Tag Archive | "Government debt"

Why Currencies Lose Value


Why would a government want to weaken its currency?  The answer to this question creates a 50% currency profit potential over the next two years.

Governments as a whole might not want to weaken their currency.  Politicians as individuals do, inadvertently perhaps, because promising something for nothing attracts votes.  The way such promises are kept is through deficit financing.  Politicians treat voters in a similar way to how I train our dogs.

Ma & Chuk

Mah and Chuk.

Merri and I have two dogs.  Training them and maintaining their obedience requires a  lot of carrot (dog treats, play or affection actually) and a little stick (the word “No” should suffice).  Dogs need to want to obey their master because it feels good, not because of fear.  Training should be easy, gentle, fun but firm, without fear.

Sometimes training requires a little trick because hounds have short memories and when together they can become less obedient.  The pack mentality makes them more likely to ignore commands such as the “Do not dig under the fence”.

electric

Digging under the fence is a problem because our hounds cannot be watched all the time.  They cannot be punished for coming to a call when they are outside the fence.  They need fear of the fence not fear of me.  Enter the Haveahart eFence (e is for electricity).   One wire, a little juice and one touch of the wire solves the problem.  Fear of the fence (not Merri or me) is created.  The juice can then be removed.  The problem is solved.

electric

Politicians treat voters like dogs.  They offer voters something for nothing.   Politicians may deliver the promise, but with dollars borrowed.  The politicians look great.  They are recognized for keeping the promise.  The voters do not connect them to the debt.  The debt is government debt and voters fail to note that this debt is theirs and mine and every person who holds dollars.  We will pay it, one way or the other, through increased taxes, reduced government services in the future or a currency that has reduced purchasing  power.

The dogs do not fear me because I am not directly related to the eFence.   The voters do not fear or hate the politician because the politician is not directly related to the debt.  It’s a neat but terrible trick that can help destroy the integrity of a currency.

Currency devaluation is not totally the politician’s fault.  Human nature is the real driving force.  George Orwell captured this fact nicely in Animal Farm.  Power corrupts and as long as a system exists there are some who will take advantage.  Voters vote for promises without asking, “Who will pay and how?”  Politicians promise something for nothing because they want to be elected.  This entire process is paid for with borrowed money.

Debt reduces the rarity of money.

Politicians everywhere use this trick and the strength of a currency is enforced or reduced, in part, by the sum total of  politicians using the currency to keep promises of something for nothing.

We saw this scenario play out last week in Greece’s elections.  Contender Alexis Tsipras promised to end tough bailout conditions, which he said had locked Greece into “a straitjacket of debt, unemployment and stagnation”.  The President Antonis Samaras ran on the stance that Greece had little choice to enforce austerity because “the ship was sinking”.  The President’s platform was shaky because Greek youth unemployment is running at almost 60% and general unemployment over 27%.

Greek voters want better conditions. The promise of something for nothing sounded pretty good.  The contender swept away the President and formed a new government.  How is he going to pay for an austerity cut back? Tsipras will try to renegotiate debt or have the country default on some of their debt.  This will not solve the problem.  In fact conditions will grow worse and Greece may end up losing the euro as its currency.   If Greece creates a new Drachma the currency will have a serious devaluation because the voters bought into a “Something for nothing promise”.

The Greek election also reduced the purchasing power of the Euro.  A Reuters article “Euro hits fresh 11-year lows versus dollar following ECB move” tells the tale and tells how the euro fell to fresh 11-year lows against the dollar and is down over 7 percent since the start of the year.  The article explained how the Greek elections could add uncertainty to the euro’s weakness.

This in turn creates difficulties with the US dollar and America’s economic growth as evidenced by a Wall Street Journal article “Euro’s Big Drop Puts U.S. Economy, Federal Reserve to the Test Strengthening Dollar Will Make American Goods More Expensive Abroad and Could Slow Both U.S. Growth and Inflation”.  This article says:  U.S. officials have been playing down that scenario, and, more broadly, resisting talk of a global currency war—competitive devaluations by countries eager to keep their currencies as low as possible to protect exports.

