Debt

A Quadrillion Yen And Counting – The Japanese Debt Bomb Could Set Off Global Panic At Any Moment

August 9, 2013August 9, 2013 by Michael

How much is 1,000,000,000,000,000 yen worth? Well, a quadrillion yen is worth approximately 10.5 trillion dollars. It is an amount of money that is larger than the “the economies of Germany, France and the U.K. combined“. It is such an astounding amount of debt that it is hard to even get your mind around it. The government debt to GDP ratio in Japan will reach 247 percent this year, and the Japanese currently spend about 50 percent of all central government tax revenue on debt service. Realistically, there are only two ways out of this overwhelming debt trap for the Japanese. Either they default or they try to inflate the debt away. At this point, the Japanese have chosen to try to inflate the debt away. They have initiated the greatest quantitative easing experiment that a major industrialized nation has attempted since the days of the Weimar Republic. Over the next two years, the Bank of Japan plans to zap 60 trillion yen into existence out of thin air and use it to buy government bonds. By the time this program is over, the monetary base in Japan will have approximately doubled. But authorities in Japan are desperate. They know that the Japanese debt bomb could set off global panic at any time, and they are trying to find a way out that will not cause too much pain.

Unfortunately, the only way that this bizarre quantitative easing program will work is if investors in Japanese bonds act very, very irrationally. You see, the only way that Japan has been able to pile up this much debt in the first place is because they have been able to borrow gigantic piles of money at super low interest rates.

Right now, the yield on 10 year Japanese bonds is sitting at an absurdly low 0.76%. But even with such ridiculously low interest rates, the central government of Japan is still spending about half of all tax revenue on debt service.

If interest rates go up, the game is over.

But now that the Japanese government has announced that it plans to double the monetary base, it would be extremely irrational for investors not to demand higher rates on Japanese government debt. After all, why would you want to loan money to the Japanese government for less than one percent a year when the purchasing power of your money could potentially be halved over the next two years?

Amazingly, this is exactly what the Japanese government is counting on. They are counting on being able to wildly print up money and monetize debt, but also keep yields on Japanese bonds at insanely low levels at the same time.

For the moment, it is actually working. Investors in Japanese bonds are behaving very, very irrationally.

But if that changes at some point, we could potentially be looking at the greatest Asian economic crisis of all time.

And there are some very sharp minds out there that believe that is exactly what is going to happen.

For example, the founder of Hayman Capital Management, Kyle Bass, has been sounding the alarm about Japan for a long time. He correctly predicted the subprime mortgage meltdown, and in the process he made hundreds of millions of dollars for his clients. Now he believes that the next major crash is going to be in Japan.

According to Bass, the bond bubble in Japan is so large that once it begins to implode fear is going to start spreading like wildfire…

Remember, Japanese banks in general have 900% of their tangible assets invested in JGBs that are the most negatively convex instrument you can put into a portfolio. Assume for instance that a bank holds a 10 year bond yielding 80 basis points. A 100 basis point move will cost the JGB investor about 10 years of expected interest payments.

Think about the psychology of all the players and financial implications if rates do move 100 basis points. Think about the solvency of a nation which currently spends 50% of its central government tax revenues on debt service, half of which earns the lowest yields of any country in the world.

You can’t look at this as a simple question. You need to think about this as a multivariate equation. You have to think about the incentives and the fears of all the participants. And you need to think about the fiscal sustainability of the government.

If rates even rise by a full percentage point, it could start a stampede toward the exits that nobody in the entire world would be able to control…

I ran a survey of 1,009 Japanese investors where we asked: “If rates were to move up 100 basis points, would that engender more confidence and make you want to buy more JGBs?” or, “Would you take your money elsewhere, even if it were hamstringing your government’s ability to operate?” 8 – 9% of respondents that said that they would buy more bonds and almost 80% said they would run, not walk the other way.

For much more on this, you can watch a video of Kyle Bass discussing why Japan is doomed right here.

And of course Japan is not the only “debt bomb” that could potentially go off over in Asia. As I mentioned in another article, the major problem over in China is the level of private debt…

In China, the big problem is the absolutely stunning growth of private domestic debt. According to a recent World Bank report, the total amount of credit in China has risen from 9 trillion dollars in 2008 to 23 trillion dollars today.

That increase is roughly equivalent to the entire U.S. commercial banking system.

There is simply way, way too much debt in our world today. Never before has there been so much red ink all over the planet at the same time.

Many in the mainstream media insist that this party can go on indefinitely.

But that is what they said about the housing bubble too.

Sadly, the truth is that every financial bubble eventually bursts, and this global debt bubble will be no exception.

I hope that you are getting prepared while you still can.

The Most Important Number In The Entire U.S. Economy

July 31, 2013 by Michael

There is one vitally important number that everyone needs to be watching right now, and it doesn’t have anything to do with unemployment, inflation or housing. If this number gets too high, it will collapse the entire U.S. financial system. The number that I am talking about is the yield on 10 year U.S. Treasuries. When that number goes up, long-term interest rates all across the financial system start increasing. When long-term interest rates rise, it becomes more expensive for the federal government to borrow money, it becomes more expensive for state and local governments to borrow money, existing bonds lose value and bond investors lose a lot of money, mortgage rates go up and monthly payments on new mortgages rise, and interest rates throughout the entire economy go up and this causes economic activity to slow down. On top of everything else, there are more than 440 trillion dollars worth of interest rate derivatives sitting out there, and rapidly rising interest rates could cause that gigantic time bomb to go off and implode our entire financial system. We are living in the midst of the greatest debt bubble in the history of the world, and the only way that the game can continue is for interest rates to stay super low. Unfortunately, the yield on 10 year U.S. Treasuries has started to rise, and many experts are projecting that it is going to continue to rise.

