Debt Default ‘Deferral’ of Greece a Dangerous Precedent – Got Gold?

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If the implications of the recent Greek tragedy were not so serious it would have been seen more as a Greek comedy (of fiscal errors). In fact, however, to deploy another metaphor, Greece’s sovereign debt is seen as the proverbial canary in the coal mine – a microcosm of the relentlessly growing sovereign debt that has taken much of Europe by storm and is threatening to spread to the U.S.

Short-Term Bail Out

Fifteen other member nations comprising the Euro currency club have recently saved colleague Greece from defaulting on its debt … for now.  On the surface this solution is just what any Keynesian economist would advocate because, as part of the bargain, Greece has agreed to implement a variety of painful spending constraints which will result in a much reduced standard of living for its people.  In spite of such action, however, Greek debt will continue to grow to 150 percent of GDP by 2012.

Long-Term Debt Tomb

Unfortunately, however, this new bailout provokes and perpetuates a series of errors because Greece cannot, and will not, be extricated from its debt tomb.  According to the UK Telegraph, Greece will now be doomed to transferring to foreign creditors an amount equal to 8 percent of its GDP in perpetuity … much more than German reparations to foreign creditors after WWI.  It cannot, and will never, be repaid.

Temporary Hiatus

Further proof that these loans will provide only temporary relief is recent research by economists Carmen Reinhart and Kenneth Rogoff in their new book “This Time is Different:  Eight Centuries of Financial Folly.”  They concluded that when sovereign debt exceeds a level of over 80 percent of its GDP, that debt grows ever more rapidly invariably pushing the country into financial default.

Inevitable Default

If we are to take the Reinhart/Rogoff research at face value then all that this recent bailout of Greece has done is buy it sometime before its inevitable financial default.  It also allows Euro countries, the IMF and other agencies and persons with responsibilities for debt issues to work their magic.  Moreover, it conveys hope to other countries on the brink of financial collapse.  It defers the calamity and appeals to the overwhelming need of politicians everywhere to avoid and escape responsibility, if only to have the debt implosion occur on someone else’s watch.

Dangerous Precedent

While the temporary hiatus given to Greece should be characterized as default deferral, it also, unfortunately, sets a highly dangerous precedent.  Each of the next Euro default candidates – Portugal, Spain and Italy – comprise of much larger economies which will therefore require substantially greater levels of assistance.  Of course, fairness will demand that they too receive an equivalent boost from their Euro partners and backstopping by the IMF.

A closer look at bailout details brings to light something else which should raise serious concern.  Who are the foreign creditors which Greece is having difficulty paying?  While the current bailout originates among the taxpayers of the sixteen member nations of the Euro group, the existing debt which is in danger of default is held by foreign banks…not foreign nations.  These foreign banks are headquartered in France, Germany, Switzerland, the UK and elsewhere.  A short list includes Credit Agricole and Germany’s Landesbanken. This begs a few unanswered questions:

a) Is this a Greek government bailout or is it an indirect bailout of foreign banks by their own governments under the guise of loans to the government of Greece?

b) Will this Greek script be played out on the stages of other Euro nations?

c) Will it spread to the United Kingdom and the United States?

Will the Debt Default Tragedy ‘Tour’ the U.S.?

U.S. national debt now stands at $12.78 Trillion, more than twice as large as it was in the year 2000.  Even the President Obama’s budget director admits that the on-budget debt level will reach close to $20 Trillion by 2020, almost double over what it was just over one year ago.  The non-partisan Congressional Budget Office says it will be even higher.

As major as those debts are, however, the genuinely mind-boggling debt projections are the future commitments to citizens for such services as Social Security and Medicare, as well as a myriad of additional federal government obligations.  These Unfunded Contingent Liabilities are now well beyond the $100 Trillion level. Some calculate the number is closer to $137 Trillion. Remember that these pending expenditures are the unfunded portions.  No money has been set aside, just another promise.

It has been calculated that the net present value of these future budget needs is in the neighbourhood of $35 Trillion.  What that means is that $35 Trillion of 2010 dollars needs to be invested  today in order to meet the $137 Trillion United States government responsibilities to its citizens in the years ahead.

Combine the current budget debt of $12.78 Trillion with the $35 Trillion net present value for future obligations, then add in $1.5 Trillion of continuing annual deficits for as far as the eye can see and factor in future rising interest rates from their current multi-generational lows and it is clearly evident that:

America’s debt picture is truly astronomical and, like the situation with Greece, the debt cannot, and never will, be repaid. Indeed, any way you look at it, the consequences for the United States, let alone the many other haunted economies, are grim, dismal – even disastrous.

As long as bond creditors retain a modicum of confidence the play – the ‘Greek’ tragedy - can continue for awhile longer, maybe even indefinitely. However, should interest rates spike northward or external events affect us it is highly likely we will witness a sudden unscripted end.  We can only hope that creditor confidence, supplemented by modest economic gains and strengthened by politicians who exhibit vision and serve tough love to their respective electorates, might be sufficient to enable us to experience a ‘muddle through’ scenario. Time will tell.

How Can You Protect Yourself From Sovereign Debt Defaults?

Quite simply, individuals should invest in gold and silver in the form of bullion and select precious metals mining stocks. There is no better protection available.

