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« Gold and Gold Stocks: Hammered by global De-leveraging? | Main | Gold Drops to $800, Why? »

Deficit could exceed $1 Trillion!

Deficit Casey  18oct08

In the mailbag this morning we received this article by Olivier Garret, CEO, Casey Research which looks at the current financial crisis in the US, the liquidity problems and efforts to thaw the market.

U.S. in Crisis Mode -- What’s Next?
By Olivier Garret, CEO
Casey Research – The Casey Report

In the last few weeks, it has become clear that the current financial meltdown is not our usual, run-of-the-mill crisis. It’s supersized, inexorably linked to the rest of the world, ruled by chaos, and precariously perched atop a mountain of debt. ”What makes this crisis different from some of the earlier ones,” says IMF Historian James Boughton, “is that the interlinkages among financial institutions are much greater now than they used to be.”

Daily efforts to “thaw credit markets,” “provide liquidity,” and “support financial stability” only add to the myriad market dislocations. And despite what we may hear from politicians and the news media, recovery is unlikely to be “just around the corner.”

The party really is over. We are facing hard times, no matter what the government does. If it continues to prop up the sick markets, it will only delay and worsen the inevitable deep recession.

To survive the current financial crisis and the accompanying economic downturn, we must understand the big picture, and how it will be affected by the slew of “support” from the federal government.

Casey Research accurately predicted the specifics of the crisis in its International Speculator edition of March 2007:

For one thing, at the point that falling prices leave homeowners with mortgages exceeding the value of their homes, default rates will soar. This, in turn, will put lenders that hold large amounts of mortgage debt at risk, and possibly jeopardize the solvency of Fannie Mae and Freddie Mac, since they guarantee much of this debt. If these mortgage giants faced collapse – and they are already in well‐documented trouble – a government bailout involving hundreds of billions of dollars would be a likely next step.

The impending calamity – mass housing foreclosures, failing banks, Fannie Mae and Freddie Mac in ashes, millions of personal bankruptcies – is so dire… most people can’t even conceive of it. And indeed it may not hit us this year, or next, but the market always corrects itself, and this time will be no exception, sooner or later.

We have said before, and we repeat again: Rig for stormy weather.

Now the Casey Research team forecasts something outside the realm of any recent experience: the Greater Depression may be looming on the horizon.

Doug Casey coined the term “Greater Depression” in his best-selling book Crisis Investing, published in 1979. Today it resounds throughout the land; even CNN’s Glenn Beck recently used it in an op-ed piece. And the signs are increasing that a depression may indeed be what we are moving towards.

On September 30, 2008 (end fiscal 2008), the Congressional Budget Office reported a record federal budget deficit for the year of $455 billion, up $293 billion (or 181%) from fiscal 2007.

And that does not yet include the Fed’s bailout package for failing banks, Fannie Mae and Freddie Mac, and various other “economic stimuli.” The chart above shows that the $700 billion agreed to by Congress may have been a very optimistic estimate.

On October 3, President Bush signed into law the Emergency Economic Stabilization Act of 2008. With this Act, Congress and the president have ensured a runaway government deficit next year… one sure to exceed $1 trillion. Along with total federal debt outstanding already around $10.3 trillion, unfunded liabilities of at least $50 trillion, and many new programs and tax rebates promised by both presidential candidates, this does not bode well for the global economic outlook.

As if that was not enough, during the past few weeks, the Fed increased the country’s monetary base by as much as 20% to shore up the financial systems.

Federal budget deficits facilitate “loose” (expansionist) monetary policies, and these policies set in motion the business cycle. As the economy enters the cycle’s “bust” phase, massive federal deficits have left the government with only one option -- to try to inflate itself out of the current crisis, regardless of the impact on the value of the dollar.

A rapidly growing money supply at the same time the biggest credit bubble in 25 years bursts makes for a less than desirable scenario – one that could make the stagflation of the ‘70s look like a walk in the park. In March 1975, industrial production fell by nearly 13% while the yearly rate of CPI growth jumped to around 12%. It took another seven years and a second recession before the U.S. was able to break from the stagflation cycle.

