The sky IS FALLING (in graphs)

The NCAA tournament isn’t over yet but we know its coming to an end in exactly 16 days. If I was to tell you it’s not over yet, I would be correct. But does change the fact that is will end? Of course it doesn’t. For many people, because we haven’t seen bread lines or riots in the streets the “sky isn’t falling” yet. Does that change the reality that our economy is on the downside of the bell curve?

When the FED dropped interest rates back in ’07 the idea was that it would incur borrowing from the public & private business; therefore creating new/bigger business and in the process creating jobs or at least not hemorrhaging more than the economy was already in the process of doing. Then the rates kept dropping and dropping and wont go up until the very least 2014 and then what? Go up? The debt will explode in a hyperbolic fashion.

This graph shows we paid MORE in interest on our debt in 2008 (10,024,724,896,912.49) then we did in 2012 (16,066,241,407,385.89). How do you pay LESS interest on six trillion more in principal? There is only one solution; you pay substantial less interest. 

As we know, unemployment has dropped from its high of 10.0% back in ’09 to 7.7% as of last month but at what cost?

GDP has only seen moderate gains during the last five years and in fact, as you can see below, the last quarter actually seen our GDP in decline; despite the fact that private GDP rose in the same period. 

Some people will point to the cuts in defense spending as the main culprit and they would be correct (as defense have seen a 22% drop in spending) but if running nothing short of an empire and that is how we are keeping afloat in the first place, well… 

Mortgage rates are now at their lowest rate in recorded history and this has been a yearly trend these last few years. Only now in March of 2013, are we beginning to see signs of the real estate market coming back to life; despite a plummet in interest rates the last six years that were supposed to (as said in my opening) entice borrowers. Was it worth it?

Was it worth it and at what cost are the two questions I pose to you today. At what cost and is it worth it to live for today at the expense of tomorrow?

The CBO estimates of this nation’s debt keep getting worse, study after study. This is a quite simple process: the interest rates remain low, the debt piles up and the economy barley moves. These projections below are based on current conditions. Remember, zero is the end game; there isn’t much that can be done after that. We are basically at zero interest rates now.  

These examples I gave are just the tip of the iceberg and they are all interconnected. And that iceberg is the general public of this nation being so inundated in debt, so much so that we are getting to the point where offers of basically free money can’t move the needle any longer. These last four years of record low interest rates with barley a crawl until four, five sometimes six years later illustrates this quite luminously.

With wages not keeping up with real inflation (not the phony government statistics) and the globalization of the market, incomes for the average American (an overwhelming majority of) are stagnated; if not in decline. Is there any way that changes? Of course not, this is the new reality.

So to keep up, for most Americans, debt is the only logical solution. Afterall, we know saving via the conventional bank route is futile with rates being under 1%. And as we know debt = money, so when the economy can’t jump start and the FED’s QE programs don’t jump start growth; what else can the FED do? It’s been said by Bernanke that the quick death of deflation will not occur, so that only leaves one alternative; go to zero and close its eyes. Then hold on for limb and life as the decent to a slow death via hyperinflation begins.

The political process here has become a joke. A crooked game ran by self-serving lawyers and career politicians hell bent on seeing who can kick the can down the road the furthest. What was once a calling of statesmen has been replace by a bloodthirsty pack of statists. Republicans blame Democrats for not cutting spending despite having no solution themselves and god-damn you if you want to cut a bloated defense budget! Democrats want to actually ADD to the problem with a monstrosity addition to healthcare. While both “sides” will tell you it’s the other guys fault. Then all the puppets and zombies watching/reading the propaganda will parrot it. You think this is going to change?

At this moment, under these terms we are watching the beginning of the end finally become visible before our very eyes. Americans and their distractions have reached the crescendo. They can no longer afford them. The sky isn’t falling, but our economy is. It’s circling the drain, not as fast as Greece or Spain but its circling nonetheless. So move over American Idol, the freak show isn’t just in your living room its right outside your window. Get ya’ popcorn ready.

Turning Japanese? Turning Japanese? I really do think so.

That's why I'm turning Japanese
I think I'm turning Japanese
I really think so

I know I cannot be the first to use this analogy, but god bless new wave music & the 80's, for this apropos song. 

With so much attention being paid to the Eurozone, specifically Greece’s departure from it and 165% debt to GDP ratio in tote, its surprising to me that nobody in the MSM mentions the king of living beyond its means. This is none other than the spawn of American ingenuity and the benchmark that all post-war reconstructions whom are modeled after… Japan.

