Based on official estimates, America’s debt is projected to reach $23 trillion in 2015 and, if the correlation remains the same, the indicated gold price would be $2,600 per ounce. However, if history is any example, it’s a safe bet that government expenditure estimates will be greatly exceeded, and the gold price will therefore be much higher.
And it’s not just the US. Most Western economies have reached unsustainable levels of debt that will be impossible to pay off. It’s worth noting that the US Federal Reserve, unlike the European Central Bank, can create currency without restriction. The US dollar has been the de facto world reserve currency for over half a century; the rest of the world’s currencies are essentially its derivatives. Whether global debt is in euros or Special Drawing Rights issued by the IMF, the Fed, and thus indirectly the US taxpayer, may become the lender of last resort.
There are four possible ways to reduce government debt:
One: Grow out of it through increased productivity and increased exports. This is highly unlikely, as Western economies, and even China, are poised for recession.
Two: Introduce strict austerity measures to reduce spending. This has the unwanted short-term effect of increasing unemployment and reducing GDP, resulting in even higher deficits.
Three: Default on the debt. This will make it difficult to raise future bond issues.
Four: Issue even more debt, and have the central bank in question simply create whatever amount of currency is needed.
Most politicians will select option four, since few have the political will to choose austerity, cutbacks and full economic accountability over simply creating more and more currency. Almost inevitably, they will choose to postpone the problem and leave it for someone else to deal with in the future.
Last August, the world watched as the US government struggled to come to an agreement on raising the debt ceiling, and was forced to compromise and delegate the final solution to a “super committee”. Its lack of political will earned the country an immediate downgrade from the S&P. Then, the hastily convened “super-committee” failed to reach a solution.
In Europe, matters were even worse. Greece did try to write off half its debt, but Germany and France reminded the Greeks that, if they did, no one would buy their bonds. The British and Irish implemented austerity measures that raised unemployment and reduced GDP, resulting in even higher deficits. The Italians watched their bond yields rise to 7 percent. While the tsunami and related nuclear incident deflected attention from Japan’s financial problems, it is a temporary lull, because Japan has the highest debt to GDP ratio of any of the developed countries.
In order to compensate for slowing growth, governments attempt to devalue their currencies and thus improve export competitiveness. This can lead to a global currency war that author and Wall Street/Washington insider James Rickards discusses in his bestselling new book, Currency Wars. This process is now well underway.
A recent Congressional Budget Office report predicted the US federal government’s publicly held debt would top an unsustainable 101 percent of GDP by 2021. Currently, the official US debt is an astronomical $15 trillion. Yet this is only the current debt. If the US government used the same accrual accounting principles that public companies must use, unfunded liabilities like Social Security and Medicare make the real debt more than $120 trillion. This represents over $1 million per taxpayer. Obviously, this amount is impossible to repay.
It’s interesting to note that in almost every recorded case of hyperinflation, the point where inflation exceeds 50 percent a month was caused by governments trying to compensate for slowing growth through full-throttle currency creation. This is exactly what we are seeing today.
These events gave me the confidence to title my new book $10,000 Gold. The book connects the many trends that will be directly and indirectly responsible for both the rising debt and the rising gold price over the next five years. It will be published this year.
To make matters worse, the irreversible macro trends I discussed in last year’s Empire Club speech are still very much in place today. These include the added costs of retiring baby boomers, systemic unemployment due to outsourcing of Western jobs through globalization and rising oil prices due to peak oil. These irreversible trends will increase unemployment, lower GDP, reduce tax revenues, increase deficits further and force governments to borrow even greater amounts.
Governments find themselves between the proverbial rock and a hard place, as even austerity measures tend to negatively impact GDP. As GDP falls and debt increases, credit downgrades are likely to follow, resulting in higher bond yields followed by even greater deficits. This becomes an unstoppable descending spiral.
Loss of purchasing power against gold continued unabated last year. The US dollar and the British pound have lost over 80 percent of their purchasing power against gold over the past decade, and the yen, the euro and the Canadian dollar have lost over 70 percent.
