In the United States, it is not just the federal government that has a horrific debt problem. Today, state and local governments across America are collectively deeper in debt than they ever have been before. In fact, state and local government debt is now sitting at an all-time high of 22 percent of U.S. GDP. Once upon a time, municipal bonds (used to fund such things as roads, sewer systems and government buildings) were viewed as incredibly safe investments. They were considered to have virtually no risk. But now all of that has changed. Many analysts are now openly speaking of the possibility of a municipal bond market crash in 2011. The truth is that dozens upon dozens of city and county governments are teetering on the brink of bankruptcy. Even the debt of some of our biggest state governments, such as Illinois and California, is essentially considered to be “junk” at this point. There are literally hundreds of governmental financial implosions happening in slow motion from coast to coast, and up to this point not a lot of people in the mainstream media have been talking about it.
Fortunately, a recent report on 60 Minutes has brought these issues to light. If you have not seen it yet, do yourself a favor and click on the video below and spend a few minutes watching it. It is absolutely stunning.
In the piece, one of the people that 60 Minutes interviewed was Meredith Whitney – one of the most respected financial analysts in the United States. According to Whitney, the municipal bond crisis that we are facing is a massive threat to our financial system….
“It has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States and certainly the largest threat to the U.S. economy.”
State and local governments across the United States are facing a complete and total financial nightmare. The 60 Minutes report posted below does a pretty good job of describing the problem but it doesn’t even pretend to come up with any solutions….
Unlike the federal government, state and local governments cannot just ask the Federal Reserve to print up endless amounts of cash. If state and local governments want to spend more than they bring in, they must borrow it from investors.
If the municipal bond market crashes, and investors around the world are no longer willing to hand over gigantic sacks of cash to state and local governments in the United States, then the game is over. Either state and local governments will have to raise taxes or they will have to start spending within their means.
Most Americans have no idea what this would mean. For decade after decade, state and local governments throughout the nation have been living way, way, way above their means. If the debt cycle gets cut off, it is going to mean that many local communities around the nation will start degenerating into rotting hellholes nearly overnight.
We are already seeing this happen in places such as Detroit, Michigan and Camden, New Jersey but if the municipal bond market totally collapses we are quickly going to have dozens of Detroits and Camdens from coast to coast.
Let’s take a closer look at some of the state and local governments that are in some of the biggest trouble….
California
California is facing a 19 billion dollar budget deficit next year, and incoming governor Jerry Brown is scrambling to find billions more to cut from the California state budget. At this point, investors are becoming increasingly wary about loaning any more money to the state. The following quote from Brown about the desperate condition of California state finances is not going to do much to inspire confidence in California’s financial situation around the globe….
“We’ve been living in fantasy land. It is much worse than I thought. I’m shocked.”
Unfortunately, the economic situation in California continues to degenerate. For example, 24.3 percent of the residents of El Centro, California are now unemployed. In fact, the number of people unemployed in the state of California is approximately equivalent to the populations of Nevada, New Hampshire and Vermont combined.
The housing market in the state is also a major drag on the economy there. For instance, the average home in Merced, California has declined in value by 63 percent over the past four years.
The state of California is swamped with so much debt that there literally appears to be no way out.
Arizona
The state government of Arizona is so incredibly starved for cash that it actually sold off the state capitol building, the state supreme court building and the legislative chambers. Now they are leasing those buildings back from the investors that they sold them to.
Arizona also recently announced that it has decided to stop paying for many types of organ transplants for people enrolled in its Medicaid program.
Illinois
Illinois is widely regarded to be in the worst financial condition of all the U.S. states. At this point, Illinois has approximately $5 billion in outstanding bills that have not been paid.
According to 60 Minutes, the state of Illinois is six months behind on bill payments. 60 Minutes correspondent Steve Croft asked Illinois state Comptroller Dan Hynes how many people and organizations are waiting to be paid by the state, and this is how Hynes responded….
“It’s fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state.”
The University of Illinois alone is owed 400 million dollars. There are approximately two thousand not-for-profit organizations that are collectively owed a billion dollars by the Illinois state government.
New Jersey
The New Jersey state budget has been slashed by 26 percent, a billion dollars have been cut from education and thousands of teachers have been laid off.
But even with all of those cuts, New Jersey is still facing a $10 billion budget deficit next year, and the state has $46 billion in unfunded pension liabilities and $65 billion in unfunded health care liabilities that it is somehow going to have to address in the future.
Detroit
Detroit Mayor Dave Bing has come up with a new way to save money. He wants to cut 20 percent of Detroit off from essential social services such as road repairs, police patrols, functioning street lights and garbage collection.
Miami
One Miami commissioner declared earlier this year that bankruptcy may be the city’s only financial hope.
Philadelphia, Baltimore and Sacramento
Major cities such as Philadelphia, Baltimore and Sacramento have instituted “rolling brownouts” in which various city fire stations are shut down on a rotating basis.
Camden
The second most dangerous city in the United States – Camden, New Jersey – is about to lay off about half its police in a desperate attempt to save money.
Oakland
Oakland, California Police Chief Anthony Batts has announced that due to severe budget cuts there are a number of crimes that his department will simply not be able to respond to any longer. The crimes that the Oakland police will no longer be responding to include grand theft, burglary, car wrecks, identity theft and vandalism.
America used to be viewed as the land of great economic progress, but that is no longer the case. Sadly, all over the United States there are signs that we are actually going backwards as a country.
All over the nation, asphalt roads are actually being ground up and are being replaced with gravel because it is cheaper to maintain. The state of South Dakota has transformed over 100 miles of asphalt road into gravel over the past year, and 38 out of the 83 counties in the state of Michigan have transformed at least some of their asphalt roads into gravel roads.
Just think about that – we are actually going back to gravel roads.
What’s next?
But this is what is going to happen all over America if dozens of state and local governments start defaulting and the municipal bond market crashes.
In fact, don’t look now, but there are signs that a “bloodbath” in the municipal bond market has already begun. The months of November and December have been incredibly rocky for municipal bonds.
The days when U.S. states and cities could borrow seemingly endless amounts of incredibly cheap money are officially over.
So where are state and local governments going to get the money that they need?
Well, they are going to come and try to get it from you of course. Over the past two years, 36 of the 50 U.S. states have jacked up taxes or fees.
Many local governments are trying to raise funds any way that they can. For example, from now on if you are caught jaywalking in Los Angeles you will be slapped with a $191 fine.
This kind of thing is happening all over America. Police departments are being turned into revenue raising operations. Police are so busy writing tickets that they barely have any time to investigate actual crimes anymore.
But it simply is not going to be enough. State and local governments across the U.S. are facing financial holes of legendary proportions.
The 60 Minutes report above stated that the combined unfunded pension and health care liabilities of the 50 states is $1 trillion. Unfortunately, that is an estimate that is probably way too conservative. In fact, two prominent university professors have calculated that the combined unfunded pension liability for all 50 U.S. states is approximately 3.2 trillion dollars.
So if the municipal bond market does crash will the federal government step in and bail everyone out?
Well, this upcoming spring the $160 billion in federal “stimulus money” runs out. At that point there will likely be a huge cry for even more “stimulus money” for state and local governments.
Unfortunately, as I wrote about yesterday, the federal government is also flat broke and swimming in an ocean of endless red ink. Congress could potentially step in and try to bail all the state and local governments out, but in the end it is the American people who are going to have to pay the bill.
We are on the verge of a horrific economic collapse which is going to change life in this country as we know it forever. All of this debt is absolutely going to swamp us. Our politicians can keep trying to kick the can down the road for as long as they can, but eventually the financial nightmare that so many of us have been dreading is going to overtake us.
