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U.S. and Japanese Debt Threaten World Financial Stability

Monetary Digest, March 2002

Japan has one of the world’s worst budget deficits, and that this year’s public-sector (government) debt will approach 118% of total economic output, more than twice the U.S. level. By year end, Japan will have the biggest debt as a percentage of GDP that has ever been owed by any developed economy during peacetime.

Since 1992, the Japanese have tried nine economic “stimulus packages” totaling more than one trillion dollars to revive the world’s second largest economy. A revived Japanese economy is essential to averting another financial crisis; yet, the Japanese economy remains stagnant.

But, Japan is not the world’s largest borrower; that distinction belongs to the United States. In Japan, the big borrower is the government; in the U.S., it is the private sector. The January 22, 2000 issue of The Economist magazine carried a major article about the dangers of Japanese and U.S. debt. It noted that all the crises in recent years have involved countries where debts rose to excessive levels which, when circumstances suddenly changed, resulted in crises.

However, The Economist claims that private-sector debt is unlikely to bring on a calamity. So, debt in the U.S. is unlikely, according to the British magazine, to create a financial crisis. Yet, The Economist admits that U.S. private debt could mean a “hard landing,” i.e., severe recession, when a downturn comes. CMi believes that private debt in the U.S. could lead to worldwide problems, perhaps a financial crisis that would dwarf the Asian crisis.

Reviving the Japanese economy is dependent on the U.S. economy remaining strong. Japan’s economy is based on exports, and the U.S. is their best customer. A downturn here would practically guarantee that the Japanese economy would remain stagnant, probably cause a depression. With Japan’s banks being among the world’s largest, and already fragile from a decade-long stagnant economy, even a recession in Japan could precipitate another crisis. So, what’s the likelihood of a downturn in the U.S. economy?

American household and business debt stands at a record 132% of GDP. For the twelve months ending September 1999, total debts of non-financial firms increased by 12%, the fastest pace since the mid-1980s. Although much of the borrowing went to finance high-tech investments, a large slice was used to buy back stock shares, which does nothing to increase productivity. During the past two years, non-financial corporations increased their debts by $900 billion and bought back a net $460 billion in shares. In effect, firms are borrowing to pay bills and support stock prices.

In 1992, total household debt stood at 85% of personal income; last year it was 103%. Margin debt (borrowing to buy stocks) has tripled over the last five years; it jumped by 25% in the past two months alone. When stock prices decline, “margin calls” require the borrowers to come up with more money so that the lender is at less risk. Borrowers unable to do so must sell to meet margin calls, which sends stock prices still lower. With most borrowers at their limits, a severe decline would prompt the selling of millions of shares.

The greatest stock market in history has given rise to increased borrowing, both in corporate America and among households. With stock prices at such lofty levels, the wise-and what used to be traditional-thing to do would be to sell shares and retire debt. Stocks carry no liability to corporations; dividends do not have to be paid unless the board of directors so declare. On the other hand, debt burdens the debtor with crushing legal responsibilities. Debt has a maturity date, at which time it must be repaid. It also carries interest payments that must be met. If a corporation is unable to pay dividends, the shareholders have no recourse except to sell their shares; when a business fails to service its debt, it is forced into bankruptcy.

Optimists claim there is nothing to worry about, that the increase in debt has been more than matched by an increase in financial assets. Indeed, balance sheets look healthy. Households’ net wealth (assets minus debt) has increased from less than five times personal disposable income in 1990 to an historic height of more than six times. At the same time, the ratio of corporate debt to the market value of equity has fallen from 0.6 to 0.35. These “healthy” numbers, however, are based on stock prices being fairly valued, something that many analysts question. A robust economy and rising stock prices seem to have wiped from memories lessons of the past. No boom lasts forever; neither does a bull market.

The problem with borrowing on the back of rising asset values is that debt is fixed in value, whereas the value of assets, such as stocks and property, is not. Debts can only be serviced from income; assets can pay the interest bill only if they are sold, and if lots of debtors are forced to sell at the same time, asset prices plummet. A better measure of the debt burden is debt-service payment as a percentage of income. Despite low interest rates, households’ debt-service ratio is currently close to a record level. Corporate debt-service, on the other hand, is still relatively low, thanks to bumper profits.

