The Beginning Of The End
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The Sovereign Debt Bubble Will Continue To Expand Until – BANG – The System Implodes

The Sovereign Debt Bubble Will Continue To Expand Until - BANG - The System Implodes - Photo by Jeff KubinaWhy are so many politicians around the world declaring that the debt crisis is “over” when debt to GDP ratios all over the planet continue to skyrocket?  The global economy has never seen anything like the sovereign debt bubble that we are experiencing today.  The United States, Japan, and nearly every major nation in Europe are absolutely drowning in debt.  We have heard a lot about “austerity” over in Europe in recent years, but debt to GDP ratios continue to rise in Greece, Spain, Italy, Ireland and Portugal.  In general, most economists consider a debt to GDP ratio of 100% to be a “danger level”, and most of the economies of the western world have either already surpassed that level or are rapidly approaching it.  Of course the biggest debt offender of all in many ways is the United States.  The U.S. debt to GDP ratio has risen from 66.6 percent to 103 percent since 2007, and the U.S. government accumulated more new debt during Barack Obama’s first term than it did under the first 42 U.S. presidents combined.  This insane sovereign debt bubble will continue to expand until a day of reckoning arrives and the system implodes.  Nobody knows exactly when that moment will be reached, but without a doubt it is coming.

But if you listen to the mainstream media in the United States, you would be tempted to think that this giant bubble of debt is not much of a concern at all.  For example, in a recent article in the Washington Post entitled “The case for deficit optimism“, Ezra Klein wrote the following…

“Here’s a secret: For all the sound and fury, Washington’s actually making real progress on debt.”

How many times have we heard that before?

About a decade ago, government officials were projecting that we would be swimming in gigantic government surpluses by now.

Instead, we are running trillion dollar deficits.

But right now there is a lot of optimism about the economy.  The stock market recently hit a 5 year high and the business community is loving all of the false prosperity that all of this debt is buying us.

Even Warren Buffett does not really seem concerned about the exploding U.S. government debt.  He recently made the following statement

“It is not a good thing to have it going up in relation to GDP.  That should be stabilized. But the debt itself is not a problem.”

Oh really?

A debt of 16 trillion dollars “is not a problem”?

Perhaps we should all run our finances that way.

Why don’t we all go out and open up 20 different credit cards, run them all up to the max, and then tell the credit card companies that we can’t pay them back but that it “is not a problem”.

Of course real life does not work that way.

The truth is that government debt is becoming a monstrous problem all over the globe.  Just check out how debt to GDP ratios all over the planet have grown over the past five years

United States

Debt to GDP ratio in 2007: 66.6 percent

Debt to GDP ratio in 2012: 103 percent

United Kingdom

Debt to GDP ratio in 2007: 43.4 percent

Debt to GDP ratio in 2012: 85.0 percent

France

Debt to GDP ratio in 2007: 63.7 percent

Debt to GDP ratio in 2012: 86 percent

Germany

Debt to GDP ratio in 2007: 67.6 percent

Debt to GDP ratio in 2012: 80.5 percent

Spain

Debt to GDP ratio in 2007: 39.6 percent

Debt to GDP ratio in 2012: 69.3 percent

Ireland

Debt to GDP ratio in 2007: 24.8 percent

Debt to GDP ratio in 2012: 106.4 percent

Portugal

Debt to GDP ratio in 2007: 63.9 percent

Debt to GDP ratio in 2012: 108.1 percent

Italy

Debt to GDP ratio in 2007: 106.6 percent

Debt to GDP ratio in 2012: 120.7 percent

Greece

Debt to GDP ratio in 2007: 106.1 percent

Debt to GDP ratio in 2012: 170.6 percent

The Eurozone As A Whole

Debt to GDP ratio in 2007: 68.4 percent

Debt to GDP ratio in 2012: 87.3 percent

Japan

Debt to GDP ratio in 2007: 172.1 percent

Debt to GDP ratio in 2012: 211.7 percent

So how does all of this end?

