Thursday, December 17, 2009

Dollar Devaluation: U.S. Dollar Devaluation as American Government Goes Deeper in Debt

Everywhere in the world where I travel takes or exchanges U.S. dollars, but not for long as the dollar devalues further. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

Where is the money going to come from? From our foreign creditors?

I agree with Porter Stanberry that foreign creditors won't pony up the money any more as freely and readily as they did in the past. Certainly not according to Greenspan-Guidotti.

Indian or Russian central banks are withholding and hesitating buying U.S. Treasury bills, opting to buy enormous amounts of gold. Stanberry says the Indians bought 200 metric tonnes this month. Sources in Russia speculate the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing on the top of many central banks priority lists is NOT buying more U.S. debt - a very risky proposition at present. Which central banks will abandon the dollar next? Stanley thinks Brazil, Korea and Chile.

These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

All of this will lead to a severe devaluation of the U.S. dollar... are you ready for the wildest ride of your financial life? - worldwide speaker and author of United States of Arrogance

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