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-- Posted Wednesday, 26 April 2006 | Digg This Article
Many people still don’t think the amount of debt the US government has amassed is anything to worry about, most commonly because it is still inconsequential relative to the US economy. As much as the nominal debt may have grown, the growth in the US economy has ensured that servicing and carrying the debt is not a problem. Stated another way, the US debt as a percentage of US GDP (gross domestic product) has not grown out of hand and therefore the nominal amount of debt is nothing to worry about. Let us examine that proposition for a minute. Below is a chart of the annual US GDP, the US government debt, and the US government’s debt as a percentage of the US GDP. 
The exploding debt during the Second World War is obvious, but notice how long it took the debt to GDP ratio to decline to pre-war levels. The level of actual debt has never declined, except for an insignificant $1 billion decline in 1946 and an equally insignificant $2 billion decline in 1949. The US debt has expanded every year since World War II. Another interesting fact is that from around 1945 to about 1985 the US economy was growing at a faster pace than the US debt. This is evident from the decline in the debt to GDP ratio. Since 1985, however, the situation is exactly the opposite: the US debt is growing much faster than the US GDP. The debt to GDP ratio improved during the late 1990s and the current rate of growth in the ratio is much less than it was during the eighties. But that reversal of the ratio in the late 1990s was due to the influx of foreign capital into the US and the subsequent stimulus this influx of capital had on the US economy. As a result tax receipts by the US government rose dramatically (all those capital gains during the tech bubble and stock market boom). That’s over and the debt to GDP ratio is once again on the rise. Also, we have not seen the reversal of those international capital flows -- something that has been discussed at length in these pages -- and when that reversal occurs it will not only cause the dollar to decline, but will also cause the US debt to increase. Regardless of what the Fed, the White House, the Senate or the press want you to believe, if China and Japan stop supporting the US dollar, US medium to long-term interest rates are going to rise. That would put a drag on the already anemic US economy, which means tax receipts by the US government will decline at the same time as the interest charges on the US debt will rise. The problem is that the US government is more likely to increase its deficit spending than to cut it, in an attempt to add stimulus. The current debt to GDP ratio is almost twice as high as the debt to GDP ratio during the final stages of the Vietnam War and compared to Vietnam the US’ current military adventures are skirmishes. If we combine increasing military spending with an increase in domestic deficit spending, higher interest rates and lower government tax receipts, then the debt to GDP ratio could rapidly approach World War II levels. Anyone who is not alarmed by the increase in US government debt is living with his head in the sand. Paul van Eeden P.S. I f you enjoy reading these commentaries I suggest you go to my website at http://www.paulvaneeden.com/commentary.php and register to get them by email. Rest assured that I do not sell or rent any of my subscribers’ email addresses. Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477. Disclaimer This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.
-- Posted Wednesday, 26 April 2006 | Digg This Article
Previous Articles by Paul van Eeden
Paul van Eeden is an independent investor, analyst and newsletter editor.
Born in South Africa, Paul graduated from university with a degree in chemistry and applied chemistry with additional credits in accounting, economics, business economics, philosophy, statistics, mathematics, biochemistry and physics.
Paul's first business was an African art distributorship, of which he acquired a 50% interest during his first year at university in 1985. He has experience, either as an owner, manager or director, in plastics manufacturing, food supplements and cosmetics distribution, advertising & marketing as well as the manufacturing and distribution of gas detection equipment.
Paul van Eeden left South Africa in 1994. He joined Yorkton Securities in Toronto as a stock broker in 1995 and moved to Global Resource Investments in Carlsbad, California in 1996. In November 2002, Paul decided to leave the brokerage industry and joined Doug Casey as co-editor of the International Speculator (www.internationalspeculator.com) newsletter.
His investment approach was shaped by the ideas of Benjamin Graham and David Dodd so Paul is always on the search for tangible value that can be bought at a reasonable price. That can usually be accomplished only during the trough of a market, which is currently not the case for general US equities.
Therefore Paul decided to focus on the natural resources sector, specifically gold. The period from 1996 to 2001 was a trying time - the bottom of the worst bear market in gold in twenty years - but, of course, it was also a time of opportunity.
At the San Francisco Gold Show in November 1998, Paul van Eeden introduced his original thesis that the gold price in US dollars is driven by the US dollar exchange rate, and that traditional commodity style analyses would not yield predictive results when applied to gold. He showed that a dollar-only view of the gold market is inadequate: understanding the gold price requires a global view, incorporating exchange rates across many currencies. This novel line of thinking is now ubiquitously accepted.
In 2003 Paul went further, showing that the price of gold in US dollars is tightly correlated to the expansion of US monetary aggregates (M3) and that an analysis of gold as money not only clarifies the gold price from 1971 to the present, it has other implications that are still unforeseen by most financial and commodity analysts today. One of these is that the gold price will soon exceed $1,000 an ounce. Another is that, aside from operational differences, not all gold mining companies will benefit equally from this increase in the gold price.
Paul van Eeden not only does his own research on the fundamental drivers behind the gold market, he also takes a hands-on approach to investment analysis: interviewing management, studying exploration projects and visiting mining operations. Whilst investing in mining and exploration companies is inherently risky, value is never far from his mind and features forcefully in his selection criteria.
Most of Paul's time, now, is devoted to finding investments for his own portfolio.
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Putting the US debt into perspective
