Future Debt Crisis? (BUY COMMODITIES)

The Wall Street Journal article, “The Coming Deficit Disaster” , points at the Obama Administration’s inability to reduce the U.S deficit and the Administration’s plan to not attack the deficit until next year. It explains that, 

“The federal government ran a 2009 deficit of $1.4 trillion—the highest since World War II—as spending reached nearly 25% of GDP and total revenues fell below 15% of GDP. Shortfalls like these have not been seen in more than 50 years... spending far outpaces revenues... Our national debt is projected to stand at $17.1 trillion 10 years from now, or over $50,000 per American. By 2019, according to the Congressional Budget Office's (CBO) analysis of the president's budget, the budget deficit will still be roughly $1 trillion, even though the economic situation will have improved and revenues will be above historical norms.” 

It then goes on to ask, 

“At what point, some financial analysts ask, do rating agencies downgrade the United States? When do lenders price additional risk to federal borrowing, leading to a damaging spike in interest rates? How quickly will international investors flee the dollar for a new reserve currency? And how will the resulting higher interest rates, diminished dollar, higher inflation, and economic distress manifest itself? Given the president's recent reception in China—friendly but fruitless—these answers may come sooner than any of us would like... In short, any combination of what is moving through Congress is economically dangerous and invites the rapid acceleration of a debt crisis.”

Now, wait a minute... A debt crisis in our future??? I thought we were in a debt crisis?

It is important to read this article with commodities in mind because they are negatively correlated to the dollar. As the Obama Administration lets the U.S deficit grow, the value of the dollar is falling. This is causing the dollar to grow increasingly risky, making it less attractive to both lenders and borrowers.  (I highlight In my post "A+B= Get Ready for Another Market Dip" one of the ways the government is not reducing debt but is merely replacing credit with stimulus.)

As the currency of the world, the dollar is held to high standards. Failing these standards could be catastrophic to the U.S economy and it seems we might be doing just that. When the market realizes this deficit problem, you can be sure that the value of the dollar will shrink to new lows and the value of commodities will skyrocket. 

Take a look at the following etf’s that track certain or all of the commodities: SPDR Gold Shares (GLD), U.S. Oil (USO), iShares Silver Trust (SLV), and PowerShares DB Commodity Index Fund (DBC). I am expecting to see new record highs in this area of the market for 2010. 


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