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Weekend Edition

How the government is destroying the U.S. dollar
Saturday, December 18, 2010

I'd like to begin today with a parable of sorts. I'd like to show you what the "compromise" reached in Washington was all about and the damage it will have on our economy moving forward. The specifics of the compromise are mind-numbingly dull, so I've thought of a more entertaining way to explain what's really going on...
Here's how our story begins: Pretend you're one of the millions of deadbeat home "owners" out there. I put "owners" in quotes because lots of the people in this situation don't actually have any equity in the property at all – and never did, thanks to piggyback and no-doc loans (among other absurdities).
Now, I realize our readers aren't these kinds of people. So you'll have to use your imaginations. Just indulge me for a minute. Pretend you bought a house you knew you couldn't possibly afford (unless home prices actually did go to the moon), and you haven't been making any real payments on your house in months or years...
Normally, you'd be facing two choices. If there's simply no way you can afford the interest on the note – if you've lost your job, for example – you don't have any other choice. You have to return the keys. You'll lose whatever equity you had in the house. And you'll have to start paying rent somewhere else or rely on the kindness of family (or strangers) to take you in.
The other choice, assuming your income exceeds the interest and principal payments is simply to reduce all your other expenses until you're able to make the payments. That's biting the bullet and taking your lumps. It's painful, but it will teach you a valuable lesson about buying things with credit.
Congress faces a similar choice. Our current total debt is now close to $14 trillion. The number is so large, it's meaningless. No one can comprehend how much money $14 trillion really is. A better way to think about it is that each American taxpayer owes $125,000. That's like a whole additional mortgage for most people.
I want to be clear about this: These debts are real. These debts are money we owe today. These debts must be financed (we have to pay interest on them). These debts DO NOT include any future promised payments.
And the money Congress officially owes fails to include other significant debts. Regardless, Congress is likely to end up repaying these debts. Total debt at the state level now totals $1.1 trillion, and local government debt is another $1.6 trillion. Investors have long assumed Congress effectively guarantees these debts. (Investors trusted the federal government would step in to prevent state and local governments from defaulting.)
In addition to these debts, Congress has guaranteed the assets of Fannie Mae and Freddie Mac on an unlimited basis. Losses at these two companies, by my estimate (which was once thought ludicrously large and is now a mainstream prediction), total $800 billion. And then there's a slew of TARP-related investment and guarantees, the costs of which are unknown. If you throw on an extra $3 trillion, that brings the total debt package up to much more than 100% of GDP.
Adding up all the numbers and applying a market-based rate of interest (6%) to these debts, you'll find that real (i.e. not manipulated by the Federal Reserve) cost of servicing these $17 trillion in debts would be a little more than $1 trillion. Total annual federal revenue from income taxes and corporate taxes over the last year was $1.1 trillion.
These are all real numbers. You can verify all of them. What they tell me is... absent the Federal Reserve's intervention in the Treasury bond market... and absent the myth of "off balance sheet" obligations... our federal government would already be bankrupt. I don't believe in financial myths. Neither should you. Our government is bankrupt: It cannot possibly afford to finance its existing obligations in sound money.
At the moment, none of the official numbers appear so dire because state governments haven't gone belly up (yet), the losses from Fannie and Freddie (which are certainly real) haven't been officially added to the budget, and the Federal Reserve is still holding down interest rates. The problem is, by manipulating interest rates and printing money, inflation pressures are already heavily influencing the real economy. Sooner or later, the Fed will have to stop or risk a massive hyperinflation.
And the moment the Fed steps away from the Treasury bond market, how high will rates go? Given the real state of the government's balance sheet, rates could soar well past 6%. This collapse of the bond market could happen overnight. It could happen at any time... any time.
Again... all of these facts and numbers are real – all of them. They are all based on what we owe today. I'm not counting projected deficits (which are huge and growing). I'm not counting any personal debt in these forecasts – which are also immense. Total debt in the U.S. comes to more than $680,000 per family. No doubt, these personal debts cannot be repaid and could not even be financed without the ongoing intervention by the Federal Reserve.
Thus... our nation's economy is literally hanging by a piece of a paper – the global paper-dollar standard. And Fed Chairman Ben Bernanke is destroying it by printing billions of dollars per day. How long can this go on? Not long, friends. Not long at all.
The Congressional Budget Office knows all of these facts. WikiLeaks obtained none of this data. Every single member of Congress knows these facts. Bernanke knows them, too – which is why he was trembling so hard on national TV a couple weeks ago.
So what did Congress decide to do about these problems this week? What was the compromise that was reached the media seems so happy about? The politicians decided to lower taxes. It's a move that the Congressional Budget Office estimates will add nearly $1 trillion more to the deficit over the next two years. That's another $1 trillion that we will have to finance. No spending programs were cut. None.
Congress is like an upside down, deadbeat homeowner who has refused to move out of his house and can't possibly afford the mortgage. He thinks everything will be fine because he's living rent-free and thus can afford to go out to dinner, take vacations, and buy a new car. In fact, things are going so well, he's kind of forgotten about the entire risk of foreclosure. Nobody will ever get around to kicking him out, he's come to believe. What could wrong?
The leadership of the United States is driving our country directly off a cliff. They are pretending a day of reckoning will never occur... that Bernanke can successfully paper over these debts along with however many trillions of additional dollars are necessary. This is the absolute height of ignorance. The destruction of our currency and our country's standing in the world's economy is certain.
We are already at the point where our government's debt cannot be financed at any legitimate rate of interest... and yet our leaders show zero interest in doing anything to prevent this unmitigated financial disaster.
As many of you know, I've produced a video about these real problems and my suggestions for dealing with them. If you haven't watched it yet, I strongly encourage you to do so. You can access it free here.
Porter Stansberry

This Week's Winners
S&P 500 Symbol Change
Tenet Health Care THC +54.6%
Vulcan Materials VMC +11.3%

Countries Symbol Change
Chile CH +3.5%
Israel ISL +3.3%
Switzerland SWZ +2.7%

Sectors Symbol Change
Biotech PBE +5.5%
Big Pharma PJP +3.8%
Water PHO +3.2%

Commodities Change
Cotton +7.7%
Coffee +6.2%
Sugar +6.0%
Date Range:12/9/2010 to 12/16/2010
This Week's Losers
S&P 500 Symbol Change
Best Buy BBY -17.6%
Visa V -15.1%
Mastercard MA -11.0%

Countries Symbol Change
Turkey TKF -3.5%
Indonesia IF -3.4%
Singapore EWS -2.3%

Sectors Symbol Change
Airlines FAA -2.4%
Gold Mining GDX -2.1%
Semiconductors PSI -1.7%

Commodities Change
Natural Gas -9.1%
Wheat -4.1%
Zinc -2.3%
Date Range:12/9/2010 to 12/16/2010
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