Higher Bills for the U.S. Means Higher Gold Prices

One question being raised in recent days regarding the Treasury Department's plan to save the world, but one that has received far too little attention in the media due to the stark choices that are now apparently on the table is, "Who will pay for this massive bailout?"

The $700 billion estimate was roughly the mid-point of the optimistic total of $500 billion and the pessimistic view of an even one trillion dollars, but, if the last year has taught us anything, it is that we've been way too optimistic about the credit crisis so far.

To this $700 billion figure can be added more than $600 billion which has already been made available for bailouts of Bear Stearns, AIG, Fannie Mae, Freddie Mac, the economic stimulus, foreclosure aid, and the guarantee of money-market funds. This puts the total bill at a minimum of $1.3 trillion with the real possibility that it could go much higher. Factor in the rising costs of funding Medicare and Social Security as large numbers of baby boomers begin to retire, and the U.S. government faces a daunting challenge of securing financing via Treasury sales in the years ahead.

The debt ceiling is about to be raised to $11.3 trillion with far higher levels expected in the next decade.

What is a debtor nation to do?

Some argue that Japan navigated their post-bubble period by going further and further into debt and that the U.S. could do this too, however, the big difference between Japan in the 1990s and the U.S. today is that Japan had a trade surplus. The U.S., on the other hand, has a trade deficit, in large part financed by capital inflows into Treasurys and GSE debt, which are now essentially the same thing.

More than ever before, the U.S. has become reliant on the kindness of foreigners (which, in and of itself is bad enough), but in their absence, there is only one real alternative - monetize the debt. The period ahead holds the real possibility that a significant amount of these Treasury purchases will be made by the Federal Reserve which is, in effect, "printing money".

What does this mean for gold?

All other things being equal (e.g., no massive government intervention in the gold market), it means a much higher gold price.
Truth be told, there isn't much happening in the world today that doesn't mean we're looking at much higher gold prices in the future.

The events of the last week have taught us a very important lesson, one that I have been sure of for years, but now, about which there is strong evidence - the government's resolve. That is, the U.S. government will do "whatever it takes" to avoid a financial market and economic meltdown, and "whatever it takes" is sure to involve debasing the currency.

In the world we live in today, there really is no other reasonable choice for governments as the lessons of the Great Depression are not lost on today's policy makers. We may end up with a different kind of Depression in the next decade, but we certainly won't end up with a "deflationary" depression (at least not at first) as long as the U.S. government can still borrow or print money.

Comments

[ineedacookie:]

Well, here’s something that goes beyond the trivial discussions that go on within seekingalpha; Something that’s beneficial & important especially to you here on seekingalpha. Today we are going through a financial crisis in the world and its concentrated within the US. Changes are occurring at a rapid pace and we have reached a point right now where we have hit a crossroad for what the world's future would be like the next decade; (1) one road leads to a collapse of our economic system that will destroy the country's ability to preserve jobs & create future jobs, lead to destruction of the remaining value of what we own & earn, lead to higher costs for you, your family (grandparents & sons & daughters), and friends who'll no longer be able to scrape by to pay for housing, food, healthcare, and transportation, and lead to government control that goes beyond anything we can imagine today; OR (2) the other road that leads to flushing our economic system to preserve our ability to create future jobs, save the value of our livelihoods & standard of living for all of us, and salvage our base freedoms & rights to prosperity-which have been undermined but we need to atleast preserve the base that we have today so we can fight to reclaim all our freedoms & deserved rights that any world citizen should enjoy.

Anyways, this is what brought me out of my apathy, getting turned on to an amazing man fighting for us, Karl Denninger who put up this 10 min video that lays out what happened to our financial system from banks down to us these past 5 yrs in a comprehensive, logical manner;
www.youtube.com/watch?...

Here is the SOLUTION he posted today, September 21, 2008. Very important - Watch this:
www.youtube.com/watch?...
Again this solution is a document you can read through and has been submitted to the senate this weekend. It has been hand-signed and distributed to each member of the Senate Banking Committee and hopefully is considered there.

This is the solution & the best, realistic shot at starting to address & fix the problems we are facing today. All I ask of you is to check out the videos, consider it, think about it, discuss it, share it with others, distribute it please. At the very least this will create much needed discussion amongst us for a realistic solution today or at the very best it will lead to the first step in many to halt a finacial collapse & stop a government shutdown on the people, preserve our ability to financial prosperity and ability to get a job (a good paying one in this country), and provide an example for others to follow. It can lead to a much brighter future for our ourselves, our families, and friends.

Please tell me what you think and copy/paste this to others you know.

Thank You,
Pete
(I had not had any communications with Karl Denninger, however since he moved me to get out of my seat & do this, I copied and pasted this message to him and I hope he appreciates this message as a token of respect to the message he is fighting to get out to the rest of us).

2008 Sep 22 03:43 AM

[phdinsuntan...:]

whatever it takes means they can buy/sell gold futures with this money and controling the gold price too...

2008 Sep 22 07:15 AM

[Mr.G:]

even if the fed intervenes on Paper with the gold market by shorting it -physical prices for physical gold(gold literally held in your hand ) will be much higher (this is already starting to happen ) as there is already a physical shortage -It would not surprise me if central banks flood the market with the gold reserves to make it appear as though there is plenty of physical gold -and it will just act like a giant spring when that is all used up to hide the fact that the bailout is having enormous inflationary consequences

2008 Sep 22 08:20 AM

[buyitcheap:]

The author is exactly, exactly right. And that is because he has written my thoughts far more eloquently than I could have myself.

Mr. G - interesting thesis - however the comex has recently been buying everything in sight fromthe smelters hence the lack of availability of coins, physical bullion, etc.

2008 Sep 22 09:23 AM

[vince v:]

Cookieguy: for those of us with dial up where a 10 minute video takes 4 hours to download, please supply a link to the written statement so we can get on board.

2008 Sep 22 09:42 AM

[jhm47:]

Karl Denninger proposes some very drastic solutions, but I think they would work. The problem is that the entrenched politicians currently in power will NEVER begin to consider them. The ruling class is so busy getting re-elected, and lining their own pockets that they have absolutely NO reason to change the status quo.

And---those of us who do understand the problem that is currently facing our beloved country are in the tiny minority. The vast majority of Americans are far more interested in Dancing With the Stars, Days of Our Lives, the Packers/Cowboys game, and the Red Sox/Yankees than with what is really important. Until this changes, we will continue to be in trouble. God bless America!

2008 Sep 22 09:53 AM

[traderstraffic:]

Manipulation of the metals works very well, as we have seen in the last month. All the experts have concluded that these markets were not manipulated. If you think this time is going to be any different you are in for the surprise of your life. The almighty dollar is about to rein like it never has before. Get ready, almost time again. Short the metals and long the dollar.

2008 Sep 22 10:08 AM

[goldis4ever:]

"Higher Bills for the U.S. Means Higher Gold Prices"

That is speaking of the obvious.

2008 Sep 22 11:15 AM

[sorgmot:]

He who lends what isn't hisen gets it back or goes to prison.

Of course he could run to a nice socialist government to get taxpayer money which he will also squander and not pay back so that the rich get richer and the poor get poorer. Hey, isn't that modern socialist?

Now, the governments of the world at all levels are complete failures by the test of wealth of nation increase. Wealth of all nations is now collapsing. Assets are not worth what they were in local currencies and local currencies are falling against commodity prices.

Good luck.

2008 Sep 22 12:18 PM

[Alex Stanczyk:]

Wheres all the bashers today??

www.rapidtrends.com/bl.../

2008 Sep 22 01:57 PM