Japan offers a chilling example of how seemingly healthy balance sheets provide little protection. Japanese household debt rose from 89% of their disposable income in 1985 to 112% in 1989, an increase only slightly larger than that recorded by American households in the 1990s. Yet, as the value of stocks and property also soared, Japanese net household wealth rose from five times disposable income to 8.5 times over the same period. Companies’ net worth also rose sharply relative to GDP. But when Japanese stock prices and property values fell (1989-1992), debtors and banks found themselves in big trouble. The Japanese are still struggling to extricate themselves from that hole.

During the late 1980s, when Japan was enjoying great prosperity, economists around the world proclaimed that every country should emulate “Japan Inc.” The Japanese were viewed as economically invincible. But, look at them today. U.S. government officials and corporate executives openly lecture the Japanese on how they should now model their economic structure and business practices after those of the United States.

The quality of loan portfolios in the U.S. has already deteriorated in recent years as banks, facing more competitive pressure, have been forced to lend to riskier borrowers. Despite a booming economy, nonperforming loans have increased. The number of companies defaulting on their bonds also hit a record level last year, and Moody’s downgraded twice as many American companies as it upgraded.

Clearly, U.S. households and firms are vulnerable to shocks, such as higher interest rates, a fall in asset prices, or an economic slowdown. All three are possible, indeed likely, over the next few years. Now is the time for prudent investors to pull in their horns, to prepare for higher interest rates, a fall in stock and property values, and an economic slowdown.

It should be noted here that gold has a “negative correlation” to stocks. When stocks go up, gold goes down; when stocks go down, gold goes up. Investors still in stocks should seriously consider selling and buying gold. This stock market will break, if it hasn’t already, and gold will go up. Do not wait until stocks are down 50% before you realize it is a bear market.

The Economist maintains that “the United States is vulnerable in a way that Japan never was. America is already the world’s biggest foreign debtor, with net foreign liabilities of $1.5 trillion, around 20% of GDP. As a credit-fueled spending binge has sucked in more imports, America’s current-account deficit has widened to about 4% of GDP. If it remains at this level, America’s net foreign debt will rise to more than 50% of GDP within ten years.

“This leaves the American economy dependent on foreigners’ willingness to hold more and more dollar-denominated assets. But there is surely a limit to this. If foreigners’ appetite for dollars dries up, the currency will fall. America would then need to offer progressively higher interest rates to convince foreigners to put a growing share of their wealth into dollar securities. Higher interest rates, and hence lower share prices, would be a blow to American debtors.”

In short, The Economist sees the potential for a crisis for the dollar. A dollar crisis means higher precious metals prices. With gold selling near the cost of production, it is a safe haven which all investors should consider.

CMI’s Web site now is up and running at a quality that our clients and friends have come to expect. We have the best coin photographs on the Web plus information and facts that enable first-time and experienced investors to make informed decisions when investing in precious metals. Daily, we post spot prices for gold, silver, and platinum as of the close of futures trading in New York. Normally, prices are posted by 1:30 p.m. MST. When appropriate, a commentary follows. Often, recent developments or announcements affecting one or all the metals are published and analyzed. Sometimes, we provide links to other Web sites which carry items that we believe are of interest to our clients.

Plans for the Web site call for constant improvements and additions which will make the site even more valuable. For example, the CMI Coin Guide now has photos of the popular gold, silver, and platinum bullion coins. From each photo you can link to larger images for closer inspection of the coins’ details. Soon, you will be able to link to specification tables or commentary about the individual coins. Furthermore, the Coin Guide will be expanded to less popular bullion coins which are sometimes available or often are promoted by telemarketers.

Links from the coins will provide additional information and specifically their precious metal content. Amazingly, many investors purchase European coins (British Sovereigns, French Roosters, Swiss Francs, etc.) without knowing how much gold they contain. In the near future, facts about all the commonly promoted coins (and some obscure ones) will be posted on CMi’s Coin Guide.