Well, it is going to be messy, but it is very difficult to say exactly when the system will collapse under the weight of too much debt.  Some nations, such as Japan, are able to handle very high debt loads because they have a very high level of domestic saving.  Up to this point, an astounding 95 percent of all Japanese government bonds have been purchased domestically.  But other nations collapse under the weight of government debt even before they reach a debt to GDP ratio of 100%.  The following is an excerpt from a recent Congressional Research Service report

It is hard to predict at what point bond holders would deem it to be unsustainable. A few other advanced economies have debt-to-GDP ratios higher than that of the United States. Some of those countries in Europe have recently seen their financing costs rise to the point that they are unable to finance their deficits solely through private markets. But Japan has the highest debt-to-GDP ratio of any advanced economy, and it has continued to be able to finance its debt at extremely low costs.

When a government runs up massive amounts of debt, it is playing with fire.  You can pile up mountains of government debt for a while, but eventually it catches up with you.

Over the past 10 years, the U.S. national debt has grown by an average of 9.3 percent per year, but the overall U.S. economy has only grown by an average of just 1.8 percent per year.  That is unsustainable by definition.

There is going to be a tremendous price to pay for the debt binge that the U.S. government has indulged in over the past decade.  During Barack Obama’s first term, the amount of new debt accumulated by the federal government breaks down to about $50,521 for every single household in the United States.  That is utter insanity.

If you can believe it, we have accumulated more new government debt under Obama than we did from the inauguration of George Washington to the end of the Clinton administration.

And most Americans realize that something is seriously wrong.  One recent poll found that only 34 percent of all Americans believe that the country is heading in the right direction, and 60 percent of all Americans believe that the country is heading in the wrong direction.

If we keep piling up so much debt, at some point a moment of great crisis will arrive.  When that moment arrives, we could see havoc throughout the entire global financial system.  For instance, most people don’t really understand the key role that U.S. Treasuries play in the derivatives market.  The following is from a recent article posted on Zero Hedge

This time around, things will be far worse if nothing is solved. If the US loses another AAA rating, then the financial markets could face systemic risk. The reason for this is that US Treasuries are one of the senior most forms of collateral used by the banks to backstop the $600+ trillion derivatives market.

As any trader who trades on margin can tell you, when the value of your collateral is called into question, those on the other side of the trade come looking for you to put up more capital on your trades. This can result in assets being sold en masse (similar to what happened after Lehman failed) and things can get very ugly very fast.

For much more on the danger that derivatives pose to our financial system, please see this article: “The Coming Derivatives Panic That Will Destroy Global Financial Markets“.

Once again, nobody knows exactly when the sovereign debt bubble will burst, but if we continue down the path that we are currently on, it will inevitably happen at some point.

And according to Professor Carmen Reinhart, when this bubble does burst things could unravel very rapidly…

“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.”

At some point the global financial system will hit the wall that Professor Reinhart has warned about.

Are you ready?

When Will The Bubble Burst?

By The Numbers: 20 Facts About The Collapse Of Europe That Everyone Should Know

By The Numbers - 20 Facts About The Collapse Of Europe That Everyone Should KnowThe economic implosion of Europe is accelerating.  Even while the mainstream media continues to proclaim that the financial crisis in Europe has been “averted”, the economic statistics that are coming out of Europe just continue to get worse.  Manufacturing activity in Europe has been contracting month after month, the unemployment rate in the eurozone has hit yet another brand new record high, and the official unemployment rates in both Greece and Spain are now much higher than the peak unemployment rate in the United States during the Great Depression of the 1930s.  The economic situation in Europe is far worse than it was a year ago, and it is going to continue to get worse as austerity continues to take a huge toll on the economies of the eurozone.  It would be hard to understate how bad things have gotten – particularly in southern Europe.  The truth is that most of southern Europe is experiencing a full-blown economic depression right now.  Sadly, most Americans are paying very little attention to what is going on across the Atlantic.  But they should be watching, because this is what happens when nations accumulate too much debt.  The United States has the biggest debt burden of all, and eventually what is happening over in Spain, France, Italy, Portugal and Greece is going to happen over here as well.