Japan’s ascension from rubble after WW2 to the world's third-largest economy has been staggering, especially for a country that’s about the size of the state of Montana. With a population that values education as much as anyone in the world, Japan has become a standard to many and no more than those in the corporate world, noted for their dedication to innovation and organization. But if you dig a little deeper, Japan and with all its glitz, glam & refined style; it isn’t all what it seems.

Because, like all fiat facilitated economies, the debt monster is alive and well and the only way to keep from getting swallowed up is to keep pushing, keep innovating and never, ever under any circumstance become stagnant. Well, at least over the last 20 years or so that’s been the case.

This is precisely what happened to Japan in the 1990’s known in Japan and around the world as Japan’s “lost decade”. When the NIKKEI started to free fall and real estate prices started to fall with it, those asset bubbles burst. This left the government in panic mode, so like all bureaucracies do in a panic, they did the opposite of what was right and did what was easy - threw money at it, instead of letting the natural correction run its course. 

They began to doll out stimulus after stimulus (sound familiar?), bailed out banks and insurance companies (getting warmer?) with the economy still limping along they said the hell with it and raised its consumption tax 2 percent (doesn’t this sound familiar too?) which subsequently brought on another recession.

After about two decades, and even with stimulus’s keep piling on, Japan’s economy finds itself in a ditch. Since 2011, the Bank of Japan has issued quantitative easing programs in excess of 900 billion alone. With very little to no growth potential, an aging population and an exponentially escalating debt tab; Japan is running on borrowed time. 

 

In a recent interview with Spiegel Online's Anne Seith, The Bank of Japan's governor, Masaaki Shirakawa said: "At the moment, the effect of our monetary policy in stimulating economic growth is very limited. The money is there, liquidity is abundant, interest rates are very low -- and, still, firms do not make use of accommodative financial conditions, the return on investment is too low."

Doesn't this sound eerily similar as well? 

Japan is currently using 25% of its outlays just to service their debt. If they raise interest rates, the number will climb dramatically. This is why the US is so fearful of raising its interests rates well. The FED wont entertain raising interest rates until 2014, so imagine all the cheap money printed off until then? If we are to raise interest rates where we already pay 220 billion on basically 0% what will it look like if those rates go up? As I pointed out back in March, via Kyle Bass, for every additional percentage point it will also bring about $140 Billion dollars on top of the existing 220 Billion.

  President's FY 2013 budget, Congressional Budget Office

Japan’s current debt to GDP ratio is currently 220% according to IMF reports for comparison’s sake the US debt to GDP ratio is about 102% (but that number has doubled in just four years). Japan however, unlike the US, has a few unique circumstances that will either prolong a slow death or escalate to their death at the speed of sound. 

Graph: zerohedge.com

Japan is one of the few countries that its public finances most of its debt (an astounding 95%). Thus, if they are comfortable with virtually no return on their investing (0.75% average return) into the debt and increasing inflation, they can literally keep financing their own debt as long as they don’t mind saving up to go to the grocery store as if it were a vacation.

The other option(s) is eye popping and absolutely lunacy to say the least. Newly elected Prime Minister Shinzo Abe wants the Bank of Japan to start issuing “unlimited easing” starting with a 120 billion dollar bullet into infrastructure. If that doesn’t get inflation where he sees fit and despite a declining Yen the threats coming out of Shinzo Abe’s mouth, will bring the death of Japan sooner rather than later.

In true, ancient Japanese kamikaze fashion, the Liberal Democrat Shinzo Abe with all his love for easing (hello Bernanke) is threatening to change the country’s laws and actually take the Bank of Japan over: read quite literally, socialization.  

So, as you can see, here in the US by all accounts, we are not Japanese yet. Although if we keep up this pace, follow the Japanese playbook and we look at the last four years as any indication; it should tell you it’s only a matter of time before we do.  

Obama Wins (shocker) but where does he go from here?

Its been a while for me putting pen to paper, in fact it will be seven months & days days from now between posts and a lot has changed since. Nothing has changed in the grand scheme of things thou, not with having re-elected President Obama. Had it been Mitt Romney would it have been much different? I don't think so, but it couldn't have gotten much worse either. For full disclosure I'm not an anti-Obama guy. I think hes grossly under-qualified for the position and has gotten in way over his head. With that said, as i have stated many times on this blog, i think too much disinformation has been put out in efforts to soil the President and many of them are gross exaggerations - like this obsession with him raising taxes & running up the debt at a record pace.

