Economic despair is beginning to spread rapidly in America. As you read this, there are millions of American families that are just barely hanging on by their fingernails. For a growing number of Americans, it has become an all-out battle just to be able to afford to sleep under a roof and put a little bit of food on the table. Sadly, there are more people than ever that are losing that battle. Tonight, tens of thousands of formerly middle class Americans will be sleeping in their cars, even though that is illegal in many U.S. cities. Tens of thousands of others will be sleeping in tent cities or on the streets. Meanwhile, communities all over America are passing measures that are meant to push tent cities and homeless people out of their areas. It turns out that once you lose your job and your home in this country you become something of an outcast. Sadly, the number of “outcasts” is going to continue to grow as the U.S. economy continues to collapse.
Most Americans that end up living in their cars on in tent cities never thought that it would happen to them.
An article in Der Spiegel profiled one American couple that is absolutely shocked at what has happened to them….
Chanelle Sabedra is already on that road. She and her husband have been sleeping in their car for almost three weeks now. “We never saw this coming, never ever,” says Sabedra. She starts to cry. “I’m an adult, I can take care of myself one way or another, and same with my husband, but (my kids are) too little to go through these things.” She has three children; they are nine, five and three years old.
“We had a house further south, in San Bernardino,” says Sabedra. Her husband lost his job building prefab houses in July 2009. The utility company turned off the gas. “We were boiling water on the barbeque to bathe our kids,” she says. No longer able to pay the rent, the Sabedras were evicted from their house in August.
How would you feel if you had a 3 year old kid and a 5 year old kid and you were sleeping in a car?
Sadly, if child protective services finds out about that family those kids will probably be stolen away and never returned.
America is becoming a very cruel place.
Unfortunately, what has happened to that family is not an isolated incident. As rampant unemployment has spread across America, the number of people that have lost their homes has soared.
Today, it is estimated that approximately a third of the homeless population in Seattle live in their cars.
It is even happening to my readers. A reader named JD left the following comment on one of my articles a while back….
I was laid off from my construction job almost 2 yrs ago was on unenjoyment for over a yr they cut me off last september so i lost my apartment. Since then ive been couch surfing and hotel hopping. Now i occaisonally sleep in my car. I was lucky enough to have a friend with a lawn care business so i can at least put ever increasing gas in my car\house. I hate to say it but i think we will see hoovervilles in the major cities soon. When the welfare & food stamps & all the other govt. programs end the anarchy begins.
Desperation is rising all over America. Most people had hoped to see an economic recovery by now but it just hasn’t happened.
The phenomenon of Americans living in their cars has become so prominent that even Time Magazine has done a story about it….
For people who cannot afford rent, a car is the last rung of dignity and sanity above the despair of the streets. A home on wheels is a classic American affair, from the wagon train to the RV. Now, for some formerly upwardly mobile Americans, the economic storm has turned the backseat or the rear of the van into the bedroom. “We found six people sleeping in their cars on an overnight police ride-along in December,” says John Edmund, chief of staff to Long Beach councilman Dee Andrews. “One was a widow living in a four-door sedan. She and her husband had been Air Force veterans. She did not know about the agencies that could help her. I had tears in my eyes afterwards.”
Unfortunately, it turns out that sleeping in cars has been made illegal in many areas of the United States.
In many cities, police are putting boots on the cars and when the homeless owners can’t pay the fines the vehicles are being taken away from them.
Venice, California is one place where people have been arrested for living in vehicles. Venice had been a popular spot for people living in their RVs to go, but police started arresting people that were living in RVs and they began towing away their vehicles. The following is an excerpt from an article that appeared on the Daily Kos website….
They took Eric while he was changing his battery in his car. Claimed he lived in his car. A few days later they went to 3th Street and took his RV because he was in jail and no one moved it for 72 hours. Saturday they did a sweep of 7th and took Bear and his RV. They also took Elizabeth’s RV but do not know if they took Elizabeth but can not find her. The police went to 6th and took the white RV that always parks by Broadway on 6th. Everyday they take 1 to 4 RVs. Very soon there will be no one left.
Once you are down on your luck in America you will quickly find that authorities will try to take everything else you still have away from you.
The United States can be a very brutal place to be if you are poor.
All over America, communities are making tent cities illegal or they are simply just chasing them away.
It turns out that many Americans really don’t like large numbers of homeless people camping out in their neighborhoods.
But many of those now living in tent cities used to be just like you and me.
What is being done to tent cities in some areas of the country is absolutely disgusting.
For example, who could ever forget this video of police in St. Petersburg, Florida using box cutters to slash up the tents of the homeless….
What goes through your mind when you watch something like that?
If you don’t feel at least a little bit of compassion for those people then something is wrong.
You never know – you might be the next one forced to take refuge in a tent city.
In many U.S. cities, it is even illegal to sleep on the street. If you are homeless I am not sure what you are supposed to do. In some areas of the U.S. you can’t sleep in your car, you can’t sleep in a tent city and you can’t sleep on the street.
So what should we do with all of the Americans that are being forced out of their homes by this economy?
Should we just round them all up and put them into fenced camps?
Don’t laugh – we are getting closer to that kind of thing every day.
We live in very frightening times.
Poverty is absolutely exploding in America. The number of Americans that are going to food pantries and soup kitchens has increased by 46% since 2006. There are 44 million Americans on food stamps. If it was not for measures like these, the streets of America would be filled with destitute people.
Things are tough out there and they are about to get tougher.
At the beginning of next year, the extended unemployment benefits that have been helping the unemployed during this economic downturn will expire. Up to now, many unemployed Americans have been able to enjoy up to 99 weeks of unemployment benefits. Now that is coming to an end.
According to the New York Times, this is going to drain 37 billion dollars out of the wallets of unemployed Americans that are just barely hanging on.
What in the world is that going to do to the economy?
This all comes at a time when it looks like unemployment is going to start rising once again.
Cisco has just announced that they are going to be laying off 10,000 workers. Other large firms are expected to announce more layoffs shortly. The number of good jobs continues to shrink.
There are other signs that the economy is slowing once again. Pre-orders for Christmas toys are way down. Vacancies at U.S. shopping malls are rising again. Nearly every major poll shows that Americans are extremely pessimistic about the economy right now.
So why in the world is all of this happening?
Where in the world did all of our jobs go?
Well, it turns out that millions of our jobs have been shipped overseas where the labor is far, far cheaper and it is really starting to catch up with us.
Occasionally a half-ruined or half-burned house still stands to remind you that this used to be a cityscape. Pathetic, besieged knots of surviving homes remind you of what was once here. Sometimes amazing efforts have been made to keep them smart. More often, they haven’t.
Many bear menacing notices warning visitors to stay away. On the door of one, easy to imagine as a neat home with an iron-pillared porch where the head of the family must once have sat on summer evenings, are the words ‘Enter at ya own risk’ accompanied by a crude drawing of an angry face.
I ventured into a nearby ruin, smashed, charred and half-filled with garbage. You have no idea who or what might be lurking in these houses.
But don’t laugh at Detroit. What is happening in Detroit is coming to your area soon enough.
