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Without Low Interest Rates, The U.S. Financial System Dies

Right now, interest rates are near historic lows.  The U.S. government is able to borrow gigantic mountains of money for next to nothing.  U.S. consumers are still able to get home loans, car loans and student loans at ridiculously low interest rates.  When this low interest rate environment changes (and it will), it is going to absolutely devastate the U.S. economy.  Without low interest rates, the U.S. financial system dies.  When it comes to borrowing money, it is the rate of interest that causes the pain.  If you could borrow as much money as you wanted at a zero rate of interest for the rest of your life you would never, ever have a debt problem.  But when there is a cost to borrowing money that changes things.  The higher the rate of interest goes, the more painful debt becomes.

The only reason that U.S. government finances have not fallen apart completely already is because the federal government is still able to borrow huge amounts of money very cheaply.  If interest rates on U.S. government debt even return just to “average” levels, it is going to be absolutely catastrophic.

So what happens if rates go above “average”?

The reality is that if there is a major crisis that causes interest rates on U.S. Treasuries to go well beyond “normal” levels it is going to cause a complete and total collapse.

In 2010, the U.S. government paid out just $413 billion in interest even though the national debt soared to 14 trillion dollars by the end of the year.

That means that the U.S. government paid somewhere in the neighborhood of 3 percent interest for the year.

Considering how rapidly the U.S. dollar has been declining and how much money printing the Federal Reserve has been doing, a rate of interest that low is absolutely ridiculous.

The shorter the term, the more ridiculous the rates of interest on U.S. Treasuries are.

For example, the rate of interest on 3 month U.S. Treasuries right now is just barely above zero.

The Federal Reserve has been playing all kinds of games in an attempt to keep interest rates on U.S. government debt low, and so far they have been pretty successful at it.

But they aren’t going to be able to do it forever.

Up until now, other nations and investors around the world have continued to participate in the system even though they know that the Federal Reserve is cheating.

However, there are signs that a lot of investors are finally getting fed up and are ready to walk away from U.S. government debt.

China has been dumping short-term U.S. government debt.  Russia has been dumping U.S. government debt. Pimco has been dumping U.S. government debt.

Others are taking things even farther.

In fact, there are some investors that plan on cashing in on the loss of confidence in U.S. Treasuries.  Renowned investor Jim Rogers says that he is now going to be shorting 30 year U.S. government bonds.

Just check out what Rogers recently told CNBC….

“I cannot imagine or conceive lending money to the United States government for 30-years at 3, 4, 5 or 6 percent —you pick a number — in U.S. dollars”

And he is right.  Who in the world would be stupid enough to loan the U.S. government money at a 4 or 5 percent rate of interest for the next 30 years?

Actually, most U.S. government debt is financed in the short-term these days.  In fact, the U.S. government issues a higher percentage of short-term debt than any other industrialized nation.

This trend really got started during the Clinton administration.  Back then they figured out that the U.S. could reduce its borrowing costs substantially by relying much more heavily on short-term debt.  The Bush and Obama administrations have continued this trend.

So these days the U.S. government constantly has huge amounts of debt that are maturing and that need to be rolled over.

This is great as long as interest rates stay very, very low.

But when interest rates rise the whole game will change.

In a recent article, Pat Buchanan explained that the Obama administration is being completely unrealistic when it assumes that interest rates on U.S. government debt will stay incredibly low over the next decade….

“The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.

A return to the normal Fed rate would, by 2020, add $4.9 trillion to the cumulative deficit”

Most Americans really cannot grasp how incredibly low interest rates are right now.

Sometimes a picture is worth a thousand words.

The following chart shows how interest rates on 10 year U.S. Treasury bonds have declined over the last several decades.

As confidence in the U.S. dollar and in U.S. government debt declines, interest rates will go up.

In fact, there are troubling signs that we are starting to see a move in that direction right now.  Last week, the yield on 5 year U.S. Treasuries experienced the biggest one week percentage jump ever recorded.

The big danger is that the political wrangling in Washington D.C. will start to cause a panic.  The managing director of Standard & Poor’s recently told Reuters that if the U.S. government starts defaulting on debt at the beginning of August, the credit rating on U.S. Treasury bonds that are supposed to mature on August 4th will go from AAA all the way down to D….

Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.

“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”

When a credit rating gets slashed, interest rates on that debt can go up dramatically.

Just ask the citizens of Greece.

Today, the interest rate on 2 year Greek bonds is over 26 percent.

You are delusional if you believe that something like that can never happen here.

Right now the U.S. national debt is completely and totally out of control.  If the U.S. government had to start paying interest rates of 10, 15 or 20 percent to borrow money it would be a total nightmare.

