What's wrong with this picture?

Did you ever play Monopoly as a kid and, as the designated banker, succumb to the temptation to simply remove some money for yourself if you were strapped for cash?

Wouldn't it be great if you could do that in real life?  Solve your money problems by simply creating more cash for yourself?

That's basically what the United States is doing.

As CNSNews.com notes, at the close of business on Tuesday the debt of the US federal government exceeded $15 trillion for the first time - with the largest single owner of the publicly held portion of that debt being the US Federal Reserve.

Over the past year, as the Federal Reserve massively increased its holdings of U.S. Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held U.S. government debt.

In its latest monthly report, the US Federal Reserve said that as of Sept. 28, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of Sept. 29, 2010.

Meanwhile, as of the end of this September, entities in mainland China owned $1.1483 trillion in U.S. Treasury securities, according to data published today by the U.S. Treasury Department. That was down slightly from the $1.1519 trillion in U.S. Treasury securities the Chinese owned as of the end of September 2010, according to the same Treasury Department report.

Thus, at the end of September 2010, the Chinese owned about $339.9 billion more in U.S. Treasury securities than the Fed owned at that time. By the end of September 2011, the Fed owned about $516.7 billion more in U.S. Treasury securities than the Chinese owned.

Perhaps the most astonishing statistic is that since Barack Obama has been President, the US debt has gone from $10,626,877,048,913 on January 20, 2009 to $15,033,607,255,920 as of yesterday. That's a stunning increase of 41.5%, or $4.4 trillion.

No wonder the US Federal Reserve is now the largest holder of debt.  Who else, besides the ones who are printing the currency, is there to buy it?

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America's National Debt: Where it originated, who holds it.

This is a great graph showing under which President the massive US debt originated and who currently holds that debt.

All President's prior to Ronald Reagan contibuted only $1 Trillion of the $14.5 Trillion debt. 

Ronald Reagan contributed $1.9 Trillion. George H.W. Bush $1.5 Trillion and Bill Clinton contibuted the lowest of the Presidents since 1980 at $1.4 Trillion.

Then comes George W. Bush with an astonishing $6.1 Trillion!

President Obama is up to $2.4 Trillion and climbing.

When you break it all down, the real problem is that the US has malinvested too much of its revenue in too many fruitless and unfunded projects like wars, overseas military bases, and other subsides to oil companies, banks, and multinational corporations.

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Bouncing Back?

Update (6:38 am PDT): DOW up +141.60 in early trading.
Update (6:25 am PDT): Market futures poised to open strongly higher.
Update (2:10 am PDT): DOW futures swing wildly again, from +220.00 to - 91.00. Gold bouncing back to over $1,760.00.

So as morning dawn breaks, all eyes are on the markets to see if the carnage of the past few days (yesterday in particular) will continue.

The catalyst for all this volatility has been the S&P downgrade of US long term debt.

And for that reason the real market to watch yesterday was the bond market. Would money panic and leave US Treasury debt?

The answer yesterday was a resounding NO! 

Investors were not only willing to buy and hold US Treasury debt but they are willing to buy and hold that debt at even lower rates of interest than going into the downgrade.

In fact investors were running out of nearly everything out there except for gold and Treasuries.

So those out there cheering the downgrade as the springboard to a US dollar collapse will be severely disappointed because the market is clearly not ready for that at this point.

If you have the time, Martin Armstrong has written an interesting analysis of the S&P downgrade.

Armstrong notes that news of the downgrade was obviously running around the halls of Wall Street in advance. S&P notified the US Treasury on Friday afternoon that it was planning to lower the credit rating, according to government officials, and the company sent a draft of its analysis to the White House. The White House sprang into action trying to convince S&P that its figures were faulty. Any hint of this news was confined to the rumor mill as it did not appear on TV. White House officials argued they discovered a $2 trillion hole in their calculations and briefed journalists. Nonetheless, they failed to win a delay from S&P that proceeded with the downgrade.

The 500 point drop in the DOW on Thursday was clearly caused by selling by those who had inside knowledge of what was coming.

But that's simply an aside from the main issue.

Armstong makes an interesting analysis of the downgrade with suggestions that the act may have handcuffed the Tea Party Republicans from forcing an extension of the Bush tax cuts by President Obama in a second budget battle at the end of the year.  The drama that played out can now be leveraged to allow these tax cuts to expire.

Is the downgrade a way of manipulating the politicians? It's an interesting read.

At the time this is written (12:15 am PDT), DOW futures are up +189 and the stage is set for a dramatic rebound in the markets later this morning.

