Saturday, June 11, 2011

Gold Could Reach $20,000/ozt. by 2020 – Without Hyperinflation! Here’s How

Why Gold Above $15,000 Per Ounce By 2020 Is Realistic Without Hyperinflation

Today’s gold price of $1500+ is low…if I compare it to all other financial assets…[and if] I compare it to returns achieved since 1976 from the stock market and to the growth in US Federal liabilities. [Frankly, I can justify a price as high as $20,000 per troy ounce as early as 2020 and that is even without hyperinflation. Let me show you why.] Words: 1343

So says DoctoRx ( in an article*which Lorimer Wilson, editor , has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. DoctoRx goes on to say:

Gold has been vastly higher relative to other financial asset prices at times of extreme financial conditions in the past. Fund manager John Hathaway, an expert on gold, said in 2008:

“We calculate the market cap of all above ground gold, including central bank reserves, equals about 1.4% of global financial assets. In 1914 and 1982, when investor stress reached extreme readings, that percentage was between 20% to 25%.”

Gold at $20,000/ozt. by 2020?

Assuming the 1.4% ratio Hathaway referred to in 2008 is now somewhat higher (perhaps 2% now), one can simply multiply gold’s price by 10 to get to a percentage of global financial assets that it had at times of crisis last century. That already gets one to around $15,000/ozt. today. (This analysis assumes other asset prices stay the same as they are now.) Allow low annual growth from there for 9 years and you get to $20,000/ozt. by 2020. Obviously of course no one expects gold to suddenly rise by ten times but over the months and years, strange things can happen. [$20,000/ozt. by 2020 is the highest estimated parabolic peak price put forth by 130 analysts identified in this (1) article.]

Gold traded at $140 per troy ounce [to understand the significance of the term "troy" read this(2) article] 35 years ago, shortly after it again became legal for American citizens to own it. If it had appreciated 9% annually since then, its price today would be $2,857/ozt. If it had risen as fast as the Dow Jones Industrial Average, which I place at 900 then with an estimated dividend yield over the years of 4%, then gold would today be at $7,302/ozt. If gold were to continue averaging a compounded price appreciation rate of 11.66% from the 1975-6 price of $140/ozt. until 2020, one gets $20,000 per troy ounce.

If you think any of this is extreme, or is but idle numerology, please think again. Our system of money is based on debt. The Federal government issues bonds, the primary dealers buy the bonds, and then the Federal Reserve Bank of New York creates base money out of thin air by purchasing the debt from the primary dealers. This is how electronic dollars are created, and these dollars can be turned into paper currency at the request of depositors. Our paper money is a “note”, meaning a debt, though in a circular fashion it is only redeemable in its own form, namely other notes (or coins). This distinction between paper money that is also a debt obligation versus something on the order of scrip that one might find (or have found) at a military PX is at the core of much debate and confusion, but that’s a topic for Econophile or others more knowledgeable than I.

Here are more numbers that I think prove the reasonableness of the above analysis.

The Federal debt was $635B in 1976. Since LBJ had already put Social Security revenues into the general fund and because Medicare had come into existence with unrealistic cost estimates, there were probably already other unfunded and unaccounted-for liabilities, so I’ll estimate a total Federal liability, both on- and off-budget, in 1976 of $1T. In contrast, recent estimates of on-budget debt and off-budget unfunded Federal liabilities are, per USA Today, over $50T. (This analysis uses dollars as they were valued at each date and are NOT adjusted for purchasing power inflation.)

The compound growth rate of 1 growing to 50 over a 35 year span is 11.83%. Now let’s go back to gold. If the price had risen from $140 per troy ounce at an 11.83% annual rate for the past 35 years, it would now be about $7000/ozt. If we instead used the latest estimate of Federal liabilities of $61.6T and my (arbitrary) starting point of $1T, we get a compound growth rate of 12.49%. An equivalent rise of gold’s price would be to $8,612/ozt….[and] if gold “should” be at $8,612/ozt. today to have kept up with the growth rate of Federal liabilities, an annual growth rate of only 10% from $8,612/ozt. gets the price to$20,000/ozt. by 2020.