On August 2nd of last year, the yield on 10 year U.S. Treasuries was just 1.48%, and our entire debt-based economy was basking in the glow of ultra-low interest rates. But now things are rapidly changing. On Wednesday, the yield on 10 year U.S. Treasuries hit 2.70% before falling back to 2.58% on “good news” from the Federal Reserve.

Historically speaking, rates are still super low, but what is alarming is that it looks like we hit a “bottom” last year and that interest rates are only going to go up from here. In fact, according to CNBC many experts believe that we will soon be pushing up toward the 3 percent mark…

Round numbers like 1,700 on the S&P 500 are well and good, but savvy traders have their minds on another integer: 2.75 percent

That was the high for the 10-year yield this year, and traders say yields are bound to go back to that level. The one overhanging question is how stocks will react when they see that number.

“If we start to push up to new highs on the 10-year yield so that’s the 2.75 level—I think you’d probably see a bit of anxiety creep back into the marketplace,” Bank of America Merrill Lynch’s head of global technical strategy, MacNeil Curry, told “Futures Now” on Tuesday.

And Curry sees yields getting back to that level in the short term, and then some. “In the next couple of weeks to two months or so I think we’ve got a push coming up to the 2.85, 2.95 zone,” he said.

This rise in interest rates has been expected for a very long time – it is just that nobody knew exactly when it would happen. Now that it has begun, nobody is quite sure how high interest rates will eventually go. For some very interesting technical analysis, I encourage everyone to check out an article by Peter Brandt that you can find right here.

And all of this is very bad news for stocks. The chart below was created by Chartist Friend from Pittsburgh, and it shows that stock prices have generally risen as the yield on 10 year U.S. Treasuries has steadily declined over the past 30 years…

When interest rates go down, that spurs economic activity, and that is good for stock prices.

So when interest rates start going up rapidly, that is not a good thing for the stock market at all.

The Federal Reserve has tried to keep long-term interest rates down by wildly printing money and buying bonds, and even the suggestion that the Fed may eventually “taper” quantitative easing caused the yield on 10 year U.S. Treasuries to absolutely soar a few weeks ago.

So the Fed has backed off on the “taper” talk for now, but what happens if the yield on 10 year U.S. Treasuries continues to rise even with the wild money printing that the Fed has been doing?

At that point, the Fed would begin to totally lose control over the situation. And if that happens, Bill Fleckenstein told King World News the other day that he believes that we could see the stock market suddenly plunge by 25 percent…

Let’s say Ben (Bernanke) comes out tomorrow and says, ‘We are not going to taper.’ But let’s just say the bond market trades down anyway, and the next thing you know we go through the recent highs and a month from now the 10-Year is at 3%. And people start to realize they are not even tapering and the bond market is backed up….

They will say, ‘Why is this happening?’ Then they may realize the bond market is discounting the inflation we already have.

At some point the bond markets are going to say, ‘We are not comfortable with these policies.’ Obviously you can’t print money forever or no emerging country would ever have gone broke. So the bond market starts to back up and the economy gets worse than it is now because rates are rising. So the Fed says, ‘We can’t have this,’ and they decide to print more (money) and the bond market backs up (even more).

All of the sudden it becomes clear that money printing not only isn’t the solution, but it’s the problem. Well, with rates going from where they are to 3%+ on the 10-Year, one of these days the S&P futures are going to get destroyed. And if the computers ever get loose on the downside the market could break 25% in three days.

And as I have written about previously, we have seen a huge spike in margin debt in recent months, and this could make it even easier for a stock market collapse to happen. A recent note from Deutsche Bank explained precisely why margin debt is so dangerous…

Margin debt can be described as a tool used by stock speculators to borrow money from brokerages to buy more stock than they could otherwise afford on their own. These loans are collateralized by stock holdings, so when the market goes south, investors are either required to inject more cash/assets or become forced to sell immediately to pay off their loans – sometimes leading to mass pullouts or crashes.

But of much greater concern than a stock market crash is the 441 trillion dollar interest rate derivatives bubble that could implode if interest rates continue to rise rapidly.

Deutsche Bank is the largest bank in Europe, and at this point they have 55.6 trillion euros of total exposure to derivatives.

But the GDP of the entire nation of Germany is only about 2.7 trillion euros for a whole year.

We are facing a similar situation in the United States. Our GDP for 2013 will be somewhere between 15 and 16 trillion dollars, but many of our big banks have exposure to derivatives that absolutely dwarfs our GDP. The following numbers come from one of my previous articles entitled “The Coming Derivatives Panic That Will Destroy Global Financial Markets“…

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 362 times greater than their total assets.

And remember, the biggest chunk of those derivatives contracts is made up of interest rate derivatives.

Just imagine what would happen if a life insurance company wrote millions upon millions of life insurance contracts and then everyone suddenly died.

What would happen to that life insurance company?

It would go completely broke of course.

Well, that is what our major banks are facing today.

They have written trillions upon trillions of dollars worth of interest rate derivatives contracts, and they are betting that interest rates will not go up rapidly.

But what if they do?