The following are 20 facts about the collapse of Europe that everyone should know…

#1 10 Months: Manufacturing activity in both France and Germany has contracted for 10 months in a row.

#2 11.8 Percent: The unemployment rate in the eurozone has now risen to 11.8 percent – a brand new all-time high.

#3 17 Months: In November, Italy experienced the sharpest decline in retail sales that it had experienced in 17 months.

#4 20 Months: Manufacturing activity in Spain has contracted for 20 months in a row.

#5 20 Percent: It is estimated that bad loans now make up approximately 20 percent of all domestic loans in the Greek banking system at this point.

#6 22 Percent: A whopping 22 percent of the entire population of Ireland lives in jobless households.

#7 26 Percent: The unemployment rate in Greece is now 26 percent.  A year ago it was only 18.9 percent.

#8 26.6 Percent: The unemployment rate in Spain has risen to an astounding 26.6 percent.

#9 27.0 Percent: The unemployment rate for workers under the age of 25 in Cyprus.  Back in 2008, this number was well below 10 percent.

#10 28 Percent: Sales of French-made vehicles in November were down 28 percent compared to a year earlier.

#11 36 Percent: Today, the poverty rate in Greece is 36 percent.  Back in 2009 it was only about 20 percent.

#12 37.1 Percent: The unemployment rate for workers under the age of 25 in Italy – a brand new all-time high.

#13 44 Percent: An astounding 44 percent of the entire population of Bulgaria is facing “severe material deprivation”.

#14 56.5 Percent: The unemployment rate for workers under the age of 25 in Spain – a brand new all-time high.

#15 57.6 Percent: The unemployment rate for workers under the age of 25 in Greece – a brand new all-time high.

#16 60 Percent: Citigroup is projecting that there is a 60 percent probability that Greece will leave the eurozone within the next 12 to 18 months.

#17 70 Percent: It has been reported that some homes in Spain are being sold at a 70% discount from where they were at during the peak of the housing bubble back in 2006.  At this point there are approximately 2 million unsold homes in Spain.

#18 200 Percent: The debt to GDP ratio in Greece is rapidly approaching 200 percent.

#19 1997: According to the Committee of French Automobile Producers, 2012 was the worst year for the French automobile industry since 1997.

#20 2 Million: Back in 2005, the French auto industry produced about 3.5 million vehicles.  In 2012, that number dropped to about 2 million vehicles.

One thing that these shocking numbers cannot convey is the tremendous amount of pain that many average Europeans are living through on a daily basis at this point.  To get a peek into what life is like in Greece these days, check out this short excerpt from a recent Bloomberg article

Anastasia Karagaitanaki, 57, is a former model and cafe owner in Thessaloniki, Greece. After losing her business to the financial crisis, she now sleeps on a daybed next to the refrigerator in her mother’s kitchen and depends on charity for food and insulin for her diabetes.

“I feel like my life has slipped through my hands,” said Karagaitanaki, whose brother also shares the one-bedroom apartment. “I feel like I’m dead.”

For thousands of Greeks like Karagaitanaki, the fabric of middle-class life is unraveling. Teachers, salaries slashed by a third, are stealing electricity. Families in once-stable neighborhoods are afraid to leave their homes because of rising street crime.

All over Europe, people that have lost all hope are actually setting themselves on fire in a desperate attempt to draw attention.  Millions of formerly middle class Europeans have lost everything and are becoming increasingly desperate.  Suicide and crime are skyrocketing all over southern Europe and massive street riots are erupting on a regular basis.

Unfortunately, this is just the beginning.  Things are going to get even worse for Europe.

Meanwhile, those of us living in the United States smugly look down our noses at Europe because we are still living in a false bubble of debt-fueled prosperity.

But eventually we will feel the sting of austerity as well.  The recent fiscal cliff deal was an indication of that.  Taxes are going up and government spending is at least going to slow down.  It won’t be too long before the effects of that are felt in the economy.

