Video: Richard Duncan on The New Depression

"Those whom the gods would destroy, they first encourage to borrow cheaply"

Today's must read on the next financial panic.

Video: Niall Ferguson on Charlie Rose

Video of Niall discussing his new book, Civilization, as well as his current views on the European debt crisis, Turkey's resurgence, and Iran's future here.

Steve Keen on How He Saw "It" Coming and Why We're in a Depression

A must watch interview with Economist Steven Keen, the first part of which is embedded below (remaining parts can be found here).

Video: Kyle Bass' Full BBC Hardtalk Interview

"Capitalism without bankruptcy is like Christianity without Hell" and other choice comments from the hedge fund manager profiled in Michael Lewis' most recent book, Boomerang.

h/t Zerohedge

World's Most Dangerous Banks and Their Host Countries

Below is the Financial Stability Board's list (by host country) of systemically important financial institutions (SIFIs), alternatively known as the 29 banks which are simply Too Big to Fail.

Twelve different countries are home to these 29 banks. Half of those countries host just one Too Big to Fail institution, and the other half host anywhere from two (Germany and Switzerland) to the U.S.'s eight.

Continue reading the full article at SeekingAlpha here.

Video: Kyle Bass on the Worldwide Problem of Too Much Debt

Link to Kyle's video presentation here.

Kyle, btw, is the protagonist in Michael Lewis' latest book, Boomerang. Zerohedge has posted some of the highlights about Kyle from the book here. 

Graphic: Who Holds Sovereign Debt? 70% of U.S. Debt Held by Government Entities

Courtesy of Global Macro Monitor:

Here’s a great chart just released by the International Monetary Fund. Note that almost half — 47 percent – of the US$14.7 trillion U.S. federal government debt is held by the Federal Reserve and the government itself, such as the Social Security trust fund. Add to that the 22 percent foreign official holdings (mainly central banks) and almost 70 percent of the debt of the U.S. government is held by non-market/non-profit oriented public sector entities. Stunning! 

It’s also interesting to hear Europeans quote the $14.7 trillion (apx. 100% of GDP) figure while U.S. officials like to refer to marketable or debt held by the public, which totals US$10.1 trillion (apx. 75% of GDP).

(click to enlarge)

Has the ECB Left the Italian Rearguard Wide Open to Speculative Attack?

During the ongoing debt saga in Europe's periphery, the European Central Bank (ECB) has actually had some success fending off speculative attacks. Hedge fund manager Hugh Hendry, for one, sounded like he was licking his wounds when he remarked last year that trying to short Europe had in effect become too 'expensive'.

The ECB's working assumption has always been that preventing the spread of contagion to Spain was of paramount importance. While it's true that Italy has most always been included when discussing the PIIGS debt problem, there was a sense that because Italian debt is largely held domestically by Italians (like Japan's situation, although not as high as their 95% domestic holding level) that the risks of unstable debt dynamics there were relatively low.

All that apparently changed suddenly on Friday as Italian bond spreads widened and, perhaps even more troubling, key Italian bank stocks plunged. As Italian regulators race to curb short selling, today both Italy's largest bank, UniCredit, and Intesa Sanpaolo are limit down, which triggered a halt to trading in their shares.

Has the ECB in its successful efforts to prevent financial contagion from spreading to Spain left Italy vulnerable to speculative attack? Or is Italy's rolling-over merely a sign of the realization on the part of government officials that they simply can't go on playing the kick-the-can down the road game indefinitely? Treasury Secretary Geither seemed to concede as much during a Sunday morning interview on Meet the Press.

For how bad things could get if Italy implodes (the country is home of the world's third largest bond market after the U.S.'s and Japan's) the below chart provides some perspective.

Update: There are reports that today (Tuesday) the Italian central bank, acting perhaps on the behalf of the ECB, has been buying Italian debt, and that the ECB will need to step in again for Italy's debt auction on Thursday or it will fail.

Every time European central banks step in to purchase sovereign debt the value of the euro will ratchet down accordingly.

