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Too Much Debt!

Update: January 11, 2013

Congress lived up to their reputation and kicked the can once more.  Essentially, tax rates were raised (such as on those making $450,000 or more and estate taxes went up from 45% to 40%) but spending cuts were deferred for a couple months, entailing yet another round of political saga to come.  So, as the following chart from Casey Research shows, the deficit situation has not gotten any better.  In fact, according to the CBO, it’s worse – earlier estimates had not even considered the interest payments, so the annual deficit will be $60 billion more than originally anticipated.

Fiscal Cliff - Budget Deficit Details

September 22, 2012

On January 1, 2013 the US will face the real possibility of falling off a fiscal cliff and may take down much of the global economy with it. Specifically, the cliff is represented by three factors, which policy makers must overcome in order to avoid another severe recession – or worse, depression.

  1. The Bush Tax Cuts are set to expire at the end of 2012.  At a time such as this, when the economy is stagnant, any tax increases will only serve to further sour any potential business activity. On the other hand, the government annual deficit spending is already at $1.2 trillion and if revenues aren’t increased, budget deficits will only get worse.
  2. Mandatory budget cuts are set to take affect. Last year, when congress was unable to agree on a long-term plan to tackle the never-ending growth of the national debt – now over $16 trillion – the temporary measures they initiated allowed for a small ceiling increase, while putting in place a special super-committee to study the situation and recommend policy. The super-committee came and went without any agreement, which automatically instituted a $1.2 trillion cut in government spending – half from domestic spending and half from defense spending. These cuts are set to go into affect starting in January, 2013 at about $100 billion per month and last for nine years.
  3. The debt ceiling is again being breached. Last year, when the ceiling debate was the centerpiece of discussion, lawmakers were unable to reach agreement on a debt reduction policy. They were only able to conclude a temporary measure, allowing for a small increase in the ceiling while the super-committee furthered the discussion. The current debt ceiling limit of $16.394 trillion is coming up fast.

It should be obvious that the real problem is that there is simply too much debt!  But then again, what should one expect when the whole monetary system has become based on debt? In today’s world, money only comes into existence when someone is willing to borrow it from the banking system. This is why the Fed and all the other central banks try so hard to keep interest rates low – as  more money is borrowed, the banks are able to use fractional reserve banking methods to increase money availability even more. The economy keeps chugging along as long as people and companies are willing to borrow more.

But this debt-based system obviously has its limits, as the current economy has been showing. People and companies are unwilling to burden themselves with more debt.  The Fed’s policies have been trying to overcome that by keeping interest rates low so that the government can keep spending borrowed money in order to sustain the perception that the economy is okay.

It is impossible for the governments to ever repay these debts, which is why the central banks will continue to employ “QE” measures, just as they did in early September, when the ECB in Europe, followed by the US Fed, and finally the Bank of Japan all embarked on major money-printing policies to keep the debt-game going a bit longer.

In relative terms, it wasn’t that long ago when money was based on real, tangible assets, such as gold and silver – assets that couldn’t simply be conjured up out of thin air.  These are the real assets that people should be seeking now, especially since saving cash in a savings account yields next to nothing in interest. Plus, as the governments of the world continue to print money to cover unpayable debts, the value of all fiat paper money will only continue to decline.

However, investors in precious metals will want to get their priorities straight.  Many gold bugs, for example wish to keep their precious metals close – where they can actually touch them. Possession is nine-tenths of the law, after all.  Having physical possession of one’s precious metals has benefits, especially in the case of a complete financial collapse, which some say is inevitable, given the shape of the current over saturated debt system.  Having real money to barter with under those circumstances may be priceless.

On the other hand, not everyone is comfortable holding physical precious metals in substantial quantities. Private storage can be a risk, which should be weighed carefully.  For those concerned about the safety of private storage, or even those seeking diversification can look into alternative ways to hold precious metals. One convenient method is to use Exchange Traded Funds (ETF) traded on stock exchanges. Whether open-ended funds like GLD and SLV or closed-ended funds like PHYS and PSLV, the investor should be aware that there are still risks to overcome, such as the stock market itself.

Yet there are other ways people can invest in precious metals.  Companies such as BullionVault allow their clients to buy and sell precious metals online, via an internet browser.  Once purchased, the metal is physically stored in various geographically separated regions of the world. This immediately accomplishes two things – diversifies assets across national boundaries, which reduces some sovereign risks and also relieves the investor of personal storage responsibilities.

Perhaps some combination of all of the above methods, or others not covered can be sought after for the potential precious metals investor.  When the debt-system finally collapses, people will wake up and remember what real money really is and wonder why they never thought about it before.  It’s funny, isn’t it?  Something so vital to every day activities, yet so little thought is given to what money really is. It’s good that some people are waking up early.





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