And of course the reality of the situation is that the U.S. economy really did not perform very well at all during 2012 when you take a look at the numbers.  The cold, hard truth is that the U.S. economy has been declining for a very long time, and there are a whole bunch of reasons to expect that our decline will accelerate even further in 2013.

So if you are an American, don’t laugh at what is happening over in Europe at the moment.  We are headed down the exact same path that they have gone, and we are going to experience the same kind of suffering that they are going through right now.

Use these last few “bubble months” to prepare for what is ahead.  At some point this “hope bubble” will disappear and then the time for preparation will be over.

EU Poster Tower Of Babel

27 Things That Every American Should Know About The National Debt

The U.S. government has stolen $15,876,457,645,132.66 from future generations of Americans, and we continue to add well over a hundred million dollars to that total every single day day.  The 15 trillion dollar binge that we have been on over the past 30 years has fueled the greatest standard of living the world has ever seen, but this wonderful prosperity that we have been enjoying has been a lie.  It isn’t real.  We have been living way above our means for so long that we do not have any idea of what “normal” actually is anymore.  But every debt addict hits “the wall” eventually, and the same thing is going to happen to us as a nation.  At some point the weight of our national debt is going to cause our financial system to implode, and every American will feel the pain of that collapse.  Under our current system, there is no mathematical way that this debt can ever be paid back.  The road that we are on will either lead to default or to hyperinflation.  We have piled up the biggest debt in the history of the world, and if there are future generations of Americans they will look back and curse us for what we did to them.  We like to think of ourselves as much wiser than previous generations of Americans, but the truth is that we have been so foolish that it is hard to put it into words.

Whenever I do an article about the national debt, Democrats leave comments blaming the Republicans and Republicans leave comments blaming the Democrats.

Well you know what?

Both parties are to blame.  Both of them get a failing grade.

If the Republicans really wanted to stop the federal government from running up all this debt they could have done it.

If the Democrats really wanted to stop the federal government from running up all this debt they could have done it.

So let’s not pretend that one of the political parties is “the hero” in this little drama.

The damage has been done, and both parties will go down in history as being grossly negligent on fiscal issues during this period of American history.

Sadly, neither party is showing any signs of changing their ways.

Neither Barack Obama nor Mitt Romney is promising to eliminate the federal budget deficit in 2013.  They both talk about how the budget will be balanced “someday”, but as we have seen so many times in the past, “someday” never comes.

I didn’t mean to get all political in this article, but the truth is that the national debt threatens to destroy everything that previous generations have built, and our politicians continue to give us nothing but excuses.

The following are 27 things that every American should know about the national debt….

#1 It took more than 200 years for the U.S. national debt to reach 1 trillion dollars.  In 1986, the U.S. national debt reached 2 trillion dollars.  In 1992, the U.S. national debt reached 4 trillion dollars.  In 2005, the U.S. national debt doubled again and reached 8 trillion dollars.  Now the U.S. national debt is about to cross the 16 trillion dollar mark.  How long can this kind of exponential growth go on?

#2 If the average interest rate on U.S. government debt rises to just 7 percent, the U.S. government will find itself spending more than a trillion dollars per year just on interest on the national debt.

#3 If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

#4 Since Barack Obama entered the White House, the U.S. national debt has increased by an average of more than $64,000 per taxpayer.

#5 Barack Obama will become the first president to run deficits of more than a trillion dollars during each of his first four years in office.

#6 If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.

#7 The U.S. national debt has increased by more than 1.6 trillion dollars since the Republicans took control of the U.S. House of Representatives.  So far, this Congress has added more to the national debt than the first 97 Congresses combined.

#8 During the Obama administration, the U.S. government has accumulated more new debt than it did from the time that George Washington became president to the time that Bill Clinton became president.

#9 If Bill Gates gave every single penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.

#10 As Bill Whittle has shown, you could take every single penny that every American earns above $250,000 and it would only fund about 38 percent of the federal budget.