Oil prices are starting to spin out of control once again. In London, Brent North Sea crude for delivery in February hit 91.89 dollars a barrel on Friday. New York crude moved above 88 dollars a barrel on Friday. Many analysts believe that 100 dollar oil is a virtual certainty now. In fact, many economists are convinced that oil is going to start moving well beyond the 100 dollar mark. So what happened the last time oil went well above 100 dollars a barrel? Oh, that’s right, we had a major financial crisis. Not that subprime mortgages, rampant corruption on Wall Street and out of control debt didn’t play major roles in precipitating the financial crisis as well, but the truth is that most economists have not given the price of oil the proper credit for the role that it played in almost crashing the world economy. In July 2008, the price of oil hit a record high of over $147 a barrel. A couple months later all hell broke loose on world financial markets. The truth is that having the price of oil that high created horrific imbalances in the global economy. Fortunately the price of oil took a huge nosedive after hitting that record high, and it can be argued that lower oil prices helped stabilize the world economy. So now that oil prices are on a relentless march upward again, what can we expect this time?
Well, what we can expect is more economic trouble. The truth is that oil is the “blood” of our economy. Without oil nothing moves and virtually no economic activity would take place. Our entire economic system is based on the ability to cheaply and efficiently move people and products. An increase in the price of oil puts inflationary pressure on virtually everything else in our society. Without cheap oil, the entire game changes.
The chart below shows what the price of oil has done since 1950 (although it doesn’t include the most recent data). With the price of oil marching towards 100 dollars a barrel again, many people are wondering what this is going to mean for the U.S. economic “recovery”….
Just think about it. What is it going to do to U.S. households when they have to start spending four, five or even six dollars on a gallon of gas?
What is it going to do to our trucking and shipping costs?
What is it going to do to the price of food? According to the U.S. Bureau of Labor Statistics, food inflation in the United States was already 1 1/2 times higher than the overall rate of inflation during the past year. But that is nothing compared to what is coming.
During 2010, the price of just about every major agricultural commodity has shot up dramatically. These price increases are just starting to filter down to the consumer level. So what is going to happen if oil shoots up to 100, 120 or even 150 dollars a barrel?
Demand for oil is only going to continue to increase. Do you know who the number one consumer of energy on the globe is today? For about a hundred years it was the United States, but now it is China. Other emerging markets are starting to gobble up oil at a voracious pace as well.
Not that the price of oil isn’t highly manipulated. Of course it is. The truth is that the price of oil should not be nearly as high as it currently is. Unfortunately, you and I have very little say on the matter.
If the price of oil keep going higher, it is really going to start having a dramatic impact on global economic activity at some point. Meanwhile, oil producers and the big global oil companies will pull in record profits, and radical “environmentalists” will love it because people will be forced to start using less oil.
When it comes to oil, there are a lot of “agendas” out there, and unfortunately it looks like the pendulum is swinging back towards those who have “agendas” that favor a very high price for oil.
So what does that mean for all of us?
It is going to mean higher prices at the pump, higher prices at the supermarket and higher prices for almost everything else that we buy.
If the price of oil causes a significant slowdown in economic activity, it could also mean that a whole bunch of us may lose our jobs.
The ratio of corporate insider stock selling to corporate insider stock buying is at the highest it has been in nearly four years. This is so similar to what happened just prior to the last financial crisis. The corporate insiders are seeing the writing on the wall and they are flocking for the exits.
Many savvy investors are getting out of paper and are looking for hard assets to put their money in. For example, China is buying gold like there is no tomorrow. The Chinese seem to sense that something is coming. But of course they are not alone. All over the world top economists are warning that we are flirting with disaster.
On Friday, Moody’s slashed Ireland’s credit rating by five notches to Baa1, and is warning that even more downgrades may follow.
Just think about that for a moment.
Moody’s didn’t just downgrade Irish debt a little – what Moody’s basically did was take out a big wooden mallet and pummel it into oblivion.
Irish debt is now considered little more than garbage in world financial markets now. Unfortunately, Greece, Spain, Portugal, Italy, Belgium and a bunch of other European nations are also headed down the same road.
The truth is that the euro is much closer to a major collapse than most Americans would ever dream.
The world financial system is teetering on the brink of another major financial crisis, and rising oil prices certainly are not going to help that.
If the price of oil breaks the 100 dollar mark, it will be time to become seriously alarmed.
If the price of oil breaks the 150 dollar mark in 2011 it will be time to push the panic button.
Let’s hope that the price of oil stabilizes for a while, but unfortunately that is probably not going to happen.
The truth is that the economic outlook for 2011 is bleak at best, especially if the price of oil continues to skyrocket.
I hope that you enjoy the cheap foreign-made plastic trinkets that you will be exchanging with your family and friends this holiday season, because they are literally destroying the U.S. economy. As part of the new “one world economy” that both Democrats and Republicans insist is so good for us, millions of good paying middle class jobs have been shipped out of America. Do you need a job? Are you wondering where all the good jobs went? Well, the next time you are out just walk into a store and start looking at the product labels. Most of the things that are sold in our stores are now made out of the country. So if you need a good paying job to support your family that is just too bad – you have been merged into a global labor pool where you must compete for jobs with people on the other side of the globe willing to work for less than a tenth of what you usually make. Welcome to the “one world economy” where big global corporations make a fortune exploiting slave labor on the other side of the world while “overly expensive American workers” get dumped out on the street.
Are you in favor of a redistribution of wealth? Most of the time when the phrase “redistribution of wealth” is brought up, conservatives and libertarians visibly cringe – as they should. But did you know that right now the greatest redistribution of wealth in the history of the world is taking place and our politicians are doing nothing about it?
For a moment, imagine a giant map of the world. On that giant map, put a huge pile of money on the United States, and also put a huge pile of money on China and on the OPEC nations. Now imagine a big hand coming along once a month that takes tens of billions of dollars out of the U.S. pile and puts it into the piles of China and the OPEC nations.
As this continues month after month after month, what is eventually going to happen?
The U.S. pile of money is going to get far smaller and the other piles of money are going to get much, much larger.
And that is exactly what is happening in our world today.
Back in 1985, the U.S. trade deficit with China was 6 million dollars for the entire year – not really anything to worry about it.
Well, let’s fast forward to 2010. For the month of August alone, the trade deficit with China was more than 28 billion (that’s billion with a “b”) dollars.
In other words, the U.S. trade deficit with China in August was more than 4,600 times larger than the U.S. trade deficit with China was for the entire year of 1985.
My, how the world has changed in 25 years.
Oh, but doesn’t China “invest” some of that money they are getting from us back into our country?
Well yeah, our top officials regularly go over there to beg them to lend us more money. Now we owe China close to a trillion dollars. We also owe the major oil exporting nations of the Middle East massive amounts of money.
Is this a good idea? Let us keep in mind the ancient principle that the borrower always ends up the servant of the lender.
Is it wise for the United States to become enslaved to China and to the oil exporters of the Middle East?
Is that any way to run an economy? Is that any way to run a country?
All over the United States factories are closing down. If you go to shopping centers in many areas of America you would think that the hottest new store was called “Space Available”.
Since the year 2000, we have lost 10% of our middle class jobs. In the year 2000 there were about 72 million middle class jobs in the United States but today there are only about 65 million middle class jobs.
What kind of progress is that?
“But oh”, the supporters of the one world economy will declare, “the cheap goods, the cheap goods!”
Yes, I hope you enjoy paying ten percent less for your plastic trinkets. But you will also support American workers one way or another. Either you will provide them with good paying jobs, or you will pay for their food stamps and their unemployment checks.
One out of every six Americans is now enrolled in a federal anti-poverty program. As 2007 began, 26 million Americans were on food stamps, but now 42 million Americans are on food stamps and that number keeps rising every single month.
Can anyone out there please explain how the “one world economy” is supposed to be good for us when 42 million Americans cannot even feed themselves?
Allowing our country to be deindustrialized just so that we can consume more cheap goods from China is like tearing down pieces of your house to keep your fire going. In the end, you won’t have much of a house left.
Whatever your opinion of Donald Trump is, this next video is worth watching. Trump certainly should not run for president, but as a savvy businessman he definitely understands what China is doing to us….
It is time for the American people to wake up.
We are being taken advantage of.
