Insolvent and Going Deeper

The US budget process is entirely out of control. By extension, its fiscal future is rather bleak.

All one has to do is back up two steps, entirely ignoring the meaningless budget scuffles currently ongoing in DC, to see that the federal government's fiscal situation is in complete shambles. In fact, as things currently stand in terms of spending and revenues, the US government is insolvent - its liabilities vastly exceed its assets on a net-present-value basis.

Yes, Obama has just laid out a plan that calls for cutting some $4 trillion of new, incremental deficit additions over the next 12 years, but this merely obscures the fact that the deficit will still grow by a rather hefty amount nonetheless. Plans from both sides of the aisle call for adding more debt but at a slower pace. True, that's progress of a sort, but not the type of progress you want to bring home to meet your mother.

For anybody who is even a casual student of history or has paid the slightest bit of attention to what has transpired for Greece, Ireland, Portugal, and other countries with an unrestrained tendency to spend more than they have, it is clear what the progression of events will be for the US.

First there will be a fiscal/funding crisis that will originate in the bond market, specifically the US Treasury market. Interest rates will shoot up, and either austerity will be imposed on the US in a rather unpleasant and draconian way (the bond market is rather remorseless), or it will be self-imposed (not very likely). My estimations indicate this process will begin before the end of 2012.

Next, if the US fails to heed the edicts of the bond market and tries to maintain spending in the face of rising interest rates or print its way out of trouble, the risks increase that the US dollar will suffer a major decline. Let's say that this process will begin a year after the start of the fiscal crisis.

That's all there is to it. A fiscal crisis possibly (probably?) followed by a currency crisis - all initiated by a leadership crisis.

How long it will take the markets to wake up to this simple progression is anybody's guess. Here we must fall back on a simple maxim that has served us well: Anything that is unsustainable will someday stop.

Last year, the US was not unique in its fiscal and economic woes.

This year, the US has distinguished itself by being the only advanced economy to increase its underlying budget deficit in 2011, according to the IMF.  

Quite pointedly, the IMF has been on something of a tear recently in pointing out that the US is heading in the wrong direction fiscally (and by extension monetarily) and risking a systemic crisis by pursuing an unsustainable path.

On March 20th, the IMF's John Lipsky delivered harsh words (at a forum in Beijing, it should be noted):

Lipsky Says Advanced-Nation Debt Risks Future Crisis as Yields Set to Rise

Mar 20, 2011

The mounting debt burden of the world’s most developed nations, set for a post-World War II record this year, is unsustainable and risks a future fiscal crisis, the International Monetary Fund’s John Lipsky said.

The average public debt ratio of advanced countries will exceed 100 percent of their gross domestic product this year for the first time since the war, Lipsky, the IMF’s first deputy managing director, said in a speech at a forum in Beijing today.

“The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks,” said Lipsky. “The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion.”

I am in full agreement with the assessment that the US is adding to, not subtracting from, the financial and fiscal risks that we face. Such are the wages of attempting to sustain the unsustainable in defense of a status quo that needs to be set on a shelf, an interesting curio of a time gone by.

We've already proven that there's a limit to how much consumptive, non-productive debt can be accumulated, yet the US is now all but isolated in its vain attempts to resurrect that model for one last fling.

The Looming Debt Crisis

The IMF has some hard data to back up its concerns and recently released a report in which it has produced a table that that captures the entire essence of the "grow or die" predicament facing not just the US, but the entire developed world.

There are a number of things to dissect in the table, so let's take them one at a time.

This first is that the total financing needs for the sovereign governments (only) of most of the so-called "advanced economies" has expanded between 2010 to 2011 from 25.8% of GDP to 27.0% of GDP (green circles). This means that even with the alleged recovery fully in place -- a statistical mirage in many respects -- the debt financing needs have grown larger, not smaller.

(Source)

It is so large that it bears repeating: The gross financing needs of the US and Japan are 28.8% and 55.8% of GDP for 2011, respectively. Those are staggering amounts, and they have, as predicted by any decent framework that combines weak leadership and debt-based money with declining net energy, only grown larger over the past few years.

Zeroing in a bit, we'll note that three nations are sporting fiscal deficits in excess of 10% of GDP (Japan, the United States, and Ireland), while the UK pulls in close behind with an 8.6% deficit (see red and orange colored squares).

How does one support such magnificent borrowing needs at reasonable rates without the explicit promise that growth will soon return? It's impossible, at least for very long. Who will buy all of that debt at ridiculously low rates?

The market's autonomous participants have already arrived at a conclusion, as evidenced by PIMCO's Bill Gross, et al.,selling off their entire Treasury holdings and even beginning to short the whole mess. They are betting that the answer is "only the central banks, and their time is running out."

