The Debt Doesn’t Matter

Richard Salbato

Everyone in Washington and the News media says that if we do not raise our National debt by one and one half trillion dollars by August 2^nd, we will have financial Armageddon. Resulting in higher interest payments on our debt, and therefore higher interest throughout the entire economy, massive government layoffs, bills not paid by the government, etc. All that is probably true and yet more Americans do not want to raise the debt than want to. What do “we, the people” know that congress and the news media does not know. Or are we the stupid ones? That is what Obama says about us.

The truth is that even if we avoid this Armageddon on August 2^nd, we are still going to fail as a nation sooner or later and sooner if we don’t face it now. Our debt is now 14.5 trillion and after we pass this it will be 17 trillion and in a few years it will be 40 trillion and in under 10 years it will be 100 trillion. Then what do we do?

The United States is insolvent and this will not change.

Why is it necessary to spend more (increasing the debt) in order to cut spending (deficit reductions)? Kind of seems counterproductive.

Since we knew this day was coming for quite some time, wouldn’t it have just been easier to tighten the nation’s belt by cutting spending and reducing the exorbitant waste, and therefore not having to raise the (already unsustainable) debt level?

Which is why it doesn’t matter what happens with the debt ceiling. The beast has become so large that it is impossible to kill. The ballgame is over, and United States will never be the same. Most tragically, it is a quagmire of our own doing. We the people made our bed, and now we must lie in it.

Let’s be honest. There is no possibility left to fix the problem. It has become pointless to discuss the “solutions” to America’s fiscal situation, because they simply do not exist.

Give me, give me, more

Americans have been feeding at the public trough, in one form or another, for so long that everyone thinks they are “entitled” to damn near everything. And despite the imminent financial collapse caused by that “let me get mine” mentality, the people still don’t want to give up the keys to the Treasury. There remains a naïve belief that America is too big to fail. How wrong.

Many mistakenly believe that the high standard of living enjoyed in America is a result of having the largest economy in the world. It is not. Because we have deliberately outsourced virtually our entire manufacturing base and refuse to become energy independent, the economy is built on a house of cards just like the housing market.

American’s Debt

Like their government, Americans have an unquenchable thirst for things they cannot afford. Three year-old car not new enough anymore? Buy a new one — with debt. Want a 4,000-square-foot house with flat screen TVs in every room? Take out a massive mortgage. Want to tell all your Facebook friends your exciting status of eating out every night? Buy a smart phone you can’t afford.

So while certainly not defending the actions of Congress, it is really only reflecting the will of the people.

Which is why the debt deal, like most everything in Washington, will be smoke and mirrors. Politicians will increase our ability to borrow and spend more, but what they won’t tell you is that any future agreements to cut the deficit will be null and void in a year, as future Congresses will be under no obligation to follow any deficit- reduction measures this legislature passes. It will continue to be Business As Usual.

The United States’ debt is now equal to our annual gross domestic product, a debt so high that we wouldn’t even meet European Union standards for admission. And anytime Europe has one up on you, you’ve got problems.

The economy won’t implode in a firestorm today or tomorrow, as some predict, but will be a slow, painful burn as entitlement programs eventually run out of money, government services dry up, interest rates rise, and inflation goes through the roof.

This is no longer conjecture, but a mathematical certainty. Americans will have to reap what they have sown, and the diseased crop is quickly coming to harvest.

America’s rating no matter what?

Weiss Ratings has just downgraded the debt of the United States government to a C-minus — approximately equivalent to a BBB- rating by S&P, or one notch above speculative grade (junk).

This is critical for you.

Regardless of the outcome of the debt debate now raging in Washington, few will escape the far-reaching consequences of America’s unfolding debt disaster.

S&P and Moody’s have finally put the U.S. on credit watch. The Fed Chairman has warned of financial Armageddon.

Even if the immediate debt ceiling crisis is resolved to everyone’s apparent satisfaction, it could be just a dress rehearsal for the true tragedy of a nation unable to end its own financial decline any more effectively than a Greece, Ireland, or Portugal.

The hard facts:

1. Among the 49 sovereign nations Weiss Ratings covers, the U.S. has one of the heaviest debt burdens, the weakest international reserves, and the least stable economies.

2. It’s more dependent on foreigners for deficit financing than any other major country in the world.

3. Its consumers are among the most reliant on mortgages, credit cards, and other forms of debt to support its economy.

4. And perhaps most dangerous of all, America’s largest banks have the greatest exposure to high-risk derivatives — nearly 40% more today than during the debt crisis of 2008.

