You May Think I’m Crazy, But…..

For a long while now, I have been putting forth this long-term forecast.  The Dow to Gold ratio will eventually fall to 1.

If you’re not familiar with the Dow to Gold ratio, it is calculated by taking the value of the Dow Jones Industrial Average and dividing by the price of gold per ounce.

On Friday the Dow closed at 26,820.25 and the price of gold per ounce ended at $1496.90.  That puts the Dow to Gold ratio at 17.92.

My ultimate forecast puts the Dow and the price of gold per ounce at the same approximate level.

That may seem like an extreme forecast to new readers, but looking at the numbers and studying history, it’s easy to reach that conclusion.

Deflation will have to occur driving down stocks and the policy response will be bullish for gold.

Let me explain.

There are two words to describe today’s financial situation world wide and the inevitable economic outcome that is approaching.  Those two words are debt excesses.

We can begin by examining the official debt of the US Government.  It stands at $22.63 trillion according to usdebtclock.org.  Looking at the debt calculator on the site, that amounts to debt per taxpayer of $183,625.

But, the official US debt doesn’t count the unfunded liabilities of federal programs.  Let’s forget that many of those programs don’t exist for our brief discussion here and focus only on the two biggies – Social Security and Medicare.

According to the most recent report published by the trustees of the Social Security program, the underfunded liabilities of the program are now $43 trillion (Source:  https://thehill.com/opinion/finance/443465-social-security-just-ran-a-9-trillion-deficit-and-nobody-noticed).  That includes a not-hardly-even-reported-on $9 trillion deficit just last year!  That’s another $348,912 per taxpayer.

Then, there is Medicare.  Former Dallas Federal Reserve Bank President, Richard Fisher, stated that Medicare has total unfunded liabilities of about $85 trillion.  Add another $689,709 per US taxpayer.

When adding the liabilities per taxpayer numbers together for the national debt and the unfunded liabilities of Social Security and Medicare, one gets a total cost per taxpayer of $1,222,246.

How does that get paid?

The harsh reality is that it doesn’t.

But, unfortunately, debt excesses don’t stop there.

The majority of US states also have significant liabilities.  Only 10 states have a per taxpayer surplus according to “Truth in Accounting”.  The other 40 have per taxpayer deficits.

The chart on this page illustrates.

According to “Truth in Accounting”, there is now $1.5 trillion in state debt.

Last week, here in “Portfolio Watch”, we took a look at pension underfunding problems at the state level.  This is still another debt factor that adds to the burden.

Changing our focus to private sector debt, we find still more debt excesses.

Student loan debt now exceeds $1.5 trillion and affects 44 million Americans according to a recent “Forbes” article.  (Source:  https://www.forbes.com/sites/rcarson/2019/09/29/8-ways-to-avoid-a-lifetime-of-student-loan-debt/#7814f3f12b39)  11.5% of student loans are now 90 days past due.

The same article reported that total US credit card debt now tops $1 trillion. 

“Motley Fool” reports that US automobile debt is also now over $1 trillion.  And, mortgage debt is now over $9 trillion.

Overall, comparing these private sector debt levels to the private sector debt levels at the time of the financial crisis, it’s worse now.

At the height of the Great Recession, total household debt was $12.7 trillion, presently it stands at $13.54 trillion.

So what does all this mean?

To state the obvious, if there is too much debt to be paid, it won’t be paid. 

As far as public debt and underfunded liabilities are concerned, liability of $1.2 million per taxpayer is totally unmanageable.

Raising taxes as some in the current crop of political aspirants would advocate, can’t solve the public debt problem.  The numbers are simply too large.

Based on the level of total household assets reported at usdebtclock.org, confiscating 100% of household assets wouldn’t provide enough money to meet the obligations.

Cutting spending is an option if a deflationary depression is the desired outcome.  Although, eventually this will have to be the outcome.  Debt defaults are deflationary and cause the money supply to contract.

Seems that for the time being, world policymakers are intent on money creation. 

Outgoing European Central Bank Chair, Mario Draghi, just cut the deposit rate from -.4% to -.5%.  The deposit rate is the interest rate that commercial banks earn on deposits with the central bank.  A negative interest rate means that commercial banks pay to park money with the central bank.

On top of cutting interest rates, Draghi announced that the central bank would once again be cranking up the money creation machine committing to buy 20 billion Euros per month in bonds from banks in an effort to inject more cash into Europe’s faltering economy.

History teaches us that money creation always ends badly.  Best case scenario is considerable inflation; worst case is the destruction of a currency.

Whether considerable inflation causes policymakers to reverse course as far as policies are concerned or a currency is ultimately destroyed, eventually deflation sets in because money creation doesn’t make the debt disappear.  Money creation just adds to the debt, making the eventual deflationary event more intense.

The current political environment is reminiscent of the tale penned by Hans Christian Anderson titled, “The Emperor’s New Clothes”.  In it, the emperor hires two tailors to make him some new clothes.  The tailors make no clothes at all, instead they tell the Emperor that anyone who is unfit for their position, is stupid or incompetent won’t be able to see the clothes.  But, anyone who is competent and smart will be able to see them.

The emperor and all his advisors pretend to see the clothes so they are not perceived as unfit for their positions or incompetent.  Finally, a small child yells out the emperor is wearing nothing at all.

In the current political climate, there is not one mainstream candidate on either side of the aisle talking about the fact that debt levels are unsustainable and will lead to inevitable consequences adversely affecting nearly every American.

The current budget deficit is about $1 trillion adding to the ultimate per taxpayer liability that is already more than $1.2 million. 

Paying off the national debt and fully funding Social Security and Medicare will require more than the entire, combined net worth of all US households.

When you hear about Medicare for all, billionaire taxes, increasing defense spending or new government programs of any kind, just understand that the emperor really does not have new clothes.

This debt monster will have to be dealt with at some point.  Talk of all these new programs, negative interest rates and more money printing just feeds the debt monster and makes the ultimate problem worse.

All you can do is assemble the best plan possible to prepare for the inevitable.