And the truth is that interest rates have a whole lot of room to go up. The chart below shows how the yield on 10 year U.S. Treasuries has moved over the past couple of decades…

As you can see, the yield on 10 year U.S. Treasuries was hovering around the 6 percent mark back in the year 2000.

Back in 1990, the yield on 10 year U.S. Treasuries hovered between 8 and 9 percent.

If we return to “normal” levels, our financial system will implode. There is no way that our debt-addicted system would be able to handle it.

So watch the yield on 10 year U.S. Treasuries very carefully. It is the most important number in the entire U.S. economy.

If that number gets too high, the game is over.

Debt Levels Are Skyrocketing To Extremely Dangerous Levels – How Long Can This Possibly Keep Going?

July 24, 2013July 24, 2013 by Michael

Never before has the world faced such a serious debt crisis. Yes, in the past there have certainly been nations that have gotten into trouble with debt, but we have never had a situation where virtually all of the major powers around the globe were all drowning in debt at the same time. And what makes this crisis even more unprecedented is that everyone on the planet is using fiat currency that is backed up by nothing. It is all just a bunch of paper and data points that people have faith in. Right now, confidence in this system is being shaken as debt levels skyrocket to extremely dangerous levels. Many are openly wondering how much longer this can possibly go on.

Just consider what is going on over in Europe right now. Even the countries that have supposedly “tried austerity” continue to rack up debt at a mind blowing pace. New numbers that have just been released show that government debt to GDP ratios for some of the most financially troubled nations in Europe are absolutely soaring…

Euroarea: 92.2%, up from 88.2% a year ago
Greece: 160.5%, up from 136.5% a year ago
Italy: 130.3%; up from 123.8% a year ago
Portugal: 127.2%, up from 112.3% a year ago
Ireland: 125.1%, up from 106.8% a year ago
Spain: 88.2%, up from 73.0% a year ago
Netherlands: 72.0%, up from 66.7% a year ago

Meanwhile, the debt to GDP ratio in Japan is now well past the 200% mark and continues to march upward with no apparent end in sight. The following is from a recent MSN article…

In Japan, the good news is that the nation’s budget for the fiscal year, which started on April 1, will see the government raise a higher percentage of spending from tax revenue than at any other time in the past four years. The bad news is that the government will still cover 46.3% of its spending from borrowing. The Organisation for Economic Cooperation and Development estimates that Japan’s budget deficit for 2013 amounted to 10.3% of gross domestic product.

In China, the big problem is the absolutely stunning growth of private domestic debt. According to a recent World Bank report, the total amount of credit in China has risen from 9 trillion dollars in 2008 to 23 trillion dollars today.

That increase is roughly equivalent to the entire U.S. commercial banking system.

According to financial journalist Ambrose Evans-Pritchard, the ratio of private domestic debt to GDP in China is now wildly out of control…

The 160pc debt ratio for China is based on a conservative measure of credit. Fitch says it is 200pc if you count all offshore vehicles, trusts, letters of credit etc.

This morning China Securities Journal – an arm of the regulators – said it may really be 221pc.

Well, what about the United States?

As I noted the other day, our ratio of federal government debt to GDP has shot up like a rocket since 2008…

At this point, the U.S. already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain. It is a giant mess, and yet our politicians continue to recklessly spend more money.

And of course state and local governments all over the nation are drowning in debt too. The bankruptcy of Detroit is forcing people to come to grips with how bad things really are. Sadly, as Meredith Whitney explained the other day, there are going to be a lot more municipal bankruptcies coming down the pipeline…

As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the US municipal market – which is what the bond-peddlers are now telling their clients. The aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents.

Municipal bankruptcies have historically been rare for a number of reasons – including the states’ determination to preserve their credit ratings, their access to cheap funding and the stigma of bankruptcy. But, these days, things are very different in the world of municipal finance.

At the root of the problem is the incentive system that elected officials used to face. For decades, across the US, local leaders ran up tabs for future taxpayers; they promised pensions and other benefits for public employees that have strong legal protection. That has been a great source of patronage for elected officials: they can promise all sorts of future perks to loyal supporters (state and local workers) with very little accountability on the delivery of those promises.

And of course the overall debt level in the United States continues to grow much, much faster than our overall economy is growing.

The greatest debt bubble in the history of the planet is still expanding.

How long will it be before it bursts?

That is a very good question. For now, our “leaders” appear to just be trying to keep the party going for as long as possible. They know that if they suddenly change course hard times will hit almost immediately. For example, just check out what Federal Reserve Chairman Ben Bernanke told Congress last week…

With the economy still facing risks, especially from government spending cuts, Bernanke told a congressional panel on Wednesday the Fed is still planning to trim its quantitative easing stimulus, if growth continues at a steady pace.

But expectations that the Fed was poised to start tightening monetary policy, which have sent interest rates jumping and sparked turmoil in global markets, were unwarranted, he stressed.

“I don’t think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low,” Bernanke told the House Financial Services Committee.

“If we were to tighten policy, the economy would tank.”

Nobody wants the economy to “tank”, but the truth is that the more debt that we run up, the larger our long-term economic problems become.

And a growing percentage of Americans realize that something has seriously gone wrong. According to a recent Pew Research survey, 44% of all Americans believe that an economic recovery is still “a long way off“.

Unfortunately, the reality of the matter is that we are already living in the “economic recovery”.

This is about as good as it is going to get.