Arnold Bock is a frequent contributor to both www.FinancialArticleSummariesToday.com. and www.munKNEE.com. He can be reached at editor@munknee.com

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Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

The events of the last 12 to 18 months have been as shocking as they have been instrumental in reshaping the global financial structures. In fact, the events have pointed out the fracture of the global monetary system and banking systems. The steady stream of events is accelerating in scope and intensity. The fractures are finally being recognized. The key to understanding the continuation of disruptive and chaotic events is the realization that nothing has been fixed, no remedy put in place, no reform agreed upon, no liquidation of impaired bank assets completed, and no work toward a more stable system. Instead, the old system has been subjected to a patchwork of futile efforts and initiatives that speak more of bilking the system, redeeming impaired assets, and channeling funds to those most responsible for the fractures. Instead of seeking solutions, the banking and political leaders revert to what has been their shelf of failed tools, since they know nothing else, stuck in the Keynesian box, painted into the 0% rate corner. The costs are horrific when solutions are not pursued. The beneficiary is gold, since all wayward policy costs money, which must be created, worsening the debasement. Gold rises with new money creation gone amok. $Trillion rescue packages have become the norm, in a cavalcade of debased currencies. Historical highs come for gold and silver, with gold fighting the political battles, but silver riding through the gates with high speed and raised dust. Central banks own no silver, and industry consumes silver.

The system cannot repair itself because those in charge at the helm making decisions caused the fractures and protect their power base. They live and operate within a system that no longer functions effectively. Reform would involve bankruptcy for the elite in charge. Remedy would involve liquidation of the balance sheets for the elite in charge. True crackdown would involves prosecution and jail time for the elite in charge. Changing of the guard would involve lost power for the elite in charge. Independent audits would involve revelations and disclosures of criminal fraud on a widespread basis. So the system lumbers along, broken. Nowhere has the brokenness gone more unaddressed than under-water mortgages for 22% of the American public. True remedy and crackdown would involve a mushroom of criminal allegations from bond fraud, revelation of duplicate usage for mortgage payment revenue streams, lost property titles, and counterfeit fraud. That is a major reason why Fannie Mae was nationalized, to keep the fraud under the roof of the greatest criminal organization on earth, operating under the United States Government, where the corruption, theft, and fraud can be protected by the numerous agencies. The global response has been and will continue to be a flight into gold, finally recognized as a zero risk safe haven. The global decline in trust for government debt is the death knell for the major currencies, the monetary system, and the central bank franchise system. It is also the harbinger for $2000 gold and $50 silver.

Review briefly the scattering of powerful events in just the last 12 to 18 months. History is being made before our eyes. The franchise system of central banks and paper fiat currency has failed before our eyes, but with no specific recognition. The flood of new money creation testifies to both failure and desperation. New debt within the USEconomy no longer produces positive economic activity. The events are so diverse that any competent analyst must conclude that the global financial system has broken in irretrievable, irrevocable, irreversible manner. If the following diverse topics of disruption, breakdown, malfunction, denunciation, incompetence, compromise, corruption, and contagion do not wake people out of their slumber, nothing will. If investors do not take action amidst the plethora of warning signals, they deserve to be gobbled up and ruined. Before long, personal self-defense activity will be declared improper, illegal, and even possibly terrorist in nature. Please pardon the brevity of each topic, but too many exist, and building an argument for each would require at least 2 to 3 pages. These topics of breakdown, failure, corruption, and contagion are covered every month in the Hat Trick Letter. Skim to the end to review the gold market summary, where new highs are being registered in almost every single currency on earth. The topics covered in brevity are the same ones covered in careful treatment for the last 12 to 18 months. The array of topics arranged in sequence serves to highlight the shocking events and the historically unprecedented desperation in response, all of which has led to a powerful gold rally based on respect, integrity, and standalone value.

REJECTION OF PETRO-DOLLAR & REVOLT

Last May 2009, the Saudis with Russians and Chinese at their sides announced the eventual end to payments for crude oil to be honored in USDollars. The concept was endorsed by Japan and Germany, whose counselors from Berlin might be far more integral in reshaping the global landscape than the US-UK aging power merchants are willing to concede. The disrespect shown the USDollar has turned to revolt, seen in G-7 Meetings. In fact, the G-7 has morphed into a country club meeting for former power brokers. The new G-20 Meeting is the forum of substance, where the Chinese, Russians, Indians, and Brazilians can have a voice and no longer sit in the hallways while decisions are made. The USDollar is on the butt end of a Global Paradigm Shift with extreme force. The beleaguered buck will limp along until alternatives in the planning stage are launched. That is soon, really soon, like before 2011 is too far along. Gold will compete well with both the USDollar and any newly launched currency alternative.

NATIONALIZED BLACK HOLES

The absorption of Fannie Mae and American Intl Group into the USGovt conglomerate of bureaucracy, fraud, waste, confusion, protection, syndicate wings, off-shore accounts, and printing press operations was an urgent step. It placed the corrupted mortgage finance structures and credit derivative framework under the USGovt aegis, where the syndicate agencies can provide both proper attention and protection from prosecution. The Black Holes will cost the USGovt a few trillion$, my forecast made in 2007 and 2008. Shifting ownership of securities and putting them under official stewardship has effectively eliminated the potential for lawsuits by investors foreign and domestic. Fannie Mae is the nexus of numerous criminal fraud rings whose total value is north of $3 trillion. It is the vast sewage pit replete with slush funds, where obscure accounts reside never to face scrutiny, used to balance the accounting without prying eyes. Gold will be viewed as the clean alternative to paper, especially the toilet paper mixed in sewage treatment plant vats.

INSOLVENT BANKS

Nowhere is the brokenness more evident than in the insolvent big banks. Not a one is solvent, all vampires in search of tangible assets, willing to trade worthless stock shares for assets. Lending is a thing of the past. Their loan loss reserves have vanished, as reserves are tucked away from the lending circles in the US Federal Reserve. Insolvent banks engage in minimal lending, since approval is inhibited by the lack of working capital. The banks are loaded down by an endless raft of foreclosed properties, kept from the market, not on the market. Speaking of insolvent, the USFed itself is in wretched shape. A mere 5% decline in their mortgage assets translates to a negative balance sheet. A more likely 40% decline in mortgage assets, in closer tie to reality, translates to hundreds of billion$ in negative balance sheet. This agency, this august USFed is supposed to lift the US financial structure from its underwater grave? Methinks not!