Plain and simple, Obama has not raised taxes across the board like most think he has, in fact hes been a tax cutter (if you dont count the tax on tattoos parlors and tanning bed companies). Now with that now being said, that will dramatically change over the next few years as the Bush Tax cuts are set to expire and he has stated taxes will go up for the wealthy. Then factor in Patient Protection and Affordable Care Act (Obama Care) and you are now talking about sweeping tax hikes, but to this point the narrative of him being a greedy socialist tax whore has been blatantly false.

The Debt? Hes run up the credit card at an alarming rate, but not much more than his predecessor George W Bush did in his eight years before Obama's election. When President Bush took office the National Debt stood at 5.7 Trillion, when he left it was 10.6. So when Obama took office he entered with the 10.6 Trillion, as of this morning it stands at 16.2 (bear in mind that 3/4 of Obama's first year of office was under a GWB budget). So nominally, Obama will easily be the biggest debtor in our nations history but he will will probably "only" double the debt, just as his predecessor did before him.

So, where does that leave us? I think we are in for another recession. The President will have the veto pen and i think if everything is left in place, economically its going to be a long and harsh recovery of virtually no growth. Jobs will not be plentiful and incomes will continue to be slashed through a combination of: lack of work, inflation and debt at every level, public and privately. If his broaden agenda is brought into focus and realized things will be worse. Cataclysmic economic meltdown filled with bread lines and riots in the streets? No. But stagflation circa mid 1970's? Yes.

Hopefully, the administration understands the situation we are in and does its best to curb the rising tides that are on the horizon. If not, Obama's legacy will be nothing short of a an economic dead zone. A presidency that inherited an economic crisis that was undoubtedly dire but after a stabilization, this was a regime that failed to turn the momentum around and instead kicked out its arms every-time it tried to get up off the floor.  An 8 year window of high unemployment, economic decline via the continued assault on the dollar through currency manipulation and reckless spending. "Hope" and "Change" were the buzz words of '08 and they were empty words based on the results of the last four years. Lets hope for some change in the next four. 

Thou not lead us to temptation

When I was working on my last entry concerning FEMA and Ron Paul, I started to get into a bit of a tirade concerning the debt. This, in this writers opinion, is the United States greatest threat, not some foreign enemy. With most people showing no interest or regard for it, its up to those of us who do hold these truths to be evident, to keep putting that word out there... and that word is debt (specifically insurmountable debt) is slavery and nothing more then a transfer of wealth; from the many to the few. 

In this article I want to tackle two situations that I see problematic and the key cogs to insurmountable debt. First, there is the federal government and our elected "leaders" role in this failure to be reasponsible. Secondly, is the Federal Reserve and its banks, that have been culpable in allowing (through the manipulation of interest rates) this economy to take a path that will see it fall off a cliff. What the recoil will be from QE 2,3,4,5,6,7 bailouts and stimulus remains to be seen, but there can be only one thing we know for sure. 

 (Sodahead.com)

That is, we are accumulating debt. And vast amounts of it. The implication of compound interest makes these actions basically treasonous by our elected leaders and criminal by the FED. How can Congress and the executive branch both complicity push the cost of running the government so far out of the realm of practicality? How is it legal for the FED to lend huge sums at what amounts to no interest to those banks that were all considered "too big to fail" who then take that liquidity and invest in T-Bills that will actually yield a 2-3% interest? These practices destroy existing savings and the incentive to save; thus creating only one desired effect - consumption. 

Because, without people borrowing and spending the whole thing blows up. Money = debt, debt = money.  The biggest problem is that the American population are over saturated in debt thus why the sub-prime in housing was needed. Like its population, the US government, is over saturated as well. They, unlike you and I, have no limits and that defies logic. Lets look at the executive's role.

The Interest payment is the only debt payment required by the Constitution that must be accounted for in the budget each year to be paid.

With that said, every President hopeful on the Republican side and President Obama have all released a budget or a proposed budget.

Not one of them have a plan to balance the budget next year, neither will any one of them do so in four years either (with the exception of Ron Paul). We will without a doubt have continuous mounting deficits that will probably be in the 1-2 Trillion mark annually regardless of who is in office (with the exception of Ron Paul). Starting to notice a trend here?

We have seen Obama’s appetite for destruction already regarding deficit spending; so let’s take a peek at the eventual Republican nominee’s (Mitt Romney) insanity.

