munKNEE.com Your Key to Making Money
Bill Gross isn’t optimistic about the prospects for the U.S. dollar or U.S. Treasury bonds…Citing annual reports from the International Monetary Fund, the Congressional Budget Office and the Bank of International Settlements, Gross notes that the U.S. is one of the worst debt ‘offenders’ in the world [- within the “Ring of Fire” with the likes of Japan, the U.K., Greece, Spain and France – and, as such, unless] a combination of spending cuts and taxes of $1.6 trillion per year [are undertaken within the next 5 years,] America’s debt/GDP ratio will continue to rise, the Fed will print money to pay for the deficiency, inflation will follow, the dollar will inevitably decline, bonds will be burned to a crisp, and only gold and real assets will thrive. Words: 672
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Lokey goes on to say, in part:
Rather than reference the fiscal deficit, the IMF, CBO, and BIS evaluate the U.S. based on a measure called the ‘fiscal gap’. Unlike the ‘deficit’, the fiscal gap includes entitlements such as Social Security, Medicaid, and Medicare. To address this issue, Gross notes that these entitlements are in essence no different than bond payments and thus should be included in debt calculations:
We owe… not only $16 trillion in outstanding, Treasury bonds and bills, but $60 trillion more. In my example, it just so happens that the $60 trillion comes not in the form of promises to pay bonds or bills at maturity, but the present value of future Social Security benefits, Medicaid expenses and expected costs for Medicare.
In all then, these entitlements plus bond coupon payments and redemptions total around $76 trillion in debt or around 500% of GDP putting the U.S. on par with Greece — fortunately for the U.S., the dollar is the world’s reserve currency.
HAVE YOU SIGNED UP YET?
Go here to receive Your Daily Intelligence Report with links to the latest articles posted on munKNEE.com.
It’s FREE and includes an “easy unsubscribe feature” should you decide to do so at any time.
Join the crowd! 100,000 articles are read monthly at munKNEE.com.
Only the most informative articles are posted, in edited form, to give you a fast and easy read. Don’t miss out. Get all newly posted articles automatically delivered to your inbox. Sign up here.
All articles are also available on TWITTER and FACEBOOK
Gross complies the figures from the IMF, CBO, and BIS and concludes that in order to keep its debt-to-GDP ratio from spiraling out of control, the U.S. would need to cut spending or raise taxes to the tune of $1.6 trillion per year:
The closest the U.S. has been able to come so far: the ‘super committee’s’ failed attempt to secure $400 billion per year in cuts.
Gross also plots 13 countries on a graph [see below] showing where each stands regarding the fiscal gap (x axis) and 2011 public debt-to-GDP (y-axis). The U.S. falls into a group comprised of Japan, the U.K., Spain, France and Greece. Needless to say, that is some bad company….
(Click on box for graph)
As for how to position for such an event in terms of asset allocation, Mr. Gross doesn’t mince words:
Unless we begin to close this gap…our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, the dollar would inevitably decline, bonds would be burned to a crisp, [and] only gold and real assets would thrive.[Emphasis mine]
Of course the idea of Congress being able to agree on $1.6 trillion in spending cuts and/or tax hikes per year is laughable. Should the U.S. be unable to bring the situation under control, Gross predicts that ratings agencies, bond holders, and nations which hold dollar reserves could cease to view the U.S. as the safest of safe havens.
Should this happen, yields could begin to rise on Treasury bonds against the Fed’s wishes. From there, the unraveling begins, as the Fed’s DV01 could well be $4 billion at that juncture considering the expected rate of asset purchases.
Conclusion
While the pay-off may be some ways off, shorting U.S. Treasury bonds could produce quite the pay day in the years ahead. In the mean time, gold should continue to outperform.
*http://seekingalpha.com/article/901391-bill-gross-says-treasury-bonds-will-burn-to-crisp-gold-to-thrive
Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
Related Articles:
1. What is the Best Way to Inflation-Proof Your Portfolio? Here are the Options and Recommendations
With investors concerned about inflation it begs the following questions: “What is the best way to attempt to inflation-proof ones’ portfolios? Buy TIPS? Short Treasury bonds? Stocks? Real Estate? Commodities? Gold? Currencies?…[In this article we review each option and come to a conclusion as to how best to hedge the risk of inflation.] Words: 1672
2. Collapse of Our Financial System is Inevitable! Here’s Why & How to Protect Yourself
There is a clear link between our system of fiat (paper) money, the supply of money and credit in an economy, and the 30-year boom that came to a dramatic end in 2008. It’s only by understanding this link that investors (and anyone with wealth) can appreciate just how fragile our financial system is, and what to do to protect themselves from its inevitable collapse. [Let me explain.] Words: 961
The outcome of the election of 2012 will [only] determine the rate of speed at which we approach the [financial] cliff [because] neither political alternative is willing to change course, to steer away from the cliff. The cliff is so high that whether we go over it at 200 mph (Obama) or whether we merely slip over the edge (Romney), the end result is the same — fatal for the economy and perhaps our entire political system. It is the fall that will kill us. [This article explains why that is going to be the case.] Words: 1135
4. U.S Likely to Hit the Financial Wall by 2017! Here’s Why
The deficits aren’t going to stop anytime soon. The debt mountain will keep growing…Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things….The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for….[and] the Federal Reserve will hear their prayer. When will the economy reach the wall toward which it is headed? Not soon, I believe, but in the meantime there will be plenty of excitement. [Let me explain what I expect to unfold.] Words: 1833
5. This Will NOT End Well – Enjoy It While It Lasts – Here’s Why
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
6. Events Accelerating Towards an Ultimate Dollar Catastrophe! Here’s Why
With the U.S. election just months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
7. Major Inflation is Inescapable and the Forerunner of an Unavoidable Depression – Here’s Why
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
8. An Inflation Inferno is Expected – but When?
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
9. Major Price Inflation Is Coming – It’s Just a Matter of Time! Here’s Why
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
11. The U.S. Debt Spiral: When Will it End? More Importantly, HOW Will it End?
The U.S. already has more government debt per capita than the PIIGS (Portugal, Italy, Ireland, Greece and Spain) do and it just keeps getting worse and worse thanks to both political parties. We are on the road to national financial oblivion yet most Americans don’t seem to care. They don’t realize that we have enjoyed the greatest prosperity we will ever see…and that when the debt bubble bursts there is going to be an immense amount of pain. That is a very painful truth, but it is better to come to grips with it now than be blindsided by it later. [Let me explain.] Words: 1140
I believe that in the autumn of 2012 we are going to see…a series of negative events – failing economies, higher unemployment, more QE, and extraordinary levels of social unrest. When QE is announced, I see a temporary rally in stocks but at some point stocks will collapse. I’m not talking about mining stocks, but common stocks outside of the mining sector.
13. Foreigners Beware: U.S. Treasury Maturity Dates are Alarming
While many investors want to believe that U.S. treasuries are a safe haven, I will use this article to debunk that myth with plain hard evidence…[to support my contention that] holding U.S. bonds is the worst investment going forward. Words: 500
14. Almost 3 Million Views! Why U.S. Debt & Budget Will NEVER Balance
This short video – on the sustainability of government spending – should be watched by everyone, including those not yet old enough to vote. It should be shown in every high school and college classroom.
15. World’s Largest Economies Have NO Choice But to Engage in Massive Money Printing – Here’s Why
The choice facing the leaders of the world’s largest economies is a simple one: Either they engage in massive money printing, or they let the world slip into another great depression. This article examines why they have no choice but to print money, something which will have significant consequences for everyone. Words: 560