Preserving the purchasing power of your earnings, savings and wealth requires currency diversification.  

Three events including the US dollar’s rise contain remarkable similarities to similar positions 30 years ago.  These similarities reveal three patterns that in 1982 created the best opportunity investors have seen in 32 years.  The first profit came two years after when the dollar dropped, like a stone, by 51%  in just two years.  A repeat of this pattern is growing and could create up to 50% extra profit in the next two years for investors who understand these currency, market and economic conditions.

This is the most exciting opportunity I have seen since we started sending our reports and conducting our Multi Currency International Investing seminars over three decades ago.  The trends are so clear that I have created a short, but powerful report “Three Currency Patterns For 50% Profits or More.”  This report shows how to earn an extra 50% from currency shifts with even small investments.

I’ll be marketing this shortly and have set a price of $29.95, but want to try a test.  The report shows 22 good value investments and a way to invest very small amounts (even $5,000).  There is extra profit potential of 50% so the report is worth a lot.

I’ll be marketing the report for $29.95 but right now you can order this report for any amount you wish to pay.  Order the report here for whatever price you choose.

Gary

(1) Euro hits fresh 11-year lows versus dollar following ECB move

(2) Euro’s Big Drop Puts U.S. Economy, Federal Reserve to the Test

Protected: Trading Down: The Global Economy Shifts Gears- Part III


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Ecuador Police Unrest


Ecuador police unrest creates a hard spot that rocks with turmoil.

ecuador-police

Ecuador’s police and part of the military are on strike. The Ecuadorian President is speaking to the nation as I write… so let’s take a moment to understand the problem and project what might happen.

Ecuador’s president is between a rock and a hard spot as he has been trying to enhance Ecuador’s infrastructure and help the poor all at the same time.

Unlike the US and some other governments, Ecuador does not have unlimited credit. This creates a problem as explained in a recent article at Bloomberg.com entitled “Ecuador will probably tap China pensions to finance deficit Fitch says”  The article says:

Ecuador will probably tap the nation’s pension fund and seek a loan from China to help finance its $2.7 billion budget deficit, according to Erich Arispe, an analyst at Fitch Ratings.

South America’s seventh-biggest economy may need as much as 4.3 percent of gross domestic product to fund the “relatively large” deficit, Arispe, a New York-based analyst at Fitch, said yesterday in a telephone interview.

Ecuador is using debt to increase spending on infrastructure projects and social programs in a bid to lower unemployment and boost economic growth, President Rafael Correa said in a June 5 statement. The nation’s default on $3.2 billion in bonds since 2008, declining oil production and a slump in private investment has crimped funding sources, Arispe said.

Correa “has to find a way to finance his ambitious investment projects,” Arispe said. “Given the limited potential of increased oil-derived revenue” and declining investment, “increasing debt is the option they have at this point.”

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries narrowed 6 basis points, or 0.06 percentage point, to 10.36 percent at 9:09 a.m. New York time, according to JPMorgan Chase & Co.’s EMBI+ index. Ecuador’s spread has widened 23 basis points in the third quarter, compared with a 58 basis-point drop for the index.

Ecuadorean sovereign debt is the second-riskiest after Venezuela’s among 15 emerging markets tracked by JPMorgan, according to the bank’s EMBI+ indexes.

The government next year will also begin offering treasury notes with a term of less than one year to boost liquidity, Rivera said Sept. 24. Ecuador has proposed legal changes to allow the country’s banks to use short-term government bonds for as much as 75 percent of their reserves and let the government boost public debt to 50 percent of GDP from the current limit of 40 percent, Rivera said.

The article was correct in a number of respects… the first being that the government is trying to finance part of its debt with Ecuador pension funds.

Yesterday the government altered retirement and military regulations and at least three changes have led to a strike.