One could go on almost ad infinitum. The bottom line is that if gold is, and remains, the monetary metal, as President Nixon signified 40 years ago when he chose to default on the U.S.’s Bretton Woods commitment in order to hold onto the remaining gold, then, assuming the government is going to take the usual statist path and meet its debt commitments by inflating them away, gold can be re-valued vastly higher without hyperinflation. (I am expecting high inflation in such a situation.)


In summary, a simple analysis of compound rates of return of assets such as the DJIA and, separately, the liabilities of the sole remaining monetary and military superpower, indicate that gold may well be substantially undervalued. Should times of true panic occur and gold be re-valued to an extreme level as has occurred before (and after which the economic world in fact kept turning), prices in the $15,000-$20,000/ozt. range could become fair market prices simply by preference of investors, again without using hyper-inflated asset values as comparators.

None of this is a prediction. For all I know, governments will band together to demonetize gold and will enforce that decision by force. Or gold will simply sink in price for any set of reasons, or from a “random walk”. If one is going to do as I have done, however, and allocate a significant percentage of one’s savings to gold-related investments, it is nice to believe that there is substantial real upside, not merely that of keeping up with price inflation. More importantly, the above numbers demonstrate the point that financial theorists know, which is that while buying “right” is important in the short term, buying the right asset at around a reasonable market price for the long term is the most important thing.

I believe that per the above calculations, a sound case exists that gold may appreciate substantially over the long term relative to other goods and services. This potential appreciation has nothing to do with it as a commodity, in which case I would perform no such analysis. It is because gold continues to be what it has been for many years – a store of wealth – that I feel it is reasonable to think about it in this manner.

There are certain things that have absolutely no equivalents or substitutes. There is only one United States of America with its dollar, “backed” by the full faith and credit of the Federal government. As of June 2011, there is exactly one generally-accepted monetary metal: gold.

I think that people who buy their goods and services with dollars and who have dollar-based savings should think deeply about the possibilities for the key financial ratio of the future, namely that between the two most important and most different moneys of the world, gold and US dollars…


Jim Rogers: Rogers: Only a Crisis Can Fix U.S. Debt Problem

In an interview with WSJ's Simon Constable, famed investor Jim Rogers weighs in on what it will take to solve the U.S. debt crisis, why he's shorting U.S. tech companies, why the stimulus package was a bad idea, and the looming energy crisis.

Safety Plays from Hilary Kramer: KFT, TEF, NGG

TOM HUDSON: As stocks have moved lower this month, investors again learn the lessons of diversification and defense. Tonight`s "Street Critique" guest finds safety in food, electricity, and telephones, and some of it oversea. Hilary Kramer back with us, editor at

HUDSON: Hilary, your safety picks here we`re going to talk about, also sport higher dividend yields than most U.S. government bonds these days. We`re going to begin with Dow component Kraft (NYSE: KFT) Food, K-F- T is one of your safety plays. The stock has had a nice rally this spring and has held on to most of it. What fuels it from here?

HILARY KRAMER, EDITOR, GAMECHANGERSTOCKS.COM: Well, Kraft (NYSE: KFT) required Cadbury, the European chocolate-maker. So if Kraft (NYSE: KFT) can take some their Oscar Meyer wieners, and some of the Philadelphia Cream Cheese and Oreos, and uses that distribution network, leverage off of it, you could see Kraft (NYSE: KFT) become even more of an international diversified play. And I`m not so worried about commodity prices. As they moderate, Kraft (NYSE: KFT) is going to do really well. You have a lot of upside and a lot safety in Kraft (NYSE: KFT), K-F-T.

HUDSON: You mentioned international growth being a potential for Kraft (NYSE: KFT). And you do like some international ideas, including the Spanish telecom Telefonica, T-E-F, the ticker symbol. Big dividend yield, 8 percent, the stock has been kind of choppy. And it`s interesting because most of its business is in Latin America, not Sprain, right?

KRAMER: Right. Telefonica, T-E-F, known as Telefonica de Hispana formerly, is totally misunderstood, just because it`s a Spanish-based company doesn`t mean that their debt is a sovereign debt problem with Spain, OK, you know, could be defaulting.

Telefonica operates (INAUDIBLE) in Brazil, they`re across Latin America. No matter how bad the economy is, people are still moving to cell phones. And this is a mobile play, fixed line, data communication, T-E-F. And you can`t go wrong with that dividend. Telefonica is here to stay for a long time, a great stock for your portfolio and for some protection.

