now .65...it goes on.

    We will not be importing Inflation: Ruble, Rupee, Won...the list goes on, all down drastically against the dollar.

    If we do not import inflation, we have to create it internally. In the present climate, I see no current hope for that either.

    Hold off Fear by holding gold, but do not expect Hyperinflation in 2009.
    Feb 03 04:46 PM | Link | Reply
  •  
    Hey ecliptix, I'm with you. Ammo is a great investment. Guns too. Also hand tools. And maybe canned food. Not only is this stuff going up in demand and price in the next few years, but it is always useful in bad times.
    Feb 03 04:57 PM | Link | Reply
  •  
    User 261133 writes:

    "In the real world unlike other metalls gold has no use or value."

    The utility of gold is as money. "Gold is money, and nothing else." --JP Morgan.

    Gold is still money: That is why central banks, like our (privately held, BTW) Federal Reserve, still hoard it.

    Gold is not money for the masses anymore, because the owners of the world's central banks convinced their respective governments to assign their gold hoards to the banks as collateral for issuing paper currency. Such issuance has been abused to the point that confidence is being lost in the value of that paper.

    "Nobody needs it it is nothing else but a CDO in yellow."

    The common people do need it, as a store of value that can't be corrupted by politicians and bankers, and as a way to limit abusive money printing by the well connected financial elite. The bailouts you see are those elites paying themselves first with money they are printing up, all at the expense of the common people.

    Gold is not "a CDO in yellow." CDOs (Collateralized Debt Obligations) are promises to pay which can be defaulted on by the promiser. That is in fact the root of our problems in this crisis.

    Gold, on the other hand, has no such "counterparty risk" of default. When someone puts a piece of gold (or silver) in your hand, you know you have well and truly been paid. The metal will not default on its promise to pay.

    Thus it has been for thousands of years. Our modern delusion that pieces of paper are literally equal to gold and silver, is of a part with the other delusions that are falling away, such as the "value" of mortgages, real estate, Enron accounting, Social Security, and on and on. As lies multiply, trust in promises to pay, written on paper, evaporates like dry ice on a warm summer day.

    Our current crisis will not see the beginning of its end, until trust is restored in payment transactions. This trust will only be restored, when gold and silver are once again the media of exchange, freely circulating amongst the people.
    Feb 03 05:27 PM | Link | Reply
  •  
    If you want to hoard something to spend at a time when paper currency has no value, I would suggest Silver american coins. They come in denominations that make them easy to divide or multiply. Buying bags full is easy now. Personnally it is hard for me to believe we will come to that. But I don't put down folks who do.
    Feb 03 05:38 PM | Link | Reply
  •  
    The five-year auction was anything but tragic. A 1.98 bid-to-cover only barely connotes poor demand.
    Feb 03 05:42 PM | Link | Reply
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    So? The issue here is the value of the dollar. I do believe the dollar will be devalued to 40 or 50% of it's current value. But outright default? We will just print the money to pay it off. In the long run all currencies will have a trading range, including the dollar. I do believe the days of a world currency like the dollar, are counted. We will buy and sell from china but we will buy from them in renmbi and they will buy from us in dollars. This is good since there will be an exchange clearinghouse, like the IMF, which will contain the currencies.
    I sincerely think no central bank or country will allow another country to ever again set their exchange rates, You buy from mexico, you convert to pesos and buy from them. That is why i am holding stocks in various currencies and not just one. My favorite trade though is gold in India and china. 1.5 and 1.1 billion new middle classes anxiously awaiting to buy gold earrings and nick nacks. jejeje. I do not know what the phsycological atraction of gold is. I mean, why not plastic, or platinum or heck, chicken meat earrings. But i will go with the trade.


    On Feb 03 05:42 PM dlaw wrote:

    > The five-year auction was anything but tragic. A 1.98 bid-to-cover
    > only barely connotes poor demand.
    Feb 03 06:55 PM | Link | Reply
  •  
    Hey what did the gov do with the gold confiscated in the 1930's? They pegged an outrageously higher price for it after they were majority stakeholder in it. So you could thank the gov for value creation in that era if you had some squirreled away. BTW All you doomsdayers keep buying gold in the near term, because it will make a nice short in a deflationary environment. I can feel the thumbsdown coming in already, bring it on.
    Feb 03 08:32 PM | Link | Reply
  •  
    when the euro and renminbi jump up and kick our ass then i'll worry about inflation. We are not alone in devaluing our currency. Right now us and the rest of the world are trying to jump into a creek and not get our pants wet.
    Feb 03 08:35 PM | Link | Reply
  •  
    Future is dificult to predict. At present, it does not look promising. Prepare for the worst! I am buying silver coins now. Silver is both a monetary and an industrial metal.
    Feb 03 09:52 PM | Link | Reply
  •  
    RELAX!!! The US government is the ultimate arbiter of asset prices.

    De-regulators have allowed the us financial system to become an incomplete system, by allowing the spread of credit derivatives which cannot be expressed in terms of other assets.

    In mathematical terms, we have a n dimensional system, with n-1 actual equations to describe it, and therefore asset prices are left to a bounded vector of possibilities which cannot be agreed upon through logic, rational thought, or anything else, every possibility potentially comes into play, but not really.

    What the US government says, goes, implicitly this is so. It is not rational, it may take a while to play out, but this is how the world will work. Get used to, and get on the train sooner than latter so we can all move forward.
    Feb 04 02:12 AM | Link | Reply
  •  
    The options are simple and repayment in full is not one of them.

    They either devalue the debt through high inflation, many would say hyper-inflation or they default.

    True the US has never done that before, but then the US has never been so badly managed before.

    Some inflation could be a boon if there is discipline in wages. Devaluation of the dollar would make exports cheaper and imports more expensive. Inflation would also increase the Treasury's revenue, so they could start to balance the books. It could just make them solvent. And of course it would help to reduce wages to globally competitive rates across the board. But of course this will only happen if it is combined with wage increase restraint, which is unlikely, as the No Pain No Gain message is not out there yet, and it will take years for Americans to accept that message even if they find a politician that has the courage to run with it. Somebody has to explain to the people that this is going to a long hard rocky road.
    Feb 04 03:48 AM | Link | Reply
  •  
    I don't think so. I think the most likely scenario is high public spending, deflation, transition to multiple reserve currencies, leading to lower growth rates, more stability, global regulation, and finally after several years technological breakthroughs that return growth rates without the credit expansion.
    Feb 04 04:50 AM | Link | Reply
  •  
    The good news is that if the dollar becomes worthless due to hyperinflation so do our personal debts. My mortgage is payable in dollars....not gold, silver, or Euros. Thank God I'll have wheelbarrows of dollars on hand.
    Feb 04 09:17 AM | Link | Reply
  •  
    The Government will not confiscate gold. Since the dollar in 1933 was backed by gold, the Government confiscated it so they could print as much money as needed to shore up both the banking system and the economy. 99% of the population owned gold in 1933, they carried it in their pockets, and they carried it in their purses. Now, in 2009, less than 1% of the U.S population own gold. Thus, it would not be worth the Government’s time to confiscate it.
    Feb 04 09:40 AM | Link | Reply
  •  
    Well said.


    On Feb 04 09:40 AM MikeLovesGold wrote:

    > The Government will not confiscate gold. Since the dollar in 1933
    > was backed by gold, the Government confiscated it so they could print
    > as much money as needed to shore up both the banking system and the
    > economy. 99% of the population owned gold in 1933, they carried
    > it in their pockets, and they carried it in their purses. Now, in
    > 2009, less than 1% of the U.S population own gold. Thus, it would
    > not be worth the Government’s time to confiscate it.
    Feb 04 09:53 AM | Link | Reply
  •  
    I suggest oil as an alternative to gold. Oil has just fallen 73%. Gold is presently near an all time high. Oil is actually useful. Gold has limited functional uses. And if the dollar is devalued, oil will be shooting thru the roof because of the present pricing linkage....and I don't think oil will be confiscated.
    Feb 04 09:56 AM | Link | Reply
  •  
    There is one missing piece to this puzzle which is the demand from foreign buyers for U.S. dollars. They have to invest their assets in either the U.S. or Europe and therefore, this demand will continue to prop up the dollar in the near term. See my videoblog for more details at davidportnoy.blogspot....
    Feb 04 10:07 AM | Link | Reply
  •  
    Articles like this are obnoxious. A half-baked analysis isn't any prettier for being confidently and plausibly expressed. For all your erudition, you don't show any signs of encompassing in your mind the widely disparate components of the economy, or of human psychology, one bit better than anyone else. This bandwagon of pessimism you've jumped on isn't any more reflective of reality, or useful in predicting what's possible, than its opposite number was during flush times.

    Finally, to the extent that articles like yours are a self-fulfilling prophecy, by encouraging the unfounded degrees of pessimism that they have to take as granted to go through this kind of analysis in the first place, they're reprehensible, because they make the situation worse than it needs to be.
    Feb 04 10:24 AM | Link | Reply
  •  
    Well argued James. The Chinese have become more pragmatic with regard to Treasuries and have their own problems to deal with. The recent Treasuries auction, I believe, only confirms that Uncle Sam's debtors are beginning to choke on the debt they already have. There have been numerous articles on a Treasury pop that have so far been greeted with general disbelief but reality is setting in and it will become more difficult for mainstream financial journalism to spin their way out of this mess.
    As far as confiscation of Gold is concerned, there is a rapidly growing market worldwide for physical gold as a store of value and on examination of U.S. Government actions so far in the economic crisis, it would not be surprising in the least if there was a 1933 redux.
    Feb 04 10:39 AM | Link | Reply
  •  
    With interest rates so low the percentage of the US budget needed to service this debt is quite small. And 1.98 oversubscription when rates are low (and theoretically unattractive) should alarm nobody.

    I sure wish I was in a position to sell 30 year bonds at 3%. That is like stealing.

    So where are the real harbingers of default in 2009 here?

    The only reason for a story like this is that the writer is long GLD.

    Feb 04 10:46 AM | Link | Reply
  •  
    The more immediate impact on the US dollar is the treasury bonds. If foreigners don't buy the new bonds, that will f**k us and the USD up. Looks like foreign governments are considering this. This will, in turn, affect the world's faith in the greenback.

    www.foxnews.com/story/...
    Feb 04 11:28 AM | Link | Reply
  •  
    Agree 100% and the best part is that all those billionares...well they'll go back to being millionares as the currency devalues.jejeje


    On Feb 04 03:48 AM Dave Wrixon wrote:

    > The options are simple and repayment in full is not one of them.
    >
    >
    > They either devalue the debt through high inflation, many would say
    > hyper-inflation or they default.
    >
    > True the US has never done that before, but then the US has never
    > been so badly managed before.
    >
    > Some inflation could be a boon if there is discipline in wages. Devaluation
    > of the dollar would make exports cheaper and imports more expensive.
    > Inflation would also increase the Treasury's revenue, so they could
    > start to balance the books. It could just make them solvent. And
    > of course it would help to reduce wages to globally competitive rates
    > across the board. But of course this will only happen if it is combined
    > with wage increase restraint, which is unlikely, as the No Pain No
    > Gain message is not out there yet, and it will take years for Americans
    > to accept that message even if they find a politician that has the
    > courage to run with it. Somebody has to explain to the people that
    > this is going to a long hard rocky road.
    Feb 04 12:10 PM | Link | Reply
  •  
    That's easy. Diversify in currencies. I have stocks from Brasil, China, Canada and Australia...all in their local currencies. There will be massive hyperinflation, do not doubt it. The US stocks, though are going to be punished. McD's and Yum are all over china. China is buying up about 19% of Vale do Rio in brasil and picking up another percentage from the Bolivian Lithium mines. The best bet is to follow what they buy stocks in since these are the companies china will buy from. I would stay oughta Russia, to much oligarchy, and Mexico, Govt to corrupt.
    My best bets...Canada, Australia and especially Brasil.


    On Feb 03 12:06 PM Jake Berzon wrote:

    > I think most of us here are worried about these same things. I would
    > like to hear from anyone who has already found a tangible way to
    > capitalize on these trends, or at least preserve the purchasing power
    > of capital, without using some offshore (or onshore) scammers.
    Feb 04 12:18 PM | Link | Reply
  •  
    Default of the US Treasury on USD denominated debt is extremely unlikely.

    The more likely extreme scenario is for rates to increase to reflect the increase in the supply of US-debt. Higher rates will draw money from gold and other investments and restore equilibrium.

    Is this good for the economy?. No. It will only increase rates for every other type of financing, which means fewer projects will be financed.

    Feb 04 12:37 PM | Link | Reply
  •  
    Default? Maybe.

    Downgrade?

    A dead solid lock.

    Remember Japan in 2001?

    When debt/gross GDP hits 1 the downgrade happens, or the rating Agencies explain why it doesn't

    Either way, it not a conversation the Gocernment wants to have.

    Feb 04 01:07 PM | Link | Reply
  •  

    Scholar,

    Ah that it were so easy. Just raise the retirement age to 75 and everything will be fine. Wipe the unfunded liability slate clean! Make the buck a 12 pointer again!

    Ummm. Where are all us boomers going to work for the extra nine years? I just turned 63 and have a twenty three year career in I/T with many successful systems in my resume, but people laugh when I apply for a job. Business knowledge and proven skills solving problems are no longer desired; nope, it's all Java all the time. As long as it looks pretty it doesn't matter if it chokes. "It was probably a Denial of Service attack that brought down the server", (not crappy SQL queries generated by the webtool used by the hipster who knows nothing about business except splashing Flash elements around an HTML screen). Who was hired by a bitter Gen-X'er who also knows nothing about business.

