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Wherever we look at the world economy today, we see a wall of risk…and potential financial catastrophe. We see a large number of virtually bankrupt major sovereign states (US, UK, Spain, Italy, Greece, Japan and many more) teetering atop a financial system that is bankrupt, but is temporarily kept alive with phony valuations and unlimited money printing. Increasingly, therefore, investors will want to exchange this funny money for gold.
Governments like the US and the UK are committed to printing increasing amounts of worthless paper money in order to finance their growing deficits. The consequence of this rescue mission will be a hyperinflationary depression in many countries, due to many currencies becoming worthless.
The list of countries at risk of bankruptcy is increasing by the day. The acronym used to be PIGS (Portugal, Ireland, Greece and Spain). It is now PIIGSJUKUS and growing. The main contenders are currently: USA, UK, Japan, Spain, Italy, Greece, Ireland, France, Portugal, Baltic States, Eastern Europe and many more. On a proper accounting basis all of these countries are already bankrupt, but since many nations can either print money, like the US and the UK, or increase their already high borrowings, like Greece and the Baltic States, they have technically avoided bankruptcy.
The problem is not just the current debt levels of these nations, because the deficits in all the countries are rising. Tax revenues are collapsing at the same time, while the governments’ expenses for social charges are soaring. In the US for example the federal deficit in 2009 was $1.5 trillion (10.7% of GDP) and is forecast to stay around that level for many years. The plight of the US states is just as bad. Out of 50 states only four are expected to have a balanced budget in 2010.
It took almost 200 years for US Federal debt to reach $1 trillion, which it did in 1981. In 2009 the debt increased by $1.9 trillion in just that year to $12.4 trillion. In the next ten years the US debt is forecast to reach $25 trillion. And this doubling of the debt does not include any funds to continue propping up a bankrupt financial system. The forecast also assumes optimistic growth in GDP, which is extremely unlikely. Currently, US Federal debt is six times what it collects in tax revenue every year. With debt exploding and tax revenues collapsing, there is no chance that the debt can ever be repaid with normal money. Also, with debt out of control, interest rates will rise substantially to 10-20% per annum. Applying a 15% interest rate to a $25 trillion debt would give an annual interest bill of $3.75 trillion, which is the same size as this year’s ENTIRE budget.
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