This year the U.S. government will have income of about 2.2 trillion dollars.

If in future years the U.S. government is spending a trillion or a trillion and a half dollars just on interest on the national debt, then how in the world is it going to be possible to even run the government, much less balance the budget?

But rising interest rates would not just devastate the federal government.

It would become much more expensive for state and local governments to borrow money.

Student loans would become much more expensive.

Car loans would become much more expensive.

Home loans would become out of reach for everyone except the very wealthy.

As we saw during the housing crash of a few years ago, rising interest rates can absolutely wipe homeowners out.

On a standard home loan, if you change the rate of interest from 5 percent to 10 percent you increase the mortgage payment by approximately 50 percent.

If you change the rate of interest from 5 percent to 15 percent, you roughly double the mortgage payment.

As the 30 year fixed rate mortgage chart below shows, interest rates are near historic lows right now….

Keep in mind that even with such ridiculously low interest rates the U.S. real estate market has been deader than a doornail.

So what would a significant spike in interest rates do to it?

When all of these low interest rates go away the entire financial system is going to change dramatically.

A significant spike in interest rates would wipe out U.S. government finances, it would push state and local governments all over the country to the brink of bankruptcy, it would bring economic activity to a standstill and it would destroy any hopes for a housing recovery.

This country, and in particular the federal government, is enslaved to debt but right now we are not feeling the full pain of that debt because interest rates are so low.

If you want to know when things are really going to start coming apart, just keep an eye on interest rates.  When they really start spiking you can start sounding the alarm.

The truth is that the state of the economy is going to continue to get worse.  Our debt is growing every single day and our country is getting poorer every single day.  When interest rates start surging it is going to start knocking over a lot of dominoes.

I hope you are getting prepared for when that happens.

  • PETER K

    When interest rates rise too high for the US to pay, it will simply default on it’s debt. It’s all part of their plan to fight deflation by stoking inflation, and thereby push up food prices and thereby bring down developing economies like China. So don’t worry about the cost of paying back the debt, because you won’t have to. It is already mathematically impossible anyway.

  • Gary2

    Why the hell are my credit card rates so high? Did we not bail these Mother F out? WTF!

    • Ben Dover

      I avoid credit cards. They keep you poor. I love the “dear in the headlights” look I get when I pay cash for minor things like TVs, etc. I have had to repeatedly refuse to finance trivial items like a $330 digital camera and tell the young salesmen an old-timer’s story about a time when financing a $330 item was laughable.

    • 007

      Well put Gary. Bank of America has not gotten the memo. Why we prop up these crooks amazes me. I would be just fine if we taxed them out of existence.

    • Louise in MO

      Gary 2

      For the first time I agree with you…why are my interest rates on credit cards doubling and in one case,tripling. Never missed a payment, never went over the limit. Stopped using them entirely.

      I have absolutely no sympathy for the banks, especially: First Bancard Omaha, Capital One Bank, Juniper Bank and Orchard Bank. They are nothing more then extortionists!

      What chumps we Americans have been!

  • Nostradamus

    Quotations:

    “The USA has developed a New Economy of Financial Engineering. Therefore irrational exuberance does not matter.”
    – Alan Greenspan

    “Debt and deficits don’t matter.”
    – Dick Cheney

    “What matter is we invade Iraq. What not matter is how we pay for it. Dollar or blood.”
    – GW Bush

    “Housing bubble does not matter.”
    – Ben Bernanke

    “Capitalism does matter until we bail out Goldman Sachs. Because Goldman Sachs matters more than capitalism.”
    – Hank Paulson

    “Debt ceiling does not matter.”
    – US Congress

    “I made interest rate to be zero because dollar and saving do not matter. But infinite debt does.”
    – Ben Bernanke

    “When empires and nations collapse, people discover they matter more than money.”
    – Nostradamus

    • Alan Turing

      Ah mixing quotes of dogs Bush & Dick with Nostradamus somehow gives me the creeps!

  • SMASH THE CONTROL MACHINE

    The history of the actual word “mortgage” is very interesting. In the word “mortgage”, the “mort”- is from the Latin word for death and “gage” is from the sense of that word that means a pledge to forfeit something of value if a debt is not repaid. So mortgage is literally a dead pledge. It was dead for two reasons, the property was forfeit or “dead” to the borrower if the loan wasn’t repaid, and the pledge itself was dead if the loan was repaid.

  • Cyk

    Well, if the situation is that hopeless,
    why don’t you all lay down and die?

    This would at least lower your CO2 output.

    • Ben Dover

      For the good of the planet, all environmentalists should take your advice.