PHONY ACCOUNTING STANDARDS ENDORSED

On April 1st of 2009, the Financial Accounting Standards Board endorsed corrupt accounting of impaired assets. Banks were permitted to place any value they wanted, with clumsy laughable minimal justification. Enter the basis of the great US stock rally. What a joke! Shock waves like on May 6th will likely become the norm. Bond shock waves are in vogue. Without proper accounting, valuation exercises in US financial arenas becomes a farce, joke, travesty.

ENDLESS QUANTITATIVE EASING

The QE1 was welcomed. Vast new money printing for the purpose of meeting federal deficits, rescuing big banks, and providing vast slush funds was deemed necessary. The end of QE1 was heralded but a lie. Perhaps it was proclaimed at an end so that QE2 can be launched amidst fresh needs. The QE2 seems to be launched in Europe with a grand US conduit. In March, USFed Chairman Bernanke lied through his teeth to the USCongress about how Quantitative Easing had come to an end, that USTreasurys were not being monetized. In late April, Bernanke admitted his lie to the same US Congressional committee. Remove QE and the entire system grinds to a halt, then collapses under the weight of debt. Claims of QE removal serve as deceptive political clapptrapp, pure diversion from the reality. The QE is as crucial as the right leg. Uncle Sam cannot negotiate the mine field while skipping and hopping on one leg.

REACTIVE CREATION OF USTREASURY BUBBLE

You gotta love the denials that the USTreasury Bond complex is a bubble. Its needs have grown enough to demand a significant slice of the entire global savings. Actually, the global savers have lost their appetite for further USTBond buys. As a bubble, it is fed by accelerating sources of funds, mostly nowadays from printing press creation of money. The near 0% interest rate is a dead end with no reversal, since higher borrowing costs would bring about a cave-in for the USTBond bubble. The USTreasury Bond bubble is the sentinel signal for the gold market to release, find global acceptance as true safe haven, and find proper value over $2000 per ounce. A supposed safe haven can NEVER be a bubble. In fact, as the USGovt adopts one broken child after another like Fannie Mae and AIG, the US$-based obligations extend beyond federal debt to cover mortgage wreckage and credit derivative fires. To call USTreasurys a safe haven is like calling Al Capone a savior, calling Lloyd Blankfein a crusader for God, calling Alan Greenspan the architect of prosperity, or calling Franklin Roosevelt a friend to gold investors.

ACCELERATION OF BANK FAILURES

Banks are falling victim to death experiences at an accelerated rate. The bank failure rate grew in mid-2008. The rate grew again in mid-2009. In 2010, already the rate has accelerated again. Bank failures are picking up speed rapidly. The FDIC insurance fund is deep in the red. The bank fees were levied at 13-fold increases last year. Even advanced bank fees have been exhausted by the FDIC. Soon the FDIC will need more billion$ in funds. A new wrinkle is that commercial mortgages are killing banks, at a time when many assets are revealed as being held on balance sheets at double their true value. See the recent bank failures and consistent over-valued assets in liquidation. The problem is systematic and endemic.

UNENDING MORTGAGE DELINQUENCIES

Despite claims of a stabilizing housing market, the mortgage delinquencies and enormous inventory of bank owned homes is not being relieved. Fannie Mae reports still rising mortgage delinquencies. Prime Option ARMs are showing delinquency rates that rival the subprimes. Commercial mortgages are also showing delinquency rates that rival the subprimes. The newest wrinkle is Strategic Defaults, where people just stop paying their mortgages, an active decision, often by people with high RICO credit scores. Many are demanding the banks to produce their legitimate property title. Many are sick & tired of bank welfare, with Wall Street taking the lion’s share of aid. Some suspect vast bond fraud. Civil disobedience a la Henry David Thoreau has entered the equation. With each new delinquency comes a default and more inventory. The entire USEconomic growth spurt in the 2002 to 2005 timeframe was founded on a housing bubble that was washed away. No new bubbles can be found of practical usage, only the USTreasury Bond bubble acting like a powerful black hole to inhibit capital formation.

REVELATIONS OF RIGGED METALS MARKET

In the last few weeks, the metals markets are abuzz over the revelations by Andrew Maguire that the London silver market is rigged from JPMorgan trading desks. Price suppression has come from naked shorting, otherwise known as selling silver contracts without collateral, without benefit of metal. The paper Ponzi scheme of the London Bullion Market Assn and the COMEX is slowly being unmasked. The concentrated short positions have no economic justification, and represent over a year of global mine output. The GATA organization is being vindicated, soon to be granted great respect. Without the outsized naked short position in silver, all completely illegal, all totally protected by the USGovt and its obedient regulators, the silver price would be north of $50 per ounce. The same rigged market exists in gold. Without the outsized naked short position in gold, the gold price would be north of $2000 per ounce. That is where both are heading.

PROSECUTIONS OF US TITAN BANKS

The Big Four banks in the United States had better grow accustomed to legal charges and lawsuits. For several years, they sold toxic assets, misrepresented asset sales, have engaged in naked shorting of metals, have sold bogus derivative products, have laundered counterfeit bonds of various types, have paid in collusion for debt ratings, have engaged in insider trading schemes, and much more. My sources tell of powerful Chinese interests and indirect agents putting tremendous pressure on the USGovt to enforce the law and enforce the regulations, which would effectively release clogged markets and force prosecution. They are ultimately USTreasury Bond creditors and Gold investors. They are angry. Watch the prosecutions and civil lawsuits continue like an endless parade. Watch for exposés and sting operations also.

