By supposedly compromising to raise the debt ceiling, Congress and the President have now paved the way for ever higher levels of federal spending. Although, the nation was spared the trauma of borrowing restrictions, the actual risk of default existed solely in the minds of Washington politicians. But the real crisis is not, nor has it ever been, the debt ceiling. The crisis is the debt itself. Economic Armageddon would not have resulted from failure to raise the ceiling, but it will come because we succeeded in raising it. This outcome falls along the lines that I had forecast (See my commentary, “Don’t Be Fooled by Political Posturing” from July 9th).

Both parties are now pretending that the promised cuts in spending outweigh the increase in the debt limit. But the $900 billion in identified cuts are spread over a decade and are skewed toward the end of that period. There are an additional $1.4 trillion in cuts that the plan assumes will be identified by a bi-partisan budget committee. But similarly empowered panels in the past have almost never delivered on their mandates.

More importantly, none of these “cuts” are actually binding. There is plenty of time for future Congresses to reverse what was so laboriously agreed to over the past few weeks. My guess is renewed economic weakness will be used to justify ultimate suspension of the cuts. In addition, most of the spending reductions were already scheduled to take effect before this agreement. So what did we really get?

The Congressional Budget Office currently projects that $9.5 trillion in new debt will have to be issued over the next 10 years. Even if all of the reductions proposed in the deal were to come to pass, which is highly unlikely, that would still leave $7.1 trillion in new debt accumulation by 2021. Our problems have not been solved by a long shot.

Essentially, the structure announced today allows both political parties to talk about reform without actually changing anything. To underscore that point, the deal involves less than $25 billion in immediate cuts! This is less than a rounding error in a $3.8 trillion dollar budget. This is politics as usual.

Even these estimates are based on rosy economic assumptions that have no chance of coming to fruition. For example, for the current fiscal year, Washington estimates GDP growth at 4%. But actual growth for the first half of 2011 is below 1%! If our government is over-estimating our current year’s growth by a factor of 4, how accurate could their forecasts be ten years into the future? A more honest assessment of likely economic performance would reveal future budget deficits spiraling out of control.

Some might say that the primary goal of this deal was to avoid the dreaded credit rating downgrade. Unfortunately, the deal addresses none of the ratings agencies’ stated grievances.  If they fail to follow through on their downgrade warnings, the rating agencies will lose whatever credibility they have left. For political reasons, the downgrades may not come right away, but they are inevitable. But as has happened so often in the past, by the time the tardy downgrades arrive, the market will have likely already rendered its verdict.

The debt ceiling itself merely represents a self-imposed limit on US borrowing. Since Congress can vote to raise the limit, its existence has been more of a political nuisance than an actual barrier. The operative factor is not how much we allow ourselves to borrow, but how much our creditors are willing to lend. That type of ceiling can’t be raised by an Act of Congress. Once our creditors come to the conclusion that they have lent beyond our capacity to repay, they will be very reluctant to lend more. As trillions in short-term Treasuries mature, the dwindling pool of buyers will demand higher rates of return to compensate them for the risk. But our government is in no condition to afford those higher rates without gutting the rest of the budget.

Last week, it was revealed that despite Obama’s warnings that a default would immediately occur if the debt ceiling were not raised, the administration had already agreed to prioritize interest payments to avoid default. Such preferential treatment is only possible because current interest rates are so low and debt service represents only about 10% of total revenue. When the pool of willing lenders evaporates, net interest payments could quickly consume more than 50% of federal revenue. This is particularly true since rising rates will also plunge the economy into a recession that will substantially reduce revenues – even as debt payments surge.

At that point, prioritizing interest payments would mean deep sacrifices in the rest of the federal budget – including Social Security, Medicare, and the Armed Forces. The question then becomes: will US politicians really be willing to take the political heat that would emerge from prioritizing interest payments to foreign creditors over payments to American voters?

I expect that as soon as our creditors decide that they are no longer willing to lend to us at ultra-low rates of interest, we will refuse to repay what they have already lent.

Besides default or major cuts to domestic spending, inflation provides the only other means for the government to deal with this intractable crisis. Because of its political palatability, inflation is, in fact, the most likely outcome. Once we go down that path, we risk high inflation turning into hyperinflation, which would decimate the remainder of our economy. So, as our leaders congratulate themselves for saving the nation, the reality is that they may have just sold it down the river.