Graphic: Countries Most (Directly) Exposed to Greek Debt

The below picture doesn't tell the whole story as it misses indirect exposure to Greece, which in the case of the U.S. is purportedly quite significant.

From the BBC.

Roubini on the Eurozone: 'Messy marriages lead to messy divorces'

Nouriel Roubini

Some of the other choice quotes:

• 'when Greece folds like a wet gyro, and it will...'
• 'the politicians at these meetings will not be the same ones at a similar meeting in two years'
• 'but if the marriage doesn’t work, even the threat of a messy divorce cannot keep couples together that are not a long-term match'
• 'Let me suggest to my fellow US citizens that you really pay attention to this. If you think that we can somehow avoid making difficult choices by kicking the can down the road, watch the European theater. And coming to a theater near you in a few years will be a real Japanese monster movie. Godzilla on steroids.'

Roubini's full analysis on why Greece and other PIIGS will ultimately be left with no choice but to exit the euro and return to their respective currencies (e.g., the Greek drachma) here.

Video: A Bleak Long-Term Economic Picture for Japan?

Predicting the Land of the Rising Sun's future is a complex undertaking, and many a financier has had both their belt and suspenders handed to them from betting on Japan's economic implosion.

I'll admit up front that I don't have a ready prediction that X will happen by Y date. But here are some of the macro elements to keep in mind:

1. Japan is a major surplus country, meaning it produces and sells much more than it consumes. Much of the savings the country generates, which have to go somewhere, have been invested at home in Japanese Government Bonds (JGBs) and abroad in U.S. dollar denominated assets. Alongside China, Japan is the second largest holder of U.S. treasury debt with as almost $1 trillion in holdings.

2. While Japan has a breathtaking 200%+ public debt/GDP ratio (the highest in the developed world), 94% of that debt is Japanese owned. What this means, basically, is that so long as the Japanese keep buying JGBs then Japan's fiscal future is in its own hands. In contrast, the U.S. depends on foreigners to finance a large portion of its federal deficit. The thrifty Japanese save enough to finance their Keynesian stimulus policies all by themselves and still have plenty left over to spot Uncle Sam!

Now, the Japanese savings rate has been steadily declining to what would seem an unsustainable level in terms of maintaining the current fiscal course.

Continue reading the full article published on SeekingAlpha here.

Michael Lewis on How a Japanese Earthquake Could Devastate Wall St.

ML_Tokyo

Video: Animated Visualization of Japan's Nuclear Meltdown

Bank of Japan Intervention: What Happened Last Time? What's Next?

On Tuesday the yen traded at ¥82.88 yen per dollar, its highest level since May 1995. As predicted the Japanese government decided it had seen enough and instructed the Bank of Japan (BOJ) to 'intervene in the currency market' (aka print money). This caused the yen to quickly fall back to ¥85 per U.S. dollar level.

The BOJ also confirmed that its intervention -- reported to be in the ¥300-¥500 billion range ($3.61-$6.02 billion) -- will go unsterilized, which means that the BOJ will not seek to withdraw the new yen it has 'printed'.

Currency Traders Now Have an ¥82 Yen Bullseye

Via Bloomberg, Japan’s Chief Cabinet Secretary Yoshito Sengoku communicated two very important pieces of information:

1. ¥82 yen per dollar is "the line of defense to prevent currency strength from harming the economy"
2. "The government is seeking to gain the understanding of the U.S. and Europe for the intervention"

We now know the Japanese government's pain point (¥82 yen per dollar). Providing the market with an exact target -- not unprecedented for Japan (see below) -- could prove to be a mistake.

We can also infer from the "seeking to gain the understanding" comment that the BOJ's intervention was not only uncoordinated, but also without the consent of other central banks. It would be surprising if the Fed and ECB signed off on the BOJ's intervention. Europe, the U.S. and other nations are mired in a slow recovery and seeking export led growth. Japan's currency intervention makes U.S. and European goods more expensive in Japan.

What Happened Last Time the BOJ Intervened?