America is in an advanced state of decay. The number of “outcasts” is going to multiply as more Americans lose their jobs and their homes. Millions more Americans will be sleeping in their cars, in tent cities or on the streets before this is all over.
The U.S. economy is never going to get back to “normal”. What we are living through now is the “new normal” and it is rip-roaring prosperity compared to what is coming.
Please show compassion to the people around you that are hurting right now.
You never know, as the economy continues to unravel it may be you that needs some compassion soon.
Have you noticed that a really bad mood seems to have descended on world financial markets? Fear and pessimism are everywhere. The global economy never truly recovered from the financial crisis of 2008, and right now everyone is keeping their eyes open for the next “Lehman Brothers moment” that will send world financial markets into another tailspin. Investors have been very nervous for quite some time now, but this week things seem to be going to a whole new level. Fears about the spread of the debt crisis in Europe and about the failure of debt ceiling talks in the United States have really hammered global financial markets. On Monday, the Dow Jones Industrial Average dropped 151 points. Italian stocks fared even worse. The stock market in Italy fell more than 3 percent on Monday. The stock markets in Germany and France fell more than 2 percent each. On top of everything else, the fact that protesters have stormed the U.S. embassy in Syria is causing tensions to rise significantly in the Middle East. Everywhere you turn there seems to be more bad news and large numbers of investors are getting closer to hitting the panic button. Hopefully things will cool down soon, because if not we could soon have another full-blown financial crisis on our hands.
Even many of those that have always tried to reassure us suddenly seem to be in a really bad mood.
For example, U.S. Treasury Secretary Timothy Geithner admitted to “Meet the Press” that the U.S. economy is really struggling and that for many Americans “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”
Does Geithner know something that we don’t?
To say that what Americans are facing will be “harder than anything they’ve experienced in their lifetime now, for a long time to come” is very, very strong language.
It certainly is not helping things that the Democrats and the Republicans still have not agreed on a deal to raise the debt ceiling. It is mid-July and Barack Obama and John Boehner continue to point fingers at each other.
Of course if they do reach a “deal” it will likely be a complete and total joke just like their last “deal” was.
But for now they are playing politics and trying to position themselves well for the 2012 election season.
Meanwhile, world financial markets are starting to get a little nervous about this situation. The newly elected head of the IMF, Christine Lagarde, has stated that she “can’t imagine for a second” that we are going to see the U.S. default on any debt. Most investors seem to agree with Lagarde for now, but if we get to August 2nd without a deal being reached things could change very quickly.
But it isn’t just the debt ceiling crisis that is causing apprehension in the United States. The truth is that there are a host of indications that the U.S. economy is continuing to struggle.
Even big Wall Street banks are laying people off. A recent Reuters article described the bad mood that has descended on Wall Street right now….
Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and some other large U.S. investment banks are not just laying off weak performers and back-office employees. They are also cutting the pay of those they are keeping, scrutinizing expense reports and expecting even the most profitable workers to bring in more business for the same amount of compensation.
That is not a good sign for the U.S. economy.
If the corrupt Wall Street banks are even struggling, what does that mean for the rest of us?
But the big trouble recently has been in Europe. The sovereign debt crisis continues to get worse and worse.
As I wrote about yesterday, the emerging financial crisis in Italy has EU officials in a bit of a tizzy. If Italy requires a bailout it is going to be an unmitigated disaster.
One of the most respected financial journalists in Europe, Ambrose Evans Pritchard, says that financial tensions in the EU are rising to dangerous levels….
If the ECB’s Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago – and I think he is – it is hard see how the threat is any less serious right now.
Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.
Last year it was just small countries like Greece and Ireland that were causing all the trouble.
Now Italy (the fourth largest economy in the EU) and Spain (the fifth largest economy in the EU) are making headlines.
Up to this point, the EU has had all kinds of nightmares just trying to bail countries like Greece out.
What is going to happen if Italy or Spain goes under?
At this point things with Greece have gone so badly that some EU officials are actually suggesting that Greece should just default on some of the debt.
Yes, you read the correctly.
There are news reports coming out of Europe that say that EU leaders are actually considering allowing the Greek government to default on some of their bonds. According to The Telegraph, “the move would be part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.”
All of this chaos is causing bond yields in Europe to go soaring.
Earlier today, The Calculated Risk blog detailed some of the stunning bond yields that we are now seeing in Europe….
The Greek 2 year yield is up to a record 31.1%.
The Portuguese 2 year yield is up to a record 18.3%.
The Irish 2 year yield is up to a record 18.1%.
And the big jump … the Italian 2 year yield is up to a record 4.1%. Still much lower than Greece, Portugal and Ireland, but rising.
Could you imagine paying 31.1% interest on your credit cards?
Well, imagine what officials in the Greek government must be feeling right about now.
If these bond yields do not go down, we are going to have a full-blown financial crisis on our hands in Europe. If these bond yields keep rising, we are going to have a complete and total financial nightmare in Europe.
The only way that any of these nations that are drowning in debt can keep going is if they can borrow more money at low interest rates. There are very few nations on earth that would be able to survive very high interest rates on government debt for an extended period of time.
Pay attention to what is happening in Europe, because it will eventually happen in the United States. Right now we are only paying a little more than $400 billion in interest on the national debt each year because of the super low interest rates we are able to get.
When that changes, our interest costs are going to absolutely skyrocket.
Not that the United States needs any more economic problems.
Right now Americans are more pessimistic about the economy than they have been in ages.
*According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%.
*According to one recent poll, 39 percent of Americans believe that the U.S. economy has now entered a “permanent decline”.
*Another recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.
The American people are in a really bad mood and investors around the world are in a really bad mood. More bad financial news seems to come out every single day now. Everyone seems to be waiting for that one “moment” that is going to set off another financial panic.
Hopefully we can get through the rest of this summer without world financial markets falling apart. But the truth is that the global economy is even more vulnerable today than it was back in 2008. None of the things that caused the financial crash of 2008 have been fixed.
We will eventually have a repeat of 2008. In fact, next time things could be even worse.
The entire world financial system is a house of cards sitting on a foundation of sand. Eventually another storm is going to come and the crash is going to be great.
Did anyone really think that Italy would be able to get through this thing without needing a bailout? Just when you thought that things in Europe could get back to normal for a little while, here comes Italy. On Friday, there was a bit of a “mini-panic” as investors started dumping Italian financial assets. European officials are concerned that the sovereign debt crisis that has ravaged Greece, Ireland and Portugal will now put the Italian economy through the wringer. European Council President Herman Van Rompuy has called an emergency meeting for Monday morning. He is denying that the meeting is about Italy, but everyone knows that Italy is going to be discussed. European Central Bank President Jean-Claude Trichet and European Commission President Jose Manuel Barroso along with a host of other top officials will also be at this meeting. If it does turn out that Italy needs a bailout, it is going to change the entire game in Europe.
What is going on in Italy right now is potentially far more serious than what has been going on in Greece. Italy is the fourth largest economy in the European Union. If Italy requires a bailout, the rest of Europe might not be able to handle it.