  • Mark McBee

    The U.S. bond market is 5 times the financial market and 7 times the stock market. When the bond market collapses it will bring down the entire U.S. economy and destroys America. Great empires fall because the cost of borrowing is eating up the budget and left no more money to finance the empires. This happened to the British, Spanish, French, Russia, etc. Watch the interest rate every hour and everyday. It is the American’s economic Achilles’ heel. Heck, it is the Achilles’ heel of all nations which rely selling debts to finance the countries.

  • Nexus

    It is inevitable the debt will feed through to lower living standards. When does a society start to unravel? Unemployment on a non readjusted (fiddled) basis is around 22% and this is at Great Depression levels. Any further increases will put a great strain on social cohesion. Nothing on this scale has happened in history and the potential for global dislocation are high as we are all interlinked.

  • Credit rates

    What the author fails to mention is that those of us who had to credit during the teaser rates to survive have seen a huge spike in interest rates as high as 29%, these high interest rates are cripling millions of consumers as greedy banks are refusing to lower rates. Forcing many americans to severly cut back and forcing many into foreclouser and bankruptcy.
    Nothing is being done to help those of us who are drowning in credit debt through no fault of thier own. This is the main reason we are heading into a severe depression. Bankers greed.

    • Ben Dover

      Use the bankruptcy laws against the banksters.

    • jackieR

      How else do you expect them to recover their lost investments. They didnt get enough from the taxpayers they want more. So they put more of the squeeze on the people that can least afford it.

  • The Jig’s Up

    We WILL have our Methadone!!! Nobody will take away our Crack!!! Our Heroine must remain!!!

    Low Interest Rates are now “Needle Park” and Woodstock for the Baby Boom Generation and Low Interest Rates WILL remain!!!

    Like Rush Limbaugh with his drug Addiction to Mega Doses of Narcotics–America WILL KEEP HER Narcotic Addiction Drug and No One will take IT away.

  • Tommy

    “This country, and in particular the federal government, is enslaved to debt”. As a wise man said, “The rich rules over the poor, the borrower becomes the lenders slave”. Just look at who holds the largest portions of our debt and you will see who “owns” us, and who we are enslaved to.

    • patriot Alice

      It seems that all debt can be forgiven through bankruptcy, except student loans…

      • D

        And don’t forget to include the recourse Second Mortgages a.k.a. Home Equity Loans/Lines of Credit. These are also not forgiveable, and the lender has recourse to come after you for the debt, much like Student Loans

  • http://www.jobwaltz.com zack

    Higher interest rates will also bankrupt the bailed out banks again, as they are all holding massive amounts of US government debt that will lose value in a higher interest rate environment. Real estate prices will get crushed as well, further impacting the banks balance sheets. All of the major US banks are technically insolvent, and are being propped up with accounting tricks and loose monetary policy from the Fed.

    Stuck in a job you don’t like? Let us help you find a better one. http://www.jobwaltz.com for premium job search assistance.

  • Brady

    So this is it huh? I have been reading your blogs since early march and they have been spot on every time. You get the info to the people weeks before mainstream media makes a peep about it. When you break down the chaos into understandable bites it does wonders for people. I can now say honestly that I am an educated citizen on the state of our economy and other breaking events. Thanks again for all you do, I can imagine you carry a considerable weight with these stories. You help lots of people

    • Michael

      Brady:

      Thank you for the encouraging words. With this last article I was feeling frustrated because I did not feel like I was communicating the points I was trying to make as clearly as I should be. It seems so clear in my head but I couldn’t find just the right words to say what I was trying to say.

      The U.S. economy is trapped in a situation where only low interest rates will enable us to survive. When the interest on our government debt starts doubling or tripling it is going to be a total disaster.

      Michael

      • BigM

        And Mike, as much I too value every article you write, I sit here and think of those who “Have-no-clue!”

        These are the ones, when things fall apart “suddenly” will be a dander not only to themselves, but society.

        But I’ll tell yah, I can’t wait for HIM to show up. The sooner the better.

        HE’s my only hope at this point. The best hope anyone could have frankly.

        • Greg

          You’re exactly right! I wonder what the number is for those not having a clue? I just know I sure don’t want to be living where I do when things unravel. Looking at some abandoned hard to get to place out in the mountains sounds like a much friendlier environment to me!

  • Mike M

    The Chinese central bank raised rates again overnight and the ECB is set to raise their rate later this week.

    When the debt ceiling limit is raised the treasury is going to have to issue nearly a half a trillion dollars in new debt immediately to payback the money they raided from pension funds. Without the Fed buying new debt who exactly is going to buy it all? How much higher rates are they going to have to offer to get people to buy this much debt?

