Mon Post #2: This crisis is a long way from over

Faithful readers know that I am fond of saying that the 2008 Great Financial Crisis is not over.

We suffered a financial earthquake in September 2008, the depth and breadth of which many of us still do not understand nor appreciate.

The western world has been on a credit binge for the last 40+ years and we have put off dealing with the effects of this binge over and over again the past four decades. Rather than deal with difficult recessions, Government has constantly intervened with 'stimulus' to avoid the pain of dealing with inherent problems.

The result?

As noted by the Boston Consulting Group in a recent report, the developed world currently has $20 trillion in debt over and above the 'sustainable threshold'.

The definition of "stable threshold" is a debt to GDP of 180%.

This $20 trillion in debt encompasses household, corporate and government debt and you read that correctly... that's $20 trillion over and above a debt to GDP ratio of 180%! 

Since 2008 all attempts to eliminate the excess debt have failed. 

This includes that US Federal Reserve's relentless pursuit of inflating our way out this insurmountable debt load... which after adding $3 trillion to the US National Debt have been for nothing.  Inflation has not worked so far because of the pressure to deleverage and because of the low demand for new credit.

And looming on the horizon is the elephant in the room that no one wants to acknowledge.

While everyone today is focused on the European sovereign debt problem right now, the debt problems of the PIIGS (Portugal, Italy, Ireland, Greece, Spain) et al are nothing compared to what looms in America.

US states have spent nearly half a trillion dollars more than they have collected in taxes, and face a $1 tillion hole in their pension funds. California alone is a bigger problem than the 'PIIGS' (less Spain) combined. Then throw in Illinois which has spent twice as much money as it has collected and is about six months behind on creditor payments.

From 2002 to 2008, the individual states had piled up debts right alongside their citizens’: their level of indebtedness, as a group, had almost doubled, and state spending had grown by two-thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23% of state pension money had been invested in the stock market; by 2008 the number had risen to 60%. To top it off, these pension funds were pretty much all assuming they could earn 8% on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you are looking at multi-trillion-dollar holes that can be dealt with in only one of two ways: massive cutbacks in public services or a default—or both.

At the municipal level, the financial health of American cities is in even greater deplorable shape.

Meanwhile there is consumer debt.

American Households are still more indebted than their counterparts in Austria, Germany, Spain, France and even Greece. Tens of millions of citizens remain burdened with mortgages they can no longer afford, in addition to soaring credit card bills and sky high student loans.

Trillions of dollars in outstanding consumer debt is stifling demand for goods and services and that's why the demand for new credit is so low. And without the consumer demand, cash-rich U.S. companies are reluctant to hire and unemployment remains stubbornly high.

As of June 30, roughly 1.6 million homeowners in the U.S. were either delinquent on mortgages or in some stage of the foreclosure process, according to CoreLogic. And the real estate data and analytics company reports that 10.9 million, or 22.5%, of homeowners are underwater on their mortgage — meaning the value of their homes has fallen so much it is now below the value of their original loan. CoreLogic said the figure, which peaked at 11.3 million in the fourth quarter of 2009, has declined slightly not because home prices are appreciating but because a growing number of mortgages are entering foreclosure.

America's banks, meanwhile, still have more than US$700-billion in home equity loans and other so-called second lien debt outstanding on those U.S. homes, according to SNL Financial.

Debts owed by American consumers account for almost half of the nearly US$9-trillion in worldwide bonds backed by pools of mortgages, car loans, credit card debt and student loans, which were sold to hedge funds, insurers and pension funds and endowments.

And that doesn’t include the US$4.1-trillion in mortgage debt sold by government-sponsored finance firms Fannie Mae and Freddie Mac.

Kenneth Rogoff, professor of economics and public policy at Harvard University and former chief economist at the International Monetary Fund, has said the ongoing crisis should be called the “Second Great Contraction” because households remain highly leveraged. He says the high level of consumer debt is what distinguishes this from other recessionary periods.

Meanwhile American banks also have their own big debt burdens to deal with. Next year alone, banks and financial institutions must find a way to either pay off or refinance US$307.8-billion in maturing debt, compared to the US$182-billion that is coming due this year, according to Standard & Poor’s.

This maturing debt for banks comes at a time when they must start raising capital to deal with new international banking standards.

Beyond bank debt, hundreds of billions of dollars in junk bonds sold to finance leveraged buyouts also are maturing soon. S&P says “the biggest risk” comes in 2013 and 2014, when US$502-billion in speculative-grade debt comes due.

The problems you see in the news today about Bank of America and Morgan Stanley are only the tip of the iceberg.

The issue of this decade is Debt.

And the issue hasn't even begun to be dealt with yet.

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The looming Canadian Debt Crisis?

I was going to post my thoughts on the new R/E theme that 'HAM is not prevalent in Vancouver' yesterday but didn't get a chance.  Look for it later this week.

Other themes from the past couple of weeks have been the European/Greek debt crisis, the US debt situation and Carney/Flaherty's comments on the Canadian debt situation.

Ultimately all these topics are inter-connected, which is why we focus on them.

And the Canadian debt situation will hinge on how all these external factors play out.

Our blogging colleague Ben Rabidoux, who now blogs on his great new site The Economic Analyst, has come out with some great graphs that reflect the status of Canadians. 

The first clearly show how debt is exploding in Canada as the growth in lines of credit is compared to the growth of disposable income, GDP and inflation (click on images to enlarge):

Next the growth in Mortgage debt is similarly compared:

Mortgage debt as a percentage of GDP:

And finally how mortgage rates have fallen over the past 30 years:

For the past 2 years there has been a steady stream of warnings from analysts that the artificial accomodative money policies of the past 30 years will be coming to an end.

Our own central banker and federal finance minister have spent the past year issuing warnings that Canadians should get ready for interest rates that will return to the historic norm.

These charts clearly show why they are concerned.

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Once again Jim Rogers succinctly summarizes the situation...

Rogers is talking about Greece. The key problem with Greece and why it matters to North America is that so many North American banks have huge exposure to Greek debt.  If Greece defaults, those banks lose massive amounts of money.

And in this segment below we see the root of the economic problem in North America... we're too busy blaming China for our woes as opposed to understanding why we can't bring the manufacturing of products we consume back to North America. 

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Inflation + Debt = Higher Interest Rates

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is now kicking into high gear.

Back on October 7, 2010 I wrote that while we would have deflation in some areas, we were going to suffer a concurrent bout of inflation - producing a paradox that many have difficulty reconciling.