The truth is that the real storm has not even hit yet. When the debt bubble finally bursts, we are going to see economic chaos in this country unlike anything that we have ever experienced before.

I hope that you are getting ready.

Share This Chart With Anyone That Believes The U.S. Economy Is Not Going To Crash

July 21, 2013July 21, 2013 by Michael

Anyone that thinks that the U.S. economy can keep going along like this is absolutely crazy. We are in the terminal phase of an unprecedented debt spiral which has allowed us to live far, far beyond our means for the last several decades. Unfortunately, all debt spirals eventually end, and they usually do so in a very disorderly manner. The chart that you are about to see is one of my favorite economic charts. It compares the growth of U.S. GDP to the growth of total debt in the United States. Yes, U.S. GDP has certainly grown at a decent pace over the years, but our total debt has absolutely exploded. 40 years ago, the total amount of debt in our system (government debt + corporate debt + consumer debt, etc.) was about 2 trillion dollars. Today it has grown to more than 56 trillion dollars. Our debt has grown at a much, much faster rate than our economy has, and there is no way in the world that we will be able to continue to do that for long.

Posted below is the chart that I was talking about. The blue line is our total debt, and the red line is our GDP. As you can see, this chart kind of speaks for itself…

So how did we get here?

Well, of course the federal government has been the biggest offender. It would be a tremendous understatement to say that the politicians in Washington D.C. have been reckless. Since the year 2000, the size of the U.S. national debt has grown by more than 11 trillion dollars.

Posted below is a chart that demonstrates the dramatic growth of the national debt as a percentage of GDP. In particular, our debt has absolutely exploded as a percentage of GDP since the financial crisis of 2008…

Does that look sustainable to you?

Of course it isn’t.

Right now, the mainstream media is very excited that the federal budget deficit for this year might be less than a trillion dollars, but they are really missing the point. The debt of the U.S. government is still growing much, much faster than the economy is, and the United States already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain.

What we are doing to future generations is absolutely criminal. We are piling up mountains of debt that will haunt them for the rest of their lives just so that we can make the present a little bit more pleasant for ourselves.

As I noted in another article, during Obama’s first term the federal government accumulated more debt than it did under the first 42 U.S presidents combined. And now we are entering a time period when demographic forces are going to put a tremendous amount of pressure on the finances of the federal government.

The Baby Boomers have started to retire, and they are going to want to start collecting on all of the financial promises that we have made to them.

As I have written about previously, the number of Americans on Medicare is projected to grow from a little bit more than 50 million today to 73.2 million in 2025.

The number of Americans collecting Social Security benefits is projected to grow from about 56 million today to 91 million in 2035.

Where are we going to get the money to pay for all of that?

Boston University economist Laurence Kotlikoff has calculated that the U.S. government is facing unfunded liabilities of 222 trillion dollars in the years ahead.

There is no simply no way that the U.S. government is going to be able to meet those obligations without wildly printing up money.

And of course the federal government is not the only one with massive debt problems. We just saw the city of Detroit go bankrupt, and there are lots of other communities all over the nation that could soon follow.

Posted below is a chart that shows the growth of state and local government debt over the years. In particular, please take note that the total amount of state and local government debt has grown from about 1.2 trillion dollars in the year 2000 to about 3 trillion dollars today…

But the chart posted above does not even take into account the massive unfunded pension obligations that state and local governments are facing. According to the Detroit Free Press, state governments are facing unfunded pension obligations of nearly a trillion and a half dollars…

From Baltimore to Los Angeles, and many points in between, municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center for the States, in Washington, estimated states’ public pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010.

And many large cities are dealing with similar situations. Detroit was the first to go down, but could Chicago or Los Angeles eventually be forced to declare bankruptcy too?…

Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.

According to a report that was released earlier this year, the largest U.S. cities are facing hundreds of billions of dollars in unfunded pension liabilities at this point…

Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities. While cities had long promised health care, life insurance and other benefits to retirees, “few … started saving to cover the long-term costs,” the report said.

So where will all of that money come from?

That is a good question, and nobody has an easy answer at this point.

Meanwhile, U.S. consumers have been racking up staggering amounts of debt over the past several decades. Just consider the following numbers…

-Total home mortgage debt in the United States is now about 5 times larger than it was just 20 years ago.

-Car loans just keep getting longer and longer, and approximately 70 percent of all car purchases in the United States now involve an auto loan.

-The total amount of student loan debt in America recently surpassed the one trillion dollar mark.

-One study discovered that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt, and according to a report published in The American Journal of Medicine medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States.

-Consumer debt in the United States has risen by a whopping 1700% since 1971, and 46% of all Americans carry a credit card balance from month to month.

Sadly, most people don’t realize how damaging credit card debt can be. If you just carry an “average balance” on your credit cards each month, and those credit cards have just an “average” interest rate, you could end up paying millions of dollars to the credit card companies by the end of your life…

Let’s say you are an average American household, and you carry an average balance of $15,956 in credit card debt.

Also, as an average American household, let’s assume you pay an average current rate of 12.83%.

Finally, let’s assume you carry this average balance for 40 years, between ages 25 and 65. How much did your credit card company make off of you and your extreme averageness?

Answer: $2,629,618.64

Incredibly, a large percentage of the population does not seem to understand these things. An astounding 43 percent of all American families spend more than they earn each year.

Are you starting to understand why approximately half of all Americans die broke?

We are a nation that is completely and addicted to debt.

