Point of No Return

Economic outcomes are fairly predictable, its the timing of outcomes that isn’t. I was only one of thousands who wrote that USG was putting itself into a position from which it could not recover. This was the absurdity of trying to finance the nation’s way out of a debt-based financial collapse. Sooner or later they would destroy the very Treasury market that made the financing possible, thereby forcing the Fed to pick up the slack. Of course, with the Fed creating new money to buy treasuries, that devalues the dollar which devalues the bonds. Catch 22, damned if they do and damned if they don’t, a lose-lose proposition if ever there was one.

All indications are that the Treasury market turned the corner last week with rates rising and prices falling. Also, news broke (via Tzarina Pelosi) of yet even more “stimulus” bills in the works, all this in the face of the USG needing to raise at least $2.8 trillion and up to $3.3 trillion this year. That is simply impossible without collapsing the market, so hi-ho, hi-ho, its off to the printers they go.

Consider: $3 trillion is now 1/4^th of the whole economy, now down to about $12 trillion GDP. To pull that much money from private capital would by itself collapse the economy.

Next, China has issued its fourth warning, this time by Premier Wen. These warnings started at low levels and climbed the ladder to the top. That latest warning is no idle threat; they are telling the rodents in DC that they will dump their bonds if the rodents start monetizing. The threat is no longer idle since exports to the US are down by half, and so the Chinese have far less to loose by dumping than by keeping.

I believe that this is setting the stage for a future dollar devaluation. That is the only remaining option after a Treasury collapse. Despite the massive amounts of new government credit creation, I do not see this as inflationary since most of it is going into the black holes of derivative implosions and very, very little of it will reach the pockets of the people. Government spending cannot take the place of consumer spending and so has very little power to cause price increases except in limited sectors like shovels for filling potholes. FACT: Government can spend $3 trillion but consumers spend more than $10 trillion, so that barely offsets the decline in consumer spending, yet alone increases it.

The bond market will not collapse quickly, nor will Fed bond purchases ramp up fast. The time frame for this second leg down of the GREAT COLLAPSE will be 1-2 years.

The outlook for Precious Metals is that the fear factor can be expected to steadily grow as the current rally fades out. I see a case for a slow, but steady climb in prices (with the usual wild swings in sentiment). If the economic news is bad enough in May, prices will hold throughout summer, so we may have at best only a couple more months to buy at bargain prices. Silver should easily be flirting with $20 by September and $25-30 by November.

There is a huge consensus that silver will close the spread with gold; I agree, and fear plus limited quantity is the reason.