Friday, December 31, 2010

2011 Is No Time To Slack Off

The U.S. Dollar's Prospects in the New Year

As the editors of Sound Of Cannons, we regularly get those "timing" e-mails from readers, asking us for our predictions of when the U.S. Dollar will collapse. We can't provide you a date, but you don't need to be a past recipient of the Nobel Prize for Economics to see some crucial facts and draw some logical conclusions. Consider the following:
The Federal Reserve recently became the largest holder of U.S. Treasury debt, surpassing China and Japan. The neo-Weimar monetization that is dubbed "Quantitative Easing" is wildly inflationary.
The number of dollars in circulation is galloping, and that can only result in inflation.
The government's annual outlay just to pay the interest on the National Debt is nearly half a trillion dollars. The charts show a decline since 2008, but that is illusory. The decrease in interest payment obligations is only because interest rates have been kept artificially low, and because the Federal Reserve is monetizing the debt. (With Quantitative Easing, the government is effectively buying its own debt, with magically created dollars.
The U.S. dollar is has lost 96% of its purchasing power since 1913. The gradual effects of continuing inflation are only noticed by a few. But the Generally Dumb Public (the other "GDP") is oblivious to the fact that they have been robbed by currency debasement and inflation.
The Treasury Department conservatively estimates that the U.S. debt will be $19.6 trillion within four years. (Many private estimates are substantially higher.)
The total long term government obligations including Social Security and pensions are variously estimated at from $48 trillion to $65.5 trillion. That would exceed the gross domestic product of all of the nations on Earth.
Federal government indebtedness is approaching 100% of GDP. The only time that it was ever higher was in the 1940s and 1950s because of the huge debts piled up in fighting World War II, and in funding post-war rebuilding of Europe under the Marshall Plan.
The Federal Reserve banking cartel finally admitted that they lavished $3.3 trillion in new liquidity and in excess of $9 trillion in short term loans. But in doing so, they downplayed the fact that a good portion of those trillions was used bailing out soured or failed mortgage-backed securities (MBS) derivatives contracts.
In essence, the gig is up. Starting in 2011 or 2012, I expect foreign creditors to demand substantially higher yields to justify their continuing to buy U.S. Treasury paper. Once that happens, prevailing interest rates will jump, and that will stifle economic growth, resulting in stagflation. Interest rates jumping to double digits could result in interest payments on the National Debt becoming the largest single annual outlay for the government-- even bigger than even that for the Department of Defense. Meanwhile, the U.S. Dollar will see a sharp degradation as its status as the world's reserve currency. A death spiral for the U.S. Dollar would then ensue.
It is difficult to predict exactly how the end game for the Dollar will play out, and the timing thereof. It is especially hard to predict the timing of a currency collapse because the key triggers are always subtle psychological tipping points. But once enough foreign creditors give up hope for the Dollar, there will be a wholesale rout.
Some Specific Recommendations:
~Watch the US Dollar Index (USDI) closely. A drop below 72 would be a very bad thing.
~Watch for jumps in interest rates.
~Look for announcements of either failed Treasury auctions, or "mystery buyers" that save the day for auctions. The latter will indicate more monetization.
~Watch commodities prices. (In the midst of a global recession, commodity prices should be weak. But they aren't. This indicates that they are being used as tangible safe havens in times of currency and credit turmoil.)
~Monitor international news on the global credit and currency markets.
~You can largely ignore stock market indices, since stocks are manipulated. As a last resort, the government may covertly buy large blocks of stock, or overtly nationalize all IRAs and 401(k)s.
~Get out of the stock market, stock market funds, hedge funds, and municipal bonds,
~Plan ahead for mass inflation. Protect yourself from further declines in the U.S. Dollar by diversifying into tangibles. Common caliber ammunition should be at the top of your list.
~Expect another 20%+ drop in residential real estate. Once a double dip in the economy is confirmed, commercial real estate is likely to also collapse.
~Count on higher taxes (at all levels) and endless bailout schemes.
~Don't count on getting much from your pension fund, whether it is public or private. (And even if it does pay in full, it will be in grossly inflated dollars.)
~Expect continuing bank failures and perhaps some bank runs. Monitor the safety of your own banks.
~Complete your food storage, self defense, home medical supply, gardening, canning, alternative energy, and Alpha Strategy purchasing. Train with what you have.
~Round out your bookshelf with key references that you will need to be self-sufficient.
~Team up with like-minded families. Establish a well-stocked rural retreat with good soil and plentiful water that is well-removed from major population centers. Move there, get your garden in, and plant fruit and nut trees, ASAP!
~Get in shape and lose your addictions. The physical demands of surviving the unfolding multi-decade depression will be tremendous.

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