Monday, November 16, 2015 |
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YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET | ||||||
Debt, Deflation and Danger | ||||||
by Martin Weiss | ||||||
Dear Subscriber,
In 1928, when my father first
went to work on Wall Street, he warned his clients about a new and
dangerous scourge about to strike the U.S. economy and financial
markets — deflation.
Today, I'm warning you again.
The similarities between then
and now are striking: Massive, devastating declines in the price of
commodities like copper, foods, grains and energy. Booming stock
prices. And a gaping disconnect between the two that seemed to defy all
logic.
But it's the big differences between now and then that have
me worried the most — especially when it comes to the role the U.S.
government plays in the economy.
Compare key facts about then and now, and you'll see what I mean ...
Federal debt: When my father first warned of deflation's potential impact in 1928, the total debt of the U.S. government was just $17.6 billion. Today, it's over $18.6 trillion — over one thousand times more.Even taking into consideration the huge growth in the U.S. economy over the past nine decades, the size of government today is far, far larger: Federal debt: In 1928, the national debt was less than 17% of GDP. Today, it's over 100%.
Federal debt: When my father was a young man, Social Security, Medicare and veterans' benefits didn't exist. There were virtually no entitlements. So the federal government's financial obligations were limited almost entirely to the funded federal debt. In contrast, today Washington is drowning in $127 trillion of unfunded liabilities, according to Forbes.
All this leads to two unmistakable consequences:
Consequence #1. Uncle Sam as master puppeteer. The
U.S. government now has such a supersized stake in the economy and so
much to lose if things go sour, political leaders of all stripes have
virtually outlawed failure of any kind, prompting them to manipulate
markets like never before. For many years, their list of taboo events that "must never happen" included (1) another Great Depression, (b) big financial failures and (3) national bank runs.
Now, on top of these, the Fed
is attempting to counter (1) sharp stock market declines, (2) low
inflation, (3) international market turbulence and (4) even normal,
cyclical declines in the economy.
But for Uncle Sam, it’s like quicksand. The more he struggles, the deeper he’s stuck. Consequence #2. Out-of-control corporate debt. During the Great Recession, in order to save the government from bankruptcy, the Federal Reserve felt it had no choice but to buy up the majority of government bonds offered for sale, while driving interest rates to nearly zero. This, in turn, opened the floodgates to corporate debt bubbles that are even larger than the federal debt bubble.
Totally Unprecedented Convergence of Circumstances
We have never seen anything like this before in U.S. history.
Sure, we've had other periods
when the U.S. government was up to its eyeballs in debt —during the
American Revolutionary War when Benjamin Franklin borrowed money from
the French ... and again during World War II, when the U.S. government
issued billions in war bonds.
And yes, we've also seen periods of deflation — particularly the
commodity deflation in the late 1920s and the financial asset deflation
that followed.
But
what we've never seen — until now — is the convergence of huge
government debts AND the real threat of deflation at the same time.
This is absolutely critical for a number of related reasons:
First, deflation makes it far
harder for all borrowers, including the government, to pay off debts.
They earn less income. They collect less in taxes. And as the value of
each dollar owed goes up, the real burden of their debts looms larger
and larger.
Third, nearly everything falls — corporate profits, personal income, and government tax revenues from both.
Connect the dots and you'll see how, suddenly and without warning, the government is squeezed in a massive vice.
And you'll see how deflation
could directly threaten the great bubble of government debt that has
accumulated over the decades.
This head-on collision between
deflation and debt is the grave danger we will face in the years ahead.
And it's the one economic certainty that most of today's political
leaders (and candidates) fail to grasp.
Don't fall into that same
trap. Stay alert to the collision of deflation and debt. Understand how
it can impact not only your investment portfolio, but nearly every
asset you own, and nearly every kind of income that you count on.
Stand by for more instructions. Then take action accordingly.
Good luck and God bless!
Martin
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Friday, November 20, 2015
Debt, Deflation and Danger
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