US government--lender or borrower of last resort?

http://dailyreckoning.com/the-golden-years/

And over at The Financial Times in London, Gillian Tett asks “Will sovereign debt be the next sub-prime?”

Everyone knows what when wrong with sub-prime. When you lend money to people who can’t pay it back, you’re asking for trouble. So, if you’re out of a job and looking for a sub-prime loan to buy a double-wide trailer you’re out of luck. Bankers won’t give you a dime.

But now, the world’s lenders are doing something just as dumb. They’re lending to governments. Imagine you were a banker. And the US government comes to you for a loan.

“Do you have enough income to cover the payments,” you ask.

“Well, no,” comes the answer. “In fact, our revenue has fallen off a little. Because of the recession, you know. Like everyone else.”

“How bad is it?”

“Uh…we spend nearly two dollars for every dollar of income.”

“Oh…and you expect us to lend you money? What do you have for collateral? What is your net worth position?”

“We were hoping you wouldn’t ask. The most recent tally of our obligations comes to $113 trillion.”

“Well, don’t you have assets?”

“We have some buildings in Washington…military bases around the world…things like that. But as a practical matter, you could never foreclose on them.”

“Oh, I see…”

What is interesting is that the world’s investors are beginning to see that the US and many other governments are bad credit risks. This is an extraordinary event. Until now, the US government has been able to finance and refinance its debts at the lowest rates in three generations. Lenders have wanted to lend the feds money, because they believed they were the safest credits in the world.

Bankers can always be counted on to find the worst investments at the worst time. They are at the tail end of the chain of insights that begins with the sharpest, most independent-thinking analysts…runs through the broker/hedge fund community…passes on to the financial journalists and the TV pundits…arrives at the lumpeninvestoriat through the popular media…and finally gets to bankers when they pick up the Wall Street Journal and read about what’s going on.

Now, the bankers are buying sovereign debt – government paper – because they think it offers a “risk free” return. In fact, it is one of the riskiest investments you can make.

The collapse of the Weimar Republic

http://mises.org/web/4016#pg182

'The population is ripe,' Joseph Addison wrote home to Alexander Cadogan,* (Later Sir Alexander Cadogan, O.M., Permanent Under-Secretary of State for Foreign Affairs, 1938-1946.) 'to accept any system of firmness or for any man who appears to know what he wants and issues commands in a loud, bold voice.'

Addison had another significant point to make:

Economic distress is leading the people to be much more amenable to authority as representing the only hope of salvation from the present state of affairs. Unemployment is taking the gilt off the gingerbread of democracy, while the working classes realise that striking is useless since nothing would be more welcome to employers.

The "commands in a loud, bold voice" came from none other than Adolf Hitler.

Any historians of Germany want to chime in?

Porter Stansberry on the "role" of government

This rant needs no introduction.

I'd like to make you a business offer. Seriously. This is a real offer. In fact, you really can't turn me down, as you'll come to understand in a moment...

Here's the deal. You're going to start a business or expand the one you've got now. It doesn't really matter what you do or what you're going to do. I'll partner with you no matter what business you're in – as long as it's legal. But I can't give you any capital – you have to come up with that on your own. I won't give you any labor – that's definitely up to you. What I will do, however, is demand you follow all sorts of rules about what products and services you can offer, how much (and how often) you pay your employees, and where and when you're allowed to operate your business. That's my role in the affair: to tell you what to do.

Now in return for my rules, I'm going to take roughly half of whatever you make in the business, each year. Half seems fair, doesn't it? I think so. Of course, that's half of your profits. You're also going to have to pay me about 12% of whatever you decide to pay your employees because you've got to cover my expenses for promulgating all of the rules about who you can employ, when, where, and how. Come on, you're my partner. It's only "fair."

Now... after you've put your hard-earned savings at risk to start this business and after you've worked hard at it for a few decades (paying me my 50% or a bit more along the way each year), you might decide you'd like to cash out – to finally live the good life.

Whether or not this is "fair" – some people never can afford to retire – is a different argument. As your partner, I'm happy for you to sell whenever you'd like... because our agreement says, if you sell, you have to pay me an additional 20% of whatever the capitalized value of the business is at that time.

I know... I know... you put up all the original capital. You took all the risks. You put in all of the labor. That's all true. But I've done my part, too. I've collected 50% of the profits each year. And I've always come up with more rules for you to follow each year. Therefore, I deserve another, final 20% slice of the business. Oh... and one more thing...