Last Wednesday we noted that CNBC was reporting something that we have said for over 2 years now... that if you go back to the way inflation was calculated prior to 1999/2000 (when all the important components of inflation were stripped from the calculations to hide it's true impact) that inflation is actually raging at almost 10% right now.

But now even the highly manipulated current inflation calculation method is unable to disguise what is going on.

As the Wall Street Journal notes, Canada's consumer-price index jumped by its biggest monthly increase in two decades, adding Canada to the list of major economies recently pressured by inflation.

• "The jump surprised economists and analysts here, many of whom had been comforted by so-far benign inflation pressure across Canada, much of that thanks to a strong Canadian dollar. It also raises the likelihood of an interest-rate increase by the Bank of Canada, the central bank, sooner this year rather than later. Some economists had pushed back their forecast timing of such a hike after the Bank of Canada, which kept rates steady last week, offered a less hawkish tone on future action than many had expected."

Meanwhile in the US the big news is that the ratings firm Standard & Poor’s lowered its outlook on the United States rating to negative. Although the agency did not actually lower its highest AAA rating on America's debt, it was the first time since the S.& P. started assigning outlooks in 1989 that the country was given an outlook that was something other than stable.

This has lead M&T Bank Corp. CEO Robert G. Wilmers to warn today that the United States "may be on the same calamitous path" toward an economic and government debt crisis akin to that of Ireland, Greece and Portugal if it doesn't rein it its ballooning spending and debt.

As this blog has said before, the story of this decade is going to be all about sovereign debt.  Gobs and gobs of sovereign debt.

The gridlock in American politics combined with the paltry spending cuts proposed only guarantee things are going to get worse.

Meanwhile, as Zero Hedge notes, the real beauty about waging a two front war (keeping gold from hitting the barrage of $1,500 limit spot orders; and silver from passing a dollar a day) means that the COMEX cartel has to pick its fights. Today gold loses for now, as the $1,500 spot (but not futures) price is safely defended. The same can not be said for silver. $44 was just taken out. And those who actually wish to buy American Eagles or Silver Maple Leafs can do so at the low, low price of $47.32

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A Trillion dollars a year...

Some people ask why I focus so much on Silver when I primarily write about Real Estate.

For years Real Estate represented a great opportunity. Some would call it the trade of the last decade.

But the sun is setting on those days. And while the City of Vancouver (and its immediate suburbs) continue to witness a frenetic pace of home sales and consequent price rises, it is end stage of our great housing bubble.

Vancouver stands in stark contrast to the real estate markets of the Fraser Valley, Chilliwack, Okanagan, Northern Interior, and everywhere else in British Columbia.

People ask, "if not Real Estate, then what to invest in?"

Hence my emphasis on Silver, which you are well aware is what I consider the 'opportunity of the decade'.

The story of the decade is going to be inflation and debt, especially the debt of the United States (which holds the world reserve currency).

PIMCO’s Bill Gross said two months ago on CNBC,

• “We have a deficit in the $1 trillion plus arena, which means we must borrow at least a trillion dollars additional a year in order to fund the deficit. And, so, the debt ceiling currently at $14.3 trillion, which is 95% of GDP, has to go up by another trillion or so every 12 months.”

Grasp, if you can, the enormity of that statement.

Yesterday the Associated Press reported that the Republican-controlled House is on course to pass legislation cutting federal spending by $4 billion and averting a government shutdown for two weeks. And Senate Democrats say they will go along. Republicans want to slash more than $60 billion from agency budgets over the coming months as a down payment on larger reductions later in the year, but are settling for just $4 billion in especially easy cuts as the price for the two-week stopgap bill.

Let's look at that again, the politicians are having a knock down, drag-em-out fight over $60 Billion?

Does this pass as meaningful budget reform?

There is still $940 Billion in budget cuts required to prevent the deficit from growing. Then there's cuts to deal with the interest on the debt each year... and that's just to keep the debt from growing, it doesn't even begin to pay down that debt!

US Federal Reserve Chairman Bernanke responded to Senator questions yesterday by saying, “You want to make sure the debt is paid, interest is paid, and meaningful budget reform is highly desirable. I’m just concerned that there could be a significant probability that we would not raise the debt limit, and that would cause real chaos... This is money we’ve already borrowed. These are commitments we’ve already made to contractors, to senior citizens and so on...”

And it's the "and so on..." that is the real problem.

Almost all US States are insolvent, as are many US cities and municipalities.

There will only be one way the US Federal Reserve will deal with the looming problems. QE 3, 4 and 5 are a certainty.

Which means the flight into Gold and Silver is only just starting.

I can't say the same for Real Estate.

Meanwhile there was a fascinating comment made by the man many are now calling the ChairSatan (Ben Bernanke). As noted in an article in the Wall Street Journal, Bernanke was pushing back at the idea that policy makers should consider alternative proposals like the gold standard.

Bernanke said a return to the gold standard wouldn't work.

"It did deliver price stability over very long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So I don't think it's a panacea," Bernanke said.

Additionally, Bernanke said there were a number of practical issues that would prevent the return of gold as the world standard. Namely, there's not enough gold in the world to effectively support the U.S. money supply.

The writer of the WSJ article then made the point that so many investors are already keenly of.

• "(Bernanke's] argument is very one sided. Either gold and other PM's are grossly overpriced or substantially undervalued. It would appear from that the Ben Bernank has his philosophy wrong, as his true fiat banker mentality shows. He is thinking of Gold relative to current price with a relationship to money supply. As he sees it, there is not enough gold "at it's current price" to back the massive money supply of the US alone. In real terms he has just supplied the basis for the argument that Gold, Silver and other PM’s are grossly underpriced within this relationship. We can have a gold standard and you do not need more metal to achieve it, the metal just needs to be priced in real terms as a relationship to the money supply. This underlying fundamental would imply that the PM's need to be 10's of times higher than their current value. We may very well see this as more citizen's around the world flee their current currencies for the safety of precious metals."

10's of times higher would be an understatement.

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The American Debate Begins...

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Ferris... the miles aren't coming off!

Last week I started to talk about how I believe the stage is being set for a Canadian real estate collapse of historic and massive proportions.

Since the collapse of the dot-com bubble in the late 1990s, western governments have manipulated economic conditions so that we moved quickly from the unwinding of one bubble and into another.

