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« Preparing for What’s Next | Main | Gold, Silver and Mining Companies Shaping Up »
Thursday
May272010

An American Concept: Crushing Debt

Debt Levels Casey 28 May 2010.jpg


By David Galland, Managing Director, Casey Research

Commenting on the European crisis – because this has gone well past being one that can be termed “Greek” – the New York Times cited a senior U.S. official on the significant role the U.S., including Obama himself, played in getting Europe’s leadership to agree to a bailout approaching one trillion. One particularly telling quote…

The U.S. officials began talking to their counterparts about an American concept: overwhelming force. “It’s all about psychology,” said the senior official.
 
Funny how these things work, isn’t it? In response to its own debt crisis, the U.S. mirrors the failed Japanese experiment in quantitative easing, except that we look to “fix” the flaw in that experiment with the overwhelming force of trillions upon trillions of unsupported spending, in the process making the idea of unleashing a money flood an “American concept.” Europe, desperate and without the advantage of the time needed to witness the ultimate consequences of the latest American concept, agreed to a money flood of its own… with the result that it, too, plans on taking on nearly a trillion dollars in new debt.

Now, the funny thing is that the way this latest bailout is structured calls for the European Central Bank to try and sell over $500 billion in new bonds offered by what is being termed a special purpose entity, whose bonds will be backed by the European member states – Greece, Portugal, Spain, and all the other PIIGS included. The rest of the money will be delivered by the IMF (17% of whose funding comes as a transfer out of U.S. taxpayers’ pockets).

Will the new special purpose bonds prove popular with investors? Or will they prove unpopular, requiring higher and higher interest rates? What happens then?

And who is going to buy all these bonds, given the energetic selling going on by the U.S. Treasury?

When you strip away all the psychology that senior officialdom seems to think is what really counts, you have a bunch of sovereign deadbeats attempting to impress by moving into a really nice new mansion – maybe even in Brooklyn Heights -- hoping to cover the mortgage with a “no (real) money down” liar loan.

Do you want to own a piece of that loan? Because soon, thanks to the American concept and the new special purpose entity being cobbled together in Europe for the sole purpose of spitting out yet more debt, you’ll be able to buy up all of the stuff you want. Meanwhile, the above chart is what you’re actually buying…


Note, as bad as those numbers are, and they are bad, they don’t take into account unfunded liabilities – you know, little things like Social Security and Medicare. Throw those into the mix, and the picture gets a lot darker.

And what does Mr. Market really think about these numbers? As you can see from the table below, gold is starting to trade up against all the fiat currencies… just as we have been expecting it would.

Gold Up in all Currencies Casey 28 May 2010.jpg

Commenting on the situation, Casey Research CEO Olivier Garret had this to say…
Another thing that can't last is interest rates going down as debt goes up significantly. We are in for a fun ride, better buckle up. By the way, Greece is not that much worse than most developed countries when it comes to debt-to-GDP ratio; no wonder that Obama and the European leaders try to do something before the market got spooked too much.
 
I sometimes feel like a broken record (for our younger readers, that is a reference to solid vinyl discs with grooves in them that, when run over with a needle, would create sound… when scratched or “broken,” the record would repeat the same notes over and over) in my dire prognostications about just how wrong-headed it is what now passes for fiscal and monetary policy.

You can’t cure debt with more debt. And if you can produce the stuff in unlimited quantities, then it’s not money – that is, not if your definition of money is something you can use to efficiently hold and transfer wealth.

No wonder the big money traders are beginning to recall gold’s historical role as money. ---

Europeans are starting to get the picture – many precious metals sellers in Europe are now finding themselves out of stock – but most Americans are still woefully clueless when it comes to the safe-haven value of gold. And timing can be most important. Read our FREE report How Do I Know When to Buy? Click here to get it now.




Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

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Reader Comments (3)

Release Madoff, indict Bananke, Geithner and Trichet. These clowns are running the biggest Ponzi scheme in the history of the world and doing it in the name of 'Saving' the world. However on the other side of the coin they are 'saving' the world, the world of those who are sensible and foreseeing enough to invest in anything other than fiat currencies. Thanks fellas. Roger Levinson.

May 28, 2010 | Unregistered CommenterRoger Levinson

While this might well be a useful commentary, I am immediately suspicious about the table including 2007 and 2009. Why not 2008?

May 28, 2010 | Unregistered Commentergeopark

I find it sad that so many investors, financial advisors, public, friends and yes my wife have bought the crap out of Washington and Ottawa that all is well and be happy.

As a result they are buying, buying and buying some more, much on credit.

Try to talk to them about the world defacto reserve currency gold and yes even silver and all you get is blank stares, worse still "That is not what the Government is saying".

Sad when your own Governments are your biggest enemy and you don't even know it.

Baa Baa Black sheep

May 28, 2010 | Unregistered Commentertsunami

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