First, if you are going to accept some advice on where to place your money in a volatile world economy, you had better be listening to someone who has his finger on the pulse of the economy, a person who can see ahead so you don’t step on avoidable land mines down the road.
You may have what little wealth you have accumulated in real estate, savings accounts or maybe a few shares of stock. The value of these stores of wealth can be pummeled by what is going on in the bond market today. So you had better know what that is about.
A stand-up financial advisor who calls a spade a spade is Michael Pento, author of a new bookThe Coming Bond Market Collapse (Wiley 2013, 304 pages).
Well, you don’t own any government bonds so why should that matter to you? Right now, the whole world is sitting on a $17 trillion precipice – the amount of accumulated debt the United States has racked up.
The U.S. has borrowed trillions from Japan and China, and hundreds of billions from other overseas lenders. The question for lenders is – does the U.S. ever intend to pay us back?
Why financial Armageddon didn’t happen
There are a number of reasons why the gloom and doomers have had to sit on their hands. The first way to hide a collapse of the economy is paper-over the economy’s dismal numbers. The U.S. is running a shell game of sorts. It is hiding its real financial numbers – saying unemployment is ~8% when it is more like 22%, and saying inflation is ~2.3% when it is more like 9.3% (ShadowStats.com).
In a column I wrote at LewRockwell.com some time back, I explained that the U.S. avoided a predicted financial doomsday when it lowered interest rates on its borrowed money. Had it not done that, the U.S. would be paying more interest on its debts than any other federal outlay. That is something Mr. Pento says can no longer be avoided.
But a country pays a price for cheap money that can be borrowed at a low rate of interest. Right now banks offer loans at historically low lending rates, but in turn they have to offer low yields on saving accounts to do that. So interest on long-term savings is less than 1%.
Savers are watching the value of their money erode away as the cost of living is greater than the yield on their savings. Essentially, in 5-years savers will have about the same dollar amount in their long-term accounts but it will be able to buy about half as much as it once did.
Rubber money can’t be stretched forever
Getting back to the bond crisis Mr. Pento points to, when a country begins living off of expansion of credit, just like a household that keeps asking its creditors to expand the amount on its credit cards so it can continue on a spending spree, lenders are going to be remiss about lending more money and accepting U.S. IOU’s (U.S. Treasury Bonds).
It’s not like Mr. Pento stands alone here in his analysis that the bond market is going to trigger a collapse of the U.S. and the world economy.
In other words, knowing they are not going to be paid back, Japanese lenders try to sell their debt paper (U.S. Treasury Bonds) to other parties at maybe 30% or 50% less than their stated value. That would result in a forced devaluation of the U.S dollar in the world currency markets.
Economist John Williams, who writes at ShadowStats.com, also echoes Mr. Pento’s concerns. Williams has been saying a “dollar sell off” is imminent now that the U.S. has signaled it isn’t really going to curb spending and the Federal Reserve Bank is going to continue propping the economy with its money-printing.
With a $17 trillion debt to pay back Mr. Williams wonders if any other party will buy marked-down U.S. Treasury Bonds at all. If so, Williams hints at a “total debasement” of the U.S. dollar in the markets. That means zero value folks.
In his book, Mr. Pento points to an unavoidable collapse in the US economy before 2016 as the nation heads toward a date when expenditures exceed revenues in Social Security by 2016 and around the years 2015-16 interest payments on $17 trillion of accumulated national debt will rise to 30-50% of all Federal Revenue collected.
If you think there is some remote chance the U.S. can dig its way out of this quagmire, figure in $54 trillion total public and private sector U.S. debt, both which are records, notes Mr. Pento. That $54 trillion represents 350% of U.S. GDP, which is the same level it was at the start of the Great Recession, he adds.
Which numbers are they using?
Recognize Mr. Pento is using less alarming numbers than Mr. Williams. While Mr. Pento quotes federal spending at $3.7 trillion and tax revenues at $2.5 trillion, Mr. Williams says the federal government is not employing Generally Accepted Accounting Principles and the $3.7 trillion figure only address spending from the general fund, not Medicare and Social Security. Those two welfare funds continue to collect money in the form of deductions from paychecks but taxpayers are kicking in for the shortfall, which Williams says now totals $6.6 trillion in overall spending!
So America is living a lifestyle it hasn’t earned. It’s military, pensioners and doctors are being paid on borrowed money.
Bond market red alert
A recent PBS news segment says the bond market alarm button may have just been pushed.
Paul Solman, writing for PBS, notes that the May 1 interest rate the U.S. had to pay to borrow money for 10 years was 1.64%. On May 29 it was 2.14%, about a one-third rise. That’s a dramatic increase.
Lenders who buy up U.S. Treasury bonds to fund the U.S. debt habit are likely to demand higher rates of interest on borrowed money.
When we reach this point, in Mr. Pento’s view, austerity will be forced on America, like it or not.
Go find a less gloomy psych-onomist
If this is all too unsettling for you, go find an economist who will calm your queasy stomach, like Paul Krugman, the Nobel laureate who says: “We actually don’t have a problem with government debt, not yet.” (PBS interview)
Krugman continues to call for expansion of the money supply and says he will “turn into a deficit and debt hawk once we’re out of this depression.”
So PBS reporter Solman asks Mr. Krugman point blank: “What about the argument that too much debt will inevitably lead bond investors to demand much higher interest rates and make government debt increasingly expensive?”
Krugman offers Japan as an example of his money expansion idea. Krugman says “In Japan, people have been saying, ‘Oh, those interest rates are going to go soaring any day now.’ It’s been 20 years that people have been saying that they’re going to have inflation from all that money printing. In fact, they’re trying desperately to break out of deflation.”
This is where our stand-up guy, Michael Pento, reigns in. He says Krugman always uses Japan (a country that is an exception because it has a very high rate of savings over spending) as an example of how massive debt levels don’t cause interest rates to spike. “But he refuses to look at Greece, Ireland, Italy, Portugal or Spain, or other historical examples of runaway interest rates in Zimbabwe, Argentina, Hungary or Georgia,” says Mr. Pento.
David Stockman, former budget director in the Reagan administration, also is quoted to say in the PBS interview that the federal government has become addicted to debt and over two years ago he predicted interest rates were about to zoom when they declined. So where does that leave the gloom-and-doomers?
PBS’ Solman quotes Mr. Stockman to say: “I just didn’t realize how crazy the Fed was and that they would keep interest rates low for this long.”
So the savers keep getting robbed, and that is something Mr. Krugman ignores. Everything is fine by Mr. Krugman and Federal Reserve bank chairman Mr. Bernanke if the banks have been rescued at the expense of savers.
So much for esoteric arguments over bond rates and predictions of inflation or deflation (we’ll probably get a little bit of both initially, with hyper-inflation dominating in the long run), what should we do now?
What do we do now?
Mr. Pento says: “any one single investment strategy no longer works in this new age of investing.” Nor will a diversified portfolio (traditionally 70% stocks, 30% bonds) as all asset classes are anticipated to drop in value, says Pento. Nor will long-term investments out-ride what is happening today, he adds.
If your investment counselor is still spinning this type of advice he/she isn’t addressing the volatile world of finance today.
Mr. Pento expects swings in the economy and markets with eventual protracted and severe inflation (your money will purchase less).
Mr. Pento says the only exceptions will be precious metals, oil and energy investments. But you had better buy a copy of Mr. Pento’s book to get the whole reality picture he paints on how to side-step this volatile world economy.
When a meltdown in the economy occurs and money is devalued (seems certain, doesn’t it), don’t panic. Gary North, advisor to many, saysAmericans will repudiate their debt and not pass it on to their children. So far, he is right. Americans are not paying down their student loans. Some are not paying their home mortgages. Others are not paying off their credit card debt.
If there is no money, “old geezers” are going to have to stay healthy and practice self care instead of relying upon free doctoring provided by Medicare. Pension checks will become nearly worthless as the cost of goods and services rise faster than pension checks can be adjusted. In other words, the future Medicare and Social Security shortfall simply will dissolve as these welfare payments simply can’t be delivered, and the debt won’t be passed on to the next generation.
In a massive economic meltdown, few will be able to pay their property taxes, even their income taxes. Food on the table and a full gasoline tank to get to work will predominate over tax and mortgage payments. If you are in debt, let the lenders fret over it, not you.
Mr. North notes, in a recent May 28, 2013 posting at his website (GaryNorth.com) that three noted billionaires (Warren Buffett, John Paulson and George Soros) recently sold off their shares in consumer-related companies. They see a forthcoming collapse in consumer spending which represents about 70% of the U.S economy today.
Consumer spending has remained relatively high, facilitated by Mr. Bernanke’s cheap money flooding policy. While the average investor is driving the stock market higher, the billionaires are exiting. What do they know? Regarding the stock market, Mr. North says: “the safe position is to be out.”
For most readers of this column, they likely don’t have enough money to invest. They have no appreciable wealth. You can thank Mr. Bernanke for that as incomes haven’t kept up with inflation, particularly since the 2008 financial collapse.
A recent survey shows nearly two-thirds of Americans can’t even afford a $1000 emergency expense, let alone consider investing money in gold, silver or stocks. But for those who do have some measure of wealth, a quick read of Mr. Pento’s book may be in order. You wealth is going to be determined by what happens in the bond market. Keep your ear to the ground, or listen to someone who does, like Mr. Pento.