HUDSON: You also like a different kind of fixed line, and that being electric utilities. National Grid is your idea here, it operates in the U.K. as well as in New England here in the U.S. A pretty good-looking stock chart, has been dropped off from its recent high lately, but again, another big dividend yield here for this utility.

KRAMER: Right. This -- 6 percent on National Grid, N-G-G. A lot of people haven`t heard of N-G-G because it`s a U.K.-based utility infrastructure play. But they have bought up National Grid via these plum properties, these plum utilities across the United States mainly the Northeast. A very profitable company, growing, but I`m really recommending it for the safety. It`s a great way to be in a utility, but to have geographical diversification so you don`t have regional risk that can happen with bad weather, for example.

HUDSON: Sure. Let`s get to some viewer e-mails asking for some updates. John sent us this note asking about Telvent, it has received a buyout offer. And the stock has appreciated significantly. "Does Hilary recommend selling or holding?"

You first mentioned this back on December 30th, 2009, when it was $38 and change. The buyout offer that it received a few weeks at $40. How about it, do you take it?

KRAMER: Take your money. Take it off the table. Deploy it in other opportunities, especially in this down market here. But it did get acquired, if you went in it, you made -- you eked out a little bit, it`s nice change for yourself.

HUDSON: Are you selling your position in Telvent here?

KRAMER: Yes, yes. And I`m recommended subscribers to newsletter sell and take that $40.

HUDSON: What about the other three safety picks, disclosures, do you own those?

KRAMER: No, I`m just in the process of selling the Telvent.

HUDSON: There we go. You can e-mail us, that address is Of course, we`re online elsewhere on Twitter and on Facebook. More questions next week. Our guest with "Street Critique," it`s Hilary Kramer,

Many of us won’t be able to retire until our 80s You’ll probably have to work much longer than you anticipated

We all think it’s a panacea. If you don’t have enough money saved for retirement, you’ve got a few ways to close the gap between what you have and what you need in your nest egg: Save more, invest more aggressively, and/or work longer.

Well, it turns out that working longer is indeed an option, according to the Employee Benefit Research Institute latest study. The only problem is that the latest research shows that you’ll have to work much longer than you anticipated. In fact, many Americans will have to keep on working well into their 70s and 80s to afford retirement, according to the study, titled “The Impact of Deferring Retirement Age on Retirement Income Adequacy.”

What’s more, it’s even worse for low-income workers, according Jack VanDerhei, one of the co-authors of the study. Those who earned (on average over the course of their careers) less than $11,700 per year, the lowest income quartile, would need to defer retirement till age 84 before 90% of those households would have just a 50% chance of affording retirement.

Those who earned between $11,700 and $31,200 will need to work till age 76 to have a 50% chance of covering basic expenses in retirement. Those who earned between $31,200 and $72,500 will need to work to age 72 to have a 50% chance and those who earned more than $72,500, those in the highest income quartile, catch a break; they get stop working at age 65 to have a 50/50 chance of funding their retirement.

So what can be done to make sure you have enough income in retirement? Well, the sad truth is that not working is no longer an option and working past age 65 is fast becoming a fact of life, at least for those in the lowest three income quartiles.

One bright spot, according to John Nelson, co-author of ‘What Color is Your Parachute? For Retirement’ is that working works: “For those in the lower half of the income spectrum, delaying retirement from 65 to 69 has a profound effect,” he said. “It increases retirement income adequacy by 25% to 50%! That’s a powerful incentive.”

The new normal

Now the reality about EBRI’s findings is that many Americans — who are able to continue working and whose skills are still in demand — are already working past age 65. In 2009, 17.2% of Americans age 65 and older were in the labor force, according to recent AARP Public Policy Institute report, “Family Income Sources for Older People, 2009.”

And about 14.2 million older persons (36.7% of the older population) had family incomes from earnings in 2009. The median family income from this source was $32,330, while the mean was nearly 1.6 times as large — $50,971. Read the AARP report here.

And the new normal isn’t that people are working past age 65, rather it’s this: They are also hunting for second jobs as all, according to Art Koff, founder of “Even those older Americans who are still working are looking for ways to make additional monies,” he said.