Even after you've sold the business and paid all of my fees... I'd recommend buying lots of life insurance. You see, even after you've been retired for years, when you die, you'll have to pay me 50% of whatever your estate is worth. After all, I've got lots of partners and not all of them are as successful as you and your family. We don't think it's "fair" for your kids to have such a big advantage. But if you buy enough life insurance, you can finance this expense for your children. All in all, if you're a very successful entrepreneur... if you're one of the rare, lucky, and hard-working people who can create a new company, employ lots of people, and satisfy the public... you'll end up paying me more than 75% of your income over your life. Thanks so much.

I'm sure you'll think my offer is reasonable and happily partner with me... but it doesn't really matter how you feel about it because if you ever try to stiff me – or cheat me on any of my fees or rules – I'll break down your door in the middle of the night, threaten you and your family with heavy, automatic weapons, and throw you in jail. That's how civil society is supposed to work, right? This is Amerika, isn't it?

That's the offer Amerika gives its entrepreneurs. And the idiots in Washington wonder why there are no new jobs...

COMEX December gold and silver options

COMEX December gold and silver options expire tomorrow, Monday, November 23, which usually means the commercial shorts will go into overdrive to manipulate the price down. However, given the physical shortage, gold has been gapping up in anticipation of this date. Combined with the backwardation of gold as I blogged last Friday here, the price of gold is increasing this evening (in Asian Monday morning trading).

Should rumors of COMEX defaults on gold and silver actually occur, the exchange may just retroactively invalidate all delivery contracts, and merely slap a fine on short sellers who settle via cash. Physical buyers will be stiffed, despite receiving a cash premium.

To those who believe a COMEX default will never occur, refer to the London Metals Exchange default on nickel in 2006. Buyers did NOT receive the physical inventory, and short sellers merely had to pay a 10% fine above spot price.

http://www.lme.com/4670.asp

Should such a default occur with gold or silver, the price of physical gold and silver will soar, as will paper certificates allegedly backed by the precious metals. There will be huge dislocations in financial markets worldwide should such a default on COMEX occur. Gold bugs ridiculed for their conspiracy theories will have the last laugh.

The CFTC is also reviewing enforcement of position size limits in the energy and precious metals pits, which would force bullion banks to drastically reduce their concentrated permanent short positions. This will also catalyze gold and silver price spikes.

Are precious metals reaching bubble status?

This question has been raised by inflationists and deflationists alike. Most people believe the prices of gold and silver have increased too far, too fast. In my opinion, they are wrong.

Without forecasting specific targets, let's look at facts. The US government national debt has climbed above $12 trillion. The 2009 budget deficit was $1.4 trillion--and rising going forward. Entitlement programs including social security, Medicare, Medicaid, and two ongoing wars bring our unfunded liabilities to over $100 trillion. There are only a few ways to cut the deficits and pay down some of that debt: raising taxes, reducing government spending, increasing productivity and economic growth, and inflating the money supply. We should expect all four. Inflation devalues the USDollar, reducing the burden of those huge debts. But savers and creditors are punished by artificially suppressed interest rates and a debased currency.

To provide personal context, I've been long gold and silver since November 2008--and have been ridiculed the whole way up by almost everyone. For those who believe we are in bubble territory for precious metals, I will offer the following counter arguments.

Many Americans are becoming aware of gold as an asset class, but MOST AMERICANS HAVE NOT ACTED UPON THIS AWARENESS. Furthermore, financial planners don't earn fees when clients buy gold and silver bullion or coins, so they haven't been endorsing owning precious metals as a hedge against inflation and financial crises. Despite foreign governments encouraging citizens to own physical gold and silver, the US government downplays the fact that precious metals prices have soared over the last decade.

Americans have seen Cash4Gold commercials ad nauseum, but these television commercials entice people to SELL grandma's gold jewelry, allowing the general public to gladly pocket an extra few hundred dollars. The problem is they are only getting 50 cents on the dollar--selling into a bull market. In any case, the scrap market is dwindling, as consumers aren't selling as much as in previous rallies.

The smart money is taking the opposite side of the trade: hedge funds led by billionaires John Paulson, Jim Rogers, George Soros, Paul Tudor Jones, and David Einhorn are BUYING gold and gold-related vehicles. So are central banks worldwide, who have been net sellers in the past. They are now buying.

