How does a man go broke? Slowly, then all at once. –Ernest Hemingway, Writer
Prudent debt is the promise of a tomorrow that is substantially larger and better than today – you make capital investment to lay the ground work for dynamic and muscular productivity.
Out-of-control debt is the desperate attempt to maintain the status quo and a scrambling hope to push today’s unsustainable problems to some future date. The consequences of this approach usually build slowly and then give way to massive, sudden, and unstoppable resolution. Anyone who has experienced bankruptcy knows exactly how this plays out.
So let’s be respectful of reality and take a leap beyond academics and theory and look at Europe today, with Greece and now Ireland as the starting points. This is the sobering face of national bankruptcy in real time: financial chaos, a collapsing currency, and widespread social unrest. And strangely, it seems to have happened suddenly and all at once.
Let’s put this chart in perspective by looking at a little story:
Suppose I had a magic eye dropper and I placed a single drop of water in the middle of your left hand. The magic part is that this drop of water is going to double in size every minute.
At first nothing seems to be happening, but by the end of a minute, that tiny drop is now the size of two tiny drops.
After another minute, you now have a little pool of water that is slightly smaller in diameter than a dime sitting in your hand.
After six minutes, you have a blob of water that would fill a thimble.
Now suppose we take our magic eye dropper to Fenway Park, and, right at 12:00 p.m. in the afternoon, we place a magic drop way down there on the pitcher’s mound.
To make this really interesting, suppose that the park is watertight and that you are handcuffed to one of the very highest bleacher seats.
My question to you is, “How long do you have to escape from the handcuffs?” When would it be completely filled? In days? Weeks? Months? Years? How long would that take?
I’ll give you a few seconds to think about it.
The answer is, you have until 12:49 on that same day to figure out how you are going to get out of those handcuffs. In less than 50 minutes, our modest little drop of water has managed to completely fill Fenway Park.
Now let me ask you this – at what time of the day would Fenway Park still be 93% empty space, and how many of you would realize the severity of your predicament?
Any guesses? The answer is 12:45. If you were squirming in your bleacher seat waiting for help to arrive, by the time the field is covered with less than 5 feet of water, you would now have less than 4 minutes left to get free.
And that, right there, illustrates one of the key features of compound growth…the one thing I want you take away from all this. With exponential functions, the action really only heats up in the last few moments.
We sat in our seats for 45 minutes and nothing much seemed to be happening, and then in four minutes – bang! – the whole place was full.
Now let’s take a good look at that chart again. After over 200 years as a republic we reached our first $1 Trillion in debt by 1981. In less than 30 years we have now stampeded past $14 trillion, with no industry, housing market, tax revenue, employment, or plan to address even a fraction of this flood of ruinous, inflationary, and unsupportable debt. This is a classic runaway trend of unstoppable exponential acceleration.
The only problem we have is seeing the rising water for what it is: the total swamping of all that we have known as “normal,” and realizing these numbers are real and true and significant in our lives. An habitual trust in the dollar is like the handcuff in the story we just read. Gold and Silver and other precious metals are the key to release us. And at this point we, the average citizens, are the only ones left in the stadium.
The world is clearly turning upside down. Central bankers are aggressively accumulating gold instead of buying US Sovereign Debt. In fact, in 2009 they bought the most gold in any year since 1964. Total central bank holdings worldwide, according to the World Gold Council, grew by 425 metric tons last year.
China, India, and Russia all added to their reserves in 2009. And it fits into a bigger picture – growing distrust of the world’s reserve currency.
“I think we already have a gold standard and it is being created by the marketplace,” says the well-known financial writer and hedge fund manager Marc Faber.
And other major fund managers, such as George Soros and Warren Buffet, have been quietly increasing their precious metals positions, doubling and then doubling again their previous gold and silver acquisitions.
In other words, everyone is fleeing the stadium and leaving us to our fates. Dollars are flooding into the system through monstrous tsunamis of debt, reaching previously unthinkable and unimaginable levels over shorter and shorter periods of time.
Crisis and financial loss have become our New Normal. We’ve been experiencing this building flood, at first very slowly, then gaining almost imperceptibly in momentum until these final overwhelming moments. And now it is upon us.
All at once.
In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists. – Eric Hoffer, Philosopher