And many, judging from the page views at’s website, are often exploring ways to work from home. “Those older Americans who are looking for a job, those who have already retired and those who are working but need additional income or want to start something that they can continue into their retirement years are all reading (the work-from-home) pages,” Koff said.

Making it work

To be sure, many Americans haven’t figured out how to make working later a real option, instead of just a fantasy. And for them, Nelson has this advice: “You need to pay attention to your career and your health.”

“First, for your career, do some in-depth research and planning. Second, for your body, take a health risk assessment. You may need to keep both of them in shape longer than you thought,” he said.

Work and save

Working past age 65 is certainly one way to make sure you have enough income to fund retirement expenses. But EBRI also noted that Americans who work past age 65 who continue to save for retirement in a 401(k) or some such account earmarked for retirement increase the odds of having enough income in their golden years. “One of the factors that makes a major difference in the percentage of households satisfying the retirement income adequacy thresholds at any retirement age is whether the worker is still participating in a defined contribution plan after age 65,” the co-authors of the report. “This factor results in at least a 10 percentage point difference in the majority of the retirement age/income combinations investigated.” The EBRI report can be found at this website.

A new compact

Others, meanwhile, have a different take on EBRI’s study and findings. “This report just reinforces the need for a new social compact that provides increased financial security in return for increased contribution,” said Marc Freedman, author of “The Big Shift: Navigating the New Stage Beyond Midlife and CEO of Civic Ventures.”

“We need to enable the many people who want and need to work longer, without hurting those who are not able to,” Freedman said.

China ratings house says US defaulting: report

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

"In our opinion, the United States has already been defaulting," Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies -- eroding the wealth of creditors including China, Guan said.

Guan did not immediately respond to AFP requests for comment.

The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion -- but Republicans are refusing to support such a move until a deficit cutting deal is reached.

Ratings agency Fitch on Wednesday joined Moody's and Standard & Poor's to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.

A downgrade could sharply raise US borrowing costs, worsening the country's already dire fiscal position, and send shock waves through the financial world, which has long considered US debt a benchmark among safe-haven investments.

China is by far the top holder of US debt and has in the past raised worries that the massive US stimulus effort launched to revive the economy would lead to mushrooming debt that erodes the value of the dollar and its Treasury holdings.

Beijing cut its holdings of US Treasury securities for the fifth month in a row to $1.145 trillion in March, down $9.2 billion from February and 2.6 percent less than October's peak of $1.175 trillion, US data showed last month.

Foreign ministry spokesman Hong Lei on Thursday urged the United States to adopt "effective measures to improve its fiscal situation".

Dagong has made a name for itself by hitting out at its three Western rivals, saying they caused the financial crisis by failing to properly disclose risk.

The Chinese agency, which is trying to build an international profile, has given the United States and several other nations lower marks than they received from the the big three.

Homebuilders and Shanghai Index break down at the same time!

It's Friday, and Chris "Just the Facts" Kimble returns for a cameo Dragnet impersonation, this time with a look at a similar pattern in a pair of assets not normally thought of in the same context.

Chris comments: The Shanghai Index and homebuilders both have broken out of multi-year flag/pennant patterns — to the downside — at the same time.

Not good price action from these two leading indicators!

Oil Production & Consumption

7 Steps To Survive The Coming Economic Collapse From Water Shortage to Cannibalism

You may deny it all you want just like the mainstream media and the government is doing. The truth is with the mounting national debt and annual deficit rising it is mathematically impossible for the US to not head for a collapse. The 7 deadliest sins the US has done are to blame for the coming collapse. These are “sins” that the government committed which the people now has to suffer from.

Many economists and successful international investors are warning the people that the worst is yet to come. Even though the stock market has shown an increase and the gold price has dropped to below the US$1,200 an ounce level, investors such as Jim Rogers and Marc Faber do not easily buy the good news. The have not changed their opinion. The ultimate economic collapse IS still coming.

Forecasters such as Gerald Celente has been warning the people and urged them to forget about hope and change and immediately switch into survival mode. What you can do now is to dream on and hope that the government is going to save you or anticipate for the worst and prepare for your family’s survival through the coming economic storm.

