Can The US Government Indefinitely Defer Financial Consequences?
- From: bromselick@xxxxxxx
- Date: 22 Aug 2006 11:54:55 -0700
By Greg McCoach
DENVER, CO -- Oftentimes, the ideas for the topics I write about in
these weekly postings come from the many emails I receive. While I
don't have the time to answer all these emails on a daily basis, I do
read them for content to see what investors are asking.
When I see the same kinds of questions coming up over and over again, I
will use these weekly posts to offer my viewpoint or answer on that
particular topic or question.
Lately, one topic that seems to have once again come to the surface is
the ongoing argument as to whether the US government/economy will ever
face any significant financial consequences for the decades of abuse of
its system of credit.
I have received many emails the past few months begging an answer to
the question, "Can the US continue to indefinitely postpone what many
consider as inevitable financial consequences"?
It appears to some that because of the largess of the US economy, even
outrageous levels of debts can be successfully managed and will never
fully take their toll in the US economy as some in the gloom and doom
crowd predict.
Those in the latter camp of course see economic and financial chaos for
the future of America. They cite the current debt levels in the US as
being totally unsustainable and the foundation to ruin for a country
that has been the most prosperous nation in the history of the world.
For those of you not familiar with the two sides of this equation, let
me explain the basic tenets of each line of thinking.
Those who take the stand that the total debt level in the US is not a
problem cite the fact that the overall debt is still a reasonable
percentage of GDP. They maintain that since the debt still represents
only a small percentage of GDP, the US can continue on its merry way
and not incur severe financial consequences. They believe this debt can
be managed over time. This line of thinking typically is very
optimistic about the general stock market with some extremists still
touting a DOW index at 30,000 or 40,000 in the next ten years.
This group also believes that there is a natural protecting influence
built into the system because of its size and that even difficult
financial challenges can be absorbed without a tremendous shock to the
market. They offer examples such as the crash of 1987, and 2000 as a
case in point. They take the stand that markets are resilient and will
bounce back rather quickly even faced with tremendous downdrafts at
times.
On the other side of the equation, you have the sound money crowd that
believes that fiat money and excessive debt levels will ultimately be
the undoing of the prosperous ways in America. They tout statistics and
show charts that seem to prove each point causing its believers to take
defensive positions in their portfolios.
This group invests in tangible assets such as physical gold, silver,
and mining stocks. They inevitably believe the dollar will crash,
(return to its intrinsic value/zero) and that the asset bubbles of real
estate and the stock market will finally be popped, leaving many
financially destitute.
While the tangible asset crowd may eventually be more correct in their
prognostications than the "DOW 30,000" group, they certainly have not
had the timing correct. The sound money group has been making dire
predictions for literally decades about the dollar and the US debt
structure. The difference now however is that circumstances and facts
appear that they may finally be right.
As an investor, wading through all of this information can be quite
daunting as one tries to figure out what to do for one's portfolio of
assets. Each side of the argument seems to make both good and bad
points. How will reality actually play out? Where in lies the truth of
the matter?
Depending on which side of the pendulum you fall in your assessment of
the current financial situation in the US, investors have a lot to lose
or gain based on where they put their money in such volatile times.
An incorrect assessment at such a critical time could be devastating. A
correct assessment could lead to exponential profits. Thus, a clear
understanding of the issues at hand is paramount for making what I
consider the most important financial decisions of our lifetime.
A quote that comes to mind at a time like this is from Will Rogers when
he said, "One of the biggest problems with information is not what we
don't know, so much as what we know that ain't so".
In many cases, we tend to believe easily, that which we hope for
earnestly. This seems especially true right now as I listen and read
the opinions of many investors. They are investing in what they believe
in, but which may not necessarily be true. This could prove to be a
fatal error.
I see many investors still putting the bulk of their money into the
general stock market and not diversifying into other asset classes,
simply because they want to believe that all is well with their beloved
stock market.
We should all be wary of things we think we know that may not be so and
reevaluate our positions. I always try to keep an open mind to the
various opinions out there regardless of whether I agree with them or
not.
How will the markets play out? Will things continue to move forward as
we have been accustomed? Could we see a total global economic collapse
as some predict? Will the markets continue to be volatile but remain
intact and avoid a big melt down? We just don't know.
Regardless, of how you feel about the various issues mentioned above,
making sure one is adequately diversified seems to be the prudent way
to play the current financial scenario no matter how it plays out.
Owning some physical gold to stay properly diversified is akin to
buying financial insurance. If the central banks of the world are
starting to diversify into physical gold, then maybe its time to
consider the yellow metal as an investment class in order to protect
ones overall net worth. Central banks are now net buyers of gold. This
is a significant shift in thinking from what has been going on the past
24 years and represents tremendous upside potential for gold.
No matter how you feel about the current economic condition of the
United States, the reality is that financial risk is being perceived by
more and more smart money people, and they are choosing to go into gold
for diversification. This trend looks like it is going to get stronger
not weaker as time moves forward for the foreseeable future.
Personally, I believe the United States is going to experience
financial consequences for its debt structure, as foreigners stop
buying and holding US paper. The main reason for this incredible
ability to postpone financial consequences in the US for many decades
stems mostly from foreigners willing to buy our debt. The end game for
all this excessive spending and debt has always been the time when
foreigners finally say no more to our debt instruments.
I believe that time is upon us.
Even the United States -- as strong as its economy has been -- cannot
stop economic consequences from happening. We will reap what we have
sown. The question in my mind is really how bad things will get, not if
we are going to have significant financial changes in America.
In my opinion, these changes will bring the greatest wealth transfer
mechanism the world has ever known. Amazing opportunities and shifts of
wealth are going to occur for those who have chosen wisely. And for
those who believed in something that simply was not true, they will pay
a heavy price.
.
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