We all know the debt load in the US economy is horrendous and unsustainable.
The US government runs deficits of approximately $1 trillion per year, even
with interest rates at historical lows. Current official national debt
exceeds $19 trillion, of which $13.9 trillion is public debt. Unfunded
liabilities are much larger. Even a 7% average interest rate would require
nearly $1 trillion per year for interest only debt service, thereby
increasing national debt even more rapidly.
National debt has increased exponentially for the past 50 years. Expect
the exponential increase to continue and accelerate, even with historically
low interest rates.
What if we priced national debt in “real money” – actual gold instead of
the digital and paper stuff that can be created at the whim of a central
banker?
I used the annual average of gold prices and heavily smoothed them with a
7 year moving average. Then I divided the national debt by the heavily
smoothed gold prices.
The 35 year graph shows that, on average, national debt has increased
rapidly, even when priced in gold. This should be cause for alarm – debt is
increasing far too rapidly, and gold is underpriced.
The current national debt is equal to about 100 times the total value,
at current gold prices, of the gold “officially” stored in Fort Knox. This
should be cause for alarm.
What about transfer payments per the St. Louis Fed (FRED)? According to
FRED the total transfers for social benefits in 2015 was about $1.959
trillion – or 10 times the value of the gold officially stored in Fort Knox.
A 35 year graph is shown below. Of course, transfer payments have steadily
increased from $251 billion in 1981 to $1,959 billion in 2015, but even
priced in gold the transfer payments have increased.
What about non-financial corporate debt? According to FRED
that debt was $474 billion in 1981 and about $5.4 trillion in 2015. If the US
economy falls into a recession what percentage of that debt will default? All
of that debt is someone else’s asset, and if that debt defaults, those assets
disappear. Cause for alarm…
What about wages as calculated by Social Security? The
official average national wage in 1981 was $13,773 and in 2014 it was
$46,481. I divided that official average wage by the heavily smoothed price
of gold and produced this chart. National debt, corporate debt, and transfer
payments are increasing more rapidly than average wages. Cause for alarm . .
.
CONCLUSIONS:
- Official national debt is massive and accelerating
higher even though rates of interest paid to service that debt are
historically low. The Fed will have difficulty raising rates.
- Non-Financial Corporate debt currently exceeds $5
trillion, thanks to low interest rates, QE, and stock buy-backs funded
via debt. The next recession will be problematic for debt repayment to
those who believe those debts are assets.
- Wages are increasing slowly compared to debt. Sustaining
a standard of living via debt (individuals and governments) only
works for a limited time. “Those trends are coming to an end…”
- The official horde of gold supposedly stored in Fort
Knox is 147.3 million ounces, worth at current prices less than $200
billion, a tiny fraction of official national debt – debt which
can’t be paid will be defaulted, either via inflation or repudiation.
The price of gold will rise substantially as global currency values fall.
- Defaulting debt will be destructive to the value of the
dollar as well as all other paper and digital currencies. Gold has no
counter-party risk and will benefit accordingly.
From Bill
Gross:
“For over 40 years, asset returns and alpha generation from penthouse
investment managers have been materially aided by declines in interest rates,
trade globalization, and an enormous expansion of credit – that is debt.
Those trends are coming to an end…”
From Charles
Hugh Smith:
“Leaders face a no-win dilemma: any change of course will crash the
system, but maintaining the current course will also crash the system.”
Repeat: “Those trends are coming to an end …”
Gold and silver come to mind . . .
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GE Christenson is the owner and writer for the
popular and contrarian investment site Deviant Investor and the author of the book, “Gold
Value and Gold Prices 1971 - 2021.” He is a retired accountant and business
manager with 30 years of experience studying markets, investing, and
trading. He writes about investing, gold, silver, the economy, and central
banking. His articles are published on Deviant Investor as well as other
popular sites.
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The author is not affiliated with, endorsed or sponsored by Sprott Money
Ltd. The views and opinions expressed in this material are those of the
author or guest speaker, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the
accuracy, completeness, timeliness and reliability of the information or any
results from its use.
