Money

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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