The one world economy is going to keep destroying the U.S. middle class. There is no way that American workers can compete with slave labor on the other side of the globe. It is impossible.
In fact, just about every kind of job imaginable is being shipped to places where labor is cheaper. Even engineering and computer programming jobs are being offshored and outsourced.
The United States is even being slaughtered in high-tech industries. Back in 1998, the United States had 25 percent of the world’s high-tech export market and China had just 10 percent. Ten years later, the United States had less than 15 percent and China’s share had soared to 20 percent.
According to one recent study, China could become the global leader in patent filings by next year.
The United States has become a bloated, slovenly nation that consumes massive amounts of wealth but that produces relatively little.
With each passing year, we make fewer things inside the United States….
*The United States has lost a staggering 32 percent of its manufacturing jobs since the year 2000.
*As of the end of 2009, less than 12 million Americans worked in manufacturing. The last time that less than 12 million Americans were employed in manufacturing was in 1941.
*Manufacturing employment in the U.S. computer industry is actually lower in 2010 than it was in 1975.
Oh, but won’t “getting more education” solve all of our problems and get the American people back to work?
No.
The truth is that tens of millions of Americans have a “higher education” that is not doing them any good today.
In his article entitled “The Great College-Degree Scam“, Richard Vedder explains that a large percentage of U.S. college graduates are working in jobs that have not historically required college degrees….
Here it is: approximately 60 percent of the increase in the number of college graduates from 1992 to 2008 worked in jobs that the BLS considers relatively low skilled—occupations where many participants have only high school diplomas and often even less.
Ouch.
Later on in his article, Vedder notes that the number of college graduates that are waiting tables or that are working as cashiers is absolutely exploding….
In 1992 119,000 waiters and waitresses were college degree holders. By 2008, this number had more than doubled to 318,000. While the total number of waiters and waitresses grew by about 1 million during this period, 20% of all new jobs in this occupation were filled by college graduates. Take cashiers as well. While 132,000 cashiers possessed college degrees in 1992, by 2008, 365,000 cashiers were college graduates. As with waiters and waitresses, 20% of new cashiers since 1992 are college graduates.
So do you still think that the “one world economy” is a great idea?
Well, you might want to practice the following two phrases….
#1 “Would you like fries with that?”
#2 “Welcome to Wal-Mart!”
Our economy is turning into a low-wage service economy because we don’t make much of anything in the United States anymore.
So if you need a good job, I am afraid that the joke is on you.
The good jobs are being shipped out of the United States as part of the new one world economy, and millions of unemployed Americans have been left to fight over the low paying service jobs that remain.
So if you are flipping burgers or stocking shelves for a big multinational retail chain, perhaps you should consider yourself to be fortunate. At least you still have a job. There are millions of desperate, hungry-eyed Americans that would take your job in a second.
And you know what? Things are only going to get worse.
Selling government debt is a gigantic confidence game. For decades, investors all over the globe have gobbled up massive amounts of U.S. debt at incredibly low interest rates because they believed that it was a certainly that they would be paid back and be able to make a little bit of profit on top of it. Unfortunately, things have changed. Confidence is U.S. Treasuries is dying, and if confidence in U.S. government debt completely collapses at some point we could literally be looking at financial Armageddon. Why is that so? Well, when the world totally loses faith in U.S. Treasuries, interest rates on U.S. Treasuries will have to keep going up until enough investors are found to buy them. But much higher interest rates will mean much higher interest on the national debt and thus much higher federal budget deficits. That will erode confidence in U.S. Treasuries even further. In the end, a vicious cycle of eroding confidence and higher interest rates could ultimately lead to hyperinflation as the U.S. government and the Federal Reserve flood the system with endless amounts of paper money to try to keep the system solvent.
Faith in U.S. Treasury bonds is absolutely critical if the world financial system is going to continue to operate in a stable manner. In the post-World War 2 era, U.S. Treasuries have been largely viewed as the absolutely safest investment out there. So if there comes a point when the market for U.S. Treasuries completely collapses, it is going to cause unprecedented financial chaos. The worldwide derivatives market, which is already highly unstable, would almost certainly implode. Credit markets all over the globe would seize up. Global trade would quickly grind to a standstill.
This isn’t going to happen overnight (hopefully). Rather, the loss of confidence in U.S. Treasuries is something that is likely to take months or even years to play out. But once that confidence is gone, it is not something that will be able to be rebuilt easily.
Think of it this way – once you drive a car off a cliff, is it easy to reconstruct it?
Of course not.
Well, that is where we are headed with U.S. Treasuries.
The Federal Reserve is flooding the system with new dollars, Barack Obama and the U.S. Congress seem poised to pass a new tax deal which does not include corresponding spending cuts which will cause U.S. government budget deficits to become even more bloated, and there is a tremendous lack of faith both in U.S. political leaders and in the Federal Reserve at this point.
The rest of the world is losing faith that the U.S. government is going to be able to handle all of the debt that it has accumulated. We may be approaching a “tipping point” soon.
The following are 10 signs that confidence in U.S. Treasuries is dying….
#1 The financial community is extremely concerned that the tax deal that Barack Obama is pushing is going to dramatically increase U.S. government budget deficits over the next two years. On Monday, Moody’s warned that if Barack Obama’s tax deal with the Republicans becomes law, it will increase the likelihood that Moody’s could soon be forced to slash the rating of U.S. government debt.
#2 Already there are signs that some bond investors are looking for the exits. Last week, U.S. Treasuries suffered their largest two day sell-off since the collapse of Lehman Brothers back in September 2008.
#3 The yield on 10-year Treasury bonds set a six-month high on Monday before pulling back a bit. Most analysts believe that Treasury yields are going to push significantly higher in coming weeks.
#4 This trend of rising yields has been going on for a while. In fact, yields on 10-year Treasury bonds have been steadily rising since October 7th.
#5 Even before the recent tax deal was announced there were already troubling signs regarding the growth of U.S. government debt. The U.S. government budget deficit rose to $150.4 billion in November, which was the largest November budget deficit ever recorded.
#6 It is not just the new tax deal that has investors around the globe spooked. The truth is that the rest of the globe reacted very negatively to the new round of quantitative easing that the Federal Reserve announced back in November. The Federal Reserve is flooding the system with liquidity and the rest of the world is not amused.
#7 The American people have less faith in the Federal Reserve and in the financial system than at any other point in recent memory. For example, a new Bloomberg National Poll has found that a majority of Americans now want the Federal Reserve to either be held more accountable or to be abolished entirely.
#8 Investors all over the globe are starting to wake up and realize that America’s debt problem is unsolvable. David Bloom, the currency chief at HSBC, raised eyebrows when he recently stated that “if yields are rising because people think America’s fiscal situation is unsustainable, then its Armaggedon.”
#9 There is also a growing feeling among investors that the Federal Reserve simply does not care about the danger of inflation, and this is making bondholders very nervous. Stephen Lewis of Monument Securities recently put it this way….
“There is a feeling that the Fed doesn’t care about inflation – in fact, wants more of it – and that is certainly not in the interest of bondholders.“
#10 Over the next 12 months, the U.S. government is going to be rolling over trillions of dollars in debt along with all of the new borrowing that it is going to be doing. In fact, the U.S. government is somehow going to have to find a way to finance debt that is equivalent to 27.8 percent of GDP in 2011.
For years our politicians have told us that “deficits don’t matter”, but the truth is that they do matter. The national debt of the United States is now the biggest debt in the history of the world by far, and yet most Americans do not seem to grasp the absolute financial horror that we are facing as a nation.
In the end, debt is always painful. It can be a lot of fun to run out and buy a beautiful new house, a couple of brand new cars and to run your credit cards up to the max, but eventually it catches up with you. Well, the same thing is now happening to us on a national level.
We are getting to the point where eventually we are not even going to be able to service the debt that we have already piled up. Once that happens we can either declare national bankruptcy or we can try to hyperinflate our way out of trouble.