What we are likely in for now is an unprecedented period of price inflation, economic depression, and high unemployment, i.e., not just stagflation but depflation (inflationary depression).

Depflation will affect the entire population, and its effects on people’s personal finances will manifest in multiple ways.

· Purchasing power declines as prices for consumer goods increase faster than wages.
· Taxes levied on businesses and individuals increase when nominal incomes rise.
· Late recipients of new money incur cost of additional hidden tax.
· Cost of money (interest rates) increases, hurts investments in capital goods, stocks and bonds.
· Once expectation sets in, it becomes a self-feeding phenomenon, taking years and a severe recession to work itself out.

Just like a shot of adrenalin administered to a sick patient generates an apparent revival, only to have the patient collapse as soon as the injection wears off, the artificial monetary injections by the Fed will do the same. Paraphrasing former Fed chairman Paul Volcker, "Once you have a little [monetary] inflation, you need a little more". As with any medicine, its effects wear off and become less potent the more "injections" are received.

At this stage, your primary goal should be asset protection. Once that is in place, you will be in a better position to hunt for the opportunistic profits one can only find in times of crisis.


If you had known all this was happening, what would you have done differently?
If you had seen this coming, you could have moved to protect yourself and your portfolio. You could have shorted financials and bond insurers, like MBIA. You could have played more in the gold fields.

But how could you know all this was going to happen?

We at Casey Research have long foreseen what is unfolding right now… and those investors who followed our recommendations have successfully preserved their wealth. We believe in making the trend your friend… otherwise it can be a fearsome enemy.

Which is what The Casey Report is all about – giving you the pertinent and well-researched information on big economic trends unfolding at this moment, and how best to invest to make them work for you, instead of against you. Find out more about the power of the trends, and about The Casey Report, by clicking this link now.

To stay updated on our market commentary regarding gold, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address.

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter. Just click here.

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Reader Comments (16)

Think again:
"In 1933, US President Franklin Roosevelt imposed a ban on U.S. citizens’ buying, selling, or owning gold. While the U.S. Government continued to sell gold to foreign central banks and government institutions, the ban prevented hoarders from profiting after Congress devalued the dollar (in terms of gold) in January 1934. This action raised the official price of gold by more than 65 percent (from $20.67 to $35 per troy ounce). Gold coins and certificates considered collectors’ items were exempt from the prohibition, and artistic and industrial users of gold were permitted to deal in the metal under a special Treasury license."


October 18, 2008 | Unregistered CommenterThe Devil

THat sounds promising...

October 18, 2008 | Unregistered CommenterGAry

The situation is very unnerving. Those of us who have played the gold fields, are sitting with our feet in cement while our investments have been decimated.

What do we do now, oh honorable guru with Casey Research? You neglected to tell us when we can expect a turn around if indeed, there is going to be one.

As the earlier post stated, the guv can confiscate available gold, like some want them to do with our guns right now leaving us defenseless. Keep smiling.


October 18, 2008 | Unregistered CommenterJohn Ell

An armed population that knows better is going to be hard to proceed against. Most gold and silver investors have safes and guns here in the States. There isn't the same blind faith that was true during the 1930's.

October 18, 2008 | Unregistered CommenterDavid

Stagflation or Deflation in my view simply does not help the working man by investing in gold.
In an stagflationary environment, the economic growth is negative, and inflation is high. This is the most likely outcome in relation to what you can do as a government (print more fiat paper currency) to remain out of the deflationary spiral.
Only thing what is happening right now, is the worlds panic in the financial market is so volatile, that the contraction of M3 money supply is larger than the inflationary actions (bailouts etc) implied by the US and EU and Asian goverments. Thus resulting in a deflationary situation with the common money retreat from the worlds stock markets.(Its a world wide problem starting in America)

And what are the parameters in a deflationary situation? Below you can see a summary of what happened before in Japan. Its almost identical on basic points.

Deflation in Japan;
Deflation started in the early 1990s. The Bank of Japan and the government have tried to eliminate it by reducing interest rates (part of their 'quantitative easing' policy), but this was unsuccessful for over a decade. In July 2006, the zero-rate policy was ended, and by 2008 Japan was again sustaining positive inflation rates.