    And if you don't hail from Bangalore or Mumbai don't even bother applying. You're too expensive. No, I don't care what you'll work for; you're too expensive. (Meaning of course, "Since I don't have the threat of revoking your H1B I'm afraid that you'll make me look stupid in front of my boss by speaking out". That would REALLY be "too expensive", wouldn't it?)

    Remember that I work in an "in-demand" career classification. What about all those mortgage originators, salesreps at Ikea, BestBuy, and Macy's, truck drivers, framing carpenters and on and on? What will everyone do between 66 and 75? Very few people have enough in retirement savings to live entirely without an external income for nine years.

    While your solution is good from the "macro" economy viewpoint, it's hell for the "micro" of peoples' lives. I'm not saying retired and retiring people are "entitled" to bankrupt the country. Rather I'm saying that we need to think long and hard about any amelioration, and not make misery and want more severe than they will be anyway.

    On Feb 03 09:55 AM cyclingscholar wrote:

    > With the financial markets desperate for gov't bonds, the US gov't
    > wouldn't have to default..it could 'merely' ROLL over the debt as
    > it comes due, to 100 year treasury bonds. Given the increase lifespan
    > humans will have as medical breakthroughs proceed apace, this would
    > make alot of sense. Raise the retirement/social security eligibility
    > age in stages up to 70, 75, 80, as is appropriate; and most of the
    > government's unfunded liabilities would disappear.
    >
    > cyclingscholar
    Feb 04 01:41 PM | Link | Reply
  •  
    Default probably isn't the correct word, as the US government would be able to print as many dollars as necessary to repay creditors.

    In theory there could be a run on the dollar. This would mean that something other than the dollar would become the world's reserve currency.

    What seems more likely than either of these alternatives is that rates on government debt would be pushed up to very high levels.

    There's probably some slight chance of a return to the gold standard. If this were done today, it would mean pricing gold over $5000 an ounce.

    One factor that should be considered is that the US has military assets that might be used in a crisis.
    Feb 04 01:55 PM | Link | Reply
  •  
    On Feb 04 03:48 AM Dave Wrixon wrote:
    > True the US has never done that before, but then the US has never
    > been so badly managed before.


    April 5th 1933
    August 15th 1971

    The USA has defaulted several times.
    Feb 04 03:06 PM | Link | Reply
  •  
    Certainly something will have to give as a result of this colossal increase in the money supply. Eventually.

    But I don't "get it" about gold. It has only extrinsic value; people say it's worth something, so it is. If someone wants to pay me with an ounce of gold, I can't look at it and decide what its value is. I have to find out what value *other people* perceive it has, and that can fluctuate wildly. It also shares a characteristic of a fiat currency in that, instead of being loaned into existence, it's mined into existence.

    Energy, on the other hand, has intrinsic value. The energy content of a gallon of oil is known, its value readily discerned, and it can be put to productive use in many ways. That makes sense to me.

    (I have no position in gold or oil).
    Feb 04 03:23 PM | Link | Reply
  •  
    And this reasoning worked out so well for people who shorted the yen, and Japanese bonds, in the early 90's....
    Feb 04 03:30 PM | Link | Reply
  •  
    First of all, if you REALLY believed a hyperinflationary economic collapse on the scale of Weimer Germany or Zimbabwe was about to occur, you would not be blogging about it from your home in the US.

    You would be getting the hell out and taking your gold with you, not writing endless blogs, websites, or internet infomercials about how EVERYONE can get rich buying gold. Does anyone really think these people are being charitable to all those internet strangers they care so much about?

    If anyone still in Weimer Germany / Zimbabwe had hoarded gold, they would have spent it all within a decade trying to survive, had it stolen, or died from disease, starvation, or violence. A plane ticket, a passport, a work visa, and a citizenship application would be more valuable assets than gold in the case of hyperinflation.

    It's rational to worry about the future - I have plans for multiple scenarios too. However buying gold coins in anticipation of hyperinflationary collapse is like buying marshmallows in anticipation of your house burning down. The more realistic plan is to get out, and get out early.
    Feb 04 03:58 PM | Link | Reply
  •  
    "... a bunch of angry crazy pseudo-Muslims ..." - from the article

    "Angry"? It seems so.

    "Crazy"? Perhaps.one or two. But 19? In any case, there's no way to know.

    "Pseudo"? Here you're claiming to be an arbiter of who is, and who isn't, a true Muslim. They called themselves Muslims and claimed to be acting in the name of their faith. Who are you to say otherwise?
    Feb 04 04:08 PM | Link | Reply
  •  
    Inflation is the answer. The gov't can print its way to prosperity and eliminate the debt with inflation. For example. If they owe $10T today, they can just run the printing presses wide open for the next year or so and print up $10T and hand it back out.

    The beauty of a fiat currency is that once you have the world believing that the paper is worth something, then everybody puts their faith in it. You can then create this additional paper on-demand using print manufacturing to enrich yourselves, but deflating the wealth of others. When push comes to shove, the U.S. will enrich themselves at the expense of screwing over China, Japan, Saudi Arabia and any other country with large hoards of our paper currency.
    Feb 04 04:22 PM | Link | Reply
  •  
    Definition of hyperinflation from wikipedia

    "In economics, hyperinflation is inflation that is "out of control", a condition in which prices increase rapidly as a currency loses its value. Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to "inflation exceeding 50% a month."[citation needed] In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month."

    And

    "Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss. Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals."

    ######################...

    The stimulus packages worldwide and especially the US will result in serious inflation eventually and possibly hyperinflation its just a question of how long it takes to kick in.

    The worlds geopolitical systems are restructuring as political and economic power drains away from the US to emerging economies like China, India, Russia and Brazil.

    The US will remain the leader of the western world by having the single largest homogeneous economy for some considerable time. Learning to adjust to a global redistibution of power will not necessarily occur at the same time the adjustment is taking place.

    Lets hope they have the wisdom to prepare the way in an amicable and harmonious way.

    Default may happen, inflation will happen so prepare for it and think very carefully about paying high interest rates on 'cheap assets' you buy now.
    Feb 04 05:21 PM | Link | Reply
  •  
    Consider that if the dollar collapses, the gov't will need to use PM's to pay for strategic imports, such as Oil, and parts made overseas to keep the trains and farm tractors running.


    On Feb 04 09:40 AM MikeLovesGold wrote:

    > The Government will not confiscate gold. Since the dollar in 1933
    > was backed by gold, the Government confiscated it so they could print
    > as much money as needed to shore up both the banking system and the
    > economy. 99% of the population owned gold in 1933, they carried it
    > in their pockets, and they carried it in their purses. Now, in 2009,
    > less than 1% of the U.S population own gold. Thus, it would not be
    > worth the Government’s time to confiscate it.
    Feb 04 06:06 PM | Link | Reply
  •  
    I agree, this guy is shorting treasuries, good move crashmarketstocks.com
    Feb 04 06:22 PM | Link | Reply
  •  
    So what happens to the value of stocks if the dollar crashes or there is hyperinflation?
    Feb 04 07:42 PM | Link | Reply
  •  
    Good article. Let's all declare a jubilee.

    And before that let's all spend time teaching each other about our money. How it is based on debt. That the available money in the system is made of up principal owed on debt. And that there isn't enough money in the system to pay interest. Let's start by asking, "Where's the Interest?"

    WheresTheInterest.com

    Feb 04 09:22 PM | Link | Reply
  •  
    If you had a printing press in your basement, would you default or always pay your bills on time? We live in a very large world; you can print a whole lot of money and it will still buy a lot of things. A dollar has become worth 4 cents in my lifetime, and I live better now than before. Prepare for more of what has happened in the past 60 years, but just more of it, and a lot faster.
    Feb 04 09:37 PM | Link | Reply
  •  
    Some readers appear to have a hard time understanding gold's intrinsic value. That value is not only in its magical qualities but also its rareness. Take all the gold ever mined during all history to one spot and it would sit on a single tennis court to the height of about 60 feet.

    Divide that among six or seven billion people and there's very little for each of us. Because of that scarcity and the amazing difficulties associated with finding and mining it, it's valuable. And, because it's univerally recognized, it is exchangeable.





    Feb 04 09:47 PM | Link | Reply
  •  
    On Feb 04 03:58 PM Chris B wrote:

    > First of all, if you REALLY believed a hyperinflationary economic
    > collapse on the scale of Weimer Germany or Zimbabwe was about to
    > occur, you would not be blogging about it from your home in the US.
    >
    >
    > You would be getting the hell out and taking your gold with you,
    > not writing endless blogs, websites, or internet infomercials about
    > how EVERYONE can get rich buying gold. Does anyone really think
    > these people are being charitable to all those internet strangers
    > they care so much about?
    >
    > If anyone still in Weimer Germany / Zimbabwe had hoarded gold, they
    > would have spent it all within a decade trying to survive, had it
    > stolen, or died from disease, starvation, or violence. A plane ticket,
    > a passport, a work visa, and a citizenship application would be more
    > valuable assets than gold in the case of hyperinflation.


    I for one have never said I am NOT planning a physical exit strategy; personally, I expect high inflation to preceed hyperinflation, and I expect that particular end game to play out over a period of years. It would be the height of insanity to jump before it was clear where the best landing place would be. There IS a possibility of an Iceland-like rapid collapse, in which case we're all stuck right where we are, and in that case one would be way "offside" to be caught without gold.

    >
    > It's rational to worry about the future - I have plans for multiple
    > scenarios too. However buying gold coins in anticipation of hyperinflationary
    > collapse is like buying marshmallows in anticipation of your house
    > burning down. The more realistic plan is to get out, and get out
    > early.

    If you can tell me definitively where to go that will not be effected, or will be minimally effected, I am all ears. Jim Rogers has been recommending China for some time now.


    Right now, given available information and my limited vantage point, I place the highest probability on this scenario: the Treasury market starts to stumble under the weight of the vastly increased supply (cracks beginning to show now). The Fed initiates QE in a large and noticeable manner and overtly monetizes the long end of the curve (they've already nibbled to show their resolve). At first, other CB's also announce QE programs (BoE already has, for example), and MSM outlets are used to calm the masses (hot "financial news" babes wear more revealing attire while spouting pro-government rhetoric); suspiciously and simultaneously the number of radical dollar bugs poo-pooing gold on SA triples. This proceeds for a few months, but at some point the idea of joint currency debasement hits home with the public and formerly floating turd currencies start to sink precipitously as their citizens realize the extent and true meaning of debasement. A period of currency panic ensues which lasts until Bernanke and that idiot Mervyn King are fired and a new Volcker is installed (Volcker 2, or maybe even Volcker 1.0). In the meantime, the Fed by now has expanded its balance sheet by a few $Trillion US (hopefully no more than $10 Trillion or so) and this, plus a plethora of "forced lending" measures from that master banker Barney Frank, initiates a wave of inflation. QE is finally halted and interest rates raised to try to quell inflation.

    Nationalized banks are made whole via forced abrogation of a sufficient number of financial contracts, starting with underwater derivative instruments. Winners and losers are picked by government "experts" protected by "no legal recourse" clauses.

    Just my opinion / Not investment advice.
    Feb 04 11:31 PM | Link | Reply
  •  
    A US debt default inevitable and in the same breath saying that they are monetizing (fed buying treasuries)...that doesn't work for me.
    If they are monetizing, it is because they prefer a hyperinflationary scenario and pay off foreign debtors with debased money.
    That is the beauty of having a currency that is the worlds reserve currency...debts are in USD.
    So I just don't see how a default is inevitable.
    Feb 04 11:59 PM | Link | Reply
  •  
    well, I might have said "duck!"
    Feb 05 12:48 AM | Link | Reply
  •  
    This is a well-reasoned argument that foolows the same string of well-reasoned arguments put out by Von Mises disciples. Parlaying this knowledge into action just feels like playing with fire to me. I find it hard to actually pull the trigger and move to a bearish position in the dollar as every other society based on their lousy fiat currencies are taking similar actions with their central bank balance sheets without the luxury of having reserve status. I just can't seem to convince myself that this scenario is more likely to play out in the next five years than the fed inflating our debt to at least a point where our liabilities are at least somewhat manageable in the short term; even if we may be one extended bear market rally away from eventual hyperinflation and a dollar crash. I'm just too skeptical to get on this bandwagon at this point because too many other variables have to play themselves out. Ask Peter Schiff's clients how short-term variables can affect a portfolio with a sound long-term strategy jk.
    Feb 05 01:36 AM | Link | Reply
  •  
    SA is infested with gold bugs. They need to get an exterminator in there.


    On Feb 03 01:59 PM David Roskoph wrote:

    > User 261133,
    >
    > Shhhhhhhhhh. You'll anger the gold bugs.
    Feb 05 03:07 AM | Link | Reply
  •  
    I'll be honest. Today I invested in a case of canned beans and started putting together an emergency reserve of of food and water. It's like having a fire extinguisher, a precaution in the event of fire, however unlikely.

    I own GLD as well and have been pleased with the investment although it hasn't skyrocketed, at least it is holding its value. I would like to get physical gold but where to hide it? A safe deposit box would most likely be out of reach as the banks will probably be closed for a while once this crisis gets really out of hand.