If you think it is wise to prepare for survival, read on. Below are 7 steps for you to take:

1. Get rid of your debt and downsize

The reason why the credit crunch is happening in the first place is because Americans have incredibly out of control spending habit. Whether it is the government that is spending money on wars they can not afford or the individual that is living on luxurious lifestyle that they can not pay for, the spirit of greed and consuming is great there.

If you want to survive the economic collapse, you will need all the money that you already have now or will be earning in the future. You will not want to be using your money to make already rich people richer, such as your lender or the designer stores, while you struggle to get food on the table for your family.

Before the economic storm comes, which will be very soon, make sure you fight your way out of debt. Once you have gotten rid of all your liabilities, learn to live within your means. Cut down your spending and don’t throw your money on things unnecessary. As much as you can find ways to save your money, such as selling your car for something that is much more fuel-efficient, or using tools at home that are more energy efficient which will save you money in the long run. Here is a website I found informative to help you find ways to make your home more energy and money saving. Click here.

2. Spend your money on essential things

The video below shows an event not so long ago that should be considered as a “preview” of the coming economic collapse due to hyperinflation. Sit down with your family and watch the video with them together. Discuss with them what essentials you should be spending on when a collapse like that happens in the whole country.

A very informative video I have attached at the bottom of this post suggest that you spend your money only on essentials such as food, water, blanket, soap and duck tape. It is also a good idea to invest in a water purification system, first aid kit and fishing tackle. If you are paying rent for your housing, you might want to consider moving back with your parents and consolidate, share the cost of living and use less of what you are used to using now.

3. Grow your own food

There will be times when there is food shortage. It may also happen that food is available but there will not be any money to pay for it. What you can do now is start your own little farm to grow your own food. Can your food as much as possible and buy food that can be easily stored for a long time. If possible you may also consider living near a river or forest where you can fish or hunt.

It will be difficult for you to grow your own food if you live in the city. When there is food shortage people living in the farming states will be the ones who will survive. The people in the cities will most likely see food riot and violence amongst the people, fighting for food. Desperate measures may have to be taken during these times, so consider ways to protect your family.

4. Bond and unite with your neighbors – Cannibalism alert during food shortage

It is easier to buy locks and guns to protect your family during desperate times when there is food shortage. But what lasts longer and keeps your neighborhood safe long enough for you and your family is to bond with your immediate community and unite to cooperate and watch each others’ back. Crime rates will increase during this time and you might want to ally with your neighbors to defend your neighborhood from criminals instead of shooting and killing each other for food.

Be also forewarned that because of food shortage and starvation, cases of cannibalism will also emerge. History teaches us that great famine and starvation has triggered people to feed on each other.

  • Between 1315-1317 in Europe, it was a period of great famine marked by extreme levels of crime, disease, mass death and cannibalism.
  • During the Starving Time between 1609-1610, colonists in colonial Jamestown in Virginia resorted to cannibalism as the food supplies diminished.
  • A group of American pioneers, known as the Donner-Reed Party, who set out to California between 1846-1847 was stuck in a winter of starvation and hunger, causing some of the settlers to resort to cannibalism.
  • Between 1920-1921 during the famine in the Soviet Union, hunger caused its people to eat each others flesh which eventually led to a widespread cannibalism.
  • If you read the Bible in the Book of Isaiah chapter 19, you will also see that famine has caused the Israelite to eat their own daughters and sons.

The best thing you can do is bond with you neighbors and watch each others back. What you want to avoid is fighting and shooting each other instead of fighting criminals and cannibals.

5. Prepare your first-aid kit

Put together a basic first-aid kit for emergencies. Include bandages, pain relievers, cold packs, and alcohol, and keep the kit in a secure place. You will never know what will be and will not be available in stores during the economic collapse. Knowing that you have your first-aid kit ready in your home, will give you a peace of mind.

6. Sell everything that is unnecessary

If you look around you and pay attention to the things that you have bought and are sitting in your home, you may realize that there are a lot of things that is and will be unnecessary for you to keep. What Americans have in their possession is usually way more than what they actually need. In the coming greatest depression you will come to a point that all you really need is to have food on the table. Nothing else will matter.

While things are still bearable, sort out the things that you don’t need that is in your possession, sell them and exchange them with things that you will need the most in the near future during the economic storm.

