Our government's current debt-fueled policies are unsustainable and creating a huge crisis.
The simple fact is, if our government were required to pay a fair market
rate of interest on its debt… the interest payments alone would swallow
up all of our tax revenue (and then some).
Sooner or later, that fact will overwhelm the smoke and mirrors and the
chicanery of quantitative easing. Sooner or later, that fact will
overwhelm the passions of the world's banks that keep 60% of their
reserves in U.S. dollars. Sooner or later, that fact will overwhelm the
popularity of the U.S. dollar as the basis of international trade.
And make no mistake… China has had good reason to negotiate bilateral
trade and currency agreements over the last 18 months with every single
major trading counterparty in the world.
At some point, the Chinese will unveil a complete convertibility of its
currency, the yuan. And when that happens, what do you think will happen
to the value of the U.S. dollar? What do you think will happen to the
actual rate of interest on U.S. Treasury bonds, especially long-dated
bonds?
All of those things will change because, as I said yesterday, the
markets over time are weighing machines. And I guarantee you the
passions of the crowd change over time. So the current pricing for
equities in the United States is based on 18 years of earnings.
Facebook is trading at a valuation of around 100 years of earnings. But
what is the value of all those future earnings if the value of the
dollar crashes? What is the value of all those future earnings, 15
years', 17 years' worth of earnings, if instead of the long bond being
3%, it was 8%?
If you do the math, if you do the dividend discount models, and you
compare it with the risk-free rate, you can see for yourself that
evaluations of U.S. stocks could easily fall in half.
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