In my April letter, I warned readers of the upcoming volatility and suggested that if they wanted a trade, to execute the plan then and resist selling into weakness later. At the time I sent the letter (4/21), Silver was at $46.26 and subsequently moved to $48.70 on 4/28.
Hopefully you already have gold/silver holdings for protection and you’re just accumulating. If so, you can be more patient. One school of thought is a cost-averaging approach. Another is to pick your entries. My long-term outlook has not changed and pull-backs (including this one) should be used to accumulate.
Please don’t mistake my citing of the April letter as an attempt to proclaim that I will always be correct or that I am looking for credit on a good/lucky call. To the contrary, I fully understand short-term market movements are difficult to call and I am quite often uncomfortable with receiving recognition. If I have a positive affect, even a small one, I will have fulfilled my purpose. My rewards, my desired results, are to educate, inform and equip our readers with knowledge and truth. “To scatter plenty o’er a smiling land, and read their history in our Nation’s eyes.” (Thomas Gray).
The Bigger Picture
Definitions of hyperinflation vary. If we use a 100% cumulative rate over three years as our rule, hyperinflation is now a possibility, not a certainty. I hope I’ve learned enough to never guarantee anything, however, I don’t see any way to salvage the USD without sacrificing the financial industry. More on this later. The difference between this depression and the 1930’s is that the dollar is no longer pegged to gold.
Currency Devaluation
In March 2010 I wrote in more detail about Currency Devaluation. What you have to recognize is that gold is money. It is the benchmark by which the Central Banks ultimately measure and devalue their currency. The US is devaluing against gold to reduce the debt burden. You can go as far back as Rome to see how this is done and the consequences. Don’t be mislead, devaluation is NOT a good thing. I expect you understand how inflation has impacted the USD. That is what devaluation is. It is a theft of savings, purchasing power and standard of living.
It is true that global currencies are not independent of each other. Although run independently, the exchange rate reflects the overall state of the Balance of Payments of each country. The bulk of global currencies ‘encourage’ their exchange rates to retain the global competitiveness of that currency through the adjustment of interest rates and more directly occasionally by the buying and selling of that currency in the foreign exchanges. Unless other nations retaliate by devaluing their currencies by a similar amount, they will find their Balance of Payments skewed as though they revalued their currency by that amount against the US Dollar.
Point of No Return
What most analysts aren’t discussing is that we have already come too far to turn back. Although unlikely, let’s say they decide to try to salvage the dollar at the expense of the banks. This would destroy the western banking system with massive defaults and derivative explosions, which would ultimately destroy the USD. The Fed could allow the bad debt to default (written off). As defaults rage the USD would skyrocket, due to massive liquidations and to a lesser extent, the safety trade. However, as a result of massive defaults, US banks would immediately be unable to honor deposits and the overleveraged financial system would implode. Of course, the government could “back stop”/guarantee the banks, but then we’re back into easing which puts the currency at risk. In addition to the banking collapse, The Fed and US Treasury (as the Fed’s back-stop) would default. Since this would be a sovereign default, and the USD is stock of that sovereign entity, the USD would collapse.
Should You Dump the Dollar
I’m conservative by nature, but I have to tell it like it is. We’ll have hyperinflation before a new currency is established. In order to bring in a new currency, the people first have to ask nicely. Still, I advise keeping cash for protection. 
Although the outcome of the USD is abundantly clear, current laws enforce the USD which should be held for expenses, emergencies, purchases and so forth. By exiting the USD completely, you forfeit your ability to protect other holdings or take advantage of future opportunities. We are players in a game in which rules are changed (and enforced), sometimes without warning. COMEX margin increases are a perfect example. Don’t give up your financial freedom or your ability to protect yourself – in my opinion it’s worth the potential cost of dollar devaluation. This is why holding both dollars (national currency) and PMs is prudent.
Foreign Currencies
Personally I don’t think the average investor needs to be trading foreign currencies. As I’ve mentioned before, all currencies are tied to the same global economy and are nothing more than a promise by the issuing government. If you’re looking to protect purchasing power, PMs fit the bill and are much easier to manage.
Understand The Implications
National Receipts
US annual income from Social Security, Individual and Corporate Income Taxes and Excise Taxes come to about $2.3T.
Deficit
As I mentioned, the reinvestment from the Fed’s existing balance sheet may be able to cover the $1.6T annual deficit. I am being generous assigning $750B-$1T annual rollovers payments from MBS and maturing Treasuries. That’s about 65% of the funding for newly issued debt. These payments may last up to two years, depending on the maturity dates of the reinvestments.
Interest Payments
National debt stands at $14.3T. Since September of 2007 the debt has gained $4B, daily. Interest payments on US national debt in fiscal 2010 was approximately $400B. The average rates for a 3-month T-bill was 0.14%. A weighted increase of just 1% would result in an additional $140B, while a 5% increase would add $700B. This is why I asked the question, what’s the Fed’s plan of action should rates revert to the mean?
Maturing Debt
Rollover of existing debt is going to require around $2.4T.
GAAP-based Deficits (SGS)
Including the Social Security and Medicare, unfunded liabilities have been in the $4 trillion to $5 trillion range since 2008. Total obligations were $76T as of 12/2010 – 5X annual GDP.
There’s simply no way for the US (or foreign) governments to cover these shortfalls. Even is the US were to tax 100% of
wages and corporate profits, they could still not cover the bill (SGS). This is why I say it’s already too late to change course. I believe by the end of 2011 or very early 2012 the US QE will resume in full force. Depending on what tricks can be pulled out of the hat, we may be able to avoid a full blown crisis for a couple years, or it could break within a year.
I’m not too worried about George Soros’ portfolio, but I am concerned about mine. Keep your eye on the bigger picture.
~David Freedom
david@thevictoryreport.org
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