If you do not believe that it will ever catch up with us you are being delusional.

We have piled up the biggest mountain of debt in the history of the planet, and a day of reckoning is fast approaching.

The U.S. Government Will Borrow Close To 4 Trillion Dollars This Year

July 18, 2013July 18, 2013 by Michael

When you add maturing debt to the new debt that the federal government is accumulating, the total is quite eye catching. You see, the truth is that the U.S. government must not only borrow enough money to fund government spending for this year, it must also “roll over” existing debt that has reached maturity. Of course the government never actually pays any of that debt off. Instead, it essentially takes out new debts to cover the old ones. So the U.S. government is actually borrowing far more money each year than most Americans realize. For fiscal year 2013, the U.S. budget deficit will be about $845 billion, but on top of that the government will also have to borrow about 3 trillion dollars to pay off old debt that is maturing. Overall, the U.S. government will borrow close to 4 trillion dollars this year, and that number will likely be even higher next year. That is not going to cause a crisis as long as interest rates stay super low, but if interest rates begin to rise substantially, the game will change dramatically.

When the government borrows money, it has to pay it back someday. Back in the old days, the federal government used to issue lots of debt that would not mature for a very long time. But in recent years things have been very different…

In order to fund the government, the Treasury Department periodically auctions Treasury securities with various maturities ranging from 30-day Treasury bills to 30-year Treasury bonds, with 2-3-5-7-year and 10-year Treasury notes in between. It used to be that the bulk of Treasury borrowing was done in the longer-term instruments with maturities of at least 10 years.

In more recent years, however, this trend has shifted more toward shorter-term Treasury securities. There are pros and cons to both strategies. Generally speaking, the shorter maturities are considered more risky since short-term interest rates can vary frequently. Shorter-term maturities obviously have to be rolled over much more often. That raises the risk that there might not be enough buyers when the government needs them.

At this point, the average maturity of outstanding government debt is only 65 months, and only about 10 percent of all Treasury debt matures outside of a decade.

So what does that mean?

It means that the federal government must constantly roll over massive amounts of debt. Once again, this is not too much of a problem as long as interest rates stay super low, but as John Cochrane pointed out, if rates start rising back to “normal” levels things could get quite hairy very quickly…

Here’s the nightmare scenario: Suppose that four years from now, interest rates rise 5 percent, i.e. back to normal, and the US has $20 trillion outstanding. Interest costs alone will rise $1 trillion (5% of $20 trillion) – doubling already unsustainable deficits! This is what happened to Italy, Spain, and Portugal. Don’t think it can’t happen to us. It’s even more likely, because fear of inflation – which did not hit them, since they are on the Euro – can hit us.

Sadly, those running things appears to be quite clueless. For example, retiring U.S. Representative Michele Bachmann recently asked Federal Reserve Chairman Ben Bernanke why the national debt has remained frozen in place for 56 straight days even though we have been borrowing lots of money. Bernanke seemed to have no idea how to answer that question…

As Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee Wednesday, Bachmann asked how there could be no increase reported in the total debt when the government is racking up about $4 billion a day in new debt.

“After nearly 10 years as the head of the Federal Reserve, Chairman Bernanke could not answer my question today in Financial Services Committee,” Bachmann told WND.

She wondered if there’s a political motive.

“I asked whether the Treasury Department was cooking the federal government’s books as it was reported that the Feds debt balance sheet remained at $16,699,396,000,000 for 56 days straight, presumably so the Treasury Department wouldn’t officially register that once again the Congress had exceeded its legal borrowing limits.”

For the moment, the federal government is able to recklessly borrow and spend money and investors are rewarding this behavior with super low interest rates.

Unfortunately, this state of affairs is completely and totally unsustainable. At some point global financial markets will begin to behave rationally, and when that happens it is going to mean a tremendous amount of pain for the United States.

Over the past decade, the U.S. government has added more than 11 trillion dollars to the national debt at a time when the U.S. economy has been steadily declining. Anyone that thinks that we can continue to pile up more debt like this indefinitely does not know what they are talking about.

The following are some more statistics about the U.S. national debt for you to consider…

-Back in 1980, the U.S. national debt was less than one trillion dollars. Today, it is rapidly approaching 17 trillion dollars.

–During Obama’s first term, the federal government accumulated more debt than it did under the first 42 U.S presidents combined.

–The U.S. national debt is now more than 23 times larger than it was when Jimmy Carter became president.

–If you started paying off just the new debt that the U.S. has accumulated during the Obama administration at the rate of one dollar per second, it would take more than 184,000 years to pay it off.

–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.

–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.

–Some suggest that “taxing the rich” is the answer. Well, if Bill Gates gave every single penny of his entire fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.

–If the federal government used GAAP accounting standards like publicly traded corporations do, the real federal budget deficit for 2011 would have been 5 trillion dollars instead of 1.3 trillion dollars.

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

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

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

–The U.S. national debt is now more than 37 times larger than it was when Richard Nixon took us off the gold standard.

–The U.S. national debt is now more than 5000 times larger than it was when the Federal Reserve was first created.

–Boston University economist Laurence Kotlikoff is warning that the U.S. government is facing a gigantic tsunami of unfunded liabilities in the coming years that we are counting on our children and our grandchildren to pay. Kotlikoff speaks of a “fiscal gap” which he defines as “the present value difference between projected future spending and revenue”. His calculations have led him to the conclusion that the federal government is facing a fiscal gap of 222 trillion dollars in the years ahead.