It was six years ago when the Bank of Japan last intervened in the currency market. In 15 months through March 2004, the BOJ sold ¥35 trillion yen ($421.7 billion) for dollars. What was the BOJ trying to accomplish? As noted back then Economy Trade and Industry Minister Takeo Hiranuma said "a dollar at ¥115.00 is the ultimate life-and-death line for Japanese exporters".

Two comments:

The Yen: A Little Less Conversation, A Little More Action?

The value of the yen just hit its highest level against the U.S. dollar since Nov. 27 at 85.32, which is close to its 15-year high of 84.82.

While recent news from Japanese exporters has been relatively positive, a higher value yen could threaten Japan's fragile economic recovery. A strong yen makes the price of Japanese exports less attractive in key foreign markets, such as the U.S.

In the past simple jawboning by Japanese officials has proven effective at 'talking down' the yen. On cue Yoshihiko Noda -- Japan's eighth Finance Minister in the past three years -- said that he is “closely watching” the currency market and that the yen’s current movement “is a little one-sided”. And as I write the yen is trading off a bit to 86.24.

However, given the serious discussion of QE 2.0 or QE Lite in the U.S., will talk alone be enough to keep the yen from rising this time?

Some Japanese exporters already appear to be looking for 'a little less conversation, a little more action' from the Bank of Japan. Yesterday Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said "with the current rate there would be an impact on our orders for export. I hope each country will cooperate to minimize the impact of the yen’s strength, and I hope the government (Japanese) will make such efforts.”

The last time the Bank of Japan intervened in a significant way was in 2004. I recently interviewed Axel Merk, portfolio manager of the $500 million Merk Currency mutual funds. Merk contrasted the Bank of Japan's currency prowess with the recent ineffectual efforts of the Swiss National Bank (SNB), which failed miserably in its attempts to halt the rise in the Swiss Franc against the Euro. Unlike the SNB, the Bank of Japan can "do real damage" to the value of the yen. Earlier this year Merk removed the yen from his list of "hard currencies" when it appeared the government might finally get organized enough to put pressure on the Bank of Japan to devalue the yen.

I wouldn't expect Bank of Japan intervention unless the yen breaches the 84.83 level for a sustained period. For investors, there are several yen ETFs to choose from.

In the meantime, here's Elvis:

Federal Reserve Continues March Down the Primrose Path

Federal Reserve Chairman Ben Bernanke and his army of monetary economists have now had four months to observe the lay-of-the-economic land since winding down their massive $1.2 trillion in mortgage bond purchases.

How do things look? Based on the Chairman's recent comments, not good.

Peer Pressure, Washington Style

When the economic going gets tough and then stays tough for a protracted period there is one institution politicians can be counted on to turn towards for help, and that institution is the nation's central bank.

In the U.S. this political pressure typically involves congressman, and presidents, banging on about how the Fed needs to 'do something'. These politicians, often facing an upcoming election, are making noise so that if monetary surgery fails to deliver a cure (economic growth) it will at lease provide the scapegoat (the central bank).

With the U.S. Congress currently facing historic low popularity and re-election right around the corner, mild-mannered Ben Bernanke is feeling the heat of D.C.'s boiler room. Case in point, Senator Jim Bunning pressed the Chairman during recent testimony on whether he was "out of bullets?", to which Bernanke replied "well, I don't think so." 

What 'bullets' are Jim and Ben referring to?

The Mother of All Bullets

To answer the above question we have the luxury of being able to refer back to the verbatim text of a speech Ben Bernanke delivered in 2002 titled Deflation: Making Sure "It" Doesn't Happen Here (which I've written about previously). 

The economic problem du jour just so happens to be deflation. In the speech, Bernanke outlines detailed steps the Fed could take to combat deflation, which is basically a widespread decline in prices. The last time the U.S. experienced this was during the Great Depression, an area of economic history which Dr. Bernanke is considered to be one of the pre-eminent experts. 

Bernanke's most oft-quoted line from his 2002 speech: "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

Put simply, Dr. Bernanke's deflation prescription is to print a 'ton-o-money'. 