This latest crisis was precipitated by a substantial sell-off of Italian financial assets on Friday. An article posted by Bloomberg described the pounding that the two largest Italian banks took….
UniCredit SpA (UCG) and Intesa Sanpaolo SpA (ISP), Italy’s biggest banks, fell to the lowest in more than two years in Milan yesterday as contagion from Europe’s debt crisis threatened to spread to the region’s third-largest economy.
UniCredit plunged 7.9 percent, the biggest decline since March 30, 2009, while Intesa dropped 4.6 percent. Both hit lows not seen since the period when markets were emerging from the crisis spawned by the collapse of Lehman Brothers Holdings Inc.
Unfortunately, this is just the continuation of a trend that has been going on for a while.
When you look at them as a group, the stocks of the five largest Italian banks have lost 27% since the beginning of 2011.
That is not a good sign.
Also, investors are starting to dump Italian government debt. Reuters says that the yield on 10 year Italian bonds is approaching the danger zone….
The spread of the Italian 10-year government bond yield over benchmark German Bunds hit euro lifetime highs around 2.45 percentage points on Friday, raising the Italian yield to 5.28 percent, close to the 5.5-5.7 percent area which some bankers think could start putting heavy pressure on Italy’s finances.
The Italian national debt is now up to about 120 percent of GDP. The Italian government would be able to manage it if interest rates were very, very low. But unfortunately they are rising fast and if they get too much higher they are going to become suffocating.
As I have written about previously, government debt becomes very painful once you take low interest rates out of the equation. For example, if Greece could borrow all of the money that it wanted to borrow at zero percent interest, it would not have a debt problem. But now the yield on 2 year Greek bonds is over 30 percent, and there is not a government on the face of the earth that can afford to pay interest that high for long.
Unfortunately for Italy, this could just be the beginning of rising interest rates. Just recently, Moody’s warned that it may be forced to downgrade Italy’s Aa2 debt rating at some point within the next couple of months.
If things continue to unravel in Italy, all of the credit agencies may downgrade Italy sooner rather than later.
The frightening thing about Italy is that a financial crisis has a way of exposing corruption, and there are very few countries that can match the kind of corruption that goes on in Italy.
As a child, I had the chance to live in Italy. I love Italy. The people are friendly, the weather is great, the architecture is amazing and the food is spectacular. I will always have great affection for Italy and I will always cheer for the Italian national team when the World Cup rolls around.
However, I also know that corruption is deeply ingrained into Italian culture. It is simply a way of life.
Just check out the prime minister of Italy. Silvio Berlusconi is the consummate Italian politician. He is greatly loved by many, but it would take days to detail all of the scandals that he has been linked to.
At this point, Berlusconi has become a parody of himself. Each new sex scandal or financial scandal just adds to his legend. Italy is one of the only nations in Europe where such a corrupt politician could have stayed in office for so long.
Not that the U.S. government is much better. Our government becomes more corrupt with each passing year.
But the point is that if a financial collapse happens in Italy and people start “turning over rocks” it could turn up all sorts of icky stuff.
So what is Europe going to do if Italy needs a bailout?
Well, they are probably going to have to fire up the printing presses because it would probably take a whole lot more euros than they have right now.
The truth is that the EU has now entered a permanent financial crisis. You have a whole bunch of nations that have accumulated unsustainable debts and that cannot print their own currencies. The financial system of the EU as it is currently constructed simply does not work.
Some believe that the sovereign debt crisis will eventually cause the breakup of the EU. Others believe that this crisis will cause it to be reformed and become much more integrated.
In any event, what just about everyone can agree on is that the financial problems of Europe are not going away any time soon. For now, EU officials are keeping all of the balls in the air, but if at some point the juggling act falters, the rest of the world better look out.
A financial crash in Europe would be felt in every nation on earth and it would be absolutely devastating. Let’s hope that we still have some more time before it happens.
In the past, there certainly have been governments that have gotten into trouble with debt, but what we are experiencing now is the first truly global sovereign debt crisis. There has never been a time in recorded history when virtually all of the governments of the world were drowning in debt all at the same time. This sovereign debt crisis is never going to end until there is a major global financial collapse. There simply is no way to unwind the colossal web of debt that we have constructed in an orderly fashion. Right now the EU and the IMF have been making “emergency loans” to nations such as Greece, Ireland and Portugal, but that is only going to buy those countries a few additional months. Giving more loans to nations that are already drowning in red ink may “kick the can down the road” for a little while but it isn’t going to solve anything. Meanwhile, dozens more nations all over the globe are rapidly approaching a day of reckoning.
All of the bailouts that you are hearing about right now are simply delaying the pain. The reality is that when the “emergency loans” for Greece stop, Greece is going to default. Greece is toast. The game is over for them. You can stick a fork in Greece because it is done.
One of the big problems for Greece is that since it is part of the euro it can’t independently print more money. If Greece cannot raise enough euros internally Greece must turn to outside assistance.
Unfortunately, at this point Greece has accumulated such a mammoth debt that it cannot possibly sustain it. By the end of the year, it is projected that the national debt of Greece will soar to approximately 166% of GDP.
The financial collapse of Greece is inevitable. If they keep using the euro they will collapse. If they quit using the euro they will collapse. When the rest of Europe decides that it is tired of propping Greece up the game will be over.
At this point very few people are interested in lending Greece more money.
As I wrote about yesterday, many of the nations around the world are only able to keep going because they are able to borrow huge amounts of money at low interest rates.
Well, nobody wants to lend money to Greece at a low rate of interest anymore.
Fortunately for the rest of the world, Greece is just a very, very small part of the global economy, but when interest rates start spiking like that on U.S. debt or Japanese debt the entire world financial system will be thrown into chaos.
So why is there so much of a focus on Greece right now?
Well, there is a real danger that the panic will start to spread.
The other day, Moody’s Investors Service slashed the credit rating on Portuguese government debt by four notches.
Portuguese debt is now considered to be “junk”.
But even more alarming is that Moody’s stated that what is going on in Greece played a role in reducing the credit rating of Portugal.
The following is a portion of what Moody’s had to say when they cut the credit rating of Portugal by four notches….
Although Portugal’s Ba2 rating indicates a much lower risk of restructuring than Greece’s Caa1 rating, the EU’s evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.
Do you understand what is being said there?
Basically, Moody’s is saying that the terms of the Greek bailout make Portuguese debt less attractive because Portugal will likely be forced into a similar bailout at some point.
If the EU is not going to fully guarantee the debt of the member nations, then that debt becomes less attractive to investors.
The downgrade of Portugal is having all kinds of consequences. The cost of insuring Portuguese government debt set a new record high on Wednesday, and yields on Portuguese bonds have gone haywire.
If you want to get an idea of just how badly Portuguese bonds have been crashing, just check out this chart.
But it is not just Portugal that is having problems.
That certainly is not going to help the PIIGS much.
But Europe is not the only one facing a horrific debt crunch.
In Japan, the national debt is now up to about 226 percent of GDP. So far the Japanese government has been able to handle a debt load this massive because the citizens of Japan have been willing to lend the government gigantic mountains of money at interest rates so low that they are hard to believe.