For the moment everything is fine because interest rates are incredibly low and the mockers in the “deficits don’t matter” fan club are having a field day.

But what is going to happen when interest rates return to rational levels?

How will the U.S. government be able to borrow the trillions of dollars that it needs to borrow every single year?

That is why it is so important to watch interest rates. When they start skyrocketing, big trouble is ahead.

40 Stats That Prove The U.S. Economy Has Already Been Collapsing Over The Past Decade

July 17, 2013July 17, 2013 by Michael

The “coming economic collapse” has already been happening. You see, the truth is that the economic collapse is not a single event. It has already started, it is happening right now, and it will accelerate during the years ahead. The statistics in this article show very clearly that the U.S. economy has fallen dramatically over the past ten years or so. Unfortunately, there are lots of mockers out there that love to mock the idea of an economic collapse even though one is happening right in front of our eyes. They love to say stuff like this (and I am paraphrasing): “An economic collapse is never going to happen. We can consume far more wealth than we produce forever. We can pile up gigantic mountains of debt forever. There is no way that the party is over. In fact, the party is just getting started. Woo-hoo!” That sounds absolutely ridiculous, but “economists” and “journalists” actually write things that reflect these kinds of sentiments every single day. They do not seem alarmed about the fact that our national debt is nearly 17 times larger than it was 30 years ago. They do not seem alarmed about the fact that the total amount of debt in our country is more than 28 times larger than it was 40 years ago. They do not seem alarmed about the fact that our economic infrastructure is being absolutely gutted and we are steadily becoming poorer as a nation. They just think that the magic formula of print, borrow, spend and consume can go on indefinitely. Unfortunately, the truth is that a massive economic disaster has already started to unfold. We inherited the greatest economic machine in the history of the world, but we totally wrecked it. We have been able to live far, far beyond our means for the last couple of decades thanks to the greatest debt bubble in the history of the planet, but now that debt bubble is getting ready to burst. Anyone with half a brain should be able to see what is coming. Just open your eyes and look at the facts. The following are 40 stats that prove the U.S. economy has already been collapsing over the past decade…

#1 According to the World Bank, U.S. GDP accounted for 31.8 percent of all global economic activity in 2001. That number dropped to 21.6 percent in 2011.

#2 The United States was once ranked #1 in the world in GDP per capita. Today we have slipped to #14.

#3 The United States has fallen in the global economic competitiveness rankings compiled by the World Economic Forum for four years in a row.

#4 Since the year 2000, the size of the U.S. national debt has grown by more than 11 trillion dollars.

#5 Back in the year 2000, our trade deficit with China was 83 billion dollars. Last year, it was 315 billion dollars.

#6 In the year 2000, about 17 million Americans were employed in manufacturing. Today, only about 12 million Americans are employed in manufacturing.

#7 The United States has lost more than 56,000 manufacturing facilities since 2001.

#8 The United States has lost a staggering 32 percent of its manufacturing jobs since the year 2000.

#9 Between December 2000 and December 2010, 38 percent of the manufacturing jobs in Ohio were lost, 42 percent of the manufacturing jobs in North Carolina were lost and 48 percent of the manufacturing jobs in Michigan were lost.

#10 Back in 1998, the United States had 25 percent of the world’s high-tech export market and China had just 10 percent. Today, China’s high-tech exports are more than twice the size of U.S. high-tech exports.

#11 In 2002, the United States had a trade deficit in “advanced technology products” of $16 billion with the rest of the world. In 2010, that number skyrocketed to $82 billion.

#12 The United States has lost more than a quarter of all of its high-tech manufacturing jobs since the year 2000.

#13 The number of full-time workers in the United States is nearly 6 million below the old record that was set back in 2007.

#14 The average duration of unemployment in the United States is nearly three times as long as it was back in the year 2000.

#15 Throughout the year 2000, more than 64 percent of all working age Americans had a job. Today, only 58.7 percent of all working age Americans have a job.

#16 The official unemployment rate has been at 7.5 percent or higher for 54 months in a row. That is the longest stretch in U.S. history.

#17 The U.S. government says that the number of Americans “not in the labor force” rose by 17.9 million between 2000 and 2011. During the entire decade of the 1980s, the number of Americans “not in the labor force” rose by only 1.7 million.

#18 The average number of hours worked per employed person per year has fallen by about 100 since the year 2000.

#19 The U.S. economy continues to trade good paying jobs for low paying jobs. 60 percent of the jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created since then have been low wage jobs.

#20 The U.S. economy lost more than 220,000 small businesses during the recent recession.

#21 The percentage of Americans that are self-employed has steadily declined over the past decade and is now at an all-time low.

#22 According to economist Tim Kane, the following is how the number of startup jobs per 1000 Americans breaks down by presidential administration…

Bush Sr.: 11.3

Clinton: 11.2

Bush Jr.: 10.8

Obama: 7.8

#23 In the year 2000, there were only 17 million Americans on food stamps. Today, there are more than 47 million Americans on food stamps.

#24 In the year 2000, the ratio of social welfare benefits to salaries and wages was approximately 21 percent. Today, the ratio of social welfare benefits to salaries and wages is approximately 35 percent.

#25 Since Barack Obama entered the White House, the average price of a gallon of gasoline in the United States has risen from $1.85 to $3.64.

#26 More than twice as many new homes were sold in the United States in 2005 as will be sold in 2013.

