Mr. Dines On Gold: America's Debt Is Unpayable

Written by James Dines
Posted June 1, 2019

Publisher's Note: We live in an unprecedented time, but we can rely on knowledge and experience nonetheless. That's why we're bringing you Mr. James Dines' analysis today.

Read on for an excerpt from the latest edition of The Dines Letter to capitalize on his unique and authoritative view on debt, currency, and how gold is more important than ever.

Call it like you see it,

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Nick Hodge


"The creditor hath a better memory than the debtor."
                                                — James Howell

According to the U.S. Treasury Department, America’s national debt was 22 trillion dollars on December 31, 2018. In addition to the amounts directly attributed to government deficits, that total also included debt owed to those outside the government (such as foreign governments, individuals, funds, corporations), internally to the Federal Reserve (mostly in the form of Treasury bonds), and debt incurred by government agencies (such as Social Security).

The nonpartisan Congressional Budget Office has projected that the debt held by the public is currently at 78% of GDP — the highest since during World War II’s urgency — will be nearly 100% of GDP by 2030, and 152% of GDP by 2048. This reckless borrowing to pay for overspending begs for serious concern.

The debt will be forced to grow, due to the expected increase in mandatory spending for Social Security and Medicare, which will expand in coming decades as Baby Boomers retire. Expected to live longer, they will collect Social Security and use Medicare longer than previous generations. Social Security and Medicare spending amounts for almost 37% of the 2017 federal budget. Along with Medicaid, these three programs alone make up nearly one-half the federal budget. Politicians who have tried to reduce these have been warned about not getting reelected; they are silenced by fear of losing their jobs.

Outside those large expenditures, there is discretionary spending, which is the annual focus of Congressional haggling on what and how much is to be spent. In 2017, discretionary spending amounted to 30% of the federal budget. Those sums are committed for defense, transportation, education, veteran’s benefits, and housing assistance, etc. Making substantial cuts to many of those programs would again be politically untenable, since many of these programs’ benefits are enjoyed by a widespread group of voters from both major political parties. It is easier to get and stay elected by supporting deficit-increasing proposals, such as spending for local projects or tax cuts, than it is to increase government revenue by slashing benefits, raising taxes, or closing tax loopholes. The sneakiest two words in the English language are, “plus tax.”

Besides the mandatory and discretionary spending, there are the increasingly menacing interest payments on America’s existing debt (Treasury bonds) to consider. These payments are expected to grow even faster than any of the other major spending categories in the next decade. The Congressional Budget Office estimates that the interest expense on debt is expected to increase 186% to $929 billion annually by 2029 — surpassing all categories except for Medicare and Social Security. That is almost a trillion dollars annually! While these projections assume interest rates on 10-year Treasury bonds will remain below 3.8%,

A ONE PERCENT HIGHER-THAN-EXPECTED INTEREST RATE ON THE 10-YEAR BONDS WOULD ADD ANOTHER $1.9 TRILLION IN OVERALL INTEREST EXPENSE!

A jump in interest rates of several percentage points would thus bust America’s budget. That is partly why governments try so desperately to suppress interest rates. Ordinarily, government bond buyers get a higher interest payment to compensate for the risk of default. In Germany, despite growth slowing down due to falling global trade — especially with China — recent bond buyers will get back less than they loaned! The resulting yield is a “negative” interest rate, meaning investors were paying for the privilege of lending money to Germany that will return less when held to maturity, at a guaranteed loss — that’s crazy! Much money will go under a mattress, instead of to a bank. We accordingly remain “The Original Bond Superbear.” We predict someday bond buyers worldwide will regretfully awaken from their stupor and demand from themselves, “What was I thinking?” Believe the unbelievable or not.

Given that the economy goes through up-and-down cycles, it would seem natural during periods of growth that budgets would be in surplus, since crises often create deficit spikes that result in a debt surge. After the years following the Clinton presidency in the late 1990s, when there was strong growth and budget surpluses, the American government nonetheless ran deficits. The first surge in debt was during the 2001 recession at the start of the new century. Then, funding for the 2003 Iraq war, and later in what we called “The Second Great Depression” starting in 2008. Even in the subsequent nine years of steady, positive economic growth, deficits have continued. Another round of broad tax cuts was planned in 2018, which are expected to push deficits up again and cause America’s national debt to increase steadily at an even faster pace for the next decade. With no budget surpluses before 2031, the U.S. will have had a deficit in 88 out of 100 years and only 4 out of 62 years with a surplus. America can’t even balance a single year’s budget, much less start paying down its net debt. We regret to conclude realistically that THE ACCUMULATED DEBT IS UNPAYABLE.

That means government bonds would only be partially paid off, minus a “haircut,” or some other word play. Bonds would surely crash, not helpful to the economy.

Without the political will for a realistic solution to the inexorably rising debt, a link between the U.S. dollar and a tangible asset (such as gold, or even oil, land, silver, etc) would successfully limit the government from financing perennial deficits by issuing ever-increasing amounts of Treasury bonds — without the normally painful consequence of a devalued currency. No more “deficits without tears.” When a currency is backed by gold, the value of that currency is determined by the amount of gold held by the government backing it. Any attempt to increase spending would require the government to either increase gold holdings by generating more revenue, or reduce spending elsewhere. Otherwise the quantity of currency would rise relative to the government’s gold holdings, and result in the currency’s devaluation. Historically, that latter scenario has caused devastating hyperinflations, already being experienced by Venezuela and Iran, as examples. And Argentina is already at risk as well. Turkey’s lira has been plunging because that nation is running its printing presses, so it risks a hyperinflation.

Getting a handle on fiscal health, and preventing debt from spiraling out of control, both important, become achievable with a gold-linked currency. That’s because current politicians are offering perennial fiscal deficits that their voters are all too irresponsibly willing to accept gleefully — sticking the debt to the next generation. Venezuela’s government in its hyperinflationary desperation, in mid-April 2019, sold $400 million of its gold, for temporary relief, a lesson for people or governments to observe the wisdom of maintaining gold, for an emergency. Even better, that gold — the serious money — could back their next currency, after the present one gets valued at zero when hyperinflation rises to infinity, as did Zimbabwe’s in 2007 and Germany’s in 1921.

Unless governments at the very least begin to balance their budgets, and take seriously that debts require repayments, a soaring gold price appears to be inevitable. Nobody knows when for sure, although that gold and silver prices are flat, as previously noted, suggests that the gold crisis probably won’t erupt tomorrow. And that’s at least something.


James Dines is legendary for having made correct forecasts that were in complete contradiction to the rest of the financial community. He is the author of five highly regarded books, including "Goldbug!," in addition to his popular newsletter, The Dines Letter, and videotaped educational series. Dines' highly successful investment strategies have been praised by Barron's, Financial Times, Forbes, Moneyline, and The New York Times, among others.

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