Home > Protect Yourself: Why The U.S. National Debt Could Drain Your Savings (GLD, SLV, EWS, AUY, FXF, EWY)
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Protect Yourself: Why The U.S. National Debt Could Drain Your Savings (GLD, SLV, EWS, AUY, FXF, EWY)

January 10th, 2012

David Zeiler: Now that Congress has allowed the U.S. national debt to grow bigger than the American economy, it won’t be long until the American public suffers the consequences by losing most of its savings to inflation.

Figures for last year show the national debt officially exceeded 100% of the nation’s gross domestic product (GDP). According to government figures, the national debt stood at $15.23 trillion at the close of 2011, compared to a GDP of $15.18 trillion.

“The 100% mark means that your entire debt is as big as everything you’re producing in your country,” Steve Bell of the Bipartisan Policy Center, told USA Today. “Clearly, that can’t continue.”


Government overspending has grown the federal debt at an alarming rate. As recently as 2010, the Congressional Budget Office (CBO) had projected this milestone would not be reached until 2020.

“Congress is doing everything it can to make sure the national debt grows,” said Money Morning Capital Waves Strategist Shah Gilani. “Republicans want more tax breaks for the rich while they appease the middle class by considering extending the payroll tax cuts and unemployment benefits. The Democrats want to hire voters as government employees, a la Greece, to not only expand their base, but prove that big government can indeed be friendly. It’s sickening.”

According to projections in the latest budget submitted by U.S. President Barack Obama, the federal debt will soar to $26 trillion over the next 10 years. At that pace, the economy would need to grow at a 6% pace to stay even. The historical average for the annual GDP growth since 1948 is only 3.25%.

Unless Congress acts – and its recent track record of bickering while doing nothing to shrink annual budget deficits is not encouraging – this crushing debt will soon start inflicting serious pain on the American public.

Headed the Way of Italy and Spain

Although Congress could choose to tax its way out of debt, it would need to go far beyond the millionaires the Democrats want to tax. Fear of voter backlash will dissuade lawmakers from imposing the sort of taxes on the general public that could make a dent in the U.S. national debt.

Instead, Gilani sees the United States following the path of such troubled Eurozone countries as Italy and Spain.

“Greece, and more precisely Italy and Spain, are our ghosts of the future past,” Gilani said. “The Fed will print more money. That’s what they do. They work for the banks.”

When countries print money to pay off debt, it typically leads to inflation. In such a scenario, the middle class loses big time as their savings lose value.

“The government’s strategy appears to be some kind of “repression,’ where you keep rates low and figure out a way of forcing domestic investors to take government bonds at very low interest rates,” said Money Morning Global Investing Strategist Martin Hutchinson, noting that British bonds lost 90% of their value from 1945 to 1975.

“Repression’s main effect is to solve government’s problem at the expense of the middle class — it’s effectively a very nasty extra tax,” Hutchinson said.

The Lessons of Weimar Germany

One extreme case of damaging inflation took place in the German Weimar Republic of 1920-1923. By 1921, prices were already 15-times what they had been in 1914 at the beginning of World War I.

What followed was a period of “hyperinflation” that in 1914left the German mark worth only one-trillionth of its value.

“The Weimar hyperinflation wiped out the entire savings of the German middle class,” Hutchinson said, noting that current U.S. policies of low interest rates, low taxes, deficit spending and an expansion of the money supply have mirrored those of the Weimar Republic.

“U.S. authorities probably won’t pursue expansionary monetary policies with quite the dogged Germanic persistence that caused the mark to fall to one trillionth of its former value,” Hutchinson said, “but the turnaround needed to stop a Weimar repetition will be very unpleasant, so there will undoubtedly be considerable denial and fudging of the figures as inflation begins to take off.”

Although Congress can still prevent a national debt-induced disaster that would destroy much of the savings of the middle class, time is running out.

“Congress has until 2013 to start doing something, maybe through the first or second quarter of 2013 at most,” said Gilani. “After that, if the world is growing and the U.S. is back on a growth trajectory, commodities will spike and inflation will start its inexorable, ineluctable rise.”

Protect Yourself

There are several things investors can do to protect themselves from inflation. Hutchinson recommends:

  • Investing in Gold: Gold is still the best hedge against inflation. The SPDR Gold Trust ETF (NYSEARCA:GLD) is a good option. Alternatively, you could go for a solid gold mining company such as Yamana Gold Inc. (NYSE:AUY). These tend to move somewhat independently of the gold price, but also become more valuable through earnings as the period of high gold prices lengthens.
  • Investing in Silver: Try to work silver into your portfolio, as well – specifically the iShares Silver Trust (NYSEARCA:SLV).
  • Investing in Asia: A third option is to invest in Asian stocks – especially South Korea and Singapore. Two strong prospects are the iShares MSCI Singapore Index Fund (NYSEARCA:EWS) and the iShares MSCI Korea Index Fund (NYSEARCA:EWY).
  • Fleeing the Dollar: With damage sure to be inflicted on the U.S. dollar, the Rydex Currency Shares Swiss Franc Trust (NYSEARCA:FXF) also is a good choice. It tracks the performance of the Swiss franc and has an expense ratio of only 0.4%.

Written By David Zeiler From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years.  And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing  exponentially; and a technological revolution even in the most distant markets on the planet.  And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.


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  1. Knave Dave
    May 25th, 2012 at 17:35 | #1

    In a properly run economy, the U.S. would have paid down its debts during good times, rather than create debts in order create good times at someone else’s expense. THEN, when bad times came, the U.S. (or any other country on the same program) would have ample ability to do some spending and stimulate the economy. If you pay off debt in the good times, then you have the capacity to use debt to get by in the rough times. That kind of economic program evens out the highs and lows and makes life a lot more livable in a responsible way.

    The U.S. has been so profligate with debt during the good times that it has no capacity to take on more debt now. (In one of the greatest travesties of American history, we used national debt and personal debt to create good times for ourselves by setting up our children to pay for our easy high living.)

    The U.S. already has more debt than it will ever find the political will to pay off. More dangerous by far than that, as a result of these bailout spending policies that began in the Bush II years, the U.S. NOW has more debt than it could ever pay off, for paying off the debt at any time in the future will be such a burden that it would pull even the strongest of economies right back down.

    We have passed the point of no return, and that is why Krugman and others want to keep up deficit spending. Without it, there would be / will be NO economy because the old economy is existing solely on life support now. When an economy is moribund, it would be better to declare a “year of Jubilee” and forgive all debts everywhere and do a complete reboot. Tough as that is, it would put the entire world in better shape for the future.

    “Throughout the years of Reagonomics, however, the United State’s national debt as a percentage of GDP — after decades of decline – grew rapidly and continued to do so under President George Bush the First. Then U.S. debt plunged for the first time throughout the Clinton years (when taxes on the wealthy were raised) and finally began to rise again during the Bush II years (when taxes on the wealthy were cut again … even more than they were cut by Reagan).”

    Obama has essentially continued with the Bush Bailout Plan.

    –Knave Dave

  2. April 24th, 2012 at 05:18 | #2

    I totally agree with you.

  3. January 12th, 2012 at 13:21 | #3

    our government “debt” is really more like money than what most think of as debt; government debt need never be paid back…the markets are telling us there is a shortage of safe assets…at a negative real interest rate, we should be borrowing more…

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