    • jackieR

      Do you realy believe they will return the money to the pension fund? They just found a new source of money to raid. You can bet that they will be looking for more sources in the future.

  • Ghulam

    So what is the down side here? It is difficult to imagine a situation more positive for the poor and peaceful people of this world than a collapse of the United States, making it unable to sustain half of the world’s military spending, endless wars and untold military bases. What better gift could there be to the future of life on earth than a crash of the rapacious capitalism? What surer salvation can human culture and faith find than in the burying of the dollar and those who have made it into a god.

    • Ben Dover

      If you hate the USA, you will really be upset with whatever replaces it.

      • the Beast

        USA is falling. What will replace it is a global power of people with piety and divine moral conduct. Even the people of USA will be better under the replacing power. Do you think that you live in a good condition as a human being?

    • http://www.povertylinejournal.blogspot.com/ the optimist

      Excellent point. Of course Americans across the board are going to disagree : )

    • http://survivalistboards.com Sierra Dave

      Ghulam – More poor people died under Communist Chinese and Soviet rule than anywhere else.

      • Ghulam

        Absolutely right, Sierra Dave the Communists seem to be ahead in the number of outright killings, but by introducing “clean, safe, nuclear power” the Americans may have the death prize in the end. Communism and Capitalism are the materialism twins, similar products of the self-called Enlightenment and the shift to worship of the state. They are like two halves of a team of professional tag-team wrestlers, and every bit as sophisticated as systems in which to place ones faith.

        The mediaeval roots of capitalism are fairly well known, and that history tells of interesting precedents regarding usury and who gets the blame when recession hits and schemes collapse. Marx and Lenin gave us Communism, just as Einstein, Oppenheimer, and Teller, along with big business, gave us the nuclear age, launched in secret during “war time” and sprung on Congress as a fait accompli. Now we fear a financial crash orchestrated by Bernanke and Rubin, Somers, Goldman and Sachs. If there were this many Mormons taking things over and leading the society into disasters of this order, it would be possible to say something directly about it in public. In such a case I would be greatly concerned for the sake of the many Mormons who were in no way to blame, especially if that people had a long history of getting in trouble exactly the same way.

  • mondobeyondo

    If you can’t afford student loans or car loans or a mortgage right now, at these low, low rates – imagine how you’ll pay for those once interest rates rise.

    Expect a dramatic rise in foreclosures and bankruptcies in the next couple of years.

    • Beau

      I agree with your comments. I just want to clarify that under current US Bankruptcy law, one cannot discharge student loans in a bankruptcy.

      I believe Michael wrote about this previously, but for some, they see no other choice but to take out loans for skills that can be used in other countries, and then leaving the USA and some are even giving up their citizenship to get rid of their debts.

      For tens of thousands of years if someone needed to put their youthful discretions or whatever behind them they could leave and start a new life elsewhere. They could join a distant tribe or move to another state or country. In general that has been a very good thing. However, the Rockefellers and the rest of the Mafia gang that wishes to rule the world and make slaves of us all are making that increasing difficult. Soon, if the trend continues, there will be nowhere to go to start over.

      However, until their goal of chipping us all come to pass, we still have a few options even if very limited.

      • Ben Dover

        If possible, transfer to another form of debt well in advance of bankruptcy. You must cover your tracks well if you do this, but it is possible.

        • Brian

          Please get a clue: The Fed sets interest rates, not “the market.” Modern Monetary Theory (MMT, or functional finance) describes how the U.S. money system actually functions. Do a search on Warren Mosler, Stephanie Kelton, Mike Norman, L. Randall Wray to learn more. There is no danger of hyperinflation in the U.S. There is no realistic danger of a dollar collapse or losing its reserve currency status. The U.S. federal government absolutely cannot default and become insolvent.

  • Dave in Scenic City

    Low interest rates are forcing folks who depend on interest income from savings to eat into their principal. As such, low interest rates represent a form of wealth confiscation by the government and ruling plutocracy. Low rates are also fueling commodity speculation by banks and hedge funds that benefit from this “free” money. And that is showing up as cost-push price inflation — yet another form of wealth and income confiscation. In the end, there must occur a worldwide write-down in debt and a return to normal interest rates.

  • dar

    So what or who exactly sets the interest rates? There is already low confidence in the dollar and the gov., so why are’nt the rates going up now?

  • William

    Things will only get worse. The reason for that is, in Nov 2012, YOU will send the same idiots back to the US Congress who caused this nightmare. The US Congress is corrupt to the CORE, Republicans and Democrats.

    • Ken

      Right on! The U.S. of A. has been snookered into believing that either the Democrats or Repulicans are a better choice. Divide and conquer has been the game and the citizens have lost the battle. We have been conquered by believing that either of the two parties are good for the country, when in reality, NEITHER ONE are good for anyone but themselves and the super rich who control the D.C. “District of Crooks”.

