Wednesday, February 8, 2012

Why Hasn’t the Day of Financial Armageddon Occurred Yet?

In a household, what would force a family to file for bankruptcy? Of course, it would be the day when a family couldn’t pay the interest on their credit cards. Using this example, when would the day of financial Armageddon occur for the US federal government? Answer: the day it can’t meet the interest payments on the national debt. Until then, the US government keeps racking up bills on its imaginary credit card, largely by borrowing money from foreign countries that do business with the US, or if these trading partners no longer want to lend the US money in the form of IOUs (US Treasury Bills), then the US can just print money to pay for its debts, a counterfeiting privilege a household obviously does not have.
For some time now, economic prognosticators have predicted a day when the financial world plunges into an abyss that it cannot save itself from. Various dooms-dayers have suggested that the public buy precious metals like gold based upon a predicted but nebulous future day of financial Armageddon. But over recent decades, people listening to dire prognostications have been so bombarded that they have become desensitized to them, given that massive bank runs, an official devaluation of the dollar and insolvency of the federal government never occurred.
Why buy gold, betting on an imagined future day when the paper money becomes worth less, when I can spend by money to buy something practical that I can use, like an I-pod, I-phone or I-pad, rather than store a shiny gold bar in a home safe?
Lower interest rates delayed financial Armageddon
In 1993 Harry E Figgie and Gerald J Swanson wrote a book that predicted America would financially collapse in 1995. This prediction heavily relied upon prevailing interest rates the US government would pay to borrow money.
One analyst shows us why that day of financial Armageddon never occurred. Interest rates of borrowed money, which were said to be 21% in 1993 and 30% in 1994, took a plunge. Interest rates on long-term bonds declined to under 5% by the year 2000. Due to declining interest rates, the percentage of taxes that were apportioned to interest payments on the national debt dived from over 18% in 1991 to only 8.5% in 2003 and interest payments went from 3.3% of GDP in the early 1990s to a mere 1.4% in 2003. America was saved by cheap money.
Notice in the chart below the US Federal Reserve reveals a progressive decline in interest rates on US Treasury bills that are used as the vehicle for the government to cover its debts. Also notice in the second graph the steep plunge in interest rates at the height of the financial collapse in 2008-2009.


Declining tax revenues
But just like a household that barely makes minimum payment on its debts and then faces a sudden unexpected loss of a job in a two-income family, America now collects less income tax due to high rates of unemployment and declining capital gains among the wealthy, so that in 2007 it had tax revenues of $2.568 trillion and $2.828 trillion in outlays, for a –$160.7 billion that it had to lend.
In 2009 the federal government started to suffer a steep decline in tax revenues to $2.105 trillion versus $3.517 trillion in outlays, for a –$1.412 trillion deficit. In 2010 the federal government’s tax revenues were not much better, $2.162 trillion, and government failed to significantly cut expenses, which were $3.456 trillion, for another –$1.293 it had to borrow or print into existence to meet its obligations.
In 2011, with political rhetoric of budget neutral spending and pressure to cut military spending, the US government took in $2.173 trillion in taxes and spent $3.818 trillion, for a –$1.645 trillion increase in its accumulated debt, which now stands over $16 trillion total.
Government predicts a rosier future than reality
What you see in the following chart is that the federal government apparently predicts it will be able to grow the economy and cut the growing budget deficit from –$1.412 trillion (2009) to –$644 billion (2014) in just 5 short years. Notice there is no significant reduction in federal spending planned. Federal spending grows from $3.8 trillion to $4.189 trillion from 2011 to 2015. The problem with the following chart is that it presents an overly rosy picture where the nation grows its economy out of trouble and finally cuts the annual debt nearly in half, to –$606.7 billion in 2015. There is no substantiation for this scenario.

Summary Of Receipts, Outlays, Surpluses & Deficits: US Government
In current dollars (billions)
As percent of GDP
+ or 1
+ or –
Source: Tax Policy Center

Just when IS that day of financial Armageddon going to occur?


