Government Debt

Another Way That The Federal Reserve Makes Massive Gobs Of Money For The Big Banks

When most people discuss how the Federal Reserve benefits the big banks, they usually only focus on the ways that the Federal Reserve directly brings in income.  But there is so much more to it than that.  The truth is that the Federal Reserve is used in a whole variety of ways to indirectly assist the big banks in making huge gobs of money.  One of the ways this is currently being accomplished is through the U.S. Treasury carry trade.

So how does this carry trade work?

Well, it basically has three steps and it works something like this….

#1) Mr. Big Bank goes over to the Federal Reserve and says, “Hey Mr. Federal Reserve – please loan me a big bag of cash for next to nothing.”  Of course, the Federal Reserve is more than happy to loan it to him.

#2) Mr. Big Bank then invests the same big bag of cash into U.S. Tresuries which have a much higher interest rate than what Mr. Big Bank just borrowed at.  To give  you an idea, 10-year U.S. Treasuries are earning around 3 and a half percent right now.

#3) Mr. Big Bank sits back and enjoys the huge amount of risk-free cash which comes pouring in.

This little three step procedure helped enable four of the biggest U.S. banks (Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup) to have a “perfect quarter” during the first quarter of 2010.  What that means is that these four banks had zero days of trading losses in the first quarter.

Wouldn’t you like to have a perfect batting average?

Don’t you wish you could pitch a perfect game every time?

Well, it certainly helps when you are being subsidized by the Federal Reserve as Bloomberg recently explained….

The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.

Doesn’t it just seem like whenever we turn around the Federal Reserve is doing something new to “help out” the big banks?

This is just getting ridiculous.

Remember all of that talk about how the U.S. government had to help out Wall Street so that they could help out Main Street?

Well, a ton of money did get injected into the banking system.

In fact, the Federal Reserve pumped hundreds upon hundreds of billions of dollars into the banking system since the beginning of the financial crisis.  This has caused the U.S. monetary base to explode….

So did the big banks use all of that money to help out Main Street?

No.

In fact, business lending by the big banks has been falling precipitously.

So what have the big banks been doing with all of that money?

Buying U.S. government debt of course….

So instead of making loans to American businesses who desperately needed it, most of this new money has gone to pump up yet another bubble.  This time the bubble is in U.S. Treasuries.  Asia Times recently described how this trillion-dollar carry trade in U.S. government securities is setting up a very dangerous situation….

Remarkably, the most aggressive buyers of US government debt during the past several months have been global banks domiciled in London and the Cayman Islands. They borrow at 20 basis points (a fifth of a percentage point) and buy Treasury securities paying 1% to 3%, depending on maturity.

This is the famous “carry trade”, by which banks or hedge funds borrow short-term at a very low rate and lend medium- or long-term at a higher rate. This works as long as short-term rates remain extremely low. The moment that borrowing costs begin to rise, the trillion-dollar carry trade in US government securities will collapse.

But as long as the gravy train of the U.S. Treasury carry trade continues, why should the big banks make risky loans to American businesses and consumers when increasing numbers of them are turning out to be deadbeats anyway?

That is a good question.

Meanwhile, we have this sick situation where the Federal Reserve subsidizes the big banks and enables them to buy up a big chunk of the debt the U.S. government is constantly churning out.

Our national banking resources are increasingly being turned away from building up our once great system of free enterprise, and instead are being devoted to servicing the never ending spiral of government debt and funny money that we have created.

But a bunch of folks down on Wall Street are getting exceedingly rich from this little game, so they certainly aren’t going to complain about it.  And as long as the vast majority of Americans continue to stay in the dark about all of this, the bouncing ball will just continue to keep rolling.

How Is The U.S. Economy Supposed To Succeed When Our Politicians And The Big Banks Are Making Billions Of Dollars Betting Against It?

Most people around the globe think of America as a great “capitalist” economic machine, but the truth is that the U.S. financial system is essentially one massive betting parlor at this point.  In fact, there has been a whole lot of easy money made in this betting parlor over the past several years by our politicians and by the big financial players down on Wall Street.  So how did they make all of this money?  They did it by betting against America.  By betting that the U.S. economy would do badly, a lot of very powerful people have gotten insanely wealthy.  Literally billions of dollars have been made over the past five years simply by betting that the U.S. housing market would go into the toilet.  But is all of this “short selling” and are all of these “side bets” actually good for the American economy?  How is the U.S. economy supposed to succeed when the big banks and so many of our politicians are actively making bets against it?

