Dec 18, 2006


The Daily Reckoning PRESENTS: Only rarely can you look into the economic future and see what's coming... at least in time to take advantage. This is one of those times. As David Galland points out below, clarity is possible because of a combination of factors that, taken together, leave nothing but hard choices...

by David Galland

78 million.

That figure is the key to steering your portfolio successfully past the
reefs of today's brewing monetary crisis. And, if you play things right,
it's the key to making a lot of money for yourself over the next decade.

78 million is the number of baby boomers who are in or approaching
retirement. That's the biggest demographic bulge in U.S. history, fully
26% of the population.

And many of those 78 million are in a jam. As they approach retirement,
they are still carrying historic levels of debt and, on average, have
woefully inadequate net worth -- and much of that based on shaky housing

In fact, 25% of the retiring boomers - nearly 20,000,000 in all - are
facing retirement with a net worth of less than $50,000. You don't need to
be an accountant to see that, with today's degraded currency and longer
life expectancies, they won't get very far on so little.

This is a real tragedy in the making. After all, what could be sadder than
millions of people striving for a lifetime to reach the American dream and
then discovering that the "golden years" are just a fantasy, their wealth
having been sucked away by decades of inflation and taxes so that
politicians and bureaucrats could squander it to grease the skids for
their own political success.

In 1930, the total share of the U.S. economy directly controlled by or
dependent on government was about 11%, leaving the balance of 89% firmly
in the hands of private enterprise.

Today, by the late Milton Friedman's calculations, the government's share
of the U.S. economy - including the time and resources required to comply
with all the regulations - has ballooned to over 50%, reducing the
wealth-creating machinery of free enterprise to an auxiliary engine for

No wonder so many people live paycheck to paycheck.

U.S. government debt now tops $9 trillion, before taking into account its
unfunded obligations for Social Security and Medicare - debts that the
retiring boomers will soon have their hands out to collect.

After adding in Social Security, Medicare and all the government's other
pay-later obligations, the current debt actually comes in at over $60
trillion - an amount so large, not one person in a million has a real
sense of it. So let's try to put that number into perspective.

A trillion is 1000 X 1000 X 1000 X 1000, or a million millions. In his
first address to Congress, President Reagan, himself a big spender,
accurately pointed out that a stack of $1,000 bills four inches high makes
you a millionaire, and that a trillion dollars would be a stack 67 miles

The U.S. government owes 60 of those sky-piercing stacks of $1,000 bills.

It's a lot of money. And it's not just any kind of money. Amazingly, this
unbacked currency of a bankrupt government is still the reserve currency
of virtually every nation in the world today. But not, we think, for much

To service its debt and keep the game going, the U.S. government must sell
on the order of $2.5 billion per day in new Treasury bills, much of it to
foreigners already sitting on something like $6 trillion of U.S. paper.

Absent the foreign buyers of U.S. Treasury securities, the whole scam
begins to unravel. And once it begins to unravel in earnest, with wealthy
foreigners and then governments rushing to switch out of dollars, the
speed and steepness of the monetary collapse will be breathtaking.

While millions of boomers will be lucky to scrape by for a year or two of
hard living in a trailer park, their meager assets won't carry them
through the 20 or 30 years of retirement that medical science now
promises. For that, they'll have to rely on scraps from Washington. And if
they have nothing else, every one of them has a mailbox that's just right
for receiving government checks.

In fact, according to the Fed, a majority of retired Americans already
rely on Social Security for 80% or more of their income.

And that makes Social Security and Medicare politically untouchable, no
matter how badly the programs trap the U.S. economy.

Recognizing that the United States has little capacity to rein in its
profligate spending and has neither the intent nor the ability to actually
pay off its $60 trillion debt in money worth anywhere near what it's worth
today, foreigners are increasingly leery about accumulating more

On November 9, for instance, Reuters reported that, "The bond and
foreign-exchange markets were struggling to come to grips with comments
from China's central bank governor Zhou Xiaochuan, who said his country
had a clear plan to diversify its $1 trillion in foreign-exchange reserves
and is considering various options to do so."
Normally, the more skeptical foreign investors become, the higher interest
rates must go to entice them to continue raising their hands at Treasury
auctions... and to keep them from dumping their existing holdings.

But even that route, at least for now, is closed. That's due to the
critical role of housing in today's economy and in the financial
statements of so many millions of American homeowners. Simply, higher
interest rates would devastate the already weak housing market and bring
ruin to a heavily indebted populace, especially cash-strapped boomers, and
further ratchet up the cost of government borrowing. In other words,
raising rates is not an option.

So what are nervous bureaucrats to do?

The answer is to depreciate the currency - and as quietly as possible.
That allows the government to meet its obligations, but with ever more
worthless dollars. It's their only way to buy time.

In fact, Fed Chairman Ben Bernanke virtually gave the game book away in a
speech in Frankfurt on November 10.

"It would be fair to say that monetary and credit aggregates have not
played a central role in the formulation of U.S. monetary policy."

In other words, the total amount of money in the system - what we "print"
-- is whatever the government finds convenient from one day to the next.
That's a politic way of admitting that the U.S. government is planning to
paper over all its many obligations and accelerate a trend that has been
in motion since the creation of the Federal Reserve in 1913.

Make no mistake, it's a desperate strategy, but at this point it's the
only option for a government whose decades of reckless spending have led
the economy into a box canyon, the floor of which is covered in quicksand.
There is no way out. The best they can hope for is to stall the inevitable
for as long as they can. "Not on my watch" is the phrase of the day.

In this age of instant communication, the government can't hide the truth
- at least not for long. So, no matter that they have stopped publishing
M-3 money supply numbers, recognition that we are between a rock and a
hard place is spreading.

Reckoning day is not far off. And when it comes, it will rush in faster
and more brutally than almost anyone expects. The world's financial
picture will be redrawn from scratch, and a painful unwinding of the
economic dislocations built up by decades of political pandering will

While no one can say with certainty how the disaster will play out, there
is one truth you can take to the bank. Throughout all of human history,
gold has always held its value as a monetary instrument. That sort of
shockproof durability cannot be claimed by any paper currency, certainly
not by the dollar, which has lost 95% of its value since abandoning the
gold standard in 1971. With the dollar untethered from gold, the worth of
the $20 bill in your pocket is headed for its intrinsic value... as a

In the weeks, months and years just ahead, gold, silver and other tangible
assets are again going to become much more than financial obscurities
tucked away on the commodities page. They're about to become front-page

When that happens, the prices of the metals - and of the high-quality gold
and silver shares we follow on behalf of subscribers to our International
Speculator -- are heading for the moon.

Hopefully, enough of the 78 million baby boomers will catch on to the
underlying realities of their situation early enough to take advantage.
For many, it may be their last chance at enjoying dignified golden years -
instead of laboring through their eighth decade under the Golden Arches.


David Galland
for The Daily Reckoning

Editor's Note: David Galland is Managing Director of Casey Research, LLC.,
publishers of Doug Casey's International Speculator, a monthly newsletter
focused on identifying high quality natural resource stocks with the
potential for a double or better over the next 12 months. A 3-month
risk-free trial to the letter is available for interested investors. Click
here for all the details:
International Speculator


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