Readers who do not have access to the Internet should make plans to do so. That does not mean you have to buy a computer; you could use a computer at the local library or maybe even your granddaughter’s. Perhaps it will mean that you should look into a Web TV that lets you have access to the Internet from your television set. Microsoft advertises a Web TV receiver for $99. People wanting the advantages of a computer, but not the complications of a Windows-operated PC, should seriously consider an iMac.

Many people are repelled by the Internet, perhaps with justification. Much of the Net is used for evil; however, the same can be said for paper, which is used for pornography. But, the Scriptures also are printed on paper. To be without an Internet connection today is comparable to having no telephone in the 1950s. Being without the Internet in five years will be like having no telephone today.

The site also has a glossary of precious metals terms, which should be of use to many investors. Additionally, it has a page detailing the American Church Trust’s excellent IRA program which accepts gold, silver, and platinum investments. Readers with their IRAs still in stocks should seriously consider switching to gold or silver.

While gold and silver are priced a little above twenty-year lows, many stocks are at blue-sky levels and could suffer 50% losses. Some already have. The stock market has seen some scary down days, signs of what is to come. Bigger stock market declines and/or a prolonged decline will send many stock investors looking for values, and there are few better values than gold and silver.

Forward-thinking investors should take advantage of present low metals prices. Do not wait until stock prices break before moving into the metals. Then, you will be acting with the masses. You want to be ahead of them, not with them. There are no tax consequences when you sell in your IRA, and ACT’s program is relatively inexpensive.

Additionally, CMI’s Web site contains our famous Myths, Misunderstandings, and Outright Lies, which was originally published in the May 1998 Monetary Digest. Perhaps the piece should be subtitled The things that precious metals dealers tell you to get you to buy overpriced coins. We’ve received many calls from grateful investors who were saved from some bad coin purchases by reading this expose.

Finally, if you’re still getting phone calls from telemarketers promoting old U.S. gold coins, you need to read our Old U.S. Gold Coins page. It complements the Myths, Misunderstandings and Outright Lies page. Sometime in the future-not yet, don’t get eager-old U.S. gold coins will be good investments. When low-end (VF, XF, AU) St. Gaudens and $20 Libertys can be bought near spot, when MS-62 “slabbed” coins within $40-$50 of spot, they will be good buys. At those prices, old U.S. gold coins will be better investments than bullion coins. CMI has excellent sources for old U.S. coins and can sell them at the lowest prices anywhere. But, we recommend they be purchased when the time is right.

When prices of old U.S. gold coins trade near spot, not only will they be better buys than bullion coins, but bullion coins should be traded for St. Gaudens and Libertys. Such a move would employ the principle of owning the coins that hold upside potential from a premium increase and from a rise in the price of gold. As noted in previous issues of Monetary Digest, during most 1989 and 1992 low-end old U.S. gold coins sold at spot, and MS-62, even MS-63, “slabbed” coins sold with a few dollars of spot. Those were the gold coins to buy at that time.

As most readers know, for the last five to six years old U.S. gold coins have carried huge premiums; consequently, they should have been traded for bullion coins, a move that increases the investor’s number of ounces of gold. With an increased number of ounces, a rise in the price of gold produces better returns. Although premiums on old U.S. gold coins have shrunk over the last year or so, it is not yet time to trade bullion coins for St. Gaudens and Libertys. When the time is right, readers of Monetary Digest will know it.

But, visitors to our Web site will know it, too. That’s the type of helpful information we plan for the site. Generally, such information will be found on the Spot Prices and Commentary page.

Additionally, we email spot prices daily. Readers who would like to receive this service need only to email and request to be added to the Daily Prices list. Investors who do not follow prices that closely need only go to and click on Spot Prices and Commentary whenever they want to see what the metals market is doing. We post the daily prices with changes from the previous trading day and prices a week ago, a month ago, and a year ago. The many clients who call our voice recorded messages can be assured that we will continue this service.

Finally, we look forward to hearing from clients as to how we can improve our Web site.