Just take a moment and check out some of the folks that have been betting against America….

*A Wall Street Journal analysis of congressional disclosures shows that 13 members of the U.S. Congress or their wives were engaged in substantial short selling during the financial crisis of 2008.

*An individual by the name of Jeff Greene made hundreds of millions of dollars during the real estate collapse by making huge bets against the residential housing market.  Now he wants to use some of that money to run for the U.S. Senate in Florida.

*Goldman Sachs openly and brazenly bet against its own clients as the housing market began to implode back in 2007 and 2008, and they made a TON of money by doing so.

*John Paulson (with the assistance of Goldman Sachs) has quickly become one of the richest men in the United States by betting against America.  Shorting the subprime mortgage market enabled his firm, Paulson & Co., to make 15 billion dollars in 2007.  John Paulson alone made approximately 4 billion dollars that year.

*Legendary investor Warren Buffett said on Saturday that he’s bearish about the ability of all currencies to hold their value over time because of massive deficits being run up by governments in the wake of the global financial crisis.

*The Federal Reserve holds credit-default swaps on the debt of Florida schools, and on debt owed by the states of Nevada and California.  So the Federal Reserve would profit if one of those states defaulted on its debt.

*JPMorgan Chase, Bank of America, and Citigroup are offering “municipal credit default swaps” that enable investors to make big money if U.S. states and cities end up defaulting on their debts.

It is one thing to make a legitimate profit on an investment.  It is another thing entirely for the biggest financial institutions in the United States and our politicians to be making massive amounts of money off of the economic collapse of America.

You see, those making huge bets against the U.S. economy also have an incentive to do what they can to make those bets profitable.  So for those who have the power to do so, does there come a point where they give the U.S. economy a little “push” in the wrong direction so that their bets will pay off?

The reality is that we have created a financial environment where fear rules.  For example, very few people want to back U.S. home loans anymore.  So now the U.S. government has to do it.  According to Inside Mortgage Finance, U.S. government-related entities backed 96.5% of all U.S. home loans during the first quarter of 2010.  This was up from 90% in 2009.

We should really rethink a financial system where a few people make a ton of money off of the fact that everyone else is doing badly.  Sure a few people are laughing all the way to the bank, but America as a whole is hurting.

Just consider the following charts.  U.S. national income has never experienced such a radically negative change in modern times….

All of these economic problems have caused the revenue of the U.S. government to dramatically decline at the same time expenditures are rocketing into the stratosphere….

As the U.S. economy continues to tank, the U.S. national debt is going to keep spinning wildly out of control.  Back in 1980, the U.S. national debt was approximately 1 trillion dollars.  Today it is accelerating rapidly as it pushes past 12 trillion dollars and towards 13 trillion dollars….

The truth is that the massive deficits being run up not only by the U.S. government, but by governments all over the world, are something that is clearly not sustainable.  In fact, Warren Buffett recently made an interesting remark about how painful it is going to be when the debt party ends….

“How the world weans itself off huge deficit financing is going to be difficult to watch.”

In fact, there are some nations that are in bigger trouble with debt than even the United States is.  Japan’s gross public debt has reached 201% of GDP, and the only way that the government of Japan can avoid bankruptcy at this point is by borrowing ever-increasing amounts of money.

But the truth is that this game cannot be played forever.

There has never been a time when so many nations around the world have piled up so much debt so quickly.

When the sovereign debt bubble pops, things are going to get really messy and the dominoes will start falling really quickly.

But when that happens one thing is for certain – there will be a lot of people ready to make a lot of money by betting on the financial failures of others.

Loyal9.org

“Things Are Never Going To Get THAT Bad”

Our recent article, “20 Things You Will Need To Survive When The Economy Collapses And The Next Great Depression Begins“, has drawn some intense criticism from those who believe that the U.S. economy is so strong that it could never completely and totally collapse.  In fact, this blog is being accused of officially going off the deep end.  Why?  It’s not because we are pointing out that the economy is bad.  After all, according to a recent Pew Research national poll, 88 percent of Americans rate national economic conditions as only fair or poor.  No, rather it is because we are projecting the eventual complete and total collapse of the U.S. economy.  There still seems to be a belief among a large number of Americans “that things are never going to get THAT bad”.  But they are going to get that bad.  It’s just that most people do not realize it yet.

