The Final “D” Word

By Rusty McDougal

Let’s move ahead, once again, to preview the next major macro-economic event on the radar screen. It is inevitable and will drastically alter your life.

I’ve been highlighting a particular “D” word a little over a year now... depression. The new American century has brought a historically horrible economy our way by any realistic measure of accounting. We are in a “Lost Decade” similar to what Japan went through in the 1990s and next week’s article will take a deeper look into this problem.

In the meantime, denialruns rampant though the slow motion train wreck continues unabated. Central planners can amp the stock market and bring in monthly economic data that is warm and fuzzy but they absolutely cannot reign in our out of control debt. Longer term problems will not be avoided.

Yep, it’s the debt stupid! That leads right to the final “D” word …. Default.

What happens when your Brother-in-Law, Bobby, loses his job, sees his house in foreclosure, has no savings, no credit line and owes $62,500 on six consumer credit cards? He can’t find work and you and the rest of the family have caller ID when he reaches out.

You know he’s toast, bankrupt, finished wiped out. It is just a matter of months until it’s tent time. This we can understand. Bobby will be forced to default on all of his obligations because he has no means of paying them back. Oops, my bad!

It’s much harder to recognize and understand when countries declare bankruptcy.Still, it happens all the time. South American countries, like Argentina, have perfected default to an art form. Argentina defaulted on its sovereign debt in 2002 and is now in trouble once again. Some of their national bonds are so risky they presently yield 50%. If you own Argentinean debt it will take more than a tango to get your money back.

So, it’s painfully obvious that millions of Americans, as well as emerging nations, can undergo debt defaults. No need to review third world countries like Zimbabwe.

How about the land of the free and the home of the brave? Can it happen here? Are we next in line for an IMF “workout”?

The present statistics are both mind boggling and mind numbing. Let’s carefully inspect them:

• US GDP is $14 trillion. I should say it used to be$14 trillion.
• US national debt stands presently at $11 trillion.
• According to Richard Fisher of the Dallas Fed, unfunded liabilities (Social Security, Medicare etc) were somewhere near $100 trillion a year ago.
• Crony bailout and stimulus pledges total an additional $12.8 trillion, which represents $42,000 for each man, woman and child in the US.
• The Congressional Budget Office is projecting a $1.7 trillion federal deficit this year as well as similar deficits for the next few years. This year’s deficit is four times larger than any previous one.
• Federal and state tax receipts are plummeting.
• Corporate tax receipts are down 57% over the first six months of fiscal 2008.
• For the last several years, the US has required a net foreign inflow of capital around $70 billion per month. Bailout and stimulus plans will make that much worse.
• The world has balked at buying more of our treasury debts. Only $15 billion per month has come in over the last 12 months! Feb. 2009 showed a $97 billion net outflow. The US has $3 trillion in bond sales slated for this year.
• The Fed is playing a shell game in the dark and actually buying our own debt.
• The Federal Reserve balance sheet holds assets worthy of a local flea market with valuations like that of Neiman Marcus.
• The US dollar has a crumbled foundation and is directly in the crosshairs.
• Many states are bankrupt.
• True unemployment is well over 15%.
• Commercial real estate is joining residential real estate in malfunctioning.
• US banks remain frozen and chock full of fully priced toxic paper.
• A quadrillion dollars (!) of derivatives continue to sink. Levels of derivatives, astoundingly, are still rising as we approach end game.
• One of our premier banking entities, Goldman Sachs, has $1,056 in credit exposure for every dollar of capital they hold. Cardiac arrest comes to mind.
• There is fraud piled upon fraud in all of the bailout scams.

That’s nothing short of a national stress test! Unfortunately, no practical remedies are being offered. The solutions being thrown on the fire are only making things worse. There is no easy way out. A couple thousand up points on the Dow are meaningless compared to these issues.

Would you rather lend money to the criminals who sponsored these problems or to your Brother-in-Law? Bobby’s starting to look like a pillar of economic stability, no?

Again, the purpose of this article is to bring the term default into the conversation. The terminal national bankruptcy is obvious to anyone with an open mind. These idle promises cannot be paid.We are running on smoke and mirrors alone.

The bankruptcy courts will handle Bobby’s creditors. It’s more complex on a national basis. Citizens are accustomed to being lied to every election season. The bigger lies will get choked on in the immediate future. Failing programs like Social Security or Medicare will be just another notch in the belt.

What do you think has happened to Argentina’s many international creditors as the country stumbles from crisis to crisis?

The US is now in default mode as the Fed buys our own treasury debt. That’s a form of default. Diluting existing dollars via quantitative easing (burning up the printing presses) is another form of default.

The only conclusion to this sordid financial mess is default either through hyperinflation or public announcements.

Public announcements will be few and far between. That would require an act of integrity that has been missing for decades in our shadow government. Nevertheless, it’s game over. This dreaded “D” word will be the final one spoken.

Precious metals do not default. Make sure you have some around.

Live Resourcefully,

Rusty