I lamented in May 2010 that the US federal budget deficit was $83 billion, or about $8.90 per person per day. Now the Washington Times (hat tip: the American Thinker) reports that the US government has posted its largest monthly deficit in history, $223 billion in February. Now that means that the US government borrowed nearly $26 per person per day. Clearly, the fundamentals that have caused the US dollar to depreciate against commodities is getting much worse not better: the US government is borrowing three times as much money as what it was only 10 months ago. This is proof that the debt death spiral is a reality in our times.
Now here is what has been happening: (1) the US government borrows money but doesn’t find sufficient lenders whether domestic or foreign, so the Federal Reserve bank lends to them the remaining shortfall. This is called quantitative easing because the money is created out of nothing. But that is not the end of QE: for Bernanke is also buying old debt as it turns over and finds no new borrowers (see “Hyperinflation when?“). QE greatly increases the amount of greenbacks that are in the money base: view (chart below) and be afraid and weep. (2) Next, commodities go up in price because too many dollars are chasing too few goods–food riots start happening in poorer countries. (3) Then, consumer prices go up. (4) Lastly, workers will get cost of living adjustments if indeed their employer can pay them at all. In any case, the last thing to adjust to this whole mess is people’s take home pay. But unfortunately, the adjustments will be too little too late because the next round of QE has already taken place and the spiral of hyperinflation has reached the next stage even before they receive their next pay cheque.
The newly elected Republican Congress? They swept into power with Tea Party momentum. But they can’t or rather they won’t fix anything. Their puny little efforts to reduce the deficit are a joke.
My investment approach remains steady (current portfolio is up 88% above book) :
Short: US dollar
Long: Canadian oil & gas; Canadian gold mining; physical gold and silver (via Sprott Physical Gold Trust, Sprott Physical Silver Trust)
Finally, in my opinion, those who are telling people it is a great time to exchange your loonies for greenbacks and to go long on US stocks are really not doing their readers a favor; they seem ignorant of the fundamentals. Yet even Warren Buffet’s famous and flippant advice about gold is little better. What, pray-tell, Mr. Buffet, do you suggest to the American people regarding how they might protect themselves from this robbery? Remember these words of Alan Greenspan (hat tip: Monty Pelerin):
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. Deficit spending is simply a scheme for the confiscation of wealth.
… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.