But while times are still good (and what we are experiencing now is rip-roaring prosperity compared to what is coming), large numbers of people are going to continue to live in denial.  In fact, those who try to warn people about what is coming are going to be accused of “fear-mongering”.  One recent commenter even accused us of totally going off the deep end like many of the Y2K alarmists did….

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“Ok – you’ve officially fallen off the deep end. This blog went from legitimate economic concerns to grand fear mongering. This is the same as Y2K all over again. I have friends who still have bunkers and thousands of dollars of expired canned food and you’re suggesting they go do it again…”

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First of all, it was completely and totally obvious that Y2K was going to be a non-event to anyone with a bit of common sense.  There was simply no way that a “computer glitch” that was foreseeable years ahead of time was going to cause the collapse of society.

What is happening with the U.S. economy now is completely different.  We have built an entire economic system on ever-increasing amounts of debt and paper money, and anyone with half a brain should be able to see that such a system is not sustainable in the long-term.  The collapse of the economy is inevitable due to the way that it was constructed.

As for having “thousands of dollars of expired canned food”, that would not be a problem if you rotated the food that you have stored.  You eat the old stuff first and you replace it with new food that you have purchased.

But the commenter above was not the only one to accuse us of trying to scare people….

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“How does the economic collapse lead to a complete halt to all economic activity? More people may be poorer, but they will still have some money to motivate others to produce for a market. The natural disaster scenario seems more plausible for this type of warning. More and more foreclosures don’t. This posting is a bit much for me, seems just some much scaremongering.”

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The commenter is right about one thing – a few bad economic statistics are not enough to run out and start preparing for the collapse of society.  After all, the American economy has always recovered no matter what happened before.  If we made it through the Great Depression, we can make it through this, right?

Well, the truth is that there are some fundamental differences between what is happening now and what happened during the Great Depression.

During the Great Depression, most Americans were not up to their eyeballs in credit card debt, car payments, student loans and mortgage debt.

During the Great Depression, most Americans either owned their land or had a great deal of equity in their land.  As we wrote about recently, today that is not the case.  Equity as a percentage of home value in the United States has been hitting all-time record lows.

During the Great Depression, most Americans were not dependent on giant corporations to feed and supply us.  Back then, the majority of Americans knew how to live off the land and grew at least some of their own food.  Today that is most definitely not the case.

During the Great Depression, America still had the greatest manufacturing base in the entire world.  Today we have “offshored” our once great manufacturing base, and we have become a fat, spoiled society that consumes everything in sight but manufactures very little.

During the Great Depression, America did not have a colossal trade deficit.  Today we have got the biggest trade deficit in the history of the world.

During the Great Depression, the wealth of Americans was not being sucked dry by dozens of different kinds of taxes.  Today we are being taxed in so many various ways that many Americans actually end up spending over half their incomes just in taxes.

During the Great Depression, the U.S. government had debt, but it was not threatening to collapse the entire global economy.  Today the U.S. government has piled up the biggest mountain of debt in the history of the world.

During the Great Depression, derivatives were not even an issue.  Today, we have created a derivatives bubble that is now well beyond a quadrillion dollars.

Just think about that.

Over 1,000,000,000,000,000 dollars.

Counting at one dollar per second, it would take 32 million years to count to one quadrillion.

In fact, renowned investor Warren Buffett has warned that derivatives are “financial weapons of mass destruction” that could bring down the entire world economic system.

And he is right.

When derivatives collapse, there is not enough money in the world to fix the mess that will be created.  All of the governments in the world working together would not be able to print money fast enough to even make a dent in the colossal wave of red ink that would be created.

The truth is that the U.S. economy (and the world economy for that matter) is teetering on top of a giant pyramid of debt and paper that is on the verge of coming down like a house of cards.

But if you do not want to believe this blog, perhaps you will listen to some of the top financial experts in the world who are also warning that a complete and total economic collapse is coming.

For example, Gerald Celente, the CEO of Trends Research Institute, is forecasting that we are going to see a devastating economic collapse by the year 2012.  It would be easy to dismiss him, except for the fact that he has a sterling track record of forecasts going back 3 decades, and he has appeared on almost all of the major news networks who have no problem relying on him as a source.  What Celente says is on the way for America is absolutely bone chilling….