We do live in interesting times.

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Default now or suffer a more expensive crisis later

In an oped piece posted in Bloomberg, Congressman Ron Paul once again outlines the common sense argument over US debt that is so poignant.

In strict terms, the US will default if America fails to meet its debt obligations, through failure to pay either interest or principal due a bondholder.

To avoid this, there is a giant push to raise the debt ceiling.  The other way of avoiding it is to make massive spending cuts.  America is bringing in roughly $1 Trillion in tax revenue and needs to borrow an additional $1.9 Trillion to cover all expenses.  To avoid raising the debt ceiling, America would have to institute massive spending cuts.

In his OpEd piece, Ron Paul notes that there are numerous claims that a default on Aug. 2 is unprecedented and will result in calamity (never mind that this is simply an arbitrary date, easily changed, marking a congressional recess). 

Paul notes that the U.S. government defaulted at least three times on its obligations during the 20th century;

• In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40%
• From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.
• From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government.

Paul goes on to describe how these moves freed the US government to now spend unlimited amounts of money because they were no longer constrained by any sort of commodity backing; the only check on its spending being the market’s appetite for Treasury debt.

• "Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes.  The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable."

Paul quotes the Austrian School’s theory of the business cycle that describes how loose central bank monetary policy causes booms and busts:

Loose monetary policy drives down interest rates below the market rate, lowering the cost of borrowing; encourages malinvestment; and causes economic miscalculation as resources are diverted from the highest value use as reflected in true consumer preferences.

Loose monetary policy caused the dot-com bubble and the housing bubble, and now is causing the government debt bubble.

Paul zero's in on how, for far too long, the Federal Reserve’s monetary policy and quantitative easing have kept interest rates artificially low, enabling the government to drastically increase its spending by funding its profligacy through new debt whose service costs were lower than they otherwise would have been.

• "Neither Republicans nor Democrats sought to end this gravy train, with one party prioritizing war spending and the other prioritizing welfare spending, and with both supporting both types of spending. But now, with the end of the second round of quantitative easing, the federal funds rate at the zero bound, and the debt limit maxed out, Congress finds itself in a real quandary."

And it's that quandary which has America at it's most important crossroads since the Civil War.

• "Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later. If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing."

By raising the debt ceiling all America does is postpone the inevitable. Increasing the debt ceiling allows the US to keep spending.  Since there is no way the money can be paid back, it means default is simply kicked down the road.

More spending will mean more money printing. A future default won’t take the form of a missed payment, but rather will come through hyperinflation.

• "The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately."

Paul notes that default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S.

The past 40 years have clearly shown that pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first.

• "And continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic. We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse."

Wise words.

But the path of action has already been chosen. And without titanic resolve, there won't be a deviation from that path.

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Ratings agency from China says what everyone already knows

Dagong, the infamous Chinese rating agency, came out today and said what  everyone already knows but is afraid to say out loud:

• "In our opinion, the United States has already been defaulting....Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies - eroding the wealth of creditors including China, Mr Guan said."

The Dagong announcement follows on the heels of various reports from earlier this week which are urging China to not only pull its US holdings, but to minimize its USD exposure in total.

You can read the full story about Dagong's downgrade here.

This comes just after the German credit rating agency Feri lowered its rating on US debt by a full notch, from AAA to AA.  Feri becomes the first Western agency to downgrade US government bonds!

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$118 Billion per month

The story of this decade is debt.  More specifically, government debt.

We've said it time and time again.

And the biggest story within the story is US government debt.

Right now America is spending $118 Billion per month more than it takes in.  That is an astounding figure.

Today all the talk is of America 'officially' hitting the debt ceiling today. And prospects for the future are bleak.  Increasing revenue is going to be almost impossible. Despite talk of a recovery, the economy is badly under performing. Growth last quarter came in at just 1.8%. America isn't even creating enough jobs to employ new workers entering the job market, let alone the six million workers who lost their jobs during the recession.

Most importantly, the unsustainable trajectory of government spending is accelerating the America's ruinous debt crisis.

This trajectory is catastrophic.

By the end of the decade, America will be spending 20% of it's tax revenue simply paying interest on the debt – and that’s according to optimistic projections.

This course is not sustainable. That isn’t an opinion; it’s a mathematical certainty.

The big news is that the US Treasury will now start dipping into federal retirement funds to give the country more room to borrow.

Treasury Secretary Tim Geithner sent a letter to Congress alerting them to actions that have be taken to create additional headroom under the debt limit so that Treasury can continue funding obligations made by Congresses past and present. 