“Uncle” Harry on Gold

The comments below were excerpted from The International Harry Schultz Letter ($285/year). Harry Schultz is a renown gold bug and boasts of being the world’s highest paid investment advisor. “Uncle Harry,” as he is called by his subscribers, was a leading gold bull in the 1970s; he is again bullish on gold.

GERMANY DECLARES WAR on the gold bullion price manipulators. The Germans were not amused when Bank of England did their sneaky surprise gold sale last year, which pulled the rug out from under the price. Germany was behind the 15-nation accord to limit gold sales and curtail gold lending. After that, the price shot up $80, whereupon the manipulators marshaled their forces (including the NY Fed) to add supply to orchestrate the price down again.

Germany was unamused again, so they announced the Bundesbank will mint one million gold coins to commemorate the 50th anniversary of the D-Mark. That’s a shot across the bow of the Bank of England, UK Labour party and NY bullion dealers. Is it also a sign Germany is having second thoughts about fat-head Kohl’s euro currency, which sank since birth? Many Germans want the D-Mark to remain. The new coin will rekindle gold demand. (Kohl is being investigated for fraud; but his greater crimes were his euro promotion and the 1-for-1 east/west D-Mark-rate upon reunification).

GATA (Gold Anti-Trust Action Committee, has an ally in US Senator Joe Lieberman (CT) who has put 11 hard questions to Greenspan and US Treasury Secretary Summers. They ask about US government intervention in gold markets. An earlier set of questions from GATA got “Who me?” replies. This time the questions are framed to avoid wiggle room. GATA has given hope to gold believers that the monopolists won’t win. GATA is a volunteer force, being supported by contributions by you and me and gradually by gold miners who are realizing they shouldn’t be selling production forward (a la Barrick) and should aid the battle to get an open, free market for gold–something certain governments don’t want, and which hasn’t existed in 20 years.

Famed author Arthur Hailey joined the war against gold price-fixers and gold mine sellers. He sold his Barrick shares and triggered a surge of selling by funds and the public, who don’t invest in a gold mine to see how clever they are in derivative manipulation. They want a pure gold play, and Barrick ain’t it! Barrick has underperformed the field ever since GATA & Hailey & HSL exposed their gold price-killing tactics. Anyone still holding Barrick is probably a sadist.

Barrick’s VP Borg had the effrontery to attack gold investors who don’t like hedging, as “irrational gold bugs who see conspiracies.” Can you imagine, a gold mine executive disparaging its natural shareholders? Barrick richly deserves blackballing. It’s more a derivatives trader than a gold stock.

Disbelieve the garbage churned out by Gold Fields Mineral Services, a front firm for anti-gold forces. Proof: they refuse to debate Frank Venerosa to get the real facts out about the shortage of gold, i.e., net supply-demand deficit. Huge burst of gold-bar buying in a Beijing dept. store limited time sale.

Suspicion is voiced again that US Fort Knox gold supply is not up to its quantity and quality claims. Inventory being demanded. Physical gold demand (not paper gold: options/futures) is at record levels. Goldman Sachs & clan keep selling it to cap the price. Free market? Bah, humbug.

Bill Murphy says ( “Oil has doubled, copper went from 65 cents to 86 cents, meat rose big, base metals like aluminum soared, etc. But gold in the same period is unchanged. Why? Price-rigging! If athletes were fixing a game like the NY Fed and others are doing with the gold price, it would be a big scandal. It soon will be. Pandora’s box has been opened. We’re exposing all the players in turn.” And he does! A year ago GATA was a flea attacking an elephant. Now, the flea has grown into a tiger, and the elephant has shrunk to a water buffalo; still a formidable foe, but I’d not bet against the tiger.

FLASH: Y2K striking oil patch. Venezuela halts gasoline exports from three refineries. Another to be restarted after a shutdown. One of biggest catalyst-crackers in the western hemisphere shut (system failure) at Amuay Refinery; hope to restart in 30 days. It supplies US east coast. The 1972 oil crisis was from a 4% reduction over four weeks. Motiva’s Norco, LA oil refinery shutdown; power outage. Nigeria oil plant down. Coastal Eagle Point, NJ refinery down; generator power loss. Coastal Corpus Christi refinery FCC problem. Equilon Wood River, IL refinery down. PDVSA/Hess divert oil cargo back to Europe, was US-bound. BP Amoco Yorktown down, mechanical failure. Big media silence, like the three monkeys: see/hear/say nothing. You know why!

