National Debt - Or 1 is Too Many And 12 Are Not Enough

You have probably heard that phrase regarding alcoholics.  It applies elsewhere.

• One hit of “meth” is too many, but when you NEED it, 12 hits are not enough.
• One shot of “mainlined” heroin is too many, and you know the rest of that story.
• One burst of monetary heroin – quantitative easing – is too much if central bankers want a financial system that does not debase their currencies. But central banks around the world are “shooting-up” with increasing amounts of fiat currency created from nothing.
• A government sale or “lease” of 100 tons of gold is silly, but after years of deficit spending, dumping 1,000 tons on the market is not enough to stabilize fiat currencies.

 The Vietnam War in the US is often mentioned as a major cause of the inflationary 1970s.  The war and spending escalated in the late 1960s after Johnson became President.  The national debt increased about $20 Billion between 1967 and 1968, which was big money back then.  But 11 years later the national debt increased by $80 Billion.  Once deficit spending and currency devaluation began, it was difficult to return to fiscal sanity.

The increase in US national debt was $421 Billion between October 2001 and October 2002, but the debt increased by $1.89 Trillion between October 2008 and October 2009.  A $100 Billion deficit was too much spending to maintain a stable currency, but after traveling down the dangerous road of deficit spending, over $1 Trillion in excess spending was not enough to stimulate the economy back to health.

Global debt has been reported at $200 Trillion, having increased $57 Trillion in the last 8 years, yet economies are still weak in Japan, Europe, the UK, and the US.  If global central bankers and governments had wanted sound financial systems, they would not have traveled down the dangerous road of ever increasing debt, monetizing bonds, ZIRP (zero interest rate program), negative interest rates in Europe, and more.  One trillion dollars in debt was far too much, but in our “Financial Twilight Zone” world, $200 Trillion is not enough.

Central banks and governments created this addiction – addicted to debt, deficit spending, and Quantitative Easing.  Consider the upcoming pain for most people, governments, markets, and pension plans if the drug is removed and we suffer the withdrawal symptoms.

An alcoholic claims that he doesn’t get a hangover if he never sobers up.  However, alcoholism eventually kills him, but that story is seldom mentioned.  Massive deficits and debts eventually destroy the currency and the economy, even if the “hangover” can be delayed by QE.

SUMMARY

• Euros, yen, pounds and dollars have purchasing power based on confidence in their value. Where were they 400 years ago?  Will any of those currencies still exist in 40 years?
• However, gold was valuable 4,000 years ago and I expect it will remain valuable in 400 years.
• Once banks and governments become addicted to easy money, the habit is difficult to control.
• Some roads are best left untraveled.

Compare 4,000 years of gold and 44 years of dollars unbacked by gold – since 1971.  Which will better provide safety, insurance, return-on-investment, and sound sleep during dangerous financial events?  Gold was not a good investment for the two decades following its bubble high in 1980, but those days are gone forever and this decade is very different.

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Gary Christenson

The Deviant Investor