Meanwhile, the once great U.S. economic machine is dying as well. The only reason we have been able to survive with all of this debt as long as we have is because of how powerful our economy has been.
The mighty economic machine which is supposed to provide funds to pay off all of this debt is being dismantled right in front of our eyes.
There was no way in the world that U.S. government debt was going to be sustainable even if our economy remained vibrant and healthy. The sad truth is that U.S. government debt is approximately 13 times larger than it was just 30 years ago.
But now that the “real economy” is dying a savage death there is simply no hope that this thing is ever going to turn around. The only thing left to do is to take bets on when the implosion is going to happen.
All of this “great tax cut debate” nonsense going on in Washington D.C. right now is just a bunch of incompetent politicians running around rearranging the deck chairs on the Titanic. Perhaps these tax cuts will provide enough of a short-term economic boost to get many of them re-elected in 2012. Meanwhile, our long-term economic problems continue to get a lot worse.
It has become quite obvious that Barack Obama is completely clueless about the economy, and what is even sadder is that the “highly educated” Chairman of the Federal Reserve, Ben Bernanke, seems almost equally as clueless.
Unfortunately, Americans have become so dumbed-down that they don’t even realize that their leaders are incompetent. In fact, as sad as it is to say, most Americans you will meet on the street probably cannot even tell you what U.S. Treasuries are.
Let us hope and pray that investors around the globe continue to have at least some confidence in U.S. Treasuries for at least a little while longer. When “financial Armageddon” finally does happen, it isn’t going to be pleasant for any of us.
So enjoy these happy economic times while you still have them, because at some point things are going to get a whole lot worse.
If you took an opinion poll and asked Americans what they considered the biggest threat to the world economy to be, how many of them do you think would give “derivatives” as an answer? But the truth is that derivatives were at the heart of the financial crisis of 2007 and 2008, and whenever the next financial crisis happens derivatives will undoubtedly play a huge role once again. So exactly what are “derivatives”? Well, derivatives are basically financial instruments whose value depends upon or is derived from the price of something else. A derivative has no underlying value of its own. It is essentially a side bet. Today, the world financial system has been turned into a giant casino where bets are made on just about anything you can possibly imagine, and the major Wall Street banks make a ton of money from it. The system is largely unregulated (the new “Wall Street reform” law will only change this slightly) and it is totally dominated by the big international banks.
Nobody knows for certain how large the worldwide derivatives market is, but most estimates usually put the notional value of the worldwide derivatives market somewhere over a quadrillion dollars. If that is accurate, that means that the worldwide derivatives market is 20 times larger than the GDP of the entire world. It is hard to even conceive of 1,000,000,000,000,000 dollars.
Counting at one dollar per second, it would take you 32 million years to count to one quadrillion.
So who controls this unbelievably gigantic financial casino?
Would it surprise you to learn that it is the big international banks that control it?
The New York Times has just published an article entitled “A Secretive Banking Elite Rules Trading in Derivatives“. Shockingly, the most important newspaper in the United States has exposed the steel-fisted control that the big Wall Street banks exert over the trading of derivatives. Just consider the following excerpt from the article….
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
Does that sound shady or what?
In fact, it wouldn’t be stretching things to say that these meetings sound very much like a “conspiracy”.
The New York Times even named several of the Wall Street banks involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.
Why does it seem like all financial roads eventually lead back to these monolithic financial institutions?
The highly touted “Wall Street reform” law that was recently passed will implement some very small changes in how derivatives are traded, but these giant Wall Street banks are pushing back hard against even those very small changes as the article in The New York Times noted….
“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”
So why should we be so concerned about all of this?
Well, because the truth is that derivatives could end up crashing the entire global financial system.
In a previous article, I described how derivatives played a central role in almost collapsing insurance giant AIG during the recent financial crisis….
Most Americans don’t realize it, but derivatives played a major role in the financial crisis of 2007 and 2008.
Do you remember how AIG was constantly in the news for a while there?
Well, they weren’t in financial trouble because they had written a bunch of bad insurance policies.
What had happened is that a subsidiary of AIG had lost more than $18 billion on Credit Default Swaps (derivatives) it had written, and additional losses from derivatives were on the way which could have caused the complete collapse of the insurance giant.
So the U.S. government stepped in and bailed them out – all at U.S. taxpayer expense of course.
As the recent debate over Wall Street reform demonstrated, the sad reality is that the U.S. Congress is never going to step in and seriously regulate derivatives.
That means that a quadrillion dollar derivatives bubble is going to perpetually hang over the U.S. economy until the day that it inevitably bursts.
Once it does, there will not be enough money in the entire world to fix it.
Meanwhile, the big international banks will continue to run the largest casino that the world has ever seen. Trillions of dollars will continue to spin around at an increasingly dizzying pace until the day when a disruption to the global economy comes along that is serious enough to crash the entire thing.
The worldwide derivatives market is based primarily on credit and it is approximately ten times larger than it was back in the late 90s. There has never been anything quite like it in the history of the world.
So what in the world is going to happen when this thing implodes? Are U.S. taxpayers going to be expected to pick up the pieces once again? Is the Federal Reserve just going to zap tens of trillions or hundreds of trillions of dollars into existence to bail everyone out?
If you want one sign to watch for that will indicate when an economic collapse is really starting to happen, then watch the derivatives market. When derivatives implode it will be time to duck and cover. A really bad derivatives crash would essentially be similar to dropping a nuke on the entire global financial system. Let us hope that it does not happen any time soon, but let us also be ready for when it does.
Many of you have decided that you are going to attempt to start a business in the United States today. Many of you are still convinced that this is “the land of opportunity” and that starting a business is fairly easy. Are you sure about that? Are you certain that you have considered all of the headaches involved? Are you sure that you are ready to handle the thousands of regulations that apply to your business and the mountains of paperwork mandated by various levels of government? Are you prepared to deal with entrenched unions, predatory lawyers and rabid environmentalists? The truth is that the business environment has never been this toxic in all of U.S. history. So even if you are able to start a viable business that can compete with the monolithic global corporations that dominate our economy, you still might not be able to make it. In the end, thousands upon thousands of businesses across America have been doomed to failure by ridiculous regulations, mountains of paperwork, health insurance costs, predatory lawsuits or corrupt government officials. So do you really think that you can beat the odds?
Historically, small businesses have been the driving force behind America’s economic growth. But today, we have made the business environment so complicated that small business owners are being completely smothered by red tape.
The following are 10 areas that anyone wishing to start a small business had better think about before moving forward. When you really stop and think about it, the fact that anyone out there is still attempting to start small businesses in America today is absolutely amazing.
#1 Regulations
If you plan to start a business in America today, you better get a hold of a good lawyer. In fact, if you want to be safe, you better get a small army of lawyers. You are going to need an expert on the federal regulations that apply to your business, you are going to need an expert on the state regulations that apply to your business and you are going to need an expert on the local regulations that apply to your business.
There are going to literally be thousands of regulations that apply to any business started inside the United States today. There is no way that you will ever be able to learn them all. Not only that, but the truth is that your lawyers will only be aware of a small fraction of them.
Do you know what the Federal Register is? The Federal Register is the primary source of regulations for U.S. government agencies. In 1936, the number of pages in the Federal Register was about 2,600. Today, the Federal Register is over 80,000 pages long. That is just one example of how bad things have gotten.
So what do you do? Well, just do your best to try to learn about the major regulations that apply to your business and pray that you don’t end up violating some important regulation that you are not even aware of.
#2 Paperwork
Do you know what paperwork the federal government expects you to fill out? Do you know what paperwork the state government expects you to fill out? Do you know what paperwork the city or the county expect you to fill out? Do you know what paperwork you will be required to fill out when hiring a new employee?
The truth is that the paperwork burden on small businesses has multiplied in recent years. Many small business owners are so swamped with paperwork that they barely have time to conduct their actual businesses.