FLASH: Barrick Gold is rethinking its hedging policy; will cover 500,000 ozs this quarter, lowering forwards to 13.5 million ozs! They’re starting to get the message.

FLASH: Mitsui reported a gold producer buyback of shorts out of London on 1/18. We’re winning gold battles at last. As Churchill said, “This is not the end or the beginning of the end, but it is the end of the beginning.”

Beware! SS Central America Gold Being Promoted

In 1857, off the Carolinas coast, a hurricane sank the SS Central America, a side wheel steamer carrying fifteen tons of gold headed for New York. The gold was valued at $1.2 million, a staggering sum of money then, and its loss contributed to the financial panic of 1857. In 1988, much of the gold was recovered. The treasure includes gold bars and coins from the San Francisco Mint. The recovery operation was detailed in the book Ship of Gold in the Deep Blue Sea; it is well worth reading.

Although a complete inventory of the recovered gold has not been released, coins literally picked off the bottom of the ocean include 5,200 Mint State 1857S $20 Libertys and probably some earlier dated S-mint coins and territorial gold pieces. It is believed that a complete inventory will not be forth coming for years.

Since the recovery, sale of the gold has been held up by legal complications and maneuvering. Now, though, the first phase of a program to sell three tons of the bounty has begun with the telemarketing of 525 MS-63 $20 Libertys. The asking price for one: $7,000. At this time, it is not clear how many MS-63 quality $20 Libertys were plucked from the ocean.

However, before you pay $7,000 for a coin containing less than an ounce of gold, be aware of what happened to the prices of other coins recovered from sunken ships and sold to the public. Today, most, if not all, sell at prices far below what they were originally offered to the public. In the 1980s, “Coins of the Concetcion” were described as “great antiquities” and other such Madison Avenue terms designed to evoke feelings for inanimate gold. Today, those coins sell at probably 20% to 25% of the prices they were sold, not much more than the value of their gold content.

More recently, in 1998, a batch of 1907 and 1908 $20 St. Gaudens was marketed as the “Wells Fargo hoard.” Promotional material and telemarketers left the impression that the coins were discovered in a Wells Fargo bank somewhere in the West. In reality, the coins were purchased from an individual who had stored them at a Wells Fargo branch. Some of those coins were graded MS-65 and sold at $2800 each. If you were unfortunate enough to have bought one, today you would get about $800 for it.

The recovery of the coins that went down with the SS Central America was a truly remarkable feat. But, determining the real worth of those coins worth is nearly impossible. Telemarketers will say that investors buying SS Central America coins are buying a “part of history.” But, history shows that buyers of such coins usually lose on their purchases.

Free Books

The free book program announced in the October Monetary Digest will be continued. We have found two sources that can supply most of the books we want to send out. Therefore, clients placing more than one order will not be sent the same book.

Most of the books being distributed are economic classics. They include Frederic Bastiat’s The Law and three excellent books by Murray Rothbard; The Case Against the Fed, The Case for a 100 Percent Gold Dollar, and What Has Government Done to Our Money? Hans Sennholz’s The Great Depression: Will We Repeat It? is available, and we’ve added Lawrence W. Reed’s A Lesson from the Past: The Silver Panic of 1893.

Although each book discusses a different topic, the books have a central theme: government interference distorts free markets and sooner or later the people suffer. The minimum order to receive a book remains 20 ozs of gold or platinum, 1,000 ozs of silver, or $1,000 face pre-1995 U.S. 90% silver coins.