Within a year of the collapse of the Internet Bubble, we moved seamlessly into the Real Estate Bubble. And within a year of the collapse of the Real Estate Bubble we have moved into another bubble… and it’s as if nobody can see that there are any similarities.

The only reason it worked in 2000 (and it didn’t really work then), is because we were able to borrow the money from the rest of the world and spend it. And we were able to live in the delusion that we were getting richer even when we were getting poorer.

We believed this because we looked at our asset prices (real estate and stocks) and we saw the prices going up and we said “hey, were actually getting wealthier”.

But we weren’t getting richer because we were spending money at the same time instead of saving money. We would borrow on the asset value and spend it consuming. And as we spent money, the government counted that money as GDP.

And as long as our GDP was rising then we thought our economy was growing.

But the whole time our GDP was going up, we weren’t measuring how much our wealth was going up. We thought we were okay because some appraiser said that our house was worth more. Or the stock market was still going up.

The 2008 Financial Crisis was simply the inevitable collapse of this ponzi mindset.

But when that collapse happened, it was SO intense…. SO profound... that our political masters panicked.

What happened in September and October 2008 had previously been considered completely impossible and totally unthinkable. We have always been told that the lessons of 1929 and the Great Depression had resulted in changes to the financial system so that NEVER AGAIN could the financial system come close to totally collapsing.

Yet we were within two hours of a complete collapse of our banking system and of our economy... and governments responded with panic measures.

They responded the same way they did each time there was a ‘financial emergency’ over the past several decades... with stimulus money and bailouts. Only this time they did it on a scale that has never been seen in the history of the world.

• In the 1990s the US Federal Reserve had been too easy and loose with money. Interest rates were too low and we created too much money. And that facilitated massive investments in the stock market.
• This created the 1997-1999 NASDAQ bubble. When that market crashed the government responded with even lower interest rates and easier access to stimulus money.
• And the exact thing that had happened with the Internet Bubble... now starts occurring with real estate.

We had the internet bubble because the US Federal Reserve was too easy with money.

Easy money allowed people to invest in companies that were tremendously overvalued. None of the dot.com stocks were paying dividends because none of the companies had a realistic chance of making money. But it didn’t matter. The frenzy was pushing stock prices up so people grabbed all the money they could and kept investing in them.

Recognizing what was going on, Federal Reserve Chairman Alan Greenspan sought to intervene. In 1996 he talked about irrational exuberance and they took him to the woodshed for saying something negative. But he still went ahead and raised interest rates to correct the imbalance.

And the bubble burst.

Of course, when the stock market crashed, a lot of the malinvestments were exposed. A lot of the people working at the dot.com’s were going to have to be unemployed. A lot of companies who were given a lot of capital who shouldn’t have been given capital, were going to lose it all. And a lot of investors who invested foolishly who were going to lose a lot of money.

We were destined for a long, painful recession. Those malinvestments were going to have to be worked off. Capital would have to be reallocated to where it could be productively used, and labour would have to be laid off and rehired as that capital found productive uses.

As painful as it might be, it would be a necessary recesiion; the free market's way of correcting the imbalances.

But government intervened in the free market.

Rather than permit the painful process to play out, government would ‘stimulate’ the economy... again.

As always, the stimulus money created a catastrophe. This time in real estate.

During the dot-com, if you questioned the wisdom of what was happening, the reply was always, ‘you don’t understand the stock market’. Now, when anyone questioned the wisdom of what was happening in real estate, the reply was, ‘you don’t understand the real estate market’.

People were told rents don’t matter to real estate in the same way they said dividends don’t matter to stocks. What evolved was a rationalization that said all real estate would appreciate, year after year, for no other reason than a belief that real estate appreciates.

Everyone bought into the idea that it was going to go up... year after year... just because.

And it made no sense. Were incomes going up each year? Would you be able to charge 10, 20, 30 percent higher rents each year? No? Then why is the value going to go up 10, 20, 30 percent?

And the answer was... ‘it just will’.

And for the last nine years it has, fueled by easy money which is being invested in something that does not make fiscal sense – other than the value of the ‘asset’ seems to be rising by 10 – 30% each year.

The real estate bubble, and the financial services industry it created, has grown stupendously out of proportion.

The 2008 Financial Crisis is a result of the stimulus that created the dot-com bubble, the stimulus that tried to prevent the correcting of the dot-com bubble and the real estate bubble it all created.

A long, painful recession is needed to correct the imbalances.

But by responding in the same egregious manner to the 2008 Financial crisis, another catastrophe is inevitable.

Not only have we failed to correct the imbalances, western governments have liquefyed the system beyond any rational explanation in response to fears the entire system could collapse.

In the United States, the U.S. money supply has been expanding at an absolutely unprecedented rate (more than doubling the monetary base since the collapse of Lehman Brothers).

Fears of inflation – even hyperinflation – have been propagated throughout the blogosphere.

So why are we not experiencing rampant inflation?

Why is the U.S. dollar not falling through the floor?

Well, the truth is that all of this new money has gotten into the U.S. financial system but it is not getting into the hands of U.S. businesses and consumers. In fact, even though the money supply is exploding, U.S. banks have dramatically decreased lending. This has brought us to a very bizarre financial situation.

What we have seen is the U.S. government shovel massive amounts of cash into the U.S. financial system and then watch as the big banks sit on that cash and refuse to lend it. The biggest banks in the U.S. reduced their collective small business lending balance by another 1 billion dollars in November 2009.

That drop was the seventh monthly decline in a row. In fact, in 2009 as a whole U.S. banks posted their sharpest decline in lending since 1942.

So all of this money that the U.S. government pumped into the financial system has been doing American businesses and consumers very little good. That is why we can have a vastly increased money supply and very little inflation.

So if the banks are not lending the money to the American people, what are they doing with it?

One of the things they are doing with it is buying U.S. government debt. While U.S. banks have cut business lending by approximately 350 billion dollars since early 2009, they have meanwhile been purchasing approximately 300 billion dollars worth of U.S. Treasury securities.

So instead of loaning money to American businesses and consumers who desperately need it, a ton of this new money is being used to pump up yet another bubble. This time the bubble is in U.S. Treasuries. Asia Times recently described how this trillion-dollar carry trade in U.S. government securities works...