REFUSALS FOR BANKING DISCLOSURE

The common practice of off-balance sheet usage is rampant. Various devices for temporary account ledger items are under fire. Banks place unsold home foreclosure inventory often off the balance sheet. Bigger banks place wrecked mortgage assets off the balance sheet. Loser credit derivatives and other derivatives routinely are placed off the balance sheet. The USTreasury funds its own USTBond purchases from agencies in the Caribbean, again off the balance sheet. The entire Enron operation, from its Harvard hatchery, its Citigroup funding, and its JPMorgan special purpose vehicles, was an off-shore enterprise also. Proper disclosure involves proper valuation. False accounting prevents the disclosure process. The motive is simple. The big banks are insolvent and do not wish to disclose their insolvency. Lending as a result suffers.

DEMANDS FOR USFED AUDIT

Imagine a nation whose central bank is part of a foreign owned syndicate, with full control of the monetary management, full control of channels to their favorite bank entities, full control of destinations for funds. The USFed is a paid consultant for the USCongress which refuses to disclose its gold inventory, refuses to disclose its currency management, refuses to disclose its disbursement of TARP Funds, refuses to disclose its monetization of USTreasurys and USAgency Mortgage Bonds, refuses to disclose its Wall Street fund swaps, and desperately conceals its money laundering for CIA narcotics funds that enter the Wall Street system. Demands for a USFed audit coincided with a May 6th freakish stock plunge, resulting in watered down language for power to audit the USFed itself. The new bill at least is a foot in the door. Let’s hope it is size 22 like Shaquille O’Neal.

TRILLION DOLLAR USGOVT DEFICITS

After the 2008 fiscal year USGovt deficit was announced in the $1.5 trillion range, shock was felt. The American public was told of a lower $1.3 trillion estimated deficit for 2009. It also ended up in the $1.5 trillion range. Expect the 2010 deficit to again be at least $1.5 trillion. Federal revenue receipts are still trending down for both individual and corporate tax sources. Another stimulus bill is soon to be entered, unless the nonsensical story of a recovery is actually embraced and believed. Funding of the Fannie Mae and AIG black holes is costly. And never overlook the endless wars and defense (offense) programs. Their budgets are sacred, never debated, and always endorsed without delay. The end result is a continued flood of USTreasury creation, at a time when refunding rollovers are required. Gold competes with this travesty, competes successfully, seen as a carnival sideshow moved to center stage. Record debt issuance occurs each month.

MISSING USTREASURY AUCTION BIDDERS

The details of USTreasury official auctions have become a subject of open debate. Irregularities among direct and indirect bidders has attracted attention, bad attention. Simple calculations reveal how USTBond purchases by known sources account for less than half of USTBonds auctioned off, the difference made up by pure monetization in the typical secretive centers like the Caribbean bank centers. The Treasury Investment Capital (TIC) Reports continue to reveal a decline in most nations for USTreasury holdings, yet even more USTBonds are sent into the market. The monetization is the only answer to explain vast anomalies.

PLUMMETING MONEY VELOCITY

A new phenomenon, documented, explained, even with visual aids, was given in the May Macro Economic Report out last week. The monetary base is accelerating upwards at a mindboggling rate. The broad money supply in usage is actually falling, due to reduced lending and loan approval. The money velocity has fallen dangerously low, like to levels seen in the teeth of vicious recessions. Thus the monetary inflation, Bernanke’s reason for being, has not been successful. The relationship between broad money supply and declining labor market is well known, tracked expertly by John Williams and his Shadow Govt Statistics staff. The conclusion is to expect a nasty recession to continue, to reappear, depending on your perspective and level of denial. Money is being thrust into the system, but it is not being put to work, as capital formation is non-existent. Think of a big car burning its engine, revving up wildly, but going very slowly down the road. Blown pistons and gaskets litter the roadway.

ABUSE OF EXCHANGE TRADED FUNDS

The Exchange Traded Funds are a system for Wall Street to control prices for key items. The natural gas ETFund has had little bearing on the natural gas price. The silver ETFund (SLV) inventory has diverged from the silver metal price, the lost correlation as testimony to corrupted management. The lazy investors prefer to own an ETFund out of unwillingness to research or manage the asset, preferring to open the door to corrupt management by Wall Street firms, the same ones who corrupted the mortgage bond market, the muni bond market, the oil market, and the entire stock market. The most corrupt of all ETFunds are the Street Tracks SPDR (GLD) gold fund, the Barclays (SLV) silver fund, and the Goldman Sachs (GDX) gold mining fund. Each of these funds serves an important role in the price fixing, price manipulation, and heavy handed leveraged control of price suppression. If investors are loaded with such ETFunds, then someday they will realize a divergence between the share price and the underlying prices, probably some lawsuits for impropriety and malfeasance, and likely forced liquidations without participation in the rallies observed. As Stewart Dougherty put it, “Big Money is going to be way too smart to buy the Exchange Traded Funds that have been pimped to retail investors as a way to sterlize their money and keep it out of the metals market for which it was internded.” The solution is to own a gold or silver bullion account. See the Sprott (PHYS) fund which is given a 30% price premium, due to integrity.

