Editor’s note: Today is the final entry in this week’s series from Porter Stansberry. Below, he lays out the “endgame” for the dollar… what to expect from the market… and four steps to take today to protect your wealth and your family.
This Is How the Dollar Dies
By Porter Stansberry
The research I’ve laid out in the past few days (here, here, and here) suggests interest rates are inevitably headed higher. But how much higher?
Over the long term, the average real rate of interest on U.S. sovereign debt has been around 2% a year. The latest Producer Price Index (which we believe is more reliable than the Consumer Price Index) shows price inflation is currently 6.8% annually. Add the 2% real return we believe investors expect, and you get 10-year Treasury bonds yielding 8.8%.
[ad#Google Adsense 336×280-IA]Currently, those bonds yield only about 3%.
This implies a huge collapse of bond prices – a collapse of more than 50%.
A collapse of that magnitude would completely wipe out the stock market. It would be a massacre.
No one is expecting any of this. Everyone believes something like this could never happen. Yet this rise in interest rates would only carry us to the average return bond investors have earned over the last several decades. It doesn’t even consider the kind of panic selling that would ensue.
In truth, rates might go considerably higher than this for one fundamental reason. If the bond market crashes, investors would begin doubting America’s ability to finance its debts, never mind trying to repay them. As rates rise, the cost of maintaining our debts would grow substantially – perhaps doubling.
Keep in mind, the U.S. Treasury currently pays only 1.4% annually to borrow $14 trillion. Yes, 10-year Treasurys currently yield around 3%. But because the Treasury has issued so much more short-term debt than long-term debt, U.S. borrowing costs are lower.
No, all our debts wouldn’t “reset” to higher rates overnight. But the losses in the bond market, the losses in the stock market, and the resulting decline in business activity would cause a lot of our creditors to worry about our ability to afford higher interest payments.
Think about it this way: By the end of 2012, our national debt will likely exceed $17 trillion. Let’s assume our average interest increases to 4.4% – half the rate we believe investors will eventually demand. That works out to an annual interest expense of almost $750 billion. That’s more than we spend on defense or Social Security. Interest expenses would leave the government spending almost $0.25 of every dollar on interest payments.
Does that sound wise or reasonable to you? Given these expenses, some of our creditors would become reluctant to “roll” our debt into the future by offering new loans. This could cause a serious problem for the U.S. Treasury.
Portugal’s government recently had too much short-term debt coming due and not enough lenders were willing to extend these loans at affordable rates. It suffered a debt default. The country required a bailout by the European Central Bank (ECB). Lots of economists criticized Portugal’s borrowing strategy because much of its debts were short-term.
Apparently, these folks haven’t bothered looking at the U.S. Treasury’s debt-maturity curve. We have. The numbers are so shocking, we expect most of our subscribers simply won’t believe us.
You can read all of the numbers for yourself, if you’d like. The Bureau of the Public Debt includes them in its Financial Audit, which you can read here.
Feel free to read all 35 pages… Or focus on just one piece of data. It’s all you really need to know: 61% of all the marketable Treasury debt held by the public will mature within four years.
Thus, over the next four years, the U.S. Treasury must either repay or refinance more than $1 trillion in existing debt each year – not to mention additional deficit spending of at least $1.5 trillion. For us to avoid a default, the U.S. Treasury may have to borrow or refinance as much as $10 trillion in the next four years.
That would double the amount of U.S. Treasury bonds currently trading in the world’s markets.
Think about that for a minute. Then consider the decades-low yields in the Treasury market today, which would surely rise to accommodate this enormous increase in supply.
Now, try to arrive at any sort of scenario that ends well for today’s U.S. Treasury bond market investors. We can’t… We don’t know exactly what the end game will look like or exactly when the bond market will crash. But we know it is coming. We know it can’t be avoided. And we know many investors will suffer catastrophic losses.
Given these risks, the Federal Reserve cannot allow the Treasury’s borrowing costs to increase. It cannot allow the dollar to strengthen. It cannot allow the stock market to fall or business activity to slow…
That’s why we are 100% certain the Fed’s promise to stop printing money and buying Treasury bonds on June 30 is a lie.
[ad#article-bottom]Even though we know Bernanke will have to turn back on the printing presses sooner or later, we have no doubt the market will react strongly to the presses’ temporary stop. Expect big moves: falling commodities, a rising dollar, and even falling stock prices.
We have been warning our readers since the spring of 2010 that the stock market was no longer broadly attractive. Since then, valuations have only gotten more extreme. A big correction is overdue. We will likely get that correction this summer.
That means for the risk-averse investor, the best advice I can possibly give right now is to seek safety. Seek it in a diversified portfolio of cash, gold, silver, and a “core” position of income-producing blue-chip stocks bought at cheap prices.
There’s a storm coming… but there’s no reason you should suffer, as the vast majority of Americans will.
Good investing,
— Porter Stansberry
P.S. Please think carefully about the facts I list above. Like it or not, these issues are going to affect you and your family in the months and years ahead. Ignoring this problem will not protect you from it. What do I think people should do right now to protect themselves? Watch this video to find out.
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Source: Daily Wealth