But if you don’t want to listen to Celente, perhaps you will listen to Peter Schiff, the president of Euro Pacific Capital.  He accurately predicted the recent financial crisis, and he is also forecasting that a depression is on the way.  Schiff is convinced that we need to allow the current “Ponzi economy” to collapse so that something more substantial can arise from the ashes….

Jim Rogers is another financial expert that is forecasting a major economic collapse.  Jim Rogers was a co-founder of the Quantum Fund, and is a college professor, author, economic commentator, and creator of the Rogers International Commodities Index.  He says that civil unrest is on the way and that now is a good time to take up farming if you want to make it through what is coming….

The truth is that the vast majority of Americans have no idea just how vulnerable the U.S. economic system is.  A new Gallup poll has found that 44 percent of Americans believe that they could barely go a month before experiencing severe economic hardship if they lost their jobs.

How long could you go if you suddenly lost your job?

Right now the U.S. economy is being kept afloat by unprecedented U.S. government intervention and spending, but we all know that the U.S. government cannot keep spending money like it is water forever without very serious economic consequences.  To give you an idea of how desperate things have become, just check out the following graphic about the U.S. national debt that was featured in the Chicago Tribune….

Anyone who believes that such a tidal wave of red ink is sustainable please raise your hand.

The truth is that the U.S. economy is caught in a death spiral.

Already there are some areas of the United States that are literally dying.

For those who do not believe this fact, the following is a challenge for you….

Head down to Detroit and buy one of those houses that are on sale for less than a thousand dollars (in fact there have even been reports of some houses selling for a single dollar in Detroit), and try to live there for a month.

You will quickly learn what it is like to live in an area that is literally dying economically.

When people are hungry and they can’t get jobs they get desperate.

So far this year in Detroit, car thefts are up 83%, robberies are up 50%, burglaries are up 20% and property destruction is up 42%.

What is happening in Detroit is a preview of what is soon going to happen all over America.

So doubt it all you want, but all the doubting in the world is not going to stop what is coming.  The U.S. economy is dying so you better start getting ready.

The Prep Room

Taxed Enough Already!

When you talk to most Americans about taxes, primarily what they think about is the U.S. government and the federal income tax.  But while that may be the biggest tax that most Americans pay, the reality is that the truly insidious nature of the tax system in the United States is how it sucks money out of us in dozens of different ways until we don’t even feel it anymore.  Instead of having one or two big tax bills, U.S. taxpayers face a “death by a thousand cuts” as tax after tax after tax just keeps coming.  Most Americans don’t even realize how many kinds of taxes they pay.  Before reading the rest of this article, try to estimate how many different kinds of taxes that Americans pay each year.  Five?  Ten?  Twenty?  Well, below we have listed over 50 different kinds of taxes that Americans pay.  It is no wonder the Tea Party movement is growing so fast!  People are sick and tired of constantly being financially drained by tax after tax.  But even as you read this, members of the White House panel charged with reducing the U.S. national debt are considering recommending the adoption of a “European-style” Value Added Tax as a way for the U.S. government to bring in even more money.

Well, the truth is that millions upon millions of Americans are quite sick of being taxed into financial oblivion and they have one giant message for those who want to tax us some more….

“We Are Being Taxed Enough Already!”

Just consider the following list of the various types of taxes that Americans have to pay each and every year…..

Accounts Receivable Tax

Building Permit Tax

Capital Gains Tax

CDL license Tax

Cigarette Tax

Corporate Income Tax

Court Fines (indirect taxes)

Dog License Tax

Federal Income Tax

Federal Unemployment Tax (FUTA)

Fishing License Tax

Food License Tax

Fuel permit tax

Gasoline Tax

Gift Tax

Hunting License Tax

Inheritance Tax

Inventory tax IRS Interest Charges (tax on top of tax)

IRS Penalties (tax on top of tax)

Liquor Tax

Local Income Tax

Luxury Taxes

Marriage License Tax

Medicare Tax

Payroll Taxes

Property Tax

Real Estate Tax

Recreational Vehicle Tax

Road Toll Booth Taxes

Road Usage Taxes (Truckers)

Sales Taxes

School Tax

Septic Permit Tax

Service Charge Taxes

Social Security Tax

State Income Tax

State Unemployment Tax (SUTA)

Telephone federal excise tax

Telephone federal universal service fee tax

Telephone federal, state and local surcharge taxes

Telephone minimum usage surcharge tax

Telephone recurring and non-recurring charges tax

Telephone state and local tax

Telephone usage charge tax

Toll Bridge Taxes

Toll Tunnel Taxes

Traffic Fines (indirect taxation)

Trailer registration tax

Utility Taxes

Vehicle License Registration Tax

Vehicle Sales Tax

Watercraft registration Tax

Well Permit Tax

Workers Compensation Tax

When you add all the taxes together, a significant percentage of Americans end up paying well over 50 percent of their income in taxes of one form or another.