• Remarkably, the most aggressive buyers of US government debt during the past several months have been global banks domiciled in London and the Cayman Islands. They borrow at 20 basis points (a fifth of a percentage point) and buy Treasury securities paying 1% to 3%, depending on maturity. This is the famous "carry trade", by which banks or hedge funds borrow short-term at a very low rate and lend medium- or long-term at a higher rate. This works as long as short-tem rates remain extremely low. The moment that borrowing costs begin to rise, the trillion-dollar carry trade in US government securities will collapse.

Anyone who has dealt with carry trades in the past knows that when carry trades unwind they can do so very, very quickly and the results can be nightmarish.

And this one will unwind too, causing the bubble it is supporting (US Treasuries) to collapse.

You’ve heard it said that doctors 'practice' medicine and lawyers 'practice' law?

They say this for a reason. These 'professionals' never really know their craft. They learn about past mistakes and try to utilize tried techniques to address problems. When something goes wrong, they learn from it and ‘tweak’ their responses.

It is no different for economists, even those entrusted with running the Bank of Canada and the US Federal Reserve (recall Saturday’s post of a paper by Alan Greenspan admitting how the Federal Reserve had failed).

The ‘experts’ panicked when the crisis of 2008 hit.

And they responded with tried techniques (plus a few new tricks) to address the problem.

The truth is that the U.S. financial system is a house of cards that could fall at any time. A lot of economic pain is on the horizon - it is only a matter of when it comes and how bad it is going to get.

And when it does come, interest rates are going to shoot up like nothing we have seen in over 30 years.

Tomorrow, the reckoning that Canada faces.

To read the next part of our series, click here.

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Debt Market Update: Market 'downgrades' US from Triple A

Healthcare in the US grabs the news the morning, but the real story is this piece from Bloomberg this morning.

Two-year notes sold by the Warren Buffett's Berkshire Hathaway Inc. in February yield 3.5 basis points less than US Treasuries of similar maturity.

Meanwhile debt issued by Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. also traded at lower yields in recent weeks.

This, folks, is what one chief fixed-income strategist described as an “exceedingly rare” event in the history of the bond market.

It means that key corporate debt now trades for lower yields than U.S. bonds of similar maturity.

We're at one of those historic moments in the credit market, when U.S. government bond yields are clearly no longer considered one of the safest investments in town.

It is a defacto move by the debt market to downgrade the value of US debt in advance of the 'official' ratings provided by agencies such as Moody's and Standard and Poor's.

Whatever credit ratings firms may say, markets have now made it pretty clear that the U.S. is far from a risk-free debtor. It's as if markets are already moving yields ahead of a potential cut to the AAA-rating.

And regardless of whether the credit ratings firms actually cut America's rating, the reality is that the old risk-free rating is essentially gone; even it still officially remains... the markets have figured it out.

(Note: this post is the second one today, in addition to the one directly below)

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Fry?... Fry?... Fry?...

This will be the third post in our series this week.

Post #1 can be read here. Post #2 can be read here.

Yesterday we ended by noting that governments in the western world had responded to the 2008 Financial Crisis by liquefying the system beyond any rational explanation, more than doubling the monetary base since the collapse of Lehman Brothers.

The debt obligations of the financial system have now been passed onto government.

For the United States this is no small issue, because it is being piled onto an already massive pile of debt.

Many people don’t understand how money is created. Most, mistakenly, think that the United States simply prints up some more cash as needed.

It doesn’t.

The US Federal Reserve Bank is a private institution owned and controlled by private banks. It is a private bank that enriches its private owners.

As for regular banks, they do not make loans only from money they have on deposit. Through what is called "fractional reserve banking," They loan well over ten times the amount they have on deposit.

So where does the money come from?

The Federal Reserve Bank buys $10,000 of US debts called Treasury Bills from the US. Where does the Fed get the money? The Fed creates it out of thin air. This is the first bit of magic. This is authorized by the Federal Reserve Act of 1913, and is a questionable delegation by Congress of its own power to "coin money and regulate the value thereof.” It is the ultimate in privatization.

The Fed then loans this $10,000 to a bank and requires the bank to pay the current federal funds rate as interest. This $10,000 becomes a "liability" of the bank, but the bank immediately loans this money to a borrower, but in double entry bookkeeping, this $10,000 loan becomes an "asset" of the bank from which the bank can make further loans. Here is where the second bit of magic occurs called "fractional reserve banking." The reserve is not gold or any other hard asset. The "reserve" is debt.

All debt of the US, all corporate debt, and all individual debt are owed to private banks. All money is debt. And the people of the United States pay interest on that debt.

So when the United States doubled the monetary base, they added massively to the pile of public debt.

And this debt pile faces an avalanche of looming additions.

In the United States, Social Security, which was in balance in year 2000, is now underfunded by $15 trillion dollars.

Total unfunded obligations of the US Government are now $104 trillion.

If we add the $6 trillion of outstanding Fannie Mae and Freddie Mac debt and the $14 trillion of outstanding national debt, we arrive at a total US government debt obligation of $124 trillion.

It’s a truly preposterous amount of money that will never be paid off in today’s dollars.

And how is the United States handling the management of this “debt”?

Anyone who has debt knows that you manage it by paying the interest and paying down the debt. At the end of the month you pay your bills and then take any left over cash, and you put it towards your debt.

The United States currently, at the end of the month, has more bills than income. There isn’t enough to pay the basic bills, let alone pay down the debt. It means at the end of each month, the United States has to ‘borrow’ even more money... and goes deeper in debt. We call this deficit financing.

And as Martin Weiss,PhD, tells us, this deficit financing is reaching a critical stage.

For those of you other there who think that the sovereign debt crisis is mostly behind us... that America’s federal deficit is turning into a non-issue... or that we can just go back to business as usual... you’d better consider the drama now unfolding in the hard numbers just released last week:

In February alone, the official U.S. federal deficit was a monstrous $221 billion, far greater than anything the US has ever experienced in history.

To put this into perspective, back in the 1980s, for example, President Reagan was plagued with the worst string of federal deficits ever recorded until that time. But with February’s deficit, Washington has managed to run up just as much red ink as it did in all of 1986, the single worst deficit year under Reagan.

Going back further, to the 1970s under President Nixon, there was also had a rash of deficit spending that sent chills up the spines of economists. But last month’s deficit of $221 billion was more than TRIPLE the sum total of ALL deficits during the six years under Nixon.

Ever since America’s Declaration of Independence, deficit spending has been a recurring theme in Washington that invariably returns with a vengeance, especially during wartime. But it took 169 long years and seven major wars — from 1776 to 1945 — to rack up a cumulative deficit that matches the gaping budget hole of just 28 short days in February.