Y2K Sellers Pummel Market Coin Premiums Disappear

With Y2K turning out to be a non-event, coins are flooding the market, and bullion coin premiums have collapsed. Gold Eagles, which sold at $22 over spot in quantities of twenty, now are available at $6 over. The 1/10-oz Gold Eagles, a favorite of people seeking Y2K insurance, now sell at 6% over their gold value. At the height of the Y2K buying, 1/10-oz Gold Eagles sold at 30% over spot. CMi staff spent many hours trying to convince investors who wanted 1/10-oz Gold Eagles not to pay the 30% premium but to switch to 1/10-oz Australian Kangaroo Nuggets or Maple Leafs, which sold at 12% premiums. Those who did so saved at least 18%.

Sellers of any gold bullion coins can expect to get less than spot, about 2% less in worst case scenarios, a rate that will allow them to be delivered to a refinery at a small profit. Low prices in bullion coins will continue until the sellers quit or when enough buyers come into the market to take up the slack.

Premiums on silver products have fallen also, with the exception of Silver Eagles. Bags of pre-1965 U.S. 90% silver coins can now be purchased near spot. During part of 1999, pre-’65 bags sold at 50% premiums. Smart investors traded them for other forms of silver, usually 100-oz bars and 1-oz silver rounds. This increased the number of ounces of silver they now own and put them in forms of silver that have not suffered premium collapses.

As this is written, Silver Eagles are bid at about $6.80 to $7.00, a strong premium considering the avalanche of selling in other silver products. Promotions of 1999-dated and 2000-dated Silver Eagles have kept interest in these coins high. However, the premiums should not hold. This is especially true if silver rallies to the $7-$8 level.

Probably 80% of the people who own Silver Eagles paid $7 to $9 for them. When they get the opportunity to “get out even,” they will, and the premium on Silver Eagles will disappear. On a $2 rise, you can bet your money that Silver Eagles will sell for spot.

It would be a smart move to trade Silver Eagles for forms of bullion that now have little to no premiums. That way, when silver rises $2, you will enjoy a $2/oz rise in your silver. If you continue to hold Silver Eagles, you will not benefit for any silver significant rally.

Gold Explodes

As this issue was about to go to the printer, the price of gold exploded, rising $22.60 in a single day. The reason given: a major Canadian mining company was forced to cover some of its short positions. Rumors were that the company was unable to meeting its margin calls.

Past issues of Monetary Digest have detailed the massive forward selling of gold mining companies. The October 1999 issue noted the dangers that those companies face. On page three of this issue, the esteemed Harry Schultz comments on gold mining company short selling. Getting the short sellers out of the market is a major step toward a major bull market in gold.

Another positive for the metals would be a declining stock market. Nothing new to report on that; it’s coming. Slower than thought, but it’s coming.


The December Monetary Digest stated, “Because of huge short positions, gold will probably see great volatility before those shorts are covered,” and “as those short positions are unwound, the price of gold will move higher.” The $22.60 move is only a glimpse of things to come. The mining companies short sales (forward sales) artificially depressed the price of gold. With massive short selling a thing of the past, prices will rise to higher levels where unfettered supply and demand balance the market. Investors who plan to add to their gold position should do so before gold leaps again. This is an exceptional opportunity with bullion coins selling near the spot price of gold.

Best gold investment: 1-oz Gold Eagles. If prices of the fractional ounce Eagles are driven down to spot, or near it, buy them.

In the December issue, we also recommended trading platinum for gold. Platinum’s price is at a huge premium to gold because of delayed shipments from Russia. When shipments begin, platinum could easily fall $100. With the price of gold being artificially depressed and the price of platinum having risen because of problems in Russia, trading platinum for Gold Eagles makes good sense.

Many investors complain that precious metals “don’t earn any interest.” If you own platinum, here is an opportunity to increase your precious metals holdings and “earn some interest.” Trade platinum for gold, whose price is artificially depressed. Additionally, bullion gold coin premiums are low.

From these levels, silver holds the best upside potential of the metals. Buy it in nearly any form: pre-65 U.S. 90% bags, 100-oz bars, 1-oz rounds. The Silver Eagles are overpriced at present; their premiums are too high.

If you want to discuss any aspects of investing in the metals, call us at 1-800-528-1380. We take calls Mondays through Fridays, 7:00 a.m. to 5:00 p.m. MST.