Following up the report that produced the above table (among many others, some equally disturbing) the IMF has gone on a PR campaign to press the issue:

US Must Cut Massive Debt: IMF

April 12 2011

The International Monetary Fund Tuesday urged the United States to outline credible measures to reduce its budget deficit, pressuring the White House to detail plans to ratchet down record debt levels.

The IMF said while most advanced economies were taking steps to rein in budget gaps, two of world's largest economies — Japan and the United States — had delayed action to nurse their recoveries.

The fact that the IMF has decided to say that the emperor lacks a credible wardrobe tells us much about where are we in the arc of this story (Hint: near the end).

Our job is to figure out what the endgame looks like.

Conclusion

The US is on a fiscally unsustainable path and has almost entirely wasted the opportunity this crisis represented to get its house in order.

Obama, and whoever sits in the oval office next, has an enormously difficult task of explaining to ordinary people why the belt tightening that is to come applies to them and not to the banks that created the mess (and are feverishly handing out record bonuses as a result).

Given this constraint, and the general paralysis of logic that now grips DC, we can almost certainly expect that the resolution to the multi-decade game of kick-the-can will be a crisis of sorts. The IMF has weighed in with its very measured and dry, if not boring, recitation of the risks involved.

I admit to some affinity to their assessment, at the risk of letting my guard down, because they have finally conformed to the views I have been writing about for years. Debt-based money is in a bind. It's damned if we do and damned if we don't.

The only way out is to accept the idea that living standards have to fall to match the prior excesses, an admission that 'experts' agree is politically impossible in the US at this time.

Yet the conditions and risks remain, regardless of what experts think is doable.

The job of any primary bear market -- and we are in the mother of them all -- is to destroy wealth.

Your job is to preserve wealth. But buckle up; it's going to be a rough ride.  

My overall advice for what's to come remains: Convert your fiat money to useful things. True, gold doesn't earn any interest, but neither does money in the bank these days, and gold can't be devlaued away by reckless monetary policy. So holding precious metals for purchasing power preservation should be a fundamental part of your plans. And while there is real risk of a short-term deflationary downdraft in commodities as the Fed jawbones about ending quantitative easing, my general advice is anything that you expect to buy over the next year you should just buy now. What the heck, you'll use it anyways, and you just might buy it for a lot cheaper than later on.

Enjoy life, love your family, and note that the sun still rises, the birds still sing, and all of our human foibles will resolve themselves eventually. We've arrived at a peculiar point in history where attitude is a tangible element of your future wealth and paper money has become like fog on a warm morning.

Make of it what you will. My wish is that you enjoy the ride.

This is a companion discussion topic for the original entry at https://peakprosperity.com/insolvent-and-going-deeper-2/

That covers all of our options.  If the gov’t would just do the right thing, we could minimize the coming pain and get ourselves on the right track for a sustainable future.  It’s plainly obvious that They will not do anything close to the right things.  Like Dmitri Orlov said in Reinventing Collapse: just ignore the gov’t; they won’t do the right thing; make your own preparations.  If we could just wake up the American people to what’s going on, they would stand up and make the gov’t do the right thing.  That’s not working either since most of our family and neighbors refuse to see what’s going on.   That only leaves making our own personal preparations as best we can in the time we have.  Depressing, but better than being among the blind ourselves.

Would be very interesting see the component parts of the personal investment portfolio’s of Geithner and the Fed board. 

+1

I can’t spend my money fast enough on “things”. I only wish I had about 36 hours in a day and 10 hands. As I learned this past winter with the “snow rake crisis”, you want to purchase, fix and take care of things before the masses do. Otherwise, there will be shortages and then lines to get stuff, if and when it does come in. Without sounding like an alarmist, make a list and go buy it, now, while you can.

We have been prepping it feels for ever (only 1 year) but drawing a blank right now…I need more lists!  Please tell me please what other things to buy.  What am I forgetting?

…to buy enough guns and ammo.If marketing trends tell you anything, home security shotguns have been selling like snow shovels in a snow storm again, after a brief break in the action.
Also, the collectors are really collecting (beautiful cowboy guns, rifles everything special is going going going).
AR rifles are topping everybody’s list, though.
Mary Kay at http://PersonalSecurityZone.com
 
 

