Two years ago, I made this prediction on Sunday Square Off.
"I don’t want to be a doomsayer or anything, but it looks to me like the world is headed for financial collapse.
Let’s face it Americans can’t afford this much government. The American standard of living is being propped up by government expenditures that are being financed by nearly one trillion dollars in Chinese loans. Americans in turn use these Chinese loans to buy Chinese goods—so our huge trade deficit is financed by our huge national debt. That’s about as sustainable as investors lining up to flip houses the town of Maricopa.
Voters of both parties support candidates who will give them the most goodies—but the federal government can’t afford to buy your old car, finance your new house, or replace your eighty- year old knee.
The deficit in president Bush’s final year was an outrageous 400 Billion dollars…the White House projects that in President Obama’s first year the deficit will be four times higher—one point six trillion dollars.
I don’t have a solution. It’s not like either political party is actually willing to balance the budget. All I can say is that in the not too distant future, it’s all going to come crashing down and it’s not going to be pretty."
I don't know much about financial markets, but I know a lot about politics and the day after that prediction, I moved a third of my IRA into gold funds--and since then, have earned a tidy 70% return.
And it's still a good time to buy.
I can assure you that there is no way that Washington is going to fix this problem in time to avoid an economic collapse. Let's take Arizona as an example. We had a collapse in revenue at a time when the House, Senate and Governor's office were all controlled by Republicans--and dominated by Conservative Republicans. We also have a balanced budget amendment and a cap on debt. What did we do? Raised taxes a billion dollars, and borrowed as much as possible. It took years before we saw real cuts and that was only after we had exhausted every conceivable option.
Now take that scenario and apply it to Washington. Is Congress ever going to be as conservative as the Arizona Legislature? Will the US ever have a balanced budget amendment or a debt moratorium? The answer is clearly no. So will the folks in DC ever be able to fix this problem? No. They don't have the tools or the political will. And frankly, the populace won't accept real cuts. The Boehner cuts are nothing and yet Congress has melted down.
So what's going to happen? Collapse of the Soverign debt markets. In 50 years when we look back on the current crisis, the financial collapse of 2008 will only be a point on the time line--just like the crash in 1929 is a point on a time line that goes all the way to WWII.
How long is the current time line? I have no idea. It's possible that Republicans will take over in 2012 and will be able to cut the growth of spending, bend the debt curve and at the same time repeal the growth-killing policies of the last few decades*. That may buy us a few years. However, the current political system can't solve the current economic crisis.
So the system will collapse and then Washington will eventually have no other choice but to really fix it.
That's why I was telling people to buy gold two years ago. That's why I'm telling people to buy gold now. The current crisis is only a hint of things to come.
I don't know anything about financial markets. But I know a lot about politics.
*Footnote: One of the things I do in the real world is work with transmission lines and power plants. The rule of thumb with a transmission line used to be that building one costs about a million dollars a mile. That was 10 years ago. Now the rule is that the PERMITTING PROCESS costs a million dollars a mile.