This is an unprecedented level of borrowing. And to where does the government resort in order to finance these humongous deficits?

In just one week last month (ending 2/26), the U.S. Treasury issued...

• $32 billion in 7-year Treasury notes,
• $42 billion in 5-year notes,
• $44 billion in 2-year notes,
• $8 billion in 30-year TIPS bonds,
• $26 billion of 3-month bills,
• $28 billion of 6-month bills,
• $31 billion of 4-week bills, and
• $25 billion of cash management bills.

Grand total: $236 billion in government debt issued in a single week, the most in the history of the world.

This means that Uncle Sam borrowed new money — and replaced old debt — at the rate of $390,212 per second … $23.4 million per minute… and $1.4 billion per hour — around the clock!

It is a pace of debt issuance that simply cannot be sustained without disastrous consequences.

One of those consequences is going to be a dreadful crowding out of the private sector. As long as Uncle Sam is continuing to hog most of the available credit, it’s going to be increasingly difficult — sometimes nearly impossible — for most businesses and consumers to get their share of desperately needed funds.

Consider the fourth quarter of last year, for example. The Fed’s Flow of Funds report, just released on Thursday, tells the story...

Government borrowing was massive. The U.S. Treasury jumped into the credit markets and grabbed up new funds at an annual pace of $954.7 billion, while local and state governments raised $114.2 billion. Total government borrowing (after some reduction in gov’t agency bonds): $1,040.4 billion.

In contrast…

Most business borrowers were shoved out of the credit markets: Not only did they have a tough time getting new loans, they also cut down their EXISTING debts — either voluntarily or not — at the breakneck annual pace of $1,097.5 billion.

Millions of consumers were virtually ostracized from the credit market. They were forced to cut their existing mortgages at the annual rate of $365.1 billion and their consumer credit at the rate of $145.3 billion — a total annualized cutback of $510.4 billion.

Don’t underestimate the potential impact of this phenomenon on the economy and your investments.

Remember, We are not just witnessing a decline in new business and consumer borrowing — a trend that typically signals economic weakness. Rather, what we have here is a decline to ZERO on a net basis! Plus… massive pressure on consumers and businesses to actually PAY DOWN debts outstanding! Plus… widespread defaults and foreclosures forcing the lenders to WRITE OFF massive amounts of debts

It’s bad enough when you see credit flowing to consumers and corporations at a slower pace. But what’s happening now is far, far worse! Credit is actually being sucked OUT of the consumer and corporate economy at a torrid pace.

Huge amounts of credit being denied — or even taken away from — those who could fuel a recovery … at the same time, huge amounts of credit being grabbed by federal and local governments to finance their giant deficits.

That’s why everyone is saying the current economic recovery is being bought and paid for by Washington. Which is why a sovereign debt crisis — and future difficulties by governments to continue borrowing — is such a threat.

If the U.S. economy is just limping along now - with massive government support - imagine the paralysis that’s likely to occur if the government cuts back that support in order to curtail out-of-control deficits!

In Greece the day of reckoning has arrived. The bond market vigilantes are forcing the Greek government to deal with their deficit and bring things under control.

That day of reckoning is not too far off for the UK and then it will be the turn of the United States.

Tomorrow we will look at what that means, for both the economy in general and for Canadians in particular.

To read the next part, click here.

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Economic Abyss

Came across some succinct snippets yesterday that perfectly summarize the looming economic crisis in America.

David Walker, the former comptroller general of the United States and CEO of the Peter G. Peterson Foundation, is the author of 'Comeback America'.

'Comeback America' is a book detailing Walker's belief that if significant fiscal reforms aren't immediately enacted in the United States, interest rates on the national debt will rise, and federal taxes could easily double from current levels by 2030.

You can read Walker's take on the USA's current financial woes and his explanation of how America got there at this link.

"We're on an imprudent and irresponsible path," Walker says. "We must start making tough choices, sooner rather than later, and before we pass a tipping point."

Walker, who led the U.S. Government Accountability Office for almost 10 years, says that despite the many current economic pressures that America faces — war, recession, bailout — their recent budget deficits may pale in comparison to the economic disaster that looms if we don't take action.

"What threatens our [country] is the structural deficits that will exist after we are out of the recession, after unemployment is down, after the wars are over, and after we get past the current crises," he says. "Structural deficits represent a fundamental imbalance between projected revenues and projected expenditures even when the economy is growing, even when the wars are over, even when unemployment is down. And in that circumstance, we face — because of known demographic trends — the retirement of the baby-boom generation primarily and rising health care cost — large, known and growing structural deficits that could swamp our ship of state."

Walker says that unless spending is controlled, the country will enter an "economic abyss."

"The things that are growing the fastest are health care — which would be Medicare, Medicaid and other federal health care programs. Social Security is growing, but not as fast — but you also have to look at the fact that before we even entered the recession, we were spending more money than we took in," he says.

"There are three key points with regard to spending. Spending more money than you make on a reoccurring basis is irresponsible. Irresponsibly spending someone else's money is unethical; and if you're a fiduciary, a fiduciary breach. And irresponsibly spending someone else's money when they're too young to vote and not born yet is immoral. And all three of those things are going on right now, and they threaten America's future."

He is, of course, bang on.

The economic crisis is only just starting. The full depth and breadth of the financial earthquake of 2008 still isn't fully appeciated (or understood) by Americans or Canadians.

And it's not all that surprising. On October 29th, 1929 the world changed, but most wouldn't be fully aware of the depth and breadth of that change (or exactly what had happened) until the end of the 1930's and into the early 1940's.

It's going to be the same this time around too.

Postscript: Great Britain is considered the canary in the coalmine for United States debt. For a UK update, I would refer you to: UniCredit Bank Warns Of Plunge In Sterling And Gilts, As Britain Is Next Country "To Be Pummeled By Investors"

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Through the Looking Glass and What Bernanke Found There

Today I am reminded of the book 'Through the Looking-Glass, and What Alice Found There'. Written by Lewis Carroll in 1871, it is the sequel to Alice's Adventures in Wonderland (1865).

Although it makes no reference to the events in the earlier book, the themes and settings of 'Through the Looking-Glass' make it a kind of mirror image of Wonderland including opposites, time running backwards, and so on.

Kinda like the mirror image of rational finances we are currently seeing in the western world.