#27 Right now there are 20.2 million Americans that spend more than half of their incomes on housing. That represents a 46 percent increase from 2001.

#28 The price of ground beef increased by 61 percent between 2002 and 2012.

#29 According to USA Today, water bills have actually tripled over the past 12 years in some areas of the country.

#30 In 1999, 64.1 percent of all Americans were covered by employment-based health insurance. Today, only 55.1 percent are covered by employment-based health insurance.

#31 Median household income in the United States has fallen for four years in a row.

#32 As I mentioned recently, the homeownership rate in America is now at its lowest level in nearly 18 years.

#33 Back in the year 2000, the mortgage delinquency rate was about 2 percent. Today, it is nearly 10 percent.

#34 Median household income for families with children dropped by a whopping $6,300 between 2001 and 2011.

#35 Back in 2007, about 28 percent of all working families were considered to be among “the working poor”. Today, that number is up to 32 percent even though our politicians tell us that the economy is supposedly recovering.

#36 According to the Federal Reserve, the median net worth of families in the United States declined “from $126,400 in 2007 to $77,300 in 2010“.

#37 According to the New York Times, the average debt burden for U.S. households that earn $20,000 a year or less “more than doubled to $26,000 between 2001 and 2010“.

#38 Medicare spending increased by 138 percent between 1999 and 2010.

#39 During Obama’s first term, the federal government accumulated more debt than it did under the first 42 U.S presidents combined.

#40 Today, more than a million public school students in the United States are homeless. This is the first time that has ever happened in our history. That number has risen by 57 percent since the 2006-2007 school year.

Are there any other items that you would add to this list? Please feel free to join the discussion by posting a comment below…

11 Signs That Italy Is Descending Into A Full-Blown Economic Depression

July 7, 2013 by Michael

When you get into too much debt, really bad things start to happen. Sadly, that is exactly what is happening to Italy right now. Harsh austerity measures are causing the Italian economy to slow down even more than it was previously. And yet even with all of the austerity measures, the Italian government just continues to rack up even more debt. This is the exact same path that we watched Greece go down. Austerity causes government revenues to drop which causes deficit reduction targets to be missed which causes even more austerity measures to become necessary. But if Italy collapses economically, it is going to be a far bigger deal than what happened in Greece. Italy is the ninth largest economy on the entire planet. Actually, Italy used to be number eight, but now Russia has passed it. If Italy continues to stumble, India and Canada will soon pass it as well. It really is a tragedy to watch what is happening in Italy, because it really is a wonderful place. When I was a child, my father was in the navy, and I got the opportunity to live there for a while. It is a land of great weather, great food and great soccer. The people are friendly and the culture is absolutely fascinating. But now the nation is falling apart. The following are 11 signs that Italy is descending into a full-blown economic depression…

#1 The unemployment rate in Italy has risen to 12.2 percent. That is the highest that it has been in more than 35 years.

#2 The youth unemployment rate in Italy is sitting at 38.5 percent, and in southern Italy it recently hit the 50 percent mark.

#3 An average of 134 retail outlets are shutting down in Italy every single day. Overall, approximately 224,000 retail establishments have closed since 2008.

#4 Italy’s economy has now been contracting for seven quarters in a row.

#5 It is being projected that Italy’s GDP will shrink by 1.8 percent this year.

#6 Industrial production in Italy has declined for 15 months in a row. It has now fallen to its lowest level in about 25 years.

#7 Overall, factory output in Italy has fallen by about one-fourth since 2008.

#8 In May, automobile sales in Italy were down 8 percent compared to one year earlier.

#9 The number of people that are considered to be “seriously deprived” in Italy has doubled over the past two years.

#10 Italy now has a debt to GDP ratio of 130 percent.

#11 It is being projected that Italy will need a major EU bailout within six months.

At this point, Italy is flat broke.

And unlike the U.S. or Japan, Italy cannot run over to a central bank and have them print up oodles of new money with which to buy up government bonds. Italy is married to the euro, and so that greatly limits their options. Unfortunately, the money is rapidly running out. The following is from a recent article by Wolf Richter…

In most countries, it would be an act of mind-bending chutzpah, or perhaps a display of political insanity, but in Italy it barely made ripples: for a government official, a minister no less, to declare that the country cannot pay its long overdue bills, and not for a month or two, but for the rest of this year! Due to “technical” problems.

The Italian government is out of money. Not that the US government is in any better shape in that respect, or the Japanese government for that matter, but they have central banks that print the missing moolah with lavish abandon. Italy doesn’t. It has the ECB which is run by an Italian who promised last year to print with lavish abandon to keep countries like Italy afloat. But that promise is not the same thing as having your own central bank.

On July 4, Italy’s budget fiasco came to light once again. Wracked by the pretense of austerity, expenditures rose 1.3% in the first quarter, while revenues remained flat. So the deficit rose to 7.3% of GDP, up from 6.6% last year, bringing the national debt to 130% of GDP. Ballooning debt and deficits in a shriveling economy – Italy has been in recession since the fourth quarter of 2011 – is a toxic combination in the Eurozone.

While those numbers may sound really bad, the reality is that the people that are suffering the most are the average folks on the street. Many Italians have been completely blindsided by this economic depression, and suicides are skyrocketing…

In Italy, the tragic stories of suicides apparently linked to the deep recession are becoming all too frequent. Last month, a former factory worker hanged himself near Turin because he could not find work, his relatives said. In May, a young man committed suicide outside of Rome shortly after he lost his job. The next day, Italian President Giorgio Napolitano begged the government to deliver “the utmost attention for situations of greatest malaise and need” to help stop the wave of suicides.

