What’s happening in Europe should be a wake-up call for America.
These three countries have all collapsed under the weight of too much debt and are now dependent on rescue funds cobbled together from other European nations.
The Finnish vote is crucial. Because Finland has the right to vote on European requests for bailout funds. If parliament rejects the request for funds to shore up Portugal, it spells trouble for Europe’s bankrupt nations.
The problem of too much debt isn’t confined to Europe. Japan has far more debt relative to the size of its economy – 230% of GDP, according to the IMF – than any European country.
And the true level of debt in the U.S dwarfs even this debt mountain.
If you take the IMF’s official statistics for America’s debt-to-GDP ratio for 2011, it’s just a tad under 100%. But according to Bill Gross, who is head of Pimoc, the world’s biggest bond fund, America’s true but unrecorded debt load is close to $75 million.
This is made up of the following components:
- Federal Debt – $9.1 trillion
- Unfunded Social Security – $7.9 trillion
- Unfunded Medicare – $22.8 trillion
- Medicaid – $35 trillion
This makes its total debt burden closer to 500% of GDP! As Gross put it, America is “out-Greeking the Greeks” with its dependency on unsustainable debt. Greece’s debt-to-GDP ratio is 152%, according to the IMF.
The problem is the same whether you are talking about Greece or Japan or America: too much debt and not enough growth.
This is a lethal combination. Because the more debt you take on, the more interest on that debt you have to pay. And the only way you can continue to increase your debt load…and therefore the burden of interest payments…is to grow your economy.
If you fail to grow your way out of debt, you eventually reach the end of the road – the same place Greece, Ireland and Portugal reached.
Republicans and Democrats in Washington have been warring over this issue. Some within the Republican Party want to dramatically cut federal spending before it’s too late.
But these more radical proposals have very little chance of passing into law. Instead, we are looking at “more of the same” from Congress on government’s spending habits.
This is bad news for the U.S. dollar and for U.S. Treasurys…and for investors who are left holding too much dollar cash and Treasury bonds when the music stops.
Add into this mix recent moves on behalf of the BRICS nations – Brazil, Russia, India, China and now South Africa – to carry out more trade in non-dollar currencies, and you have potentially very big problems indeed for the U.S. dollar.
If you’ve been a long-time reader of International Living Investor, hopefully you acted on my recommendation last October to protect your savings.
Back then, I urged you to take three steps to counter the dollar’s decline:
- Buy gold.
- Diversify out of U.S. stocks and into a mix of U.S. and overseas stocks.
- Place some of your savings in the CurrencyShares Australian Dollar Trust (NYSE:FXA) and the CurrencyShares Canadian Dollar Trust (NYSE:CAN) – two exchange-traded funds that track the strength of the Canadian dollar and Australian dollar versus the U.S. dollar.
It’s hard to quantify the effects of a strategy of diversification out of U.S. stocks. But it’s easy track the performance of gold and the two currency ETFs since my recommendation.
Since then my favorite gold tracker ETF, the ETFS Physical Swiss Gold Trust (NYSE:SGOL), is up 10.5%… the CurrencyShares Australian Dollar Trust (NYSE:FXA) is up 7.5%…and the CurrencyShares Canadian Dollar Trust (NYSE:CAN) is up 4.5%.
It’s not too late to add these “anti dollar” currencies to your portfolio. It’s Europe’s turn to crack up now. But if America doesn’t get its own house in order soon, the problems won’t be just European ones.