Reinforcing that imagery is the Monthly Treasury Statement released yesterday. As Tyler Durden of Zero Hedge asks, what's wrong with this picture?

The United States has completed another month in the red. In February, the budget deficit was $220.9 billion, after receipts of just $107.5 billion with vastly surpassed by outlays of $328.4 billion.

That, btw, is a record.

Yet the interest on the public debt was a mere $16.9 billion (page 13 of the MTS report). The reason, as Durden writes, is because in February the interest on public marketable debt (which as of Monday stood at $8.061 trillion) hit an all time low of 2.548%.

In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. How is it possible that unprecedented debt accumulation can result in ever declining interest rates?

It's a rhetorical question, of course.

We know the answer. The US Federal Reserve, through complete domination of the entire capital market courtesy of ZIRP and Quantitative Easing, have now turned market logic upside down by 180 degrees.

Can we assume that the Fed can forever keep rates on debt at record low levels?

The only way that will happen is if the United States engages in Quantitative Easing to Infinity. If that becomes the only course of action, at some point all that money will have to enter the money supply and - voila! - hyperinflation.

Now we already know that current US Fed chairman Bernanke insists he won't do that. He delivered a blunt warning on U.S. debt and outlined how the stage is set for a Greek-style debt tragedy in the United States if dramatic action isn't taken on the national debt because the Federal Reserve won't monetize the debt with QE to infinity.

Does it look like the politicians heeded Bernanke's warning? Do you see how the United States is racing towards a cliff's edge?

If Bernanke remains true to his word, then you can understand former US Fed chairman Alan Greenspan's concerns when he said that he keeps daily watch on the interest rate on 10-year Treasury notes and 30-year Treasury bonds and calls them the "critical Achilles' heel" of the US economy?

Those spreads are some point are going to spin wildly out of the control at a moment's notice as investors come to full grips with what is looming on the horizon.

The only reason we haven't encountered that scenario is because the QE hasn't ended yet and because no one believes Bernanke won't continue with the policy.

And who can blame them?

Ask youself, what happens if the Fed ends the practice of keeping rates on debt at record low levels?

Currently income from taxes in the United States are plunging. Despite platitudes to the contrary, the economy is not rebounding and incomes are not rising - they're falling. Thus income from taxes are plunging dramatically.

Meanwhile the expenditure side of the ledger has exploded, and not as a function of debt funding: the bulk of outlays have to do with entitlement programs (social security, medicare, etc).

As expenses rise and income falls, it can only mean one thing: more debt.

Recently the debt ceiling was raised to $14.3 trillion which is expected to be hit in less than a year. Observant readers will recall that the previous ceiling of $12.4 trillion was supposed to last the US until the end of March.

Not only was this number passed over a week ago, it is now (less than halfway into the month of March) at $12.5 trillion. Left as it was, the US have broken the debt ceiling far in advance of expectations.

[And remember. This is a debt CEILING... the level goverment won't allow debt to pass!!!]

Obviously this leads us to believe that the $14.3 trillion ceiling will likely have to be raised once again.

Bernanke said the stage is set for a Greek-style debt tragedy in the United States, and he isn't kidding. Consider...

• Just as recently as September 2007 the interest rate on marketable debt was nearly 5%. It plunged to 2.5% in a year. Even the mere mention of actual tightening will spring rates right back to 5%. What does that mean for actual outlays?
• If total debt hits $14.3 trillion it will mean the marketable debt will be about $10 trillion, and the incremental 250 bps of interest will mean about $250 billion of additional interest outlays a year, or half a trillion annually.
• That comes to about $42 billion a month in interest payments alone.
  

In January 2010, $42 billion dollars represents double the amount of all money collected by the United States in income taxes.

If interest rates are allowed to rise, it will decimate the United States of America.

The bottom line is that either Bernanke will be true to his word and the bond vigilantes will force America into the same brutal debt management as Greece or Bernanke is going to pull the United States permanently to the other side of the Looking Glass and give us quantitative easing to infinity.

Do the math and the conclusions are inescapable.

We are going to have either sky-high interest rates from sovereign debt problems or Bernanke will trigger significant inflation with QE to infinity.

What more do you need to know when discussing the future of real estate in Vancouver and Canada?

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PIIGS, Dubai, America and Debt

As the world watched the markets melt down in 2008, I commented constantly that what we were experiencing was a deep, financial earthquake the repercussions of which we do not fully appreciate or understand.

I maintain that viewpoint even today.

The chain of events set into motion in 2008 still have a long way to play out.

I have posted here numerous times before about the massive amount of private debt that has accumulated and how the system needs to allow this debt to unwind, no matter how painful this process will be (and it will be painful).

We cannot have meaningful recovery until this happens.

But Western governments have not allowed this to happen. They have intervened to prevent the pain. And no region has been shielded more than Canada, in general, and Vancouver, in particular.

Emergency interest rates and stimulus spending have been the most visible signs of this intervention.

But we are only delaying the reckoning.

And as the months go by, the shenanigans are exposing themselves.

Subprime mortgages in the United States were only a small tip of the iceberg, the first element to fall. Now the problem has spread to all areas of the housing market.

Investments built on that sham of the real estate bubble have crumbled all over the world, and in turn have crippled industry after industry.

In Europe, we are now coming to understand how Goldman Sachs Group Inc. (through it's management of $15 billion of bond sales for Greece) arranged a currency swap that allowed the Greek government to hide the extent of its deficit. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days. Greece’s vast deficits caused it to fail the criteria for joining the single European currency in 1999, but it succeeded in 2001. With this manipulation by Goldman Sachs, Greece was able to gain entry into the European Union.

Now as debt caves in on itself, the situations in Greece, Ireland, Italy, Spain and Portugal are wrecking havoc.

Then there is Dubai. Temporary fixes have created some breathing room but clear warnings are coming out that time is running out for the country to restructure its debt and pull itself out of economic danger.

But nowhere is the mountain of debt more worrisome than in the United States.

"It keeps me awake at night, looking at all that red ink," said President Obama in Nashua, N.H., on Feb. 2. "Most of it is structural and we inherited it. The only way that we are going to fix it is if both parties come together and start making some tough decisions about our long-term priorities."

Over the past year alone, the amount the U.S. government owes its lenders has grown to more than half the country's entire economic output, or gross domestic product.

Even more alarming, experts say, is that those figures will climb to an unprecedented 200% of GDP by 2038 without a dramatic shift in course.