    • Otown Right Guy

      The ONLY candidate who wants to end the Fed, the source of the problem, is Ron Paul.

  • HerrLT

    The Great Depression originated in Europe. Today, Portuguese credit ratings were lowered again. Contractions are felt in both Spain and Italy…

    Michael, your posts are spot-on and it really blows my mind how most people are blissfully ignorant of what is actually taking place around us. Portugal will need another rescue package by the IMF. The same IMF warned of US state defaults being as damaging to America as a Greek default would have been to the Eurozone… On the same topic New Jersey requires a two billion bridge loan from JP Morgan.

    The dominos are falling. I especially enjoy the last sentence in each of your articles because it sinks in for me reading about the gravity of the situation and need to prepare. In the next month my wife and I are going to Chicago and getting my permanent residency visa for Brasil and a contact there will be scouting for jobs for me should the need arise. It’s getting scarier every day :(

    • Michael

      Wow – Brazil, eh?

      That will be quite a change.

      Michael

    • Ben Dover

      I hope Portugal has the sense to refuse the bailout and tell the IM(other)F to pi** off.

  • Maria

    Industry could be brought back, and the economy could be repaired inside of a decade, BUT…

    It would take a miracle to get the necessary changes implemented. The corrupt politicians we have running this country now have been bought and paid for by the very people who are benefitting from this orchestrated economic collapse.

    So down we are going…and hard. This collapse is meant to hurt and hurt bad. This nation must be brought to its humble knees before the New World Order can take full control.

    Prepare, prepare, prepare.

    • jackieR

      The same goes for all the other corrupt govs.

  • onecansay

    The entire problem is “usury”. What is that, you say!

    Interest, which is nothing more than pulling money out of thin air. Nothing more than ridding YOU of YOUR wealth.

    Get rid of the privately owned central banks (NOT SO(Federal Reserve)). The country must print it’s own interest free money. That way you can print as much as you want and never go bankrupt.

    Get rid of the leaches that only enrich themselves on YOUR own stupidity. Rise up fat, stupid, lazy sheeple. Storm the castle before it is too late.

    Do it before all the drones and troops and tanks and whatever other strange, human ending technology comes home to be used on ALL of US A.

    • http://doug-lamb.blogspot.com/2011/07/at-last-day.html TK

      Right on onecansay, getting rid of the fed would solve a lot of problems, but are the masses waking up?

      Thanks to wonderful blogs like this one, the truth is getting out there.

      But is it too little too late?

      Only time will tell.

  • Prepping for the Future

    Here is video to see if we follow Gary Plan and tax the rich how to pay for the Obama overspending plan.

    http://www.youtube.com/watch?v=NVNs8QLFsvQ&feature=channel_video_title

  • taxpayerforever

    who said “gangster politicians”? Are the citizens of the US sending “gangster politicians” to represent them or are they sending individuals who have the citizens interest in mind?

  • Daniel Simon

    Michael,

    You write:

    “The U.S. economy is trapped in a situation where only low interest rates will enable us to survive. When the interest on our government debt starts doubling or tripling it is going to be a total disaster.”

    Why is it so impossible to believe we could “survive” with no more borrowing? In other-words, by making the admittedly extremely traumatic hard choices to cut spending to the level of income?

    All of these articles keep repeating the same general theme…we can’t keep doing what we are doing indefinitely…but we have to keep doing it a little longer…so we can somehow figure out the “soft landing” scenario the author admits isn’t going to happen.

    We are going to have to take the medicine and the longer we put it off the more bitter it is going to be.

    Frankly, I think it is time to default on the entire debt and then not spend a penny more than we take in…whatever THAT takes.

    The debt was created out of thin air and is fraudulent. Defaulting would free up the interest we pay and wipe out the principal as well.

    It is going to happen sooner or later anyway.

    Dan

    • Michael

      Daniel:

      We certainly need a system where the government does not borrow any money. Unfortunately, I don’t think we have a prayer of getting to such a system.

      But even if we did, it would be much more preferable to transition to such a system in an orderly fashion rather than having a complete collapse happen.

      In any event, I am not optimistic at all about our financial future.

      Michael

  • http://www.jeunitedrealty.com Orange County Real Estate

    The thing about the interest rates is that the lower rates makes it easier for buyers to get the credit they need to make a purchase. If the interest rates go up it wont be so bad if they go up at the right time when our economy can handle it.

  • Joseppi

    Here’s why I think interest rates can stay low longer than you would expect – Just look at the twenty years of ZIRP of Japan, and the Yen isn’t even the reserve currency.