Peter Schiff President & Chief Global Strategist
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, economy, real estate, the mortgage meltdown, credit crunch, subprime debacle, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation’s leading newspapers, including The Wall Street Journal, Barron’s, Investor’s Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and appears regularly on CNBC, CNN, Fox News, Fox Business Network, and Bloomberg T.V. His best-selling book, “Crash Proof: How to Profit from the Coming Economic Collapse” was published by Wiley & Sons in February of 2007. His second book, “The Little Book of Bull Moves in Bear Markets: How to Keep your Portfolio Up When the Market is Down” was published by Wiley & Sons in October of 2008.

Ed Note: As of Sunday Night July 31st Obama announced a debt ceiling deal that raises the debt ceiling, does not raise taxes and defers most spending cuts into the future. The Deal has yet to be ratified by congress.

As the drama in Washington reaches its climax, what next for gold prices…?

PSYCHOLOGY plays a key role in investment results – particularly in the short term, writes Peter Krauth, contributing editor to Money Morning.

Recent trading patterns clearly demonstrate that most of the recent increase in Gold Prices is due to the debt-ceiling debate in Washington, as well as the European sovereign-debt crisis that continues to lurk in the background.

The bottom line: The debt-ceiling debacle could cause a short-term drop in Gold Prices.

As of late Thursday, gold was trading within 1% of the all-time high of $1,628.05 reached on Wednesday, and was poised to record its first monthly increase in three – all because of the debt-ceiling deadlock and the fear that a US government default would level the global financial markets. Spot gold has surged 7.6% in July.

If you think about it, a number of things just don’t add up. For instance:

The 30-year US Treasury bond is yielding just 4.31% – meaning the rate is virtually unchanged since the start of the year. But with Standard & Poor’s saying there’s a 50% chance it will downgrade the United States’ top-tier AAA credit rating – something once considered bulletproof – you’d expect that yield to be surging as “rational” investors dump US debt. Right?
In fact, a quick glance at yields on the one-month, one-year, two-year, five-year, 10-year, 20-year – and every maturity in between – shows that yields are down from the start of the year, meaning investors are still buying US Treasuries, despite record deficits and the debt-ceiling debacle. If there’s a risk of a downgrade and a default, shouldn’t those same “rational” investors be avoiding all new purchases, even as they dump current holdings?
During his primetime television address last week, President Obama actually told us that interest rates on credit cards and car loans would spike, and that the US economy would suffer a serious disruption if the debt ceiling were not raised.

Sorry, but I don’t buy it.

…continue reading HERE

From my home base in Bangkok, Thailand, I can tell you — in no uncertain terms — that …

• Americans are getting screwed by their own leaders.

• The U.S. economy is headed down the tubes, again.

• Washington’s shenanigans with its debt, debt ceiling, and political grandstanding is shameless … and nothing but a bunch of smoke and mirrors that is killing the country and ruining the lifestyles of all Americans, not to mention their children and grandchildren.

• That we are witnessing the decline of the American empire, an event no less historic than the fall of Rome.

• And that every American should now take steps to protect themselves. I’ll get to those in a minute.

• First, I want to lay out the steps I think need to be immediately taken to save our country. If we do the following, we have the chance to remain the number one economy in the world, the number one superpower, and have a bright new future for generations to come.

• Anything short of the following steps, will simply not work.

• We must immediately stop all Federal borrowing. Even to rollover existing debt. Yes, that means lots of short-term pain for everyone, but it will be worth it.

• We must freeze all outstanding debt. No more payments on that debt, not even interest payments. Yes, this too is going to hurt. But it will be worth it.

• At the same time …

• We must monetize all, and I mean 100%, of all outstanding debts. Print the $144 trillion necessary to pay all debts off, all IOUs, all Social Security payments, all Medicare programs, all pensions, all foreign holders of our bonds, everything.

• Inflationary? One might think so. But not really. Bonds are money. All the bonds out there represent money injected into the system, but at a huge cost: Interest expense!

• So why not chuck them and get rid of them all. The interest expense on the debt alone is killing our country.

Don’t believe me? Then consider the following …

• From 1990 to the end of 2010, the debt cost us $7,311,652,660,508.89 in interest expense.