That is absolutely tragic.

But you know what?

The United States is headed down the same path that Italy has gone.

In the coming years unemployment and suicide will both skyrocket here too.

Those that are sticking their heads in the sand right now will be absolutely blindsided by what is coming. But those that understand what is on the horizon and are preparing for it will have the best chance of making it through.

Italy is kind of like the Leaning Tower of Pisa. Everyone knows that it is going to fall eventually, and when it does fall it is going to be a major disaster.

When the financial system of Italy totally implodes, that will be a sign that things are really starting to accelerate. Expect dominoes to start tumbling much more rapidly in the aftermath.

Have Central Bankers Lost Control? Could The Bond Bubble Implode Even If There Is No Tapering?

July 4, 2013 by Michael

Are the central banks of the world starting to lose control of the financial markets? Could we be facing a situation where the bond bubble is going to inevitably implode no matter what the central bankers do? For the past several years, the central bankers of the planet have been able to get markets to do exactly what they want them to do. Stock markets have soared to record highs, bond yields have plunged to record lows and investors have literally hung on every word uttered by Federal Reserve Chairman Ben Bernanke and other prominent central bankers. In the United States, it has been remarkable what Bernanke has been able to accomplish. The U.S. government has been indulging in an unprecedented debt binge, the Fed has been wildly printing money, and the real rate of inflation has been hovering around 8 to 10 percent, and yet Bernanke has somehow convinced investors to lend gigantic piles of money to the U.S. government for next to nothing. But this irrational state of affairs is not going to last indefinitely. At some point, investors are going to wake up and start demanding higher returns. And we are already starting to see this happen in Japan. Wild money printing has actually caused bond yields to go up. What a concept! And that is what should happen – when central banks recklessly print money it should cause investors to demand a higher return. But if bond investors all over the globe start acting rationally, that is going to cause the largest bond bubble in the history of the planet to burst, and that will create utter devastation in the financial markets.

Central banks can manipulate the financial system in the short-term, but there is usually a tremendous price to pay for the distortions that are caused in the long-term.

In Bernanke’s case, all of this quantitative easing seemed to work well for a while. The first round gave the financial system a nice boost, and so the Fed decided to do another. The second round had less effect, but it still boosted stocks and caused bond yields to go down. The third round was supposed to be the biggest of all, but it had even less of an effect than the second round. If you doubt this, just check out the charts in this article.

Our financial system has become addicted to this financial “smack”. But like any addict, the amount needed to get the same “buzz” just keeps increasing. Unfortunately, the more money that the Fed prints, the more distorted our financial system becomes.

The only way that this is going to end is with a tremendous amount of pain. There is no free lunch, and there are already signs that investors are starting to wake up to this fact.

As investors wake up, they are going to realize that this bond bubble is irrational and entirely unsustainable. Once the race to the exits begins, it is not going to be pretty. In fact, the are indications that the race to the exits has already begun…

During the month of June, fixed income allocations fell to a four-year low, according to the American Association of Individual Investors, as major bond fund managers like Pimco experienced record withdrawals for the second quarter. That pullback sent places like emerging markets and high-yield bonds reeling—just as the Federal Reserve signaled plans to taper its easy-money policies within the coming years. Benchmark bond yields ticked up on that news, and in an unexpected twist, the stock market nosedived as well.

A lot of people out there have been floating the theory that the Fed will decide not to taper at all and that quantitative easing will continue at the same pace and therefore the markets will settle back down.

But what if they don’t settle back down?

Could the bond bubble implode even if there is no tapering?

That is what some are now suggesting. For example, Detlev Schlichter is pointing to what has been happening in Japan as an indication that the paradigm has changed…

My conclusion is this: if market weakness is the result of concerns over an end to policy accommodation, then I don’t think markets have that much to fear. However, the largest sell-offs occurred in Japan, and in Japan there is not only no risk of policy tightening, there policy-makers are just at the beginning of the largest, most loudly advertised money-printing operation in history. Japanese government bonds and Japanese stocks are hardly nose-diving because they fear an end to QE. Have those who deal in these assets finally realized that they are sitting on gigantic bubbles and are they trying to exit before everybody else does? Have central bankers there lost control over markets?

After all, money printing must lead to higher inflation at some point. The combination in Japan of a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation (indeed, that is the official goal of Abenomics!) are a toxic mix for the bond market. It is absurd to assume that you can destroy your currency and dispossess your bond investors and at the same time expect them to reward you with low market yields. Rising yields, however, will derail Abenomics and the whole economy, for that matter.

The financial situation in Japan is actually very similar to the financial situation in the United States. We both have “a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation”. In both cases, rational investors should demand higher returns when the central bank fires up the printing presses.

And if interest rates on U.S. Treasury bonds start to rise to rational levels, the U.S. government is going to have to pay more to borrow money, state and local governments are going to have to pay more to borrow money, junk bonds will crash, the market for home mortgages will shrivel up and economic activity in this country will slow down substantially.

Plus, as I am fond of reminding everyone, there is a 441 trillion dollar interest rate derivatives time bomb sitting out there that rapidly rising interest rates could set off.

So needless to say, the Federal Reserve is scared to death of what higher interest rates would mean.

But at this point, they may have lost control of the situation.

+ More