Why do you think they call it a Debt Trap?

Mish again points out the obvious but today he is still preaching to a mostly sleeping herd.  What am I talking about?  Simply that a US currency crisis is as much a given as is the collapse of Greece, the whole EU, Japan and the rest of the global economy.  While Mish has been correctly predicting that deflation will be the first stage of the breakdown, he has also said many times that eventually we will have a so called "currency crisis".  Wiki defines a currency crisis as "a sudden devaluation of a currency caused by chronic balance-of-payments deficits... It occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value."

"Changes quickly" is a fancy way of saying "plummets".  Long time recipients of my emails and readers of my blog know that I predicted this years ago.  I used the term "supernova economy" to describe first a rapid contraction (deflationary crash) followed by a massively inflationary (perhaps hyperinflationary) eventual outcome.  Here is a 01-29-2011 link from my blog referring to it but it showed up in my emails several years before that.

Despite the massive expansion of government debt we are well into the deflationary stages and the interest rate chart reflects this.  Yes, Bernanke has been buying up bonds in order to drive rates lower than they would otherwise be.  But make no mistake: Bernanke is just adding energy to the existing trend, he is not overcoming the will of the market.  The reason Bernanke is finding it relatively easy to keep rates low is that so many others are willing to run into US debt as a safe haven when the rest of the world is falling apart.  If this were not the case then Bernanke would need unlimited amounts of money in order to buy up all the US debt being floated.  If Bernanke does this, gold will go screaming at the top of its lungs "FRAUD!!!".  Gold and only gold has the power to do this.

For those that still don't get it, no government is big enough to thwart the will of the global market!  The con men posture and pose and want everyone to think that they are Wizards of Oz with unlimited power but L. Frank Baum had it right: they are just little men hiding behind a curtain putting on a big show.  There is no real wizard of Oz.  The master of "oz" is the Troy oz of gold, period.  Always was, always will be no matter what other foolishness people have allowed themselves to believe in.  If the US did not supposedly have 8000+ tonnes of gold in hand then nobody would be running into US debt as a safe haven.

The end game of the Debt Ponzi for the US is the same as for everyone else.  When the US can no longer borrow cheaply enough to make it appear that debt fueled growth actually works then nobody will loan us money at these stupidly low interest rates anymore.  Of course, sustainable debt based growth was never anything more than an illusion and so it is inevitable that we will not be able to maintain this appearance forever.  When our borrowing costs go up, our debt service costs go up.  We will either have to raise taxes to pay it (GOOD LUCK!!) or take on more debt (the well-known debt death spiral).

The fact that the interest rate curve is starting to slow its decline tells me a bottom is near - probably within 6 months.  After that, the trend will reverse.  People will greatly slow their buying US debt because of the fear of Bernanke and/or Congress causing massive inflation.  Those currently hiding in US debt will attempt to save themselves from the inflation monster by storing wealth in something, anything except paper money (or instruments like bonds that amount to paper money).  In other words, they will begin to buy physical things not because they desire them but rather because they are worried that the value of the funny money they hold will collapse while they are holding it.  This is the essence of Ludwig von Mises' so called "crack up boom".

When people stop buying the debt, the buy side demand will collapse.  Since there will be little demand for the new debt offerings, Bernanke will have to increase the interest rate in order to foist any of the worthless crap off onto suckers.  Remember it is the buyer, not the seller who sets the market price for anything.  The seller can suggest prices all day long but if the market disagrees then there is no sale.  The dearth of buyers will result in a skyrocketing interest rate.  When the market sees this and does the math associated with paying the debt service at the sky high interest rate, it will panic.  Why?  Because the US will not be able to make up the difference via taxation.  No way, no how. 

So it will only have 2 choices: print up more money from thin air or default on the debt.  Unfortunately, both ways will lead to the collapse of the dollar. 

If they default on the debt then nobody will loan us money at any price because we will have proven ourselves bad credit risks at any rate of interest.  This means that government spending will collapse which will in turn collapse the economy since federal, state and local government spend is 45% of GDP.  That makes our GDP an artificially inflated one which is driven by debt.  When the ability to take on more debt collapses, so will the GDP.  The resulting debt:GDP ratio will be just as bad as Japan's currently is today: > 200%.  In that type of unstable economy there will be great capital flight as government gets heavy handed with anyone who looks like they might have a little something to shake down for.  We are already seeing the tip of this iceberg in Obama's now infamous "you didn't build that" speech.  What's he's really saying is you didn't build it so you didn't earn it and thus when government decides to come in and take it you better not put up any fight.  This is certainly not an environment that attracts capital investment.  In all of this, banks will go insolvent.  Without the government's ability to borrow the only recourse will be to print and print and print.  Period.

If government doesn't default in response to higher interest rates then it will have to print starting right away just to make the increased debt service payments.  There is no way the con men will be able to increase taxes to make up the difference.  The debt is just too high these days.  The only way to pay it off would be for every productive person in the country to work approximately a full year without pay.  Most people don't have enough of a buffer to go 2 months without pay and many are living at their current rate of consumption completely hand to mouth.  Thus, the debt is unpayable and so only a fool will expect that it will ever be repaid.

Many people will just ride it in like Slim Pickens's Major Kong did in Dr. Strangelove.  They won't see it coming or they will trust government to the very end simply because government has been getting away with its scam for so long.  But they will have missed the important age old lesson about not being able to fool all the people all the time.  Debt based Keynesian government which operates on a fraudulent money system consisting of fiat currency and fractional reserve banking is doomed to fail badly.  Nobody can say exactly when so there is no use in speculating about it.  But there is 100% certainty that it will someday end and there is no reason to speculate about that either.  All I can say is that in every case the people who own and possess physical gold will do much better than those who trusted in the paper fraud being perpetrated by all governments of the world today with their funny money system.