As things currently stand, the government and the Fed may take any steps they want to stabilize the economy, no matter how much these steps cost.
Now, the government is like a fat schoolboy taking candies from a well-dressed stranger. It has spent $8.5 trillion of future taxpayers' and foreign creditors' money guaranteeing debt and bailing out failed companies. But the government doesn't have its own money to pay for these remedies. So it borrows and inflates.
Analyst Jim Bianco's research shows the government's remedies have now cost America more than World War II. The Fed is expanding the money supply at a current rate of 151% a year... and in the last three months, the Treasury borrowed $485 billion. It has never borrowed this much in 12 months.
In 2009, the government will run the world's first trillion-dollar deficit.In 2010 or 2011 – when the Chinese arrangement ends – the Bond Market Vigilantes will return. Watch gold for the signal.
Gold is a much smaller market than the bond market, so it's more nimble. When gold makes a new high above 1,050, you should immediately start looking for shelter. It means the Chinese arrangement is winding down and the Vigilantes are coming.
The Vigilantes will run interest rates up by at least 10%.
They will force the U.S. economy to deal with its debt problem, the root of all our troubles today. No more bailouts, no more government guarantees, no more expensive spending programs, and no more printing money. This is what the situation was like in the early 1980s. It was chaos, but those who prepared ahead of time made a fortune.
This time around, while the vigilantes restore balance, you should own only gold, cash, and short-term money-market instruments. In the meantime, you should use the stability to earn as much income as you can by selling options against blue-chip stocks and holding high-yield bonds and other income investments.
These investments prosper when there are no Bond Market Vigilantes around.