Keep in mind that the European countries are threatened by this very debt to GDP ratio. On a vulnerability index, the United States ranks 9th.

But what is looming in the coming months is going to place the United States in the same cross hairs currently confronted by the PIIGS and Dubai.

Symptoms of the looming problem can be seen in rising homelessness in rural and suburban America that is becoming so bad it is straining shelters, all the result of a perfect storm of foreclosures, unemployment and a shortage of affordable housing.

40 of America's states are in deep financial trouble. But none more so than California.

California's situation has been compared in relation to the United States what Greece is to Europe. But that downplays the significance.

Were it a country, the state's economy would rank eighth in the world - roughly the size of France and much larger than any of the so-called PIIGS. Portugal' economy is ranked 50th in the world, Ireland's is 56th, Italy's is 11th, Greece's is 34th and Spain's is ranked 13th.

Mighty California is drowning in debt. And it has shown itself incapable of managing its finances in recent years. It's now facing a $20-billion (U.S.) budget shortfall in the current fiscal year, and another big gap in 2011. Even with brutal planned cuts to government services and dramatic tax hikes, Republican Governor Arnold Schwarzenegger has asked for nearly $7-billion from Washington to fill the gap - a sum he is unlikely to get.

The shortfall equals a whopping 22% of the state's GDP. That compares with a projected 10.6% of GDP this year for the U.S. federal government's record deficit.

California can borrow money to build roads, schools and other capital projects that the State needs to fund, but it currently has $94-billion worth of bonds outstanding. And the ongoing expenses of government - education, health care, policing, jails, social services and the like - must be paid for out of this year's revenue.

When you combine the fact that more than 40 US states are headed for shortfalls, you start to get a sense of the looming crisis.

Those states cumulatively have a record $194-billion hole to fill, equal to 28% of total state budgets. And it's forecast that there will be another $180-billion gap in 2011.

The inescapable truth is that the mounting toll of unmet state obligations - more than $350-billion in 2010 and 2011 - compounds the debt threat facing the United States. Foreign investors, who help finance all that borrowing, will not much care who the debt actually belongs to.

We are now entering a time where the big players in the market are shorting the debt of soverign countries just like they did with the financial companies. Money is being made by taking countries down, all without a single shot being fired. How long before this mania turns to America?

The US government is either going to have to print money (and actually stick it into circulation - thus triggering hyper inflation) or the cost of borrowing money is going to skyrocket as hundreds or Sovereign nations, states, provinces and municipal governments pursue a limited supply of money.

We've lived through a 12 year period of historically low interest rates. That era is coming to an end. And it's not all that hard to see why.

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For those who enjoy the pics I have posted on the Olympics, you can see more updates on this sub-site I have created. All future photo updates will be uploaded on this sub-site.

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Casting long, long shadows on Groundhog Day (updated)

It's been a busy week so you will excuse the absence of posts. And as the games approach sporadic may become the norm, so I apologize in advance.

Interesting phone call from a colleague on the weekend. He reads the blog and was keen for my comments on the plunging price of gold.

Was I wrong about my prediction for 2010?

"Nope!"... I told him in that a 'matter-of-fact' way.

In what will become the theme of the 2010's, the American President has started to discuss the fundamental issue of our time: American debt.

Obama's candor on the issue this week lead to this article in the New York Times which analyzed Congressional Budget Office reports going back almost a decade.

The Times was trying to understand how the federal government came to be far deeper in debt than it has been since the years just after World War II.

The article included this terrific chart demonstrating succinctly the endless abyss that the actual US budget is becoming. It shows just how deep the sovereign debt rabbit hole goes. (click on image to enlarge)

Their observation? "This debt will constrain the country’s choices for years and could end up doing serious economic damage if foreign lenders become unwilling to finance it."

Those American politicians who paint rosy expectations for a surplus are dreaming in technicolour - the likelihood that the US can claw its way back out of the hole at this point are slim to none. Even David Gergen, presidential advisor during the administrations of Nixon, Ford, Reagan, and Clinton, was moved to comment on CNN yesterday that the debt is massive and threatens to trigger a dollar collapse and/or bankruptcy. He doesn't see either side - Democrat or Republican - having the political will to deal with the problem.

Meanwhile, at the other end of the spectrum, there is the US Federal Reserve.

Chairman, Ben Bernanke, is brewing further sorcerer-style plans to hopefully control and manipulate interest rates. The latest this weenie is now considering involves adopting a new benchmark interest rate plan to replace the one they’ve used for the last two decades.

The Fed is floundering for a way to have an effective policy rate in place when it starts to raise interest rates from record lows to keep inflation in check. Policy makers are concerned that the Fed funds rate may fail to control inflation as the economy recovers.

“One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that,” Richmond Fed President Jeffrey Lacker told reporters on Jan. 8 in Linthicum, Maryland.

The choice of a benchmark is the “front line of defense against inflation, and also it’s at the heart of the central bank being able to precisely and flexibly guide interest-rate policy in the recovery,” said Marvin Goodfriend, a former Fed economist.

In the past, the Fed had controlled the prime interest rate by buying or selling Treasury securities, adding or withdrawing cash from the system. That mechanism broke down when the Fed started flooding the system with cash after the bankruptcy of Lehman Brothers.

What the Federal Reserve is planning to do is pay banks a higher rate on interest on the funds the banks have been given in these bailouts, so that the banks keep the money at the Federal Reserve. By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers.

The deposit rate would help set a floor under the fed funds rate because the Fed would lock up funds by offering a fixed rate of interest for a defined period and prohibiting early withdrawals.

“In general, banks will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve,” Bernanke said in an October speech in Washington.

But as William Ford, a former Atlanta Fed president at Middle Tennessee State University in Murfreesboro said, there could be complications to using the deposit rate. "Banks may be able to generate more revenue by lending at prime rate rather than by earning interest at the Fed."

As the world loses confidence in the United State's finances, there are so many variables introduced that the Federal Reserve is playing with matches as it sits on a massive powderkeg of stimulus money.

I guess it comes down to having supreme faith in Bernanke's ability to predict what is coming and dance his way around it successfully.

And Ben's foresight is Stirling, isn't it?

One of the main problems is that Bernanke is only focused on money supply, and only on the money supply in the bank reserves.

But money supply is relative to demand, and potential money supply to potential demand.

There is a funny thing about potential money supply. It can grow quietly in assets, stored in investments and other less repositories of value, and then spring into action relatively more quickly, when wealth is converted to money, the medium of exchange.

