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Treasury to re-issue 30 year bonds, any takers?

Peter Schiff
May 5, 2005

The prospect of the U.S. Treasury returning to a more fiscally responsible method of financing its debts has profound implications for the U.S. budget and current account deficits. While it makes perfect sense for the government to borrow for 30 years, I would question the intelligence of any one foolish enough to lend. While it is no secret that individual American debtors have temporally benefited though the use of low-cost, short-term financing, most notably through the proliferation of ARMs, many have neglected to notice that the Federal Government, the world's largest debtor, has employed the same tactics.

The reason that many individuals, and the Federal Government, have chosen to borrow on the short end of the yield curve, is that in so doing they temporarily reduce the cost of servicing their debts. However, in the long run, this strategy comes at the price of higher interest payments in the future. For the federal government, the future has just arrived. With short term rates now at 3%, and the yield on 30 year bonds at about 4.5%, the savings between borrowing short and borrowing long are not nearly as great as when short rates were only 1%. As a result, the Treasury apparently realizes that it no longer makes sense to keep the maturity of its debts so short.

However, the problem for the Federal government, and obviously American taxpayers, is that the process of refinancing trillions of dollars of short-term debt will inevitably push long-term rates much higher. So not only will the government no longer have the benefit of cheap short-term financing, it will also face much higher long-term rates than would have been the case had they acted responsibly these past several years by locking in low long-term rates while they had the chance.

With the national debt approaching 8 trillion, every 100 basis increase in the average rate at which that debt is refinanced adds 80 billion in additional interest expense which the federal government must pay annually. Since the government is already operating in a deficit, this increase will also have to be borrowed. My guess is that over the next several years, 100s of billions will be added to the annual budget deficit merely as a result of increased interest payments. Also, because a significant percentage of those payments will flow to foreign creditors, the current account deficit will grow significantly as a result. Further, as higher interest rates will likely push the highly leveraged U.S. economy into a severe recession, the structural deficit will swell as tax revenues decline and higher expenditures kick in.

In the end, not only will the federal government be confronted with far bigger budget deficits, but it will also need to finance them at considerably higher interest rates. The Treasury had better hope that Asian savers are willing to step up to the plate, for if they balk, default or hyper-inflation will be the only alternatives. Holders of U.S. Treasuries, or any U.S. dollar-denominated assets, be warned.

May 4, 2005

Do not wait for pull backs that may never come. Buy gold at current prices and do not look back. I still believe the best way for average investors to participate is though the Perth Mint in Australia. For more information on their unique, safe, private, low-cost program visit www.goldyoucanfold.com.

In addition, as the dollar's value is likely to sink far faster than those of other fiat currencies, investors can learn strategies to protect wealth and preserve purchasing power by downloading my free research report on the coming collapse of the U.S. dollar at www.researchreportone.com and subscribing to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.

Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net

website: www.europac.net
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Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.

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