Out of my way - we are Printing!

"Don't stop me now I'm having such a good time, I'm having a ball.  If you want to have a good time, just give me a call." - Lyrics from the Queen song Don't Stop Me Now

The Queen song really sums up the state of the mess that is the United States government.  The song continues on:

"I'm a rocket ship on my way to Mars
On a collision course
I am a satellite I'm out of control
I am a sex machine ready to reload
Like an atom bomb about to
Oh oh oh oh oh explode"

Well as we are up against the debt ceiling and congress has once again spent the last year kicking the can down the road there is no doubt that they will once again procrastinate until the last minute.  Then they will once again pull an all night session to show the American people how diligent they are being and will make a snap decision about something as important and complex as the debt ceiling and the rest of the "Fiscal Cliff" both of which were deferred for a few months during the last all night session.

 

In the interim the Treasury has once again (I say once again as it was floated in 2010) brought forth the thought that they can print money without waiting for congress to get its act together.  The idea as we all know is to print a Trillion dollar coin.  The coin would not be huge as it would not contain a trillion dollars worth of platinum but would just be a platinum coin with a one and twelve zeros printed on it signifying debt owed to it by the buyer, the Federal Reserve.

 

Let's look at this in a little more detail.  If it were backed by a trillion dollars of actual platinum it would be worth something, however with platinum at $1,650 dollars an ounce you would need to buy over 600 billion ounces.  The price of platinum would spike through the roof.  It is hard to even imagine where it would settle but looking at the total open interest in platinum futures shows around 3 million ounces traded on a given month.  As the Treasury would need 600 billion ounces or 200,000 times the market it is not inconceivable that platinum prices would shoot to around $350,000 an ounce! 

 

By the way this is why the gold standard held inflation in check.  You could not print money unless you had the underlying asset to back the money.  Taking it a step further if we now backed the whole $17 trillion of debt with say platinum the price would reach well over a million dollars an ounce.  While this is nonsensical it should put it into perspective just how much a trillion dollars is and the bad news is that this would just be a short term solution as the United States is going to run another trillion dollar deficit this year and the next and the next. 

 

At present this is manageable as interest rates are still exceptionally low.  As long as interest rates remain at these low levels the debt service costs will remain a small part of the overall budget, but at some point in time like the song says interest rates will explode however as I have argued this will be years from now.

 

The first point I want to make is that this is not just a US problem but a global problem.  Europe is nowhere near to repairing their problems, China, while slowing has shown some hope with their latest economic data but these numbers always need to be discounted particularly with a new government taking over and the United States is hooked permanently to the printing machine for life support.

 

The second point is that these deficits and money printing will result in low interest rates for the foreseeable future.  Normally interest rates would rise but the shenanigans that the Treasury and the Federal Reserve are pulling (printing a trillion dollar coin being one) should give you an indication that they will stop at nothing to ensure that interest rates do not rise as then the game is definitely up.  This will have a large impact on the returns to your portfolio in the coming years so look to alternatives to repair the damage and protect your downside.

 

Finally, with all the money printing it is clear that asset values will start to rise creating inflation.  Inflation is good for hard assets such as gold and housing so skew your investment portfolio toward those asset classes and away from the cauldron that is the global stock market.