    I believe the CDS market is the turbo booster on this crisis, turning a severe recession into financial armageddon. It is what makes this crisis unique and history irrelevant. The size of this market dwarfs any government's ability to come to the rescue.

    As far as a US default goes, I don't see that happening for some time. However, with a possible 3 trillion dollar deficit this year and trillion dollar deficits expected for many years, total indebtedness could rise to 30 trillion.

    Default seems likely at some point but I believe that the catalyst for total meltdown will come from the bankruptcy of a large corporation that then ripples through the CDS market, and, with confidence totally gone, creates a massive run on the banks. A bank holiday will be declared and banks will close for several weeks.

    A prudent investor should be diversified which means don't forget some canned peas, rice, beeferoni, and a few cans of spagettios to go along with the beans.
    Feb 05 03:19 AM | Link | Reply
  •  
    Mr. James West;
    You are talking bunch of BS.
    We took a trip to quite a few countries recently and all those
    people only wants US Dollars if given a choice.
    It the US Dollar failed, the whole world will be dead-meat.
    Go home and study more please !!
    Feb 05 04:34 AM | Link | Reply
  •  
    All this worry about the CDS market and numbers of 58 to 300 trillion (where the 300 comes from I know not) are misleading. For every CDS contract there is a buyer and a seller. If you look at the CDS data at DTCC you will see that 90% of contracts are inter-dealer i.e. they will all net out. Also, we saw Lehman go bankrupt with a recovery value of 10 cents or so on the dollar and the settlement of all the triggered CDS went smoothly. This piece is by someone who knows almost nothing about this market throws but yet throws round false information and an obvious lack of understanding in order to scaremonger.

    I do agree that CDS had some part to play in the crisis but only with regards to AIG. Using CDS style contracts they had written too much credit insurance to the banks on sub-prime assets and when the sub-prime market tanked, the value of these CDS fell in value on AIGs books resulting in a massive collateral (margin) call which AIG did not have the cash to meet. The US government then stepped in with the cash to help out AIG (probably because Goldman were one of the main buyers of this insurance and we all know Paulson did not want Goldman to fail like Lehman).

    Feb 05 04:35 AM | Link | Reply
  •  
    A humble observation that refutes your admittedly plausible conclusion: In 2008, the year par excellance of quantitative easing, when Federal Reserve Bank Credit exploded from $1Tr to $2.2 Tr (ie issued more liabilities in one year than the cumulative total since time immemorial), why did the US 10 yr Treasury yield actually decline? (4% to 2.4%)

    Surely if this monetary explosion presages a default, bond investors would demand a higher premium to hold this 'risk-free' asset. Dollar doomsters have predicted 10 of the last dollar crashes in the last decade; alas there has been one minor correction.

    In my humble opinion, the problem is: what is there to crash against. Gold? Too tiny to replace the greenback as the global store of value. Real estate or hard assets? Rather yours than mine. The Euro? Sure if we can find any constancy between increasingly divergent EU states, some on the verge of default themselves.

    Tis a skewed world indeed, where apparently obvious conclusions merit much closer scrutiny.
    Feb 05 04:41 AM | Link | Reply
  •  
    How can the US default on USD debt when it controls the printing presses?
    Feb 05 05:34 AM | Link | Reply
  •  
    Here's something to make you even more humble: you obviously have no idea how the bond market works or what QE means. When the Fed buys Treasuries it does so specifically to cause long rates to fall, and prices to rise, by increasing demand for them. It does this by printing money and using it to buy Treasuries. And while 2008 may have been the first year when this was done in such a scale, it will not be the last; the US federal budget deficit is projected to be $1.3 Trillion in fiscal '09, and that doesn't include any 'stimulus' bill, so tack on another $800 Billion. Over $2Trillion will need to be borrowed by the US alone; China just went into deficit, BOJ just announced it is going to start buying securities, and with oil at $40 the ME doesn't have much surplus to 'invest'; practically all nations now need to borrow for deficit spending. There just isn't enough money to go around. So where will all this new 'capital' come from?

    Only one place: the printing press. 'Government,' said Ludwig von Mises, 'is the only agency that can take a useful commodity like paper, slap some ink on it, and make it totally worthless.'


    On Feb 05 04:41 AM sunil shah wrote:

    > A humble observation that refutes your admittedly plausible conclusion:
    > In 2008, the year par excellance of quantitative easing, when Federal
    > Reserve Bank Credit exploded from $1Tr to $2.2 Tr (ie issued more
    > liabilities in one year than the cumulative total since time immemorial),
    > why did the US 10 yr Treasury yield actually decline? (4% to 2.4%)

    >
    >
    > Surely if this monetary explosion presages a default, bond investors
    > would demand a higher premium to hold this 'risk-free' asset. Dollar
    > doomsters have predicted 10 of the last dollar crashes in the last
    > decade; alas there has been one minor correction.
    >
    Feb 05 06:53 AM | Link | Reply
  •  
    i agree - the usdx is about as relevant as the cpi or gdp... speaking of which, it will probably be quite awhile before the u.s. defaults due to excessive debt - iceland had a 3:1 debt:gdp ratio if not mistaken; but that day will surely come.
    Feb 05 07:27 AM | Link | Reply
  •  
    I have never understood goldbugs. If things get as bad as the author predicts what good is some shiny metal bricks going to do me. I can't eat or drink it. I can't build a shelter out of it. I am concerned about the future and the mistakes our federal government is making. I believe we will have substantial inflation in the medium and long term. I'm increasing the size of my vegetable garden, planting blueberries, enriching my soil to increase yields. I have extra canned food, water, hiking gear and ammunition. If the US currency becomes worthless we will revert to a barter system. I will be trading my extra food and gear, good luck with your shiny pile of metal. And for the record, I don't think it will get that bad. I am long on US and Brazilian stocks.
    Feb 05 09:14 AM | Link | Reply
  •  
    You may be a financial expert, but not a good writer. Learn to use a simpler style and no flowery and useless, completely meaningless sentences! Also, don't make up stupid, long and contrived expressions, write down real facts and state your ideas clearly. Here is a quote from your article, which is utter nonsense, somewhat along the line of your opinion, which is doomsday prediction:
    I think the spin-controlled version of events will make the collapse of the derivatives market the red herring that facilitates the aw-shucks-we-have-no-c... shoe-gazing moment possible, and that’s exactly the parachute the government needs to retain a veneer of credibility - at least in its own delusional mirror.
    Feb 05 09:28 AM | Link | Reply
  •  
    Central Banks are NOT selling gold as was evidenced last month when the German Bundesbank publicly stated they had no intention of selling any of their gold reserves anytime soon. The Swiss echoed similar sentiments. It is simply wishful thinking that we will see a major selloff by Central Banks. By the way they have already satisfied over 90% of their "quota" so even if they wanted to, they are not compelled to sell gold at this time.


    On Feb 03 10:20 AM David Roskoph wrote:

    > This storm has already passed and the dollar has necessarily survived.
    > When the world was reassembled in Bretton Woods (1944) the dollar
    > was linked to gold, now it will replace gold. American capitalism
    > has won the world and contracts or not, America will not fall as
    > its leader. The consequences of our failure would cast the world
    > backward 20 years. The world IS supporting the US dollar even though
    > we solemly swear our presses will run round the clock; it's the value
    > of the franchise. Gold is supported by a public frightened into thinking
    > this will result in a complete meltdown (again). Markets are ever-more
    > a fleecing ground, just like the good old pre SEC days. My guess
    > is central banks are selling as gold is moving away from being a
    > monetary instrument.
    >
    > ps. Nice methapors
    Feb 05 09:46 AM | Link | Reply
  •  
    What Mr. West argues is certainly possible. In fact it may even well be probable... "at some point". But personally I don't think we are quite there yet, though we certainly are working very hard to get there just as soon as possible. What is much more probable (and nearly certain) is that fairly soon after the Great Depression of 2008 - 2018 is finally over (all good things must end sooner or later) the world and the insane principal denizens who inhabit this lonely and lovely planet and help give it some of its particularly lovely character ....(and I don't mean lions and tigers or other run of the mill ferocious beasts) will first, run out of petroleum; and second they will witness and be the subjects and objects of the greatest environmental catastrophe (due not only to global warming and climate change) ever in the history of the planet and of "man-kind"...(or of woman-kind for that matter)

    If it now already seems pretty hard to put humpty-dumpty back together again (now that all we face is a long and protracted economic depression at the very worse) think what it will feel like to try to put back together again the ecological and physical balances of the planetary system once they are irrevocably out of whack..... in roughly only 30 to 50 years? (enough for lots of us to still be able to "enjoy")

    And how should one "hedge" or plan to make lots of money out of these impending catastrophes? (apart from building and sitting on a personal gigantic castle made out of pure gold surrounded by machine gun turrets and preferably with a few personal nuclear bombs in stock and ready to fire?) (in some direction or another)

    Could this be done by perhaps finally using a bit more judiciously the only asset any one of us ever really has? The number of years, months, weeks, days, minutes and seconds we have left to live? Something which is without exception also ALWAYS a probabilistic proposition?

    Said in a nicer and better way (by John Lennon many years ago): "Life is what is happening while you are busy making other plans".

    And so with that great (and free) advice (I will not be sending out an invoice) duly taken on board may all self-respecting and authentic Alpha Seekers .....get plenty of authentic Alpha both now and in the future!

    All the best to ALL from Max12345 (and maybe 6 and 7 too)




    Feb 05 10:19 AM | Link | Reply
  •  
    Your plan is to hunker down and hoard utility-providing resources if things get fairly bad, but not too bad - perhaps a 5-10 year depression-lite in which income would be low and often interrupted and those resources would be periodically utilized. It sounds fairly rational for that scenario.

    The scenario that goldbugs worry about is far more severe: a Weimer Germany or Zimbabwe hyperinflationary starvation-poverty situation.

    Their plan is to make profitable trades at that point, using a few ounces of gold to buy the resources that it would have taken millions of dollars to buy in the past. Note that this is based on the assumption that people in the future would be eager to trade massive amounts of those resources (food, housing, energy, labor, etc.) for tiny bits of jewelry metal. The plan is to eat well and live in a mansion while society disintegrates into the poverty, starvation, disease, violence and desperation found in Sub-Sahara Africa, perhaps yelling from the balcony each morning "I told you so you fiat-money defenders! Gold at $1M per oz!"

    Is this plan rational? Would your gold wealth have been safe in Zimbabwe or Weimer Germany? Would you personally be safe living the high life among desperate, starving people? Are you actually rich if you have to live poorly to avoid attracting attention? For how many years could you live by spending your gold (or canned goods) until it ran out or was stolen / seized? Can even the wealthiest people in Zimbabwe get decent medical care? Would you chose to cash in your savings now and move to sub-Sahara Africa (you'd be rich in that society)? These are the things I question about the plan.

    People who had money in pre-crisis Zimbabwe wish they had physically gotten out when they could have, not that they had allocated their investments differently. Now they're trapped, impoverished, and perhaps dead from cholera, even those who correctly predicted everything and invested in gold.


    On Feb 05 09:14 AM tylakewalker wrote:

    > I have never understood goldbugs. If things get as bad as the author
    > predicts what good is some shiny metal bricks going to do me. I can't
    > eat or drink it. I can't build a shelter out of it. I am concerned
    > about the future and the mistakes our federal government is making.
    > I believe we will have substantial inflation in the medium and long
    > term. I'm increasing the size of my vegetable garden, planting blueberries,
    > enriching my soil to increase yields. I have extra canned food, water,
    > hiking gear and ammunition. If the US currency becomes worthless
    > we will revert to a barter system. I will be trading my extra food
    > and gear, good luck with your shiny pile of metal. And for the record,
    > I don't think it will get that bad. I am long on US and Brazilian
    > stocks.
    Feb 05 10:21 AM | Link | Reply
  •  

    Great post. Very thought-provoking!

    On Feb 05 10:21 AM Chris B wrote:

    > Is this plan rational? Would your gold wealth have been safe in Zimbabwe
    > or Weimer Germany? Would you personally be safe living the high life
    > among desperate, starving people? Are you actually rich if you have
    > to live poorly to avoid attracting attention? For how many years
    > could you live by spending your gold (or canned goods) until it ran
    > out or was stolen / seized? Can even the wealthiest people in Zimbabwe
    > get decent medical care? Would you chose to cash in your savings
    > now and move to sub-Sahara Africa (you'd be rich in that society)?
    > These are the things I question about the plan.
    Feb 05 10:30 AM | Link | Reply
  •  
    SW Richmond,

    You have to pick an economic theory AND be right to locate the best landing place. Then, the exchange rate for your currency and assets will make a big difference on what you can afford.

    If you believe that national wealth comes from the extraction of natural resources, Kuwait, South Africa, Canada, Brazil, or Australia seem like good possibilities.

    If you believe that wealth comes from manufacturing dominance, China and South Korea look good.

    If you believe that the countries with the highest quality of life will be the ones with the least debt and most income, China and Kuwait win (and Europe and Japan lose).

    If you believe that long-term prosperity is determined by a country's comittment to education, democracy, and a quality legal system, most of Europe and perhaps Japan win (the US would win too, except for education).

    Then again, you could be a bargain hunter. You could move to Iceland now that their currency has already collapsed and use your USD to buy real estate and business assets at fire sale prices before your USD collapse in value, as predicted. They have democracy, rule of law, excellent education and healthcare, a stable culture, near-infinite sources of geothermal energy, and few external threats. Global warming is a plus.