Of course, gold and silver will eventually reach bubble status--every asset experiences peaks and valleys over time. But the secular peaks aren't $1150 or $18 per ounce, respectively. As a reference point, $2400 and $140 represent inflation-adjusted peak values of $850 and $50 in year 1980 for gold and silver, respectively. With the world awash with more trillions of dollars today than in 1980, the true value of gold is $6300, according to French investment bank Societe Generale. Divide that by 15, the historical gold/silver ratio, and one derives a peak value of $420 for silver.

Again, these are not forecasts, but valuation models based on historical precedent. One could argue gold will fall to $250, or silver back to single digits--back to year 2001 levels. No one has a crystal ball, but all we can do is make educated calculations, based on economic fundamentals and previous history. The commodities markets, specifically precious metals, are a very volatile asset class. Equity shares in resource companies producing said commodities can be even more volatile. Hence, the disclaimers. A long bet on commodities is a bet against central banks worldwide, which by extension is a vote of skepticism against sovereign governments' inability to keep their fiscal house in order. Some will accuse these trades to be unpatriotic. I view them as protection against the abuses of central bankers gone wild--a means to preserve the diminishing purchasing power of an impaired currency--the USDollar.

This is one potential scenario, but one that is becoming increasingly apparent, despite skepticism from our government economists, academia, banks, and the general public. I admittedly swim upstream when it comes to populist Keynesian economics. On the other hand, mainstream financial models haven't exactly worked like clockwork, either. Look at the carnage of collapsed banks and government agencies guaranteeing home mortgages, for instance. And look at equities and real estate. It hasn't been pretty...

Whether one chooses past performance, or money supply vs. above-ground gold supply dynamics, the prices of precious metals appear to be headed higher--much higher. With any bullish trend, it won't run straight up, so the corrections will be painful, but the spikes will be breath-taking--and unpredictable. Trading the tops and bottoms will be difficult to time due to high price volatility. Buying and holding, while averaging in on dips may be prudent. When and if the gold mania kicks in, I'll know it when the headlines are splashed across the major media outlets. I will probably average out at that point. And when bartenders and cab drivers recommend obscure gold mining companies, giving advice on "how to make a killing" on the next hot trading tip, I will be heading for the exits. We are not even close to that mania phase yet.

These are my opinions only, and not specific recommendations. No specific targets or position sizes are implied. Past performance does not guarantee future results. Do your own due diligence. Investing is risky and investors can lose most or all their capital. Holding US dollars could be just as risky.

Disclosure: long gold and silver mining shares.

The hazards of our huge national debt

Persistent deficits and huge debts eventually make it tough to even pay the interest on that debt. So the government must continue to print more currency.

http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm

Gold in backwardation--again

If the title of this blog entry appears redundant, it's because it is. Gold appears to be in backwardation again this Friday evening / Saturday morning, as the spot price exceeds the forward contract--only this time the premium is not a few cents, but $4. Obviously, there's a shortage of the physical inventory overseas.

Gold in Vietnam has persistently been priced at a premium above spot from $20 to as high as $60, a sure sign the black market is thriving.

President Obama regarding China

“I was pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time,”

- President Obama during his recent trip to China.

The Chinese must have had a good laugh, given the US government is in the process of abandoning market-oriented exchange rates.

FHA problems looming

http://www.bloomberg.com/apps/news?pid=20601087&sid=arqAG5n7wEVw&pos=3

"Yesterday's subprime is today's FHA."

- Toll Brothers CEO, Robert Toll.

Toll Brothers is the largest U.S. luxury homes builder. You would think he would spin things positively.

Note: Robert Toll has sold almost 7.5 million insider shares of his company stock in September, 2009 alone. Apparently, he's not just sounding the alarm bells randomly--he's acted upon it.

GDX vs. GDXJ

A few have invested in GDX, the ETF tracking major gold producers, in an effort to gain more leverage and upside for the increasing price of gold. Here's a synopsis of the differences between GDX and GDXJ, the newest entrant in gold mining shares.

http://www.hardassetsinvestor.com/features-and-interviews/1870-rethinking-gold-miner-etfs.html

Jim Rickards on the weak Dollar and gold

Watch the video to the end on the weak dollar and its implications:

http://www.cnbc.com/id/15840232?video=1336090735&play=1

To provide context, I am including again his interview in September on the Dollar, central banks, and the relationship with gold:

http://www.cnbc.com/id/15840232?video=1275511738&play=1

In the interview, he makes the following observation:

"When you own gold you're fighting every central bank in the world."