    Presently, in this highly manipulated fiat system of floating currencies, The US FED sets the level of interest rates. They are now buying US Treasury debt with the help of the TBTF Primary Dealers.

    Banks buy government debt and then sell it to the FED for a nice profit, and the FED pays with this with electronic ‘make believe’ money.

    This is going on around the world with Central Banks supporting each other to keep the western banking cartel afloat. Don’t worry about QE 11, it will just be called something different.

    How long can this go on? Until Russia, Brazil, the Gulf States and China say no more debt backed money will be accepted.

    Then the true capitalists will emerge as victors in the currency wars. Those with a manufacturing infrastructure, resources and a competitive labor force will prevail.

    The US, with the help of the multi-national corporations and politicians have destroyed the manufacturing capacity of the US. The US educational system has become an expensive exercise in creating a labor force that is not able to compete internationally. We are left with our resources that are vulnerable to climate change.

    The disturbing part of all this is the low interest on part of the US citizens in why their standard of living is declining. Thank the FED policies because it’s destroying the US currency because the US dollar has become debt, and there’s too much debt in the world and not enough of credit from ‘real’ capital.

    • 007

      Good point, there is no way our debt could legitimately be bought by real buyers. Our debt amounts being purchased is mind boggling. Something rotten is happening at our bond auctions. The Fed and the central banks are playing games buying up each others debt. How long can they get away with this?

  • http://www.povertylinejournal.blogspot.com/ the optimist

    On a personal level, there is one AMAZINGLY simple solution: DO NOT BE IN DEBT. Not for anything.

    Period.

    It will take time, but you can save up the money to buy a small piece of property, a couple of acres, and build a very simple, rudimentary tiny house. Yes, you can actually live without running water, electricity, cable subscriptions, ipads, cellphones or shiny new appliances for a couple of years. Yes, you can OWN a house outright, without a mortgage. If people are willing to think outside the box of what they expect they “deserve”, or what seems “normal”, and be creative about their lifestyle, they can live a free life — free of debt, free of lifelong slavery to service the debt.

    Just don’t play into their system and become a willing pawn. There is no reasonable purpose on the planet for debt, as far as I’m concerned. And that goes for our federal government too.

    I’ve learned this the hard way. I’ve fallen into the same traps, and when I get out, it’s not happening again.

    • Otown Right Guy

      Good point. Too many of us have bought into the idea that being a debt-slave to a bank for 30 years is “normal” or even a good thing. Slavery is slavery and debt is debt and mortgages are both.

    • Ghulam

      I have never been in debt, financially, either, and it has been a wonderful strategy. However, when you know that dollar is going down down down, taking on debt right now, something like student loan debt, seems like a pretty safe gamble. What is the danger if the dollars that you will be expected to repay are going to be worthless before long?

    • mondobeyondo

      Me, too. I was suckered into the whole “buy now, pay later” craze several years ago. Just whip out the Mastercard and Visa and charge, charge, charge! Worry about the results later. Well, “later” is right now. It’s a very, very painful lesson to learn. But I’ll never make that mistake again!!

    • The Unicorn

      Been there done that Optimist.The concept sounds like a great idea the only problem is at some point state,fed. or/and local goverment will take everything you own if not by force then by making up silly laws.If you have a compost pile thats an illegal dump,if you raise bees your hive boxes will be called furniture again illegal dumping,window air conditioners are illegal because 90% of them stick out of the window and its illegal to store an appliance outside,again illegal dumping,the laws are endless.I lived 16 miles from the nearest gas station and 22 miles from town.At some point the 1500.00 fines 1000.00 per a day cause you to go broke and you either sell out or let it go to a tax sale.I was so used to having the local SWAT hand cuffing me and banging my head aganist their van I started wearing stocking caps even in the summer to cushion the blow.

      All I wanted was to be left alone and just live. I was debt free.So much for thinking outside the box.Optimist stock up on heavy thick stocking caps you’ll need them.

  • mercy me

    america enslaved to debt is more like a fat women whose become a slave to cheese cake, the more she sees the cherry delight, the more she wants to get her hands on the thing, no matter what the cost. That is, until the sherrif has her slapped in chains for shop lifting, and she is forced to live on bake beens instead. That is where america is heading.

  • patriot Alice

    Being that Greece is the tip of the PIIGS iceberg, I believe it will tip the scales before interest rate in the USA will. If bailing out Greece causes such panic in the banking system, wait until the remaining PIIS come asking for a bailout…The collapse will begin in Europe and then in the USA….Mark my words..

