Darleen, as you know, I'm no expert on this subject but, for what it's worth, I'll respond. In fact, since the experts don't even know what to do, this is open season for fools to rush in and have their say.
Clearly, one doesn't have to be a genius to know that the US is in financial trouble. That is manifest by increasing debt wherever one looks. The debt appears manageable at present because of historically low interest rates. Also, foreigners are prepared to lend the necessary funds (buy Treasuries) so that the US can balance its books. All this everyone knows.
The reason for the debt is that the Americans are living beyond their means -- they are buying more than they sell. Also, the government is creating debt at $1.5bn per day -- almost entirely as result of its militarism. Devaluation will help to balance the books if the Americans stop buying and instead do some manufacturing, some foreign selling and some saving. If they continue with the spending frenzy now while the USD falls there will be real trouble ahead with insolvencies and unemployment. The devaluation is like a medicine which will work but only if it is allowed to. Furthermore, even if the American people stop spending and start saving, the government also has to stop spending $5-600bn pa on arms and wars --- and all this is just for the debt story to be held in check.
Unfortunately, if a lot of the spending stops, there will be a major depression, like in the 1930s. So, the truth is that the US is "between a rock and a hard place" -- there is no easy way it can come out of its bind. If it stops spending, it creates deflation, unemployment and recession. If it continues to spend this necessitates further devaluation of the dollar and foreign purchases of debt -- until one day, the US is owned by the creditors. Meanwhile, interest payments have to be met and over time will increase. In order to reduce the rate of dollar devaluation and encourage foreigners to continue buying the debt, the US has to make the debt more attractive by increasing interest rates. This will be penal on Americans, especially those in debt. Furthermore, the standard of living in the US will fall all the time. And, clearly, there can be no social spending because the money for that has to be borrowed -- but from where?
I think you know my opinion about gold because I've given it often enough -- the gold price is driven solely by its inverse relationship to the value of the dollar, measured in other currencies . Since the outlook is for further dollar devaluation, the outlook for the gold price (in USD) must be favorable. Unfortunately, if you want to hedge yourself against USD weakening it means you have to subject yourself to the volatility of the market, and that means you are riding a tiger. |