How much money? Given that the nearly $2 trillion printed since the inception of the 2008 financial crisis hasn't created significant inflation concerns, estimates as high as an additional $5 trillion may not be beyond consideration.

QE2: No Longer a Question of If, But When

On Thursday St. Louis Fed President and FOMC voting member Jim Bullard wrote that the U.S. is at risk of Japanese-style deflation and that it should be actively combated by engaging in "quantitative easing" (aka printing money) through Fed purchases of U.S. Treasuries. Bullard had beenconsidered until now one of the Fed's principal 'inflation hawks'.

One interpretation of Bullard's comments is that the Fed is laying the groundwork for 'QE2', the shorthand label which has attached itself to the Fed's latest scheme.

Market Timing QE2

With QE2 fully baked when precisely will it begin?

November congressional midterm elections are a bit of an x-factor for the Fed. Like his predecessor, Bernanke is a Republican. And, again like Greenspan, he was reappointed by a Democratic President. I suspect that, barring another major crisis in the interim, Bernanke & Co. would prefer for QE2 be perceived as apolitical. Consequently, the Fed will likely wait to crank up the printing press until after midterms.

In terms of QE2's implementation, expect an iterative print, evaluate, and then decide to print some more type process. The Fed would probably prefer to trickle QE2 out over an extended period, ala the Bank of England's approach. But, as Bullard suggests, a sudden and rapid deterioration in confidence may force the Fed to go the 'shock and awe' route.

Meanwhile, In Government Debt La-La Land...

In contemplating a new $5 trillion money printing program a reasonable person might be inclined to ask the following question: "if the Fed keeps printing money to buy government bonds, doesn't that potentially create a problem for maintaining the value of the U.S. dollar?"

Uh, yeah.

The prospect of QE2 may be currently driving U.S. Treasuries to rally even further into nose bleed territory as the market contemplates the supply of government debt being squeezed by the Fed even further. And if the Fed doesn't activate QE2 then deflation (or disinflation) could continue to make U.S. Treasuries attractive to investors. So on the surface U.S. Treasuries may at present appear like a win-win trade.

Having said that, printing money at these levels represents a massive and unprecedented financial experiment. Our policy leadership has now guided us into uncharted economic territory and there really is no telling for sure just what will happen.

Nassim Taleb, for one, is calling government debt "the next black swan." In a recent interview he even went so far as to call government debt "a pure Ponzi scheme".

There are several ETF options available for those looking to hedge or play U.S. Treasuries. And if the prospect of massive money printing has you concerned about the future of paper money, then you may want to consider precious metals like gold.

Thoughts on Krugman's "Myths of Austerity"

An interesting and lively discussion is taking place over at zerohedge.com in response to Professor Paul Krugman's most recent article titled "Myths of Austerity".

I highly recommend perusing the comments that follow Leo Kolivakis's response to both Krugman and Niall Ferguson's alternative view expressed in a video interview on CNN (Krugman also is interviewed on the same program).

Some of the opinions I agree with:

1. Massive government stimulus spending is inefficient in terms of the economic bang for the buck.
2. I would prefer if Krugman spent more time discussing the 'quality' of government stimulus spending vs. always focussing on the 'quantity'.
3. Government investment and support in new technology development (e.g., sustainable energy) and public works (e.g., street lamps) can add economic value.
4. Japan is not necessarily in as bad of shape as the U.S. because, unlike the U.S., it is a surplus country (it produces more than it consumes) and its astronomical debt level (over 2x larger than the U.S.'s Debt/GDP ratio) is owed almost entirely to itself.
5. Most bond investors aren't interested in playing the role of 'vigilante' -- they simply want to earn an appropriate rate of return on their capital and see their principal returned.
6. While in the near-term it may be true that "the big, bad bond vigilantes are simply no match for the Federal Reserve and they know it. Bernanke can squash them like a bug". However, over a longer-term horizon there is not a central bank on earth -- not even the mighty Federal Reserve -- that can win if confidence in that country's scrip is lost.
7. Always framing the economic conversation around 'growth' or 'inflation' distracts from the very worthwhile economic goals of 'stability' and 'sustainability'.
8. "When we are unable to borrow money to buy new crap we will put more effort into maintenance of what we have" -Paul E. Math
9. It is likely that the U.S., unfortunately, will not make the necessary political decisions and take action until another crisis hits due to the short-term outlook and a lack of public pressure and political will.