    • Otown Right Guy

      I agree. Europe first. Late this year or early next year. Followed by a Dow crash, mass layoffs, a run on banks when the FDIC is exposed as the sham it is, etc. Then we will see just how bad the collapse will be. Will it be TEOTWAWKI or will life go on as before but with fewer vacations, lattes and a lot of canceled cable TV and cell phone subscriptions? Even lower home prices? Will there be martial law? Will the preppers be vindicated by food shortages? 2012 will certainly be a bad year.

    • mondobeyondo

      Pretty good chance Europe will be the first. Then again, the U.S. might be the first, if the debt ceiling isn’t raised by August 2nd. But of course it will be raised (Congress does it every single time). So yeah, Europe will probably be the first to crash and burn. We won’t be far behind though.

  • McKinley Morganfield

    For many years we have discouraged frugality with low interest rates and encouraged debt with easy credit. This can not last much longer. Some say this is engineered by a cabal of bankers and politicians, others say never attribute to malice what can be explained by stupidity. Either way it does not matter to people like us. As Michael and others remind: prepare. Prep a little each and everyday. Every extra can of food you buy, every container of water you store will make a difference someday.

  • a cruel accountant

    I got a plan!

    Get yourself register as a bank with the Fed.

    Borrow from the Fed at .25%

    Put the money in a Chinese bank account at 3.50%

    You keep the difference.

    We will all be RICH!

  • the Beast

    One repeating dogma that is being brought forward by Satan is: “You can not live without me (i.e. my system, my values, my ideology, my economy, etc)”
    One fact that can not be hidden from those who are thinking and aware is: “The Lord of all universe created the universe and everything in it, and the Lord shall provide sustenance to them.”
    Godless system is destined to fall. God system has and will always prevail.

  • bobbobbobbob

    the chinese have a curse “may u be born in interesting times” i dont know what will happen if the gov. defaults on its debt but remember the debt is in dollars which will be printed at an unknown rate. lets raise the taxes to the eisenhower level and eliminate the tax credit for rebuplicanterrors corps that outsource all the good jobs and make things here inusa remember mcpain wanted to banrupt gm a real chinese surrogate IE he works for china.

    • bobbobbobbob

      the only goog rebuplican9 is a deleted one ctrl alt del del del all of them or unininstall them all

  • Steve

    This Debt Ceiling will NOT be raised by August 2nd. Here’s why:

    Veterans of previous budget deals say there’s no way President Barack Obama and Congress can meet the Aug. 2 deadline even if a broad overall agreement is reached in the next two weeks. First, it could take weeks more for lawmakers and staff aides to implement that deal negotiated by the president and the two parties’ leaders.

    Then, lawmakers would need time to examine and digest the legislation. And that’s hardly all.

  • Mad Max

    America as we know it is already over with and done. But that’s a good thing, because we’re going to comeback bigger and badder.

    If you are an American, You have to read:

    “Common Sense 3.1” at ( http://www.revolution2.osixs.org )

    This is the kind of stuff that makes America Great! Not sitting around huffing and puffing about nothing.

    “Spread the News”

  • 007

    I believe the real collapse will come when the Federal Reserve has to raise rates. The banks won’t be able to buy Treasuries and earn risk free income. Hence they won’t be able to buy treasury debt. That is why the Fed will fight like hell to keep rates low no matter what inflation is doing. (hint buy gold).

    But something else stinks in our U.S bond markets.

    Every country is broke and yet someone is buying, huge, massive, mind boggling amounts of treasury debt every week. And it is not China or Russia. These countries are dumping our debt. According to the Fed it is buyers from a bunch of poor third world Carabien countries. Many people believe the Fed is just printing the money and buying the bonds through straw men off the books.

    If this is correct, the Feds money printing and debt monetization makes QE2 look like small change from a lemonade stand.

  • Davey Jones

    Michael I read your post above about ‘encouraging words’-I will say this, no where else are there regular articles on the global economy that would even begin to inform and educate the way your blog does. I read articles and their comments. Sooner rather than later, life is never going to be the same. I am 33 and the next decades are going to be….well, I don’t have to tell you.

    I send as many people I can to this blog for them to learn as much as they can in the time that they have available. I have to say though, recently, I have become more subdued knowing the events we have ahead of us, and find myself actually engaging in less conversations.