Systemic reasons for deflation in Japan can be said to include:

- Fallen asset prices: There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary.

- Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, these loans could not be paid. The banks could try to collect on the collateral (land), but this wouldn't pay off the loan. Banks have delayed that decision, hoping asset prices would improve. These delays were allowed by national banking regulators. Some banks make even more loans to these companies that are used to service the debt they already have. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy.
Improving bankruptcy law, land transfer law, and tax law have been suggested (by The Economist) as methods to speed this process and thus end the deflation.

- Insolvent banks: Banks with a larger percentage of their loans which are "non-performing", that is to say, they are not receiving payments on them, but have not yet written them off, cannot lend more money; they must increase their cash reserves to cover the bad loans.

- Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. This likewise means the money is not available for lending and therefore economic growth. This means that the savings rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth, since it inflates land prices.

- Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods, raw materials (due to lower wages and fast growth in those countries). Thus, prices of imported products are decreasing. Domestic producers must match these prices in order to remain competitive. This decreases prices for many things in the economy, and thus is deflationary.

Nobody really wants this to happen, but the parameters are not good. And when you believe, (just like I do) that public anouncements by governments are easing the people with statements like; nothing is wrong people. Just go shop some more, everything is under supervision...right...then there is really something very wrong.

O by the way, in 2000 there was almost a deflationary period during the technology boom. A senor Bush then had to take some action to fight it. And a good way to fight inflation was creating money and jobs for a inflationary economy. (fights deflation!) So they started a war in Iraq.
Was 9-11 a coincidence that triggered the war on terror... I'm not into conspiracies but this is starting to itch a bit.

Have a good one.

October 18, 2008 | Unregistered Commenterde Graaf

Yep, I knew it. Signs were clear to me already. This is what the WSJ had to say today: - Amid Pressing Problems, Threat of Deflation Looms -

Policy makers navigating the U.S. through the global credit crisis may have a new concern on the horizon for 2009: deflation.

The risk of deflation -- generally falling prices across the economy, beyond volatile energy and food costs -- remains slim. But the financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labor and goods should "push inflation down ... - end quote

The M3 money supply contraction is way larger than the inflationary pressure of the Government(s). Its dampens deflation, but its coming.

Get out of gold mining stocks!... is what I did recently.

October 18, 2008 | Unregistered Commenterde Graaf

To late...Did that at the bottom of the tech bubble. Should have held on. They came back. Took a few years but they came back. Get out that our stocks have falling over 60-70 percent in most cases...and do what? Buy banks? I say it wait ir out. Your advice would have been welcome two months ago. Not now...Gary

October 18, 2008 | Unregistered CommenterGAry

They probably will fall further. I'll just buy more. Yamana has fallen 75 percent. It has to be close the the bottom..Gary

October 18, 2008 | Unregistered CommenterGAry

Think again Gary, cause this can get to become a very long ride to the money. "
If deflation really occurs in the States, you wanna have some money at hand instead of "investing" in low stocks that don't grow for a significant amount of time. Because that is were deflation ends up. Money keeps flowing out of the system and the stock markets. Negative growth. Possibly global, in some countries only as deep recessions etc.

A well, every individual is different. Gold bugs are hard to turn around. If the 1930's are revolving, gold could set at 500 these days. Don't say I didn't warn you with my questimate :)

Savvy investing.

October 18, 2008 | Unregistered Commenterde Graaf

I know de Graaf. It could absolutely happen. I remember a book I read years ago by Harry Dent.."The boom and bust theory" I think it was called. It all happened about two years earlier than Harry predicted. Hopefully, Gold won't drop much further than 650. WHO KNOWS...IF the worst happens the dollar won't be worth much anyway. When I buy more gold it won't be till the mid or low 600's. Hopefully it will go the other way, and I will get out around 1000. Will see. Thanks for your thoughts....Gary

October 18, 2008 | Unregistered CommenterGAry

go hide devil and those who would bring down the value of gold stocks !! YES! the great bringer of light and profit [ WARREN BUFFETT } has spoken ! he says now is the time to BUY ! now is the time we shall see the stocks rise--SEMICONDUCTOR,NATURAL GAS AND YES YES YES GOLD SILVER AND URANIUM STOCKS ! HAHAHAHAHAHA as well as many other stocks ! now go hide and stop talking trash that just make you look like fools until i take my profits and the market heads to another low next year--im sure youll be back ready to deceive more people next year! hahahahahaha

October 20, 2008 | Unregistered Commenterlou

Say Lou, who is deceiving whom? haha
You keep those stocks until till next year. Wanna bet you didn't make pooop money.