Unemployment Chart

Despite declaration of the end of the recession last summer, unemployment continues to soar. To get the full "color" on the extent of the problem, click on the following chart:

http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

United Kingdom's fiscal troubles

The UK shares the same fiscal troubles as the United States: high deficits, huge debts, insolvency, high taxation, a low manufacturing base, high regulation, high unemployment, a deep recession, replacement of private sector debt with public debt, and bankrupt entitlement (social) programs.

Their government response has been equally similar: quantitative easing--or creation of money supply. And the results will be identical--a huge default--via inflation or outright default.

Here's an insightful Australian perspective on a British problem.

http://www.moneymorning.com.au/20091109/britain-death-economy.html

Societe Generale

Societe Generale is one of France's largest banks with a worldwide presence, so they aren't some fly-by-night operation. For a mainstream investment bank to release this to their clients is astonishing. Investment banks don't make money by pitching gold--they don't earn fees from gold purchases by the investing public (they earn a commission when investors buy gold equities, but that is a disproportionately small sector--which, by the way, works to our advantage when the public rushes in and bids up prices of gold mining shares).

http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

One-by-one, major investment banks will tout gold, driving up prices going forward. Bank of America's Merrill Lynch became a gold bull last week.

I'm waiting to see when Dave Ramsey pumps up gold--that would signal a market top. Until then, I'm going to watch the fireworks in the COMEX precious metals pit.

Smart money

I keep seeing "bubble talk" on the price of gold, and perhaps we're due for a correction, but the bullish trend in precious metals will continue, imo. I'm not fighting the trend, even tho I took a little off the table.

John Paulson, David Einhorn, Paul Tudor Jones, Jim Rogers, and George Soros are all loading up on gold and gold equities. What's the common element? They're all billionaire hedge fund managers, who put their book where their mouths are.

The suckers in this play are selling grandma's jewelry to "Gold4Cash" outfits for 50 cents on the dollar, thinking they're getting a good deal. Scrap selling will eventually run dry, even as gold prices keep appreciating.

Staying with the supply side part of the equation, gold production peaked in 2000 and has steadily declined since. South Africa, once the world's largest producer (China is now the #1 producer), is now #4, and reserves are vastly over-reported.

Gold increases in price because supply growth is not keeping up with the increase in money supply. Gold's supply grows 2% a year, while the monetary base of dollars is growing at a much faster pace (15+%). The double-edged sword is that monetary easing also debases the USDollar, making gold even more attractive.

Let's be honest: gold and silver compete against the USDollar--and against every other major currency. A bet on gold is a bet against every central bank in the world with the ability to print currency. That's why they hoard it and that's why they hate gold bugs.

The downside of gold is that it doesn't earn interest or pay a dividend--it earns 0% interest. When interest rates are high, the demand for gold is low. But when interest rates are suppressed to near 0%, the flight to gold is justified, as no one wants to hold paper that is not earning a meaningful rate of return. To make matters worth, that same paper is losing value very week.

Do I think we are due for a correction? Perhaps, but the smart money (and more importantly, central banks themselves) are lining up on the long side of the trade, despite higher prices. As long as Congress and Obama continue to spend money they don't have (e.g. healthcare reform), I don't see any other alternative than Bernanke and Geithner stepping up the printing presses.

Just my opinion. See the normal disclaimers in the side bar.

Disclosure: Long gold mining shares.

Warren Buffett on deficit spending

Warren Buffett, of Berkshire Hathaway fame, was recently the Charlie Rose talk show. Here is an exchange:

Charlie Rose: This question is asked frequently: Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we're in a crisis?

Warren Buffett: We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion... so these numbers are unsustainable over time, what we're doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they're going to get less and less and less enthused about your debt. And then, one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy...

The Federal Reserve Bank has been monetizing the debt since March, 2009, catalyzing a rally in equities, commodities, and bonds to a lesser extent. It keeps short-term interest rates artificially low, in an attempt to stimulate the economy. As it did in the early 2000's under former Fed Chairman Alan Greenspan, it also created a massive bubble in certain asset classes, namely the housing market and equities.