And if you haven't already read it The Zero Hedge Conflicts/"Full Disclosure" Policy is pretty entertaining.

Is a U.S.- China Economic War On Its Way?

The tone of U.S.-China relations, as evidenced by General Electric CEO Jeff Immelt's provocative “colonization” remarks, are deteriorating rapidly and signaling trouble ahead. Given the importance of this relationship it is important to understand what's at stake and how events may play out.

Sizing Up the Sino-American Relationship

The U.S. has the world's largest economy and the U.S. Dollar is the world’s reserve currency. China has the world’s fastest growing large economy, and it has proven comparatively resilient in the wake of the ‘Great Recession’. China recently passed Japan to become the world's second largest economy, and Goldman Sachs has forecasted that China will overtake the U.S. by 2027.

While the export of manufactured goods to countries such as the United States has been a key driver of China’s growth story, benefits have accrued on both sides of the Pacific. Large U.S. government deficits have been underwritten in part by the thrifty Chinese, and U.S. consumers have snatched up voluminous quantities of low cost Chinese imports.

This seemingly symbiotic relationship, which Harvard Professor Niall Ferguson has termed ‘Chimerica’, avoided close scrutiny during the credit boom years. But amid high U.S. unemployment and a mounting public debt Chimerica is now under a microscope.

China’s “Unfair” Currency Policy

China has been accused of manipulating its currency by pegging the renminbi to the U.S. dollar at an artificially low rate, thereby allowing China to gain an unfair trade advantage. Critics point to China’s more than $2 trillion in largely U.S. dollar denominated foreign exchange (forex) reserves as prima facie evidence that the renminbi is grossly undervalued. Market participants have speculated that if the renminbi were allowed to freely float it would appreciate by 20-40% against the U.S. dollar.

Emerging market and EU officials have joined the U.S. in criticizing China's currency policy. Under pressure, China’s recent announcement that the renminbi would be allowed to float was initially greeted with widespread enthusiasm. However, since the announcement the value of the renminbi has moved within a narrow 0.5% range, remaining effectively unchanged. This has led some critics, such as NY Times columnist Paul Krugman, to accuse China of “playing games”.

A U.S.-China Economic War?

One of history’s unfortunate reoccurring themes is the tendency on the part of political leaders to create foreign scapegoats, particularly when faced with challenging economic times and an uncertain electoral environment. From this perspective surging, recalcitrant China makes for a nearly ideal political target.

Candidates for office can blame the U.S. unemployment problem on “unfair” China competition and the undervalued renminbi. China's large U.S. treasury holdings (estimated at up to $1 trillion, or roughly 20% of all foreign holdings) will also make a convenient target for fear mongers pointing at foreigners as the source of the U.S.’s troubles. Expect increasing criticism of China (reminiscent of 1980s Japan bashing) from politicians, labor groups, talk radio, etc. through this November's mid-term elections and through the next presidential election cycle.

What is the likelihood that the U.S. will go beyond rhetoric and take action? Seeing the renminbi revalued upwards is one of the few policy areas with bipartisan support. President Obama may feel pressure to appear strong and stand up to foreign powers to preserve the American economic way of life. Calls to “do something” will only grow louder in the face of the projected slow employment recovery. In short, formal trade action against China cannot be ruled out.

How would China respond to overt moves by the U.S.? The Chinese government detests foreign pressure. At the same time China's leadership, emboldened for example by the failure of The West to prevent the financial crisis and Google's recent blink, is growing more confident. Looking to flex its new economic and geopolitical muscles, China would almost certainly retaliate in some fashion against any U.S. trade action.