    On Feb 04 11:31 PM SW Richmond wrote:

    It would be the height of insanity to jump before it was clear where the best landing place would be.

    If you can tell me definitively where to go that will not be effected, or will be minimally effected, I am all ears.

    Feb 05 10:44 AM | Link | Reply
  •  
    Food for thought:

    1. We will have martial law before we have chaos. Guns and ammunition are more likely to be confiscated than gold.

    2. JP Morgan knew more about money than you. He was exactly right that the ultimate utility of gold is as money. It has the correct physical and chemical properties: it is virtually indestructible, sufficiently rare, cannot be conterfeited, infinitely divisible. Gold is not about the end of the world. It is about imposing discipline on bank lending, soveriegn borrowing, money creation, and national consumption.Gold does not make a good circulating medium. Other materials may be used as money but none has stood the test of time. If you need to heat your house, anything that burns can be used as a fuel, but natural gas is superior to camel dung. It is the hobgoblin of practical minds that they only conceive of utility in terms of industry.

    3. We sit on knife's edge between deflation and hyerinflation. Which way we go depends on how the government. If the government defaults on its debt - something that has happened several time in our history - we get deflation. If the government uses its ability to "print money" then we get hyperinflation. It is anathema for the Fed to buy newly minted bonds. Open market operations only bought existing bonds. When the Fed buys newly minted bonds this is exactly how we "print money". Recent events indicate this is the more likely scenario.

    4. The government fiscal crisis is very long in the making. Observers have commented for decades that the system of deficit spending is unsustainable. They were not wrong. They underestimated the ability of the Fed, inertia, and luck to the delay the crisis. Note the similarity to ecological warnings which began in the fifties. The movie "Soylent Green" is about the effects of global warming. Our epitaph may read "Our warnings gave us too much time."

    5. Almost all other countries are in worse shape than the U.S. Economic collapse will occur first in eastern Europe and travel west. All currencies will fail with the exception of the Swiss Franc and maybe a few others.

    6. The misallocation of capital that is the result of fractional reserve banking and a fiat currency is visible everywhere. It is called suburban sprawl. This inefficient design of our cities keeps us addicted to the automobile by confounding mass transportation, Other onerous effects are too numerous to mention. This is what we bought with our gigantic debt. It is difficult to conceive how are cities might have grown and how our population would be distributed if we had maintained discipline with a gold standard.

    7. An underestimated cause of our financial crisis is poor corporate governance. No member of management should be on the board of directors. Corporations should not be allowed to proxy unused shareholder votes to management. Mutual funds and institutions that hold shares in trust should be required to vote the shares.

    Good digestion to all.
    Feb 05 10:47 AM | Link | Reply
  •  
    The most popular article on Seeking Alpha? LOL. Speaking of "circle jerks." yeah, real classy reference there in the first paragraph. Where's artie, Jim West?
    Feb 05 11:14 AM | Link | Reply
  •  
    Well, well, well.

    In a nutshell, this is why we are going to become a third world country...the citizens REFUSE to see reality and they hold on tight to their belief system that economies ten times LARGER than ours HAVE to play with us in the sandbox.

    Fools. You all hold on to the "too big to fail" crap, meanwhile, I'm preparing my children to live off the land and under radar. You can stand in line waiting for the weekly cheese truck to feed your kids.

    Things are this bad, actually they are worse. But what did we expect to happen when we stopped employing Americans and happily cashed the dividend checks that were written in the blood of our children.

    This is the Real Great Depression, the other one was just a cakewalk.
    Feb 05 11:39 AM | Link | Reply
  •  
    Another thought.

    If the US is so solvent, and the printing presses work so well, why is IRS delaying refunds all over the place?

    Hint: cash is low, low, low and only those that get free checks file early.

    Just WAIT until the reduced revenues become apparent in a couple months, or did all of you financial geniuses forget that income tax is paid on PROFIT?
    Feb 05 11:48 AM | Link | Reply
  •  
    The circle jerk reference is gross.

    With respect to debt service payments, if the course is not changed drastically with respect to public finance, the only way to cover them will be to print cash. Once that happens, you are insolvent by definition.

    How long can one go piling on long-term debt, when the debt service payment growth rate will rise faster than the tax base? I guess that depends on what the perception is of the those that buy it. Once the attitude shifts from "sure, I want your debt" to "no, you lack credibility", the government will no longer be able to sell the future.
    Feb 05 01:01 PM | Link | Reply
  •  
    Its a gold bug and gun fetishist fiesta! Aiy!


    The treasury auction was still oversubscribed. The lowest coverage since september! OMG default! Um, no. And what lever hasn't been used at auction? Hmm, it's a toughie. Raising rates.

    The US isn't too big to fail, it's too big to fail and have it called failure. So it won't fail, because no one can afford that. Life will go on much as before, but credit will be tighter, and things will look more like the mid 70s for about 5-10 years. Sorry to spoil your post-apocalyptic fantasy.

    But please, grab your chickens, and antibiotics and of course, guns and head for somewhere or other.
    Feb 05 01:24 PM | Link | Reply
  •  
    Note that the ME countries, including Saudi Arabia, are creating their own Euro style currency backed by gold, that will be introduced in January 2010. This will have a great impact on currencies around the world and a new store for petro dollars, especially if they require payment for their oil in this new currency..


    On Feb 03 10:31 AM kelm wrote:

    > The fundamental trends I believe point to a failing bond market and
    > an attendant loss of faith in the dollar. I have been laying out
    > these arguments for some time for my readers. All of this could lead
    > to the default scenario mentioned above. The difficulty has always
    > been - "who's currency becomes the new reserve of choice?" We cannot
    > consider a dollar collapse and US debt default and assume that all
    > other currencies remain fiat currencies. Imagine what would happen
    > if another nation, say China, converted to a gold standard as the
    > US dollar begins to slide. I am not saying that will happen rather
    > that some unimagined event could occur that changes the dynamic radically.
    >
    >
    > Mr. West's points on gold and asset seizures are bang on as well.
    > If you are playing in the gold market with a view to preserving your
    > wealth you better have criteria in-place on when you convert from
    > paper to something physical and how you ensure that physical thing
    > isn't a confiscation target. Physical gold held in a vault in the
    > US is problematic. Some outfits are offering off-shore purchase and
    > storage in a transparent way. I don't have a good strategy for this
    > yet.
    >
    > I would like to see crisping-up of what "imminent" means. This year,
    > next year,...?
    >
    Feb 05 01:29 PM | Link | Reply
  •  
    Dramatic predictions using a writer's projections of newly-installed people's predilections tell more about the writer and less about the prediction. There is nothing timely about this prediction, it could have been made for over a year in the recent past.

    The US is very reliant on short term rates for its prodigious national debt. It gives us great flexibility, but always assumes the risk of no-takers in this time of short-credit. T-bills are taken by many to be an extremely liquid short-term instrument to get FDIC-class deposit insurance on amounts >$500,000. Given that sooo much cash is on the sidelines, proper management of the rates should generate sufficient interest in buying T-bills over the near term.
    Feb 05 01:37 PM | Link | Reply
  •  
    I agree, deflation is eventually going to lead to a strong downspiral, this guy has been calling it for months now at crashmarketstocks.com
    Feb 05 01:50 PM | Link | Reply
  •  
    people are self-interested. the saudi arabians, chinese and japanese (hereafter called SCJ) are people. the SCJ are self-interested. the SCJ are the largest holders of U.S. treasuries. Those treasuries hold down the SCJ's currencies to help their export driven economies. Were SCJ to sell (or cease buying) U.S. treasuries, their currencies would rise, their exports would fall and their domestic economies would deflate like a mf. this would lead to the leadership of SCJ dealing with, shall we say, bad-tempered citizens. Bad-tempered citizens kick people out of power, by hook or by crook. SCJ leaders know this and will keep buying our slightly tarnished gilts.
    Feb 05 02:28 PM | Link | Reply
  •  
    "If somebody had told you in 1998 that a bunch of angry crazy pseudo-Muslims were going to fly jetliners into the World Trade Center, what would you have said?"

    I'd tell them to learn some history.

    Some "crazy pseudo-Muslims" already bombed the WTC waaaaaaaay back in 1993:
    en.wikipedia.org/wiki/...

    Of course, back then, the President's family wasn't doing "bid'ness" with the bin Laden family and thus, they perps were caught, convicted and are currently serving time in prison.

    Unlike the perps of 9.11.01, who are walking around scott-free over in Paki...
    Feb 05 03:48 PM | Link | Reply
  •  
    The 10 year UST is trading at a yield of 2.91% right now. Mr Market certainly isn't acting like there is a high probability of default. Revisit these scare tactics when UST rates hit double digits or so.
    Feb 05 04:00 PM | Link | Reply
  •  



    On Feb 03 09:55 AM cyclingscholar wrote:

    > With the financial markets desperate for gov't bonds, the US gov't
    > wouldn't have to default..it could 'merely' ROLL over the debt as
    > it comes due, to 100 year treasury bonds. Given the increase lifespan
    > humans will have as medical breakthroughs proceed apace, this would
    > make alot of sense. Raise the retirement/social security eligibility
    > age in stages up to 70, 75, 80, as is appropriate; and most of the
    > government's unfunded liabilities would disappear.
    >
    > cyclingscholar ; When CNBC (communist News Broadcasting ) starts bragging about how many octagenarians are roaming the fruited plains of America we can be sure your predictions are true.Attention Wal-Mart greeters.
    Feb 05 04:04 PM | Link | Reply
  •  
    The government was the purchaser of gold, ordinary citizens could not keep more than 5 ounces, though there were exceptions for commercial consumers of the metal. Because it was purchased at the fixed rate of $20.68 per ounce before FDR and $35 per ounce after the Gold Confiscation Act, mines did alright. Their commodity nearly alone did not crash because of this governmental price support.


    On Feb 03 05:58 AM yellowhoard wrote:

    > Interesting. Did the government nationalize any mines in the 30's?
    > How did Newmont and other mines sell at market prices? Or did they?
    Feb 05 04:46 PM | Link | Reply
  •  
    Wow, I got 3 thumbs down merely for pointing out the crass circle jerk reference, fact it takes one to know one (most popular post on seeking alpha indeed), and a Wild Wild West joke.

    Anyone notice the Baltic Dry Index has more than doubled off its bottom?

    And i love the references in the news to worst this or that since 19__.

    Like worst jobless claims numbers since 1982? That is, since the first eyar of a 17 year stock market boom?

    Or worst hours worked drop since q1 1975? Gee, you mean 6 months into the bounce off the dreadful 2 year market bust of 1973-74?

    We're spoiled alright. So spoiled we flip out when times are even a little tough. Go read Studs Terkel's Hard Times or something. Buck up, folks.

    Feb 05 05:16 PM | Link | Reply
  •  
    On 5 Feb, Mr Richmond wrote:

    Here's something to make you even more humble: you obviously have no idea how the bond market works or what QE means. When the Fed buys Treasuries it does so specifically to cause long rates to fall, and prices to rise, by increasing demand for them. It does this by printing money and using it to buy Treasuries. And while 2008 may have been the first year when this was done in such a scale, it will not be the last; the US federal budget deficit is projected to be $1.3 Trillion in fiscal '09, and that doesn't include any 'stimulus' bill, so tack on another $800 Billion. Over $2Trillion will need to be borrowed by the US alone; China just went into deficit, BOJ just announced it is going to start buying securities, and with oil at $40 the ME doesn't have much surplus to 'invest'; practically all nations now need to borrow for deficit spending. There just isn't enough money to go around. So where will all this new 'capital' come from?

    My Response:

    A little less rich air and more humility would serve you well. You make a cardinal error of confusing Govt budget deficits with Current Account deficits. China is still generating a huge CA surplus, as are Japan and indeed the Middle East (where the marginal cost of producing oil is about $15), and whether it appeals to your sensitivities or not, these surpluses are being recycled back into $ assets.

    Whether it is direct buying by Govts or the private sector or sovereign wealth funds, they are buying $ assets, including US Treasuries. This symbiotic relationship has prevailed and grown over the last few years and there is still no practical alternative. So next time you visit any emerging country, ask them what their preferred asset as a store of value might be, and ask them where they would like to store their current account surpluses. I suggest you do it soon, before markets oblige you to drop the prefix "Rich" from your poor name.

    As an aside, have you considered the velocity of money along with the quantity. You do know they both drive inflation, and relative currency strength should reflect the combination. The paralysis of credit markets has caused a (yet) unquantifiable drop in US money velocity and it will be a while before they thaw. So even if there has been an exponential increase in US money supply, currency markets are telling you overall quantitative money is not an issue with the $.

    Your humble poor teacher
    Feb 05 06:07 PM | Link | Reply
  •  
    The penalty for not turning in your gold was $10,000 or 10 years in prison or both.

    They took all the gold, from banks, the federal reserve and private citizens and melted it down into bars. Where is it? In a bank vault(s) somewhere, though there has not been a physical audit I am aware of.


    On Feb 03 08:32 PM svosavvy wrote:

    > Hey what did the gov do with the gold confiscated in the 1930's?
    > They pegged an outrageously higher price for it after they were majority
    > stakeholder in it. So you could thank the gov for value creation
    > in that era if you had some squirreled away. BTW All you doomsdayers
    > keep buying gold in the near term, because it will make a nice short
    > in a deflationary environment. I can feel the thumbsdown coming
    > in already, bring it on.
    Feb 05 06:12 PM | Link | Reply
  •  
    what if, the "scj" , as you call them, had enough internal market to sell their products to, and didnt need american consumers ? what would happen to dear beloved united states ?