When that paradigm changes, and it will, Japan is going to be in a massive amount of trouble. In fact, an article in Forbes has warned that even a very modest increase in interest rates would cause interest payments on Japanese government debt to exceed total government revenue by the year 2019.
Of course the biggest pile of debt sitting out there is the national debt of the United States. The U.S. is so enslaved to debt that there is literally no way out under the current system. To say that America is in big trouble would be a massive understatement.
In fact, the whole world is headed for trouble.
Right now government debt around the globe continues to soar at an exponential pace. At some point a wall is going to be hit.
“These processes are not linear,” warns Prof. Reinhart. “You can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.”
That is the nature of debt bubbles – they keep expanding and expanding until the day that they inevitably burst.
Governments around the world will issue somewhere in the neighborhood of 5 trillion dollars more debt this year alone. Debt to GDP ratios all over the globe continue to rise at a frightening pace.
Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet. If even one domino is toppled there is no telling where things may end.
The combination of huge amounts of debt and huge amounts of leverage is incredibly toxic, and that is what we have all over the globe today. Almost every major nation is drowning in a sea of red ink and almost all of our major financial institutions are leveraged to the hilt.
There is only one way that the sovereign debt crisis can end.
Right now, interest rates are near historic lows. The U.S. government is able to borrow gigantic mountains of money for next to nothing. U.S. consumers are still able to get home loans, car loans and student loans at ridiculously low interest rates. When this low interest rate environment changes (and it will), it is going to absolutely devastate the U.S. economy. Without low interest rates, the U.S. financial system dies. When it comes to borrowing money, it is the rate of interest that causes the pain. If you could borrow as much money as you wanted at a zero rate of interest for the rest of your life you would never, ever have a debt problem. But when there is a cost to borrowing money that changes things. The higher the rate of interest goes, the more painful debt becomes.
The only reason that U.S. government finances have not fallen apart completely already is because the federal government is still able to borrow huge amounts of money very cheaply. If interest rates on U.S. government debt even return just to “average” levels, it is going to be absolutely catastrophic.
So what happens if rates go above “average”?
The reality is that if there is a major crisis that causes interest rates on U.S. Treasuries to go well beyond “normal” levels it is going to cause a complete and total collapse.
In 2010, the U.S. government paid out just $413 billion in interest even though the national debt soared to 14 trillion dollars by the end of the year.
That means that the U.S. government paid somewhere in the neighborhood of 3 percent interest for the year.
Considering how rapidly the U.S. dollar has been declining and how much money printing the Federal Reserve has been doing, a rate of interest that low is absolutely ridiculous.
The shorter the term, the more ridiculous the rates of interest on U.S. Treasuries are.
For example, the rate of interest on 3 month U.S. Treasuries right now is just barely above zero.
The Federal Reserve has been playing all kinds of games in an attempt to keep interest rates on U.S. government debt low, and so far they have been pretty successful at it.
But they aren’t going to be able to do it forever.
Up until now, other nations and investors around the world have continued to participate in the system even though they know that the Federal Reserve is cheating.
However, there are signs that a lot of investors are finally getting fed up and are ready to walk away from U.S. government debt.
China has been dumping short-term U.S. government debt. Russia has been dumping U.S. government debt. Pimco has been dumping U.S. government debt.
Others are taking things even farther.
In fact, there are some investors that plan on cashing in on the loss of confidence in U.S. Treasuries. Renowned investor Jim Rogers says that he is now going to be shorting 30 year U.S. government bonds.
“I cannot imagine or conceive lending money to the United States government for 30-years at 3, 4, 5 or 6 percent —you pick a number — in U.S. dollars”
And he is right. Who in the world would be stupid enough to loan the U.S. government money at a 4 or 5 percent rate of interest for the next 30 years?
Actually, most U.S. government debt is financed in the short-term these days. In fact, the U.S. government issues a higher percentage of short-term debt than any other industrialized nation.
This trend really got started during the Clinton administration. Back then they figured out that the U.S. could reduce its borrowing costs substantially by relying much more heavily on short-term debt. The Bush and Obama administrations have continued this trend.
So these days the U.S. government constantly has huge amounts of debt that are maturing and that need to be rolled over.
This is great as long as interest rates stay very, very low.
But when interest rates rise the whole game will change.
In a recent article, Pat Buchanan explained that the Obama administration is being completely unrealistic when it assumes that interest rates on U.S. government debt will stay incredibly low over the next decade….
“The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.
A return to the normal Fed rate would, by 2020, add $4.9 trillion to the cumulative deficit”
Most Americans really cannot grasp how incredibly low interest rates are right now.
Sometimes a picture is worth a thousand words.
The following chart shows how interest rates on 10 year U.S. Treasury bonds have declined over the last several decades.
As confidence in the U.S. dollar and in U.S. government debt declines, interest rates will go up.
In fact, there are troubling signs that we are starting to see a move in that direction right now. Last week, the yield on 5 year U.S. Treasuries experienced the biggest one week percentage jump ever recorded.
The big danger is that the political wrangling in Washington D.C. will start to cause a panic. The managing director of Standard & Poor’s recently told Reuters that if the U.S. government starts defaulting on debt at the beginning of August, the credit rating on U.S. Treasury bonds that are supposed to mature on August 4th will go from AAA all the way down to D….
Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.
“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”
When a credit rating gets slashed, interest rates on that debt can go up dramatically.
You are delusional if you believe that something like that can never happen here.
Right now the U.S. national debt is completely and totally out of control. If the U.S. government had to start paying interest rates of 10, 15 or 20 percent to borrow money it would be a total nightmare.
This year the U.S. government will have income of about 2.2 trillion dollars.
If in future years the U.S. government is spending a trillion or a trillion and a half dollars just on interest on the national debt, then how in the world is it going to be possible to even run the government, much less balance the budget?
But rising interest rates would not just devastate the federal government.
It would become much more expensive for state and local governments to borrow money.
Student loans would become much more expensive.
Car loans would become much more expensive.
Home loans would become out of reach for everyone except the very wealthy.
As we saw during the housing crash of a few years ago, rising interest rates can absolutely wipe homeowners out.
On a standard home loan, if you change the rate of interest from 5 percent to 10 percent you increase the mortgage payment by approximately 50 percent.
If you change the rate of interest from 5 percent to 15 percent, you roughly double the mortgage payment.
As the 30 year fixed rate mortgage chart below shows, interest rates are near historic lows right now….
Keep in mind that even with such ridiculously low interest rates the U.S. real estate market has been deader than a doornail.
So what would a significant spike in interest rates do to it?
When all of these low interest rates go away the entire financial system is going to change dramatically.
A significant spike in interest rates would wipe out U.S. government finances, it would push state and local governments all over the country to the brink of bankruptcy, it would bring economic activity to a standstill and it would destroy any hopes for a housing recovery.
This country, and in particular the federal government, is enslaved to debt but right now we are not feeling the full pain of that debt because interest rates are so low.
If you want to know when things are really going to start coming apart, just keep an eye on interest rates. When they really start spiking you can start sounding the alarm.