Change #1:  All government workers must retire at 65. In Europe people are striking because they want to retire early. In Ecuador people wish to continue to work.  However it is the second change that really creates the rub.

Change #2: Retirement pension buyouts will be paid one half in money and one half in government bonds. In other words, if no one else will buy Ecuador bonds let’s force them on retired government workers.  Americans should remember this ploy.  The US government has floated similar trial balloons about protecting pensions from stock market fluctuations with government bonds.

Change #3: The police and military are being affected. The police and military have many special benefits… military hospitals… bonuses for promotions… for moving, etc. The government has stripped all these away.  In retaliation the police are currently on strike.

As I wrote these details, President Correa was speaking to the public and one of our A TeamEcuador just sent me this note:

Gary President Correa told the people he doesn’t care.  He said he won’t back down on his decision and he said if  the policeman desire,  they can kill him.  That’s not good negotiation in my opinion.

There are several protests going on today.  Since the police are on “strike” no one will make sure that the protesters behave.

This is happening all over the country.   We do not know what will happen but the president went to talk to the police headquarters.  They refused to hear him.

The Asamblea (Congress) has no police protection at this time.  All public employees are going to march to the Carondelet (Presidential Palace) this afternoon, with no police protection to stop them.

I’ll keep you posted.

And we will keep you posted.

Gary

Join us at our October seminar to learn how to earn and diversify globally.

Read Ecuador will probably tap China pensions to finance deficit Fitch says

Ecuador & Economic Collapse


Ecuador may be a great place to be if there is a global economic collapse.

A theme in our messages is that there are four ways to beat inflation… investing in commodities… real estate… stocks and your own small business.
This is one reason I like Ecuador real estate. First it is a good value now.  Second it is a great place to be any time and third it is an especially good place to be during a global crisis.
The people are by nature, friendly and easy going.  There is plenty of food and never severe temperature problems.
Ecuador is a small agricultural country and as such, a huge national distribution system is not required.  The food is fresher.  Preservatives are not as required.

Ecuador’s land for producing food is rich.

ecuador-safety

Food is produced in every nook and cranny.

ecuador-safety

and available in markets and every village.

ecuador-safety

Corn, beans and potatoes are the basics in the Andes.

Excerpts from my latest multi currency portfolio lesson explains why this is extra important at this time. The lesson says:

This message is about risk and the chances of economic collapse.

Every investment adviser I work with is nervous… due to the massive debt that has been created in the last recession…  without a lot to show for the spending.

For example… an article in the telegraph entitled “Société Générale tells clients how to prepare for potential ‘global collapse” provides a big warning.

Société Générale is one of the oldest banks in France and is one of the main European financial services companies and is active all over the world.

The Telegraph article about this bank says:

Société Générale has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

Explosion of debt: Japan’s public debt could reach as much as 270pc of GDP in the next two years.  In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.

Under the French bank’s “Bear Case” scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run.

We have almost reached a point of no return for government debt,” it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money.

SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”.  Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.

Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns.”

There are several ways for governments to solve debt problems.

Excerpts from an article last week in USA Today by John Waggoner entitled “Depression, WWII lessons for economic recovery? Sacrifice” explains:

Even during the Great Depression, federal spending was never more than 11% of GDP.   The last time the nation’s debt was this big compared with gross domestic product — 70.4% of GDP — was immediately following World War II.

How did the Greatest Generation pare it down? It didn’t.

It grew the economy faster than the debt, pushing down the debt-to-GDP ratio and making debt payments easier to manage. But that generation also did some things that U.S. citizens and politicians don’t seem willing to do today. It paid higher taxes, and it had a smaller government — and, at least until the 1980s, it kept annual budget deficits small.

The citizens of the U.S. owe $12.3 trillion in Treasury debt to banks, individuals and foreigners. That’s about $40,000 per person living in the U.S., and it’s not counting the amount our states owe — or, for that matter, what we owe to our individual creditors.

Although the U.S. is currently handling its debt comfortably and pays remarkably low interest rates on it, there’s mounting recognition that sooner or later, we must move the debt-to-GDP ratio in the other direction. And that will involve hard decisions on taxes, spending and sacrifice — something the World War II generation knew much about.

Even during the Great Depression, federal spending was never more than 11% of GDP, according to the Economic Report to the President, an annual government publication by the Council of Economic Advisers.

By 1942, spending climbed to $35 billion, or the inflation-adjusted equivalent of $465 billion. Annual spending peaked at $92.7 billion in 1945, or $1.1 trillion in today’s dollars. By 1945, the U.S. debt was 121.7% of GDP, vs. an estimated 70% today, according to the Economic Report to the President.

Then and now:

How did the government repay the war debt? It didn’t, really. Much of it was rolled over when it matured, but new borrowing was limited. “During the early postwar years, the federal government ran either small surpluses or small deficits,” says Anthony O’Brien, professor of economics at Lehigh University. The federal debt was $260.1 billion in 1945 and $274.4 billion 10 years later in 1955.

But the economy grew faster than the deficit did. GDP was $221.4 billion in 1945, and $394.6 billion in 1955 — despite high tax rates, which persisted. Because of economic growth, the ratio of debt to GDP fell nearly every year from 1947 to 1981. As the nation’s debt became a smaller part of GDP, the debt became much less burdensome, much as a fixed mortgage payment becomes more affordable as your income grows.

What’s different between then and now? Plenty.

World War II was a finite event, and it’s pretty easy to stop war spending and bring the budget back into balance — or close to it — when the war is over.

“Government spending went down by a dramatic amount,” after WWII, says Steven Hess, lead U.S. debt analyst for Moody’s. And government was far more limited: In 1945, there was no Department of Education, no Environmental Protection Agency, no National Security Agency, for that matter.

Today, the U.S. is involved in two wars: Both have lasted longer than WWII, but they have been far less expensive — about $1 trillion so far. So there’s no one dramatic event that will reduce the debt-to-GDP ratio, Hess says. “It’s going to be much more difficult.” The problems:

•Recession. When the economy falters, so does the government’s income — that is to say, the taxes it collects from corporations and individuals. The government collected $2.5 trillion in 2008, and it collected $2.1 trillion in 2009, a $400 billion shortfall.

•Spending. Federal spending has jumped from $1.8 trillion in 2008 to an estimated $3.1 trillion in 2009. Unlike World War II spending, however, there’s no quick end in sight to current spending. Much of the growth in spending since the end of the war came from entitlement programs, such as Social Security, and military spending. In 1963, for example, Social Security and Medicare were 14.8% of all federal tax receipts, and defense was 50.1%. In 2009, Social Security and Medicare are an estimated 40% of federal tax receipts, and defense is 25.7%.

•Taxes. The maximum federal income tax rate in 2009 is 35%, down from 39.6%in 2000.

Lower taxes stimulate the economy, and raising taxes in a recession is a nearly sure-fire way of deepening the recession. Nevertheless, tax cuts add to the deficit if the government doesn’t rein in spending. “You can’t raise spending and cut taxes,” and get a balanced budget, says David Wyss, chief economist for Standard & Poor’s. Estimates of how much the tax cuts have added to the deficit range from about $1.8 trillion to $1.35 trillion.

•War. Fighting a war is one of the most reliable ways to create a big debt. The British, for example, finished repaying their World War II debt to the U.S. in 2007. Germany will finish repaying its World War I reparations in 2010. Every Allied nation except Finland defaulted on its World War I debt to the U.S.

The article goes on to point out that there are three ways to solve the problem… Raise taxes, cut spending, or grow the economy fast enough — and grow the deficit slowly enough — that debt becomes a smaller portion of GDP.

Currently, the nation’s debt-to-GDP ratio is in line with most other developed countries and well below Japan’s.

This does not mean the US debt is good. This means that the global debt is bad!

And the US debt is headed higher towards the 100%, level where it is difficult to grow out of.