Yes, that’s $7.311 TRILLION in just interest expense. $21,606 in interest expense paid for every man, woman and child in the country!

It also represents fully half of our total $14 trillion in national debt now outstanding. How unproductive!

• And so far this fiscal year, for the nine months ended June 30, interest expense cost us another $385,871,949,498.62.

Annualized, for fiscal 2011, that means the interest expense on our debt will hit a record annual high $514,494,667,667 billion.

That’s another $1,558 in interest expense just this year for every man, woman and child in the country.

What a waste. Especially when you consider that up to 40% of the interest expense we pay goes to foreign governments and entities! Talk about a transfer of wealth from the U.S. to other countries. Wow!

• Once we monetize all debts and obligations to everyone, we must pay them in like kind, either dollars, gold, or some sort of combination that includes shares in the U.S. government that pay dividends based on annual earnings.

Put another way, we must run our government like a corporation, a for profit company that is in the business of running the country for profit for its shareholders, the American citizens.

There must be annual shareholder meetings. Quarterly and annual audited financial reports. Directors and CEOs elected — and thrown out — by shareholders. A third party independent Board of Directors and auditors. And more.

We must also …

• Get rid of the current tax system, its loopholes, its social engineering rules and the army of more than 106,000 IRS workers and tens of thousands of tax lawyers and tax preparers that are nothing more than leeches on a tax system gone bad.

• Replace it with a national sales tax. Or a flat tax. But no more indirect taxation of income, no more capital gains taxes, no more alternative minimum taxes (AMT), no more bracket creep due to inflation. No more IRS. You pay your tax at the sources of your consumption, or a flat rate on your total income, no deductions. Period.

And we must also, with the governments and central banks of the world, introduce …

• A single world currency for all international transactions. Each country would be allowed to keep their existing currency, but for domestic purposes only. Kind of like a closed capital account.

The single world currency would be based on a basket of commodities, and each country’s exchange rate with the single world currency would fluctuate. But the single word currency, let’s call it SWC for now, would act as a firewall, helping to prevent contagions from developing as the result of fiscal irresponsibility in any one country.

More steps would be necessary than I could possibly cover in this column. And the undertaking of overhauling the country’s debts and thereby the world’s monetary system would be an enormous task.

It would certainly also be painful in the short term. But on the other side of it all, I see a world free of debt … a world full of entrepreneurs and innovation … and a real, true world of liberty, just as our forefathers wanted for this country.

In the meantime, there’s no question you must continue to protect your wealth like never before. That means …

A. Holding gold in various mediums: Physical, ETFs, gold mutual funds, and mining shares.

B. Staying OUT of the U.S. Treasury note and bond markets. Period.

C. Being very careful in the broad U.S. and European stock markets. They remain vulnerable in the short term, but long term, I am becoming more and more bullish due to the near constant devaluations of the dollar, the consequence of which will ultimately mean reflation in stocks.

D. Investing in regions of the world that are growing, where there are no indebted countries, where there are consumers spending money, and where entrepreneurship is leapfrogging higher.

That’s Asia, where there are huge opportunities to grow your wealth, and where there will be for years to come.

Best wishes, as always,

Larry

P.S. I can’t think of a better time to become a member of my Real Wealth Report. I am now preparing a slew of new recommendations to take advantage of the next leg up in precious metals, oil, agriculturals, and more.

So if you’re not already a member, join now. It truly is a bargain that can pay for itself hundreds of times over. Click here to join now.

Larry Edelson has nearly 33 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Resource Windfall Trader (weekly) provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management.

For more information on Real Wealth Report, click here.
For more information on Resource Windfall Trader, click here.

Market Buzz – What Happened to the Growth Canada?

Toronto’s main stock index closed sharply lower on Friday, but did bounce back from the new one-month low it hit earlier in the day, as weak economic data (within Canada) and the U.S. debt crisis pushed investors to the safety of the sidelines.

The index took a real kicking on the week dropping 4.1% and ended down 2.7% for July. With most Canadian markets closed on Monday for various provincial holidays, anxious investors moved to the sidelines in advance of Tuesday’s deadline for the United States to raise its debt ceiling – an exercise which has been ripe with political theatrics.

