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Steve's note: Today's essay is Part II of our colleague Porter Stansberry's latest analysis of the government debt crisis. Yesterday, Porter focused on Europe. Today, he turns to the U.S.
The Single Most Important Financial Step You Can Take Right NowBy
Saturday, May 22, 2010
You might recall as early as late 2008, I warned the U.S. had embarked on a massive inflation – the creation of money – designed to save our banking system.
I believed this marked the beginning of the end for the U.S. dollar paper standard. And the imbalances in our economy had become so large they had warped the real economy: Americans no longer made anything or saved anything (no deposits and no true assets to back up the money).
They'd come to believe they could grow wealthy merely by trading houses with one another, effectively manufacturing money. It was an enormous delusion, bringing about the largest accumulation of debt in human history, a debt bomb enabled by the first truly global paper currency – backed by nothing at all. Here is what I wrote then...
We are past the liquidity crisis. The forced selling has come to an end. We are now beginning the solvency crisis... With a currency and a budget process totally untethered to any reality, nothing limits the amount of foolish spending Congress can (and will) authorize... We are witnessing the end of the paper-dollar standard. Like every experiment with paper money in history, our paper dollar will be destroyed in an all-out attempt to paper over deficit spending, bad investments, and war debts.
– Porter Stansberry's Investment Advisory, December 2008
I told you the best way to protect yourself from the reckless and unlimited money printing was to buy gold: "Buy as much gold bullion as you can reasonably afford." And because gold shares were crushed in the bear market of 2008, I specifically told my paid readers not only to buy gold, but to buy gold stocks: "There has literally never been a better time in history to buy gold stocks."
Back then, gold was trading for around $850 an ounce. And the fund of gold-mining stocks I recommended was trading at a little less than $30.
Today, as you surely know, gold trades for around $1,200 and the mining fund is close to $50 per share. At one point after the European Central Bank (ECB) announced its big bailout, the gold mining fund shot up almost 10% in two trading days.
While some pullback is expected to follow after such a sharp rally, these big moves in gold and gold stocks are likely to continue. More and more people are beginning to realize gold is the only stable currency left. The paper currencies of all of the sovereign issuers are not only troubled, they are all ultimately backed by the U.S. Treasury.
I believe my prediction and advice to buy gold is the most important thing I've ever written.
I don't think this merely because the prices of gold and gold stocks have shot up. I think this because the underlying fundamentals have deteriorated in exactly the way I predicted.
Before the bailouts began in late 2008, total U.S. government debt held by the public stood at around $5 trillion. Today, total U.S. government debt held by the public stands at almost $10 trillion. It has doubled in less than two years. The rate of new debt issuance is still completely out of control. This April, the U.S. government's deficit totaled more than $80 billion. This marks the 19th month in a row the U.S. government has run a monthly deficit. That's the longest string of monthly deficits ever.
Moody's now warns it may downgrade the U.S. Treasury's debt as soon as 2013 because interest payments on our national debt alone could surpass 20% of federal revenue by then. That leaves only 80¢ of every dollar in tax receipts to pay for Medicare, Social Security, defense, etc., which we already can't afford (hence the 19 straight months of deficits).
I'll keep hammering away at these issues because all of these problems are going to get a lot worse.
As I see things today, the ECB's actions prove that all of my concerns about the future of our paper money system are valid. Not only is the ECB prepared to print as much new money as necessary to protect its banks and sovereign borrowers, the Federal Reserve is backing the plan. How will these systems survive if the U.S. is downgraded?
Investors will continue to seek safety in gold (and silver), pushing prices higher at a faster and faster pace until they see a serious and credible effort to bring the U.S. deficit under control. But that won't happen.
Barack Obama is on the verge of losing control of both the U.S. House of Representatives and the Senate. His ability to raise taxes will probably disappear. Even so, there has never been – nor will there ever be – any real political support for drastically reducing the size of the federal government.
As a result, the U.S. dollar will collapse. It's no longer a prediction. It is a certainty. Few people believe me yet, but more and more people have begun to consider my repeated warning: The U.S. dollar will lose its standing as the word's reserve currency.
This will happen far sooner than anyone can imagine. And the destruction of our currency will wipe out most of the middle class in the United States and lead to a decline in our standard of living.
Given these facts, I once again urge you to buy as much gold bullion as you can reasonably afford and store it someplace safe. It's the single most important financial step you can take right now.
Good investing,
Porter Stansberry
Further Reading:
Don't miss Part I of Porter's series here: Why Gold Is a Sure Long-Term Bet.
If you're looking for strategies to preserve your wealth during a global currency crash, check out our research on protecting your savings from the government, from a run on the bank, from a massive bear market, and from inflation. If things get really hairy, don't forget: You Can Escape This Market.
Market NotesCHART OF THE WEEK: THE WORLD'S NEXT DEBT CRISIS Not many people are following it, but there's an incredible race happening in Europe right now... one we predicted. It's between the paper currency of mainland Europe and the currency of Great Britain.
As you can see from this week's chart, it's a race to the bottom right-hand corner of the price chart.
More than three months ago, we highlighted the downside breakout in the British pound. The country's government has taken on a ridiculous amount of debt... which makes it a likely candidate for "the world's next debt crisis starts here" award. We told the euro to expect some competition on the race to destruction. Since our bearish note, the pound has relentlessly plunged to a 52-week low.
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Stat of the week
37%
Drop in stock price of Transocean since the Deepwater Horizon oil spill crisis began. Transocean is the world's largest offshore drillship operator... and owner of the Deepwater Horizon. In The Daily Crux
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