The truth is that the state of the economy is going to continue to get worse. Our debt is growing every single day and our country is getting poorer every single day. When interest rates start surging it is going to start knocking over a lot of dominoes.
I hope you are getting prepared for when that happens.
Is the United States “number one”? Many Americans take deep pride in their nation and the truth is that the U.S. has a lot going for it. The United States has the largest economy in the world. The United States also has the most powerful military on the entire planet. The United States has produced most of the greatest movies that the world has ever seen. But the United States is also number one in a lot of categories that are not go great. If we ever want to turn this country around, we need to be very honest with ourselves. We need to take a long, hard look in the mirror and realize that it is not a good thing that we are number one in divorce, drug addiction, debt, obesity, car thefts, murders and total crimes. We have become a slothful, greedy, decadent nation that is exhibiting signs of advanced decay. Until we understand just how bad our problems really are, we won’t be able to come up with the solutions that we need.
A lot of people that write articles like this have a deep hatred for America. But that is not the case with me. I love the United States. I love the American people. America is like an aging, bloated rock star that has become addicted to a dozen different drugs. America is a shadow of its former self and it desperately needs to wake up before it plunges into oblivion.
If you do not believe that America is in bad shape, just read the list below. The following are 20 not so good categories that the United States leads the world in….
#15 More pornography is created in the United States than anywhere else on the entire globe. 89 percent is made in the U.S.A. and only 11 percent is made in the rest of the world.
#16 The United States has the largest trade deficit in the world every single year. Between December 2000 and December 2010, the United States ran a total trade deficit of 6.1 trillion dollars with the rest of the world, and the U.S. has had a negative trade balance every single year since 1976.
#17 The United States spends 7 times more on the military than any other nation on the planet does. In fact, U.S. military spending is greater than the military spending of China, Russia, Japan, India, and the rest of NATO combined.
#20 The U.S. has accumulated the biggest national debt that the world has ever seen and it is rapidly getting worse. Right now, U.S. government debt is expanding at a rate of $40,000 per second.
So are you convinced that we are in trouble yet?
The truth is that America has changed. Most of us don’t even say hello to our neighbors anymore.
In fact, we have become so self-involved that many of us don’t even notice when someone around us dies.
Just consider the following two examples.
*USA Today recently reported on the body of a dead woman that was not found for approximately a year even though a whole bunch of people walked right past the car where she died….
Bank contractors, inspectors and even the new owner of a foreclosed home walked past the silver Chevy Nova in the garage numerous times before discovering the former homeowner — dead on the front seat.
*In an even more shocking case, the CBS affiliate in Boston recently reported that a dead woman was lying on the bottom of a public pool for two days while large numbers of people swam right over her. How in the world could something like this possibly happen?….
It’s a mystery as murky as the water at Veteran’s Memorial swimming pool in Fall River public pool: how did swimmers, lifeguards, or inspectors not notice a woman’s body at the bottom of the pool for a few days?
Marie Joseph, 36, was last seen at the pool on Sunday. The pool was open to the public Monday and Tuesday with six lifeguards on duty, and no one noticed the body under 12 feet of water.
Most Americans have become so self-involved that they barely even notice anyone other than their family and close friends.
The love of most Americans is growing cold and when the collapse of the U.S. economy happens it is just going to make things worse. Instead of working as a community, most Americans will only be concerned with making sure that their own needs are taken care of.
The United States was once the most blessed nation on the face of the earth, but now we are literally falling to pieces.
Does anyone have any ideas about why this could be happening?
Every year when July 4th rolls around, Americans from coast to coast celebrate July 4th with cookouts, outdoor concerts and fireworks. We love celebrating Independence Day and yet we are deeply enslaved to debt. We like to think of ourselves as “free” and yet we have rolled up the biggest pile of debt the world has ever seen. The people that we have borrowed all of this money from expect to be paid. Sadly, instead of addressing the problem, we have been loading more debt on to the backs of future generations with each passing year. What we are doing to our kids and our grandkids is so immoral that is almost defies description. At the heart of this debt-based system stands the Federal Reserve. It is a perpetual debt machine that was designed to trap the U.S. government in a spiral of debt permanently. Today, the U.S. national debt is 4700 times larger than it was when the Federal Reserve was created back in 1913. This year alone, we will add more to the national debt than we did from the presidency of George Washington to the beginning of the presidency of Ronald Reagan. So yes, enjoy the hotdogs and the fireworks, but also remember that we will never be free as long as this constantly expanding debt problem is hanging over our heads.
If you know anyone that does not take our national debt problem seriously, please share with them the video posted below. It is entitled “Economic Armageddon and You” and it is definitely worth the 5 minutes that it takes to watch it. Someone out there did a really great job of explaining our debt problem in a way that almost anyone can understand….
So is there any solution to this problem?
Not under the current system.
The debt-based Federal Reserve system is designed to expand U.S. government debt indefinitely. But of course all debt bubbles burst eventually and we are rapidly reaching that point.
It is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course. The truth is that it would never get even close to that high because the whole system would completely collapse long before then.
We need to transition to an entirely new system that has nothing to do with the Federal Reserve or Federal Reserve notes. We need an entirely new system where the money is not based on debt.
But even though more Americans than ever are awake to the flaws in our monetary system, the truth is that neither major political party is remotely ready to even consider an end to the current financial system.
Many Republicans believe that if we can just cut government spending enough we can solve the problem. Many Democrats believe that if we can just “raise enough revenue” we can solve the problem.
Neither of those solutions will work.
Many conservatives are so frustrated with the whole thing that they just want Congress to refuse to raise the debt ceiling. I have taken a lot of heat over the past couple of days for suggesting that this is a bad idea.
If we refuse to raise the debt ceiling, our borrowing costs will absolutely explode. Even if the U.S. government adopted a “balanced budget” by some miracle, the reality is that the federal government would still need to “roll over” very large amounts of debt every single year. If interest rates on U.S. debt rise substantially it will be beyond catastrophic.
In 2010, the U.S. government paid $413 billion in interest on the national debt.
If interest rates were to start rising as a result of a debt default, interest on the national debt would likely double or even triple.
Look, if we want to come anywhere close to balancing the budget under our current system, it will be a whole lot easier to do if we are spending 400 billion dollars on interest on the national debt rather than 1.2 trillion dollars.
Today, the U.S. government only takes in about 2.2 trillion dollars in taxes. How in the world are we going to have a chance if we have to pay out a trillion dollars just in interest on the national debt?
The yield on 10-year U.S. Treasuries rose from 2.86% to 3.18% just this past week. Let us hope that this is not the beginning of a bad trend.
A refusal to raise the debt ceiling would also likely set off another recession (or worse). The following is what a new article on CNBC says would happen if the U.S. does not raise the debt ceiling by August 2nd….
A U.S. default would not only be historic, it would also almost certainly lead to a new financial crisis. Interest rates would likely spike, equity markets would plunge along with the value of the dollar, and the country could fall back into a recession.
We have to raise the debt ceiling.
So does this mean that I am advocating “kicking the can down the road”?
No.
If you are a conservative, you can still get the same result that you want without destroying the credit rating of the United States.
