US Gov't Needs to Borrow $2.7 Trillion and why a Can of Coke is headed for $2

Martin Weiss, a noted economic adviser, is now predicting that the US Gov't will need to borrow a minimum of $2.7 Trillion during the next year to fund its bailout plans, and even that may not be enough. He then predicts that interest rates will rise and bond values will fall because of this "oversupply" of bonds and borrowing.

I believe he is right, that the Gov't needs this money, but I think he has the endgame wrong. Neither the US Economy nor the Gov't itself can afford to pay 10, 15 or even 20%, the rates that would be required to lure that money out of the hands of the rest of the world. Instead, I believe the Federal Reserve will simply purchase the debt directly, meaning that this is the equivalent of the Treasury just printing $2.7 trillion and spending it, rather than borrowing it from the rest of the world and retaining some sense of keeping the supply of dollars in line with the economic production of this country.

I just don't believe there are enough dollar holders in the world who want to buy all this planned debt. The Chinese are using their reserves to stimulate their economy, the ruble is cratering, the Arabs have to be wondering what happened to the price of oil and their own cash reserves and not feeling excited about lending the US even more money. Where will the US get all this money then?

I believe that the Fed will have to buy this debt and thus create this money out of thin air. When it does, the resulting inflationary cycle is going to be at first stimulating to the economy, but in the end result in a round of stagflation, a stagnant economy with inflation.

This is an important turning point in our country, investments and economy. Is Weiss right and a person should short bonds because rates are headed higher due to borrowing demand? Or am I right in predicting the Fed will buy the debt, initially keeping rates down but eventually leading to inflation and eventually higher rates?

A third viewpoint can be found in advisors from Deutschebank who advise buying long term treasury debt because rates will be falling! I was astounded when I saw this prediction on the news a few days ago. They say because we have a recession, the US dollar is going to strengthen and go up in value as the prices of all commodities continue to drop.

This is what makes horse races and why you can find someone to bet against.

Who is right?

Well, I think I am, the only way out of this recession/depression is for the Fed to create more and more money, and I firmly believe they are going to end up buying US Gov't debt directly as a buyer of last resort when rates start to climb because the gov't needs to borrow so much during the next year. I'm betting on higher gold and silver prices and a destructive tsunami of inflation as jobs are created in this country and our economy recovers. Eventually the gov't is going to have to deal with people trying to get their money out of this country as people have done in the past in Argentina etc., where inflation raged out of control when the gov't found itself in the same position and created too much money.

But, that's a different set of problems and much more politically acceptable, because at least people have jobs and have money, the problem is, the money is getting worth less each day! But who can argue against deferring pain for a few years? Hardly anyone.

I don't think you can go wrong in betting that this country's currency will continue its long downward spiral in value. My nickle coke in 1950 is now a dollar, a 20 to one increase in price, and headed for $2 a can.

Oh, and by the way, the CFTC has publicly admitted that several banks massively shorted silver earlier this year, to the tune of nearly 25% of annual world production, and that is what made the price drop to close to $10 an oz. Nothing will be done about it in all likelihood, but I have to believe the price of silver isn't going to be at this level much longer.

New Companies Offer Hope for the Future

With all the current doom and gloom, I thought it might be useful to offer more of what is just over the horizon with new technology that is going to revolutionize our country by bringing jobs to America that solve many of our current problems such as the fact that we are shipping so much of our money to Arab countries in exchange for their oil.

While there are many approaches to alternative fuels, I believe that a start up called LS9 offers the clearest and simplest path to replacing foreign oil. You can see this at LS9.com, and here's a quote about their technology:

"Pushing the frontiers of synthetic biology and industrial biotechnology, LS9 has created industrial microbes that efficiently convert renewable feedstocks to a portfolio of "drop in compatible" hydrocarbon-based fuels and chemicals. LS9's unique technology provides a means to genetically control the structure and function of its fuels, enabling a product portfolio that meets the diverse demands of the petroleum economy.

LS9 has developed a new means of efficiently converting fatty acid intermediates into petroleum replacement products via fermentation of renewable sugars. LS9 has also discovered and engineered a new class of enzymes and their associated genes to efficiently convert fatty acids into hydrocarbons. LS9 believes this pathway is the most cost, resource, and energy-efficient way to produce hydrocarbon biofuels and petroleum-replacement products. This translates into efficient land and feedstock use and directly addresses tensions between food versus fuel production."

LS9 is using that old enemy e coli as their bacteria for converting starches like cardboard and paper into biodiesel! Waster, water and e coli combine to make diesel. What a miracle.

While energy systems in the past have been centralized and monopolized as in large scale electric utilities and huge oil companies who dominate the world, I wonder if our future isn't going to be a more diverse and spread out form of energy industry.

For example, what if farmers can get a culture of the LS9 ecoli and simply place it in a big vat with waste corn stalks and water? The LS9 information states that the end result of such a mixture is biodiesel that floats to the top of a tank and when skimmed off, can be burned in a diesel motor. Talk about cutting out the middleman! A process this simple could make farmers extremely efficient. I'm reminded of Jurassic Park and the statement that "Life finds a way". It strikes me that once an ecoli bacteria has been created like this it will be spirited out of some lab or factory and become like a yeast for making bread that no one owns and everyone can use. Life will find a way and no small handful of large companies will control all the energy.

In the same manner, another company, nanosolar inc. at nanosolar.com describes itself as the third wave of solar. They have developed a technology for printing photovoltaic material on thin film aluminum rolls, and promise solar power at one sixth the cost of current silica based technology. Again this is a few years out, but this seems to offer the possibility of running the average household with an investment of less than ten thousand dollars.

I like GM's Volt concept, a battery electric motor car with a small electric generator that is fueled by gasoline, but in the future could be a small biodiesel powered generator. What a wonderful future this is going to be! Plug your car in at night and fill up the battery with electricity from the grid that you have been sending electricity to all day, or storing perhaps in your home zpower battery system, (see previous blog). Top off your biodiesel tank with the daily skimming of biodiesel from your small garage garbage processor, "Mr. E Coli?", which converts your newspaper and cardboard into liquid biodiesel fuel?

And more than likely, a low cost subsidized government loan courtesy of our wonderful new President Obama will help us pay for the new aluminum solar roof, the Mr E Coli unit and the Volt!

I for one will enjoy the sight of the Arab nations returning to their days as wandering nomads of the desert, their palatial cities abandoned for tents and camels as they wander from oasis to oasis feeding their goats and camels and wondering how all that money slipped through their fingers leaving them nothing to show for it as I drive my Volt around on yesterday's newspapers and sunshine.