POLITICAL REACTION TO FAILURE & COLLECTIVISM

The public disgust and anger is growing fast. The Tea Party movement has gained acceptance and vigor at the grassroots level. Some like Bill Clinton attempt to associate the Tea Party participants with terrorists, which is ludicrous. George Washington, Patrick Henry, Thomas Jefferson, John Adams, James Madison, and especially the outspoken Benjamin Franklin might be maligned if alive today, or at least harassed with tax audits. At least one might sit in a secret prison without criminal charges filed. The USCongress is distrusted more than Wall Street. Bankers are despised and disrespected. The people did not want a national Health Care program, but their desires are secondary. The USGovt had better beware of a blossoming of civil disobedience in reaction. One form is not to make mortgage payments. Another form is to drain investment accounts and to purchase gold & silver, coins or bullion, either way.

DISRESPECT SHOWN TO THE UNITED STATES

International prestige has vanished for the United States. The revolt that started against the USDollar two years ago has branched in multiple directions. US bankers are on the extreme defensive, the former ambassadors to economic export. The narco war and oil war have tarnished the US reputation. The military services fraud has tarnished the US reputation. The abuse of NATO airbases has tarnished the US reputation. The Wall Street toxic bond export on a global scale has tarnished the US reputation. The interference with foreign sovereign debt by Wall Street and US-based hedge funds has tarnished the US reputation. The heavy hand of IMF and World Bank leverage, pressures, and poison pills has tarnished the US reputation. The ratcheting trade war and stream of tariffs and complaints by the USGovt have tarnished the US reputation. The Madoff Ponzi Scheme has tarnished the US reputation. The numerous nationalized companies has tarnished the US reputation. The new prosecutions against Wall Street fraud have tarnished the US reputation. The flood of new USTreasury Bond supply has tarnished the US reputation. The lack of leadership in times of crisis has tarnished the US reputation.

FLASH TRADING EXPOSED

In the last two years, much attention has been given the Flash Trading, also called High Frequency Trading, even the basic name of Computer Program Trading. Estimates that 73% of the New York Stock Exchange trading volume is from program trading. So Wall Street is essentially deeply committed to circle jerk endeavors, or exercises to eat each other’ lunch, certainly not producing anything. Paul Volcker accused the financial industry of one good innovation in 20 years, the automatic teller machine. He finds no value in either credit derivatives or computer program trading. In fact, much of the Flash Trading proprietary devices are elaborate insider trading mechanisms that view the order stream and front run. See the Goldman Sachs incident one year ago, when an employee stole the illegal software, but the FBI came to the rescue of GSax and kept the story and device under wraps. The Flash Trading was unleashed on May 6th again. A grand heist ensued, clearly motivated by insider information of a weekend European bank rescue and $1 trillion monetization package. Lack of liquidity is blamed, but so is lack of value. In today’s world of high finance, a flash trade computer program device is a different form of pistol used in a holdup, gunning for the sell stops, filling them at absurdly low levels, mugged on the trading platforms. The Dark Pools in OTC trading account for $60 trillion in annual activity, versus a mere $5 trillion in monitored traffic. That translates to more back alleys for mugging than passageways well lit to prevent criminals at work.

SOVEREIGN DEBT REJECTED

Since late November when the Dubai debt went into default, the sovereign debt crisis has been unleashed like a relentless storm. Following Dubai was Greece, the common denominator being the London and West Europe banks. Denials are shallow minded and stupid when analysts claim that sovereign debt risk is fenced from one nation to another. Contagion will be the norm. Much of the Greek Govt debt is held by Swiss, London, and French banks. So a rescue of Greece is tantamount to a rescue of these big exposed banks. The rash of sovereign debts facing default, or pressure toward default, testifies to the failure of the monetary system. The usage of newly hatched money to fix problems from unbacked untethered unsecured money is lunacy. Eventually, a condition marred by debt constipation results. Uncle Sam needs to visit the toilet for relief but cannot, as his bowels are blocked by debt without benefit of healthy liquidity. His intestines are clogged with financial engineered vehicles, basic fur balls. The next nations to face the sovereign debt hammer of scrutiny and market retaliation are Italy, Spain, France, and then England. The fireworks are nowhere finished. With each new episode, the Gold price will rise further.

FAILURE OF CENTRAL BANK FRANCHISES

The sovereign debt crisis is actually a symptom of the failed central bank franchise system. The central bank had better hurry to produce new global reserve currencies backed and fortified by gold, also possibly by crude oil, or else the fires in the government debt will continue to burn. The end result will be ruined currencies, broken national banking systems, national budgets in tatters beyond remedy, economies ground to a halt, and eventually civil strife. We are witnessing the end convulsions of the fiat paper monetary system. The central banks are powerless to stop the crisis. The $1 trillion European bank bailout plan gave lift to the Euro currency for less than 24 hours. The USDollar is viewed as likewise wrecked and undermined as the Euro. In my view, the simple perspective is that their near 0% interest rates are like a minimal pulse on the banking system, a depleted body lying in the Intensive Care ward. The currencies are all dying. Gold will rise until given proper recognition, then it will rise even more.