All the Republicans in Congress have to do is to pledge that they will never pass anything but a balanced budget for 2012 or for any year beyond that. Without the permission of the House of Representatives, Barack Obama and the Democrats cannot continue their deficit spending. The sad truth is that the Republicans have been enabling and actively participating in this debt binge all along.
A balanced budget would definitely hurt the economy, but at least it would not wreck our credit rating and cause our borrowing costs to multiply.
But is that what the Republicans are shooting for?
No.
It is being reported that the Republicans and the Democrats have tentatively agreed to between $1 trillion and $2 trillion in budget cuts over the next 10 years.
So that comes to $200 billion in spending cuts a year at most.
Considering the fact that we are running budget deficits of about a trillion and a half dollars a year, that is not nearly enough.
So don’t accuse me of wanting to kick the can down the road. I want to actually do something substantial about the national debt. I just don’t think it is a good idea to trash our credit rating in the process.
It is the Republicans and the Democrats in Congress that are kicking the can down the road.
Trillion dollar deficits are not acceptable. Our nation is on the road to financial ruin.
But it is not just the federal government that is in massive financial trouble.
The reality is that we have “government debt problems” from coast to coast.
Did you hear that the government of Minnesota shut down the other day?
As the financial health of almost every single state government continues to decline, this type of thing is going to become more common.
In the state of Illinois things are so bad that some income tax refunds have not been paid since 2009. The following is a brief excerpt from an article on the Economic Policy Journal blog….
I repeat, this is no time to own state or municipal bonds. The desperation level at various states and municipalities is getting more and more intense.
With the start of a new budget year just two days away, thousands of Illinois businesses are still waiting for state income tax refunds dating back to 2009.
In a recent article entitled “Is The Economy Improving?“, I went into greater detail about the horrific financial crisis that Illinois is facing….
*****
Did you know that things have gotten so bad in Illinois at this point that the Illinois state government is letting bills go unpaid for long periods of time on a regular basis?
It’s true.
Right now they have billions in unpaid bills and they are facing a financial future that is so bleak that it is almost indescribable.
In one recent article, author Stephen Lendman described the horrific financial crisis that Illinois is facing right now….
With spending exceeding revenues, and obligations not postponed, unpaid bills are growing “at a frightening rate. For instance, IGPA’s Fiscal Futures Model indicates (they) could reach $40 billion by July 1, 2013, with an associated delay in paying those bills of more than five years.”
Besides its $13 billion deficit and $6 billion in unpaid bills, its pension fund is about $130 billion in the red – a red flag that state workers may lose out altogether, wiping out their promised retirement savings.
But it isn’t just the state government that is having problems. According to Cook County Treasurer Maria Pappas, the average household in Chicago would owe a whopping $63,525 if all local government debt was divided up equally among all of the households.
*****
How can we claim that our country is free when we are enslaved to such horrible debt burdens?
The borrower is always a servant of the lender. As a nation, we are becoming a little bit less independent every single day.
So enjoy celebrating Independence Day while you still can.
If we continue on the path that we are currently on, nobody is going to be celebrating much of anything in the future.
As the deadline to raise the debt ceiling draws closer, many are now wondering if Barack Obama will try to go around Congress if a deal is not reached by August 2nd. In particular, a number of voices (including U.S. Treasury Secretary Timothy Geithner) are now touting the 14th Amendment as a way to get around the debt ceiling. There are others that believe that Barack Obama should invoke “national security” in order to avoid a default. If the Republicans and the Democrats do not reach a deal by the end of July, things are going to get really, really interesting and there is no telling what Barack Obama may do.
Section 4 of the 14th Amendment to the U.S. Constitution says the following….
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
At a breakfast hosted by Politico last month, U.S. Treasury Secretary Timothy Geithner actually pulled out a copy of the Constitution and read this clause out loud.
Geithner (and others) are now attempting to argue that the debt ceiling is actually unconstitutional. They believe that the phrase “shall not be questioned” means that if the U.S. government refuses to make debt payments it would be directly violating the U.S. Constitution.
So what does Barack Obama think of this legal theory?
Reporters have been trying to ask him this question, but right now Obama is not answering.
Certainly Obama would very much prefer to have the Republicans and the Democrats reach a deal far before the debt ceiling deadline arrives.
So what will Obama do if a deal is not reached?
Nobody seems to know.
But this clause of the 14th Amendment brings up some deeper issues as well.
Does this clause make it unconstitutional for all future generations to renounce the national debt?
Does this clause make it illegal for all U.S. citizens to even question the validity of the U.S. national debt?
Most Americans would like to think that when it comes to constitutional questions there should always be some clear answers. But the truth is that for many constitutional questions there are a lot of gray areas.
When there is something in the U.S. Constitution that we do not like, that does not mean that we get to ignore it. We have way too many politicians doing that already.
Personally, I would like to see this phrase in the 14th Amendment changed. I think that this phrase is way too vague and could potentially open up a whole can of worms.
But of much more immediate concern is raising the debt ceiling.
Yesterday, I talked about how horrible our national debt is and I also talked about how dangerous refusing to raise the debt ceiling would be.
A large number of Americans that are deeply concerned about the national debt are also completely opposed to raising the debt ceiling.
But if we default right now, it is going to make our national debt problem much, much worse.
Think of it this way – if you had friends that were drowning in debt, would you tell them to immediately start defaulting on their mortgage, their car loans and their credit cards?
Of course not.
The penalties, fees and interest rate hikes would kill them.
Well, it is the same thing with the federal government. Right now we have a great credit rating and we are able to borrow money at extremely low interest rates.
If that suddenly changed, interest rates on our debt would go up dramatically. Just look at Greece. Greece is paying somewhere around 28 percent interest on 2 year bonds. If that happened to us, it would be a complete and total nightmare.
Even if we adopted a “balanced budget” next fiscal year, we would still need to roll over gigantic amounts of debt.
If interest rates on U.S. government debt started skyrocketing, interest payments on the U.S. national debt would very quickly start eating up the majority of our tax dollars. We would soon have very, very little money to spend on anything else.
Wrecking our credit rating just to make a point about fiscal responsibility is not going to solve anything.
What point would there be to wrecking our financial system when neither political party has a viable plan for something better?
A lot of people (including some readers of this column) are actually rooting for a financial crash so they can watch the world go down in flames.
Yes, an economic collapse is coming, but that doesn’t mean that we should wish for it and try to get it to happen faster.
Look, you are probably going to die someday. That doesn’t mean that you should go out and run your car into the nearest tree.
If we blow out our national credit rating right now, it is going to make it 10 times worse to try to get a handle on our national debt.
Plus, if the world financial system was to crash, it would create a massive amount of economic pain for hundreds of millions of people.
Most Americans cannot even conceive of what the consequences of a complete and total financial collapse would be. It is not something that we should be wishing for. Life as we know it would change dramatically.
Once our economic system crashes, it is not going to be able to be put back together again so easily. Most Americans have no idea how bad things could get.
Yes, we must do something about the national debt. We must stop spending ourselves into oblivion. We must dismantle the current debt-based financial system that we are operating under and we must transition to something new.
