Burning Money at the Rate of $113 Billion a Month; How Can They Stop Printing?
Interest-Rates / Quantitative Easing Dec 17, 2013 - 03:02 PM GMT
Michael Lombardi writes:
In the month of November, the U.S. government registered a budget deficit of $135 billion. Over the course of the month, it spent $318 billion and only took in $182 billion. So far for the fiscal year 2014, which began in October, the U.S. government has registered a budget deficit of $227 billion; that’s an average of $113.5 billion a month so far this fiscal year. (Source: Department of the Treasury; Bureau of Fiscal Service, December 11, 2013.)
In the same period a year ago (October and November of 2013), the U.S. government registered a budget deficit of almost $300 billion. (I ‘m certain that some politician comparing the two periods will say, “Look, our budget deficit situation is getting better!”)
Whenever the U.S. government registers a budget deficit, it has to go out to the market and borrow money to pay for its expenses and obligations. This increases our national debt, which has skyrocketed over the past few years due to consecutive years of extremely large budget deficits. As of December 10, our national debt stood at $17.2 trillion. (Source: Treasury Direct web site, last accessed December 12, 2013.)
I believe our national debt will double to $34.0 trillion in the years ahead.
Here’s my reasoning:
According to the Congressional Budget Office’s projection, between 2014 and 2018, the total U.S. budget deficit of the U.S. government will add up to about $2.4 trillion. This means that by the government’s own estimates, the national debt will hit about $20.0 trillion in four years. (Source: The Congressional Budget Office, May 2013.)
But I think the budget deficits the U.S. government will post in the years ahead will be much higher than estimated. Interest rates could double three to four years out and that could easily tag on another $400 billion in interest costs for the government. We still don’t know the true costs of ObamaCare. Cities are crying out for federal government aid or bailouts. The population is aging; social security is stretched.
And that brings me to our creditors… When will they say “enough with the borrowing, enough with the money printing; we want our money back”?
China, which has already financed a significant amount of our national debt, says it will not buy any more U.S. bonds. It says it doesn’t want to increase its foreign reserves. I wonder if the country has realized that our government can’t continue to go on like this? Spend more, borrow the difference, and print more if foreigners won’t finance us—it’s unsustainable in the long run…
What are we looking at? A national debt that could double in less than 20 years, accelerated paper money printing to finance that debt, and rapidly rising inflation. Look at the precious metals. They are very, very cheap today, and they will be a great hedge for the inflation headed our way.
Michael’s Personal Notes:
An old friend walked into my office the other day and told me I was dead wrong about the stock market being overvalued and overbought. “Michael, it looks like key stock indices can go even higher next year.” His reasoning: the Fed won’t stop printing and that means “the market can only go up.”
This is exactly where the trouble begins.
You see, I have read a lot about bubbles…and not just the ones in key stock indices. All bubbles have one thing in common: when bubbles get bigger, optimism goes mainstream.
Looking back, you will see this yourself. During Tulip Mania, the general consensus was that tulip prices would only go higher—they did, but then they came crashing down. The housing market bubble of 2004–2006 is another prime example of this. Back then, I remember everyone talked about how home prices would only go up. People took risks beyond imagination. They talked about getting a third mortgage to buy another investment property and many investors I talked to were juggling several properties. Home prices then collapsed.
I believe the stock market of today is clearly displaying signs of a classic bubble.
Sadly, investors continue to buy into it. According to the Investment Company Institute, between the weeks ended November 6, 2013 and December 4, 2013, long-term stock mutual funds saw an inflow of $24.8 billion. (Source: Investment Company Institute, December 11, 2013.)
Meanwhile, the number of stock advisors bullish on key stock indices continues to rise. Insiders are selling more stock than they are buying. The VIX (Volatility Index) is near a record four-year low. Margin to buy stock is at an all-time high. I can’t find any time-proven indicators that say this market is not overpriced and overbought!
Dear reader, I can’t stress this enough: The fundamentals that drive the key stock indices higher are fragile. There’s a massive disparity between the performance of the stock market and factors like corporate earnings growth and general economic conditions.
As it stands, irrationality prevails for key stock indices. Bad news is taken as good news, and the good news is taken as better news.
Unlike my old friend, I remain skeptical about the performance of key stock indices. I know bubbles can stretch longer than most people envision, and it is very difficult to predict when they will burst—but this stock market bubble will burst big.
This article Burning Money at the Rate of $113 Billion a Month; How Can They Stop Printing? is originally publish at Profitconfidential
Michael Lombardi, MBA for Profit Confidential
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