Investors feel they can put their money into Treasuries and not worry.

But maybe they should spare a thought or two about what is really going on. Lending money to the US government is no sure thing. Far from it. In fact, under the present circumstances, lending money to the feds is asking for trouble. Recently, you could put your money in T-bills and get zero yield. "An extraordinary thing..." said Warren Buffett - so extraordinary that he was "not sure [you'd] see that again in your lifetime."

The US Treasury market is in a bubble. Like all bubbles, it will pop. And as always, when bubbles pop, there are those who get hurt - and those who profit.

On the numbers, the US government is the worst credit risk in the world. You determine a man's creditworthiness by looking at his balance sheet. Add up his assets and subtract his liabilities. Do that to the federal government and you get a very big number with a minus sign in front of it. Even if they were to sell off the Capitol building and all the federal lands west of the Mississippi, the feds would still have a hole in their finances larger than any other in the entire world.

While the balance sheet looks awful, the cash flow is worse. In the current year, the feds will take in about $1.9 trillion in taxes and spend $3.6 trillion. In other words, the feds aren't just living beyond their means...they're not even on the same planet. Who in his right mind would lend to a spendthrift whose outgo exceeded his income by nearly 100%?

The only way any loan can reasonably be repaid is from income. Income must exceed expenses or there will never be money for debt repayment. Lending to a corporation or an individual, the lender expects the borrower to earn his way out of debt. Otherwise, it's a fool's game. The debtor is soon kiting checks and going deeper in the hole. He borrows from one lender in order to pay off the first lender... In effect, he operates a pyramid scheme - depending on fresh suckers to keep giving him new money - until the whole thing comes crashing down.

The federal government doesn't even pretend that it is going to earn its way out of debt. It presumes that there's an endless supply of money it can borrow...and new suckers born twice a minute who are willing to lend. But this is exactly where all Ponzi schemes crack up. The fed's pyramid will fall in the same spot; where it runs out of new money.

Mr. Obama says he plans on cutting the budget deficit in half by the end of his term. Let's see...that's four years out. If he's true to his word, that will mean deficits averaging about $1.5 trillion a year...or about $6 trillion total. Where will that money come from? What sucker has that kind of cash?

America's savers are putting their backs into it. They're saving about 4% of GDP currently, which could rise to 5%. They typically only put less than one percent of their wealth into Treasury paper; but let us imagine that they use every penny to buy it. Over Obama's term that could be as much as $2.4 trillion. The other big buyer is the Chinese. If they were somehow able to continue buying at the same rate that they have for the last 6 months, that would add $2.8 trillion more. So even if both these Hollywood endings should come to pass, the show would still be a horror. There would still be $800 billion worth of Treasuries left unsold.

More likely, Americans might multiply their purchases of Treasuries by 10 times...not 100 times. And more likely, the Chinese might buy another $1 trillion or so. But sooner...not too much later...buyers are going to begin to notice that there aren't enough of them to keep this Ponzi scheme going. The smart ones will head for the exits early...the slow and the dull will be crushed at the doorways.

"The Brazilian real overtook the South African rand today as the world's best-performing currency. Brazil posted a $146 million current account surplus in April, its government announced yesterday, the first such surplus since September 2007. Brazil's government has introduced aggressive new tax cuts and new trade agreements (mostly with China), and has thus become the darling of the currency trade. Low taxes, open trade and account surplus is good for a nation's economy? Huh... Who'd have thought?

"'And any current account figure that's written in black is good for a country and its currency!' chimes in our friend Chuck Butler. 'And the real is no exception to this rule.

"'The real is trading this morning at 2.0060, spittin' distance from losing that "2" handle! (The real is a European-style priced currency, so the lower the price, the more value it returns versus the dollar.) The real hasn't seen the underbelly of a "2" handle since October of last year!

"'You may recall last fall, I wrote about how the real was holding serve, but eventually, it had to give up ground, with the euro losing value and commodity prices circling the bowl. But now that the euro and commodity prices are on the rise once again, the real is back in the driver's seat.'"

The price of oil remains at $62...the American peso is still trading for peanuts ($1.39 against the euro)...and gold lost about $5 yesterday; it trades this morning near $953.


As the supply of Treasuries increases, the supply of willing and able Treasury buyers is likely to lag. Into the gap comes the Federal Reserve, checkbook in hand. Rather than allow Treasury yields to increase - which is what happens when there are more borrowers than lenders - the Fed will do the buying itself. It will buy, not with savings but with money of its own making.

As the Fed creates more new green money, the old-fashioned yellow money is likely to look better and better. Perhaps only because it will be harder to find.

There are about $1,600 trillion worth of derivatives in the world...$125 trillion worth of real estate and business assets...$100 trillion worth of stocks and bonds secured by assets...$65 trillion worth of government bonds (rising rapidly)...$4 trillion worth of actual currency...and only between $2 and $4 trillion worth of gold and silver.

We'll take the gold and silver...at least until the bubble in Treasury debt blows up.

Government spending is out of control. We have a big-spending Congress in Washington that can't say no to anything (except the token defense cut, or taking away school vouchers from inner-city kids in the District of Columbia). It's been going on for way too many years, under both previous and current party management.

Everybody who's anybody in this country, it seems, gets a permanent, pet government program, if not a large bailout. (Huh? You didn't get your program or bailout?) How long can it last? I think we're about to find out.

As Bernie Madoff might say, "Bailout, schmailout." Still, the axis of overspending leads to inflation. It's the 1970s redux. And inflation will soon rear its head and roar so loud that even the wizards of Washington will have to admit the obvious.

Remember that line from the movie Apollo 13? "Houston, we have a problem."

Wow. Do we have a problem in this country, or WHAT? It's WORSE than Apollo 13. We should be so lucky as to be in a small capsule in the cold of space heading away from Earth toward the moon with almost no oxygen or electrical power. Instead, we're watching the national currency declining and dying right before our eyes. And the opinion makers of the nation don't know anybody who owns gold. Amazing!

Well, they could always go find somebody in Dubai. Because from that distant desert kingdom comes word that the Dubai Multi Commodities Centre (DMCC) has finished building a state-of-the-art precious metals vault, with world-class tracking and security systems. Think Fort Knox, but in the desert and without the trees and pretty landscaping we see in the hills of Kentucky.

You want "hoarding behavior"? The new vault will become the home for the exchange-traded fund (ETF) of Dubai Gold Securities. Also, "It's a natural home for the central banks in the region to store their gold in Dubai, rather than in London, where they have typically held their gold," said a Dubai-based gold dealer INTL Commodities DMCC's CEO Jeffrey Rhodes. Yep. "Natural home." (Margaret Mead, call your office!)

A DMCC official stated that the new vault will be used to store precious metals associated with precious metal-based ETFs that are on the drawing boards and scheduled for launch later in 2009. This can only add to worldwide demand for gold and silver, especially from the traditionally gold-friendly Middle East.

OK, so here's the bottom line. When the American people realize that the dollar is in for another round of inflation, they're going to look for a way out. When people envision the future decline in their purchasing power, we'll see a rush for the monetary exits. It'll be the "Gold Panic" of 2009, or 2010 or 2011... Whichever year gets the naming rights.

When the reality sinks in, people will flock in droves to physical precious metals (yeah, try to get some!), as well as mining shares.