FORGET GOVERNMENT SHUTDOWN, BIGGER
CRISIS LOOMS,
Axel Merk Says Interest expense
could bankrupt the country in not-too-distant future.
http://www.thinkadvisor.com/2013/10/01/forget-government-shutdown-bigger-crisis-looms-axe?ref=hp
October 1, 2013
“Forget about a government shutdown. The quibbling over
concessions to keep the government funded distracts from what might be the most
predictable economic crisis.”
So argues currency manager Axel Merk, noting that the
country faces problems that may affect everything from the value of the dollar
to investors’ savings and even national security.
“To see why we have a problem, let’s
look at the projections of the Congressional Budget Office,” Merk begins in his
October insight. “From 1973-2012, government spending averaged 20.4% of GDP; in
contrast government revenue averaged 17.4% of GDP. That equates to an average
yearly deficit of 3%. As long as an economy grows sufficiently, it may be able
to carry a sustained 3% annual deficit.”
Financing any level of government
spending can occur either through increasing revenue (taxes) or borrowing.
Trouble is that there aren’t enough “rich folks out there” to tax to mend the
system, he argues.
He then lists the following
projection by the CBO:
•In 10 years, our annual budget
deficit is projected to be 4.5% of GDP.
•In 25 years, our annual budget
deficit is projected to be 13.6% of GDP.
•In 35 years, our annual budget
deficit is projected to be 18.7% of GDP.
But the biggest “elephant in the
room,” he says, is interest expense. According to the CBO, in 2048, we will be
spending almost 12% of GDP on interest expense, compared to just over 1% now.
Differently said, as a share of GDP, we will be paying more in 2048 for
entitlements and interest expense than we currently pay for all government
services combined.
“Said still another way, even with
substantially higher taxes, there may not be any money to pay for the military,
education or infrastructure. In fact, Republicans and Democrats can stop
arguing about discretionary spending, as there might not be any to fight over!
[Erskine] Bowles argues, and we agree, that our deficits might be the biggest
threat to our national security.”
So what does it mean for investors,
he asks? The most obvious choice might be to consider shorting bonds. But while
he agrees that bonds may be one of the worst investments over the coming
decades, he warns that it can be very expensive to short bonds.
“Markets tend to exert maximum pain
on investors; as such, it’s conceivable that bonds hold on much longer than one
might think, possibly even rise. During this ‘wait and see’ period, investors
shorting bonds have to pay the interest on them.”
A more effective way to prepare for
what lies ahead might be to focus on the greenback, he concludes. The United
States has a current account deficit. That means foreigners have to buy dollar
denominated assets to keep the dollar from falling to cover the deficits.
Higher interest rates might attract investors, but if one believes the Federal
Reserve might keep rates artificially low, it also means that Treasury
securities would be intentionally overpriced.
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MUST-WATCH VIDEO:
Jim Rogers: US Govt Shutdown Is Sham & Charade To Jerk Us All Around (2/10/13)
Wednesday, 02 October 2013
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HERE THE ART OF ALEX MERK
THE MOST PREDICTABLE ECONOMIC CRISIS By Alex Merk. October 1, 2013
[HIS INTRODUCTION]
Forget about a government shutdown. The quibbling over
concessions to keep the government funded distracts from what might be the most
predictable economic crisis. We have problems that may affect everything from
the value of the U.S. dollar to investors’ savings, but also to national
security.
[HIS CONCLUSION]
A more effective way to prepare for
what lies ahead might be to focus on the greenback. As indicated earlier, the
U.S. has a current account deficit. That means foreigners have to buy U.S.
dollar denominated assets to keep the dollar from falling to cover the
deficits. Higher interest rates might attract investors, but if one believes
the Federal Reserve might keep rates artificially low, it also means that
Treasury securities would be intentionally overpriced. Less abstractly
speaking, if you think the Bank of Japan in Japan or the Fed in the U.S. might
try to keep a lid on yields, the currency may well be the valve. In fact, we
would go as far as to argue that we cannot afford high positive real interest
rates. As a result, the Fed might need to err on the side of inflation rather
than cripple the economy. Sure, a hawkish Fed might be able to hike rates in
the short-term, but let the economy kick into higher gear. If we look at what
happened, for example, in Spain, perception maters more than reality: Spain had
very prudent debt management, with an average duration of about 7 years; yet
the market started to lose confidence, causing concern in the market that Spain
might lose access to the market. Similarly, in the U.S., the numbers above
matter little should investors lose confidence. By all means, U.S. markets are
deeper and more liquid than Spanish markets. But to us, it also suggests that
policy makers will be more tempted to kick the can down the road, only
exacerbating the day of reckoning.
All the more so, shorting bonds may
only be for the brave. Diversifying out of the greenback, however, be that
through gold or a basket of currencies, is also risky, but allows investors to
potentially take advantage of other opportunities along the way. A more active
investor may want to contemplate whether there’s money to be made from the
“currency wars” that might rage as different regions of the world address their
challenges in different ways. None of these are easy choices, but doing nothing
may also be a risky proposition, as the purchasing power of the dollar may
increasingly be at risk.
Merk Funds.
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MUST-WATCH VIDEO:
Jim Rogers: US Govt Shutdown Is Sham & Charade To Jerk Us All Around (2/10/13)
Wednesday, 02 October 2013
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