Behold the
humble credit limit
Dennis Wheeler
February 20, 2004
Everybody has
a credit limit; from the minimum-wage worker to the greatest
governments on earth. This even applies to the United States
government in Washington.
At present, Uncle Sam's credit limit is unknown. But he has already
run up a bill over $7 trillion and is hurtling toward his credit
limit at break-neck speed. And believe me, when he hits it, all
the world will know it.
As of this moment, the national debt for the United States stands
at $7.060 trillion. A big number, indeed. It is climbing faster
than any time in history in real dollars and growing in very
large chunks. Up $421 billion in 2002; up $555 billion in 2003;
on pace to be up $711 billion in 2004.
The President of the United States says he can bring that back
down to $500 billion or so in 2005. Whoop-ti-doo! So if the federal
government exercises due restraint, by next year they can have
the government's finances in such good shape that it only goes
$500 billion farther into debt.
It's grim; very grim. Their best-case scenario puts the total
indebtedness of the United States up to $8.0 trillion by September
30, 2005. This is not a very high aspiration, believe me. No
motivational speaker would call this "reaching for the stars."
You cannot spend your way out of debt. No. To get out of debt
you have to make sacrifices; you have to cut back; you have to
be austere.
While there is a mini-revolt taking place in the Republican Party
right now as conservatives are aghast at the big-spending ways
of their President, even if they win, which is doubtful, there
will be no cuts; there will be no sacrifice; there will be no
austerity. In short, even if conservatives win, nothing will
happen to address the problem that has already come upon us.
Conservatives, as always, will work to make sure the problem
gets worse at a slower rate of speed than their liberal colleagues.
That's all they'll do.
The Inverse
Relationship
When
the bull market in stocks ended in January-March 2000, the entire
dynamic of Washington's finances changed. For several years prior
to that, millions of Americans had been paying billions in capital-gains
taxes. Subsequent to the end of the bull market, these same millions
began asking for capital-loss refunds.
It didn't take long for the deficits to reappear. Since then,
the entrance of a presidential administration who believe "deficits
don't matter"; the economic fallout from the 9/11 terrorist
attacks; the extra spending on the War on Terror; the extra spending
on the war in Iraq; among other things, have really plunged Washington's
balance sheet into the red. The situation is now reaching a crisis.
Look at how gold has moved up as Washington's finances have crumbled:
In 2001, Washington ran up $131 billion in debt and the high
for gold that year was $305.
In 2002, Washington ran up $421 billion in debt and the high
for gold that year was $353.
In 2003, Washington ran up $555 billion in debt and the high
for gold that year was $418.
In 2004, Washington is on a pace to run up $711 billion in debt
and the high for gold so far has been $430.
As the amount of debt Washington runs up each year climbs, so
does the gold price.
(There is a web
site
maintained by the U.S. Department of the Treasury that tracks
the national debt for you on a daily basis. The show is really
something to watch.)
By the way, since Washington is running up so much debt this
year, I fully expect the price of gold to climb well above the
$430 high we've already seen,. Just have a little patience.
"Uncle
Sam, We're Calling Your Loan"
As
I stated before, even Uncle Sam has a credit limit. Right now,
China, Japan, and other countries, to a lesser degree, are buying
U.S. debt instruments in very large quantities in order to keep
the U.S. economy from imploding. Why would they do this? So that
U.S. consumers can keep buying their cheap goods at Walmart.
This way they are systematically draining American wealth into
their own coffers. The declining value of the dollars is just
a cost of doing business. For whatever wealth is left, they have
it and America and Americans do not.
This is called euphemistically the "trade deficit."
In reality it's the transfer of America's wealth, the bilking
of America's wealth, to other countries. And it's happening to
the tune of almost $500 billion per year.
The Bible says in Proverbs: "... the borrower is the slave
of the lender." This is true in every arena. Applied to
our present subject you can see that America is becoming a vassal
to China, Japan, and others who hold its debt in large quantities.
Since they can wreck our economy at any moment by selling our
debt instruments into the open market, they effectively are our
masters.
These are hard words, I understand, but running up all this
debt is no trifling matter. It is the most important economic
issue of our day. It is turning the United States of America
into a vassal of foreign powers!
Does that sound like it's good for the dollar to you?
What Happens
When ...
the
United States government reaches its credit limit? First, the
same thing that happens to you. No more credit. It will be forced
to live within its means.
Yet the situation is not static, but fluid. A severe decrease
of $500 billion per year in government spending would bring about
a deflation and an economic depression that would be absolutely
stunning in its social and political consequences.
So there you have the second consequence: an economic depression.
Third, I don't want to scare you and since I don't know exactly
what would/will happen, I 'll be delicate here. But there could
be severe social upheaval, the breakdown of law and order, and
even the collapse of many local governments.
Fourth, people could begin asking just what is the purpose of
the United States government and begin working to discard it.
This would be similar to what took place in the Soviet Union
when that central government no longer served any useful purpose.
And in that instance, people began distancing themselves as quickly
as possible from the Soviet government so they would have to
repay any portion of its debt. We could see history repeat itself
here.
Finally, those who now own Washington's debt consider it part
of their wealth, their estate. They would no longer have such
an illusion; their perceived wealth would be gone. This would
be far worse than the stock market debacle we saw earlier in
this decade as trillions of dollars of perceived wealth would
be swept away.
This is not a definitive answer to what happen "when the
music stops," but I hope it gives you something to think
about. When a government is over $7 trillion in debt, it is in
a world of hurt, whether it likes you to think about that or
not.
"Protect
Yourself at All Times"
This
is the number one rule in boxing. And it's a darn good one to
use in life as well. Protect yourself at all times. You can't
count on anyone else doing it for you.
As the U.S. government withers its way into obscurity and irrelevance,
its dollar and financial instruments will continue losing their
value. Guess what investment vehicle will benefit greatly.
If you guessed GOLD, then you're a pretty smart fellow.
As the federal debt continues to soar, the dollar will continue
to fall. And as the dollar continues to fall, it will take more
of them to buy an ounce of gold. I see nothing that will change
the trend, not even a change of administrations in the White
House. What Richard Russell calls "the primary bear market"
is here to stay. The bear will stay as long as he wants and will
do whatever damage he intends. Nothing will stop him.
You can hide from him by purchasing gold.
You can even beat the bear by purchasing quality gold stocks
and reaping profits far greater than those brought to you by
gold, although you should never pooh-pooh physical gold ownership.
But it's only for the few, the brave, the chosen.
The government is not in business to protect your wealth. Whereas
it is charged with promoting domestic tranquility in the U.S.
Constitution, this concept has degenerated into "perpetuating
its agenda." This is what the government considers tranquility.
Since they won't help you, you must help yourself. Washington
is approaching its credit limit. When they hit it, all heck will
break loose and their paper won't be worth much. But you'll sure
be able to get a lot of it with your gold. Buy gold and quality
gold shares.
We can certainly help you with some great gold and silver stocks
in our monthly newsletter, Gold Stock Report. The
subscribers have made a tremendous amount of money the past few
years and this year looks like another great one.
All the best
to you.
Dennis Wheeler
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Dennis Wheeler
is the editor of Gold Stock Report, now in its 12th year.
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