Debt and Delusions – Part 2

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Published : March 10th, 2018
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Category : Opinions and Analysis

This article was written for Miles Franklin by Gary Christenson. Part one is available here.

The problem with debt is the creditor expects to be repaid.

Sovereign debt will be “rolled over,” never extinguished, and repaid with new debt. We delude ourselves and pretend total debt will increase forever (it can’t). That explains global debt exceeding $230 trillion today and official U.S. government debt approaching $21 trillion, with unfunded liabilities adding another $100 – $200 trillion. There are two choices.

Behind Door # 1 lives the default dragon. The consequences of releasing the default dragon upon the financial world are frightening and difficult to comprehend. What happens if the U.S. government says the following in circumspect language?

“Sorry. We lied. We had no intention of paying you. You were foolish to trust our promises. The courts will handle your bankruptcy. Good luck with your other investments.”

The fallout would be unbelievable—on a global scale. Assume it will NOT happen.

Behind Door # 2 lives the Inflation Monster. Suppose the Treasury issued new 10 year notes and found no buyers at 3%, or 4%, or even 5%, which sounds unthinkable, but 5% is low based on decades of history.

Enter the Federal Reserve! We hear the musical theme from the approaching shark in “Jaws” as we watch in terror. The Fed monetizes a few trillion dollars of government paper as quickly as a politician issues a denial.

The Fed will monetize U.S. government debt, as they bailed out the bankers after the banker induced crash of 2008.

Expect their balance sheet to increase, regardless of distracting nonsense from Keynesian economists. During the next crisis the Fed will buy $trillions in debt to “fund” U.S. government budget deficits.

From David Stockman

“And this time it’s truly not hard to see the great bond market “yield shock” coming down the pike. That is to say, when $1.8 trillion of supply—$1.2 trillion new debt from the US treasury and $600 billion of old debt to be dumped by the Fed—hits the bond pits in FY 2019, the markets will definitely clear or perhaps “clear-out” is a better word.”

Buying government debt, or the Treasury “printing” dollars, is reminiscent of Zimbabwe, Argentina, and banana republics. Gold and silver fared well during their memorable inflations.

  • Deficits explode and the Fed must “print” and buy much of the new debt.
  • Total debt jumps from $21 trillion to $25 and $30 trillion in a few years. Interest rates ratchet up to 5% or higher, which means interest payments on the national debt reach $1.2 to $1.5 trillion per year, up from $0.5 trillion now.
  • Oops! The Fed must create another $trillion in debt to monetize the interest expenditures.
  • Sovereign governments, hedge funds, pension funds, and individuals realize the “runaway train” of debt is approaching the end of the line. They protect their assets and remove dollars from their portfolio. They see that already weak dollars will devalue more rapidly in coming years.
  • Those scared dollars search for safety. Many will realize that five millenniums of history show gold and silver are reliable stores of value.
  • Prices for gold and silver prices skyrocket from dollar devaluation and increased demand. (China and Russia appreciate the boost to their economies because they hoarded gold instead of dodgy debt-based paper assets.)
  • Congress, after much public outcry, demands the Treasury audit Fort Knox gold and is disappointed, because Treasury says “No!” or because the audit discovers… disappointing news.
  • A cup of coffee at Starbucks, now $2, sells for $5, or $10 or more.
  • Gasoline costs… we don’t want to think about it.
  • The list is long. The 1970s could look like a minor annoyance compared to the inflation created by the monetization of sovereign debt in coming years.
  • Gold will reach Jim Rickard’s target of $10,000 or more. Silver will rise farther and faster than gold.


Paul Tudor Jones via Zerohedge:

“…legendary trader Paul Tudor Jones argues that US inflation is set to accelerate sharply, making bonds a very poor investment…”

James Rickards in Strategic Intelligence (subscription)

“It is true that the U.S. will never default on its debt because it can simply print the money to pay it off. Still, this does not mean the money will be worth much when the time comes. And the time is coming fast.”

“The U.S. debt-to-GDP ratio is approaching the point at which it cannot expand much further, at least not in real terms without inducing a crisis of confidence. Inflation is the only solution, so inflation it will be.”

Bill Holter for Miles Franklin:

“Without the ability to borrow new funds, or the ability to create dollars that are accepted for the import of real goods, the U.S. would be completely cooked. The result would have been and will be… much higher interest rates and far lower exchange rate (purchasing) powers.”

“If monetizing one’s debt was the road to financial and economic nirvana, there would be no recessions, no wars, no poverty… Outright monetization has been tried thousands of times in the past, never worked and always ended in disaster. Just because the rest of the world went along with it for a short while this time does not mean it will end any differently.”

James Rickards via Zerohedge:

“A full-scale trade war is now upon us. It will shake markets and be a major headwind for world growth. It will get ugly fast and the world economy will be collateral damage.”

“Next comes the shooting war with North Korea, which will inevitably draw in Russia, China, South Korea and Japan. This will be tantamount to World War III.”

From Lindsey Graham (R-SC) via Zerohedge and CNN:

“All the damage that would come from a war would be worth it in terms of long-term stability and national security.”

“If there’s going to be a war to stop [Kim Jong-un], it will be over there. If thousands die, they’re going to die over there. They’re not going to die here.”

[Thank you for the humanitarian perspective…]

From Phoenix Capital:

“Put simply, if the choice is:

1.Let stocks drop and deal with complaints from Wall Street


        2. Let the bond bubble blow up, destabilizing the entire financial system and rendering most governments insolvent…

Central Banks are going to opt for #1 Every. Single. Time.”

  • The choices are default (unthinkable) or inflation.
  • Central banks, politicians and governments will choose inflation and weaken the dollar.
  • Monetization of huge budget deficits is coming. Expansion of old wars and beginning new wars will accelerate the dollar’s decline.
  • Higher interest rates have arrived and more QE is on the horizon.
  • Expect much higher gold and silver prices as fiat currencies descend toward their intrinsic value.

The alternative to the above requires balanced budgets, honest money and accounting, banking reform and much more that will not happen, so plan on a weaker dollar and consumer price inflation.

We hope politicians will avoid wars, global inflation, hyper-inflation and other craziness, but politicians are paid to support special interests………. Regardless, our world will create surprises, some not so good.

Financial preparation with silver and gold is necessary.

Call Miles Franklin at 1-800-822-8080. Silver is undervalued.

Gary Christenson

Data and Statistics for these countries : Argentina | China | Georgia | Japan | Russia | South Korea | Zimbabwe | All
Gold and Silver Prices for these countries : Argentina | China | Georgia | Japan | Russia | South Korea | Zimbabwe | All
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Andrew Hoffman was a buy-side and sell-side analyst in the United States (including six years as an II-ranked oilfield service analyst at Salomon Smith Barney), but since 2002 his focus has been entirely in the metals markets, principally gold and silver. He recently worked as a consultant to junior mining companies, head of Corporate Development, and VP of Investor Relations for different mining ventures, and is now the Director of Marketing for Miles Franklin, a U.S.-based bullion dealer.
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