Tuesday, August 26, 2008

I.O.U.S.A.

I went to go see I.O.U.S.A. on Thursday. It was released in theaters throughout the country for one night only, and I was pleasantly surprised to see that my theatre was full. It's good to know that there are other people in this world that are interested in the horrific state of the United States balance sheet.

The focus of the movie is the United States deficit; both how we got ourselves in the mess that we're in, and how bad things are going to get in the near future. We currently owe about $9 Trillion and the estimated budget deficit for next year was released a few weeks ago at $490 billion. However, with the current events taking place with Fannie and Freddie, I would personally estimate the deficit next year to top $1 Trillion for 2009. That would bring our total deficit to $10 Trillion.

When I talk to people about this I usually hear, "Well, people have been saying that the world is going to end for a long time and things just keep on going. We've had a budget deficit for a long time so why does it matter now." A similar misconception that I hear a few years ago was, "I make $5,000 per month, my expenses are $7,000 per month, but my home goes up by $5,000 per month so I can just borrow against that and still be ahead." That is not a problem as long as someone on the other side is willing to keep lending you the money, just as it is not a problem for the US as long as someone is willing to lend us money they know will never be paid back.

44% of the $9 Trillion is now held by foreigners. When discussing this people usually say, "Who cares?" During the movie they explained how in the past during war situations countries that held the debt of others could control the actions of the other countries by threatening to sell their bonds in the open market and destroying the value of their currency. They call this financial warfare. This is the exact situation the United States now finds itself in. The only thing keeping our currency from collapse is that it is being artificially held up by foreign countries. In return for doing this they get massive inflation within their borders and the growing threat of recession because of the losses they are taking from the money lent to the United States. This situation obviously is unsustainable, and in the best care scenarios the dollar is going to lose a lot of value.

The stock market took a pretty big beating on Monday. The credit markets have begun to seize up again, similar to what we saw a year ago. There are many big banks that are in serious trouble and banks are very scared to lend to each other because they do not know if their money is going to be paid back. The countdown has also begun for the wipe out of Fannie and Freddie's stock, and the full government takeover. Their stocks were destroyed last week, and it's only a matter of time at this point as the losses continue to pour in.

Oil had a major rally on Thursday followed by an enormous sell-off on Friday. It has regained it's footings and risen a small amount the first part of this week. It is a forgone conclusion at this point in the media that oil is now heading back to $100 and then $80. I guess all those people forgot a few weeks ago that they were calling for $150 then $200. The same goes for gold and silver, as well as the other major commodities. The same classic band of cronies are calling for the end of the "bubble." I would love to see one of those commentators put a major short position on silver right now and then come back on television at Christmas time.

The unbelievable sell off in silver the past few weeks has presented what will end up being the greatest buying opportunity of this entire bull market. Every time it drops I take a larger position. I am even buying silver right now with my tax money that I need to keep aside because I am self employed. The physical demand for metals right now is exploding. Dealers are having trouble finding metal to fill all the orders that are flooding in and there are delays right now extending months out in the future. At some point the paper market will get ripped upward by the physical market and it's going to be explosive.

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