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The Volcano of Debt

 -- Published: Monday, 11 June 2018 | Print  | Disqus 

By Craig Hemke

Just as gravity propels the lava from Kilauea inexorably toward the sea, a mountain of public and private debt looms over today's markets.

Earlier this week, the Boards of Trustees for both U.S. Social Security and Medicare released their latest updates on the "solvency" of the programs. The advisories can be read here:

Though it's common knowledge that these programs are vastly underfunded, the degree to which the pending crisis is accelerating should come as a shock to all Americans.

In their report, the Trustees state that the "Social Security Trust Fund" will be exhausted in 2034. Though this retirement income program is already running on fumes due to simple demographics— and the notion of a "trust fund" is really nothing more than an accounting trick

The report that it will be insolvent in just fifteen years should come as a cold slap to the face for anyone still clinging to the belief that the funding problems plaguing this income redistribution program can be put off indefinitely. From the report:

“Social Securitys total cost is projected to exceed its total income (including interest) in 2018 for the first time since 1982, and to remain higher throughout the projection period. Social Security s cost will be financed with a combination of non-interest income, interest income, and net redemptions of trust fund asset reserves from the General Fund of the Treasury until 2034 when the OASDI reserves will be depleted.”

Even worse was the report from the Trustees of the Medicare program. Sharply rising healthcare costs and the increase in program participation due to aging Baby Boomers led the Trustees to project insolvency as soon as 2026. That's just eight years from now! Also from the report:

“The Trustees project that the Hospital Insurance Trust Fund will be depleted in 2026, three years earlier than projected in last year s report. At that time dedicated revenues will be sufficient to pay 91 percent of hospital insurance costs. The Trustees project that the share of hospital insurance cost that can be financed with Hospital Insurance Trust Fund dedicated revenues will decline slowly to 78 percent in 2039.”

While higher tax rates and means tests may serve to push out the insolvency dates, there remains very little political expediency to enact these changes. Thus, as these critical U.S. government entitlement programs begin to falter, the only agreed-to solution from both sides will be debt monetization and currency creation from the Federal Reserve. Borrowing costs will soar, and the devaluation of the dollar will be significant. Markets will be traumatized, and threats to the hegemony of the U.S. dollar as global reserve currency will move to the forefront.

Again, this debt avalanche is coming just as assuredly as lava flows downhill.

What can you do about it? Well, you have two choices:

1. Party like it's 1999. Go on about your business as if nothing is the matter and assume that every tomorrow will be just like yesterday. When the day of reckoning arrives, just hope that you can get out of town before the evacuation routes become blocked and impassable.

2. Take steps now to prepare for this monetary eventuality. Reduce your debts. Reduce your exposure to rising interest rates. Reduce your exposure to devaluing currencies. Plan to self-fund your retirement expenses, including healthcare.

And one of the essential steps of preparation is to buy physical gold and silver. Both metals are known as "sound money" and have been recognized as such for millennia. They serve as protection against currency devaluation, and you can see this in action today when you review the recent changes to the price of gold in Turkish lira or Brazilian real. Both Turkey and Brazil are dealing with monetary uncertainty brought about by political and economic unrest. As the value of both Turkish lira and Brazilian real have collapsed, the price of gold in those currencies has soared, which once again proves the value of gold as a protector of wealth. See below:

Of course, the price of gold in U.S. dollars has underperformed and underwhelmed for the past five years. However, it's only a matter of time before the dollar price of gold resumes its upward march in a trajectory that mirrors the exponential growth of total U.S. government debt. See the chart below showing this relationship since the turn of the century.

So, again, the choice is simple. You can turn a blind eye to economic Mother Nature and the principles of Newton, OR use your time wisely to prepare today for a calamitous tomorrow. One of the easiest and simplest steps you can take is the gradual addition of physical precious metal to your portfolio.

Begin your preparations today before the growing mountain of debt "lava" inundates and overwhelms you.

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at, an online community for precious metal investors.

The views and opinions expressed in this material are those of the author as of the publication date, 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.You may copy, link to or quote from the above for your use only, provided that proper attribution to the author and source is given and you do not modify the content.”


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