But to purposely default by refusing to raise the debt limit would bring a whole lot of future financial pain into the present and would make it almost impossible to transition to a new financial system in an orderly fashion.
The sad thing is that a whole lot of people out there actually believe that the current system can be fixed. Many Republicans believe that if we can just cut spending enough we will be okay. Many Democrats believe that if we can just raise taxes on the wealthy enough we will be okay.
But the truth is that the current system cannot be fixed. It is designed to be a perpetual government debt machine from which there is no escape. We have reached a terminal phase of the debt spiral and we get closer to a collapse every single day.
According to John Williams of Shadow Government Statistics, if the U.S. government used GAAP accounting principles the “real” U.S. government budget deficit each year would be somewhere in the neighborhood of 5 trillion dollars. Williams believes that the U.S. government is essentially bankrupt and that our current system is not anywhere close to sustainable….
Generally, you’ll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That’s 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.
Sadly, Williams is right. We are drowning in debt. Something has got to be done.
But refusing to raise the debt limit is not going to help. If we allow our credit rating to be destroyed we could quickly find ourselves paying a trillion dollars or more just in interest on the national debt every single year.
If we want to handle the national debt monster, we need to do it the right way. One thing that we need to do is to admit how bad the situation really is.
The truth is that we are in a lot more than $14.3 trillion in debt.
For example, according to The Financial Armageddon blog, the combined total for all “U.S. government bailouts” and “U.S. government guarantees” related to the financial crisis comes to a grand total of over 20 trillion dollars.
Also, the “unfunded liabilities” of the U.S. government are estimated to be somewhere between $60 trillion and $100 trillion.
If Bill Gates gave every penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.
There are no easy solutions to our problems. If we refuse to raise the debt ceiling our interest costs on the national debt may end up doubling or even tripling in short order. That is not going to help us get our fiscal house in order.
Right now the state of the economy is so fragile that one really bad “shock” could cause it to totally fall apart. The U.S. economy is like a patient that is barely hanging on in the operating room. If we don’t show patience and discipline we could end up with a total disaster.
Look, you will probably not find many writers on the entire Internet that harp on the horror of the U.S. national debt more than I do. It is a crisis that is so nightmarish that it is hard to even put into words.
But refusing to raise the debt ceiling is not going to solve anything. In fact, it would only accelerate our demise.
Our economic system is in bad enough shape already. Let’s not do any unnecessary damage to it.
Sadly, that is the truth. We are in a permanent decline. Just “tweaking” a few things is not going to work. Doing what the Democrats are telling us to do is not going to work. Doing what the Republicans are telling us to do is not going to work.
Our financial system is fundamentally flawed from the Federal Reserve on down. If we continue on the path that we are on, a horrific collapse is inevitable.
We need truly dramatic changes if our way of life is going to survive.
Unfortunately, most Democrats and most Republicans believe that they can fix the current system somehow.
The entire U.S. financial system has become a gigantic shell game. While it is still in motion, a shell game can be mesmerizing to watch. But when it ends the consequences can be painful. So exactly what is a shell game? According to Wikipedia, a shell game “is portrayed as a gambling game, but in reality, when a wager for money is made, it is a confidence trick used to perpetrate fraud.” Sadly, that is exactly what is happening on the global stage today. The Federal Reserve is like a con artist that is desperately trying to stay one step ahead of everyone else. The folks at the Fed know that the debt that the U.S. government has accumulated is not sustainable and will eventually collapse. They also know that the U.S. dollar is eventually going to become essentially worthless. But for now the Federal Reserve is putting on a grand show and is trying to keep everyone believing that the game is fair and legitimate.
The Federal Reserve’s much ballyhooed “QE2″ program has come to an end, and most Americans still don’t even understand what “quantitative easing” is.
Basically, what the Federal Reserve did was zap hundreds of billions of dollars into existence out of thin air and used them to buy U.S. government debt.
It is kind of like if you are playing poker with someone and they reach under the table and pull out a gigantic pile of chips which they add to their own stack.
In the process, the big banks made a ton of money because they are the ones that the Federal Reserve was buying U.S. Treasuries from and the U.S. government was happy because all of the new government debt being issued was getting soaked up by the system.
Of course all of this is one giant Ponzi scheme, but up to this point the Federal Reserve has gotten away with it.
Meanwhile, average Americans were getting the short end of the stick because all of this new money has been causing the price of food and the price of gas to go up.
But now QE2 has come to an end.
So does that mean that “quantitative easing” is going to be completely over?
No, not really. The shell game continues.
The Federal Reserve has announced that it is going to continue to purchase U.S. government debt using the proceeds from maturing debt that it already owns. It is being projected that the Federal Reserve will purchase 300 billion dollars in U.S. government debt over the next 12 months using this method.
QE2 is just about done. But the Federal Reserve will still be buying massive amounts of long-term Treasuries.
In fact, the Fed’s purchases over the next year will likely be at least $300 billion. That’s half the size of QE2 — even if QE3 never takes place.
But “quantitative easing” is just one example of a shell game run by the Fed. There have been lots more.
For example, during the financial crisis the Federal Reserve started loaning gigantic amounts of cash to the big banks for next to nothing.
The big banks took a lot of this cash and invested it in U.S. Treasuries. U.S. Treasuries typically only pay a couple of percentage points, but when you can borrow massive amounts of nearly free money suddenly they become extremely profitable.
Instead of loaning out large amounts of money to all of us to get the economy rolling again, the big banks just parked huge amounts of cash in U.S. Treasuries and watched the risk-free profits come rolling in.
In this way, the Federal Reserve helped big banks make a ton of money and they supported the exploding federal government debt load at the same time.
The chart below shows that the amount of U.S. government securities owned by the banks has increased exponentially since the beginning of the financial crisis. This is not an accident….
The Federal Reserve does lots of stuff like this. They know that they will probably never get audited and they know that the American people don’t understand all of this financial stuff, so they get away with it.
But what if something came along and suddenly interrupted the shell games that the Fed is playing?
Well, that is exactly what this debt ceiling debate threatens to do.
If the U.S. defaults, even for a short time, all of the financial shell games and Ponzi schemes are going to be greatly jeopardized.
If Congress does not raise the debt ceiling by August 2nd, the U.S. government will start defaulting, and that would unleash a tremendous amount of chaos.
A recent USA Today article described some of the things that might happen if the government was not able to borrow any more money later this summer….
If Social Security, Medicare, Medicaid, unemployment benefits, payments to defense contractors and interest payments on Treasury bonds were exempt, that would be all the government could afford for the month. No money for troops or veterans. No tax refunds. No food stamps or welfare. No federal salaries or benefits.
In addition, financial markets all over the world would be severely rattled. If the default only lasted a couple of days it would not be bad, but if the U.S. ended up defaulting on debts for weeks or months it really would be cataclysmic.
The International Monetary Fund warned this week that a failure to raise the debt ceiling by August 2nd would be a “severe shock” to global financial markets.
In this case, the IMF is actually right. In fact, a “severe shock” would be an understatement.
