Tags: Debt | Crisis | US

It’s Only a Matter of Time Before Debt Crisis Hits US

By    |   Thursday, 01 Mar 2012 01:01 PM

We are seeing some pretty good economic numbers in the United States.

Consumer confidence is improving. Jobless claims are dropping. Unemployment has steadied. Corporate earnings have also been pretty strong. The housing market is showing signs of bottoming.

Living in the Bahamas, I have been through a few hurricanes, including Hurricane Irene last year when its eye passed right over us. In a hurricane, there is a calm before the storm. Hurricanes suck in all the energy that is around them. So usually one or two days before they hit — and then one or two days afterward — it is sunny and pleasant.

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Right now, I think we are seeing the calm before the storm of the U.S. debt crisis.

The United States is sort of in a sweet spot as people have become risk adverse because interest rates are low. The debt crisis in Europe has created demand for U.S. assets because the United States has the ability to create its own money, unlike many of the smaller PIIG nations.

In addition, debt at the federal level is just about to pass 100 percent of GDP. While this is very worrisome, usually the absolute crisis level is 110 percent to 120 percent of GDP. However, with the U.S. running deficits of about 8 percent of GDP with no end in sight, that puts us at this crisis stage in about two to three years.

In about two or three years, I expect austerity in Europe to begin to take hold.

You will see deficits in Italy, England and Ireland about half of where they are today. At that time, I think attention will turn to the United States. You will see the bond vigilantes take hold of the U.S. bond market and begin to sell, pushing rates higher.

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Some argue that the United States could be in for another lost decade like Japan and this could keep rates low. However, the problem with this argument is that more than 95 percent of Japan’s debt is owned by the Japanese, where only about 50 percent is owned domestically in the United States. Therefore, foreigner vigilantes can have much more of an effect on the market.

During the next few years, it will be time to protect yourself from a run on the dollar and U.S. bonds. This means maybe buying antidollar assets such as gold and precious metals, precious-metals stocks and other commodities, buying inflation-indexed bonds or inverse interest rate ETFs.

About the Author: David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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2012-01-01
Thursday, 01 Mar 2012 01:01 PM
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