Greece

Consider Greece, already caught in a death spiral — revenues sinking like the Titanic, insufficient funds to pay monstrous debts, and unavoidable austerity measures that sink revenues even deeper into the abyss.

Result: Just in the past few months, we’ve seen riots, the firebombing of banks, and blood in the streets.

Home values are plunging. Unemployment is soaring. The poverty rate is skyrocketing. One in four citizens, including an estimated 450,000 children, live in poverty. Crime is exploding.

And Greece is not alone.

Ireland

Just a few years ago, Ireland was booming. Banks loaned people money hand over fist to finance homes and cars — all the joys of modern life.

Then, the bubble burst. Real estate values crashed. Mortgage defaults and bank foreclosures soared. Suddenly, Irish banks, drowning in red ink, were both insolvent and illiquid.

Thus, just as we saw in the United States, the Irish government stepped in and bailed them out … and soon, it was the government itself — not just the banks — that was in danger of going under.

In May 2010, with Dublin on the verge of defaulting on its debts, the European Union and International Monetary Fund rode to Ireland’s rescue with a 110 billion euro bailout. It still wasn’t enough. So again, in July 2011, Dublin agreed to accept another bailout worth tens of billions.

Now, the Irish people are living under crushing austerity measures. Countless jobs have been wiped out; the official unemployment rate is 15%.

Salaries have been cut to the bone. Pensions and health benefits have been slashed. The Irish tourism industry — once among the richest — is a shambles.

Portugal and Spain

Similar stories are being told in Madrid, Barcelona, and 53 other cities across Spain, where tens of thousands of workers have taken to the streets to protest a problem they thought they’d never see in their lifetime — not just 9.2% official unemployment as in the U.S., but 21% official unemployment.

In picturesque plazas, beggars outnumber tourists and protesters outnumber beggars. In front of Parliament, riot police stand watch to protect lawmakers from angry mobs.

But of all euro-zone economies now threatened with this kind of chaos, Italy is, by far, the largest.

Italy

The combined GDP of all three countries that have gone bankrupt and needed a bailout so far — Greece, Ireland, and Portugal — is $739 billion. The GDP of Italy alone is over $2 trillion, or nearly three times more!

In other words, as the debt contagion strikes Italy, it will have TRIPLE the impact on global markets as the failure of a Greece, Ireland, and Portugal happening all at the same time.

Already, Italy’s government bonds are plunging, its borrowing costs surging, and the cost of insuring its debts against default exploding to all-time highs.

The obvious trigger: The demise of Italy’s UniCredit, one of the largest banks in Europe.

UniCredit will eventually collapse.

These same factors, ironically, led to the failure of big bank Credit-Anstalt in May 1931. The bank’s failure knocked Europe off the gold standard and directly led to the Great Depression. Credit-Anstalt is the predecessor of UniCredit.

UniCredit’s failure will lead directly to the collapse of the euro currency as it finally dawns on the Europeans that their savings are not safe in the current system.

These comments have turned out to be both prescient and accurate. But how are they relevant to U.S. investors? In three ways:

American Banks

First, America’s largest banks — JPMorgan Chase, Bank of America, Citibank, and Goldman Sachs Bank — are grossly overexposed to the credit risk associated with their huge holdings in derivatives. Plus, many of these are linked to large European banks like UniCredit.

Second, like Italy, the United States is now confronting the Faustian choice of either letting its credit go to hell in a hand basket or forcing austerity down the throat of a weakened economy. And this is the same choice Washington also faces, whether Congress raises the debt ceiling in time or not.

Third, like the euro zone, the U.S. has been sacrificing its currency on the altar of expediency. Washington is debasing the dollar’s value to postpone its reckoning day. It’s forcing the public to pay for its financial sins in the form of higher prices for essentials like food and fuel. And it’s careening toward the same kind of disasters we now see in Europe.

As the U.S. follows Europe, you could see cutbacks in Social Security, Medicare, veterans’ benefits, support for states, homeland security, and more.

You could see stiffer limits on government guarantees for failing banks, commercial checking accounts, and consumer deposits.

In the event of new bank failures and turmoil in the nation’s credit markets, you won’t be able to count on Uncle Sam to be the lender, investor, and guarantor of last resort.

Nor can you expect reason to prevail at the Federal Reserve. As Fed Chairman Bernanke declared last week, he’s perfectly willing to devalue your money by running the money printing presses with still another round of quantitative easing.

Partly Plagiarized from http://www.moneyandmarkets.com/.

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