Silver Bear Cafe

How The Country Dies
Monty Pelerin

Carefully read the following from Chuck Butler:

Did you know that in 2011, The Fed purchased 61% of the total net Treasury obligations that were issued? Prior to 2008, the amounts that the Fed would purchase were negligible at best!

Deficits are not being reduced in the US. This year will be equivalent to last year. Future years are not expected to be any better. The world recognizes that the fiscal situation is out of control. Their confidence in our bonds is decreasing rather than increasing. If the Fed purchased 61% in 2011, it is likely to have to purchase even more in 2012. Mr. Butler continues:

So remember when people that should know better would spout off about how the rest of the world doesn’t care how much debt the US builds, because they buy all our debt? Shoot, even former Fed Vice Chairman Alan Blinder said, “If you look at the markets, they’re practically falling over themselves to lend money to the federal government.”

Apparently Alan Blinder thinks our Federal Reserve is purchasing these Treasuries because it doesn’t want nasty foreigners to get such great investments. Surely it must be something like that or why would it be happening?

The reality is that the Federal Government cannot sell the debt it needs to sell at today’s interest rates in credit markets. Markets understand that the US is becoming a dangerous credit risk. Egan Jones, a credit rating service, just lowered the US credit rating again and has a negative outlook for the future.

The US government has reached the point where it cannot pay for its level of spending via tax revenues or market-based Treasury sales. There are only three courses of action available to the Federal Government:

Raise Taxes – This option cannot raise enough money to close the gap. Attempting to raise taxes could exacerbate the deficit by dampening economic activity. US corporate income tax rates are now the highest in the world. If anything, taxes should be lowered.
Cut Spending – This is the proper solution. Government has grown past the point where the productive sector will or can support it. Spending should be cut back to the point where deficits are eliminated.
Print Money – This is the political solution and exactly why the Federal Reserve bought 61% of Treasury Bonds last year. It is not a real solution and it is highly dangerous. Each purchase of Treasury Bonds by the Federal Reserve increases the base money supply. Any time the Fed expands its balance sheet it adds an asset and creates money/credit. Since 2008 the Federal Reserve has almost quadrupled its balance sheet. That puts into the system the potential for 300% price inflation.

Politicians never want to cut spending and almost never want to increase taxes (unless it can be done as class warfare aimed at punishing the few to get the votes of the many). It is exactly this type of behavior, with special emphasis on the spending part, that has put the country into the impossible situation it is in. My guess is that printing money will continue until high inflation, possibly hyperinflation, engulfs the nation. We are in uncharted territory for this great printing exercise. Creating more money or liquidity always leads to higher prices. The potential for damage based on money already in the system is staggering. Furthermore, additions in excess of last year’s money creation will likely be added this year. We have reached the point where government can no longer meet its obligations with traditional financing. The US government became a real Blanche du Bois, “living off the kindness of strangers.” Now the strangers are no longer interested in supporting Blanche’s profligate spending. Furthermore, they have incredible needs themselves and are busy with their own printing presses.

Credit markets are closing. Past Fed actions have already released the inflation genie into the system. When he decides to explode no one can predict, but an explosion is inevitable unless government spending is cut by almost 1/3 and the Fed begins to reverse the excess money in the system. Neither one will happen until it is too late. Rioting in the streets is an almost certain outcome. Cutting spending would trigger it. But not cutting spending will trigger high inflation which will also result in rioting. Government at this point cannot control how this ends.

They may be able to tinker with the timing a bit longer and they still have the choice of poisons with which to destroy the country. That the country is gone, is no longer alterable. What I discussed above is a rather generic way the country dies. To understand why matters will not and cannot get better, take a look at this list from The Economic Collapse. Most of these exacerbate the effects I discussed above:

#1 According to one new survey, approximately one-third of all Americans are not paying their bills on time at this point.

#2 The U.S. housing industry is bracing for another huge wave of foreclosures in 2012. The following is from a recent Reuters article….

“We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010,” said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.

#3 The Citigroup Economic Surprise Index, a key indicator watched by many economists, is on the verge of heading into negative territory.

#4 We are supposed to be in the middle of an economic recovery in the United States, but bad news just keeps pouring in from major companies. For example, Yahoo is firing thousands of workers and Best Buy is closing dozens of stores.

#5 Richard Russell says that the “big money” is starting to quietly exit from the financial markets….

“My guess is that this is the big money that has been holding off as long as it decently can — and then dumping their goods just before the close. I don’t think the big money likes this market, and I think they have been slowly exiting this market, as quietly as they can.”

#6 Goldman Sachs is projecting that the S&P 500 will fall by about 11 percentby the end of 2012.

#7 All over the country, local governments are going into default and we have not even entered the next recession yet.

#8 The U.S. government will add more to the national debt in 2012 than it did from the time that George Washington became president to the time that Ronald Reagan became president.

#9 The Federal Reserve is desperately trying to control interest rates. The Fed purchased approximately 61 percent of all government debt issued by the U.S. Treasury Department in 2011. This is the only thing that is keeping interest rates in the United States from soaring dramatically.

#10 German industrial production is falling at a pace that is far faster then expected.

#11 Italy’s debt-to-GDP ratio is now up to 120 percent.

#12 The Spanish government admitted on Tuesday that Spain’s debt-to-GDP ratio will rise by more than 11 percent this year alone.

#13 Yields on Spanish bo*nds are rising to dangerous levels.

#14 The Spanish government is projecting that the unemployment rate in Spainwill exceed 24 percent by the end of the year.

#15 Unemployment in the eurozone as a whole has risen for 10 months in a rowand is now at a 15 year high.

#16 In the aftermath of a 77-year-old retiree killing himself in front of the Greek parliament in protest over pension cuts, the economic rioting in Greece has flared back up dramatically.

#17 At this point, Greece is experiencing an economic depression with no end in sight. Some of the statistics coming out of Greece are really hard to believe. For example, one port town in Greece now has an unemployment rate of approximately 60 percent.

#18 The IMF is asking the United States to contribute more money for European bailouts.

#19 At this point, even some of our top scientists are projecting economic trouble. For example, researchers at MIT are projecting a “global economic collapse” by the year 2030 if current trends continue.

In my opinion, number 19 is the height of optimistic folly.

Now Bob Chapman weighs in on the “non-solution solution” in Europe:

Appointed Greek PM Papademos informed Europe late last week that a third bailout cannot be excluded. Just as we predicted. There will be no end to these subsidies. The idea is to keep bleeding Greece forever.

This past Friday European governments called for a bigger financial emergency fund, extra engineering a firewall to fight the regions debt crisis. The firewall commitment is $1.1 trillion, and of that $320 billion has be set aside to fund the ESM due July 1st.

If you remember more then several months ago we told you it would take $4 to $6 trillion to bail out Italy and Spain. These firewall funds are supposed to protect the sovereign debt of some six countries, and $1.3 trillion cannot accomplish that. They’ll need at least four times that amount. As you can see, the entire program is deceitful and these subsidies, if allowed to, will continue for years with Northern European taxpayers footing the bill for these subsidies. They believe eventually Europe will never be able to tear away from the grip of world government. Those of you who have been paying attention are witnessing the demonstrations, violence and arrests in Spain and it appears it is escalating. Cutting the budget by 1/3 under the circumstances is stupid. That is a fall in the public debt from 8.5% to 5.3% of GDP.

Will Europe disintegrate before the US? Well, they have a head start but never underestimate the abilities of US politicians to outperform their counterparts in Europe. We have bigger bozos running our show than does Europe. I hope I don’t get a bunch of objections from my European readers regarding our guys being worse than theirs.

The world is not in a good place!