For example, the U.S. Food and Drug Administration is projecting that the food service industry will have to spend an additional 14 million hours every single year just to comply with a new federal regulation that mandates that all vending machine operators and chain restaurants must label all products that they sell with a calorie count in a location visible to the consumer.
14 million hours just to comply with one ridiculous regulation? Yes, that is how bizarre things have gotten in America in 2010.
#3 Fees And Fines
Many small business creators in America are absolutely horrified to learn of the fees and fines that they must pay before they can ever even open their doors. Much of the time it is revenue-starved local governments that are the biggest culprits.
For example, a reader of this column named Gene recently shared his regulatory horror story with us….
Started a new business this year in AZ. Paid over $10,000 in fees for permitting, $10,000 in fee for elec hookup, $10,000 in fees for gas hook up and an extra $200 fee per month just for the “privilige” of having gas. Adding up all the fees to start our business, I don’t think we would do it again. We are now just getting to the point that we are making our bills each month, and so we are not taking a paycheck, and don’t anticipate one for at least another year. Our family has been in business for ourselves for decades,and we know what we are doing, but the rising fees caught us off guard. Cities, municipalities, counties and states are raising all fees at astronomical rates to help offset the slump in their real estate income (since banks apparently don’t have to pay real estate taxes)…I’m telling you every business person I know is on their last leg.
#4 Taxes
The United States has one of the most (if not the most) repressive business taxation scheme in the world. As a small business owner, do you know what taxes you will be expected to pay? It is not just federal income taxes and state income taxes that you will be paying. In a previous article, I detailed the various forms of taxes that Americans pay each year and most of them apply to small businesses as well….
Accounts Receivable Taxes
Building Permit Taxes
Capital Gains Taxes
CDL license Taxes
Cigarette Taxes
Corporate Income Taxes
Court Fines (indirect taxes)
Dog License Taxes
Federal Income Taxes
Federal Unemployment Taxes (FUTA)
Fishing License Taxes
Food License Taxes
Fuel permit taxes
Gasoline Taxes
Gift Taxes
Hunting License Taxes
Inheritance Taxes
Inventory tax IRS Interest Charges (tax on top of tax)
IRS Penalties (tax on top of tax)
Liquor Taxes
Local Income Taxes
Luxury Taxes
Marriage License Taxes
Medicare Taxes
Payroll Taxes
Property Taxes
Real Estate Taxes
Recreational Vehicle Taxes
Road Toll Booth Taxes
Road Usage Taxes (Truckers)
Sales Taxes
Self-Employment Taxes
School Taxes
Septic Permit Taxes
Service Charge Taxes
Social Security Taxes
State Income Taxes
State Unemployment Taxes (SUTA)
Telephone federal excise taxes
Telephone federal universal service fee taxes
Telephone federal, state and local surcharge taxes
Telephone minimum usage surcharge taxes
Telephone recurring and non-recurring charges taxes
Telephone state and local taxes
Telephone usage charge taxes
Toll Bridge Taxes
Toll Tunnel Taxes
Traffic Fines (indirect taxation)
Trailer registration taxes
Utility Taxes
Vehicle License Registration Taxes
Vehicle Sales Taxes
Watercraft registration Taxes
Well Permit Taxes
Workers Compensation Taxes
#5 Health Insurance
Do you know if you will be required to provide health insurance for your new employees? Have you familiarized yourself with the new 2,409 page health care law enough to be able to set up a health insurance program?
As a result of the new health care law, health insurance premiums for employees are shooting through the roof. Are you going to be able to afford them? Would it be better to have fewer employees and work each of them harder so that you won’t have to provide health coverage for as many people?
Will you be able to compete with the companies in your industry that have received waivers from having to comply with the new health care law?
In the United States, our system places the burden of providing health care on to the backs of employers. So are you ready to handle that burden?
#6 Pensions
Will the employees of your new business need pensions? Do you know how to set up a 401K program? Do you know what defined benefit plans are?
You can literally sit through an entire law school course on pension law and still understand virtually nothing about the subject. The truth is that if you plan to provide your employees with some kind of pension program you had better hire someone who can at least pretend that they know what they are talking about to set it up for you.
#7 Foreign Competition
Especially if you are creating a small business that does manufacturing, you are going to have to deal with foreign competition.
So are you going to be able to compete with the companies in your industry that pay their workers on the other side of the world less than a tenth of what you are paying to your American workers?
On the other side of the world, companies often don’t have to worry about unions, worker’s comp, health benefits, retirement benefits, nightmarish environmental regulations, crushing taxes or miles of paperwork and red tape.
Are you certain that you can compete against that?
#8 Lawsuits
The more successful you become, the more inviting of a target you are going to be for predatory lawsuits. The truth is that the courtrooms of America are packed with thousands of them, and the lawyers that bring them are hardly ever held accountable.
All of your hard work can go down the drain in a single moment. There are hordes of lawyers out there that make their living by filing lawsuits against small to mid-size businesses.
The truth is that if you are running a small business, you are probably doing something wrong.
Just hope and pray that a predatory lawyer does not find out.
#9 Environmentalists
Protecting the environment is a good thing. Unfortunately, there are many radical “environmentalist” groups that consider it to be a bad thing that humans even breathe because it produces carbon dioxide.
When Audi ran their now famous “Green Police” commercial during the Super Bowl last year, most Americans laughed it off and thought that nothing like that could ever happen in America. Well, it turns out that it is happening in America.
Not only are government environmental regulations totally nightmarish at this point, but there are a growing number of radical environmentalist groups that are running around the country filing lawsuits against whoever they feel like.
#10 The Federal Government
Are you prepared for a federal government that can literally change all the rules at any time?
Many businesses across America are frozen in their tracks at this point because they don’t know what Obama and the U.S. Congress are going to do next.
The truth is that things are getting really bizarre in this country. For example, federal agents recently raided an Amish farm at 5 A.M. in the morning because they were selling “unauthorized” raw milk.
If federal agents will raid an Amish farmer at 5 AM in the morning over some raw milk, do you think that they are going to have any mercy on your small business when the time comes?
The America that once embraced “free enterprise” and the entrepreneurial spirit is dead and gone.
Now we are a country filled with bureaucrats and red tape from sea to shining sea.
Is it any wonder why we can’t compete with the rest of the world?
Is it any wonder why so many millions of Americans are unemployed and can’t find jobs?
In an attempt to “solve” our problems we just keep passing more “reform” which means even more rules and regulations for our businesses to follow.
Just as they are doing on an individual level, the government is attempting to watch, track and control everything that our businesses are doing.
Everywhere you look in American society today, the government is gradually tightening the steel-fisted grip that is has around everyone and everything. Pretty soon you won’t even be able to sneeze without the government telling you how to do it correctly.
Is that really the kind of society that we all want to live in?
What a nightmare.
Do you have a horror story from starting a business in America that you would like to share? If so, please feel free to post it in the comments section below….
Have you ever seen pictures of extravagant wealth from places such as Dubai or Abu Dhabi and wondered where in the world they got all that money from? Have you ever read news stories that talk about China lending us hundreds of billions of dollars and wondered how they could possibly have so much wealth? Well, it is actually quite simple. They got much of it from us. Every month, the United States buys much more from the rest of the world then they buy from us. It is called a “trade deficit” and the United States has been running one for decades. In essence, what is happening each month is that we are transferring somewhere between 40 to 50 billion dollars of our national wealth to the rest of the globe and they are sending us oil and cheap plastic gadgets that Americans greedily consume. By the end of the year we have usually transferred somewhere around a half trillion dollars of our national wealth out of the country for good.
In order to maintain our standard of living, the U.S. government has been going to the countries we have been sending our wealth to and has been begging them to loan us massive amounts of their dollars. At this point the U.S. government literally owes trillions of dollars to the rest of the world.
Scoffers say that it is just a bunch of “paper money” that we are sending them, but the truth is that it is hundreds of billions of dollars of “paper money” that is not in the hands of average Americans. We have sent massive amounts of our wealth and prosperity overseas and it isn’t coming back unless we borrow it.
Today there are dozens and dozens of U.S. cities such as Detroit, Michigan and Camden, New Jersey that are turning into post-industrial hellholes while thousands of gleaming new modern factories are going up all over China. 42.9 million Americans are now on food stamps (a 16 percent increase in just one year) while the oil sheiks of the Middle East build opulent palaces that are extravagant beyond belief.
Most Americans do not realize how serious the U.S. addiction to foreign oil really is. We are constantly being drained of our wealth by the oil powers of the Middle East.
So what are they doing with all of this money? Well, let’s take a look at just a couple of examples.
Have you ever heard of the Emirates Palace? It is located in the United Arab Emirates and it cost approximately 3.8 billion dollars to build. The following is how one writer for a major UK newspaper described it after a visit….
The Emirates Palace has so many biggest and best boasts, it could have its own chapter in the Guinness Book of Records, but the atrium is the whistles and bells, the jaw-dropping big daddy of them all — 60 metres high, 42 metres wide and topped with the largest dome in the world. Staff need golf carts to negotiate their way around it. It is decorated with 13 colours of marble, ranging from sunrise yellow to sunset red (to reflect the many hues of the desert), and lots and lots and lots of gold: 6,040 square metres of gold leaf cover the largest gilded expanse ever created in one building. It’s even in the food. I ate gold leaf on my chocolate cake. Apparently, it aids digestion.
In Dubai, there is so much wealth that they pretty much build whatever they can dream up. For example, in Dubai you will find the largest “indoor ski resort” in the world. One travel site describes it this way….
When one thinks of Arabia, let alone Dubai, one likely pictures an arid desert of heat and sun. One does not think of snow skiing. Yet, that is what one can do at Ski Dubai, arguably the largest indoor ski resort in the world. The resort features 22,500 square meters of ski area. The heavily insulated building is kept at 30.2 degrees Fahrenheit during the day and 21.2 degrees Fahrenheit throughout the night, which is when the snow is generated. The resort features five ski runs and is open year round.
Over the past 25 years, the U.S. trade deficit with China has soared into the stratosphere. In 1985, the U.S. trade deficit with China was 6 million dollarsfor the entire year. In the month of August alone, the U.S. trade deficit with China was over 28 billion dollars.
For many Americans this can be difficult to comprehend. For a moment, imagine a giant map of the world and that there is a gigantic pile of money in China and a gigantic pile of money in the United States. Then start taking 20 billion dollars from the pile of the United States and give it to China every single month.
After a while, what is going to happen?
Well, the United States is going to be a lot poorer and China is going to be a lot wealthier.
As we have become poorer, it has been harder and harder to maintain our very high standard of living.
The U.S. government has been borrowing larger and larger sums of money from the rest of the world in order to “stimulate” our economy, but in the process we are piling up horrific amounts of debt.
The national debt of the United States is now 13 times larger than it was just 30 years ago.
If we did that again over the next 30 years, we would have a national debt of approximately $170 trillion by the year 2040.
Of course that will never happen.
Why?
Well, because the entire financial system would collapse and we would be forced into national bankruptcy long before we ever got into that much debt.
The truth is that we are already on the verge of total economic collapse. In fact, CNS News is reporting that retiring U.S. Senator George Voinovich believes that the collapse could happen at any time now….
“I think we are on the edge of it right now. I really do,” said Voinovitch. “If we don’t do something about dealing with the debt and the budgets that aren’t being balanced for as far as your eye can see, we are over the cliff. We are on thin ice right now. And I don’t think that we can wait. We need to move forward. We need to move forward for our own benefit, but we also need to move forward because the world is watching us right now.”
Indeed, the world is watching us, and they are getting tired of financing our runaway debt.
Just this week there have been some very troubling signs. For example, U.S. Treasuries just experienced their biggest two-day sell-off since the collapse of Lehman Brothers.
The rest of the world was deeply troubled when the Federal Reserve announced another round of quantitative easing. Federal Reserve Chairman Ben Bernanke had promised that the Fed would not monetize U.S. government debt, but now that is exactly what is happening. The rest of the world is less than thrilled by this.
In addition, many economists are warning that the tax cut deal that Barack Obama and the Republicans have agreed to will increase U.S. government debt even more. In reaction to the deal, economist Nouriel Roubini recently posted the following message on his Twitter account….
“Obama-GOP tax deal costs $900 billion over two years. US kicking the can further down the road. Are bond vigilantes starting to wake up?”
Bond vigilantes – the term was coined by economist Ed Yardeni in the 1980s to describe major investors who demand higher yields to compensate for the perceived risks resulting from large deficits – could derail the country’s precarious recovery, some economists say.
The truth is that the U.S. government is not going to be able to borrow endless amounts of very cheap money forever.
At some point the U.S. is either going to face much higher interest rates on government debt or the Federal Reserve is going to have to step in and monetize the vast majority of all new government debt.
Either alternative will be absolutely disastrous.
Most Americans just assume that the wealth and prosperity that we have enjoyed for so many decades will always be with us. But that is not the case. We have been exporting our national wealth and our national prosperity so that we could fill up our shopping carts with cheap foreign-made plastic crap and so that we could fill up our cars with foreign oil. It has been a fun ride while it lasted, but with each passing day a national financial implosion draws ever closer.
All over the Internet, Republican pundits are declaring that extending the Bush tax cuts will save the economy and Democrat pundits are declaring that ending the Bush tax cuts will save the economy. Well, you know what? Nothing will save the U.S. economy. The U.S. government is going to continue to drown in a sea of debt no matter what happens with these tax cuts. State and local governments are also going to continue to drown in a sea of debt. Thousands of factories and millions of jobs are going to continue to be shipped overseas every single year. America is going to continue to transfer tens of billions of dollars of its national wealth to foreign nations every single month. Nothing that the Republicans and Democrats are debating right now is going to do a thing to alter the fundamental problems that the U.S. economy is facing.
Not that I personally do not like tax cuts. I would like my own personal income taxes to be cut down to zero percent please. I will take as many tax cuts as I can personally get.
And it is absolutely undeniable that the federal government is already handed way, way, way more money than it ever should need. Starving the federal monster of cash is a good thing. We need a much, much, much smaller federal government. But the odds of us ever returning to the kind of limited central government envisioned by our Founding Fathers is somewhere between slim and none and slim just left the building.
So aren’t less taxes always good? Well, not necessarily. You see, the federal government is planning to spend much more money in the years ahead. When you combine significant tax cuts with huge increases in spending you get lots more debt.
Extending the Bush tax cuts (and throwing in a few extra ones) will help the U.S. economy in the short-term, but without accompanying brutal spending cuts it will make our long-term debt problems even worse.
But most of our politicians don’t think about the long-term. Most of them just want the economy to turn around in the short-term so that they can get re-elected.
For example, Barack Obama is not completely stupid. He realizes that these tax cuts are probably his best shot at a short-term economic boost. If the economy starts to get back to “normal”, it may be just enough to get him another term in office.
And self-preservation is what most U.S. politicians are most interested in.
Meanwhile, we are heading for a national debt nightmare that threatens to destroy our financial system and plunge us into national bankruptcy.
But if our politicians did attempt to make the brutal spending cuts that would be necessary to balance the budget, most Americans would start screaming bloody murder. The truth is that the American people have become dependent on the government and they like getting their checks, their handouts and their government contracts.
Okay, so what will this deal that Obama has made with the Republicans actually do?
Well, it will extend most of the Bush tax cuts for two years (right up through the 2012 presidential election). The following are some of the details….
*All income levels will continue to be taxed at the lower rates instituted by the original Bush tax cuts. That means that the highest rate will remain at 35 percent.
*Barack Obama claims that extending these tax cuts will save the average American family approximately $3,000 next year.
*The 15 percent rate on capital gains and dividends will be continued.
*As part of the package, Republicans have agreed to a 13 month extension of long-term unemployment benefits.
