We all know the debt load in the US economy is horrendous and unsustainable. The US government runs deficits of approximately $1 Trillion per year, even with interest rates at historical lows. Current official national debt exceeds $19 trillion, of which $13.9 trillion is public debt. Unfunded liabilities are much larger. Even a 7% average interest rate would require nearly $1 trillion per year for interest only debt service, thereby increasing national debt even more rapidly.

National debt has increased exponentially for the past 50 years. Expect the exponential increase to continue and accelerate, even with historically low interest rates.

What if we priced national debt in “real money” – actual gold instead of the digital and paper stuff that can be created at the whim of a central banker?

I used the annual average of gold prices and heavily smoothed them with a 7 year moving average. Then I divided the national debt by the heavily smoothed gold prices.

The 35 year graph shows that, on average, national debt has increased rapidly, even when priced in gold. This should be cause for alarm – debt is increasing far too rapidly, and gold is underpriced.

The current national debt is equal to about 100 times the total value, at current gold prices, of the gold “officially” stored in Fort Knox. This should be cause for alarm.

What about transfer payments per the St. Louis Fed (FRED)? According to FRED the total transfers for social benefits in 2015 was about $1.959 trillion – or 10 times the value of the gold officially stored in Fort Knox. A 35 year graph is shown below. Of course transfer payments have steadily increased from $251 billion in 1981 to $1,959 billion in 2015, but even priced in gold the transfer payments have increased.

What about non-financial corporate debt? According to FRED that debt was $474 billion in 1981 and about $5.4 trillion in 2015. If the US economy falls into a recession what percentage of that debt will default? All of that debt is someone else’s asset, and if that debt defaults, those assets disappear. Cause for alarm…

What about wages as calculated by Social Security? The official average national wage in 1981 was $13,773 and in 2014 it was $46,481. I divided that official average wage by the heavily smoothed price of gold and produced this chart. National debt, corporate debt, and transfer payments are increasing more rapidly than average wages. Cause for alarm….

CONCLUSIONS

• Official national debt is massive and accelerating higher even though rates of interest paid to service that debt are historically low. The Fed will have difficulty raising rates.
• Non-Financial Corporate debt currently exceeds $5 trillion, thanks to low interest rates, QE, and stock buy-backs funded via debt. The next recession will be problematic for debt repayment to those who believe those debts are assets.
• Wages are increasing slowly compared to debt. Sustaining a standard of living via debt (individuals and governments) only works for a limited time. “Those trends are coming to an end…”
• The official horde of gold supposedly stored in Fort Knox is 147.3 million ounces, worth at current prices less than $200 billion, a tiny fraction of official national debt – debt which can’t be paid will be defaulted, either via inflation or repudiation. The price of gold will rise substantially as global currency values fall.
• Defaulting debt will be destructive to the value of the dollar as well as all other paper and digital currencies. Gold has no counter-party risk and will benefit accordingly.

From Bill Gross: 

“For over 40 years, asset returns and alpha generation from penthouse investment managers have been materially aided by declines in interest rates, trade globalization, and an enormous expansion of credit – that is debt. Those trends are coming to an end…”

From Charles Hugh Smith:

“Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.”

Repeat: “Those trends are coming to an end…”

Gold and silver come to mind…

Gary Christenson

The Deviant Investor