Not that I have all these. Not enough money, not enough space. However:
Nail clippers, podiatrist for ingrown nails, dentist for cavity fills and crown work, antibiotic ointment, Z-pacs (just in case of infection), band-aids, first aid kits, potassium iodide, Q-tips, cloth diapers, laundry detergent, garden tools (cheap trowels tend to bend, so either buy more or get the really strong ones), leather work gloves, leather shoes, bedliner paint to consider painting on the soles of your shoes to add wear, laundry buckets, washboard, clothes wringer, extra glass for window repair, black-out film and tape to prevent light from escaping out windows into the night like a beacon, clean-burning fuel to allow for warming up food or people without the attention visible/smelly woodsmoke attracts, a sound-proof outdoor box/enclosure for a generator, cut brush to allow lines of visibility from the house, candy, iodized salt, powdered milk made before Fukushima (if you are paranoid and want fresh milk produced before Fukushima, try looking for ultra-pasteurized organic milk with expiration dates before May 10, they’ll keep past that time), condoms, cycle beads, solar calculators (mine still runs after 12+ years), slide rule, abacus, home schooling books, foot operated mechanical sewing machine, spare parts, hundreds of sewing machine needles, regular needles (in ancient China, some poor people made needles by hand rubbing small iron bars on stone), Viagra (to sell), cigars, cigarettes, cheap $1 lighters, matches, brass wood screws, nails, hand carpentry tools, zip ties, rope, clothes, disposable rain coats, rain coats, galoshes, $1 umbrellas, sturdier umbrellas, etc.

Poet

[quote=joemanc]

[quote=cmartenson]

My general advice is anything that you expect to buy over the next year you should just buy now. What the heck, you’ll use it anyways and you just might buy it for a lot cheaper than later on.

Enjoy life, love your family, note that the sun still rises and the birds still sing, and all of our human foibles will resolve themselves eventually. We’ve arrived at a peculiar point in history where attitude is a tangible element of your future wealth and paper money has become like fog on a warm morning.

Make of it what you will. My wish is that you enjoy the ride. [/quote]

+1

I can’t spend my money fast enough on “things”. I only wish I had about 36 hours in a day and 10 hands. As I learned this past winter with the “snow rake crisis”, you want to purchase, fix and take care of things before the masses do. Otherwise, there will be shortages and then lines to get stuff, if and when it does come in. Without sounding like an alarmist, make a list and go buy it, now, while you can. [/quote]

+1.  Thank-you for invaluable information scouting and analysis, Chris! 

[quote=Romans]

We have been prepping it feels for ever (only 1 year) but drawing a blank right now…I need more lists!  Please tell me please what other things to buy.  What am I forgetting? [/quote]

Romans, I remembered seeing a list of the “When SHTF these 100 things will disappear first”, and googled it.  Here is a link to a site that has the list, and potentially additional useful info: http://www.shtfplan.com/emergency-preparedness/when-shtf-these-100-items-will-disappear-first_06032010 . [edit: Don’t forget to check out their comments section as well; it looks like there may be some useful additions there]

Also, make sure you have gone through Chris’s “What Should I Do?” series since he gives Chris-quality advice on top priority items/areas to be prepped in (including the “things that are useful to buy” for each).  See https://peakprosperity.com/page/what-should-i-do

Second that!
Also, I could use a heftier supply of unallocated fiat. But I suppose I’d feel that way even if I had 10x what I do have. [grin]. Thanks as always for your thoughts Dr. Chris.
Viva – Sager

[quote=joemanc]Without sounding like an alarmist, make a list and go buy it, now, while you can.
[/quote]
With respect Joe, and others, I couldn’t disagree more. The “inflation” that you fear is just a product of market speculation. The majority of assets (including gold and silver) are showing super-exponenial price action, the hallmark signature of a bubble (see John Hussman’s Anatomy Of A Bubble). This type of price action is produced by human nature (speculative trading), not macroeconomics. Buy spending instead of saving now, your buying into the bubble. If you want to be protected during a market trend-change (crash), you need to do the opposite of the “crowd.”
The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.
Best…Jeff

[quote=JAG]With respect Joe, and others, I couldn’t disagree more. The “inflation” that you fear is just a product of market speculation. The majority of assets (including gold and silver) are showing super-exponenial price action, the hallmark signature of a bubble (see John Hussman’s Anatomy Of A Bubble). This type of price action is produced by human nature (speculative trading), not macroeconomics. Buy spending instead of saving now, your buying into the bubble. If you want to be protected during a market trend-change (crash), you need to do the opposite of the “crowd.”
The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.
Best…Jeff
[/quote]
Aaaah! I’m going insane!
Plus the Chinese bubble seems to have gone belly up:Chinese Real Estate Bubble Pops: Beijing Real Estate Prices Plunge 27% In One Month
You know what? I feel like I want to bury my head in the ground and just stop existing for a year or two (and maybe I’ll perish in the process, which may not be an entirely undesirable outcome anyway…)
Samuel

Dollar down, stocks down, everything else up… This probably explains it:
New unemployment claims surge to 412000
Samuel

 
I agree with Captain Sheeple, for the most part.  It’s a tough line to walk, knowing you must prepare (which entails spending) and having a very strong set of reasons for why things could get very cheap in the near future. Everyone has to make their own choices.
I do not see how inflation in commodities can last.  Wages (not to mention hiring) are not inflating with commodities, so the increase in commodities has to draw from spending in other areas.  It’s basically a giant tax with not even the facade of services offered in exchange. 
Wall Street money can push commodities up all it wants, and it can push stocks up all it wants.  That does not mean real actual human beings are putting more in their pocket or are in any way better off.  Instead, the exact opposite is true due to to the price inflation in commodities burning holes in multiple consumer pockets. 
When Wall Street realizes this, Wall Street will “want” to go the other way, and when the fight is downhill instead of uphill, things come down in quite a hurry.
Just my 2 cents. 
 