    On Feb 05 02:28 PM trader1138 wrote:

    > people are self-interested. the saudi arabians, chinese and japanese
    > (hereafter called SCJ) are people. the SCJ are self-interested. the
    > SCJ are the largest holders of U.S. treasuries. Those treasuries
    > hold down the SCJ's currencies to help their export driven economies.
    > Were SCJ to sell (or cease buying) U.S. treasuries, their currencies
    > would rise, their exports would fall and their domestic economies
    > would deflate like a mf. this would lead to the leadership of SCJ
    > dealing with, shall we say, bad-tempered citizens. Bad-tempered citizens
    > kick people out of power, by hook or by crook. SCJ leaders know this
    > and will keep buying our slightly tarnished gilts.
    Feb 05 06:15 PM | Link | Reply
  •  
    do you actually think gold will be used for anything if the world collapses..

    jokerstocks.blogspot.c...
    Feb 05 07:25 PM | Link | Reply
  •  
    We've seen 8 years of unfathomable events. Nothing should shock us. But how do you protect what you already have?. My belief is you can't but you need to invest in stuff that may be useful and needed if there is a meltdown. Think of it as car insurance that you buy but hope you won't need to use. And some would have salvageable value.

    Obama needs to get out of the box and condition Americans that we must sacrifice as our forefathers did. That means re instituting the Eisenhower era marginal tax rates on the high end earners. It means cutting government pay in exchange for 5 years of job security. It means extending unemployment for several years to provide security of baseline income. It means cutting government pensions and social security and freezing COLAS. Those receiving unemployment should be required to do public service for 20 hours a week. We need a new recovery savings bond that will encourage Americans to buy our debt in exchange for reasonable return.

    Concerning the financial markets I went heavy short in Dec 1999 and covered in late 2000 (but too early) then short again in 2007 and covered again too early and have been out of the equities market totally except for some gold derivatives since this spring. I invested in gold when it was selling somewhat under 300 when everyone was hedging the wrong way and remembering Bre-X. I hold 7.5% UST bonds that were up 50%. While I feel somewhat secure if my decisions, I no longer trust the institutions and their ethics.
    Feb 05 08:09 PM | Link | Reply
  •  
    On Feb 05 06:07 PM sunil shah wrote:

    >
    > My Response:
    >
    > A little less rich air and more humility would serve you well. You
    > make a cardinal error of confusing Govt budget deficits with Current
    > Account deficits. China is still generating a huge CA surplus, as
    > are Japan and indeed the Middle East (where the marginal cost of
    > producing oil is about $15), and whether it appeals to your sensitivities
    > or not, these surpluses are being recycled back into $ assets.

    I am not confused. Your statement is interesting but unsupportable. The US budget deficit was officially $160 Billion in 2007, and $455 Billion in 2008. It is projected to be $2.1 Trillion in 2009 after a likely stimulus plan is passed.

    Do you mean to say that China, Japan and the ME will be ready, willing and able to absorb this quadrupled new US debt at a time when nearly all other nations are also starving for new 'capital' and the exporting nations themselves are suffering slowdowns? Please explain that because I'd like to hear how it will work.

    Everyone anticipates trouble for the US 's new borrowing, and that is why the Federal Reserve has promised to step in with QE by printing and buying US Treasuries.

    www.forbes.com/2009/01...
    'China Not A Limitless Sponge For U.S. Debt
    Tina Wang, 01.19.09, 12:52 AM EST
    Growth of Chinese foreign exchange reserves slows at a time when Washington needs Beijing to buy Treasuries more than ever.'

    zawya.com/story.cfm/si...
    'Tuesday, Dec 23, 2008
    RIYADH (Zawya Dow Jones)--Saudi Arabia, the world's largest crude exporter, is looking to increase budgetary spending by 10% in 2009 that could result in a deficit if oil prices don't average around $50 next year.'

    The countries that were formerly our 'symbiotic' partners are finding that genuine needs are arising at home. They also see quantitative easing for what it is, and they do not share your monetarist views on the harmlessness of printing vast sums of new money. Gulf states, for example, are pursuing their own Gulf Coast Currency, in which they will denominate and sell their petroleum reserves. They seems to believe they already hold enough US Dollars and dollar-denominated assets.

    >
    >
    > Whether it is direct buying by Govts or the private sector or sovereign
    > wealth funds, they are buying $ assets, including US Treasuries.
    > This symbiotic relationship has prevailed and grown over the last
    > few years and there is still no practical alternative. So next time
    > you visit any emerging country, ask them what their preferred asset
    > as a store of value might be, and ask them where they would like
    > to store their current account surpluses. I suggest you do it soon,
    > before markets oblige you to drop the prefix "Rich" from your poor
    > name.
    > As an aside, have you considered the velocity of money along with
    > the quantity. You do know they both drive inflation, and relative
    > currency strength should reflect the combination. The paralysis of
    > credit markets has caused a (yet) unquantifiable drop in US money
    > velocity and it will be a while before they thaw. So even if there
    > has been an exponential increase in US money supply, currency markets
    > are telling you overall quantitative money is not an issue with the
    > $.
    >
    > Your humble poor teacher

    Currency markets are starting to catch on. Two generations of investors were weaned on the concept of the so-called 'risk free rate of return' in US Treasuries. This paradigm will die slowly, but die it shall. QE is the death of the US dollar. The US will borrow all your remaining capital and pay you back with the output of a printing press. Buying a long-term Treasury bond at a time when the Fed is monetizing is the ultimate act of faith. This faith has never in history been rewarded.

    In my opinion, printing money devalues all existing money regardless of whether it is being spent, saved, or invested, velocity be damned.

    Richmond is a city in Virginia, USA.
    Feb 05 09:11 PM | Link | Reply
  •  
    MichaelJ007 wrote:
    "don't see the world abandoning their belief in the greenback in the near term"

    This is how all revolutions take place. Nobody expect them to happen. But sometimes, events are going out of control in a hurry and take life on its own.

    Just 6 months ago, we were told by the FED and our government that everything was "under control". Well, lots of things happened since then...
    Feb 05 10:27 PM | Link | Reply
  •  
    As scary as the scenario described in the article is, it is absolutely plausible. I am not sure everyone understands the roots of this economic disaster. Simply put, we've relinquished our industrial might, our true productive capacity and have fundamentally given it away to mainly China in our pursuit of profits. We've been living in a house of cards getting goods in exchange for IOU's for over two decades. And now that we are being asked to pay, we want to pay with more IOUs. Ah, America! No different than the rich kid that tried to live the big life with the fortune the grandfather created, without really working to preserve and grow that fortune. He just though he was entitled to that lifestyle. "Hey, I'm the richest and most powerful dude around" he'd brag. He ran out of money, but refused to change his lifestyle. He kept getting loans to sustain his lavish habits that lenders were happy to provide believing him rich. At some point though, the lenders doubted and stop the lending. The rich kid was no more. How many generations would his descendants require to rebuild the lost fortune? Because the only way to rebuild the might is not by spending (everyone talks about estimulating spending!), but by investing: building infrastructure, rebuilding productive assets and becoming self-relaint again. Because guess what: we aren't the richest and most powerful dude around anymore.
    Feb 05 10:41 PM | Link | Reply
  •  
    a good article and not far fetched. Unfortunately, there is no where to run in this scenario. We will revert to a barter system for a while . The government will have to revalue the dollar against gold at something like $1,000 :1 oz. or maybe $5,000.00 : 1 oz.

    These gangsters really did a job on us.
    Feb 05 10:59 PM | Link | Reply
  •  
    Rafael
    It is my hope the the good ole US of A can live up to the role of prodigal son and be great once again. This near term interference does not bother me near as much as the intermediate future. That future in my eyes brings a competition to see who is the greatest consumer of all. It is my concern in the intermediate (10-15yrs) the US will be usurped in consumption by the ever progressive chinese fealty. The title of king consumer brings with it the spoils of setting the terms for repayment of things consumed. Try to think of it like the drug dealer who has a junkie on his revolving credit window. The dealer starts off accepting cash from the junkie, but, over time the junkie gets so into the junk and the astute dealer realizes this and will soon start accepting other items other than cash (like tv's and jewelry) to keep the product rolling, because g-d forbid the supply consumption chain get interrupted. As long as the role of the U.S. people as king consumer is not supplanted we will continue to be the sphere everyone else revolves around. The true thing we all should be afraid of is being pushed to the periphery by a larger consumer. To the largest consumer go the credit spoils. Because without a hardcore junkie the dealer goes out of business.
    Feb 05 11:14 PM | Link | Reply
  •  
    Re TherseaE + Nova are spot on . Jimko , DENIAL is the longest river in Egypt !
    Feb 06 12:22 AM | Link | Reply
  •  
    Wow, how did you get approved as a contributing author? We all agree this spending package is nothing more than a huge stinking pile of pork, but government default?

    Please tell me how the government can physically default when all of its debt is denominated in US dollars that can be printed? I don't know enough to comment on the auction process, but long term yields of 2% don't exactly scream "lack of demand".
    Feb 06 12:48 AM | Link | Reply
  •  
    Problems are far less severe for the US than the rest of the world. The cardinal failing of the US macroeconomy was the huge excess of consumption -- %70 of GDP in recent years. Much lower numbers are found everywhere else, and historically in the US.

    This excess of consumption did nothing much good for the US -- is your new TV that much better than your old TV? -- but was a gift to the nations selling us stuff.

    The collapse of US consumption to more normal levels was inevitable. The country is getting older, and our stuff will last us quite a long time. The only people who have any "need" to upgrade their computers are gamers -- for everyone else, a machine that's a few years old is more than good enough.

    The ugly numbers for the US become ugly numbers for the exporters (China, Japan, oil producers) very quickly -- indeed they already have-- and will stay that way unless US consumption ramps up again (which it probably won't).

    So I'm going to be a contrarian here: the US' position looks scary, but if you place it in international context, we're considerably better off than the rest of the developed world.

    Currency values are relative, and relatively speaking the US is more attractive than, say, Japan.

    Folks trying to think through the dollar shouldn't do so without considering the change in US consumption/savings rates that are likely to occur and persist.
    Feb 06 12:56 AM | Link | Reply
  •  
    So far AIG has cost your kids $150 billion. Yes, $150 billion, go ahead and let it sink in. And the number will likely be closer to $200 billion the next time we're forced to mention them. They're in the news again this morning, with a piece in the WSJ about something extra-Mensa they were doing called '10 Cubed'. Please take a moment to consider just how stupid you have to be to lose $150 billion selling insurance on other people's shit. Thank you for that collective moment.

    And since we taxpayers are the winners in the AIG Shit Sweepstakes, I've decided to do an AIG at the Outhouse links edition. Inside I am gathering articles on the entire mess. I've read way too many on AIG and I will deliver the 15 best links out there, both background and from today.


    click my name for link.
    Feb 06 01:06 AM | Link | Reply
  •  
    Dramatic is fun, but the macro-future is not likely to be fun. The banks, the government, and most large corporations will survive, just more and more people in the U.S. will be pushed into poverty. Eventually, even the Dow will rebound as overseas operations pay off for corporations. Of course, that will do nothing to help relieve the grinding poverty here at home. Finally, the corporations will leave completely, for larger and more robust markets in China and India.

    If everyone with a dirt floor in China and India upgraded to lanoleum, a "Rio Tinto" of linoleum could arise. That!...is the latent power of the market in China and India that will eventually leave America in the mud hut that it just vacated.
    Feb 06 01:24 AM | Link | Reply
  •  
    Every 15 months, the USA owes another trillion dollars against Gov expenses!

    Prop up the bad guys with money!

    Reward the mistakes & incompetence!

    We’ve increased the Money Supply 70% since October!!!!!

    Can you imagine?!

    Bernanke refused to show up the other day before congress

    Altogether, the world’s markets over the past four weeks saw $11 trillion worth of assets wiped out. This sum corresponds to virtually the entire annual gross national product of the US, or the European Union.

    Fed debt per person: $58K
    Un-funded Medicare/Medicaid per person: $332K
    Fed's plundered trusts per person: $30K
    Un-funded SS: $166K

    Every American owes: $586K for FED debt

    Gov grows 4 Xs faster than economy
    Fed spending grows 16 times faster than economy, (16 fold expansion in control & gov dependence)

    The US gov now holds 57% share of entire National Income = Government makes more than all the money made in private sector!

    How long does the USA honestly think it will last?

    Pentagon admits that 2.3 Trillion dollars has gone missing, ($8000 from every man, woman & child in the USA) – Army office hit at the Pentagon on 911 was their accounting office!

    One quadrillion dollars is the sum of outstanding fake derivatives (fake money pledged by the wealthy banks to buy real things) 1,000,000,000,000,000 on the market, (e.g. a bank with only one real dollar can legally say it owns several billions of real dollars) – Total combined assets of the world is only actually a very small fraction of that sum! -- Reuters

    The Bail Out does not help Main Street; its welfare for Wall Street!

    Small businesses can’t get loans; kids can’t get loans to go to college; home owners can’t get loans; but the elite of Wall Street get to keep their billions of dollars in Christmas bonuses last year!