7. Exchange your paper money with more valuable asset

The US dollar is losing its value and at some point in the future it will be only worth the paper it is written on. Although you still need to keep some cash in your hand, it is important to invest in precious metal such as gold and silver but also in vegetable seed and commodities. Personally I prefer to buy physical gold or silver but it is also necessary to invest in your own garden to grow your food.

I have found an excellent video that sums up the 7 steps above in a 1-minute video. Watch it below:

The Economist UK edition - 11th June-17th June 2011

The Economist UK edition - 11th June-17th June 2011
English | 118 pages | HQ PDF | 89.00 Mb

Death By Debt

by Chris Martenson

One of the conclusions that I try to coax, lead, and/or nudge people towards is acceptance of the fact that the economy can't be fixed. By this I mean that the old regime of general economic stability and rising standards of living fueled by excessive credit are a thing of the past. At least they are for the debt-encrusted developed nations over the short haul -- and, over the long haul, across the entire soon-to-be energy-starved globe.

The sooner we can accept that idea and make other plans the better. To paraphrase a famous saying, Anything that can't be fixed, won't.

The basis for this view stems from understanding that debt-based money systems operate best when they can grow exponentially forever. Of course, nothing can, which means that even without natural limits, such systems are prone to increasingly chaotic behavior, until the money that undergirds them collapses into utter worthlessness, allowing the cycle to begin anew.

All economic depressions share the same root cause. Too much credit that does not lead to enhanced future cash flows is extended. In other words, this means lending without regard for the ability of the loan to repay both the principal and interest from enhanced production; money is loaned for consumption, and poor investment decisions are made. Eventually gravity takes over, debts are defaulted upon, no more borrowers can be found, and the system is rather painfully scrubbed clean. It's a very normal and usual process.

When we bring in natural limits, however, (such as is the case for petroleum right now), what emerges is a forcing function that pushes a debt-based, exponential money system over the brink all that much faster and harder.

But for the moment, let's ignore the imminent energy crisis. On a pure debt, deficit, and liability basis, the US, much of Europe, and Japan are all well past the point of no return. No matter what policy tweaks, tax and benefit adjustments, or spending cuts are made -- individually or in combination -- nothing really pencils out to anything that remotely resembles a solution that would allow us to return to business as usual.

At the heart of it all, the developed nations blew themselves a gigantic credit bubble, which fed all kinds of grotesque distortions, of which housing is perhaps the most visible poster child. However outsized government budgets and promises might be, overconsumption of nearly everything imaginable, bloated college tuition costs, and rising prices in healthcare utterly disconnected from economics are other symptoms, too. This report will examine the deficits, debts, and liabilities in such a way as to make the case that there's no possibility of a return of generally rising living standards for most of the developed world. A new era is upon us. There's always a slightchance , should some transformative technology come along, like another Internet, or perhaps the equivalent of another Industrial Revolution, but no such catalysts are on the horizon, let alone at the ready.

At the end, we will tie this understanding of the debt predicament to the energy situation raised in my prior reportto fully develop the conclusion that we can -- and really should -- seriously entertain the premise that there's just no way for all the debts to be paid back. There are many implications to this line of thinking, not the least of which is the risk that the debt-based, fiat money system itself is in danger of failing.

Too Little Debt! (or, Your One Chart That Explains Everything)

[Note: this next section is an excerpt from a recent Martenson Blog entry, so if this seems familiar to any site members, it's because you've seen it before.]

If I were to be given just one chart, by which I had to explain everything about why Bernanke's printed efforts have so far failed to actually cure anything and why I am pessimistic that further efforts will fall short, it is this one:

There's a lot going on in this deceptively simple chart so let's take it one step at a time. First, "Total Credit Market Debt" is everything - financial sector debt, government debt (federal, state, and local), household debt, and corporate debt - and that is the bold red line (data from the Federal Reserve).

Next, if we start in January 1970 and ask the question, "How long before that debt doubled and then doubled again?" we find that debt has doubled five times in four decades (blue triangles).

Then if we perform an exponential curve fit (blue line) and round up, we find a nearly perfect fit with a R2 of 0.99. This means that debt has been growing in a nearly perfect exponential fashion through the 1970's, the 1980's, the 1990's and the 2000's. In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again, from $52 trillion to $104 trillion.