"Given the underlying downward trend, we are inclined to see it as a one-time fluke," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Nothing to see here, keep moving. Aaarrggghhh

Jeff, you perma-deflationist you!
Seriously though, can you give me an example of something that you feel where the price will drop? For example, I am spending money on insulation, improving my soil, and buying up a couple of years worth of firewood in advance. As far as I can remember, the prices of just those 3 things I listed have never gone down in price. In fact, a roll of R-13 insulation at Home Depot has gone up in price just since this past winter and the cord of firewood I purchased last year has gone up by $15. To me, anything that I can buy now that will make me more resilient and enegy efficient is worth purchasing now.

A race will be on shortly.  It is clear to me that we will eventually move into a “soak the rich” tax mode.  Which is probably only fair since a large part of the current mess is directly attributable to them.
The race will be on becuase the rich have been, are currently, and will continue to vacuum up as much of America’s wealth as possible and shift it out of the country and beyond the reach of the IRS.

And China, India, Brazil, etc. will be only too happy to help them with that program.

Another thing you may want to consider is setting up in another country. I am trying to nail down which ones would be the best bet. We have friends in Chile and it seems like the best out of South America so we have moved some assets down there. If SHTF I think New Caledonia would be as far away as you can get from any really bad things happening, like nuclear bombs.
I wonder if our countries will clamp down the borders and make it difficult to leave once things get bad.

Joe, expressed that way, you’re exactly right, but I don’t think it’s the “opposite end of the debate from Jeff.”  For the most part, Jeff seems to focus on investment bubbles.  Resilience and energy independence are much different goals that maximizing ROI.  Sure you can buy more of what you need when prices are cheaper, but not having that seasoned cord of wood is of little help if your standard fuel is not available.

[quote=JAG][quote=joemanc]
Without sounding like an alarmist, make a list and go buy it, now, while you can.
[/quote]
With respect Joe, and others, I couldn’t disagree more. The “inflation” that you fear is just a product of market speculation. The majority of assets (including gold and silver) are showing super-exponenial price action, the hallmark signature of a bubble (see John Hussman’s Anatomy Of A Bubble). This type of price action is produced by human nature (speculative trading), not macroeconomics. Buy spending instead of saving now, your buying into the bubble. If you want to be protected during a market trend-change (crash), you need to do the opposite of the “crowd.”
The time to spend is when everyone else is trying to save, and the time to save is when everyone else is in a buying frenzy.
Best…Jeff
[/quote]
While this is often good advice, IMO one must know when this trader’s approach applies and when it doesn’t.  If my wife and her family followed this advice in the early 90’s in their country (and it was a capitalist economy by that time), they would have been screwed by holding onto their cash while everyone else scurried to buy up things before their money devalued further (which it did… a lot).  Same with the people in Argentina about a decade ago.  There are many other factors other than speculation at work, and there are certain assumptions with your approach that may not apply.  One of these is the assumption of everpresent availability of these goods.  Another is that it assumes a (relatively-speaking) smooth-running and open market economy.  I’m not saying you’re wrong about some of the goods and assets were discussing, only that applying it as a blanket rule is not a recipe for success.  For example I may take this approach to real estate if/when the market tanks and buy up some property at the time when most others are trying to sell.  But at the same time I’m still buying lots of storable food even though the demand and the prices are crazy.
Sometimes, sometimes, the crowd actually knows what it’s doing

  • Nickbert

Lists are great, and it’s nice to have your essentials buttoned up for the foreseeable future, but skills are far more important.  If you’re truly concerned, take a couple of basic survival classes from someone like Tom Brown, Jr.  You’ll learn all about shelter, water, fire & food, which are the four requirements for continued human existence, and you’ll become far more self-sufficient. 
A more nuanced approach would be to find a find a group of bright, talented folks who are creating a resilient & sustainable local community, then see where you fit in and what skills you’d need to bring to the table.  If things truly go to hell, you’ll be better off with a real flesh & blood community than walled off in your own little compound.

Finally, some practical advice for today.  If you’re on a well, as opposed to a municipal water system, spend the $1500 to $2000 to add a hand pump to the top of your well casing.  There are few things that will help more in an emergency that access to clean, fresh water, and you can buy a hand pump with hardware that will fit next to your submersible.