Last week Geithner also warned about the fiscal and economic consequences of failing to increase the debt limit.

Geithner continues to urge Congress to raise the debt limit in a timely manner in order to uphold the full faith and credit of the United States.

Debt... and the concurrent solution of money printing.

The issues have not changed.

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China proposes dumping $2 Trillion US dollars

Big international news on this Easter Sunday.

Last Friday, deep in the body of the post on Silver, I mentioned that mainstream media had been slow to comment on the latest statement from the Peoples Bank of China (PBoC) wherein China's central bank Governor Zhou Xiaochuan spoke of the need to reduce foreign-reserves.

After a speech at Tsinghua University in Beijing on Wednesday, Zhou spoke of the need to reduce an excessive accumulation of foreign-reserves as those 'reserves' have exceeded a “reasonable” level and the management and diversification of the holdings should be improved.

This is the way you diplomatically say “we are sick of the US Dollar and will be taking steps to lower our holdings.”

Remember, the US Dollar is China’s largest single holding. And China has already begun dumping Treasuries (US Debt).  At the same time China (along with Russia) has started to trade in their own currencies, NOT the US Dollar.

When you add in the numerous warnings Chinese politicians have been issuing to the US over the last 24 months, Zhou's statement last week makes it very clear that China is done playing nice and is now actively moving out of US Dollar denominated assets.

Well... today we found out just how much China feels they need to 'reduce'.

China is proposing to cut two thirds of it's $3 Trillion in US dollar holdings.

The $2 Trillion China proposes to dump is equal to the amount of dollars the US Federal Reserve has been printing during QE.

• China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.
• The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.
• Tang's remarks echoed the stance of Zhou Xiaochuan, governor of China's central bank, who said on Monday that China's foreign exchange reserves "exceed our reasonable requirement" and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.
• Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.
• However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

This is huge news.

It brings to mind this highly sensationalized, fictitious account of how a US dollar collapse might play out.

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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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A significant day of reckoning is coming.

If you ever have any doubts about what looms on the horizon in the months ahead for Vancouver Real Estate (in general) and the North America economy (in particular), bookmark today's post and refer back to it.

Last week, after the U.S. debt panel failed to agree on measures to create more than $4 trillion in budget cuts over the next 10 years, BNN spoke to David Stockman, the former Director of the U.S. Office of Management and Budget under President Ronald Reagan.

If there ever was a proponent of the current measures to repair the American economy, you would figure an architect of Reagan's trickle down economics would be it.

You'd be dead wrong.

Stockman spoke about the American situation and where America goes from here. He has a stark analysis of his country's situation.

You will not find a more succinct and insightful analysis of the current economic situation in 12 minutes anywhere. Click here to see the interview, and I highly encourage you to watch the full clip before it cycles off BNN's archive list.

You will have no doubt, after watching this, about the direction that the economy will ultimately follow.

A couple of quickly transcribed excerpts:

• "It's just a further confirmation that we have a total paralysis/stalemate in our fiscal governance process, the whole process is in denial... What is actually happening is that Washington will be ADDING $350 Billion to next year's deficit (instead of cutting). They will extend the Bush tax cuts, they are going to extend the so called external tax patch - that's $60 Billion - they're going to extend a lot of the tax credits - that's 10's of Billions of dollars - what's more they're going to extend unemployment insurance for another year - that's another $60 Billion... and it gets worse from there.
  
  We're really rolling the dice thinking that somehow we can borrow another $5-6 Trillion - that's really what's baked in the cake - and that somebody's going to buy all these bonds. The fact is the only buyer on margin all of these bonds, hundreds of billions a month, is the Federal Reserve, in this so-called QE2. But it's just out and out money printing, monetization, and when they stop I think there is going to be a real day of reckoning in the global bond and currency markets because there is no indication anyone in Washington recognizes the gravity of the situation."

Stockman goes on the suggest both the Democrats and Republicans are completely unable to grapple with the breadth and depth of cuts that are needed combined with the massive amount of taxes that have to be increased. As a result America is...

• "... drifting towards the wall waiting for the bond market system to wake up and take action. I don't know when that is going to happen, it may be in the next months, it may be in the next years, it may take longer but sooner or later there is going to be a day of reckoning."

Stockman then discounts those who believe the Reagan era of 'trickle down economics' is a solution to the current problem.

