Is the U.S.A. Debt Crisis a Paradox?

Dear PGM Capital Blog readers
In accordance with the USA Debt Clock the USA has today, February 3rd 2012, a National Debt of approx. 15.3 Trillion USD. Based on its estimated nominal GDP of approx. 14.5 Trillion USD for 2011, the USA currently has a Debt to GDP ratio of over 100%.

On top of this the USA has a budgetary deficit of approximately 10% and an increasing trade deficit, which has reached 47.8 Billion USD in November 2011, as can be seen from below chart.

Everybody with a sound Economic sense would expect the yield of the 10-year note to be (far) above 4%, instead of 1.95% where it stands today.

The questions most investors would be asking themselves are “Have we missed something” and “Why is the bond market not reacting to the weakening USA fiscal situation?”

The answer for this may be found in the fact that the US-Dollar, as the world reserve currency – driven by fear of these uncertain times, by the European Debt crisis and by a slowing world Economic growth – has irrationally increased the appetite of Investors for US Government loans, despite the weakening USA fiscal situation.

Secondly, the USA FED is expanding its balance sheet via hidden and announced Quantitative Easing programs and is using this newly created money to buy USA Treasuries, which artificially is keeping the interest rates low in the USA.

So, what if the European debt crisis is nothing more than a storm in a glass of water and the world Economic growth isn’t slowing like the media want us to believe, or the world Economy starts getting momentum again.

It sounds like a paradox, but if the above mentioned is true, the U.S.A could run into trouble, because inflation will rise, forcing the FED to increase rates much earlier than expected and investors appetite could rise for corporate bonds over Treasuries, putting an upwards pressure on the US government borrowing costs.

If the USA budget deficit isn’t handled accordingly we could see the total USA National debt reach 20 Trillion USD by the end of 2015, if in this case investors will turn their backs to the US Treasuries and subsequently the yield of the 10-year note will rise to 5%, which means that the USA interest payment will be approx. USD 1 Trillion a year.

This is why a Global or USA Economic recovery isn’t in favor of the USA National Debt and Interest payment on its debt.

If we are right on the above, the media must keep on doing everything to maintain the fear high by blowing up the European Debt Crisis, while the USA debt is absolutely and relatively higher than Europe’s.

They will continue misinforming people that the rest of the world Economy is slowing and that China might have a hard landing, while China’s Economy has grown with 8.9% in
Q3-2011, and the USA only grew with 2.8%.

This also means that the USA FED must keep on printing money until there are no more trees, and to use this newly created worthless money to buy USA Treasuries nobody else wants to buy in order to keep interest rates Low.

The consequence of this will be that the smart money will flee into Gold & Silver and that more and more countries will avoid the USA Dollar as the reserve currency by pricing commodities like Oil in Gold instead of the US-Dollar or Euro or any other FIAT CURRENCY.

This event will lead to a very disastrous currency war, which will wipe out all savings in paper currency. Those most hurt will be retirees whose pension premium are mostly invested in Treasuries

For the sake of humanity I hope and wish that the points as discussed in this blog article will never happen.

But if after reading this  you agree with the content, please feel free to contact us, for us to talk with you about your future and the best investment plan than meets your profile to protect you and your love-ones for the disaster that lies ahead

Yours sincerely

Eric Panneflek

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