Thursday, September 24, 2009

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'.


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


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  1. Across the country people use their debit cards at the grocery store. Not credit cards, that's gone. Debts are now direct deposit account loans. Payroll, social security, pension payments are being lent prior to deposit. The next bubble to burst will be their own. Millions of people will be broke over night.