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How will the U.S. deal with its enormous debts?

*Dow Theory Letters, by Richard Russell, August 2, 2010

‘The US national debt is now $13.237 trillion. The US’s unfunded liabilities are over $50 trillion. All the stock market’s recent bullish activity has taken place with the near-term in mind. The frightening
long-term problems have been ignored.  The question I ask myself is ‘When will the stock market start dealing with the longer-term issues, specifically our enormous US debts?’

Actually, I believe the stock and bond markets have one eye cocked on the forthcoming US debt problems.  The debt problems of the US are so huge, so intractable, that I definitely must keep them in mind in my investment strategy.

First, I’m convinced that the US has absolutely no choice but to default on its ‘impossible’ mountain of debts.  The US is not going to face its creditors and boldly announce, ‘Sorry, we can’t pay our debts.  So we’re going to renege on them.  It’s over, we can’t pay and we can’t envision a time when we’ll ever be in a position to pay off our debt.’  Frankly, I can’t envision this kind of blunt US default.

Wait, there is another way to default.  You default by depreciating your currency, by printing so damn much of your money (inflating or ‘Quantitative easing’) that your debts become insignificant over time.

Hard to understand?  I demonstrated the ‘inflation cop-out’ in my own case with my GI insurance policy. When I took out my GI insurance policy in 1945, I treated that policy (until I paid it off) as a debt.  I struggled to pay the required $20 a month until I had paid off the policy.  By the way, paying $20 a month was a real hardship for me back in the 1940s.

Now its 2010 and I’ve lived through 65 years of Fed-sponsored systematic inflation.  Today I look back on those $20 monthly payments and they seem like small change.  In fact, today I could pay off my entire insurance policy debt overnight and not give it a second thought.

That’s the way inflation works.  It’s a creditor’s worst enemy and a debtor’s best friend.  Let me inflate (devalue) the currency through enough years, and I can make any debt feel like ‘chump change.’

And, that, I believe, is the way (and the only way) that the US is going to deal with its enormous debts. This is great for a government like the US that is deep in debt, and it’s a gift to people who are personally in debt.  Devalue my money enough and I can deal with any debt.  So maybe inflating is not a true default, but in a way it is a legal version of defaulting.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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