And the list above does not even include all of the new taxes that are in the new health care law that was just rammed down the throats of the American people.

When you add up all the taxes in that bill, it amounts to the largest tax increase in the history of the United States.

But if you enjoy being taxed until you are dry then none of this should bother you.

Sadly, according to an official U.S. government report, even with all of this taxation rapidly growing interest costs on the national debt together with spending on major entitlement programs such as Social Security and Medicare will absorb approximately 92 cents of every dollar of federal revenue by the year 2019.  That is before a penny will be spent on anything else.  Because of our reckless financial insanity, the U.S. government is now facing a financial crisis of unprecedented magnitude. 

But whatever we end up giving to the federal government just never seems to be enough.  It’s voracious appetite for spending just seems to multiply the bigger it gets.

The really tragic thing is that the U.S. federal government is not just spending our money.  It is spending the money of our children and our grandchildren and of our great grandchildren.

We are being taxed into oblivion and yet the U.S. government apparently has no shame in stealing increasing amounts of money from future generations year after year after year.

Do you think that the U.S. federal government will one day wake up and decide that we are being taxed enough already? 

No.

The truth is that unless we vote out all of the Republicans and all of the Democrats that have been taxing us to death, they will keep right on doing it.

We deserve better and future generations deserve better.

The Federal Reserve Created This Financial Mess And Now They Expect Us To Pay Higher Taxes And Have A Lower Standard Of Living So We Can Pay Interest To Them

When you watch the mainstream news, how often do you hear them identify the Federal Reserve as the ultimate source of all of our financial problems?  Never?  Well, there is a good reason.  The Federal Reserve was created and continues to benefit the elite international bankers that are raping the United States blind financially.  Many of the same financial powers own large interests in the 6 gigantic media companies that dominate U.S. mainstream media.  So you won’t hear the truth from them.  On this website we go on and on about how bad the U.S. national debt is.  And it is really, really, really bad.  But rarely do you hear from anyone who we owe all of this money to.  Yeah, we owe large amounts to Japan and China and a bunch of other nations, but the biggest holder of our debt by far is the Federal Reserve.  Just like the owner of your mortgage or your car loan, they expect to be paid back – with interest.   

Now U.S. Federal Reserve Chairman Ben Bernanke is warning that the U.S. national debt could balloon to more than 100% of GDP by the year 2020.  For those familiar with national debt statistics, that is a very, very dangerous threshold to cross.  Basically the United States is in debt up to its eyeballs and the debt continues to grow at an exponential rate.

So what is the solution?

Well, according to Bernanke, United States citizens will soon have to make difficult choices between higher taxes and reduced social spending. 

Perhaps both. 

The truth is that either alternative will slow down the U.S. economy and will reduce our standard of living, but this is the situation that we have gotten ourselves into.

And we have got to service that gigantic debt that we owe to the Federal Reserve (among others).

In fact, a whole lot of government officials are talking about taxes these days.

And not about lowering them.

Some administration officials are floating the idea of a national sales tax and others are openly discussing adopting a European-style “value-added” tax.

Any way that they can drain more money out of us sounds good to them.

In fact, members of Barack Obama’s “fiscal reform commission” say that higher taxes must be considered as a way to handle the U.S. government’s mounting debt problem.

Of course they could just stop wasting trillions of dollars, but apparently that is too hard.

And so where will all of these new taxes go?

To managing our colossal debt of course.

The truth is that we have locked generations of Americans into debt slavery.

We have piled up the biggest mountain of debt in the history of the world, and our children and grandchildren will spend all of their lives trying to pay interest on it.

Haven’t we left them with such a wonderful legacy?