The way to cut the deficit is a combination of tax increases and budget cuts. Yet because neither of these options are politically popular…. expect inflation… the loss of the purchasing power… around the world.

There is a warning signal in the markets now… the rising US dollar.

The chart below shows how the euro recovered after the past panic shift to the greenback and how the dollar is now rising again.

euro-dollar chart

End of excerpt.

My latest Multi Currency Lesson explains more about why there is extra risk now. Learn how to obtain this lesson here.

There is little we can do about the global economy.  That fate is beyond our control.  Yet there is a lot we can do for ourselves.  The common refrain among good investment managers is “do not waste the recession”.

These economic worries and concerns, pressures and tensions in countries everywhere are problems and problems create opportunity. Whether you live in Ecuador… full time or part… you can gain extra opportunity investing in commodities… real estate… stocks and your own small business.

Gary

Join Merri and me this February  at a seminar or tour and share ways to invest, do business and live that protect wealth as they bring joy, satisfaction and better health.

Join us with our investment advisors and tax attorney February 11-14  at Quantum Wealth -International Investing & Business Made EZ, Mt. Dora, Fl.

You can also come on with us to Ecuador.

February 15-16 Travel to Quito and tour Quito

February 17     Travel Quito to Manta

February 18-19  Manta & Mid Coast Real Estate Tour

February 20 Travel Manta to Cotacachi

February 21-22 North Andes, Imbabura & Cotacachi Real Estate Tour

February 23-24  Quito & Mindo Real Estate Tour

February 25 Travel Quito Cuenca

February 26-27  Cuenca Real Estate Tour

Or join us in March 2010

March 11-14     Super Thinking + Spanish Course, Mt. Dora, Fl.

March 15    Travel to Quito

March 16 Travel Quito Cotacachi

March 17-18  North Andes, Imbabura & Cotacachi Real Estate Tour

March 19-20    Cotacachi Shamanic Tour

March 21  Travel Cotacachi to Manta

March 22-23   Manta & Mid Coast Real Estate Tour

March 24 Travel Manta to Cuenca

March 25-26 Cuenca Real Estate Tour

March 27  Travel Cuenca to Salinas

Mar. 28-29   Salinas & South Coast Real Estate Tour

There are five days left to gain the largest savings on our Ecuador tours.

The Ecuador airfare war makes it cheaper to get to Ecuador than ever before… and there is still time to enjoy great Ecuador tour savings.

You enjoy discounts by attending multiple seminars and tours. Here are our multi tour adventure discounts.

Two Pack… 2 seminar courses & tours $998 Couple  $1,349 Save $149 on couple

Three Pack… 3 seminar courses & tours   $1399 Couple  $1,899 Save $98 single or $348 on a couple or more

Four Pack… 4 seminar courses & tours   $1,699 Couple $2,299 Save $98 single or $697 on a couple or more

Five Pack… 5 seminar courses & tours  $1,999 Couple $2,699 Save $496 single or $1,046 on a couple or more

Six Pack… 6 seminars courses & tours  $2,199 Couple $3,099 Save $795 single or $1,395 on a couple or more

Even Better.  Greater Savings. Our 2010 International Club membership allows you and a guest to attend as many of the 51 courses and tours we’ll sponsor and conduct in 2010  (fees would be $40,947 for all these courses individually) is only $2,999.

The International club fee rises to $3,500 January 25 2010. Enroll in the International Club now at the original fee of $2,999. Save $501 extra before January 25, 2010.

Because holiday expenses often tighten the winter cash flow, you can enroll with three monthly payments… $1,025 in January… $1,025 in February and $1,025 in March 2010.

If you join the International Club, the entrance fee for 2010 is $2,999 (until January 2010).  Your attendance fees at all courses will be waived. You and a guest of you choice can attend courses worth $40,947.You can calculate the savings as our schedule of all 2010 courses here.
International Club 2010 Membership $2,999 Enroll here