*One new tax cut included in the deal is a reduction of the Social Security payroll tax by two percentage points for one year. So for a year U.S. workers will be paying just 4.2 percent instead of 6.2 percent. Barack Obama believes that Americans will save $120 billion next year from this tax cut alone. For the average American family, it will mean that they will have approximately an extra $1000 in their wallets.
*The existing $1,000 child tax credit will be extended for the next two years.
*Another tax cut that is new would allow U.S. businesses to immediately expense all business investments in 2011. The Obama administration is claiming that this tax cut would be the biggest “temporary investment incentive” in American history.
*A compromise was reached on the estate tax. There will be an estate tax exemption of 5 million dollars per person and the maximum rate will be 35 percent.
So how much will all of this cost?
Well, all over the Internet the Democrats and the Republicans are arguing over figures.
But what is another $900 billion when we are already caught in a death spiral of government debt?
The IMF was already projecting that federal government debt was going to exceed 100 percent of GDP by 2015.
So how soon will we get there now?
Today, our national debt is more than 13 times larger than it was just 30 years ago….
So can’t we just “grow” our way out of this debt?
Not a chance.
Reducing taxes and increasing government spending will both stimulate the economy in the short-term, but both of them will always cause government debt to go up.
The sad truth, as I have written about previously, is that it is now mathematically impossible to pay off the U.S. government debt.
If you took every dollar out of every single wallet, out of every single mattress and out of every single U.S. bank and sent it to the government you wouldn’t even make that big of a dent in the national debt.
So can’t the U.S. government just go out and create more money and solve the problem?
As long as the Federal Reserve system exists, the U.S. federal government will be trapped inside a perpetual debt machine.
The best we can hope for is to slow the expansion of government debt down to a reasonable level.
But as I explained in a previous article, it is extremely unlikely that the U.S. government will ever have a balanced budget ever again.
The U.S. government currently has to borrow approximately 41 cents of every dollar that it spends. The spending cuts that would be required to slash that much out of the federal budget would be beyond draconian.
Sadly, the truth is that even the really bad official budget deficit figures severely understate the extent of the crisis that we are facing.
If the U.S. government was forced to use GAAP accounting principles (like all publicly-traded corporations must), the annual U.S. government budget deficit would be somewhere in the neighborhood of $4 trillion to $5 trillion.
So anyone who thinks that we are just a “tweak” or two from fixing U.S. government finances is living in a world of delusion.
Unfortunately, the years ahead look downright apocalyptic. After analyzing Congressional Budget Office data, Boston University economics professor Laurence J. Kotlikoff concluded that the U.S. government is facing a “fiscal gap” of $202 trillion dollars.
But the American people don’t want to hear this. The American people don’t want to hear that there are serious consequences for running up the biggest debt in the history of the world. The American people just want to be told that there are smart people working on the problem and that they are on the verge of “fixing” it.
But it is all a lie. We can keep trying to “kick the can down the road” for a while longer, but eventually a day of reckoning is going to come and it is going to be painful beyond imagination.
Somehow we have the arrogance to believe that our children and our grandchildren should pay back all of the debt that we have accumulated. What we have done to future generations is beyond criminal.
America has enjoyed the greatest party in the history of the world, but eventually it is going to be time to turn out the lights.
For now, however, the Republicans and the Democrats are busy trying to figure out ways that they can keep the party going for a little while longer.
Perhaps they can just slash taxes all the way to zero and the federal government can just borrow all of the money that it needs. At least that way we wouldn’t be endlessly pouring our own money into the financial black hole called the U.S. government.
Did you see Federal Reserve Chairman Ben Bernanke on 60 Minutes the other night? Bernanke portrayed the Federal Reserve as the great protector of the U.S. economy, he claimed that unemployment would be 15 percent higher if the Federal Reserve had sat back and done nothing during the financial crisis and he even started laying the groundwork for a third round of quantitative easing. Unfortunately, 60 Minutes did not ask Bernanke any hard questions and did not challenge him on his past record. It was almost as if they considered Bernanke to be above criticism. But someone in the mainstream media should be taking a closer look at this guy and his record. The truth is that the incompetence that Bernanke has displayed over the past few years makes the Cincinnati Bengals look like a model of excellence. Bernanke kept insisting that the housing market was stable even while it was falling apart, he had absolutely no idea the financial crisis was coming, he declared that Fannie Mae and Freddie Mac were in no danger of failing just before they failed, his policies have created asset bubble after asset bubble and the world financial system is now inherently unstable. But even with such horrific job performance, Barack Obama and leaders of both political parties continue to publicly praise Bernanke at every opportunity. What in the world is going on here?
Not that Bernanke is solely responsible. His predecessor, Alan Greenspan, was responsible for many of the policies that have brought us to this point. In addition, most of the other presidents of the individual Federal Reserve banks across the United States seem just as clueless as Bernanke.
But you would think at some point someone in authority would be calling for Bernanke to resign. Accountability has to begin somewhere.
The Bernanke quotes that you will read below reveal a pattern of incompetence and mismanagement that is absolutely mind blowing. Looking back now, we can see that Bernanke was wrong about almost everything.
But the mainstream media and our top politicians keep insisting that Bernanke is the man to lead our economy into a bright future.
It is almost as if we have been transported into some bizarre episode of “The Twilight Zone” where the more incompetence someone exhibits the more they are to be praised.
The following are 30 Ben Bernanke quotes that are so stupid that you won’t know whether to laugh or cry….
#1 (October 20, 2005) “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”
#2 (On 60 Minutes in response to a question about what would have happened if the Federal Reserve had not “bailed out” the U.S. economy) “Unemployment would be much, much higher. It might be something like it was in the Depression. Twenty-five percent.”
#3 (February 15, 2006) “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”
#4 (January 10, 2008) “The Federal Reserve is not currently forecasting a recession.”
#5 (When asked directly during a congressional hearing if the Federal Reserve would monetize U.S. government debt) “The Federal Reserve will not monetize the debt.”
#6 “One myth that’s out there is that what we’re doing is printing money. We’re not printing money.”
#7 “The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.”
#8 (November 21, 2002) “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”
#9 (March 28, 2007) “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”
#10 (July, 2005) “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”
#11 “Although low inflation is generally good, inflation that is too low can pose risks to the economy – especially when the economy is struggling.”
#12 (February 15, 2007) “Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.”
#13 (October 31, 2007) “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”
#14 (On the possibility that the Fed might launch QE3) “Oh, it’s certainly possible. And again, it depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks.”
#15 (November 15, 2005) “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”
#16 (January 18, 2008) “[The U.S. economy] has a strong labor force, excellent productivity and technology, and a deep and liquid financial market that is in the process of repairing itself.”
#17 “I wish I’d been omniscient and seen the crisis coming.”
#18 (May 17, 2007) “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”
#19 “The GSEs are adequately capitalized. They are in no danger of failing.”
#20 (Two months before Fannie Mae and Freddie Mac collapsed and were nationalized) “They will make it through the storm.”
#21 (September 23rd, 2008) “My interest is solely for the strength and recovery of the U.S. economy.”
#22 “Economics has many substantive areas of knowledge where there is agreement but also contains areas of controversy. That’s inescapable.”
#23 “I don’t think that Chinese ownership of U.S. assets is so large as to put our country at risk economically.”
#24 “We’ve been very, very clear that we will not allow inflation to rise above 2 percent.”
#25 “…inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve’s dual mandate in the longer run.”
#26 (June 10, 2008) “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”
#28 “The financial crisis appears to be mostly behind us, and the economy seems to have stabilized and is expanding again.”
#29 “Similarly, the mandate-consistent inflation rate–the inflation rate that best promotes our dual objectives in the long run–is not necessarily zero; indeed, Committee participants have generally judged that a modestly positive inflation rate over the longer run is most consistent with the dual mandate.”
#30 (October 4, 2006) “If current trends continue, the typical U.S. worker will be considerably more productive several decades from now. Thus, one might argue that letting future generations bear the burden of population aging is appropriate, as they will likely be richer than we are even taking that burden into account.”