Is is well known that many banks are playing the carry trade with funds freed up by having Fed money on reserve (and with the money they are generating for themselves from the interest the Fed is paying on those reserves). The huge profits they are collecting do not get stored in the reserve funds they have been given.

At some point they will inject this money into the economy in the form of lending. How will the US Federal Reserve control THAT when these funds start to enter the money supply?

(Answer... the exact same way Volcker did in the late 70s, early 80s).

Monetary inflation is deceptively simple, and immensely more complicated than the average person can allow, and the pundit will admit.

As another blogger I follow posted:

• "Debt/credit are one means of financing the enterprise. There is also equity. But a wise person will look at the organically generated flows of wealth in valuing the shares. Are you consuming more than you are creating? What are the future prospects for this flow of wealth? If there is no prospect of net positive wealth creation, then you are living on borrowed time, in a castle of sand, no matter how good the accounting tricks you are using to hide it from the shareholders.
  
  One might look an an unconnected car battery and say, 'oh look it is benign.' But grab hold of each of its terminals with your bare hands while grounded, and see what happens then. And gold is in part measuring that potential, for the Fed and the monetary base and a resurgent economy to generate monetary expansion. There are lags of years involved in the process.
  
  And this is the nature of Bernanke's challenge. He must at some point allow the economy greater access to his excess monetary reserves, and the swollen monetary base, but try to prevent the dollar and the bond from igniting. And gold is where the prudent seek at least a partial refuge while the central bankers conduct their experiments."

If there is one thing you can be certain about is that there is going to be great volatility in the coming months and years. And there is nothing investors love more than volatility, right?

That's why the price of gold sprang back up $35 an ounce in the last day and a half, and why I'm not the least bit concerned about the strength of my prediction for it to rise over $2000/ounce... or my prediction for the cripping rise in interest rates that will hit us in the years ahead.

Both are coming.

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Bernanke’s Debt Solution

So the big news yesterday was a report released by the real estate firm Coldwell Banker in which the firm contends that "real estate in Canada is a relative bargain compared to homes in many other parts of the world."

Gee... a real estate company telling you that now's the best time to buy. No surprise there. What galls, however, is the way the media regurgitated it as news.

It wasn't. It was a press release promoting the self-interest of a real estate company, nothing more.

And it ignores the real looming threat: interest rates.

It's funny... 28 years ago the majority of people genuinely despaired that interest rates might never again drop to as low as 10%. Now... the majority can't fathom rates spiking up above 7%.

But rates will go back up, inflation will storm back, and it will all be about government debt.

Consider these facts:

• Through August, the US federal deficit had already hit $1.38 trillion, or TRIPLE last year’s all-time record deficit of $454.8 billion. And in September alone, the Obama administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.
  
• The U.S. government’s official debt is now at an all-time high of $11.8 trillion. That’s over $100,000 for each and every household in America.
  
• Both the Obama administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, bringing the burden per household up to $177,000.
  
• The US Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.
  
• Perhaps worst of all, the unfunded government IOUs that are now starting to come due on Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.

Grand total: Each and every household in America is indirectly responsible for a debt burden of over 1 million dollars!

Bottom line... even assuming they can save 5% of their income year after year - and even assuming every single penny of their savings is thrown into the pot - in order to pay off the U.S. government’s debts and obligations, each American family (and descendents) would have to toil for the next 429 years.

The problem is America hasn't borrowed all that money from themselves. More than half of the outstanding national debt has been borrowed from overseas investors. And those foreign creditors are starting to recoil in horror.

That’s why in April, U.S. bond purchases by foreign central banks plunged 41% from the month before, while purchases by foreign private investors dropped 7%. All in a single month!

Which is why the US started buying it's own treasuries with extra money it printed and added to the overall money supply. The Federal Reserve had no choice but to pump out more and more unbacked paper dollars and dump them into the economy.

And what is all of this doing to the US dollar?

It should come as no surprise that the widely watched U.S. Dollar Index, a measure of the dollar’s performance against a basket of six of the world’s major currencies, has plunged 15.1% since its high of March 4.

It’s plunging against the euro, the Japanese yen, the British pound, the Swiss franc and even the Canadian dollar.

Is this debasement of the US dollar a deliberate strategy?

Consider this excerpt from one of the most famous speeches U.S. Federal Reserve Chairman Ben Bernanke gave in 2002:

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”

Voila... instant, un-noticed, inflation.

Make no mistake about it: Bernanke is fully aware of what’s needed to defend the dollar. He could light the fuse on the greatest bull market in the history of the greenback with the stroke of a pen if he wanted to.

The sad fact is that the last thing Bernanke or President Obama want right now is a strong dollar.

Why have Obama and Bernanke failed to come to the greenback’s defense? Why is Washington continuing to spend, borrow and print knowing that by doing so they are, in effect, declaring war on the U.S. dollar?

Simple. They have no choice.

• The U.S. government’s official debt is at an all-time high of $11.8 trillion. Every year, Washington has to make a staggering $335.3 billion in interest payments just to avoid default on that debt. In fact, just the interest on the national debt now equals 12% of all federal spending.
  
• The Federal Reserve is also in hock up to its eyeballs — the liabilities on its balance sheet have DOUBLED — from $1.2 trillion a year ago to more than $2 trillion today.
  
• Most terrifying of all — especially with the first wave of almost 4 million baby boomers reaching retirement age this year — unfunded government IOUs are coming due on Social Security, Medicare, and Federal pension payments. Those obligations are enormous: An estimated $104 trillion.
  

America is now the single most indebted nation in the history of the planet.

And Washington will add an all-time record $1.8 trillion to the national debt, pushing its budget deficits to almost 13% of GDP. This year and every year for the foreseeable future, Washington will have to borrow 80% of the world’s surplus savings just to pay its bills.

Gutting the dollar and triggering inflation is the only way Washington can hope to survive this massive debt catastrophe.

And when you need to borrow 80% of the world's surplus savings to pay your bills, the reality of looming higher interest rates is about as close to a sure thing you are ever going to get in the economic prediction biz.

Looming inflation and high interest rates.

Which brings us back to Coldwell Banker and their suggestion to Canadians that assuming hundreds of thousands of dollars in mortgage debt right now is a sound move because Canadian real estate is a relative 'bargain'.

Uh-huh.

Do I, at the very least, get a free bottle of snake-oil with that?

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