Montreal, Canada

In the absence of an initiative by government and the populace to reduce bulging deficits, the United States will eventually be forced to introduce a consumption tax to pay for its staggering borrowing. According to Lawrence Kadish (Wall Street Journal, October 12, 2009), 40% of individual income taxes in 2009 will go toward debt interest payments. This is unsustainable.

The United States remains one of the only major economies in the world without a VAT, or Value Added Tax. Though widely unpopular, a deficit tax would help to reduce the cost of skyrocketing interest payments threatening the nations' prosperity. Even under the weight of tremendous deficit spending to finance unprecedented bank bailouts, the country is mulling health care reform – a proposition that it simply can't afford. It's utterly stupid to debate universal health care reform amid a debt deflation since late 2007.

Revenue from individual income taxes this year is projected at around $904 billion dollars, according to the White House Office of Management and Budget (OMB); about 40% of that total is headed to pay interest payments on the deficit at a rate of roughly 3.25%. Imagine what happens down the road when long-term interest rates begin to rise under the weight of massive credit creation, renewed inflation and a possible dollar crisis? Though unlikely now, what if the Chinese and Japanese decide to balk or reduce Treasury purchases?

In all likelihood the United States won't introduce a deficit tax. Most crises force nations to introduce cut-throat spending cuts – the International Monetary Fund, or IMF, has been doing exactly that for the past four decades as part of its financing conditions; in all reality, the IMF should be buzzing around Washington serving a healthy dose of budget restraint advice. The problem here is that the IMF is a conduit of U.S. foreign economic policy – so no dice.

At some point in the near future the markets will force the United States to come to terms with its out-of-control deficits. How this occurs is not hard to fathom. Long-term interest rates, which affect financing costs, will rise much higher from current levels, perhaps to 15% or more. The economic fallout would be disastrous, dragging the entire global economy into the gutter and unleashing another full-scale depression – only this time, government would have no control to limit its collateral damage because its bullets have already been fired.

The way I see the big picture, it's inevitable. The dollar and most other currencies are heading to the doghouse as a depression or hyper-inflation eventually gobble the world economy over the next decade – give or take a few years. Either scenario is highly probable with hyper-inflation the likely outcome.

My investment strategy for dollar-based investors is to hold a mix of foreign currencies and gold at roughly 20% of assets now and raise that allocation to 50% over the next 36-48 months on any dollar rallies or short-term bursts of strength.

The buck is heavily oversold now and has declined for seven of the past eight years (up in 2005) and at some point will muster a counter-cyclical bear market rally. That's when I plan on buying more currencies – the Canadian dollar and Norwegian kroner. The EUR, though heavily sought after by central banks and traders to replace dollar holdings, is a disaster waiting to happen.

Gold, however, which is in a long-term bull market against all currencies since 2005 will figure most prominently in this asset mix for dollar-based investors.

For now, the entire spectrum of risk-based assets is extremely overbought since March. This includes most commodities (except the grains), foreign currencies, stocks, speculative and investment-grade bonds and REITs. Too many people are chasing foreign currencies now at exactly the wrong time; dollar bears will be burned 6-12 months from now.

Avoid the herd now and don't dump dollars. Beyond any short-term dollar rally, add to your gold, silver and foreign currency positions in 2010.