If you don’t understand who the Federal Reserve is or what they are doing to us, please watch the excellent 4 minute video below.  It does a great job of introducing people to the rotten core at the center of the U.S. financial system.  We encourage you to send this video out to as many of your friends and family as possible.  Perhaps if there is a mass awakening, Americans can elect politicians that will shut down the Fed and will reclaim America’s financial destiny….

The Silent Entitlements Monster: Social Security, Medicare And Interest On The Debt Will Gobble Up Every Single Tax Dollar By 2020

There is a silent monster that looms menacingly over U.S. government finances.  Every politician knows about it, but very few of them ever want to talk about it.  This silent monster grows larger every year, and yet nobody seems to know quite what to do about it.  Those who have closely analyzed this monster all seem to agree that one day it will create a financial tsunami of a magnitude that is absolutely unprecedented, but there is vast disagreement about how to escape this financial tsunami or if it is even possible to escape it.  The name of this monster is “entitlements” – Social Security, Medicare and other social Ponzi schemes that the U.S. government has locked itself into funding.  It would be hard to understate the seriousness of the problem that entitlements present.  In fact, according to an official U.S. government report, rapidly growing interest costs on the national debt together with spending on major entitlement programs will absorb approximately 92 cents of every dollar of federal revenue by the year 2019.  By 2020, that figure will be up around 100 cents of every dollar of federal revenue.  So that means that interest on the debt and spending on entitlement programs will eat up everything the U.S. government takes in before a penny is spent on anything else.  That is a recipe for national financial suicide.

And unfortunately, the problem is only going to get far, far worse when you project things out beyond the year 2020.  Right now, interest on the debt and spending on entitlement programs like Social Security and Medicare eat up only about 10 percent of GDP.  By 2080, they are projected to eat up approximately 50 percent of GDP.  In fact, things are even more dire than the chart below indicates.  This chart is based on previous government figures that projected that mandatory spending will exceed government revenues at some point between 2030 and 2040, but the latest government figures now project that this will happen right around 2020.  So as mind blowing as this chart is, keep in mind that it actually understates the problem we are facing….

This week, there was news that the Social Security system is in much worse shape than previously projected.  According to the Congressional Budget Office, this year the Social Security system will pay out more in benefits than it receives in payroll taxes.  This was not supposed to happen until at least 2016.

Now it is happening in 2010.

It turns out that the “recession” that we have just been through has hit Social Security revenues really hard.

And unfortunately, as waves of Baby Boomers start retiring, these “Social Security deficits” are going to get even worse.

So where will the money come from to pay the benefits that are owed?

For now, the money will come from the $2.5 trillion Social Security Trust Fund that has been accumulated.

But keep in mind that the $2.5 trillion figure is extremely misleading.

There are not $2.5 trillion dollars sitting around in a bank account somewhere to pay these benefits.

The truth is that the Social Security Trust Fund does not contain any actual assets.

The only assets the Social Security Trust Fund has are IOUs from the U.S. government.

So basically the U.S. government owes the Social Security Trust Fund $2.5 trillion dollars, and now it turns out that the Social Security system is going to start needing that money.

So where will the U.S. government get that money?

Well, they will borrow it of course.

The reality is that the Social Security program is simply not sustainable.

Back in 1950 each retiree’s Social Security benefit was paid for by 16 workers.  Today, each retiree’s Social Security benefit is paid for by approximately 3.3 workers.  By 2025 it is projected that there will be about two workers for each retiree.

As a society, we simply have not been producing enough new workers to sustain the current system.

Of course the politicians all say the right things to make us think that they are going to do something about this crisis.  For example, Barack Obama recently had the following to say about the massive deficits the U.S. government keeps piling up: “It keeps me awake at night, looking at all that red ink”.

But the truth is that neither political party would dare propose a dramatic restructuring of Social Security or Medicare that would significantly reduce benefits.

Why?

Because it would be political suicide.

Say what you want about old people – the truth is that they vote more than the rest of us do.

Anyone who would dare “take away” their Social Security or Medicare would suddenly find hordes of old people voting against them in the next election.

But something has to be done.

The 2009 Financial Report of the U.S. Government was recently released, and it basically says that the U.S. government is facing financial Armageddon if something drastic is not done….

Absent a change in policy, under this scenario, the interest costs on the growing debt together with spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019.

Keep in mind that this is before anything is spent on defense, health care, education, homeland security, job creation or anything else.

The following chart was pulled right out of the report.  These aren’t the projections of some Internet wacko.  These projections are in an official U.S. government report.  The implications of the chart below are absolutely mind blowing….