Mitt Romney wants to increase defense spending by putting 100k more troops on the ground and rebuild parts of the Navy and Air Force. He would not have left Iraq, appears to have an itch to scratch in Iran and will not leave Afghanistan until its won (the forever war) or at least until his generals say to leave??? His budget has the wealthiest Americans (who pay the most income taxes) getting a significant tax cut on top of the existing tax cuts that are already in place.

Romney has no plans to offset the lost revenue that will surly happen when these cuts take place, nor does he have any plans to make any significant cuts in existing outlays to recoup the ramped up defense spending. This defines logic. Mitt Romney's plans are contrary to anything sane in regards to the federal government living within its means. He’s fiscal policy’s will be train-wreck like.

That however, is not how Romney sees it. He thinks if he cuts taxes the gains in receipts will pay for this increase in spending. The problem with that is that the FED doesn’t think the economy is going to grow by all that much… and they control the money supply. This leads us into the second part of the equation: the insurmountable tag team.

 The FED’s long term forecast is a relatively weak one going forward with long term GDP growth outlook being in the 2.3 to 2.6 percent ranges. The FED has also said it will not look to raise interest rates until, at the earliest, 2014. Here you have the economy just barley keeping its head above water for the foreseeable future, the FED continuing its non-stop intravenous liquidity therapy into bank’s reserves creating a soon to be inflation tsunami all the while our elected representatives continue to show no regard for the situation.

I want to take a look at two charts that really speak volumes for what is going on and what we will being seeing soon enough in our own backyards. Lets start at 2006, when the FED stopped tracking M3. As you can see below, when Shadowstats picked up the tab of tracking M3, the growth in money supply was steadily rising until early 2008. As the recession came, the Fed lowered interest rates to avoid the fire of deflation but banks weren’t loaning, so the money supply dropped with it.  

(shadowstats.com)

A curious situation started occurring by the middle of 2010. M3 started to rise and its rising still as of now. Meanwhile, Interest rates from 2009 on have stayed basically at zero and as we’ve already heard from the FED, they will remain that way for years. This does not bode well for the dollar or anything equity wise going forward in my opinion. If the economy continues its "recovery” like so many in the media says it is, the eventual outcome will be a pretty substantial increase in inflation. This would, by default, put relatively the majority of commodities into buy, buy and buy more mode. Most specifically gold and silver.

Equally alarming will be the federal governments penchant for debt as we have also seen, they will not live within our means, thus piling more debt on to the insurmountable existing amount. What happens when the FED has to raise interest rates? If we are seeing 450 Billion interest payments already (Intragovernmental and Public) imagine what will happen to those when interest rates go up? They could look something like this:

Just for a little perspective. In 1988, the national Debt was 2.6 Trillion. The interest payment on that in the budget was 214 Billion. The interest payment in 2011 was 450 Billion, roughly double. The principal, as we know, was 14+ Trillion.

The US government will not cut spending and we will continue to finance the welfare/warfare system. What happens in 10 years from now will be interesting thou. Can the FED really raise rates, without completely tanking the economy? And if they did, what would happen to the interest payment on the debt outstanding (besides sky rocketing into the trillion dollar mark). If the FED does not raise rates out of the fear of deflation, isn’t massive inflation the only alternative?

George Carlin said it best:

When you're born you get a ticket to the freak show. When you're born in America, you get a front row seat.

Get 'ya Popcorn ready!

Dumb and Dumber: Yes im talking about Congress and the Executive branch.

Remember the movie Dumb & Dumber? When Lloyd and Harry "found" a suitcase with a few million dollars and they spent it on anything and everything and then replaced each item they bought with a piece of paper... an IOU?

Now, Harry and Lloyd have no money, they, like our government, are broke losers (I was referring to the movie actors as losers but this will play here as well). How do you suppose they pay it back? They would borrow it? But from whom? What if they borrowed from the people that now hold the IOU's, you know, the people whom they "borrowed from" initially? Lets keep this scenario for an exercise later, bare with me until then.  

With the stroke of a pen, President Obama extended the payroll tax cut this past Wednesday, putting between $20-$2000 dollars back into the pockets of working Americans each week. While I firmly believe cutting taxes is always a good measure, I have to question this particular measure, as how to pay for it; just doesn’t make sense.

It was the same logic of George Bush Jr who cut taxes, slashing revenue and dramatically expanded government. Sure, it’s more money back in peoples pocket but it’s going to be much more expensive down the road in the form of interest payments on the accumulation of budget deficits that end up making the public debt liability in the national debt.

