Zero Hour Debt Has Arrived

As I have warned investors a few months ago on the “Zero Hour Debt” problem here on July 2012, today we find out that GDP has actually reached the 0% growth rate while the debt growth is increasing at an enormous pace. Real GDP in the U.S. has decreased 0.1% in the fourth quarter of 2012 to a mere $15.8 trillion while debt has grown 2.4% to $16.4 trillion.

As you can see on Chart 1, the ratio between nominal GDP Growth and Total National Debt Growth has touched the zero line, which means that additional debt growth is not stimulating the economy anymore. We really are reaching the end game here and will see a parabolic increase in debt.

Chart 1: Nominal GDP Growth to Total National Debt Growth Ratio

To read the analysis, go here.

U.S. Second Quarter GDP Growth Slows Down

Today the second quarter GDP numbers came out. Real GDP growth slowed down to 1.5% from 2% in the first quarter (Chart 1).

Chart 1: U.S. GDP Growth

This is a significant drop in GDP growth and is conform with the slowdown in the U.S. PMI of which I talked here. As the U.S. PMI went below 50 for the month of June 2012, we can expect a further contraction in GDP growth in the months ahead of us.  This bad news increases the odds of further quantitative easing from the federal reserve to prevent an entire collapse in GDP as we saw in 2008.

To see more about zero hour debt, read the analysis here.

Zero Hour Debt in 2013

Let’s give an update on the Zero Hour Debt chart, which basically tells us that the economy will get into stagflation and later on in hyperinflation. The reasoning behind this is that we will need an unlimited amount of  debt to have growth in the economy. If we don’t print money, we will have negative nominal GDP and this is what the federal reserve is terrified of, because when the economy contracts, the whole system collapses (cfr. Chris Martenson’s Crash Course). I highly recommend everyone to watch Chris Martenson’s Crash Course on his website.

The chart below has been produced by another Seekingalpha contributor on August 2011 and goes to 2009. We are now in 2012 and it’s time to update the chart.

To see the latest on Zero Hour Debt, go to: Zero Hour Debt in 2013

Zero Hour Debt

Katchum’s Economic Intermezzo

Welcome!


If you are reading this article, you will be one of a few privileged people, able to prepare for the tsunami that’s coming to us. We live in one of the most exhilarating times of the past few centuries and that’s because the future, starting from 2012, will never be the same as before. We are faced with the limits of our existence concerning debt, money supply, commodities, exponential growth, population, energy and war.


If you haven’t seen this curve of base money yet, it’s time to take notice of it (Chart 1). This chart shows the amount of base money (billion USD) that has been printed by the federal reserve. It was relatively flat in the beginning of the century and started to move upwards in the 1970’s when the gold standard was abandoned. But it really started to explode in 2008, during the financial crisis that we all have experienced ourselves. This is the first sign of coming inflation. Our money will diminish more and more in value because money is being printed increasingly by governments around the world.


Chart 1: Base money supply and Ben Bernanke (Federal Reserve)

The following chart shows the federal US external debt:


Chart 2: US federal external debt

U.S. Federal External Debt

If you look closely, the debt is accelerating at a perfectly exponential pace, which is completely unsustainable. Something has to give and ultimately we will see a first sign of hyperinflation.

We are in 2012, the time where additional debt doesn’t grow the economy. Which means you need to print an eternal amount of money to grow GDP. This gives us the second sign of hyperinflation. To prove this statement I’ll show you this chart 3: “Zero Hour”.

Chart 3: Zero Hour

The “Zero Hour” chart shows us the amount of GDP growth (Y-axis) that you will get by adding 1 USD of debt to the government’s balance sheet. For decades we could just print money and grow the economy.

In 2012 – 2014 unfortunately our luck is over. Printing money will not grow the economy anymore! That’s the reason why debt is going up exponentially (see chart 2). It takes an infinite amount of debt to get us out of trouble. Which means it’s over with, we’ve finally reached the limit.

A third sign of coming hyperinflation is shown in chart 4: “Level of deficits relative to government expenditures.” This chart shows the government spending (pensions, medicare, social security) compared to foreign debt. 

=> For every 100 USD the US government spends, 40 USD is borrowed from Asia, Europe, etc…

Historically, once we reach 40%, we start a period of hyperinflation. In 2012, the USA already reached 60%…

Chart 4: Deficits relative to government expenditures (%)

Another sign of the imminent collapse of the USA is shown in Chart 5 where the government is spending too much money, while having less and less revenues.

Chart 5: US Federal Expenditures vs Revenues

A financial collapse will ultimately start happening and we can already see evidence of this in the bond markets in Europe. This is why you shouldn’t place your hard earned money in the bank.

Consider that the 1 Year German government bond yields are going under zero (see Chart 6). Would you place your money in a bank with interest less than 0%?