Please go trench yourself with more knowledge of recessions and deflation.
One question for you son; Is there any market in which America can still rely on these days to bring inflation by growth these days? answer is No. No more backyardy/garage inventions of the old times.
They got to adopt new technologies by innovation, and thats Europe these days, that brings sustained policy to the table in significant proportions to stabilize economies in a global recession.
Should I remember you on the fact that world commodity demand is down. Also American consumers make up 80 percent of US GDP. By the way...debt driven.

Until Obama entered office, things remain this for over a year. With McCain, America is grounded for a decade or so. Man that guy knows even less about economy than I do.

Take it easy Lou, don't let Mr. Buffet make you crazy. He's talking longggg term. Shares to hold foreverrr. Quality stocks. Not gold miners. Def. not.

October 20, 2008 | Unregistered Commenterde Graaf

Economy will remain like this until Obama takes office? That guy is a socialistic nutcase! Obama talks about a trickle-up wealth effect and spreading the wealth around. I don't trust either candidates, but at least McCain has more common sense when it comes to economics.

October 22, 2008 | Unregistered CommenterPaul

Today gold is down breaking year long supports, nevertheless, I should insist in keeping miners stock is not a good idea: when the market´s up, the gold is often down, pulling miners; when the markets slips, gold is usually up, but miners are down (because they are companies and are in the many investment fund portfolios as that). Not a good bet today.
I got a personal point of view about gold and invite you to review it at a new blog on wealth preservation

October 22, 2008 | Unregistered CommenterThe Devil

KGC 17 Jan Calls are worth almost nothing!
HL down below $3


October 22, 2008 | Unregistered CommenterChimera

Paul, when I read your reply, its like you copy a McCain campaign propaganda commercial from CBS.

You should dig deeper into the facts of both candidates to make a good judgement about their plans. I did for instance.

McCain (respect for its service) has not a single clue to solve this issue. He will continue to walk behind the curve (as its called) by throwing money at the problem, AFTER it happens, just like Bush.
Obama however, has a far more detailed plan on how to solve this crisis. Not on a pure socialist base, but with a necessary scalpel to change the current system, both Washington and Wall Street.
Normally an economy corrects itself now and then, but the 8 yrs of Bush government allowed it to bubble up, and you are facing the results of that.
So its actually necessary to ACT now by a democratic partisan club that holds Congress to actually change the spending spree in favor of YOU, the taxpayer.
Buying into corporations (for a limited amount of time) will keep the financial system alive (and thus capitalism) but with socialist approaches to saveguard the countries interest. Thats not socialism, thats savvy to save capitalism in the long run. (Capitalism works much better than every other system like communism, socialism or whatever, but every system has its flaws; Capitalism got Greed as flaw).

Simply said;
No goverment help results in failure and collaps of the financial system. Where assets will be sold to the highest bidder; Those bidders will be foreign Sovereign Wealth Funds (oil dollars from countries like Iran, UAE, Russia, Saoudi Arabia etc), and thats a true strategic problem for America and the world.
That leaves a few options basically:
- Buy out our own system with our unlimited printing press (inflationary) and not directly punish corporate Wall Street executives (McCain option)
- Strategic (socialist) investments into banks (with veto shareholder voting right to protects your taxpayer value) and get out with profit when America is growing again on its own. (Obama option)

There is more to it, with all the issues surrounding the US of A. But that goes beyond this gold forum topic.
America needs correction and new ethics to avoid the corporate greed cycle that comes with a way too liberal (greedy and debt based) system.
Government (i.e. the voter, YOU) should have a correctional guiding function in the long run for America's leading role and well being in the world.

Hasta la vista

October 22, 2008 | Unregistered Commenterde Graaf

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