Looking Ahead

Both the U.S. and China possess numerous incentives to avoid a serious breakdown in relations. The economic and political consequences would be devastating for both countries and the rest of the world. The central question is will the U.S. and China be able – or willing – to find a path towards compromise which is also congruent with their respective interests?

It is human nature to underestimate the probability of seemingly unlikely, large-scale events like a U.S.-China trade and currency war. However, students of history know this to be an all-too-frequent mistake.

In considering whether such a conflict can be successfully avoided it is important to remember that policymakers often fail to properly diagnose and head-off the really big problems, such as war and financial crisis. Assurances by officials shortly before the near collapse of the financial system that the subprime problem was "contained" is but one recent example.

What could lead to a more serious escalation of tensions? A WTO ruling, U.S. Congressional action, China’s sale (or further purchases) of U.S. Treasuries, or an Asia Pacific geopolitical event (i.e., Taiwan, North Korea, etc.) are just a few of the possible triggers.

With China in the U.S.'s political crosshairs investors would do well to continue to closely monitor the world’s most important bilateral economic and political relationship. And given the stakes, let us hope that the current U.S.-China trade and currency war doesn't escalate further, for even a mild economic war could be devastating.

Running for the Hills

"What you're faced with is you simply do not know which countries are solvent, which countries are insolvent. You do not know who the counterparties are for these insolvent countries, so you run for the hills."                                   

We've wound up in quite a complicated, difficult mess. And selfishly speaking, I'm young enough that I can expect to feel the full pain of it for many decades to come. So I've decided to give blogging a try. Here goes:

Governments Can Also Go Bust

The topic du jour is the sovereign debt crisis. At the current epicenter we see Greeks in the streets, rioting among other things about raising the retirement age from 53 to 67. Sadly, a few Greeks have died. Germans, who would be the principal Greek financial rescuers, don't seem all that thrilled about loaning Greece money when they (Germans) tend to work later into life than Greeks.

So where is all of this heading? Esteemed Princeton Professor and Nobel laureate Paul Krugman recently changed his public opinion and now says Greece may very well a) default on its debt (aka "restructure", "refinance", "rebalance" -- the list of euphemisms beginning with "re-" for a debt default is long) and b) drop the Euro as its currency. 

Further, there could be some "bank holidays" in Greece to prevent capital flight, along with other unpleasantries that are typical of this kind of crisis which I'll discuss in more detail later. In terms of the timing, the Greek tragedy could all play out over months, perhaps years, or maybe as soon as the next few weeks or even days.

(I don't have any data at hand to support the following hypothesis, but I believe that the ever accelerating speed at which data and information travels has lead to a general compression in the amount of time it takes today's events to unfold when compared with comparable historical events. I would therefore predict that the full Greek debt end game will play out sooner rather than later.)

But Greece is only approximately a tiny 2% of the Eurozone GDP. The real threat is "contagion", meaning a financial wildfire that spreads from one country to the next. The fire would probably next land on Portugal's doorstep. Portugal's situation is not quite as dire as Greece's. Spain, Ireland, and Italy are all potentially at risk too. For Europe there seems a significant possibility that the number of countries using the Euro as the currency could shrink. And there is a real possibility that Germany may even abandon the Euro, which may effectively equal € R.I.P.

After Europe perhaps next up is Japan. Or maybe not. Japan is different because nearly all of its debt is owned domestically. The same is not true for Greece, where some 80+% of the public debt is owed to foreigners. Greece needs outside investors from other countries to pay its government bills, whereas Japan does not. Like Greece, a large portion U.S. public debt (approximately 40%) is owed to foreigners.

Many people are understandably perplexed and asking what does relatively tiny Greece and its debt have to do with the United States, the U.S. stock market, and the U.S.'s public debt? There are long, somewhat complex answers  to this question. And there are simple, even entertaining answers. I'm going to shoot for somewhere in the middle.

I.O.U.S.A

First, if you are unfamiliar with the U.S. public debt situation, and/or you have a weakness for edutainment like me, then I recommend watching the movie I.O.U.S.A. It's a great primer on this topic and features interviews with Warren Buffet, Paul Volcker, and several former U.S. Treasury Secretaries. The film is available on Netflix and parts if not all of it can be viewed by searching for it on the web.

