Within a few weeks or months, the Obama administration will have Congress boost the $12.1 trillion debt ceiling. Over the next decade, budget deficits will add a total of $9 trillion. Experts say the real deficit will actually be higher by $4 trillion. Already, with today's low interest rates the interest or cost of servicing the debt is almost $500 million a day. In ten years the US national debt will be around $20 trillion. There's no way that $20 trillion can be carried or financed -- probably with substantially higher interest rates.

In 2009, federal receipts declined 16.6%. In order to deal with the rising debt problem, taxpayers will face higher taxes or massive spending cuts or both. The American people are not stupid. They see the approaching problems, and they are pessimistic about the future of the country. They fear for their children and their grand-children.

At some point, our foreign creditors will stop buying US debt. The US will no longer be an AAA-rated risk. At that point or before, the dollar will lose its reserve status and nations all over the world will move to unload or diversify out of dollars. At present, dollars make up a large percentage of every nation's reserves. Nations will move to protect the purchasing power of their reserves, which will mean moving away from dollars. If the dollar is distrusted, all fiat currency will be distrusted since almost all fiat currency is backed in part by dollars.

At some point the word "fiat currency" will become a dirty word. Before that happens, investors will be panicking to gold as a store of value. This is the rationale for holding gold over the long term. What happens to gold now is incidental. It's the long-term that is important. Until then, gold may fluctuate foolishly with the international level of the dollar.

www.dowtheoryletters.com

(858) 454-0481

Richard Russell’s Dow Theory Letters

PO Box 1759

La Jolla, CA 92038

17 Letters Per Year