    • Michael

      Davey:

      I want to thank you for spreading the word about these articles. The people that email these articles to their friends and share them on Facebook are an invaluable help to me. So many of the readers have been so great and I really am thankful, even though if you just read my articles you might think that I was quite grumpy all the time. :)

      Michael

  • Saurabh

    Hi Michael

    would just want to discuss the effect of Oil here. Oil still is a basic infrastructure requirement for all the economies of the world and specially for the growing ones like south-east Asia. The USD is the global exchange for Oil and thats what keeps its demand on a high for ever. The ASEAN states would gobble up all the dollars that te US can print and hence the demand and hence the justification of the printing of USD by the FED. Till this printing of the USD is justified by the huge demand the FED can keep on printing the USD and help the US Govt. manage its debt with more debt. Every year the confress increases the US Govt.’s borrowing limits to help it not default. This is the factor that keeps the US afloat. I for one think that due to the Global Oil demand the US economy can’t really go down for the foreseeable future. I agree with you that its a bad cycle to be in but I dont see the cycle breaking for some time to come. What do you and the other’s have to say about that please?

    • Michael

      I think that the U.S. dollar and oil are going to become delinked very rapidly, and that will have huge consequences for us.

      Michael

      • Saurabh

        There is no other currency right now that can take the mantle of the USD as a Global Exchange. The EUR was on its way to take up that role but with the state of the European economies that is highly unlikely. The CNY is far from it due to a govt. controlled currency and uncertainity of actual data form the country. The INR is still in infancy since the economy is not large enough to make any significant impact as yet.
        The delinking of the USD and OIL is something that Iran tried and has not been too successful.
        The pumping of physical money in the economy by the FED would keep the interest rates low due to high liquidity. This should then incentivise the setup of industries and this is what will take the US out of the situation it is in. I believe that this picture is too rosy bit it is the picture that is being aimed for.

  • Dr Nancy

    Please everyone start preparing for the future..I began several months ago storing food. Also this site was recommended to me by a friend,put together by a millionaire. Am finding the information is excellent:

    How to Profit like the Ultra-Rich in Times of Economic Chaos

    Free Video here-

    http://theelevationgroup.net/presentation/register.php?a_aid=160667&a_bid=290b868b&chan=y

    Hope this helps you

  • A small gold bug

    Michael,
    Valuable article! Can you please follow-up on 007’s point – i.e., who are the buyers of the US treasury debt? You might have better resources to research this topic. This becomes all the more relevant if the debt ceiling is raised by August 2. Then, the treasury will have issue more bonds to make up for the funds that they have been adjusting, internally. Are people waiting in the wings to buy UST bonds? If so, who are they? PIMCO, some time ago, wondered about the same thing. And I don’t remember whether they gave a straight forward answer.
    Thanks,
    A small gold bug

  • mike smith

    The usa needs help from Canada. grow up and stop spending your kids money!!!! the worlds
    economy will leave u behind. look out here comes china and india.

  • A.S.

    The end of the U.S. is now here: we lost our AAA rating.

  • Laird

    Home loans would become out of reach for everyone except the very wealthy….. actually this would cause deflation of housing prices, the prices for houses would come down to the price that people could afford with interest on the loan they take out…. I am looking at the real estate market to tumble when govt support for low interest rates goes away in 2013….

    • WMC

      One year ago Laird said:

      “Home loans would become out of
      reach for everyone except the very wealthy….. actually this would
      cause deflation of housing prices, the prices for houses would come down
      to the price that people could afford with interest on the loan they
      take out…. I am looking at the real estate market to tumble when govt
      support for low interest rates goes away in 2013….”

      Laird, a very interesting analysis, indeed.

      My take is different.

      With high interest rates the prices will drop for sure and the ‘wealthy enough’ people will have enough ‘COH’ , cash on hand, to purchase them outright. Next they will rent them out to people who are working hard to restore/rebuild their lives. That rental income will produce a decent return on the money put into the asset.

      When the rates are really high and the prices have dropped the person who is not ‘wealthy enough’ will not be able to compete with the solvent, high credit, holding plenty of COH, investor… who already owns other properties.

      Personally, I think the whole place will go upside down and there will be civil unrest therefore, as a chicken patriot, I will soon buy new home in Singapore.

      Sure prices are high but there’s a cost to security. What does Jim Rogers really think?

      Anything I own in the USA today I am willing to lose and be okay. Moving to Asia is a hedge of sorts. It is worth it.

      Surviving is necessary to life, right?!!

      Those who did NOT survive are somewhere else tonight.

      Will the US survive this Obama character with the company he keeps?

      I’m not willing to chance it given what he has pulled off thus far — and almost no one even seems to know about.

      Research will give you those answers. I’m not going to write that piece here.

      Sure, he’s a smart guy !! Very smart.
      That’s part of the problem– he is not going to use his smarts for me or for you.

      Sick around and find out.

      He’s got plans for you… and they are not pretty.

      Written with respect.

      Warren Currier
      Boston.

  • stever

    An extraordinarily low interest rate environment has become our drug of choice in this country. But the potential impact on the economy over the long run.
    mortgage calculator

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