• "I think the Fed went off the deep end in the 90s and especially in the last 4 or 5 years with very easy monetary policy of low, low interest rates that were inappropriate and encouraged businesses and the household sector to massively leverage up, that led to the crisis in 2008 and we're still only begining to dig our way out of that... We're going to have a significant day of reckoning here, there is no recovery."

The most chilling part is Stockman's assertion that the bond market is going to force America's hand before long.

As I said yesterday, this is EXACTLY the fear expressed by former US Federal Reserve Chairman Alan Greenspan.

We are seeing the effects of what happens when the bond market does this. Just look at Ireland, Iceland, Spain, Portugal and Greece.

Are you ready for double digit interest rates yet? They're coming.

Of course naysayers will simply dismiss this as yet another post from a disgruntled bear blogger fearmongering about interest rates.

Hey... speaking of fearmongering about interest rates, Bank of Canada Governor Mark Carney sent out another warning to Canadians yesterday.

In the December issue of its Financial System Review, the Bank of Canada warned Thursday that the risk of another global economic shock is rising and Canadians may not be prepared for it.

And in a veiled hint that the Bank of Canada won't shield Canadians they way they did after the 2008 crisis, the Bank said "Canadians won't be spared another shock because during the current period of tough economic times, they have continued to take on debt."

How can that be, Mr. Carney? How could be possibly suffer? I mean... you will slash interest rates to dirt so the impact won't be felt, right?

Apparently not.

• "Developments since (June) suggest that the vulnerability of the Canadian household sector has increased."
  
  "The probability of an adverse labour market shock materializing is judged to have edged higher in recent months, owing to the downward revision... to the outlook for the global and Canadian economies."

Sal Guatieri, senior economist with BMO Capital Markets, said in a commentary the review suggests the bank won't resume increasing rates until the global economy picks up and Europe's credit crisis ebbs.

• "However the bank is also cognizant of the risk to household finances (and the economy) of keeping rates too low for too long. This suggests it has every intention of guiding rates back toward more normal levels at the earliest opportunity, which in our view, is likely in May."

Hiking interest rates come May? Is this why Carney issues another direct warning to Canadians by saying:

• “Households bear ultimate responsibility for ensuring that they will be able to service that debt in the future.”

Umm... why do you say that Mark? Are you getting ready to hand us debt serfs out to dry?

What about our 'sound Canadian banks', if I can't pay my debts, won't that hurt them?

Well it seems the BOC goes to great lengths to warn that the potential for harm to our 'sound banks' this time around might be severe.

Carney suggests that high household debt this time around is going to get kicked by high interest rates. This will affect Canada's banks 'as borrowers lose their ability to make debt payments.'

Now why would Carney hike interest rates this time around when he didn't in the last crisis?

The source of the problems all stem from from other countries, the bank said.

(Ahhh... time to start connecting the dots... see Stockman's comments above re: bond vigilantes wrath being unleashed on the United States)

The BOC forsee's the very real possiblity of a global trade war. It also foresee's the looming threat of much higher interest rates.

Carney see's them coming. He's warned you time after time and given you almost a year's advance warning.

The good news?

Re/Max was far more effective in manipulating the P/R machine two days ago and got far more coverage in the press to convinced you that Real Estate everywhere in Canada can only go up, up up (at least 10% next year) and that interest rates are going to stay low for a while.

Thus, if you are smart, it should be easy to dump your massively leveraged real estate on some simpleton or wealthy Asian and prepare for what's coming.

Speaking of what's coming, did you catch this Globe and Mail article profiling the musings of Stephen Jarislowsky, billionaire investor and CEO of Montreal-based Jarislowsky Fraser Ltd?

Jarislowsky offered his thoughts on the next lurking financial disaster.

• "In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation. That’s pretty bearish. I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high. I hope I’m wrong but I think Canada is on the edge of a lot of trouble."

What drivel, eh?

You can either connect the dots or you can dismiss Stockman, Carney and Jarislowsky et al as wanker renters who live in their parents basements while hiding behind their computers to dump on real estate investors.

If you do dismiss them, tho, don't say you weren't warned.

And remember... buy now or be priced out forever!

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Massive Crisis Coming

Yesterday while surfing the TV channels I came across an interview on CNBC with David Cote, Honeywell CEO and a member of America's National Commission on Fiscal Responsibility and Reform.

His comments caught my ear and I rewound the PVR to write down what he said.

If you have any doubt about my post yesterday about Quantitative Easing and even more money printing in our immediate future, consider Cote's comments.

• "I consider myself a fiscally conversant CEO and the thing that surprised me is that I had no idea of the magnitude of the problem coming in the next 10 years.
  
