Is it time to buy US? II: February deficit $223 billion

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.

Ben Bernanke: Codependent in chief


Federal Reserve Chairman Ben Bernanke called on Congress on Monday to adopt tougher budget rules even as the nation’s top central banker warned against taking deficit-cutting action too soon.

Still, Bernanke also warned against tightening too quickly and reportedly said more asset purchases by the Federal Reserve could help the economy.

The government’s addiction to debt and deficit spending is being enabled by the Federal Reserve which is buying its debt with money that is created ex nihilo.  So if Bernanke wanted, he could stop the addiction.  It’s like the wife who responds to her alcoholic husband who has asked her to bring him a drink, “Dear–you really must stop drinking so much … Would you like that on the rocks?”

Meanwhile, gold has climbed to $1330.

The April USA deficit and buying gold

The Obama administration borrowed $82.69 billion in April, 2010.  That’s about $8.90 per day per every man, woman and child in the USA.  In my humble conservative opinion, such deficits have led and will lead to the devaluing of the US dollar, particularly because the Federal Reserve is keeping interest rates at artificially low levels.

What is the investor to do?

Gold hit a new high $1241.25 yesterday.  Gold may decline in the short term but it is experiencing a secular bull market because of the inflation of all paper currencies.  I don’t buy gold because I don’t have a safe place to store it and I don’t want to pay an army to guard it.  I’ve instead traded gold mining stocks.  At my discount brokerage, the commissions are lower than for buying and selling gold bullion or coins.   I’ve had a lot of success averaging down and selling off a little at a time as the prices improve.  My best buy was WGI (Western Goldfields), which later became NGD (New Gold), on October 23, 2008, at 88 cents; my ngd is up 183% over my average cost price.

In the last few weeks, since I learned about trading options, I’ve been selling near the money put options of abx and gg (Oct, Jan’11, Jan’12 contracts). If current trends continue, these contracts will all expire worthless (even the ABX put Jan’12 at $45) and I will simply keep the premiums.  When doing this, it is important to reserve sufficient cash or credit to buy the stock at the strike price.  But even if assigned, the purchase of the shares becomes part of the averaging down strategy.  So for example, the $45 January 2012 put on Barrick Gold paid me $8.90 premium.  The average cost price (after commissions) of the shares if assigned then is $36.29–a 22% discount off the current $46 market price.

Obama budget and investment strategy

Obama’s mendacity has reached cosmic proportions.  The AP reports the extent of his new budget, a whopping 3 trillion dollars (cela veut dire $3,000,000,000,000 pour mes amis qui ne comprennent des chiffres en anglais!  Pour ceux qui sont en Afrique francophone, cela donne 1537770000000000 CFA selon le taux actuel).  This includes 1.75 trillion dollar deficit, which he repeatedly blames on the Bush administration by calling it the deficit that we’ve inherited.  Excuse me.  But you don’t inherit deficits but debt.  Deficit spending is a result of the current administration’s decisions.  But the double-speak rises to unbelievable proportions when he says,
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