Finally, note that the most serious departure between the idealized exponential curve fit and the data occurred beginning in 2008, and it has not yet even remotely begun to return to its former trajectory.

This explains everything.

It explains why Bernanke's $2 trillion has not created a spectacular party in anything other than a few select areas (banking, corporate profits), which were positioned to directly benefit from the money. It explains why things don't feel right, or the same, and why most people are still feeling quite queasy about the state of the economy. It explains why the massive disconnects between government pensions and promises, all developed and doled out during the prior four decades, cannot be met by current budget realities.

Our entire system of money, and by extension our sense of entitlement and expectations of future growth, were formed during and are utterly dependent on exponential credit growth. Of course, as you know, money is loaned into existence and is therefore really just the other side of the credit coin. This is why Bernanke can print a few trillion and not really accomplish all that much, because the main engine of growth expects, requires, and is otherwise dependent on credit doubling over the next decade.

To put this into perspective, a doubling will take us from $52 to $104 trillion, requiring close to $5 trillion in new credit creation each year of that decade. Nearly three years has passed without any appreciable increase in total credit market debt, which puts us roughly $15 trillion behind the curve.

What will happen when credit cannot grow exponentially? We already have our answers; it's been the reality for the past three years. Debts cannot be serviced, the weaker and more highly leveraged participants get clobbered first (Lehman, Greece, Las Vegas housing, etc.), and the dominoes topple from the outside in towards the center. Money is dumped in, but traction is weak. What begins as a temporary program of providing liquidity becomes a permanent program of printing money needed in order for the system to merely function.

Debt and Europe

The debt situation in Europe is fairly typical of the developed world and mirrors the debt chart of the US seen above. There's entirely too much debt, and most of the unserviceable amounts are concentrated in certain spots (i.e., PIIGS), while the amounts owed are concentrated in the German, French, and British banks.

This New York Times graphic did an excellent job of summing everything up:

(Source - click to view larger graphic at source)

If everybody owes everybody else, then kicking the can down the road only works if there's more wealth, more growth, and sufficient economic activity down that road to service the past debts. If any one participant drops the baton in the debt relay race, the absurdity of the situation becomes unavoidable and the cause is lost.

When we hold this view, it is abundantly clear that adding more debt along the way only increases the burdens and is therefore ultimately counterproductive, although it does grant the gift of additional time to avoid facing the truth.

When all of the most indebted countries are stacked up, we see that all but Russia carry a total indebtedness greater than 100% of GDP and that nine are carrying debt levels higher than any that have ever been repaid historically.

(Source) Note: 260% debt-to-GDP is the all time record for repayment, accomplished by England between 1815 and 1900, but required both massive cuts in spending and an industrial revolution.

Without mincing words, the world does not face a crisis of liquidity, nor a crisis of insufficient debt, but one of entirely too much debt. That's the entire predicament in three words: too much debt.

More debt is only going to compound the predicament, yet that is what the world's central banks and political structures are busy manufacturing. More debt.

Of course, debt is only one component of the story; there are also liabilities to consider. The above chart merely graphs the legally defined debts involved. If we bother to add back in the liability components, which are pensions, social security and government medical plans, the predicament is seen to be three to six times larger:

Whereas the prior chart showed all debts incurred by all sectors of each nation, the above chart only displays government debt and liabilities. For reference, the red bars, above, are the amounts that you read about in the paper when commentators note that the US, for example, still has a debt-to-GDP ratio that is under 100%. It's a comforting tale, but not an accurate description of the situation.

Again, there are no historical examples of any country ever digging itself out from so deep a hole, and yet we find that the entire developed world has bravely pushed itself deep into unknown territory, seemingly without any serious discussions about whether or not this made sense.

Where We Are Now

So here we are, just a few weeks away from the end of the second round of quantitative easing (QE II) , with massive public debts and liabilities having only grown larger instead of shrinking during the Great Recession, everybody in nearly the same boat, and no clear plan for how all the sovereign debts will be funded from current productive cash flows (i.e., existing GDP).