    And these banks are using the money to give more bonuses to their executives; buying more banks; and, extending gratuitous benefits & pedicures to the corporate aristocracy
    Feb 06 01:47 AM | Link | Reply
  •  



    On Feb 03 06:55 PM nmelendez wrote:

    "I do not know what the phsycological atraction of gold is. I mean, why not plastic, or platinum or heck, chicken meat earrings. But i will go with the trade."


    Valentines day is approaching, so you can find out answer very easily. Give one of girl friends a pair of chicken meat earrings, then your 2nd girl friend a pair of GOLD earrings. After that, report back to us which girl friend gave you a blow job. Then you shall know the value of GOLD. Men don't need anything, but beautiful women need GOLD. I don't know why, but I know it works 100% of the time.
    Feb 06 03:54 AM | Link | Reply
  •  
    How can you take the outcome of one Treasury auction and a rise in interest rates of 50 basis points from their ALL TIME LOW and extrapolate that into US gov't default and USD devaluation 10 fold?

    Maybe it is because you have a strong bias for higher prices in gold and you want to make your dream come true.

    The current US and world economic problems will cause others in the future which may include inflation and a falling dollar. These problems may cause a capital flight to a reserve currency like gold. But default and a 10 fold devaluation of the dollar are not even conceivable at this point.
    Feb 06 07:00 AM | Link | Reply
  •  
    2% yield screams "credible threat of monetization via printing press", which is not exactly a statement of strength, is it?

    The US has defaulted its currency twice already; once in 1933 when FDR seized gold and then devalued the USD against it, and again when Nixon reneged on Bretton Woods when he refused to redeem USD for gold by "closing the gold window".

    Unilateral abrogation of financial agreements means "we can't pay on the terms we agreed to" and is de facto default. Default is the legacy of fiat currencies, though it is never quite called "default". I am genuinely puzzled by the inability of so many to see this fact. Perhaps we quibble about definitions; debt restructuring via printing press is IMO default.


    Feb 06 12:48 AM bcncv wrote:

    > Please tell me how the government can physically default when all
    > of its debt is denominated in US dollars that can be printed? I
    > don't know enough to comment on the auction process, but long term
    > yields of 2% don't exactly scream "lack of demand".
    Feb 06 07:14 AM | Link | Reply
  •  
    This article is ludicrous. Unlike Iceland, the UK and many other nations which are on the brink of bankruptcy, the vast majority of US debt is denominated in its own currency. Therefore, unlike the aforementioned countries, all the United States needs to do in order to pay its creditors is devalue its currency.
    Feb 06 08:31 AM | Link | Reply
  •  
    There is zero risk of "default" on US debt. People like to believe the government operates like a big corporation...It does not. It has the power to print the money that the debt is denominated in...while this would increase inflation there would be no default....just the slow subtle theft that occurs when all governments inflate their currency. The second point is: The world is too invested in the dollar to allow it to collapse: Is China going to walk away from 1 trillion in assets ? or Japan or Europe ? How about OPEC ? It aint happening. Like it or not, the US has created a worldwide, dollar denominated empire where even though the benefits to the US are great, the benefits to the rest of the world are nearly the same.

    Now as for investment advice: Deflation short term....inflation long term. So invest based on those trends.
    Feb 06 11:26 AM | Link | Reply
  •  
    El: I hope the US doesn't default - but I don't know if I'd put it at zero risk. What happens if the interest payment on the 10 trillion or so of govt debt goes to 10%? That's a trillion a year. Printing our way out of that will have some very unusual consequences....
    Feb 06 12:19 PM | Link | Reply
  •  
    This is a joke, right?
    Feb 06 01:29 PM | Link | Reply
  •  

    > The US has defaulted its currency twice already; once in 1933 when
    > FDR seized gold and then devalued the USD against it, and again when
    > Nixon reneged on Bretton Woods when he refused to redeem USD for
    > gold by "closing the gold window".
    >

    How is that a default?

    > Unilateral abrogation of financial agreements means "we can't pay
    > on the terms we agreed to" and is de facto default.

    Ah a "de facto default" -- what's that? And how does that apply?

    No Court has ever found that either incident you claim as a "de facto default" were a default.

    So bottom line: the United States has never defaulted. Period.
    Feb 06 02:56 PM | Link | Reply
  •  
    This article doesn't make any sense. The thesis may be correct, but the support is a mishmash of soundbites about disparate (and incorrectly identified) asset classes.

    CDOs are not credit default swaps (CDS). Some CDOs, but not all or even necessarily most, utilize CDS. In addition, the statement that "between 58 and 300 trillion dollars in value presently under threat if the positions" are unwound is preposterous. If you are talking about CDS, keep in mind that CDS are a zero-sum game: for every dollar one party loses, there is another party that gains. In no way is that value "under threat".

    Next, you assert that "counterparties in the largest transactions can simply 'roll forward' contracts", presumably referring again to CDS. You must instead mean futures, since there is no concept of "rolling forward" CDS. And I have no idea what you mean by their "unregulated status."

    Feb 06 03:00 PM | Link | Reply
  •  
    "When the Fed buys Treasuries it does so specifically to cause long rates to fall, and prices to rise, by increasing demand for them. It does this by printing money and using it to buy Treasuries"

    But the Fed hasn't been buying Treasuries over the last year.


    On Feb 05 06:53 AM SW Richmond wrote:

    Feb 06 03:03 PM | Link | Reply
  •  
    Run, the sky is falling! get to your bomb shelters!
    Total bunk.
    Feb 06 03:07 PM | Link | Reply
  •  
    What is most likely is that you will die after 3 days of laying in you oun feces in a nursing home where no one gives a shit whether you live or die. Gold, nor dollars, will help you then.
    Feb 06 04:10 PM | Link | Reply
  •  
    Headline's half right. The US can't "default" on debt denominated
    in a currency it prints. Dollar collapse on the other hand...
    Feb 06 04:12 PM | Link | Reply
  •  

    Check out Euro Pacific Capital

    On Feb 03 12:06 PM Jake Berzon wrote:

    > I think most of us here are worried about these same things. I would
    > like to hear from anyone who has already found a tangible way to
    > capitalize on these trends, or at least preserve the purchasing power
    > of capital, without using some offshore (or onshore) scammers.
    Feb 06 04:34 PM | Link | Reply
  •  
    Attention everyone:

    I have a gun & I'm not afraid to use it!
    Feb 06 04:40 PM | Link | Reply
  •  
    Just some thoughts...
    Unless currency markets completely fail or shutdown, what is the intrinsic value of gold? Now, we could peg all currencies to gold, but there is no need to do so provided currencies all trade against each other. Gold is only worth what we agree upon as a price, and I don't honestly see how if a complete collapse occurs that gold, even in bullion/coin form, will be a particularly easy substitute for exchange, especially if the smallest coins will be worth $200 to $300 US or so if gold doubles or triples.

    What is the new safe haven? I'm really trying to figure this one out. I have enough land to raise my own food and heat exclusively with wood if necessary. Now I seriously doubt it will get this bad, but the fact that I can imagine it kind of scares me.

    What I more likely see is more massive inefficient spending and then maintaining the ability to pay the debt service by inflation/devaluation of debt tied to the dollar. That itself is a pretty bleak future, but it seems to be the reality.

    So fellow readers, what is the "new gold"? Because metals themselves have very little use in "survival mode". What is inflation resistant and inherently valuable?
    Feb 06 05:37 PM | Link | Reply
  •  
    Another story where someone is 100% certain about the future. Stupid.

    Gold, they feel, is a store of wealth. Which is all fine and dandy, but with so many of these people being conspiracy theorists, I don't know why they don't shake in their boots about the following:
    1.If currencies around the world do collapse Governments will confiscate gold. Gold ETFs are even less useful
    2.At least with Gold ETFs you won't have possession of the gold, so you won't be a target.
    3.Gold just like money is only valuable if others view it as valuable. That won't help in chaos. Things like food and water will be more valuable than gold.
    4.Gold will really only be valuable once the chaos settled down. That is why governments would confiscate it, to hold the wealth after the dust settles.
    5.In conclusion, holding Gold may hold wealth, but in the event things get as bad as Gold Bugs think it won't help them unless they want a bunch of debased $'s which seems to be one of the things they are trying to protect themselves against.
    Feb 06 06:17 PM | Link | Reply
  •  
    The Treasury is now introducing 7 year debt, first time for 30 years. They are scared sh**less to sell 10 year debt as they know it is worthless. The US Gove now has 50 trillion in net-present-value unfunded social security obligations, 400% fo GDP. This is a disaster and unsustainable.

    The only trade here is to short the 10 year T Note (big time) and buy gold (i'm not a gold bug). And just to be sure, buy a few physical coins.

    An absolute disaster is unfolding.
    Feb 06 07:34 PM | Link | Reply
  •  
    I agree with Fairway Jack. Gold is just another fiat currency, and though I own, based on technical trends, some miners who deal in it, I realize that any commodity where reserves (in weak hands) dwarf usage is a vulnerable commodity. Oil is a sounder long-term holding at respective current prices.


    On Feb 04 09:56 AM Fairway Jack wrote:

    > I suggest oil as an alternative to gold. Oil has just fallen 73%.
    > Gold is presently near an all time high. Oil is actually useful.
    > Gold has limited functional uses. And if the dollar is devalued,
    > oil will be shooting thru the roof because of the present pricing
    > linkage....and I don't think oil will be confiscated.
    Feb 06 09:00 PM | Link | Reply
  •  
    "The Treasury is now introducing 7 year debt, first time for 30 years. They are scared sh**less to sell 10 year debt as they know it is worthless"

    Which is why 10 year bonds yield under 3%. LOL!


    On Feb 06 07:34 PM popey wrote:

    Feb 06 09:16 PM | Link | Reply
  •  
    Printing massive amounts of money to offset a collapse in the velocity (turnover) of money does not inherently devalue the currency. The goal is to stop the collapse in velocity and then to begin withdrawing excess money from the system. Is the strategy likely to be successful in its implementation? Probably not, but the most likely outcome is inflation beyond the comfort level but vastly short of hyperinflation.


    On Feb 06 08:31 AM John Rusnack wrote:

    > This article is ludicrous. Unlike Iceland, the UK and many other
    > nations which are on the brink of bankruptcy, the vast majority of
    > US debt is denominated in its own currency. Therefore, unlike the
    > aforementioned countries, all the United States needs to do in order
    > to pay its creditors is devalue its currency.
    Feb 06 09:19 PM | Link | Reply
  •  
    Apparently the value of the "Top 10" badge does not imply value or accuracy to one's comments:

    --Without taking sides on the issue of the possibility of default, I'd like to add this recommendation for this article: the caterwauling from the deflationists and radical dollar bugs centers on the impossibility of US default and the US dollar's "King of the Fiat Sewer" status. --

    a) Saying "without taking sides" does not excuse proceeding to immediately take sides.

    b) "Deflationists" do not deny the possibility of default.

    c) In fact, most cyclical, it'll-be-real-bad "Deflationists" believe there will be a default. Maybe not a declared one, but at least a "stealth" one.

    d) Default results in/is cause by a deflation spiral, Hyperinflation is caused by not defaulting.

    Before caterwauling, try to get your macroeconomics straight.
    Feb 06 09:34 PM | Link | Reply
  •  
    China will continue to buy treasuries because its own best interests are served by keeping the American consumer afloat and able to buy goods made in China. Frightened American consumers will also buy treasuries because they don't know any better.

    But China, having seen the limitations of an export-driven economy, is shifting its focus toward domestic consumption and that "latent potential" you describe is truly exciting to contemplate. Despite the many flaws of the Chinese government, capitalism is in the ascendancy in China at the same time it is in decline in the West. China is also in a much better position to channel massive savings into growth-producing investment. It offers so much more growth potential for one's dollar that I am willing to accept the attendant risks.


    On Feb 06 01:24 AM TheBill wrote:

    > Dramatic is fun, but the macro-future is not likely to be fun. The
    > banks, the government, and most large corporations will survive,
    > just more and more people in the U.S. will be pushed into poverty.
    > Eventually, even the Dow will rebound as overseas operations pay
    > off for corporations. Of course, that will do nothing to help relieve
    > the grinding poverty here at home. Finally, the corporations will
    > leave completely, for larger and more robust markets in China and
    > India.
    >
    > If everyone with a dirt floor in China and India upgraded to lanoleum,
    > a "Rio Tinto" of linoleum could arise. That!...is the latent power
    > of the market in China and India that will eventually leave America
    > in the mud hut that it just vacated.
    Feb 06 09:38 PM | Link | Reply
  •  



    On Feb 06 09:38 PM Alphameister wrote:

    > China will continue to buy treasuries because its own best interests
    > are served by keeping the American consumer afloat and able to buy
    > goods made in China.

    And because Treasuries are the only thing that they have bought that's made any money-- and its made a LOT of money for the Chinese.