Keep in mind that the U.S. government and the U.S. economy are already on the verge of financial oblivion in 2010.  So what is going to happen if these projections are anywhere close to accurate?

In addition, the report also admitted that the present value of projected scheduled benefits exceeds earmarked revenues for entitlement programs such as Social Security and Medicare by about $46 trillion over the next 75 years.

$46 trillion!

Either the U.S. government is going to have to radically slash Social Security and Medicare benefits or they will have to come up with tens of trillions of extra dollars from somewhere.

And remember, the $46 trillion figure is just the “present value” of those future payments.

Because of inflation, the “actual value” of those future payments will be far greater.

In a section about Social Security and Medicare, the authors of the report confessed that “it is apparent that these programs are on a fiscally unsustainable path”.

Obviously something has got to give.

These programs cannot keep on paying the same level of benefits.

It is financially impossible.

But what are we going to do?  Millions upon millions of elderly Americans rely on these programs.

Are we going to reduce payments to a level where they can only afford dog food to eat and a shack to live in?

As a society, we are really between a rock and hard place.

If we continue on the same path, the United States government is going to go bankrupt.

But any politician who tries to cut benefits or raise taxes will likely face the wrath of the voters at the ballot box.

So for now the U.S. government just continues to spend even more money and continues to go into increasing amounts of debt – apparently hoping that somehow everything will just turn out okay.

But things are not going to turn out okay.  We are headed for a financial mess of horrifying proportions.

The truth is that it doesn’t matter how much the U.S. government cuts spending in other areas if it does not get entitlement spending and interest on the national debt under control.  If those expenditures are not addressed, it is absolutely guaranteed that the U.S. government will be swamped in red ink for many years to come.

But until severe financial pain starts happening, a large percentage of the American people are not going to be motivated to do anything about this problem.

But by then it will be too late.

The Mystery Of The Shemitah

79 Percent Of American Voters Say They Think The U.S. Economy Could Collapse – And They Are Absolutely Right

An overwhelming majority of American voters now believe that the United States could experience a total economic collapse.  According to the latest Fox News poll, 79 percent of U.S. voters believe “it’s possible the nation’s economy could collapse”, and the poll found that this belief in the fragility of the American economy cuts across the entire political spectrum.  The truth is that the American people, at least on some level, know that a day of reckoning is at hand.  For decades, America has been enjoying the biggest party in the history of the world, but unfortunately that party was fueled by a gigantic mountain of debt, and now the bills are starting to come due.  Unfortunately for those trying to do something about this economic mess, the American people are starting to realize that the U.S. economy is now basically a house of cards, and that could lead to massive financial panic when things really start to fall apart.

Normally when a poll is taken, you can see big differences in the responses based on the party affiliation of those being surveyed.  But in this poll everyone seems to agree – the U.S. economy could experience a complete and total collapse.

Not only did the poll find that 84 percent of Republicans believe the U.S. economy could fall apart, 80 percent of Independents did as well, as did 72 percent of Democrats.

Only 18 percent of the respondents to the survey believed that the economy is “so big and strong it could never collapse.”

It is very rare these days when a large majority of the American people will agree on something.

But unfortunately, they are completely and totally correct.

The U.S. economy is in a death spiral.

So how in the world did we get here?

The answer can be summed up in one word.

Debt.

The United States has piled up household, corporate and government debt at a pace that is mind blowing.

Once upon a time, the United States was the wealthiest nation in the history of the world.

But that was not enough for us.

We had to have more.

So we went out and squandered the wealth of this nation but that wasn’t enough either.

So we started spending hundreds of billions and then trillions of dollars that belong to future generations.

All of this to fuel the greatest party the world has ever seen.

And it has been a great party.

But you can turn out the lights because the party is almost over.

It is very easy to blame the U.S. government for getting into so much debt, but they are not the only ones who have been piling up debt at an insane pace.

In fact, millions of individual Americans have been living beyond their means for decades.  Just check out the chart below which shows the growth of household debt since the mid-1960s….

Now tens of millions of Americans are massively overextended and are crying to the U.S. government for help.  But nobody forced them to get mortgages that they couldn’t afford.  Nobody forced them to max out their credit cards.  Nobody forced them to fill up their garages with luxury vehicles.