This is why so many commentators, myself included, are convinced that more thin-air money printing is on the way. My thesis, laid out back in early March is that the Fed will stop QE II on schedule and that the financial markets will react exceptionally poorly to this loss of support. Commodities will tank first, then stocks, then bonds; from riskiest and most-leveraged to least.

It is time to face the music; the levels of indebtedness now require permanent support from thin-air money in order to avoid a deflationary collapse. Given this reality, we explore key questions in detail in Part II of this report: Understanding the Endgame:

  • How will the global debt crisis play out?
  • What does a world economy without growth look like?
  • What steps should we, as individuals, need to take in preparation?
  • How can investors safeguard their purchasing power during the coming rout in the finanical markets?

Dow, S&P end sixth losing week - is seventh on tap?

The Dow and S&P 500 closed out their sixth week of losses on Friday as further signs of a global economic slowdown set the stage for more losses ahead.

The deepening gloom raised the prospect for the S&P, which suffered its worst week since August 2010, to break below the year's low of 1,250 next week.

The Nasdaq wiped out its yearly gains on Friday and also posted its biggest weekly decline since August 2010, as the latest deterioration in sentiment came on fear of flagging Chinese growth and fresh worries about Greece's debt crisis.

The Dow closed below 12,000 for the first time since mid-March.

Reflecting the bearish sentiment, options traders eyed calls on the CBOE Volatility Index .VIX, Wall Street's so-called fear gauge, which moves inversely to the S&P 500's performance. The VIX rose 6.1 percent to end at 18.86.

"We broke below the April low, which was about 1,295 (on the S&P 500) pretty much at the open today. We are probably going to test the March lows if data next week remain weak," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"But investors are very susceptible to any kind of news and since we are very oversold here, we could see the market instantly bounce back if we get anything remotely good."

The Dow Jones industrial average .DJI fell 172.45 points, or 1.42 percent, to 11,951.91. The Standard & Poor's 500 Index .SPX slid 18.02 points, or 1.40 percent, to 1,270.98. The Nasdaq Composite Index .IXIC tumbled 41.14 points, or 1.53 percent, to 2,643.73 at the close.

For the week, the Dow was down 1.6 percent, the S&P 500 was off 2.2 percent and the Nasdaq was down 3.3 percent.

The S&P 500 has fallen about 6.6 percent from its intraday peak early last month. Many see the benchmark index sliding back down to around 1,250, its March low, where valuations could bring investors back into equities.

At 1,250, the S&P 500 would be roughly 1.7 percent below current levels and approaching a 10 percent decline commonly referred to as a correction.


Bank stocks, already under pressure, finished lower, with the KBW Banks Index .BKX dropping 0.4 percent after sliding more than 2 percent earlier in the day. The Federal Reserve said it will subject more banks to annual stress tests to determine whether they have enough capital and can raise their dividends.

Some of the biggest decliners were regional bank stocks that are now going to face annual tests.

Northern Trust Corp (NTRS.O) fell 1.2 percent to $46.77 and M&T Bank Corp (MTB.N) lost 1.2 percent to $84.41.

But large banks, including JPMorgan Chase (JPM.N) and Bank of America (BAC.N), rose in a late rebound, on a news report that the extra capital charge on big banks will likely be 2 percent to 2.5 percent, compared with the widely predicted 3 percent, traders said.

Bank of America shares rose 1.4 percent to $10.80 and JPMorgan added 0.2 percent to $41.05.

The S&P energy index .GSPE declined 1.9 percent while the S&P index of industrial stocks .GSPI lost 1.6 percent.

China's sales to the United States and the European Union slumped to their weakest since late 2009, excluding Lunar New Year holidays, underlining the view that the world economy is stumbling.

In another negative for stocks, the euro tumbled more than 1 percent against the U.S. dollar as fears about Greece's debt returned to the forefront and investors curbed expectations about the European Central Bank's interest-rate hikes. Investors have been recently trading the correlation between stocks and the dollar.

The PHLX semiconductor index .SOX slid 1.7 percent, sinking to its lowest since early December. The SOX fell below its 200-day moving average for the first time since last October.

About 7.47 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, compared with the daily average of 7.59 billion.

Declining stocks beat advancing ones by 2,419 to 587 on the NYSE while on the Nasdaq, decliners beat advancers by 1,987 to 593.