When you cut taxes, it has to come from somewhere. So, anytime you cut taxes and do not make cuts in existing programs or services to pay for them its not really a tax cut, it’s a loan at interest with dollars that are becoming worthless by the day. To call it a tax cut, while already in a 1.3 Trillion projected hole without cutting a single thing from even the deficit, further expanding the budget deficit is counterintuitive if not just flat out a lie. Unlike the Bush and the Republican favored (and flawed theory) of supply side economics, coupled with increase spending, the means to pay for this tax cut comes right out of the coffers of… Social Security.

I find that interesting because when Obama was running for President he was singing a different tune and  from then senator Obama's website:

"Obama believes that the first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker makes. Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century" 

The reason we had a surplus in Social Security was a payroll tax raise (the opposite of what’s going on here with Obama’s tax cut) by Ronald Regan. I’m not a big fan of “the Gipper” like so many are, that call themselves a fiscal conservative (because he wasn’t one). However, he knew baby boomers where going to retire and need to collect from a diminished population numeric wise; thus a surplus was needed. He then, proceeded to raid it in 1987 as did George Bush Sr following him and lest not forget Bill Clinton. Hell, this goes back to LBJ in the sixties if you want to see who is culpable for raiding social security.

According to the Social Security Administration, as of 2010, Social Security should have had a 2.6 Trillion dollar surplus, but I find that odd? How can the federal government put into its budget each year a bill for Social Security when the FICA tax is already being removed from your paycheck to pay for Social Security? Is this not the essence of double taxation? So, where is this surplus? It’s been raided and spent and replaced with IOU’s (bonds) with things like wars in Afghanistan/Iraq and other toys that politicians want - but don’t want to pay for… like this tax cut. In other words, it's a gigantic slush fund used by politicians to keep their feet from the fire.  

(Image by MIT OpenCourseWare.)

In 2005 George W even had the chutzpah to admit it... while raiding it !!!  

“There is no trust fund, just IOUs that I saw firsthand that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to other critical government programs.” 

It’s rather humorous to me that this is the only measure where you will find bi-partisan support in such a partisan political scheme that is Washington these days. Its also why I write my blog, to show this type of fraudulent partisan logic, as if there was really a difference on the important issues. Why the bi-partisan support? Because its politically expedient for both parties.

The Democrats can say they are helping out Joe-six pack with more money in his pocket, while the Republicans can hold up their oath to Grover Norquist. The best part of this tax cut is it comes out of an existing program that so many people & elected leaders from both “sides” rail on for not being solvent. We have heard about the entitlement tsunami that is coming… I wonder why?

Now, both parties can appease to their constituents so that they can be reelected; totally disregarding what the cost/benefit factor is. The "rich" (anyone over 110K), who won’t collect social security anyway, can get some of their money back. Joe-six pack can break even now, to make up for the rising gas prices and other commodities and maybe even save spend a few dollars (literally a few) at Wal-Mart buying Chinese trinkets or Snuggies (never mind, they are via China as well). It’s a win-win. I guess.

But don’t tell that to Tom Harkin (D-Iowa).

“I never thought I would have to see the day when a Democratic president of the United States and a Democratic vice president would agree to put Social Security in this kind of jeopardy. Never did I ever imagine a Democratic president would be the beginning of the unraveling of Social Security.”

Now think back to the beginning with the movie exercise. We, are the person that the suitcase belongs to. Harry and Lloyd are your local congressman and President and Senator... not only do they borrow the money, but they do so at interest or whats called the coupon, through bonds (IOU's). How can we have an outlay (and subsequent budget deficit and then subsequent accumulating national debt) for social security in the budget each year with FICA coming out of our checks to pay for it?

Because of this budget deficit you will also incur a bill that will be an interest payment on the principal of the national debt, which again, is an accumulation of every budget deficit in our history. This is simply because you are spending more then you're collecting in revenue. So, unlike Harry and Lloyd, we are not just going to borrow from the suitcase owner to payback the IOU's we replaced the initial money with. No, the government takes it one step further and promises to pay back those IOU's with future obligations, ie taxes and the circular logic continues. This will go on forever if drastic measures are not taken to stop this, but without strict terms limits, I cant see that happening. After-all, intergovernmental debt doesn't have to be paid back, right? In the words of Lloyd Christmas:

Its as good as money sir, those are IOU's... go ahead and count it, every cent is accounted for.