If you're already familiar with the U.S. debt situation then you're aware of the big challenge we have financing our Big 3 federal entitlement programs: Medicare, Medicaid and Social Security.

Now, you might be thinking "Sure, I'm aware that financing our entitlements will become a problem down the road. But that's years if not decades away and there's lots of time for the economy to get back on track."

Well, the Social Security fund just went negative well ahead of schedule.

Also, baby boomers are beginning to retire. This unprecedented demographic shift will lead to even larger demands on our Big 3 entitlements. For example, approximately 60% of all current healthcare dollars are spent on people aged 65 and over.

The bottom line is:

1. the day of reckoning may be closing in faster than previously imagined 
2. we cannot pay off our public debt without some major change

The Magical Money Printing Press

One way -- and arguably the only realistic way -- for the U.S. to get out from under its unsustainable debt burden is to 'print' more money.

(When I say 'print' more money I mean figuratively, not literally. When the Federal Reserve significantly expands the supply of money it rarely prints any physical paper currency. Instead, simply put, it punches some numbers into a computer and presto, now there's more money! The subject of what exactly is money, the banking and Federal Reserve system, fractional banking, and how the supply of money expands and contracts are complex subjects. If another actual "run" on a bank happens like the ones that happened to Northern Rock and Bear Stearns, then the money supply could be a good topic for another blog post.)

Instead of printing more money, can't the U.S. just spend less? That would, and will probably be, part of the ultimate solution. But it is also a far more difficult solution to implement than printing money. Politically speaking it has been shown to be nearly impossible to cut our Big 3 entitlement programs. In fact, forming a congressional group to simply discuss the cost of our entitlement programs is difficult. The politicians that try to reform our Big 3 entitlements are often voted out of office and replaced with politicians that further perpetuate the unsustainable.

The other possible way out is to increase tax revenue via either higher taxes (assuming you can extract more tax from citizens, which is not a given) or a larger tax base (i.e., more Googles, Bill Gates, larger population to tax at today's rates).

Higher taxes are perhaps even less popular than entitlement cuts. But an economic expansion leading to a larger tax base, like we witnessed in the 1990s, could theoeretically happen. Also, the U.S. population is still expanding and this larger tax base can help pay off the previous generation's debt. However, the U.S. is facing far more competition in the 21st century than the 20th. Thomas L. Friedman's The World is Flat is probably the best known book on this topic.

Print, Baby, Print!

Of the three major options that could solve the U.S.'s debt problem (cut, grow, print), printing money is probably the path of least resistance and hence the most likely scenario.

The additional money the U.S. prints can be used to pay off those that loaned us money (U.S. creditors). The way this can be done is for the Federal Reserve to purchase and hold U.S. Treasury debt. At present Japan, China, and Middle Eastern oil rich countries are the largest foreign holders of U.S. Treasury debt.

Coming back to Greece for a moment, unlike the Americans the Greeks no longer have their very own currency. Greece exchanged the drachma for the euro, which it shares with other European countries. Because Greece does not have complete control of the euro printing press, Greece cannot unilaterally printing more money. Only the European Central Bank, which is governed by all Eurozone member countries -- including the very ironically un-Gutenberg like but powerful Germans -- can collectively decide to print more money. I bid you good luck, Greece, on convincing the wheelbarrow full of money pushing descendants of the Weimar Republic to significantly crank up the Euro printing press.

What happens when money is printed? The value of money decreases relative to what it can purchase. In other words, instead of your McDonald's Happy Meal costing $5, then...if we were to use the Germany Weimar Republic inflation rate in 1923 where prices doubled every two days well...you better buy that Happy Meal fast!

Return of the Gold Standard?

So where will all this printing of money lead? Ultimately, I believe that it will culminate in a change in the current fiat monetary system, and gold will be included in the discussion of a new monetary system.