    Think about that one-- total return on long Treasuries for 2008 were spectacular, and the Chinese own lots of them. Hard to see why the Chinese would want to trash the only good trade that they've made.
    Feb 06 09:53 PM | Link | Reply
  •  
    Hey Guero,

    I have a bazooka, and I'm not afraid to use it. I have a tank and an F-16. I have 5 MOAB's and 10 nuclear bombs in my back pocket, and I'm not afraid to use them!
    When the dollar goes to zero, Blackwater will go house to house taking your guns and gold, but they will skip my house because my house will have flashing red lights and a siren going, "wooop, wooop, wooop" you know what I mean! Yea, goddamn, I'll come at them with sharp sticks....
    Feb 06 10:59 PM | Link | Reply
  •  
    Really? *sigh*
    Feb 06 11:54 PM | Link | Reply
  •  
    You guys worry too much. If you think the dollar will crash, buy PM stock. If you think we have inflation, buy realestate.
    Maybe the best bets are the global credit card co's. They are global so dollar collapse doesn't really matter and they benefit from inflation.
    They may present some good opportunities this year.
    Feb 07 12:06 AM | Link | Reply
  •  
    O.K., seriously, the U.S. and the world economy may do what this author and what Peter Schiff says, but sloooowwwly. He is right, but wrong because he is condensing something huge and presenting this future as if the future will all occur in one, or two trading seasons. I believe that the "animal spirits" of the economic power are moving east, but it is going to take ten to fifteen years to really gear up.

    China and India will figure out how to make their populations consume. I would like to own stock in a pots and pans company, or in women's cosmetics. There is a fortune to be made in every category in these future markets, but an American like me is unlikely to have access to that pie when it gets served up.
    It is not high-tech that will drive these markets, but ordinary item and high-tech, later.

    An article like this one is dramatic, but our "default" will occur slowly. Our cultural default is well under way, but the dollar will be the last to go. If we are still just standing around and watching the dollar at that time, then we might not like what we see when we see ourselves in the mirror.




    Feb 07 01:16 AM | Link | Reply
  •  
    Let's just say that I hope you are very, very long this position, and I hope you have the testicular fortitude to come back in a year and tell us how very, very wrong you were. Good luck!
    Feb 07 07:44 AM | Link | Reply
  •  
    "Just how creditworthy is the United States of America?

    Right now, in the eyes of the official arbiters of credit grades -- Standard & Poor's and Moody's Investors Service -- Uncle Sam still deserves the highest rating of AAA.

    But as the government's costs to bail out the economy and the financial system mount, S&P and Moody's in the last month have had to address the unthinkable: whether America might warrant a debt downgrade. ..."

    www.latimes.com/busine...
    Feb 07 08:54 AM | Link | Reply
  •  
    Well, "John from Concord,"

    If you look at the chart showing how the top 1% of the U.S. population owns 90% of the nations wealth...it seems to me that that represents a lot of concentrated power with the ability to maintain the dollar for a long time.

    I suppose that you and Schiff think that all that wealth is going to voluntarily suicide to make your overseas, gold and non-dollar bets soar to the moon.

    You know nothing of testicles.
    Feb 07 12:03 PM | Link | Reply
  •  
    The author makes some important and cogent points although, in the end, I have to disagree with him on the collapse of the US dollar and/or default.

    I guess the key to my thinking this is that I can't find a reasonable substitute for the dollar in the world's finance or trade. Depending on your viewpoint, either the Euro or Chinese Yuan would be the likely substitutes for the dollar in the post-dollar day. However, I think that all the issues facing the dollar also face the Euro and potential currencies from its constituent countries. And, despite its reserves (in US dollars!), the Chinese Yuan does not have the strength to finance the world now or in the foreseeable future.

    And, no, gold is not it. Indeed, if gold were to look like a substitute for a devalued dollar, you can bet the USG (& other govts.) would step in and seize it at some ridiculously low price. Moreover, given the size and speed of global finance & trade, I don't see how it literally could serve the purpose.

    Still, I think long term the value of the dollar will slowly sink, especially against Asian currencies. But that will be after the current depression with the ensuing US hyperinflation. Not looking forward to it, but I am trying to think how to prepare.
    Feb 07 12:19 PM | Link | Reply
  •  
    Yes, imagine how the dollar would suddenly strengthen if medicaid and medicare were suddenly ended.! Drowning Big Government in a bathtub, as G. Norquist said, explains in part, what we are going through.

    All this ends with a smaller Fed. Gov. and A STRONGER DOLLAR. Oh, yea, and a country with large pockets of wealth immune to the misery around them. Maybe, eventually, "gated" cities...a conservatives wet dream.

    I am at least as right as the author of this article, since we don't know the future.

    Feb 07 12:29 PM | Link | Reply
  •  
    MMuoio's reply was to the point and great. These agreements can be canceled by the US govt.


    I had written in Aug last year that Dollar will be going up, due to deflation in the US:

    seekingalpha.com/artic...

    I still stand by that article.

    A lot of reasons including military power as well as the economic power of the US still make it the most sought after destination for all immigrants/businesses around the world.

    China and India combined are less than 25% of US economy.
    Feb 07 12:34 PM | Link | Reply
  •  
    One thing no one has covered: democratic capitalism (small d) as practiced like no where else in the world, an educated, voting middle calls (though strained), rich naturally defended lands, and a mild climate are the foundations of our wealth. Not our brains. We are not the smartest. Not our hard work. We are deffinately not the hardest working. And not luck. The Irish got that.

    These are the things that, through good fortune and a couple of good decisions by those before us, got us to where we are.

    Most of this will not change. But we are cutting it really close.

    Meanwhile because of these things and time to build an unbeliveable amount of wealth through this good fortune, we become the engine of production of excess value. ie. profit, and an unbeatable standard of living which, along with all the above, allows the rule of law to continue.

    The other thing it has done is allow us to become the worlds consumer. Most of the other nations on earth still cannot produce the excess value we produce which powers our middle class and our consumerism (which admitted got a little out of hand).

    That consumerism is now the engine that drives the economies that cannot produce the excess value we produce and cannot power a strong middle class.

    Unfortunatly for them, that means we buy their stuff.

    As long as they want us to keep bjuying their stuff, they have to give us time payments. ie Treasuries ( and the stock of Citigroup).

    Everyone has a vested interest. Unless the globe wants to call it a day and we all can go back to living in caves, we will muddle through, though they may raise our payment terms -:)
    Feb 07 07:33 PM | Link | Reply
  •  
    I am surprised you can type in a straightjacket....
    Feb 07 07:41 PM | Link | Reply
  •  
    The Elite Rich won't allow the dollar to collapse.The $100 bill fits fine in their wallets and is lighter than gold.Plus it would be too expensive to educate every store clerk on how to tell the difference between real gold coins or fake ones.
    Feb 07 07:46 PM | Link | Reply
  •  
    tdstr.

    You need to qualify your remarks better. For instance, until the 1970's, our Navy openly backed up corporations like Standard Oil and Chiquita Banana. Our army invaded nations like the Philippines and Guatemala when our trading terms were threatened. Possibly, because everything can be reported by television, we had to stop such overt tactics to "generate our wealth."

    How do these facts fit in your "travelers history of the U.S.?"

    Perhaps, only because other nations were no longer burnt out bomb craters, or peasant mass-graveyards, and we could not just kill them all, now we have some real competition.

    Since the 70's, our wealth has taken off like a hockey stick. If it were true wealth with sound fundamentals, why are we in the trouble that we are in?

    Since the 70's, haven't we just found ways to leverage our previous wealth towards fantastic speculations, with only a portion actually being anything new?
    I don't know the answers, but I would never write outright fiction like you.

    Yea, with that kind of knowledge, you are probably a danger to yourself, and others.

    Back to the straight jacket with you!
    Feb 07 10:46 PM | Link | Reply
  •  
    I don't completely discount the possibility of a downgrade or even default of treasury debt. But I don't see one convincing argument in this piece, you're logic is pretty weak.
    Feb 08 12:02 AM | Link | Reply
  •  
    www.youtube.com/watch?...

    www.youtube.com/watch?...

    Check out my two, cool videos on the economy. Enjoy.
    Feb 08 01:03 AM | Link | Reply
  •  
    The arguments against the dollar are pretty convincing, at least to a layman like me. But it seems that the was out of this mess involves similar strategies by governments around the world, all of which will result in big devaluations of their respective currencies.
    My question: I really haven't heard an explanation of exactly how all the currencies of the world, whose value is expressed in terms of other currencies, can get devalued simultaneously.
    I can see the case for gold being stronger than everything else though in all this, as it seems beyond the reach of de-valuing through a huge increase in supply.......
    Feb 08 09:31 AM | Link | Reply
  •  
    On a more general note, half the problem of confidence is the inability of a government to state how its program will work, and predict the course of events over 5 years resulting from their actions.
    Clearly the reason they don't do this is because they haven't got a clue.
    On the other side, poeple such as this guy, Schiff, Roubini,, Celeste etc etc can make cogent cases for their scenarios and so , as a reasonable person you have to try to act on them.
    Feb 08 09:40 AM | Link | Reply
  •  
    Oh, it's worth looking at leap2020.eu for a similar analysis.
    Feb 08 09:42 AM | Link | Reply
  •  
    David, with due respect, I'm thinking you are wearing some kind of tinted glasses.


    On Feb 03 10:20 AM David Roskoph wrote:

    > This storm has already passed and the dollar has necessarily survived.
    > When the world was reassembled in Bretton Woods (1944) the dollar
    > was linked to gold, now it will replace gold. American capitalism
    > has won the world and contracts or not, America will not fall as
    > its leader. The consequences of our failure would cast the world
    > backward 20 years. The world IS supporting the US dollar even though
    > we solemly swear our presses will run round the clock; it's the value
    > of the franchise. Gold is supported by a public frightened into thinking
    > this will result in a complete meltdown (again). Markets are ever-more
    > a fleecing ground, just like the good old pre SEC days. My guess
    > is central banks are selling as gold is moving away from being a
    > monetary instrument.
    >
    > ps. Nice methapors
    Feb 08 09:59 AM | Link | Reply
  •  
    I must say, I just stumbled on this article and while it was short, it was very thought provoking as is the comment stream (though it is emotional to say the least).

    For me, it seems that the reduced tax revenues--at both the state and federal level--will become the next crux of the current US crisis. It will be interesting to see how that plays out in the next 12-18 months.

    With regards to the passing of any storm....I do believe we are going into the backside of the storm so things will get worse before they get better and, again, the reduction in tax revenues will lag behind the market by some 'N' amount of time and its effects are still unknown (though California seems to be giving us a lead on that.)

    In terms of the USD....I can only hypothesize that due to the amount of forced liquidations, desire for people to sit on 'cash', and the current fear in the emerging markets (and their currencies), we are simply seeing an increased demand for USD.

    Which leads me to the top of this article and the question posed by a commenter: what if you had a printing press in your basement? Would you ever default or would you quietly keep paying the butcher, the baker and the bread maker with your Super Notes?
    Feb 08 10:39 AM | Link | Reply
  •  
    Rusky, Call it what you will. Default or hyperinflation, the results will essentially be the same. All of our govenment economists must be lost in the political climate.


    On Feb 08 10:39 AM Russian Bull wrote:

    > I must say, I just stumbled on this article and while it was short,
    > it was very thought provoking as is the comment stream (though it
    > is emotional to say the least).
    >
    > For me, it seems that the reduced tax revenues--at both the state
    > and federal level--will become the next crux of the current US crisis.
    > It will be interesting to see how that plays out in the next 12-18
    > months.
    >
    > With regards to the passing of any storm....I do believe we are going
    > into the backside of the storm so things will get worse before they
    > get better and, again, the reduction in tax revenues will lag behind
    > the market by some 'N' amount of time and its effects are still unknown
    > (though California seems to be giving us a lead on that.)
    >
    > In terms of the USD....I can only hypothesize that due to the amount
    > of forced liquidations, desire for people to sit on 'cash', and the
    > current fear in the emerging markets (and their currencies), we are
    > simply seeing an increased demand for USD.
    >
    > Which leads me to the top of this article and the question posed
    > by a commenter: what if you had a printing press in your basement?
    > Would you ever default or would you quietly keep paying the butcher,
    > the baker and the bread maker with your Super Notes?
    Feb 08 11:19 AM | Link | Reply
  •  
    Blah, Blah, Blah.

    All 160 comments convinced me not to listen to anybody.
    Trade the Forex where some real money can be made or lost in seconds.
    None of these Blahs apply whatsoever. Theories only confuse. The charts
    show it all and show who's rignt or who's wrong and what is really going on
    at the moment and try to make money right now on that.
    Feb 08 11:43 AM | Link | Reply
  •  
    Blah, Blah, Blah.

    All 160 comments convinced me not to listen to anybody.
    Trade the Forex where some real money can be made or lost in seconds.
    None of these Blahs apply whatsoever. Theories only confuse. The charts
    show it all and show who's rignt or who's wrong and what is really going on
    at the moment and try to make money right now on that.
    Feb 08 11:44 AM | Link | Reply
  •  
    The United States Government takes in nearly 2.50 Trillion in revenue each year. It Pays out about 500 billion a year in debt service. This leaves a "cushion" of 2 Trillion. It is far more likely that entitlements will be cut in the future than a default. 2009 is not the year of default in any case. The US is not in imminent danger of default. In order for it to default the following would have to happen: 1. The US economy would have to never again grow. 2. The US economy would have to increase its debt service to nearly 100% of revenue. As obscene as the national debt is, it can be managed. A far more likely scenario is that years from now the US Government will simply print money to pay the debt, thus causing the value of the dollar to move down in value vs. other currencies. It is irresponsible to even suggest that 2009 is the year of default.
    Feb 08 12:10 PM | Link | Reply
  •  
    Further, I find it almost insane that you are suggesting that the country that controls its own printing presses is going to default. They will print, print, print in the future! They will make inflation. They will not default! Buy gold to $2,500.00 It is going there in the coming years. Printing is the name of the game. Not defaulting!
    Feb 08 12:16 PM | Link | Reply
  •  
    Dear Mr. West,

    You should get out more. Things are really not that bad out there. I just got back from skiing. The slopes are packed, people are having fun. Did not see anyone entertaining a ridicules idea of using gold as anything other than jewelry and industrial metal (excellent thermal and electrical conductivity, good chemical resistance, but not much mechanical strength though; niche metal, you know).
    Feb 08 01:12 PM | Link | Reply
  •  
    Market Ace: I would like to know where you have found definitive evidence that "the ME countries, including Saudi Arabia, are creating their own Euro style currency backed by gold, that will be introduced in January 2010". I found a February 5 article by Jim Wylie ('Jackass Website') that refers to it, but I don't read that article to say it is a certainty. Please provide your reference as if it is true I have little doubt it is an important development. Thanks very much.