#11 Today, the government debt to GDP ratio in the United States is well over 100 percent.

#12 A recently revised IMF policy paper entitled “An Analysis of U.S. Fiscal and Generational Imbalances: Who Will Pay and How?” projects that U.S. government debt will rise to about 400 percent of GDP by the year 2050.

#13 The United States already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain does.

#14 At this point, the United States government is responsible for more than a third of all the government debt in the entire world.

#15 The amount of U.S. government debt held by foreigners is about 5 times larger than it was just a decade ago.

#16 The U.S. national debt is now more than 22 times larger than it was when Jimmy Carter became president.

#17 It is being projected that the U.S. national debt will surpass 23 trillion dollars in 2015.

#18 Mandatory federal spending surpassed total federal revenue for the first time ever in fiscal 2011.  That was not supposed to happen until 50 years from now.

#19 Between 2007 and 2010, U.S. GDP grew by only 4.26%, but the U.S. national debt soared by 61% during that same time period.

#20 The U.S. government has total assets of 2.7 trillion dollars and has total liabilities of 17.5 trillion dollars.  The liabilities do not even count 4.7 trillion dollars of intragovernmental debt that is currently outstanding.

#21 U.S. households are now actually receiving more money directly from the U.S. government than they are paying to the government in taxes.

#22 The U.S. government is wasting your money on some of the stupidest things imaginable.  For example, in 2011 the National Institutes of Health spent $592,527 on a study that sought to figure out once and for all why chimpanzees throw poop.

#23 If the federal government used GAAP accounting standards like publicly traded corporations do, the real federal budget deficit for last year would have been 5 trillion dollars instead of 1.3 trillion dollars.

#24 The Federal Reserve purchased approximately 61 percent of all government debt issued by the U.S. Treasury Department during 2011.

#25 At this point, the U.S. national debt is more than 5000 times larger than it was when the Federal Reserve was first created.

#26 If the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 480,000 years to completely pay off the national debt.

#27 The official government debt figure does not even account for massive unfunded liabilities that the U.S. government will be hit with in the years ahead.  According to Professor Laurence J. Kotlikoff, the U.S. government is facing a future “fiscal gap” of more than 200 trillion dollars.

As the U.S. economy continues to crumble, even more Americans are going to become financially dependent on the federal government.

For example, spending on food stamps has doubled since 2008.  Millions of Americans have lost their jobs and have needed some assistance from the government.  Since Obama became president the number of Americans on food stamps has gone from 32 million to 46 million.

But the Obama administration believes that a lot more Americans should be enrolled in the food stamp program.  The Obama administration is now spending millions of dollars on ads that urge even more people to sign up for food stamps.  In fact, their efforts to get even more Americans to sign up for food stamps have become very creative….

The government has been targeting Spanish speakers with radio “novelas” promoting food stamp usage as part of a stated mission to increase participation in the Supplemental Nutrition Assistance Program (SNAP), or food stamps.

Each novela, comprising a 10-part series called “PARQUE ALEGRIA,” or “HOPE PARK,” presents a semi-dramatic scenario involving characters convincing others to get on food stamps, or explaining how much healthier it is to be on food stamps.

I’m all for helping those that cannot feed themselves, but do we really need to run ads urging more people to become dependent on the government?

Of course Obamacare is going to cause our debt to balloon in size as well.  It is being projected that Obamacare will add more than 2.6 trillion dollars to the U.S. national debt over the first decade alone.

So where are we going to get all this money?

We can’t keep spending money that we do not have.  We have got to prioritize.  Every single category of government spending needs to be cut.

But instead we feel like we can keep ripping off future generations of Americans and that we will always be able to get away with it.

What we have done to our children and our grandchildren is beyond criminal.

The truth is that we should have listened to the warnings of our founding fathers about government debt.  For example, Thomas Jefferson once said that if he could add just one more amendment to the U.S. Constitution it would be a complete ban on all borrowing by the federal government….

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.

Where would we be today if we had taken the advice of Thomas Jefferson?

That is something to think about.

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