Dear PGM Capital, blog readers,
During the last few days our telephones and E-Mail box were red hot from readers and clients asking our opinion on the current deadlock in the USA regarding the increase of the debt ceiling.
History has proven to repeat itself within a certain cycle. On average we have a recession every 5 years and a depression every 75 years. The last time we had a depression it was in 1933; when we add 75 years to 1933 we’ll come to 2008. So was the crash of 2008 coincidental? Or is it the beginning of a new depression?
A depression also marks the end of the hegemony of a super power and the rise of (a) new one(s). Most of the time the depression is caused by a highly indebted super power, which has no other means of paying its debt than via money printing, which will lead to hyperinflation and at the end reset/ confiscation of assets by the government.
This means that a new currency will be created to replace the old one and that citizens and debt holders are only allowed to exchange a small portion of their old currency for the new one.
Most of the time imploding of the Super powers is caused by costs of wars and the military trying to maintain their supremacy.
Most of the time these military expenditures are being financed via government bonds.
The problem rises when either the war lasts too long or the country loses the war.
In both cases the debts and interest payments on the debt accumulate to such a proportion that they cannot be repaid and have to be refinanced in order to avoid default.
The consequence of this may lead to loss of confidence by the outside world in these bonds, which in its turn will lead to a decrease of credit rating, resulting in higher rates, which will increase interest payments and worsen the debt situation, causing the country to get entangled in a vicious circle of increasing debt, decreasing credit rating and increasing interest rates and interest payments, which eventually may lead to the collapse of the Economic super power and empire.
Examples of this development are the collapse of the Roman Empire, the Weimar Republic and most recently the collapse of the Soviet Union.
In our opinion, talking about increasing the debt ceiling should be accompanied by measures for a structural reduction of government spending and an increase of government revenues and reengineering of the USA Economy.
As long as this is not the case, the USA might land in a vicious circle of continuously increasing Debt (to GDP ratio) and increase of the debt ceiling.
When we revisit the History of the USA and its Debt Ceiling we see the following debt ceiling increase since JFK.
(The colors blue stands for a Democrat and Red for a Republican president)
- Kennedy raised the debt ceiling 4 times for a total increase of 5%.
- Johnson raised the debt ceiling 7 times for a total increase of 18%.
- Nixon raised the debt ceiling 9 times for a total increase of 36%.
- Ford raised the debt ceiling 5 times for a total increase of 41%.
- Carter raised the debt ceiling 9 times for total increase of 59%.
- Reagan raised the debt ceiling 18 times for a total increase of 199%.
- George H.W. Bush raised the debt ceiling 9 times for a total increase of 48%.
- Clinton raised the debt ceiling 4 times for a total increase of 44%.
- George W. Bush raised the debt ceiling 7 times for a total increase of 90%.
- Obama has raised the debt ceiling 3 times for a total increase of 26%.
Source: http://progressivetoo.com/2011/07/14/past-increases-of-debt-ceiling-since-kennedy/
The above shows that from Kennedy to Obama up to now the USA debt ceiling has been raised 75 times!!!
Ladies and Gentlemen, if a person, a corporation or a nation has to increase its debt ceiling 75 times in 39 years something is structurally wrong.
Structural problems must be handled structurally, if not it will grow to such a proportion that it cannot be handled any longer and may lead to a total collapse.
We believe that the USA with a current debt to GDP of almost 100% has reached this point, increasing of the debt ceiling without substantial measure to increase the GDP and debt repayment will bring the debt to GDP ratio of the USA before year-end 2011 above the psychological important figure of a debt to GDP ratio of above 100%.
Below figure clearly shows the negative impact of the debt on the USA GDP
With elections in 2012, we don’t believe that there will be any political willingness for taking those painful measures in order to get the USA hold in balance.
Due to this we foresee the USA sooner than later to come into the vicious circle of Debt downgrade, rate increase and debt (to GDP ratio) increase.
This may lead to a dumping and shorting of USA treasuries, which will increase the interest rates even more and worsen the debt situation even more due to the increase of interest payments.
Bondholders and other cash deposit holders may flee even more into the safe heaven of Gold, Silver and other precious metals sending their prices through the roof.
Proactively working on this scenario we offer our friends and clients custody of their portfolio outside the United States in one of the safest countries on earth, with a debt to GDP below 17%.
Secondly we advise our friends and clients to keep the cash needed for their short-term expenses in the currencies of countries with a sound fiscal policy and balance of payment with low debt to GDP ratio like; the CAD, AUD and CHF.
Please keep in mind that if your local currency is pegged to the US-Dollar the dilution of the USD will dilute your currency too.
Again for the sake of humanity we hope we are wrong on our analysis but the price increase of Gold and appreciation of the above-mentioned currencies against the USD over the last 11 years clearly shows in what direction we are moving
I trust the information I have passed on to you will be of use and look forward to being at your service
Yours sincerely
Eric Panneflek
Chairman
My compliments with this excellent and lucid explanation of the situation. Even if Washington does arrive at an agreement – which is quite likely as no politician is willing to go down in history as the mad dog that caused this debacle – the situation remains highly unstable and ready for disaster. Mr Panneflek’s explanation leaves no doubt as to the ultimate outcome: the US$ will drop even more, the US economy will remain in recession mode and may very well decrease into a depression. And why is that? Because politicians are genetically lousy administrators and even worse long-term planners, because their future is determined by the next election.
The Reps have forced a deal that the Dems must swallow: no taxes!! Incredibly stupid of course, as there is no way the US can increase income without taxes. Instead of trying to arrive at an agreement of, say, an increased VAT (value added tax) on all goods sold (which, admittedly, may reduce consumer sentiment even more, but not necessarily), tea-party diehards continue their senseless screaming for NO TAXES. while decrying BIG GOVERNMENT. They forget that without government spending on essential matters such as public health & innovation for an ahead-of-curve community, in which there is cost reduction by a more balanced utilization of the dwindling resources, the country will go down the drain. In their ‘no-tax-craze’ these people exacerbate the situation and will lead the USA much faster to its unavoidable demise as a super power.
It’s time to start thinking of protecting one’s assets, which I see as follows:
1. get out of UD$ savings, CDs, etc and convert your cash in Austr $, Can, $. Swiss Francs
2. As gold dips, because all these manic-depressive traders will cause a drop in gold, buy as much gold as you can and other precious metals
3. Buy or maintain the non-US and non-European dividend paying commodities and commodity processing stocks, because their dividends are paid in their currencies, which will give you a nice yield in US$, which you can then convert in to the safe currency of your choice, or you can have an account with a bank where they accept multiple currencies deposits.
4. keep a US$ checking account – for the foreseeable future – readily available for daily use, and keep the bulk of your savings either in the stocks already mentioned in item 3, or in a savings account in a safe currency or in several.
Next, pray and be positive.
Dear Eric and Mike,
Excellent article – very well explained and factual in every apsect. This leaves no doubt in our minds where the US is heading. Unless drastic policy changes are implemented, I see no turn around for the US economy – a rotten apple to the core.
Mark Hart