Tuesday, November 3, 2009

Disaster is inevitable

Well, I mean, if you're going to put up a seriously doom and gloom post you might as well announce it right there in the title.

I'm going to translate from a newsletter written by a well-respected money guy named Eric Sprott. I can't offer any expertise in economics, but what I can hopefully offer is a translation service into plain English. The excerpts below are from the October 2009 issue, Dead Government Walking.

[T]he United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations.

That is, there will be no Social Security or Medicare for most of us. Imagine a company that was setting aside money for its employee pension plan, only every single year they "borrowed" the entire amount that was supposed to go into pension funds, and instead used it to make payroll. That's what the US government did. There is no Social Security money. We just figured we could borrow or raise taxes when the time came. Ha! Not so much.

[T]he financial condition of the US government is completely untenable. The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars. How on earth does anyone expect them to raise this capital?

In other words, the rest of the world cannot afford to loan us $9,000,000,000,000 over the course of the next decade when everyone is broke.

As we stated in a previous article, in order to satisfy US capital requirements, all existing investors would have had to increase their US bond purchases by 200% in fiscal 2009. Foreigners, however, only increased their purchases by a mere 28% from September 2008 to July 2009 - far short of what the US government required.

So here's a similar example. Suppose that last year you had to put $1,000 on your credit card to make ends meet. This year your income is lower and your expenses are greater, and you know you're going to need to borrow $3,000. But then your credit card company sends you a letter announcing that your credit limit is being lowered to $2,280. You can only borrow another $1,280 this year, far short of what you need to get by. But here is where the difference comes in: you don't have a printing press with which to counterfeit money to make up the difference. The government does. And boy howdy, they use it.

[T]he Federal Reserve isn’t merely supporting the market for US treasuries… it is the market for US treasuries. Printing new dollars to support an almost $9 trillion dollar budget deficit that stretches out over the next ten years puts the US on the road to ruin....

In other words we print money and buy our own Treasuries. It's like transferring counterfeit money from your left pocket to your right, and pretending that all money in the right-hand pocket is now magically legitimate. Here in the real world, as it says above, that puts you on a very bad path. One that often leads to hunger, and occasionally leads to guillotines or fascism.

Taxing the citizens is another possibility, one that doesn't involve borrowing or printing, and thus seems a tad more responsible. But here we run into the principle that "you can't get blood out of a stone":

The US taxpayer can’t cover the difference either. According to recent estimates, tax revenue from all sources would have to increase by 61% in order to balance the 2010 fiscal budget. Given that State government income tax revenues were down 27.5% in the second quarter, the US government will be lucky just to maintain its current level
of tax revenue, let alone increase it....

Can't borrow it, can't get it from taxes. That leaves only breaking promises and printing money, both of which will undoubtedly take place.

Hemingway wrote that a man goes broke “slowly, then all at once”. We believe the same sentiment can be applied to governments....

Like dead men walking, the US government is merely biding its time until the moment of truth. Unlike Fannie Mae, General Motors or Citigroup, however, there is no one left to grant a reprieve.

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