('Fiat' is a term used to describe a currency, like the U.S. dollar, that is not backed by anything other than belief. In other words, what makes the U.S. dollar ultimately worth something is simply the confidence placed in it. It was not always the case that the U.S. Dollar had no intrinsic value. Up until the Nixon administration U.S. dollars could actually be converted into a fixed amount of gold by other nations. This is what was known as the Gold Standard, and it served to underpin the value of the U.S. dollar. There are other factors supporting the value of a currency beyond confidence, such as government requiring that taxes be paid in that currency. Therefore we must exchange our labor, goods and services for currency so that we can meet our tax obligations. The ability of the government to effectively collect taxes is important to the perceived value and stability of the currency. The U.S. dollar also benefits from being the world's de facto reserve currency. This provides the U.S. with some advantages vis-a-vis other currencies.)

Unlike paper fiat currencies, gold cannot be printed. There is a finite supply of gold, but an infinite number of ones and zeroes for the Federal Reserve to type into its money creation computer. Gold has several other attractive properties which have made it the world's oldest store of value. 

Perhaps the biggest argument for making gold a part of any new monetary order is that it will help hold governments accountable. Many, many governments have consistently demonstrated an inability to manage public finances. Reinstating gold as a component of the new currency would provide a proven check and balance on this temptation. The gold standard carries tradeoffs. But basic human nature has ensured that the old "barbaric relic", as Keynes called it, cannot be kicked into economic posterity just yet.

(For a excellent read on the history of Gold I strongly recommend a book by the late Peter L. Bernstein titled The Power of Gold: The History of an Obsession)

Now the Good News

When we're faced with an apocalyptic issue, a natural response is to bury your head in the sand. We do this because talk of major change can be confusing, frightening, and depressing. This is especially true when we don't feel there is much we can actually do to affect or control the situation, let alone help ourselves.

Unfortunately I'm not optimistic about the U.S.'s ability to solve the debt problem before a crisis hits. But thankfully there are things we can individually do now to help ourselves.

The age-old way to protect oneself from governments that borrow too much and create too much currency is to own gold. If it weren't for the recent and yet-to-fully deflate real estate bubble, land would be (and probably still is all things considered) a decent protective option too. Commodities and real assets in general will rise in value as the U.S. dollar is printed. It's possible that other currencies and some stocks will rise as this event unfolds.

Many both inside government and outside will fight hard against ever allowing gold to return to its former role in the monetary system. For its inclusion would hinder their ability to engage in the behavior to which they're accustomed.

How best to own gold? There are a number of gold exchange traded funds (ETFs, which can be purchased in a manner similar to stocks) which hold actual physical gold. There are gold focussed mutual funds. There are gold mining company stocks. There are both domestic and international options for all of the above. And of course there are advantages and disadvantages to each respective investment approach. But please note that: 1. gold has shown significant short-term volatility and 2. gold has experienced substantial appreciation over the past decade.

What About Owning Physical Gold?

Is it worth owning actual physical gold, such as gold coins or jewelry?

The sovereign debt crisis has moved to a stage now where owning a Gold mutual fund may not be enough for some. Why not?

If the U.S. dollar were to go into a free fall, the U.S. government may pull out the following oldie but goodie signed into law on April 5, 1933 and called Executive Order 6102.

Owning physical gold is not without its own challenges. Gold is valuable and someone may want to steal yours. So rather than show off your gold to your neighbors in the front window of your home you may prefer to keep it in a safety deposit box, have it insured, stored off shore, etc.

Final Thoughts

The stability and continued existence of the U.S. government rests to a large degree on belief in the U.S. dollar as a store of value. To prevent a currency collapse governments can and will do the unimaginable. Police may bash people's skulls. U.S. President's could reissue something like Executive Order 6102.

History doesn't always repeat. But if the dollar takes a nose dive, and because Executive Order 6102 'worked', it would seem like more than just a minor possibility. (I doubt the people who saw the value of their savings nearly cut in half by Executive Order 6102 would say it worked perfectly.)

But instead of just running for the hills, think about whether 'thar may be gold in them hills.