    On Feb 05 01:29 PM market ace wrote:

    > Note that the ME countries, including Saudi Arabia, are creating
    > their own Euro style currency backed by gold, that will be introduced
    > in January 2010. This will have a great impact on currencies around
    > the world and a new store for petro dollars, especially if they require
    > payment for their oil in this new currency..
    >
    >
    > On Feb 03 10:31 AM kelm wrote:
    Feb 08 01:20 PM | Link | Reply
  •  
    Well.. I have to admit.. not sure if it's inflation in one sector of the market, but you are 100% correct on the price of ammunition. What cost me $25 a box LAST YEAR now costs me $54... for the same ammunition.


    On Feb 03 03:55 PM ecliptix543 wrote:

    > Jake,
    > Unfortunately I have a suggestion. There is one asset class, though
    > few people in their right mind would consider it such, that has shown
    > remarkable year over year increases. Ammunition. Just for plinking
    > purposes, I bought a few hundred rounds for my rifle about a year
    > ago since the place had a decent sale at the time. I paid just under
    > $200, as of yesterday when I saw the exact same product on the same
    > advertiser's site: $900. 350% in one year. I realise it isn't exactly
    > liquid, but it does allow one to hunt or defend if necessary - two
    > qualities that gold does not offer. After seeing that, I checked
    > around some other places and saw similar price moves. Maybe it's
    > the gun freaks doing a little quiet price-gouging, maybe it's fear
    > of the new administration's potential policy shifts in that segment.
    > I dunno. I think I'll consider brass and lead in my precious metal
    > portfolio, at least until all this apocalypse stuff blows over (or
    > lands on my front door...).
    Feb 08 01:27 PM | Link | Reply
  •  
    Spend everything you have now while its still worth something.
    The Government should pretend that no business is bankrupt(they are pretending banks are not bankrupt), and then demand no more layoffs.
    This would bring back consumer confidence and encourage more spending.
    Feb 08 03:18 PM | Link | Reply
  •  
    Ian R. Campbell: The commenter you queried more than likely took two articles, combined the facts they preferred and summarized it incorrectly. The Gulf Common Currency is supposed to be pegged to the dollar, since nearly every country in the area uses the dollar. There were some articles mentioning Iran and Russia possibly using gold (“mentioning” may be a bit too broad — the mention consisted of a four-word afterthought) but if you look at Iran and Russia’s currencies it’s almost comical.
    Feb 08 04:25 PM | Link | Reply
  •  
    On Feb 06 02:56 PM Crocodilian wrote:

    >"When has the Gov ever defaulted?"


    Was There Ever a Default on U.S. Treasury Debt?
    By Alex J. Pollock on 1.21.09 @ 6:07AM

    As the bailouts in the current bust inexorably mount, financed in rapidly increasing U.S. government debt, one might wonder whether a default on Treasury debt is imaginable. In the course of history, did the U.S. ever default on its debt?

    Well, yes: The United States quite clearly and overtly defaulted on its debt as an expediency in 1933, the first year of Franklin Roosevelt's presidency. This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court.
    spectator.org/archives...
    The basis of the report is that instead of paying back US Gov. bonds in gold as promised by the bond the US government defaulted by paying the debt back in currency that it had just devalued going as far as changing the laws to change the contract. This shows the willingness of the US Gov to do anything it deems nessecery.

    In order to maintain law and order the government will ultimately have to nationalize the Federal Reserve Bank. Default on its bonds. Seize all property and debt from the banks and redistrubute it or restucture it through a bankruptcy on the national level. Possibly through some kind of homestead act where if you live on a property owned by a bank it is now yours to buy from the US Gov at 0% interest on a reduced principle. Wipe out Social Security and Medicare debt, replace with social medicine and government safety net for the elderly. Provide low interest loans to companies who build factories in the US to provide real jobs and real revenue. Flat 10% tax on consuption basic needs exempt.

    So what can you do? Canada looks like a close alternative if you don't want to ride out this storm. They have already implemented some of the above. They also have oil and that will keep there currency stable vs US. If you can't make it to Canada or hate the cold I would look to move to a rural community and hope you have some skills to trade. Gold is not the answer, it might be a short term trade. Unfortunately, most of us can't get out because we tied by debt and social slavery to stuff and are afraid to leave everything we know behind even when we all know the sky is going to fall just not when.

    I am currently long DOW, GE, USO, NAT, BUCY, WMT, BAC, FITB, HBAN hoping for a rally to move to short treasuries, then move to Canada or Austrailia or possibly Malaysia all english speaking countries with vast oil or mineral deposits.

    Feb 08 04:27 PM | Link | Reply
  •  
    If I read about "hyperinflation" one more time, I'm going to start losing control of bodily functions.

    It is very simple: Hyperinflation is a case where a country continues to pay foreign debt despite its devastating effects at home.

    No country, and I mean literally *none*, has ever submitted itself to hyperinflation so long as it maintained a credible, military force. Those that did suffer hyperinflation did so up until such time as (a) they established such a military offset or (b) they were backed by a country or countries with such military offset.

    Schiff and his zealots think linearly and ignore the non-linear nature of global geopolitical reality. Russia did *not* suffer hyperinflation for more than a brief--almost insignificant--moment. Why? Because they didn't have to. End of story.

    Your EUR denominated stocks and gold are simply not going to skyrocket to the moon because the US is dying of hyperinflation. The greater forces of history will take over long before that point. And you, the Schiffeans, will be sitting there wondering how you could be so right yet so wrong.

    Read Taleb.
    Feb 08 11:11 PM | Link | Reply
  •  
    I remain unconvinced that there will be blood in the streets (N.B.: this is different from saying that I am inconvincible on that point). That aside, the way that many have run to the U.S. Dollar seeking shelter so far tells me that in a really rough patch physical gold would indeed become the ultimate trump card to settle debts.

    As for gold confiscation, I doubt it will ever come to that. The value of the privately held gold in the U.S. is vanishingly small vs. the scale of the monetary system -- maybe 300:1 if that. Even if gold went up ten fold it still would not be worth the necessary time, effort or spilled blood for the government to extract it from the ornery and well armed group of Austrians who had had the foresight to accumulate it.

    Keep your powder dry.
    Feb 09 01:52 AM | Link | Reply
  •  
    On Feb 03 10:20 AM David Roskoph wrote:

    > This storm has already passed and the dollar has necessarily survived.... The dollar...will replace gold. American capitalism
    has won the world and contracts or not, America will not fall as
    its leader. The consequences of our failure would cast the world
    backward 20 years.

    This is perhaps one of the most arrogant, stupid responses I have seen in awhile. The storm has not even begun much less "passed". And American capitalism is dissolving before my very eyes thanks to the fact that sheeple voted for the Socialists instead of Ron Paul (the only non socialist running). And that bit about the consequences of failure being too great, are you saying the USD is too big to fail? Where have we heard that lie before? The USD will eventually prove too big to bail.
    Feb 09 06:32 AM | Link | Reply
  •  

    "This is perhaps one of the most arrogant, stupid responses I have seen in awhile"

    Only if you ignore your own comments.

    On Feb 09 06:32 AM Did U Think The Ponzi Scheme Would Last? wrote:

    Feb 09 10:37 AM | Link | Reply
  •  
    It's hard not to look at the debt that the dollar is carrying and the trillions in debt that the government is borrowing/robbing from future generations and think that the dollar is ok.

    It's looking like toast as one other commenter noted. It's not end of the world stuff we're talking here. It's just "cover yourself" talk. Be prepared.
    Feb 09 12:32 PM | Link | Reply
  •  
    How could anyone buy auto or bank stocks with websites like fakepaycheckstubs.com around?

    ----------------------...

    This is a quote that was blogged:

    The people that bend the rules GET PAID! You too can bend the rules by printing out fake paystubs w-2 w2 1099 forms using

    PROOFOFEMPLOYMENT.com

    Buy the home car or get a huge irs tax refund just for being you!
    Do what you have to do to get yours! EVERYONE ELSE DID

    FAKEPAYCHECKSTUBS.com
    Feb 09 02:16 PM | Link | Reply
  •  
    No one has mentioned our governments default in 1964-65 when they removed silver from our coins and replaced it with base metals. They defaulted on everyone holding dollars/silver certificates, no longer redeeming them in silver.
    Feb 11 09:52 AM | Link | Reply
  •  
    "If somebody had told you in 1998 that a bunch of angry crazy pseudo-Muslims were going to fly jetliners into the World Trade Center, what would you have said?"

    I would have said, "hey we should rig those towers with thermite and we can demolish them after the planes hit, this will allow us to mitigate that asbestos problem and implement our neocon agenda in the mideast, oh yea and lets short "United" stock.

    mememonkey
    Feb 11 04:24 PM | Link | Reply
  •  
    Hi Jake, A holding of pre-1965 legal tender silver coins (dimes, qtrs, & halfs) would preserve future buying power with an improbable risk of seizure.


    On Feb 03 12:06 PM Jake Berzon wrote:

    > I think most of us here are worried about these same things. I would
    > like to hear from anyone who has already found a tangible way to
    > capitalize on these trends, or at least preserve the purchasing power
    > of capital, without using some offshore (or onshore) scammers.
    Feb 12 12:55 PM | Link | Reply
  •  
    U.S. Debt by definition can never default. Why? Because the U.S. will always be able to print additional currency to pay back it's debt. This is why U.S. Debt will NEVER be downgraded. However this payback of debt will likely cause a hyper-inflationary scenario of the U.S. Dollar.
    Feb 15 09:13 AM | Link | Reply
  •  
    Watch this:
    www.guardian.co.uk/wor...
    Feb 17 02:12 AM | Link | Reply
  •  
    200 million people hooked on prescription drugs
    Everyone from Kindergarten to Grand mom
    with 1.3% of their population incarcerated, with another 1% watching them. A welfare nation with no work ethic, self centered lazy & now unemployable. I believe that when the dollar collapses & is replaced as the standard of buying & selling in the world, there will be blood shed on the streets of America. Americans against Americans, Crypts against Bloods Blacks against Whites& An Army that’s unarmed & out of country, A National guard that will turn tail & run, And unprepared unarmed people except for the outlaws. Why bother bombing America? Give them what they want, Give them more pills, Lunesta? Ambien? Weary Leg Syndrome? Late Night TV? Oh & waiting for your scooter from the scooter store. Give them what they want give them Bigger Shopping Malls, Big Screen TV's & Fancy cars Give them a credit line. The United States should put a white flag on the pentagon lawn.
    Salute your new flag America
    RITE AID
    Jun 25 04:56 AM | Link | Reply
  •  
    thank you thank you thank you.
    I am so gratified that people are starting to actually say out loud, in public, that the emperor has no clothes!

    to Jake Berzon and others:
    this is what I am doing.
    In the markets I have heavy positions in PST, TBT, HMY, ABX, and DXD.
    I do not however count on my paper as any future means of support,
    instead, I continuously consider what things I can do to protect myself and my family in the possible future scenarios:
    revolution, anarchy, general breakdown of social systems.
    Like many others I stockpile food, firewood, lamp oil, and other physical items that can be easily bartered. I hone my skills, cooking, canning, gardening. Personally I don't trust isolation and independence in the woods somewhere, too unprotected from marauders camping out in my facilities.
    Instead, I generously give away all my profits from my paper transactions
    and buttress friendships and mutual support networks.

    Lastly, I share with you all my experience that poor, hardworking people generally are a whole lot happier than fat lazy rich people ...
    there will be many wonderful little joys and discoveries in the changes that are coming!

    -chiz
    Feb 06 08:54 AM | Link | Reply
  •  
    PURSUANT TO INTERNATIONAL LAW, THE CITIZENS OF THE UNITED STATES HAVE THE RIGHT TO DEFAULT ON US GOVERNMENT DEBT UPON THE ELECTION OF A NEW GOVERNMENT WHICH OCCURS EVERY TWO YEARS. THE REASON IS THAT THE DEBT WAS ISSUED FOR REASONS OTHER THEN TO BENEFIT THE POPULATION AS A WHOLE. I WOULD PREDICT THAT THE US GOVERNMENT WILL VOTE TO DEFAULT ON ITS DEBT. SINCE THE US HAS THE BEST MILITARY ON EARTH, WHO CAN ARGUE WITH THE PASSAGE OF SUCH A BILL. SELL AND SHORT SELL US DEBT USSUES WHILE YOU CAN. THANK YOU. JOHN ROBERT, ESQUIRE
    Sep 12 04:09 PM | Link | Reply