GOLD SEEN AS ZERO RISK REFUGE

No charts are necessary. A thousand words might suffice, rather than six charts showing Gold breaking out to new highs across the world. Some major points scream to be told. Here is a list:

· Gold is rising in every single major currency

· Gold is not a hedge against price inflation, but rather against ruined monetary system

· Gold is making new highs in almost every single major currency

· Gold had consolidated in price for four months, the base for breakout

· Gold will reach $2000 in price within the next two years time

· Gold is desperately needed to anchor the failed fiat paper currency system

· Gold is planned for a component role in the new Northern Euro currency

· The sovereign debt crisis has fueled demand for Gold without the full realization that the central bank franchise system has failed along with the fiat currencies

· Quantitative Easing is monetary hyper-inflation, the fuel of the Gold rally

· Gold is urgently needed as a bank reserve to ensure proper function

· Gold contains no inherent counter-party risk

· Gold is in the midst of vast supply shortages

· The Gold Cartel is seeing defections among its allies, who are buying gold bullion after the cartel knocks down the price

· Nations are hoarding their gold mining output, the latest possibly Venezuela

· Gold is seeing panic buying in parts of Europe, like Austria

· Gold mining output is trending down for the past few years

· Gold was by far the #1 investment asset in the entire 2000-2009 decade

· The US Dow Jones Industrial Average is in multi-year decline, in Gold terms

· Gold is protected from human corruption, except in its theft and hollow replacement

· Gold market is receiving heavy scrutiny for corrupt metal exchanges

· The London Bullion Market Assn has been in default since December, bribing on delivery demands to receive cash settlement with a 25% premium paid

· The GLD gold exchange traded fund is a corrupt diversion from metal ownership

· Hong Kong is soon to offer several exchange traded funds for Gold

· Gold can and does rise in price concurrently with the USDollar

· Future payment for oil shipments will require a gold-backed currency

· New barter systems of trade will contain a gold core component

· Gold is the ultimate safe haven asset

· The USTreasury has no gold reserves, as Fort Knox is empty, since the Clinton-Rubin gang leased it and sold it all

· PIGS nations have more gold reserves than the United States

· Switzerland and Canada have almost zero gold in national reserves

· The IMF gold sales are lies, actually closed out USGovt gold short transactions from past years when the Clinton-Rubin gang leased gold for sale

· Gold leased from the Italian central bank was lost by LongTerm Capital Mgmt

· Bear Stearns was targeted for a kill, since it was long in gold, defying Wall Street

· China participates with the IMF sideshow game in order to buy its gold pledges

· If Gold were revalued at 3x to 5x the price, many national banking systems would be restored to health and solvency

· Price hyper-inflation is the likely next blemish on the US landscape, which will fuel broad public gold demand

· Any attempt by the USGovt to confiscate gold would result in a gigantic backfire, with the gold price doubling in price, and US foreign assets subjected to freezes

· Gold will reach its high range when US bankers along with London bankers face a Nuremberg style criminal trial on the global stage

· Prepare for the arrival of a small group of new Gold-backed currencies, the USDollar death knell

· As John Pierpont Morgan once stated under oath before the USCongress and the Pujo Commission in 1913, “Gold is money, and nothing else”

THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.

From subscribers and readers:

At least 30 recently on correct forecasts regarding the bailout parade, numerous nationalization deals such as for Fannie Mae and the grand Mortgage Rescue.

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by Bryan Rich 03-06-10

In my December 26 Money and Markets column I focused on the outlook for 2010, and the looming threats to global risk appetite. I warned that sovereign debt problems posed a major threat to global economic recovery. And I concluded that this threat represented a catalyst for a return of global risk aversion.

I also said that in a global crisis, these sovereign debt fears have the ability to be contagious. Such fears can destroy investor confidence in the capital markets of troubled countries, as well as in the overall global economy.

And when confidence wanes, capital flees … a surefire recipe for falling dominoes. That’s especially true in the wake of a deep global recession that has left many countries with bloated deficits and debt loads.

Despite the European leadership’s attempt to lessen the sense of urgency in the euro zone and despite the ambitious plans rolling out to shave outsized deficits, the problems with governments’ finances are not finding a resolution.

More likely, it’s just the beginning of another major destabilizing force for the global economy. And the result is looking more like another bout with recession … or perhaps depression.

Sovereign debt is setting the dominos up for a fall.

Here’s a brief look at how the dominos are setting up to fall, and ultimately why I think the British pound is the next vulnerable currency, as fear and instability spread from country to country.

Falling Domino #1: Dubai, the Wakeup Call

In late November the Dubai government created a hiccup in the rosy plans that many market participants were increasingly hitching their wagons to: A V-shaped economic recovery.

All of the sudden the new, innovative center for global finance was in default. And contrary to what was assumed, its rich neighbors weren’t there to provide a lifeline.

Now Dubai World’s debt holders are getting only 60 cents on the dollar for their government bond investment.

Falling Domino #2: Greece, Next in Line

Greece, the weakest of the sixteen-member European monetary union, the euro, was running a budget deficit more than four times the limits set forth in the euro-zone’s fiscal constraint guidelines.

The ratings agencies took the alert from Dubai. And they started slashing Greece’s sovereign debt ratings sending out a warning signal to all debt holders and making Greek government debt refinancing that much more difficult.

Falling Domino #3, #4 and #5: Portugal, Ireland and Spain The Next Troubled Spots

Greece isn’t the only euro-zone country in trouble … Portugal, Ireland and Spain all have severely bloated deficits and debt levels. That puts them in violation of European monetary union (Emu) guidelines, not to mention diminishes their outlook for economic growth — a tool desperately needed to start dealing with their red ink.

S&P stripped Spain of its AAA rating.

Consequently, the ratings agencies have put these weak countries under the magnifying glass. And ratings and outlooks have been downgraded. For example, Spain, the third largest economy in the euro zone, lost its AAA rating in January.

In prior Money and Markets columns I’ve discussed in more detail how the developments within these troubled Emu members have exposed structural flaws in the euro and have created an irreparable moral hazard.

Now, European leadership has stepped in and promised to provide support to the most immediate need: Greece.

By doing so it opens the floodgates. Meaning there is nothing to stop the other weak, fiscally-irresponsible members from lining up hat-in-hand to be bailed out by the stronger, more fiscally-responsible ones.

As for the euro, this total breakdown in the foundation of the currency union has it on a path for destruction or, at best, an extended period of uncertainty.