Is there a way of knowing the day, not necessarily a calendar day but an event day, such as when the US can’t pay the interest on its accumulated debt?
I’ve said that day of infamy is when the US can’t make interest payments on its accumulated national debt. While the US has larger financial obligations that extend into the future, such as some $60 trillion to provide social security and Medicare health coverage, it doesn’t pay interest on these obligations (though it has borrowed from these funds and owes interest to itself).
Last year, one online source, calculating the accumulated national debt at $16 trillion, surmised interest rates would rise on this debt and that the "game over" point would occur some time mid-2012.
A CNN Money report assumes foreign and other lenders to the US who buy up US Treasury bills, seeing there is increasing risk in holding US IOUs, will demand higher interest rates on borrowed money, and if interest rates rise gradually that will mean about $5.5 trillion will need to be allocated to pay off the interest on existing debt over the next decade; if interest rates rise 1 percentage point more than anticipated then interest payments will be ~$6.8 trillion over the coming decade; and if they rise more than expected and tax cuts are implemented, about $7.5 trillion (about $750 billion a year) will need to be directed towards interest payments on the accumulated national debt.
The Washington Post displays a graphic which projects that interest on the national debt rises to almost $800 billion a year in this decade, making it the top financial priority over providing services to the American people.
The Economic Collapse Blog says it is now mathematically impossible for the U.S. government to pay off the U.S. national debt since the US government now owes more dollars than actually exist.
An article in The New American says every American will be paying $2500 a year to meet the interest payment (not the principal) on the national debt. That would be about $7500 for a family of three.
A chart at Casey Research projects annual interest on the national debt will rise above $1 trillion a year by 2014 and soar beyond $1.8 trillion annually by 2018 if interest rates rise 1% per year on borrowed money.

Year Interest on accumulated national debt
2018 $800,000,000,000.00
2011 $454,393,280,417.03
2010 $413,954,825,362.17
2009 $383,071,060,815.42
2008 $451,154,049,950.63
2007 $429,977,998,108.20
2006 $405,872,109,315.83
2005 $352,350,252,507.90
2004 $321,566,323,971.29
2003 $318,148,529,151.51
2002 $332,536,958,599.42
2001 $359,507,635,242.41
2000 $361,997,734,302.36

Sleight of hand averts a cataclysmic day


So why hasn’t the day of financial Armageddon occurred in America?
There are many reasons why an economic doomsday has been delayed. For one, other countries prop up the US dollar knowing its demise will drag them into the financial abyss too.
Second, the US has the financial advantage of being the world’s reserve currency, so it is always in demand, though that status is being challenged now as China, Russia and India are beginning to trade directly in yuan, rubles and rupees respectively.
Third, the US Federal Reserve has been able to create false demand for buying up its debt by funneling money through American banks to overseas companies that then buy US Treasury Bills (IOUs), or the Fed conducts covert operations such as urging oil companies to raise their prices, which profits countries like Saudi Arabia, who then agree to buy US T-bills in exchange for the US providing military defense.
Fourth, the US Federal Reserve is conducting gold swaps with overseas banks to put a damper on alternative currencies, such as gold.
Fifth, not willing to face the political risks associated with massive tax increases or an official devaluation of its money, the US elects to steal money out of the back door of American’s wallets via inflation. This is what is called monetizing its debt – printing new money (paper or electronic) which then causes inflation as consumers spend it, resulting in increased demand for goods and services and eventually rising prices.
The US officially says inflation is ~3%. But when using 1980 or 1990 methods of determining the consumer price index, the real rate of inflation is 7-10%. Five more years of inflation and the $8.5 trillion that Americans have in interest-bearing banks accounts will only be worth, in purchasing power, about half that much.
Sixth, the US government "cooks its books." The federal government does not use generally accepted accounting principles (GAAP). For example, the government reports a 2010 budget deficit of –$1.294 trillion that was actually –$2.080 trillion (source: ShadowStats).