With government bailouts and buying of collaterized debt securities, toxic assets have been shifted from the private sector (banks) to the public sector (government agency and US Treasury debts). The mortgage problems haven't been solved--it just shifted to the FHA. And when the bubble in government securities bursts, foreign sovereign governments won't be there to pick up the pieces.

Democracy

Alexander Tyler, a Scottish history professor at the University of Edinburgh, wrote the following about the fall of the Athenian Republic:

A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years.

Tyler published this in the late 1700's.

Hackers unite

Richard Wong, venture capitalist with Accel Partners, was in the middle of praising Google's Android and Apple's IPhone on CNBC--while politely questioning RIMM, Nokia and Motorola in the smartphone space, when he was unceremoniously unplugged by a black out in the middle of his commentary. After he came back on-line, he even joked about the "friends from Helsinki" in an opaque dig against Nokia, as the possible perpetrators.

Well done--by both parties.

Central banks stepping up to the gold window

India's central bank purchase of 200 tons of IMF gold grabbed the biggest headlines, but central banks from other countries are also buying gold. More are inevitably considering increasing their gold reserves in diversifying away from the USDollar.

http://www.reuters.com/article/businessNews/idUSTRE5AF0CP20091116?pageNumber=1&virtualBrandChannel=0

China, now the world's largest gold producer, has been stealthily increasing its gold reserves, doubling its tonnage since 2003.

Of particular interest is this note in the article:

The Royal Bank of Australia has not bought any gold since selling two-thirds of its reserve in 1997.

Australia is a huge exporter of natural resources, including gold. It would not surprise me if they keep more of their output for domestic use going forward. Selling gold in the latest 90's was classic selling at the bottom, much like Great Britain's Gordon Brown did.

In an amusing sequence of press releases, the Russia State Depository announced they would sell 50 tons of gold on the open market. A day iater, the Russian central bank denounced the planned gold sale (in light of gold's rising prices). The day after that, the State Depository announced any gold sales would end up in Russia's central bank. One has to appreciate totalitarianism.

Net purchasing--instead of selling, by central bankers worldwide infers gold's surge in price won't end any time soon.

President Nixon was a crook--and a liar

In this classic video, President Richard Nixon lies on almost every point regarding removing the gold standard. Note that since 1971, the USDollar has lost 97% of its purchasing power relative to the price of gold.

Gold in backwardation--again

I noticed gold went into backwardation against late Friday, signalling another run up in price in Asian trading this morning (it's Sunday night in the US right now). I've written several blogs on backwardation (please do a search for details), and what it infers. In normally functioning commodities markets, a contango exists where the spot price is lower than forward contracts, to account for storage, insurance, and security costs. This is normal in assets like crude oil or precious metals.

But when there is a physical shortage, and when buyers of forward delivery contracts demand physical delivery, in lieu of cash settlement, sellers have to scramble to find said inventory. This causes prices on the physical market to be bid up, which signals price bullishness.

Sure enough, gold and silver prices are trading up in Asian markets this morning. The huge short positions by the bullion banks will either cause a sharp pullback, or they are about to be stampeded by the long speculative funds and central bank gold buyers.

Zimbabwe

Zimbabwe has been the butt of many callous financial jokes, the poster child of runaway hyperinflation and its tragic consequences. As a result, President Roger Mugabe and his thugs were printing 100 hundred trillion dollar bills. Hence, citizens either starved or migrated to neighboring countries as grocery markets couldn't stock shelves due to government mandated price controls, even as their cost of goods spiraled out of control.

After the abandonment and collapse of the Zimbabwe dollar in February 2009--a reset of the currency essentially, the Zimbabwe economy has actually recovered robustly, albeit from very low levels. Unshackled by price controls and foreign currency regulations, free markets are returning in Zimbabwe, despite continued strict credit financing. The Zimbabwe case study may provide a micro illustrative portend of what is and could be occurring in the United States.

Let's hope the USDollar doesn't become the butt of currency jokes.

http://www.kitco.com/ind/Field/nov112009.html

Lloyd's Prayer

After Goldman Sachs Chairman Lloyd Blankfein glibly said his firm was "doing God's work" during an interview (a remark which he later dismissed as a joke), the jokesters on Wall Street had a field day. Among the more clever:

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally's Come. God's Work Be Done
On Earth, As There's No Fear Of Correction.

Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman And Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate,
Forever And Ever.

Goldman

Given taxpayers bailed banks out last year after horrendous losses, and given these same taxpayers are either furloughed or unemployed today, and given Wall Street is now patting themselves on the back for the recent liquidity-induced market rally, and given Wall Street is about to pay itself $30 billion in bonuses, "Lord" Blankfein should choose his words more carefully next time.

Jim Cramer jumping on the gold bandwagon

Jim Cramer of CNBC's Mad Money was praising gold's all-time new highs today, as well as a couple gold mining ETF's. Which caused me to pause, as he's been bashing the shiny metal for a while. To his credit, I believe his trust fund owns Agnico, a gold miner.

Could this about-face be the death knell for gold's ascent? Perhaps a correction is in order, and I did take a little profit off the table yesterday. Cramer has been a good contrarian indicator, as I believe most of his calls are wrong-way bets (sorry, Jim, but your track record is questionable), but that doesn't mean gold will stop climbing in price. A correction is expected after recent surges, but the secular bull market for gold since 2001 is still intact, in my opinion. In which case, I'm with Cramer on this one. Booyah!

As long as central bankers worldwide are accomodative with low interest rates and stimulative monetary policies, gold has nowhere to go but up.

I started buying gold and silver coins and mining shares last November, gradually adding to my holdings ever since on dips. With the exception of one, all the mining shares have appreciated triple digits since then, yet Cramer is only now touting the yellow metal. Curious, but predictable.

Does this mean I will exit all my precious metals holdings? After all, as a contrarian, you want to bet against the extreme majority. When sentiment gets too exuberant, you sell. Likewise, when there's blood in the streets, you buy. In other words, has the trade become too crowded? Absolutely not. Because even though some people are now understanding the logic behind holding precious metals as an inflation hedge and as a reliable store of value, very few have acted on this knowledge. I would argue most people don't understand the value of gold--or just have a distaste for the yellow metal. Most won't jump aboard until the mania phase kicks in at much higher prices, when everyone and their brother will be recommending gold as a speculative bet, without understanding its intrinsic role as a means of preserving purchasing power.

The prudent strategy is to sell into that mania--not buy into it. The parabolic rise in gold and silver prices probably won't occur for a few more years, the normal lag time behind an increase in the money supply. Inflation usually doesn't kick in until these massive liquidity injections eventually flow through the economy via bank lending. But then again, we are in uncharted territory. This is a monetary experiment run by mad scientists at the Fed and US Treasury. No country has ever printed so many trillions of dollars so quickly.

An orderly decline of the dollar will cause a steady climb in gold and silver. But should there be a run on the dollar in a currency crisis, the mania phase in hard assets will go into high gear almost overnight.

See disclaimers on the sidebar.

Disclosure: long gold and silver, and long gold mining shares.

Currency crisis

People challenge my assertions that a weak currency is ultimately bad for a country. They will argue that an artificially cheapened dollar stimulates exports and dampens imports, as exporters become more competitive in the global marketplace. This is true in the short-term, as exports are cheaper relative to exports from other countries. This leads to economic and job growth.

However, longer-term ramifications are insidious: currency debasement, inflation (diminished consumer purchasing power), asset bubbles, and higher interest rates down the road. If monetary easing is too exorbitant, it could give way to hyperinflation and ultimately, a currency crisis.

A currency collapse has eventually occurred to every paper currency known to mankind. It recently happened in Iceland and Argentina--twice. Many other countries are on the brink. The US is at risk over the next several years, due to rampant increases in the money supply.

Depicted is the aftermath of such a currency crisis, during Iceland's economic implosion last year:

The decline of the krona, which has lost half of its value since the start of 2008, has resulted in rampant inflation, which is now over 20 percent. Many people are seeing costs skyrocket, particularly on imported goods. Due to the high interest rates in Iceland, many people took out loans in foreign currencies where interest was lower. For them, costs have doubled

The economy is set to suffer a severe contraction in the coming year. Lars Christensen, an economist from Dansk bank commented, "Given the base now, GDP will then fall at least 10 percent, or even 15 to 20 percent."

Ironically, this information came from the World Socialist Website (see the whole article on Iceland):

http://www.wsws.org/articles/2008/dec2008/icel-d20.shtml

These are the unintended consequences of excessive government spending and public debt.