Falling Domino #6: The UK, Looking Grim

The next, most vulnerable and biggest domino in line to fall is the UK. Among G-7 countries, the UK has the weakest performing economy, the largest deficit and the worst deterioration of its debt position.

As conditions get worse in the euro zone and it becomes increasingly evident that there are no clean fixes, the UK is the most likely candidate to come under the gun.

The pound is becoming more exposed to speculators.

The British pound plunged to its lowest level in 24 years against the dollar at the height of the financial crisis … now just a year later it appears another test of that level is in the cards.

And that’s where the outlook for the pound looks grim. Already, this week, negative forces have gathered against the pound taking it to its lowest level vs. the dollar in more than ten months!

So while the uncertainty about the UK government’s finances continues to build, I expect the pound to be the next victim of currency speculators.

Falling Domino #7: The U.S.? In the Crosshairs

In this spread of sovereign debt fears, bond market pressures and falling dominos, the U.S. is in everyone’s crosshairs. And in a scenario where a sovereign debt crisis spreads through the major economies of the world and impacts some of the largest, most liquid currencies, the world doesn’t look like such a safe place any longer.

Therefore, if you’re evaluating your investment options, you’re likely seeking the highest probability for return of your capital rather than return on your capital. And I think the flow of global capital will demonstrate that the currency of choice will be the U.S. dollar and dollar-based assets.

Regards,

Bryan

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The Spain debt outlook is nothing like that of its Greek counterpart. When you get right down to it, Spain looks more like the United States than it does the other European “PIGS” (Portugal, Ireland, Greece and Spain, or “PIIGS,” if you wish to include Italy). It’s because of those U.S. similarities that Spain is fairly unlikely to share the fate of its Mediterranean neighbor, Greece, which is essentially insolvent.

Indeed, in one respect, Spain’s position is actually much better than its U.S. counterpart. We’ll see why shortly.

A Tale of Two Monocracies

Like Greece, Spain suffered from a reviled dictatorship that exited the scene in the 1974-1975 time frame. The dictatorship in Greece ended in 1974 with the collapse of the “Regime of the Colonels,” while the curtain came down on Spain’s autocracy in December 1975 with the death of General Francisco Franco.

However, both the tenure of the dictatorships and the two countries’ reactions to the collapse of their respective regimes were quite different.

Greece’s dictatorship lasted only seven years, was never stable, and occupied itself mostly with corruption, military expenditure and saber rattling in Cyprus. Franco, on the other hand, after winning a truly devastating civil war in 1939, devoted himself over his remaining 36 years to developing his country’s economy on a more or less free-market basis, with low public spending, while maintaining an international posture of caution and neutrality.

With the two countries traveling down such divergent paths, it’s no surprise that they experienced very different outcomes. By 1975, Greece was a total basket case, with only its offshore (and non-taxpaying) shipping sector flourishing, whereas Spain was a rapidly developing tourist magnet, with a substantial industrial economy behind it.

The Next Phase

After 1975, the two countries continued to develop very differently. Greece – which had exiled its king, Constantine II – elected the leftist socialist Andreas Papandreou and in 1981 joined the European Union (EU), where it became a master in the art of subsidy corruption: After all, Greece was the union’s poorest country at that time.

Spain, on the other hand, kept King Juan Carlos, who thwarted a coup in 1981, elected a moderate social democrat government under Felipe Gonzalez followed by a very good center-right one under Jose Maria Aznar. The nation also developed the best luxury tourism sector in Europe, together with one of its best business schools in the University of Navarra’s IESE.

Today, while both countries have similar per-capita GDPs – $33,700 for Spain and $32,100 for Greece – Spain is ranked 32nd on Transparency International’s Corruption Perceptions Index, while Greece is ranked 71st – below much poorer countries like Bulgaria and Ghana.

Spain’s debt load – at about 55% of GDP – is less than half of its Greek counterpart. Clearly, Greece’s GDP per capita needs to be sharply deflated for the country to regain competitiveness; it’s much less clear that Spain needs to do the same.

Why Spain Won’t Flinch

In addition to a budget deficit of 11.5% of GDP in 2010 – very similar to that of the United States – its banking and real estate mess (though the largest bank, Banco Santander SA (NYSE ADR: STD) is pretty solid), and its relatively low debt, Spain (also like its U.S. counterpart) also has itself a left-leaning government with a proclivity for overspending.

Prime Minister Jose Luis Rodriguez Zapatero was unexpectedly elected on an anti-U.S. platform after a terrorist attack in 2004, and was re-elected in 2008 – both times by small majorities. Zapatero is undoubtedly responsible for much, though not all, of Spain’s budget problems; he undertook two economically damaging “stimulus” packages in 2008 and 2009 and has raised public spending from about 38% of GDP when he took office to 46% of GDP today.

In fairness to Spain, the big run-up in spending wasn’t due to a big run-up in poorly thought out handouts: The country moved enthusiastically – perhaps too much so – into the green-technology sector, to the point where an all-too-familiar boom-and-bust scenario played out.

Like the United States, Spain is stuck with its left-leaning administration until 2012 (both have four-year electoral cycles; Spain’s is seven months earlier). However, it has one enormous advantage over the United States – a savings ratio (personal savings as a percentage of disposable income) that stood at an extraordinary 24.7% in the 2009 fourth quarter, compared with a mere 2.7% in the latest month here in the United States.

Admittedly, Spain’s saving is highly cyclical, so the annual average is only about 20%. Nevertheless, the much-higher level of domestic saving suggests Spain should be able to finance its budget deficit domestically much more easily than will the United States.

