Comparing the US and Eurozone Debts

Right out of the starter blocks this morning, the euro (EUR) has broken through that trading range it held last week (1.3350-1.3450), to the downside, as the ratings agency Moody’s warned the Eurozone that it would begin to review each member. I told you on Friday that I didn’t believe that the Eurozone leaders had done enough to satisfy the ratings agencies… And this is the first step of downgrades all across the board in the Eurozone… And most likely a double-notch downgrade for France.

While the ratings agencies are at it… They could take a look over here at the US and ask the question: Where’s the $1.2 trillion in automatic cuts to discretionary spending? Because, as I’ve point out before… The Eurozone as a whole, and the US both generate about 20% each to global GDP… So… If the Eurozone — which is at least addressing the matter, albeit too late — is getting downgraded, why isn’t the Eurozone’s kissin’ cousin the US? The US debt is worse than what’s going on in Europe, folks… But don’t let that get in the way of a media fire storm to point all the focus on the Eurozone.

So… I’m not saying that the Eurozone shouldn’t be downgraded… They made their bed, now they have to lay in it… All I’m saying is that if the Eurozone’s debt scares the ratings agencies, then they should be frightened out of their skin by the US’s debt…

You do realize that our debt is now greater than the GDP of the country? Our debt is greater than $15 trillion, and our annual GDP is about $14.5 trillion… And, the question I have for the ratings agencies is this… When will you make the US address this, and not the way they have proposed to do it? Don’t know what I’m talking about? Well… You know that $1.2 trillion in discretionary spending that’s supposed to get cut? It’s all back end loaded, and… Here’s the big thing… It doesn’t really “cut” spending… It cuts the proposed increases to spending! So, the US is saying, in 10 years we’ll not add to our spending as much each year… That’s not cutting the spending, folks…

But then… I personally doubt we, as a country, ever get to 10 years going “status quo”… In other words… The “you know what” will hit the fan on US debt issuance long before we get to 2021… I’ve written about this several times in the past, and even did a video on it over a year ago for the Sovereign Society, regarding the bursting of the US Treasury Bubble… It’s all tied to when the foreign creditors say “no mas” on buying our debt…

I actually read this weekend that the credit guru, Martin Weiss, is now saying the same thing… Talk about being surprised as to who has now jumped on my bandwagon! Mr. Weiss believes this “event” could happen soon…

As soon as this week’s auction of $78 billion of Treasuries? Probably not… But each auction adds to the weight of debt issues already in the hands of foreigners… One can never tell which auction is going to be the one that breaks the backs of foreign buyers, but it’s coming…

So… Here we are on December 12, 2011… And the two largest economies in the world have debt up to their eyeballs… Where does someone, who has money they just don’t want to have sitting around earning next to nothing, do in each of these countries? Well… Like I tell people whenever I speak in public… I would tell the people of any country —whether it was Canada, Switzerland, the UK, Australia, Singapore, etc. — the same thing… Do not hold 100% of your investment portfolio in your base currency… You should diversify using currencies of other countries and precious metals…

And that leads me to… Precious metals… I see that gold is down below $1,700 this morning… It just doesn’t make any sense to me… On a fundamentals basis, gold should be trading greater than $2,000… The price manipulators continue to throw a spanner in gold’s climb to $2,000… But I truly believe that the price manipulators can be used to our advantage, for every time they drive the price of gold and silver down, they provide us with buying opportunities!

Demand for the precious metals continue to climb higher, and another thing I tell people when I’m out on the road is that… Demand remains strong for the metals, and supply continues to slow, which is a problem, because miners can’t just go into a cave and flip a switch and have gold and silver appear!

Here’s a video on silver supply with some very good facts for you to consider… Again, this should just be one of the things that you use to make an informed investment decision…

So… I guess I don’t have to tell you that, with the euro getting hammered this morning, all the other currencies, save the Chinese Renminbi (CNY), are getting sold too… But there! I told you anyway!

Speaking of the Chinese renminbi, which happens to be the only currency gaining versus the dollar this morning, it looks like the Chinese government is back to allowing appreciation again. It took them longer than normal, to come around and begin the appreciation of the renminbi again. You know… I never, ever, say that an asset is a “one-way street”… And the renminbi is probably the best illustration of that, for all things considered, a person might think that the renminbi is a one-way street to greater appreciation… But, that isn’t the case… From August 2008 to June 2010, the currency held steady Eddie, and was not allowed to appreciate. In June of 2010, the Chinese government issued a communiqué that called for a faster appreciation of the renminbi… Since June 2010 to today the renminbi has gained almost 7%… But there have been periods of weakness and non-movement, like we recently experienced… So, while the renminbi may look like a one-way street, it’s NOT! Should the appreciation continue? Probably, as long as Asia’s domestic demand remains unaffected by the slowdown in Europe and the US.

The data cupboard here in the US is pretty barren today, with only the Monthly Budget Deficit expected to print… However, some months, this data is held up by someone or something… Nevertheless, the Budget Deficit for November is expected to be around $140 billion…

Tomorrow we’ll see the color of the latest retail sales for November… I have to say that this time of year I see tons of packages being delivered to our house, so… The Butler Household Index (The BHI) tells me that retail sales will be strong for November…

And don’t forget the FOMC meeting that will take place tomorrow! Geez Louise, how could I almost forget about the FOMC? Just because I would like TO forget them, doesn’t mean I CAN forget them! This meeting will be a non-event, folks… But, as always, it will be interesting to see/hear what Big Ben Bernanke has to say… Not that I find what he has to say interesting! But the markets seem to think it’s important, so since I’m in “the markets” I play along…

The Swiss National Bank (SNB) meets this week… Remember that they want to implement negative interest rates on deposits… And the Eurozone will see their up-to-date PMI’s (manufacturing index reports), which should show more weakness…

So… Besides waiting for the ratings agencies to downgrade the Eurozone members… There’s not much on our plates this morning and this week.

And that gives me an opportunity to talk about my friend, David Galland… David is THE best writer in the markets, but if he decided to do novels he would be the best at that too! David writes a weekly letter about “stuff” … Sometimes it’s the markets, sometimes it’s about things that we deal with every day. He makes people think, something that I hope I’ve learned from him.

So… This week, David is talking about the ever-expanding government and what he thinks is going on… You can read his letter here.

To recap… The euro has finally traded outside the range it held last week, to the downside though, as Moody’s sent out a warning that they will review each Eurozone member for a possible downgrade… We’re still waiting for S&P to announce their downgrades, as the Eurozone leaders didn’t do enough to satisfy the ratings agency. With the euro getting hammered this morning, the rest of the currencies, save the renminbi, are also weaker. Gold is down $30 this morning, and providing us a cheaper level to buy, for sure!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning