When Will the Currency Collapse Come?

As of the first quarter of this year, federal indebtedness was $21.1 trillion, while GDP was roughly $19.8 trillion, so the ratio of GDP to debt is 107%.   Nobody knows how the constellation of relationships in the current world economy will play out.  For instance, the dollar is the global reserve currency.  Other countries absorb and make use of the dollar.  However, as with all psychological delusions--whether faith in a tribal rain dance or faith in the integrity of the Federal Reserve Bank-- sooner or later reality intervenes.  The economy of Greece collapsed at a debt-GDP ratio of 170% or so.   The US has additional cushions, so there is not likely an impending crisis, but it is unlikely that indebtedness will do anything but grow.

There are three ticking debt clocks:  First the Social Security unfunded liability of $13.2 trillion over 75 years may require a benefit cut of 17%. Second, the unfunded liabilities of Medicare, which are unknown, may be as great. John D. Shatto and M Kent Clemens, actuaries for the Department of Health and Human Services, write that there is “substantial uncertainty regarding the adequacy of future Medicare payment rates under current law.” Third, student loan indebtedness is currently about $1.5 trillion.

If you add the hard indebtedness of $21.1 trillion to the unfunded liabilities and the student loan debt, the sum is in excess of twice GDP.

In part because the unfunded liabilities are not salient, international investors continue to accept the dollar as the global reserve curreny. As with any bubble, this will continue until it doesn't. The amount of US currency in circulation overseas is at least equal to the amount at home. 

There will be political pressure to devalue the dollar, both from Millennials who spent $100,000 each on college and never found a job and from senior citizens who do not want their Social Security benefits cut because the government claimed for 85 years that Social Security is an insurance plan rather than an at-Congressional-will welfare plan.  As well, depending on the course of technology and health care costs, Medicare can easily become the biggest problem of all.

There will thus be significant pressure to devalue the dollar in order to dupe Social Security recipients and to devalue the Millennial's unproductive student loans.  In response, there may be a global run on the dollar; alternatively, an internationalist authority like the IMF might step in and offer to substitute a global currency like special drawing rights as a substitute for the dollar.  As a result, bank dollar holdings and cash may be reduced in value.

Knowing this, I hypothesize that a portfolio allocation of 10 to 20 percent to gold and silver is wise. At the same time, gold could go back down to 2001 levels before it rebounds. As Keynes put it and my financial adviser reminds me,  "The market can stay irrational longer than you can stay solvent."  As well, trusting in the wisdom of the federal government and the American people is foolhardy.

Frightening US Deficits

Peter Degraaf of Kitco shows the following chart of US deficits since 1900. Degraaf obtained the chart from the St. Louis Fed. It does not appear that these numbers are corrected for inflation (that is, they reflect nominal rather than real dollars) and therefore understate the debt during World War II. However, the graph paints a frightening picture. Those who have faith in the Fed's or the banking system's ability to "mop up" (whatever that rather odd phrase, which has been used by numerous Fed advocates and apologists, really means) newly created money might be able to describe precedents for the current situation and examples of how central banks performed well. There are numerous examples of how past central banks have performed badly, of course. I do not believe that there are many where central banks, including the performance of the Fed in the 1930s and the 1970s, long performed well.

Citizens Against Government Waste Formats Anti-Obamanable Health Care Letter

Citizens Against Government Waste has posted an excellent formatted letter that you can e-mail to your representatives. The letter is here, and they can forward it to your representatives for you. They write:

Tell Congress: Vote NO on Obama/Pelosi/Reid Healthcare Reform!

1. Complete the form below with your information.
2. Make your letter stand out! Please take a moment to personalize the subject and text of the message on the right with your own words, if you wish.
3. Click the Next Step button to send your letter to these decision makers:
* Your Senators
* Your Representative
]

I am writing to express my strong opposition to any healthcare "reform" legislation that inflates the federal deficit and national debt even further, imposes new taxes and mandates on individuals and businesses during this economic recession, and includes a government-run plan that would ultimately crowd out the private insurance market.

With our nation facing a $1.8 trillion deficit this year and a national debt that is expected to nearly double from $11.4 trillion today to almost $21 trillion over the next 10 years, we simply can't afford a new $1 trillion-plus healthcare program.

What's more, the higher taxes and costly mandates on individuals and businesses that Congress is proposing to pay for this new program could not come at a worse time with families struggling to make ends meet and the national unemployment rate approaching double digits.

But perhaps worst of all, a government-run option that would expand the federal bureaucracy and compete with private insurance plans will only move this country down the slippery slope of a single-payer, socialized healthcare system. Such a system would restrict my choice of doctors, treatments, and medicines and erode the quality of care that my family and I receive.

A better way to expand coverage for the uninsured while preserving the high quality of healthcare we enjoy as Americans would be to enact meaningful tort reform to curb frivolous medical malpractice lawsuits that drive up costs. There are also numerous free-market proposals, such as providing tax credits for purchasing private insurance coverage, that would reduce the ranks of the uninsured.

Again, I urge you to reject any healthcare legislation that burdens taxpayers and our economy, expands the federal bureaucracy, and restricts my choice of doctors, treatments, and medicines.