Dear PGM Capital Blog readers,
On Friday November 28th, the national debt of the United States officially surpassed 18 trillion US Dollars, of which the debt held by the public rose to US$12,922,681,725,432.94, an increase of US$32 billion in one day, as can be seen from below screenshot.
The Congressional Budget Office (CBO) released two startling reports in April of this year, showing crippling levels of U.S. national debt under the status quo and President Obama’s proposed budget.
While the White House frequently touts recent deficit reductions, the claim is misleading for several reasons. It is only in the short-term that budget deficits are projected to decrease, but in the long-term they are projected to explode.
The CBO said:
“Such high and rising debt would have serious negative consequences,”
“Federal spending on interest payments would increase considerably when interest rates rose to more typical levels. Moreover, because federal borrowing would eventually raise the cost of investment by businesses and other entities, the capital stock would be smaller, and productivity and wages lower, than if federal borrowing was more limited.”
THE HISTORY OF THE USA NATIONAL DEBT:
On October 22, 1981, the US public debt crossed the US$1 trillion mark for the first time, and it had taken the USA 205 years to reach there, while in less than one year the US National debt ballooned from US$ 17 trillion to US$ 18 Trillion.
Below chart shows the explosion of the US National Debt since October 1981.
It was 1981 and Ronal Reagan, was president of the USA, and the US treasury borrowed large sums each day to fund what we were called in those days “the Jimmy Carter’s inherited deficits”.
On top of that, the Reagan administration also gave green-light to a huge defense build-up, with the consequence that the first trillion dollar national debt threshold became a fact in October of that year.
In fact, the surge of the USA Debt, accelerated in 1981, far more rapidly than had been anticipated because by the fall of 1981, the Reagan White House had enacted the largest tax reduction in American history.
On top of that, the Reagan administration in 1981, had also green-lighted a huge defense build-up.
Since the fall of 1981, in just 33 years from the first trillion dollar debt, the Debt-to-GDP ratio of the USA has tripled from approx. 32 percent in 1981 to 106% of GDP today, as can be seen from below chart.
And when you add the US$3 trillion of state and local debt, the current USA total public sector debt ratio is nearly 120% of GDP.
PGM CAPITAL COMMENTS:
It worth mentioning that the total US debt has increased by 70% under Obama, from US$10.625 trillion on January 21, 2009 to US$18.005 trillion now.
Based on the nominal GDP as of last September 30, which was US$17.555 trillion, the debt-to-GDP of the country is now 106%. Keep in mind that this GDP number was artificially increased by about half a trillion dollars a year ago thanks to the “benefit” of R&D and intangibles.
Maybe sooner much sooner than most people can imagine, the USA might adjust the way it calculates its GDP again, in order to increase it artificially like most European country did, by adding the contributions from prostitution to the GDP and by doing so pushing the total debt/GDP ratio below the psychological 100% level.
What really amazes us, is the total disconnect of the US-Dollar and Capital markets with the ballooning USA public Debt.
As can be seen from below chart, the US-Dollar Index rose to a fresh 5-year high of US$ 89.36.
Based on this the US dollar rose on Friday, December 5 above 121 Yen for the first time since 2007, while the euro slipped below US$1.23, a two-year low.
On Sunday, December 7th, the Bank of International Settlement, sounds the alarm over the rising US-Dollar.
The main reason for the rising US-Dollar is the fact that, investors are speculating about US interest rate increases in 2015, while conditions in other major economies remain subdued.
Since mid-October the Bank of Japan has upped the size of its asset buying as part of its quantitative easing program, while the European Central Bank has dropped big hints that it will unveil its own package of sovereign debt purchases early next year.
It will not be IF, but WHEN, a higher US-Dollar will start to hurt the already fragile tourism and export of the USA, with all the negative consequences for the country’s labor market.
It is also worth mentioning that a higher US-Dollar will hurt profits USA multinationals make abroad when consolidated in the US-Dollar.
Based on this we believe that the chances of policy makers in Washington not to increase interest rates in 2015, but to start a new round of Quantitative Easing program is much bigger than most people might think.
Due to the fact that more than a third of the USA Debt is owned by foreigners, the big question will be at what exchange rate of the US-Dollars, will those foreign holders of the US Treasury Securities, start to sell or diversify their reserves from the US-Dollar into Gold.
Based on this we are currently shorting the US-Dollar and are accumulating Gold and Silver.
We believe that below quote from John Maynard Keynes
The Market Can Remain Irrational Longer Than You Can Remain Solvent
is applicable for the current situation in the Global Capital Markets.
Until next week.
Yours sincerely,
Eric Panneflek