It is amazing that people want to lend money to the German government while paying extra money (0,02% of their investment) a year from now. Thereby losing money with their investment.

I can think of only one reason for this and that is: “Your money is not safe in the bank”.

Why would someone not just put their savings in a bank which pays around 1,5 % yield a year. Instead they want to lose money by buying German government bonds. Exactly because your cash is not safe in your bank. At any time your bank will go bankrupt. Germany is a safe haven, so people flee to that country. But there are far better alternatives which I will talk about next on.

Chart 6:

Completely the opposite is the 1 year Greece Government Bond Yield (see Chart 7), which is surging past a record 380 %, which basically means a default on their debt. And a collapse in Greece means a collapse in the banking industry.

Chart 7:

It amazes me that people still buy these government bonds, knowing that the bond bull market is coming to its end.

US government bond yields have run a 30+ year bull market (1980-2012). I think it’s time for the market to start moving the money from government bonds to precious metals.

Which takes me to the ultimate safe haven: Gold and Silver!

During hyperinflation, the best way to protect yourself is to buy precious metals like gold and silver. There are many reasons to do so.

The first one is because of a complete depletion of commodities in about 20 years from now (see chart 8). Especially silver (Ag) will become scarce and ultimately will be depleted in about 11 years if we keep growing exponentially. Oil will double in price in about 2 years from now due to production decreases (peak oil theory).

Chart 8: Commodity depletion

In the beginning of 2012 a very interesting event happened in the silver market. The premium over spot price of a certain silver trust (PSLV) surged to 34%. Why would people buy silver at such high premiums? That’s because the silver price is about to start surging upwards.

Chart 9: Silver premium/price

Silver premium (%) blue dots, Silver Price (USD) red dots

Much like silver, gold is ultimately the best store of value. If we consider the amount of money the US federal reserve has printed, gold is still very cheap historically, which is the second reason to buy gold. If we calculate the Gold Money Index as:

GMI = Central bank foreign exchange reserves (USD) / Central Bank Gold Reserves (ounces)

                                      

Then the gold price would have to go to 12000 USD. We are at 1600 USD so that’s an eightfold increase!

With the problems in the Eurozone I would be very wary about staying in cash. Chart 10 tells us that Belgians would lose 23,9% of their money if they would go back to the Belgian Frank. This is the third reason to buy gold.

Chart 10: Fair value during breakup of Euro

And finally the last reason to buy gold: during the Great Depression everything collapsed (real estate, oil companies, stocks, bonds, cash). The only things that surged were gold and gold mining companies. A similar event happened in Iceland in 2008, the last man standing was gold.

We can already see turmoil in the whole world. USA is starting a war against Iran. China and Japan get out of the US dollar trade. Russia sells out on 70% of their US government bonds. Occupy Wall Street happens. Greece is in chaos…

Conclusion: Enjoy the beauty of life while it lasts and buy gold/silver. 

Follow me at: katchum.blogspot.com

Zero Hour

I don’t know if I’ve shown this curve yet, but it is too important not to talk about it.

We are in 2012, the time where additional debt doesn’t grow the economy. Which means you need to print an eternal amount of money to grow GDP. This means hyperinflation.

Everything will collapse soon, so I would place my money in precious metals.


Chart 1:

http://seekingalpha.com/article/289000-is-zero-hour-debt-saturation-upon-us


Another sign of the end nearing is the outlays (government spending (pensions, medicare, social security)) compared to foreign debt. Historically, once 40 % of outlay spending comes from foreign debt, then the country is relying too much on foreign debt for its spending needs and this results in hyperinflation (James Turk: http://www.fgmr.com/more-deficits-more-debt.html).

Quote (James Turk): As further proof that the Havenstein moment is behind us, consider that 58% of the money spent by the federal government in October and November came from borrowed money ($320 billion of debt against $551 billion of expenditures). Monetary history shows that governments are on a hyperinflationary path when crossing the 40% threshold, a level long passed by the federal government.


Following chart shows the level of deficits relative to expenditures before hyperinflationary periods. As you can see, above 40% means hyperinflation:

Chart 2:

http://www.financialsense.com/contributors/john-mauldin/inflation-and-hyperinflation

Following chart says that Japan and recently USA are on the verge to go to hyperinflation:

Chart 3:

http://www.financialsense.com/contributors/john-mauldin/inflation-and-hyperinflation




For 2010:
Outlays in 2010 (see chart 6): 3,3 trillion USD
External Debt increase in 2010 (see chart 4 and 5): 1.3 trillion USD

1.3 trillion USD / 3.3 trillion USD = 39 % (almost hyperinflationary)

Chart 4:

http://gold.approximity.com/Fortune_gets_it_wrong_on_gold.htm

Chart 5:

http://www.usgovernmentspending.com/federal_deficit_chart.html

Chart 6:

http://bilbo.economicoutlook.net/blog/?p=16258