Why U.S. Bankruptcy and Currency Reform Are Inevitable

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Includes: AGG, DIA, GLD, SLV
by: Wall St. Cheat Sheet

By Jordan Roy-Byrne, CMT

The US Treasury reported that the budget deficit hit $165 billion in July which is actually less than the near $180 Billion in July of 2009. Month to month activity is volatile so it is best to compare single months to previous years and compare several months of data. I looked at the deficit for the first seven months of 2009 and compared it to the deficit through July of 2010. We are supposed to be in a recovery yet the budget deficit (for the first seven months of 2010) is up 2.36% compared to last year.

The government operates on the fiscal calendar which ends in September. In February they had expected a FY 2011 deficit of 1.267 Trillion. Weeks ago their expectation was revised up to $1.4 Trillion. Meanwhile, the deficit in July marked the 22nd straight month of deficits. In years past some months, such as April were always in the black (as far as receipts and outlays).

We should also note that the often overlooked “interest on the debt” thus far in 2010 is $375 Billion, which is very close to the $383 Billion for all of 2009. That is with five months left in the year. Wikipedia shows an estimated FY 2010 budget of $3.55 Trillion. The interest on the debt already comprises 10.56% of the entire budget.

Hyperinflation is inevitable when the government goes broke. The cause is too much debt and then an inability to grow out of the debt. We are seeing this in slow motion. Even though interest rates are historically low, the interest on the debt is surging.

According to the Treasury, the total current debt is $13.3 Trillion, which means the interest rate on the debt is a little over 3%. What happens two years from today when we add another $2.8 Trillion in debt and interest rates are 4% (which is still historically low)? Per my rough estimates, the interest on the debt would hit $644 Billion. Instead of interest payments comprising 10.5% of the budget, it would be closer to 20%. This is just in two years accounting for a little bit of economic growth, maintained spending and a small rise in interest rates.

As the interest on the debt consumes more and more of the budget, the government has to devote less and less resources to its citizens and to trying to stimulate the economy. It becomes stuck in a pit of a rising debt burden and an economy that can’t mount any growth.

Hence, bankruptcy and currency reform is inevitable for the west.

Inflation/Deflation, Bernanke, interest rates, Fed policy… it is all secondary to the above, which explains why Gold and to a lesser degree Silver, is rising against every currency and performing relatively well amid short-term changes in the markets and overall sentiment.

This is also why governments of the west hold their reserves in Gold and not in various currencies. Hence, China, India and Russia are buying aggressively. While those in positions of power hate and denounce Gold, they know it will be an integral part of the new currency regime, whenever it comes about.

In the meantime, us little people can be our own central banker and manage our own economy. While Bernanke and fellow US policy makers are shooting blanks, we can hedge ourselves with physical Gold and Silver and devote a portion of our wealth to gold and silver stocks which can rise many times in the ongoing bull market.

Disclosure: No positions