  I was disturbed by where we are, I had no idea what was going to happen over the next 10 years, largely because my generation, the baby boomers, are going to be retiring, going though social security, medicare and medicade.
  
  And when that happens we are crushing the system, it can't handle it. We go from $9 Trillion in public debt today to $20 Trillion 10 years from now, even if GDP grows at 4.6% per year.
  
  That's astonishing.
  
  I told the commission that if you spent $1 million dollars a day, every day, since Jesus Christ was born you still would not have spent a Trillion dollars. And by 2021 that will be our annual interest bill alone.
  
  Serving on the debt commission has been eye opening. We need to deal with this before we are forced to deal with it like they are being forced to in Europe.
  
  This is going to be a crisis on a scale we have never seen before."

Cote went on to say that the reforms the commission are proposing will allow America to achieve a BALANCED budget in a few years.

It does NOTHING to address paying down the debt, it just stops adding to it.

And that's if the commission is successful in getting it's reforms implemented. I can guarantee you that this commission, just like all before it, will fail to get Congress to achieve a balanced budget.

The contagion you are seeing in Europe is only a preview to what is coming to North America.

Cote said it best. "This is going to be a crisis on a scale we have never seen before."

Massive QE and ultimately massive interest rate hikes as the bond market forces discipline on goverment (just as is happening now in Europe).

Anyone who sits down and does the math can see it coming. Can you?

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US Debt

Events going on the in the United States are crucial to our little hamlet in the Village on the Edge of the Rainforest.

As we discussed in 2009, pretending that we are somehow immune is pure folly. Our provincial forest industry is decimated without steady US sales, ditto our mining industry. Our other big industry, tourism, also draws substantially on American travellers. Even our giant underground industry (BC Bud) focuses on Yankee customers.

So as Pierre Trudeau once said; when the elephant sneezes, Canada catches cold.

And right now not only is the elephant sneezing... he's hacking, wheezing and generally doing very poorly.

So poorly that one wonders how the debt rating agencies of Moody's, Standard & Poor’s, and Fitch can continue to give America (and other western governments) AAA debt ratings.

Those debt rating agenciees are supposed to assess the credit risk of corporations, financial instruments, and sovereign nations around the world. But their dismal performance of doing that lay at the core of the 2008 Financial Crisis... after having given AAA ratings to the mortgage backed securities that brought the world to it's financial knees.

But today another ratings agency is making headlines, and they have a slightly different view of things.

China’s Dagong Global Credit Rating Company has burst onto the scene and has stripped America, Britain, Germany and France of their AAA ratings. In the process they are accusing their Anglo-Saxon competitors of ideological bias in favour of the West.

Unlike Moody's, Fitch and Standard/Poor's, Dagong gives much greater weight to “wealth creating capacity” and foreign reserves. As a result the US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia.

Dagong gives ratings of AA+ to Germany, the Netherlands and Canada... and it ranks China on a similar level.

Debate will rage about the independence of any agency from China, but complaints about the bias of Moody's, Fitch and Poor have been prominent and accusations about not downgrading western countries, particularly the United States have been rife.

This all comes on the heels of a report from President Barack Obama's national debt commission.

Republican Alan Simpson and Democrat Erskine Bowles painted an extremely gloomy picture to a meeting of the National Governors Association

The committee said the United States has to consider curtailing popular tax breaks, such as the home mortgage deduction, and instituting a financial trigger mechanism for gaining Medicare coverage.

They said America's total federal debt next year is expected to exceed $14 trillion — about $47,000 for every U.S. resident.

"This debt is like a cancer," Bowles said. "It is truly going to destroy the country from within."

Simpson said the entirety of the nation's current discretionary spending is consumed by the Medicare, Medicaid and Social Security programs.

"The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans, the whole rest of the discretionary budget, is being financed by China and other countries," said Simpson.

China alone currently holds $920 billion in U.S. IOUs.

Bowles said if the U.S. makes no changes it will be spending $2 trillion by 2020 just for interest on the national debt.

"Just think about that: All that money, going somewhere else, to create jobs and opportunity somewhere else," he said.

Making matter worse, the committee has identified a truism which makes this story of paramount importance to each and every one of us. The amount of debt the United States is carrying means, “we can’t grow our way out of this,” said Erskine Bowles. “We could have decades of double-digit growth and not grow our way out of this enormous debt problem."

The commission pulls no punches and says what everyone already knows: "the nation faces a fiscal catastrophe."

One wonders if Dagong was a bit too generous with it's AA rating for America?

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