In large part, we did this to ourselves.  U.S. credit card debt per household only crossed the $1,000 threshold in the mid-1980s.  Now it is over $8,000 per household….

But the corporate world should shoulder plenty of the blame as well.  Corporate debt has been exploding at an exponential rate while profits have remained relatively flat.  There is no way that this ratio of corporate debt to profits is sustainable….

And of course the biggest culprit of all is the U.S. government.  They have piled up the biggest mountain of debt in the history of the world, but are we not at fault for continuing to elect leaders who keep putting us into so much debt?  However, there are some signs that the American people are starting to wake up about this.  According to the Fox News poll, by a nearly three-to-one margin, voters believe that the national debt (65 percent) is a greater threat to America’s future than terrorism is (23 percent).

So will this change anything when the next elections come around?

We will see.

Meanwhile, the damage has already been done.  The U.S. Congress recently approved an increase in the federal government debt cap to 14.3 trillion dollars.  In 2010, the United States government is projected to issue almost as much new debt as the rest of the governments of the world combined.  Thanks to the horrifyingly bad management of our finances by our nation’s leaders, the legacy that we are leaving to future generations is the biggest mountain of debt that humanity has ever seen….

Unfortunately, instead of learning from the past and trying to reduce debt, the U.S. government just keeps spending money and piling up debt faster and faster.

But if they stop all of this reckless spending the U.S. economy could plunge right into a depression of unprecedented magnitude and pretty much everyone would be voted out of office.

But if they keep on with all of this reckless spending the long-term consequences will be catastrophic beyond anything that any of us can even imagine.

Either way, this thing is going to end really, really badly.

Whether you want to face it or not, there is no economic future for the United States under the current system.

Enjoy things while they are still relatively good, because this is as good as things are going to get.  Incredibly hard times are coming and we all need to start getting ready.

If The Money Supply Is Exploding Why Are We Not Seeing Rampant Inflation?

The U.S. money supply has been expanding at an absolutely unprecedented rate.  So why are we not experiencing rampant inflation?  Why is the U.S. dollar not falling through the floor?  Well, the truth is that all of this new money has gotten into the U.S. financial system but it is not getting into the hands of U.S. businesses and consumers.  In fact, even though the money supply is exploding, U.S. banks have dramatically decreased lending.  This has brought us to a very bizarre financial situation as a nation.

What we have seen is the U.S. government shovel massive amounts of cash into the U.S. financial system and then watch as the big banks sit on that cash and refuse to lend it. The biggest banks in the U.S. reduced their collective small business lending balance by another 1 billion dollars in November 2009.  That drop was the seventh monthly decline in a row.  In fact, in 2009 as a whole U.S. banks posted their sharpest decline in lending since 1942.

So all of this money that the U.S. government pumped into the financial system has been doing American businesses and consumers very little good.  That is why we can have a vastly increased money supply (as you can see from the chart below) and very little inflation.

So if the banks are not lending the money to the American people, what are they doing with it?  One of the things they are doing with it is buying U.S. government debt.  As you can see from the chart below, U.S. banks have cut business lending by approximately 350 billion dollars since early 2009 and they have purchased approximately 300 billion dollars worth of U.S. Treasury securities.

So instead of loaning money to American businesses and consumers who desperately need it, a ton of this new money is being used to pump up yet another bubble.  This time the bubble is in U.S. Treasuries.  Asia Times recently described how this trillion-dollar carry trade in U.S. government securities works….

Remarkably, the most aggressive buyers of US government debt during the past several months have been global banks domiciled in London and the Cayman Islands. They borrow at 20 basis points (a fifth of a percentage point) and buy Treasury securities paying 1% to 3%, depending on maturity.

This is the famous “carry trade”, by which banks or hedge funds borrow short-term at a very low rate and lend medium- or long-term at a higher rate. This works as long as short-tem rates remain extremely low. The moment that borrowing costs begin to rise, the trillion-dollar carry trade in US government securities will collapse.

So what happens when this bubble collapses?

Nobody knows for sure.  But anyone who has dealt with carry trades in the past knows that when carry trades unwind they can do so very, very quickly and the results can be nightmarish.

The truth is that the U.S. financial system is a house of cards that could fall at any time.  A lot of economic pain is on the horizon – it is only a matter of when it comes and how bad it is going to get.  Trends forecaster Gerald Celente is predicting that it could be as soon as this year….

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