Update: I learn from Rick Moran that the $38.5 billion in cuts weren’t from the quarterly deficit but of the annual budget. I revised the post to reflect that.
I am as delighted about the compromise arrangement between Obama and Congress as anyone. You see, my portfolio is 125% hedged against hyperinflation. Congress has cut 38.5 billion. That’s seems like a lot of money doesn’t it? Let’s just all proclaim the victory. You see, when the US Federal government is spending 1,600 billion per year more than what it brings in, $38.5 billion cuts less than 2.4% of the deficit.
Let’s try to get some perspective on this. The Federal Reserve Bank is buying most of debt now since Japan is rebuilding in the aftermath of the Tsunami and the earthquake, and the Chinese are rebalancing their portfolios away from US debt while buying into the Canadian resource sector, among other things. When Ben Bernanke buys the debt, it is called monetization; i.e., the money is created out of nothing and put into circulation via government spending. This is creating hyperinflation–just look at commodities: gold is at $1475, oil at $113, silver over $40. Now $38.5 billion savings will mean that the US will only borrow 97.6% of what they were planning to borrow before the compromise. That’s a big deal.
Imagine your family had too much debt and expenses. Every year you bring in $100,000, and borrow $50,000 while spending $150,000. Now, you have a growing debt base, but you are not making a penny of payments on it to reduce its principle, and balance is now at $500,000. Your payments are 2% interest, and so you are paying $10,000 of that $150,000 just to service the debt. You’ve got a problem, because in one year that debt could cost you 5%, in which case your debt payments would become $27,500, and so you would have to borrow another $17,500 that next year just to cover the extra interest, so now instead of borrowing $50,000, you are borrowing $67,500. This is called a debt death spiral. So lets say you and your wife compromise, and you decide to reduce your overspending by 2%, i.e., now instead of borrowing $50,000 you only add $49,000 to your $500,000 debt. So in year two, your interest at 5% is only $27,450, meaning that you will only have to borrow $67,450 in year two. Wow. You’ve really made a difference by cutting your deficit by 2%! Congratulations.
Thanks to the Tea Party we have a cost cutting Congress. So I am now predicting that hyperinflation will be slowed down by a day or two.
Great job guys! It makes my job as an investor easy:
Long: Canadian oil & gas sector; long Canadian gold mining companies, physical gold and silver (Sprott Physical Gold and Silver Trusts)
Short: US dollar.