Re: OT: Tip of the Ice Berg
- From: Lone Haranguer <linuszrv@xxxxxxxxx>
- Date: Sat, 16 May 2009 11:42:52 -0500
Mike Hendrix wrote:
On Sat, 16 May 2009 02:14:47 -0500, "TXBill"
<el2468alumbrado@xxxxxxxxx> wrote:
When I last stopped by RORT late last year, we were discussing oil prices, equities, and the unfolding financial crisis. As an "investment banker" with significant international interests, I have perhaps a somewhat better than average perspective on the macro-scale financial gears that keep the world moving and believe that I have earned the luxury of holding a meaningful opinion in this one narrow area of expertise.------------------------------------
As I recall, I was ridiculed by some herein when I predicted that US equities would crash and the DOW would drop below 8,000. I was further chastised when I predicted retail gasoline prices would bottom around $1.00/gallon, and then remain relatively stable between $2.00 and $2.50 (the rough "break-even" price of many alternative energy technologies). A few of our local uber-patriots claimed that I was being alarmist when I predicted a rapid economic decline followed by a long period of financial stagnation before things really fell off the cliff. I said then, and I'll say it again now: We ain't seen nothing yet. Hang on to your hats, folks, we're in for a rough ride. For those with the forethought to buckle their seatbelts, however, it shouldn't necessarily lead to a catastrophe.
The gap between what the US owes, and what it can reasonably expect to receive in revenue is becoming untenably large. The damage that Mr. Bush did to the economy was bad enough, but what Mr. Obama is doing now will have far-reaching negative implications for decades to come. Even before the current "crisis", the US owed almost 5 times GDP, roughly half of that to foreign powers who may or may not be patient with us when the time comes to repay. That's the equivalent of you owing several times your annual salary to a neighbor who doesn't particularly like you. Mr. Obama's profligate spending spree is hugely increasing our debt at a time when our revenue is shrinking. We borrowed our way into this crisis, and as much as we'd like to think the old ways are the best ways, we're not going to be able to borrow our way out.
Here's a sobering thought: The US currently collects a little less than $2T (that's "T" as in "Trillion") in taxes each year. Our current debt, however, is pushing $12T. That means that even before Mr. Obama's policies take hold, we owe 6 times as much as we expect to take in this year. The Congressional Budget Office estimates that Mr. Obama's "borrow and spend" policies will add an additional $10T or so to our national debt over the next few years. This means that before too long debt service will consume more than 80% of the US economy. Picture spending 80% of your monthly paycheck just to pay the interest on your mortgage; there wouldn't be a whole lot left over for other things like paying the electric bill, buying food, or fixing the car. That's the state that the entire country will find itself in before the end of the next decade. Clearly, the only possible outcome of such an enormous debt load will be deprivation, a dramatic decrease in our standard of living, and, with but the tiniest of shoves by some of our less friendly neighbors, bankruptcy and total economic collapse.
Countries, like corporations, can and do go bankrupt. The only thing keeping the US afloat now is the willingness of some foreign countries, most notably China, to continue lending us money. How long this will last is anybody's guess, but it's probably not wrong to think that we will eventually over-draw our credit line. Sooner or later, other countries are going to conclude that the US is no longer a good credit risk and will begin to sell off their US securities at discounted prices (some of this is already beginning to happen). When that happens "en masse", we'll be facing a day of reckoning that I think most of us can't imagine. The value of the dollar will plummet, and the interest that we'll have to pay to borrow money will skyrocket. Picture the worst of the "banana republics" with hyper inflation, a worthless currency, stratospheric interest rates, social unrest, government oppression, and a bloody revolution every few years. This may well describe the future of the United States.
Mr. Obama's policies will help in the short term, leading to a brief period of slow decline that will feel almost like prosperity. But even this fever-dream of times gone by won't last long. The long-term prognosis of all this spending is bleak. The bottom will really drop out when the bulk of the 75-million-or-so "baby boomers" retire over the next decade or so, not only dramatically reducing the tax roles but increasing entitlement spending to impossible numbers. We're looking at a financial tsunami that will break over the economy and leave us flopping around on the beach gasping for breath and wondering what just happened.
There are a few things we can do to avert disaster if we have the stones to make tough decisions and take drastic action. First, we need to dump our current tax code and implement a universal national sales tax, with no loopholes or exceptions, of something on the order of 33% just to meet the debt service. Then we need to reduce expenses by cutting entitlements like Social Security and Medicare by two thirds. Yes, I know we worked all our lives to earn that money but we have to face the facts: it's gone, stolen by unscrupulous politicians who hoped you wouldn't notice; we can track them down and hang them later but first we need to stop the bleeding. We need to rethink the way we use credit, and pass laws that force us to live within our means (how about legislating maximum non-mortgage credit lines equal to some small percentage of expected household income? eliminating second mortgages? limiting maximum mortgage debt to perhaps twice annual income? limiting maximum auto loans to perhaps one-half of annual income?). We also need to recognize that we can no longer afford to be the world's police force, and must concentrate what resources we retain on solving problems here at home.
We need to re-industrialize America so that we are producing capital once again and not just selling hamburgers and life insurance to each other. We need to re-build a culture that encourages and rewards excellence instead of promoting conformity, mindless entertainment, and unthinking consumption. We need to think about how we take care of our less-able citizens without crippling those who produce and pay taxes. We need to beef up our educational system so that we produce citizens with the skills to compete in a very competitive world market (and, contrary to Mr. Bush's well-meaning sentiments, this means that some children who can't keep up will in fact be left behind).
What can you do to prepare yourself for this looming disaster? Well, that depends on your circumstances. I'd start by living within my means, buying hard assets, and learning new marketable skills. You may also consider exploring off-shore investment opportunities and markets. I certainly wouldn't count on Uncle Sam to help me out in my old age, as he's going to have his hands full just keeping himself alive. The basic American principles of ingenuity, creativity, industry, and self-reliance drove this country to greatness. In recent years, we seem to have forgotten these old friends. Maybe this is a good time for us to dust them off and place them back up on the mantle piece where they belong.
Don't agree with my assessment? The Federal Reserve does. So does the CIA. And the General Accounting Office. And a whole host of prominent economists and business leaders. Not to mention the governments of many of our friends and enemies around the world. When it comes to money, I have no interest in political spins or interpretations of the facts, so let's not get into a howling contest over how bad Bush was or how Obama is a socialist. None of that matters anyway, the data stands on its own. Also, don't bother to challenge me for references, it's not my responsibility to lead you by the nose. Do a little digging. Do a little reading. Do a little thinking. Then come to your own conclusions and act as you see fit. That is, after all, the American Way.
There are none so blind as those who will not see.
- TXBill
"Opinions expressed may not necessarily be those of The Management"
Bill, thanks for posting this. I think you have hit the nail on the
head. What I am having concern over is what to put my *savings*
currently mutual funds & stocks into that might appreciate rather than
depreciate.
I know that terrible inflation is coming, it has to. One used to be
able to invest in real estate and take advantage of inflation. Now I
am not sure what to invest in since real estate tanked.
Any suggestions?
mike
Inflation isn't the only thing that makes property more valuable. Demand is a factor....the land doesn't have to have a house sitting on it to gain in value.
If times are difficult, people will return to gardening and you can rent out garden plots or go into truck farming.
Or raise hemp for spending money.
LZ
.
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