Rising Debt: The Main Reason Why the Dollar Will Fall and Gold Will Rise

gold investment commoditiesIn Ronald Reagan’s first year in office, the national debt crossed $1 trillion on October 22, 1981. It took 205 years from the Declaration of Independence and 192 years after the Constitution was drafted to reach our first $1 trillion in debt.  Then it took only 27 years to reach $10 trillion in debt, in 2008.  And now, it has taken only nine years to reach a second $10 trillion in debt, reaching $20 trillion last September.

I remember all the warnings about how $1 trillion in debt could bring our nation down in the 1980s, but it didn’t. That created a sense that we can somehow manage large and rapidly growing trillions in debt, but we can’t manage a large and growing debt load forever. The demographic realities argue against that fact. The huge Baby Boomer generation (born 1946-1964) are either retired now or will soon retire. They will draw down massive amounts of currently-unfunded Social Security and Medicare entitlement payments. Meanwhile fewer low-wage younger workers will be able to fund those huge and rising entitlements.

No matter what new tax bill passes this year or next, there will likely be $500 billion to $1 trillion annual budget deficits over the next decade. That means we will reach a $25 trillion to $30 trillion national debt by 2027. Nobody is talking about balancing the budget, much less paying down the debt. The only way to keep the nation afloat with that level of debt is to (1) keep interest rates historically low, below 2%, which is likely impossible; (2) print more money to pay for benefits or (3) cut benefits or other spending, which could cause a recession – or a voter revolt. In any of these scenarios, gold will rise and the dollar will fall.

You would think that with “Brexit” and a weak euro – and tensions in the Middle East and Asia – that the dollar would be the “safe haven” currency of 2017, but the big surprise of the year is that the U.S. Dollar Index began the year at 103 and is currently under 93 – down 10% in the first 11 months of the year.

Two developments helped the euro recover – political unity and a recovering economy. The elections in France and the Netherlands helped support the European Union (EU) rather than repeating the Brexit-style divorce voted by the British in 2016.  While the German election is not yet settled, the German economy is humming along with a 3.3% GDP growth rate in the most recent quarter. With the EU back on solid ground and the European economy recovering, the euro has recovered strongly vs. the dollar.

A weak dollar helps gold, so the 10% decline in the dollar is reflected in the 12.6% gain in gold in 2017.  But most of the other commodities have not followed suit.  The CRB commodity index is down slightly (-0.15%) for the year so far. Crude oil has recovered to a 9.7% gain, but natural gas is down 24.5% in 2017.

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2 years ago

Debt is like heroine addiction. One has to increase the dosage for it to remain effective (pay off debts with more debt). Eventually, the nation will face a debt overdose , or there will be a convulsive withdraw. With the overdose, the currency becomes worthless (death of the currency – like Confederate dollars – not recognized by any trading nation); (pre-WWII German Deutschemark was cheaper as wallpaper than the cost of using actual wallpaper for the same square footage.) A convulsive withdraw would be a repetition of the Great Depression. And yes, while the value of gold will go up,… Read more »

2 years ago

I heard on the news the other day, some liberal democrat saying the new tax reform will add one trillion to the debt. I haven’t the foggiest idea where he came up with that, but he was obviously uneducated as to the debt that Obama piled on us. It’s that kind of crap that makes me sick. They must think we can’t remember what happened last week, and keep shoveling this garbage at us so we get side tracked. I say we ignore them completely for one week and get the charges filed in order to bring swift justice to… Read more »

2 years ago

As long as an individual has a minimum of 15 to 20 years outlook for holding gold or any precious metals commodity, a small percentage, say 3 to 5 percent, of precious metals in their overall investment portfolio makes sound economic sense. It is, after all, merely a financial hedge against the depreciating value of the dollar over time due to the intentional actions of government to pay down their accumulated debt with a ever more devalued fiat currency, the dollar. It is not that the value of gold rises per se, but rather that the value of the fiat… Read more »

2 years ago

Unfortunately the “powers that be” have figured out how to hold the gold market down; I guess with phony paper futures that are not expected to be delivered on. I made a lot of money off gold from 2000 on and 7 years ago it went down the tubes and cannot seem to recover. Every time it starts to recover they smash it. I don’t understand why it is so crucial now to kill gold as an investment when they let it rise before? In the early 2000’s the economy was also booming thanks to the same phony baloney that… Read more »

Walter S Cable
2 years ago

#1- I wish you would quit referring to social security as an entitlement. It is MY money that the politicos stole from the Social Security TRUST Fund. What has the national debt done, before and since, Richard Nixon took us off of the gold standard? I have not done the research, but I am willing to bet that there is a strong correlation between the two. The middle class has been losing ground ever since. Unless and until someone starts serious action towards reducing spending and the national debt we will not have true economic prosperity. This should start with… Read more »

Larry Kearney
2 years ago

Fortunately, the myth of 77 million baby boomers is just that, a myth. According to the U.S. Census, the population of the United States only increased by 52 million people.

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