The managing director of Standard & Poor’s has told Reuters that if the U.S. starts defaulting, the credit rating on U.S. Treasury bonds that are supposed to mature on August 4th will go all the way down from AAA to D….
Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.
“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”
A lot of Americans believe that Congress should just refuse to raise the debt ceiling and let the whole system crash. But the reality is that most Americans simply have no idea how much of a financial disaster that would be for the entire globe.
Yes, the U.S. national debt is completely and totally out of control. Yes, something must be done about it urgently.
But defaulting on our debts and wrecking global financial markets is not going to solve much of anything.
Sadly, even if we do not default on our debts this year, the reality is that the U.S. government debt bubble is going to collapse one way or another eventually.
The path that we are currently on is not even close to sustainable.
Even as our debt expands exponentially, the U.S. economy is being systematically dismantled and we are becoming poorer as a nation.
As I have written about previously, jobs and businesses are leaving the United States at a staggering rate because of cheap labor overseas and because of ridiculous regulations. The business environment in this country has become incredibly toxic.
Stanford University’s David Cheriton was instrumental in helping Sergey Brin and Larry Brin develop Google. Now he is warning that the anti-business policies of Barack Obama and the U.S. Congress are wrecking the economy….
“When you look at, say, Larry and Sergey of Google, they made billions of dollars, but they contributed many more billions of dollars to the US economy. And so we should be empowering these people; we should be cultivating more of the next generation of those types. And yet, I think there’s almost a hostile attitude towards people who have been successful in this country.”
As I wrote about the other day, the rate of new business creation in the United States has been declining steadily since the 1980s. We won’t have a chance at a real economic recovery until the creation of small businesses is encouraged once again.
But today businesses of all sizes are trying to avoid U.S. taxation. Right now, the United States has the highest corporate tax rate in the entire world. Sadly, all businesses have a great deal of incentive to avoid incorporating in the United States.
As savvy investors and entrepreneurs search for ways to minimize the impact of the U.S. tax system, with its relatively high rates and global reach, they are increasingly incorporating overseas, tax experts say. Some private-equity firms have relocated U.S. companies or divisions to tax-haven countries. U.S. multinational companies have spun off foreign subsidiaries in tax havens. U.S. start-ups are even beginning life offshore.
Large numbers of really good companies are fleeing the United States.
What we are doing is not working.
So what is the answer?
Well, as I have said before, we need to entirely scrap the current tax system and come up with something that works in the 21st century.
But we all know that is not going to happen.
Meanwhile, our economy continues to unravel. According to the Department of Labor, the unemployment rate rose in 210 metro areas during the month of May, and it only declined in 131 metro areas.
Unfortunately, most of our politicians don’t seem to have any answers and the Federal Reserve is just trying to keep their shell games going.
Every single day the U.S. economy is getting weaker. Every single day we are going into more debt. Every single day we get closer to the collapse of the entire system.
Time is running out.
I hope you are making good use of the time you still have left.
Economic despair is beginning to spread rapidly in America. As you read this, there are millions of American families that are just barely hanging on by their fingernails. For a growing number of Americans, it has become an all-out battle just to be able to afford to sleep under a roof and put a little bit of food on the table. Sadly, there are more people than ever that are losing that battle. Tonight, tens of thousands of formerly middle class Americans will be sleeping in their cars, even though that is illegal in many U.S. cities. Tens of thousands of others will be sleeping in tent cities or on the streets. Meanwhile, communities all over America are passing measures that are meant to push tent cities and homeless people out of their areas. It turns out that once you lose your job and your home in this country you become something of an outcast. Sadly, the number of “outcasts” is going to continue to grow as the U.S. economy continues to collapse.
Uh Oh – Italy Is Coming Apart Like A 20 Dollar Suit
What is going on in Italy right now is potentially far more serious than what has been going on in Greece. Italy is the fourth largest economy in the European Union. If Italy requires a bailout, the rest of Europe might not be able to handle it.
An anonymous European Central Bank source told one German newspaper the following on Sunday….
The source also added that the current bailout fund “was never designed for that“.
Italy has already implemented austerity measures.
This was not supposed to happen.
But it is happening.
This latest crisis was precipitated by a substantial sell-off of Italian financial assets on Friday. An article posted by Bloomberg described the pounding that the two largest Italian banks took….
Unfortunately, this is just the continuation of a trend that has been going on for a while.
When you look at them as a group, the stocks of the five largest Italian banks have lost 27% since the beginning of 2011.
That is not a good sign.
Also, investors are starting to dump Italian government debt. Reuters says that the yield on 10 year Italian bonds is approaching the danger zone….
The Italian national debt is now up to about 120 percent of GDP. The Italian government would be able to manage it if interest rates were very, very low. But unfortunately they are rising fast and if they get too much higher they are going to become suffocating.
As I have written about previously, government debt becomes very painful once you take low interest rates out of the equation. For example, if Greece could borrow all of the money that it wanted to borrow at zero percent interest, it would not have a debt problem. But now the yield on 2 year Greek bonds is over 30 percent, and there is not a government on the face of the earth that can afford to pay interest that high for long.
Unfortunately for Italy, this could just be the beginning of rising interest rates. Just recently, Moody’s warned that it may be forced to downgrade Italy’s Aa2 debt rating at some point within the next couple of months.
If things continue to unravel in Italy, all of the credit agencies may downgrade Italy sooner rather than later.
The frightening thing about Italy is that a financial crisis has a way of exposing corruption, and there are very few countries that can match the kind of corruption that goes on in Italy.
As a child, I had the chance to live in Italy. I love Italy. The people are friendly, the weather is great, the architecture is amazing and the food is spectacular. I will always have great affection for Italy and I will always cheer for the Italian national team when the World Cup rolls around.
However, I also know that corruption is deeply ingrained into Italian culture. It is simply a way of life.
Just check out the prime minister of Italy. Silvio Berlusconi is the consummate Italian politician. He is greatly loved by many, but it would take days to detail all of the scandals that he has been linked to.
At this point, Berlusconi has become a parody of himself. Each new sex scandal or financial scandal just adds to his legend. Italy is one of the only nations in Europe where such a corrupt politician could have stayed in office for so long.
Not that the U.S. government is much better. Our government becomes more corrupt with each passing year.
But the point is that if a financial collapse happens in Italy and people start “turning over rocks” it could turn up all sorts of icky stuff.
So what is Europe going to do if Italy needs a bailout?
Well, they are probably going to have to fire up the printing presses because it would probably take a whole lot more euros than they have right now.
The truth is that the EU has now entered a permanent financial crisis. You have a whole bunch of nations that have accumulated unsustainable debts and that cannot print their own currencies. The financial system of the EU as it is currently constructed simply does not work.
Some believe that the sovereign debt crisis will eventually cause the breakup of the EU. Others believe that this crisis will cause it to be reformed and become much more integrated.
In any event, what just about everyone can agree on is that the financial problems of Europe are not going away any time soon. For now, EU officials are keeping all of the balls in the air, but if at some point the juggling act falters, the rest of the world better look out.
A financial crash in Europe would be felt in every nation on earth and it would be absolutely devastating. Let’s hope that we still have some more time before it happens.