In the end, we believe some sort of compromise will be reached, but the long-term debt problems remain in place and without real spending cuts and some sort of tax increase (sales tax likely), the deficit will not begin to be addressed and tackling the debt is a pipedream. A hard pill of reality has to be swallowed, but we do not believe the appetite for the pill is in place.

North of the border, Statistics Canada reported that the economy shrank by 0.3% in May, the second consecutive monthly decline, with slumps in mining, and oil and gas production leading the downturn. The agency says the shrinkage comes on the heels of a stagnant April. The last rise in the real gross domestic product was the 0.3% increase recorded in March.

Mining, oil and gas extraction, manufacturing and construction all fell in May. There was growth in the wholesale and retail trade, the public sector, and utilities, as well as the finance and insurance sector. Wildfires in Northern Alberta and bad weather, as well as maintenance shutdowns, reduced oil and gas by 4.2%.

Looking ahead to what promises to be an interesting August, we will be reporting on 2011 second quarter results from K-Bro Linen Inc. (KBL:TSX) next week and the following week, we will take a close look at fiscal 2011 second quarter results from Boyd Group Income Fund (BYD.UN:TSX).

Looniversity – Don’t Get Burned by the Burn Rate

Burn rate refers to the amount of money a company spends from month to month (money burnt) in order to survive. Thus, a burn rate of $100,000 would mean the company spends $100,000 a month above any incoming cash flow to sustain its business.

Keeping a sharp eye on cash flow, which is a company’s life-line, can guard against holding a worthless share certificate. When a company’s cash payments exceed its cash receipts, the company’s cash flow is negative. During a bull market, unprofitable companies can finance cash burn by issuing new shares and investors are more than happy to cover cash burn – look no further than the junior mining boom we recently saw end. But when a bear hits, companies can get stuck living on their bank balances or scrounging for unfavourable finance terms and if the cash dries up, go bust. For investors, it’s important to follow a company’s available cash, evaluating how long it will last and what will happen when it runs out.

Particularly in times of turmoil, pay close attention to cash on hand (limited debt as well) and examine the company’s cash burn rate. If a company burns cash too fast, it runs the risk of going out of business.

Put it to Us?

Q. Can you give me the “411” on the “Dogs of the Dow” investment strategy?

– Daryl Andrews; Calgary, Alberta

A. The idea behind the “Dogs of the Dow” strategy is to buy those Doe Jones Industrial (DJI) companies with the lowest P/E ratios and highest dividend yields. By doing so, you’re selecting those Dow stocks that are cheapest relative to their peers.

In a nutshell, at the beginning of a given year, buy equal dollar amounts of the 10 DJI stocks with the highest dividend yields. Hold these companies exactly one year. At the end of the year, adjust the portfolio to have just the current “Dogs of the Dow.” In theory, what you’re doing is buying good companies when they’re temporarily out of favour and their stock prices are low. Hopefully, you’ll be selling them after they’ve rebounded. Then, you simply buy the next batch of Dow laggards.

Why does this work? The basic theory is that the 30 DJI stocks represent well-known, mature companies that have strong balance sheets with sufficient financial strength to ride out rough times. Some people use five companies, some use ten, some just one. You might call this a contrarian’s favourite strategy.

KeyStone’s Latest Reports Section

• Extrusion & Automotive Manufacturer Posts Solid Q3, Boosts Dividend on Strong Outlook as it Enters “Sweet Spot” in its Market – Reiterate BUY (Flash Update)
• Canada’s Leading Industrial Services Firm Posts Solid Q2 2011, Acquisition Pace to Pick-up – Rating Maintained (Flash Update)
• Q1 2011 Revenues Surge for China-based Agricultural Manufacturer, Earnings Meet Expectations, 2011 Set-up for Breakthrough in Q2-Q4 (risk level remains higher) – Rating Maintained (Flash Update)
• Auto-Tech Manufacturer With Solid EPS Growth, Strong Balance Sheet Benefits From Strong Light Vehicle Production & Introduction of New or Refreshed Vehicles – Initiate Coverage (Focus BUY) (New Buy Report)
• Oil & Gas Service Company Posts Strong Q1, Risk Remains on Balance Sheet – Poised for Solid Second Half of 2011 (Flash Update)

Will likely see a very short term bout of buying frenzy on the debt ceiling deal, following by….

Click here to read more…