Gold and Energy Advisor: Real Wealth #255, 02/04/2010

President Obama and his economic gurus have discovered US$20 billion in spending cuts that can be made in 2011 which is a cruel joke, because initial reports in the media indicate his budget for 2011 will be a towering $3.8 trillion and will generate a $1.6 trillion, deficit -- much worse than I have been warning about in past issues and updates of the Gold & Energy Advisor.

Between the pending increase in the national debt and the de facto nationalization of Fannie Mae and Freddie Mac, the total federal debt is now close to $18 trillion.

This means, of course, that we will exceed $20 trillion in National Debt next year -- even before we consider the Federal Government’s financial obligation to cover Medicare that totaled to $57.3 trillion last year -- and appears conservatively to be set to increase by an additional $2+ trillion a year, over the next ten years.

This means in the next 10 years, the Federal Debt will spiral upwards to $112 Trillion - even assuming the current Federal Reserve’s target interest rates remain between zero and one quarter of one percent.

If $112 Trillion in Federal Debt sounds like a worrisome number, it should. The situation is much worse than even this dire towering number. The projection assumes no interest rate increases, which would only further compound the debt. But there's also another huge factor.

The credit and banking crises that hit Wall Street and the world's financial markets LITERALLY emasculated companies in the business of insuring the bond debt of state and local governments. MBIA for example, which traded for $76.07 on January 29, 2007 is now trading at less than $5 a share. AMBAC was traded for $96.01 on my birthday back on May 21, 2007, now trades for 68 cents. My point: in the next down leg of this economic crisis, there's no viable insurer capable of stepping forward and making good on State and Municipal bonds. The insurer of last resort once again is the Federal Government.

This should give investors in any equity, bond or real estate investments VERY serious pause. The debt obligations tower when compared to the Gross Domestic Product of the United States, which is estimated at $14.2 trillion.

We know 2010 and 2011 are going to be rough revenue collection years for state and local governments. Given the still mounting foreclosure and REAL unemployment rate, big industrial states like California, Florida, Michigan, New York, New Jersey and Illinois are almost certainly going to need more money from the Federal Government to maintain services, much less fund bond issues.

Michael E. Lewitt of The HCM Market Letter (one of a handful of market intellegence letters I read) calls President Obama's 2011 budget ....

This is exactly why we're seeing the emergence of the Tea Party movement. The mounting debt much catapulted into existence by decades of fraud on Wall Street and in Washington is becoming too blatant to ignore.

After September 11, 2001, our greatest terrorist enemy, Osama bin Laden, predicted that he would bring the U.S. Economy to its knees. Far too few of our leaders in Washington took the threat seriously. Instead of shoring up the U.S. Economy, reviewing taxation, interest rates, and the financial structures of Wall Street, we focused solely on the military options.

I often tell investors, reporters and contemporary economists that the Roman Empire didn't collapse because of external enemies, but internal ones. Corrupt and well intentioned politicians, military and business leaders that allowed the Empire to spend itself to the point that Rome’s currency was debased to the point it could no longer survive.

The last 8 plus years have been a case study of how to bankrupt a country, one that mirrors scores of governments that fill the trash bin of history --since the collapse of the Roman Empire. It’s ironic that despite his warning of understanding how to engineer the collapse of the greatest economy in world history, Osama bin Laden wasn't taken seriously by our government.

My greatest fear has not been inflation, but instead the outright destruction of the fiat money system, precisely because the collective net debt of the United States and governments and consumers around the world has literally been growing geometrically.

The higher the debt grows, the higher the risk of rising interest rates or currency devaluations. I took no pleasure in seeing Venezuela devalue its currency over night, because to me, it's what I expect to start to see worldwide over the next several years.

Today as I write this issue of Real Wealth, the U.S. Stock Market is being hammered by concerns of higher than expected unemployment numbers and fears over the sovereign debt in Greece, Portugal and Spain. The Euro is in real danger. This is helping the greenback bounce higher and pushing the price of gold over $40 lower. I think this is a very short term event for gold - an excellent buying opportunity.

The financial markets are toxic, literally from one end of the planet to the other. Yet, less than 1 percent of all global funds under management are invested in gold. Most investment advisors from London to Shanghai are still buying into the belief that the U.S. Dollar will thrive and prosper given a few years. I however, believe the horse is out of the barn already and it is not a question of if but when the U.S. Dollar will be sharply devalued or replaced with another economic unit of exchange.

The day of reckoning may be months, even a few years away, but I can tell you it’s coming; and when it does, it will make October of 2008 and March of 2009 look like minor bumps in the road.

When the collapse of the U.S. Dollar finally takes place, your life insurance, 401K, IRA savings invested in T-Bills, Equities, and Annuities will be all but worthless. Those of us relying on Social Security and Medicare will be left abandoned.

Just today The Congressional Budget Office announces for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits. Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, another taxpayer bailout.

This year's Social Security cash shortfall is a watershed event. Until this year, Social Security has been billed by the politicians and beurcrats in Washington as a problem for the future. Now on top of all the other defit problems the United States government is facing - Social Security is now a very real problem here and now.

Social Security currently provides more than half the income for a majority of retirees.

The social implications of a collpase of the fiat money system, the U.S. Dollar and meltdown of entitlement programs are VERY important.

They will first give way to opposing political parties, then as economic system continues to decline we will seee jobless, desperate people riotin major cities around the world. Economically driven wars will grow in frequency; then we may well face the rise of a fascist and socialist government in many places around the world that each suspends many human rights taken for granted under the guise of necessity of restoring law and order.

In the days and weeks ahead, as the reality of the failure of the economic boom and bust cycle we have lived with since the industrial revolution becomes evident, you will look back on my begging you to swap at least 15% and as much as 25% of your investments and net worth to gold and platinum as prophetic.

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$112 Trillion Federal Debt, Europe Meltding Down and the Threat of a Complete Monetary Collapse