By MoneyMorning.com.au
The final stage of the crisis of the global monetary system is near. It’s the stage where investors realise the finances of the US government are worse than Greece and Italy and the UK. It’s the stage where investors and the public realise the only way for the US government to keep running large deficits is for the Federal Reserve to “monetise” them.
This is massively inflationary.
By “monestise them” I mean that if no one else can or is willing to buy US government debt, the Federal Reserve will. The important point for Australian investors to realise is that no matter what happens to the value of the Aussie dollar relative to the US (the exchange rate), the decline of the US dollar is hugely bullish for tangible assets.
The Fed Won’t Have a Choice
The cost of refinancing America’s short-term debt is going to rise. Eventually, it will rise in the same way that Italian and Greek interest rates have risen. The private market will turn on the Fed and demand much higher interest rates. To prevent US bond auctions from failing, and the US government from running out of money, the Fed will have to print.
I expect this year to be the year where professional and individual investors begin to seriously look at adding gold to their portfolio for the first time. The magnitude of the US debt problem will be impossible to ignore. The ratings agencies will make sure of that, if they aren’t shut down by the government, that is.
But there is one thing we should all keep in mind: the Fed can theoretically play this game for a long time. A coordinated, worldwide intervention by central banks in financial markets (including capital controls) would limit the ability of investors to move money freely from one asset class to another.
The nationalisation of banks could also conceivably lead to a mandated appetite for government debt, with banks forced to own a portion of their assets in liquid (if not high credit quality) government bonds.
No Time to Waste for Private Investors
10-year US interest rates stayed around 2% for nearly a full decade in the 1940s. The US financed its war spending at cheap rates. As the economy shifted from a war footing to full industrial capacity in the 1950s—and inflation became embedded in US monetary policy— rates moved up.
They are now back down at historic lows. For them to stay there, the Fed will likely have to intervene heavily in markets and purchase trillions in debt issued by the Treasury. Since the US is broke, the Fed will have to contrive this money electronically. This will lead to the great destruction of the US middle class and the death of financial assets as a way to retirement wealth. That’s why it’s critical that you have a plan ahead of time.
Dan Denning
Editor, Australian Wealth Gameplan
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