As John Williams of ShadowStats says, the federal government does this by excluding unfunded obligations for Security and Medicare. According to Williams, the 2010 federal deficit was likely near $5 trillion. Furthermore, Williams notes that the federal government still does tabulate the securities issued by Freddie Mac and Fannie Mae, the two quasi-government mortgage backstop organizations.
Williams says the US government kept "$12.4 trillion in the net present value of Medicare unfunded liabilities" off its 2010 accounting books. Recognize, as John Williams notes, "the federal government cannot cover such an annual shortfall by raising taxes, as there are not enough untaxed wages and salaries or corporate profits to do so."
The Federal Deposit Insurance Corporation (actually a private insurance agent of US banks) currently estimates there are 800-plus US banks in dire condition, but actually, if you (a) put back the $1.3 trillion of toxic non-performing home mortgages the Federal Reserve shifted from banks to its accounting books, (b) demanded banks report all of their other non-performing loans, (c) required lenders to use true market value of home mortgages (mark-to-market accounting) and (d) did not allow banks to temporarily loan money onto their ledgers to make their quarterly financial reports look rosier than they really are, nearly all of the nation’s 7400 lending banks (excluding credit unions and commercial banks which did not offer ALT-A and sub-prime low-interest "teaser" home loans) would be insolvent.
Financial Armageddon: sorry you missed it
The financial sky is falling but if you don’t report it, it never happened. Like the famine that resulted in the deaths of 14-26 million Chinese in 1958-61, which represents the worst modern day human tragedy, natural or man-made, yet it escapes your awareness because TV evening network news simply didn’t report it. Most people, if asked what was the greatest human calamity in their lifetime would likely mention the 9-11 terrorist attack on New York. If you missed the great famine in China, you may have easily missed the day when the world economies collapsed.


John Mauldin, in his book ENDGAME, reports that the nation's private GDP ceased to grow 14 years ago (another factoid the news media doesn’t report, after all, news sources are sponsored by advertisers who want consumers to buy stuff).  Government then stepped in and grew a false economy based upon contrived wars and debt. (You can listen to more of John Mauldin here.)
Chicken Little comes to mind
Bring up the topic of a day of financial Armageddon and you are likely to be ridiculed and likened to Chicken Little, a fable about a chicken that thought the end of the world was near. I’ve had so many friends tell me they don’t want to hear what I have to say about the economy. Yes, it is too unsettling. But it is something much deeper rooted than the troublesome numbers, it is their misplaced faith in the US government, inculcated in them from their grade-school days, that is being shaken. Mass denial makes it easier for government to pull the wool over everyone’s eyes.
What government is doing behind the scene
The US Treasury Department has printed new money that is being stored in a warehouse, possibly for the day when the US dollar is officially devalued (maybe at the conversion of rate of 6 or 7 new dollars for every 10 old dollars). Federal officials say these 100-dollar bills were misprinted, but why don’t they burn them instead of store them?
Governments usually conjure-up phony wars or terrorist attacks to cover for their financial sins. Patriotic Americans will respond to a foreign threat without hesitation, never recognizing a ruse is underway. Lay blame for a devalued dollar on the towel heads.
The next generation will repudiate all this debt


On a more positive note, Gary North says the current generation will repudiate all this debt. If we are all broke, how are they going to get everyone to make their mortgage payment, pay their taxes, etc.?
Recognize the goal of the elites is to transfer their losses onto the masses. But maybe not this time. We see lenders to Greece maybe facing a 90% write down in their loans. But don’t forget, lending banks also hold our saved money and 401k plans. Our banked money is likely to get swept away in a day of reckoning.
The smart investor will be holding property, artwork, precious metals, equities (I prefer stock in private companies, not the manipulated stocks in the markets) rather than banked money. Recognize 401k plans (which the government will likely confiscate under the guise of protection), or tax-free municipal bonds (which municipalities cannot possibly pay and meet underfunded pension obligations), are risky, not secure as advertised. Don’t forget, the stock markets can tank stock prices and make them appear very under-valued in a massive effort to dump risk onto naïve investors.
Keep a little cash on hand should ATM machines not be functioning because of natural calamities or a banking holiday. And if you can find one of those commercial banks that didn’t offer those ALT-A and subprime home mortgage loans, this would be more desirable than the name-brand bank where you currently store your money.
Noah and his family warned of a coming flood. He was likely ridiculed for building a boat in his front yard and driving everyone else’s property value down. Flood? What flood?
You can’t hide a flood but you can hide a financial implosion. The financial day of Armageddon occurred some time in the recent past and it is government’s job to keep the suicide rate down and to calm the masses and act like everything is normal. The goal is to keep the women shopping. The Super Bowl serves as an excellent distraction. It’s just a temporary recession, right? No, it’s the financial collapse of modern civilization and it is being papered over. If you blinked your eyes, you probably missed it. But then you probably sleep better than I do.

No comments: