10 Years of Deficits, Greece’s Next Wave, China’s Dollar Peg, Uranium’s Moment, and More!

• Buried by the government, noticed by The 5: Another $9.7 trillion in deficits
• A “cascade” of private debt default: Rob Parenteau on “the next act” in the Greek tragedy
• China hints about dropping dollar peg… Why the timing may be no accident
• Chris Mayer on “one of the best investments we can make right now”
• Readers write: Package delivery, gold as a “Ponzi scheme”

  One interesting feature of the Internet age, we observed while sitting high atop a cliff overlooking the Pacific frontier in Nicaragua last month, are the many different locales one finds oneself working.

Today, we’re in transit at the Tampa airport on our way to the final shoot of the Odyssey Marine segment of our new documentary film.

Luckily, the Tampa Airport just installed free Wi-Fi throughout. And luckier still, the bones of today’s episode were becoming evident almost as soon as we hit the “send” button on Friday’s “delusional” one. So today, we bring you an all-new “Debts and the Dollar” episode of The 5.

  The latest deficit projection from the Congressional Budget Office was conveniently revealed just prior to the close of business on Friday.

“Why so?” You ask suspiciously.

“Because,” we respond in a hushed tone.

The CBO’s latest numbers reveal that President Obama’s proposed fiscal 2011 budget would add $9.7 trillion to the national debt over the next 10 years. The White House projection is only slightly less staggering — $8.5 trillion.

Further, the CBO projects the national debt will be 90% of GDP by the end of this decade — higher than the 83.4% recorded at the end of fiscal 2009 last fall. We’re 100% certain this comment will elicit the customary response: “Look at Japan, its debt is 170% of GDP… and it’s been running massive deficits for years!”

To which we can only sigh and respond: “Exactly.” Then get back to our film in which we hope to illustrate the long-term deleterious effects caused by the “crowding out” effect, when governments spend their citizens’ future wealth… way ahead of schedule.

  “We told you two months ago,” our economist-in-residence Rob Parenteau also revealed late on Friday, “we thought Greece would not default, it would begin to implement government spending cuts and tax hikes and there would be a backup fiscal assistance facility put in place for the region in the event bond auctions began to fail. So far, this is precisely how the scenario has played out.”

So far, so good.

But “the next act gets tougher to predict,” he cautions. “Greece and other countries now face falling private-sector incomes — that is, after all, the direct and immediate result of higher taxes on businesses and households and lower government expenditures. Unless the trade deficits of these nations can swing sharply into surpluses (as lower domestic incomes lead to less import demand and lower costs of production lead to higher exports), private debt defaults will now start to multiply and cascade through the system.

“Last week, Moody’s placed four Greek banks on downgrade watch. This is just the start — the fiscal retrenchment has only just begun to take effect. By taking these steps to avoid a public debt default, we would suggest these economies are now poised for more private debt defaults.

“We believe private investors do not yet get this connection, but it will be made very clear in the months ahead. Latvia, with a GDP collapse of nearly 25%, will become the next poster child of the region in this regard.”

  “It amazes me how complacent the market remains about the situation in Europe,” Dan Amoss chimed in, likely en route to our annual Agora Financial Inaugural Banquet, which we also hosted late on Friday. “It’s become quite obvious that there are no easy, painless solutions to the crisis in Greece. Economic growth in Europe will disappoint, because governments and banks taxed and borrowed from the productive private sector about as much as they can.

“It’ll be very difficult for Europe to avoid painful reforms to its gold-plated welfare state programs. Government spending will fall. Tax rates will go up, but may, in fact, lead to lower tax revenues. Yet the market is acting as though this huge problem will just be swept under a rug.

“The youth throughout Europe are suffering from chronic levels of high unemployment. This not only includes countries like Greece and Spain, but also includes Germany and France. The powerful influence of unions has limited the opportunities of new entrants into the labor force. And a high youth unemployment rate is not good for social stability.

“The disease that will afflict financial markets in the coming years is unaffordable debt at all levels of society. Greece is just one symptom. More will pop up in 2010.”

Ominous news for the world at large, but for those in the know, the crises yield the very opportunities that can help you protect your own pile from rot. Membership to Strategic Short Report is still available at an extremely reasonable rate.

  As if to underscore Dan’s point about complacency, we see that European leaders hope to fix their problems by establishing a eurozone version of the International Monetary Fund. In theory, it would set up tougher standards of fiscal responsibility to prevent another Greece.

The German and French ministers hatching this scheme say they’ll present concrete proposals “within a few months.” Heh. With luck, the other PIIGS will still be feasting at their trough by then. Or not.

  “Surely, the main mistake Europe made,” writes a reader commenting on the world’s obsession with Greek debt, “was in assuming Wall Street knew what the hell they were doing. When every financial ‘expert’ in the world was exhorting Wim Duisenberg to lower interest rates after the dot-com bubble burst, he valiantly resisted, because he worried more about inflation. Greenspan opened the taps and created a housing bubble.

“Well, it’s a funny thing, but Spain also had a housing bubble, but the banks survived OK, because they had managed that risk. It was US junk debt packaged as triple-A investments combined with the bonus culture that screwed the world up — particularly the U.K., whose only economic policy since Thatcher has been to copy the U.S.

“For my part, I noticed a while ago that the financial markets were being controlled by 25-year-old cocaine addicts with no moral compass.”

  China is floating a trial balloon about possibly letting its currency float against the dollar again. The head of China’s central bank has described the current peg — in place since July 2008 — as a “special” policy stemming from the credit crisis. “Sooner or later, we will exit the policies,” he said.

Not what you’d call a firm commitment, but it’s an interesting good-cop counterpoint to the bad-cop act Premier Wen Jiabao delivered three months ago: “We will not yield to any pressure of any form forcing us to appreciate.”

Don’t overlook the timing here. During an extended musing about China a few days ago, we pointed out next month is when the official window opens for the U.S. Treasury to label China a “currency manipulator.” We’re in the process of assembling a specific strategy for you should this trial balloon actually float this time… you can receive it free when you accept this “beta offer” — three months of my new Apogee Advisory, free… invitation and details here.

  In the meantime, “one of the best investments we can make right now,” says Capital & Crisis legend Chris Mayer, “is to pick up relatively secure, low-cost uranium — the feedstock for nuclear reactors.

“The demand for uranium is building in intensity like a heap of hot coals. There are already 436 reactors up and running today. And there is a surge in demand coming in the next decade from the hundred or so new reactors expected to come online. Yet the industry is about 400 million pounds short of meeting that demand, as shown in the chart below.

“The market has been in deficit for years, as it burns off Cold War stockpiles, which are finite and dwindling. Another way to look at it: Uranium demand is on its way to hitting 226 million pounds per year. Yet last year, the top dogs — which make up 90% of the market — produced only about 110 million pounds of uranium.”

If you haven’t yet taken advantage of the chance to try out Chris’ premium service, Mayer’s Special Situations, for just $1, time is running out. The deadline for the offer is this Thursday at 5 p.m. EST — when his new issue and latest recommendation comes out. Here’s where to go to give this service a trial run.

  U.S. stocks opened flat this morning. The dollar index is down a bit, around 80.19. But gold is likewise down a bit, breaking below $1,130.

  Oil prices touched $82 a barrel today. Traders are overlooking the subtleties to the jobs numbers that came out Friday and concluding the U.S. economy — and, hence, oil consumption — is on the rebound.

  We’d be remiss to ignore the fact gold reached record highs last week against the euro, the pound and the Swiss franc.

  “Your retired UPS reader is wrong,” writes a reader determined to continue our debate about package and mail delivery. “Things have changed. I’m a rural mail carrier, and UPS drops off packages at post offices for delivery every day, usually by the pallet. There are even new return labels that allow the customer to send merchandise back via either shipper.”

 
The 5: You’re right. A colleague tells us he had some shoes delivered over the weekend and the tracking info from FedEx was very clear — the final leg of the journey was via the USPS.

Heh. Of all the crises, fraud and political shenanigans going on in the world today, why are we still talking about this?

  “We take exception to the comments about the USPS,” writes an octogenarian with a similar sentiment. “We are pushing 80, and so have mailed countless letters and packages without a problem. Yes, a few pieces were delayed some, and the first-class mail doesn’t always get in the box right at noon, but our local post office is manned by knowledgeable, hardworking and courteous staff. There are plenty of other things to be angry about, especially the trillion dollars spent on an unnecessary war.”

 “Gold, the ultimate Ponzi scheme?!?” writes a reader outraged by CNBC’s strange encounter with Marc Faber. “Gold has always been the anti-Ponzi scheme. The way fractional reserve banking works, the last people to receive money in the pyramid have the least purchasing power.

“People view gold as expensive right now, but what’s to stop the little guy from buying mining shares, or, hell, maybe even try their hand at gold panning. Sure, right now, maybe a day’s worth of panning will buy you a sandwich, but this is my guess as to why we are not at the top of this bull market in gold. I think at the top of the gold boom, people actually will set out and start panning for flakes again.”

The 5:

Argh!

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S.: Reserve Members: Time is short, but we had one Canadian couple cancel their reservations for the Rancho Santana Reserve “Chill” Weekend. If you’re footloose and want to join us, we’d be glad to meet you there. Details here.

P.P.S.: Our attorney has warned us that the judge and magistrate have ruled correctly in denying Odyssey’s claim to $500 million in silver and gold off the coast of Gibraltar “IF” — and this is a big “IF” — you believe the state has the right to invoke ‘sovereign immunity’ over their vessels hundreds of years after they’ve gone down in the sea. The law was originally meant to cover U.S. military secrets during World War II wartime operations… now it’s being applied to treasure, as well.

We’re willing to admit that at this point in the story we’re not sure what to think. That’s why we’re in Tampa this morning. But more than one of the subjects we talked to in London last week suggested Spain has been known to allow their ships to be salvaged in the past… but never has a sum this great been on the line.

Spain is also a signatory to a UNESCO treaty that claims all ships that have been at the bottom of the ocean for more than 100 years are “World Heritage Sites.” The U.N. needed 20 countries to sign on the treaty to make it international law. They got ’em. Ironically, Spain is the only one of the 20 that has a coastline. Hmmmn…