Oil prices are starting to spin out of control once again. In London, Brent North Sea crude for delivery in February hit 91.89 dollars a barrel on Friday. New York crude moved above 88 dollars a barrel on Friday. Many analysts believe that 100 dollar oil is a virtual certainty now. In fact, many economists are convinced that oil is going to start moving well beyond the 100 dollar mark. So what happened the last time oil went well above 100 dollars a barrel? Oh, that’s right, we had a major financial crisis. Not that subprime mortgages, rampant corruption on Wall Street and out of control debt didn’t play major roles in precipitating the financial crisis as well, but the truth is that most economists have not given the price of oil the proper credit for the role that it played in almost crashing the world economy. In July 2008, the price of oil hit a record high of over $147 a barrel. A couple months later all hell broke loose on world financial markets. The truth is that having the price of oil that high created horrific imbalances in the global economy. Fortunately the price of oil took a huge nosedive after hitting that record high, and it can be argued that lower oil prices helped stabilize the world economy. So now that oil prices are on a relentless march upward again, what can we expect this time?
Municipal Bond Market Crash 2011: Are Dozens Of State And Local Governments About To Default On Their Debts?
Fortunately, a recent report on 60 Minutes has brought these issues to light. If you have not seen it yet, do yourself a favor and click on the video below and spend a few minutes watching it. It is absolutely stunning.
In the piece, one of the people that 60 Minutes interviewed was Meredith Whitney – one of the most respected financial analysts in the United States. According to Whitney, the municipal bond crisis that we are facing is a massive threat to our financial system….
State and local governments across the United States are facing a complete and total financial nightmare. The 60 Minutes report posted below does a pretty good job of describing the problem but it doesn’t even pretend to come up with any solutions….
Unlike the federal government, state and local governments cannot just ask the Federal Reserve to print up endless amounts of cash. If state and local governments want to spend more than they bring in, they must borrow it from investors.
If the municipal bond market crashes, and investors around the world are no longer willing to hand over gigantic sacks of cash to state and local governments in the United States, then the game is over. Either state and local governments will have to raise taxes or they will have to start spending within their means.
Most Americans have no idea what this would mean. For decade after decade, state and local governments throughout the nation have been living way, way, way above their means. If the debt cycle gets cut off, it is going to mean that many local communities around the nation will start degenerating into rotting hellholes nearly overnight.
We are already seeing this happen in places such as Detroit, Michigan and Camden, New Jersey but if the municipal bond market totally collapses we are quickly going to have dozens of Detroits and Camdens from coast to coast.
Let’s take a closer look at some of the state and local governments that are in some of the biggest trouble….
California
California is facing a 19 billion dollar budget deficit next year, and incoming governor Jerry Brown is scrambling to find billions more to cut from the California state budget. At this point, investors are becoming increasingly wary about loaning any more money to the state. The following quote from Brown about the desperate condition of California state finances is not going to do much to inspire confidence in California’s financial situation around the globe….
Unfortunately, the economic situation in California continues to degenerate. For example, 24.3 percent of the residents of El Centro, California are now unemployed. In fact, the number of people unemployed in the state of California is approximately equivalent to the populations of Nevada, New Hampshire and Vermont combined.
The housing market in the state is also a major drag on the economy there. For instance, the average home in Merced, California has declined in value by 63 percent over the past four years.
The state of California is swamped with so much debt that there literally appears to be no way out.
Arizona
The state government of Arizona is so incredibly starved for cash that it actually sold off the state capitol building, the state supreme court building and the legislative chambers. Now they are leasing those buildings back from the investors that they sold them to.
Arizona also recently announced that it has decided to stop paying for many types of organ transplants for people enrolled in its Medicaid program.
Illinois
Illinois is widely regarded to be in the worst financial condition of all the U.S. states. At this point, Illinois has approximately $5 billion in outstanding bills that have not been paid.
According to 60 Minutes, the state of Illinois is six months behind on bill payments. 60 Minutes correspondent Steve Croft asked Illinois state Comptroller Dan Hynes how many people and organizations are waiting to be paid by the state, and this is how Hynes responded….
The University of Illinois alone is owed 400 million dollars. There are approximately two thousand not-for-profit organizations that are collectively owed a billion dollars by the Illinois state government.
New Jersey
The New Jersey state budget has been slashed by 26 percent, a billion dollars have been cut from education and thousands of teachers have been laid off.
But even with all of those cuts, New Jersey is still facing a $10 billion budget deficit next year, and the state has $46 billion in unfunded pension liabilities and $65 billion in unfunded health care liabilities that it is somehow going to have to address in the future.
Detroit
Detroit Mayor Dave Bing has come up with a new way to save money. He wants to cut 20 percent of Detroit off from essential social services such as road repairs, police patrols, functioning street lights and garbage collection.
Miami
One Miami commissioner declared earlier this year that bankruptcy may be the city’s only financial hope.
Philadelphia, Baltimore and Sacramento
Major cities such as Philadelphia, Baltimore and Sacramento have instituted “rolling brownouts” in which various city fire stations are shut down on a rotating basis.
Camden
The second most dangerous city in the United States – Camden, New Jersey – is about to lay off about half its police in a desperate attempt to save money.
Oakland
Oakland, California Police Chief Anthony Batts has announced that due to severe budget cuts there are a number of crimes that his department will simply not be able to respond to any longer. The crimes that the Oakland police will no longer be responding to include grand theft, burglary, car wrecks, identity theft and vandalism.
Nassau County, New York
In New York, the country of Nassau (one of the wealthiest counties in the state) has a budget deficit that is approaching 350 million dollars.
America used to be viewed as the land of great economic progress, but that is no longer the case. Sadly, all over the United States there are signs that we are actually going backwards as a country.
All over the nation, asphalt roads are actually being ground up and are being replaced with gravel because it is cheaper to maintain. The state of South Dakota has transformed over 100 miles of asphalt road into gravel over the past year, and 38 out of the 83 counties in the state of Michigan have transformed at least some of their asphalt roads into gravel roads.
Just think about that – we are actually going back to gravel roads.
What’s next?
But this is what is going to happen all over America if dozens of state and local governments start defaulting and the municipal bond market crashes.
In fact, don’t look now, but there are signs that a “bloodbath” in the municipal bond market has already begun. The months of November and December have been incredibly rocky for municipal bonds.
The days when U.S. states and cities could borrow seemingly endless amounts of incredibly cheap money are officially over.
So where are state and local governments going to get the money that they need?
Well, they are going to come and try to get it from you of course. Over the past two years, 36 of the 50 U.S. states have jacked up taxes or fees.
Many local governments are trying to raise funds any way that they can. For example, from now on if you are caught jaywalking in Los Angeles you will be slapped with a $191 fine.
This kind of thing is happening all over America. Police departments are being turned into revenue raising operations. Police are so busy writing tickets that they barely have any time to investigate actual crimes anymore.
But it simply is not going to be enough. State and local governments across the U.S. are facing financial holes of legendary proportions.
The 60 Minutes report above stated that the combined unfunded pension and health care liabilities of the 50 states is $1 trillion. Unfortunately, that is an estimate that is probably way too conservative. In fact, two prominent university professors have calculated that the combined unfunded pension liability for all 50 U.S. states is approximately 3.2 trillion dollars.
So if the municipal bond market does crash will the federal government step in and bail everyone out?
Well, this upcoming spring the $160 billion in federal “stimulus money” runs out. At that point there will likely be a huge cry for even more “stimulus money” for state and local governments.
Unfortunately, as I wrote about yesterday, the federal government is also flat broke and swimming in an ocean of endless red ink. Congress could potentially step in and try to bail all the state and local governments out, but in the end it is the American people who are going to have to pay the bill.
We are on the verge of a horrific economic collapse which is going to change life in this country as we know it forever. All of this debt is absolutely going to swamp us. Our politicians can keep trying to kick the can down the road for as long as they can, but eventually the financial nightmare that so many of us have been dreading is going to overtake us.