I finished a 45 paged, over 12000 word, data, chart, and footnote rich, content-loaded ebook about the U.S. debt crisis and the dire implications unless immediate action is taken. What will the U.S. look like in 5-10 years? How long until we really start to see serious consequences? What implications will the end game of the debt crisis have on your investments? What can be done to stop the worst from happening? What should you watch to know when the “you know what” is about to hit the fan? Read the ebook to find out. Join my email list – on the right hand side of the blog – and you’ll get my ebook absolutely free!
I was just reading the Economic Collapse Blog where I was reminded of the economic and political horrors that must inevitably come to the world and the United States in particular. The article talks about how we will look back on 2011 and 2012 with envy when we face what must be faced. And it’s true, but this particular post suggests, albeit very lightly, that even though we have intense challenges ahead, we can still make the best of it.
Sterilized QE takes money out of the private sector by offering risk-free reverse repurchase agreements from the Fed, which in turn the Fed uses to buy long-term Treasuries / mortgages. The reverse repos take as much money out of the system as the purchase of long-term securities put in the system. Hence, the idea is that the Fed can buy certain long-term asset classes without “printing money.”
You may have heard that the Federal Reserve is considering something called “sterilized QE.” The idea behind “sterilized QE” is that the Fed can buy long-term Treasuries / long-term mortgages, thus creating new money in the process. However, the idea behind sterilizing the QE is that the Fed will use reverse repo agreements to withdraw in an equivalent amount of money from the system, thus there is no net change to the monetary base or money supply.
The dollar is on the ropes. The Treasury market has become a Ponzi scheme that would make Bernie Madoff blush. No one quite knows what to expect when the day of reckoning finally comes. But, I’ll guarantee you one thing – the rich will get richer while the poor and middle class will be wiped out.
Don’t like it? Neither do I, but that’s the reality of the situation barring an economic or political miracle.
The U.S. has an addiction to short-term debt. I highlight short-term because short-term is particularly pernicious in the sense that the U.S. exposes itself to serious interest rate risk. With Treasury bonds that risk is significantly decreased because the interest rate is typically fixed for 30 years, assuming these bonds are not inflation-adjusted and most of them aren’t.
It’s as if the government has chosen to finance itself with adjustable rate mortgages instead of a 30 year fixed rate. We, of course, know what happened to the debtors who took on teaser rates before the housing crisis.
The clock is ticking. It’s just a matter of time before it strikes midnight. When it does, the United States will have to make a simple yet difficult decision: go the way of Greece, destroy the currency, or default on its debt.
Until the day of reckoning, it’s unlikely yearly increases in debt will go below $1 trillion, and if they do, it will be for a brief period. I know since 2008 we’ve grown accustomed to $1 trillion increases in debt without reaping any severe consequences. However, as I will show, that paradigm cannot last. Here’s what I predict increases in debt will look like from 2012-2017:
According to John Williams, the economist at shadowstats.com, every time since 1908 in which consistent real annual disposable income growth was above 3.3% the incumbent party won and when real disposable income growth was below 3.3%, the incumbent party lost.
Looking at BEA data shows, however, that sometimes a President lost even when real disposable income growth was above 3.3%. I think the reason for this discrepancy is that BEA’s data is not consistent like John Williams’ internal calculations. In other words, he has issues with the BEA’s methodology.
Below you’ll see comparisons from the data/charts in my ebook, and updated data/charts based on newer information.
Old charts on top, new charts on bottom:
Just like the ridiculous revenue projections the Obama administration puts out, California has chosen to delude itself into believing it can grow its way out of fundamental problem of spending too much and collecting too little. Unfortunately for California, reality is hitting them straight in the face. And unlike the federal government, California has no money printers to bail them out. On March 8th, California will have run out of cash. Perhaps California will be successful in delaying that date by pulling the same sort of gimmicks and tricks Geithner was willing to pull in the summer of 2011.