With public debt also lower than in the United States – let alone in Greece – Spain’s position is thus fundamentally sounder. It should be relatively easily able to navigate the current storm and ride out the current government’s spendthrift tendencies – giving the voters the chance to put a more-fiscally-appropriate government in place in the next election.

That being said, investors have to acknowledge that panic can trample logic. Indeed, as U.S. investors learned all too well back in 2008, in a market panic even well-run institutions can get into trouble (not that many of the Wall Street houses of that year were well-run, but a few were).

The same is true of countries, and Spain under Prime Minister Zapatero has weak-and-economically damaging leadership, which the voters are stuck with for another two years. Nevertheless, with its debt rating still a very respectable “AA,” only the worst storm should cause Spain to take the same kind of crisis-spawned battering that Greece continues to face.

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The ascending dominance of the “Currency Contagion” meme will raise the selling price of this asset 197%.

It’s all about faith, my friends. And unfortunately, that’s an increasingly rare commodity these days.

A body participates in a system if they have reasonable faith of making a decent return. If they have no faith – no expectation that the system will honor and reward their participation, they will eventually cease to take part in it, and the system will collapse.

Dogs pack up, because they figure that they might lose a piece of their next meal to the pack’s alpha male, but they have faith that the pack is the best way to assure that there will be a “next meal” on a pretty regular basis.

The Cost of Failure

It may take a while before they notice that they are missing out on a regular basis. But it is a given that a pack that does not expect adequate food will begin to slowly lose members. When things get bad enough, the remaining dogs will gang up and expel the failed Alpha.

Similarly, human participation in transactional relationships requires a certain measure of faith.

On the simplest level, one must have faith when one is trading goats for wheat that the gentleman across the table from you will not smack you upside the head with a large stick, and walk off with the goats, the wheat and perhaps your clothes, stone axe and mate. Thus we have open palm salutes and handshakes, wherein we establish to one another that we are not concealing a weapon of some sort.

Currency: A Valuable Fiction

Now let’s take things up a notch in complexity. Some say that currency exists because it is a bit of a pain dragging around goats and carts of wheat with you all the time. But really, currency exists because it allows for specialization of labor.

I might be particularly good at raising goats, while the fellow across the way is better than I am at keeping bugs out of the wheat. Neither of us makes a halfway decent boot mind you, but that’s OK, because a chap in the next town is a whiz with a scissors and a hammer.

A currency of some sort allows each of us to focus on what we do best. It also allows a body to store wealth without worrying about the smell a pile of dead goats inevitably generates.

However, any currency, be it shells, beads, coins or pieces of paper, requires a great deal of faith. One must trust that each iteration of that currency, each bit of specie will retain its value over time, or it cannot possibly be an adequate storehouse of value.

One must have faith in the creator of said specie, or the whole system falls apart, and we are stuck hauling about cartloads of stuff again. Worse yet, I would have to make my own shoes, and I am quite sure that my feet would suffer awfully.

The Gold Bug Fallacy

As long as we are discussing currencies, I’d like to take a moment to address a common fallacy. Many folks in this business like to label all command currencies as fictive and therefore undeserving of your faith.

They frequently have a good point there, as most every government has inevitably debased its command currency so as to ease the burden of paying its debts. In plain English, they borrow goats and print bucks to pay off the loan.

But these same folks will point to certain minerals as having “genuine value.” Gold and silver are the usual favorites because of their pleasant coloration and heft and relative resistance to corrosion. However attractive these bits of rock may be, their ability to retain value is simply a meme, a thought shared by millions perhaps, but still just as fictive as any paper currency.

But Can You Eat It?

A friend asked me recently if I concurred with the idea that “all hell was about to break loose,” and what they might to do about such things. They thought that perhaps they ought to convert a substantial portion of their holdings into gold coins of some sort.

I am not so sanguine as to the eventual fate of our current systems as to completely disregard his point. But I did suggest that if he really thought that our civilization was verging on one of its periodic dark ages, he might do better to invest his money in a few courses at his local community college.

In particular, he should acquire the ability to grow corn, clean and patch wounds (and given a little more time, deliver babies), prop up roofs, and brew alcohol (the basis of most all chemistry). Learning to make shoes wouldn’t be a bad idea either.

In a real crisis, you can’t eat gold. At best, I suppose you could put a chunk or two in a sock and kill marauders with it.

As much as it is romantic to ponder such dramatic turns of affairs as dark ages and depressions, I am not really looking to address such complete societal breakdowns in today’s column.

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The Price of Faith…

Let’s presume for a moment that we will indeed be able to buy shoes for some time to come, and focus instead on the decline of the meme of faith as it pertains to certain of our fiscal systems.

Currencies are not the only fiscal contracts that require faith in the issuing party. The same is most certainly true for both stocks and particularly, bonds.

No one in their right mind would lend to a company, town or country if they had no faith whatsoever in the borrowing entity’s intent or ability to repay that loan, preferably with some interest. But these things are seldom absolute, so we posit an inverse relationship of faith in repayment against additional cost asked of the borrower.

…And the Cost of Risk

Right now, for example, the more fiscally sound portion of the EU (read as Germany and France) is pondering how much interest it must charge the less sound “PIIGS” states in return for lending them adequate funds to avoid bankruptcy.

The problem is, very few honest observers have any faith that Greece et al. will ever change their spendthrift ways. So if Germany and France participate in a rescue package, will this increase faith in the European Union’s future? Or will the rest of the world lose faith in Germany and France as well?

And once this “Loss of Faith” meme begins to ascend and replicate, will it become dominant within the “Menome,” the total global kettle of conscious thought? Once folks start to ponder the ability of sovereign governments to honor debt through their own specie, the illusion of both debt and command currency (always a bit tattered around the edges) begins shred entirely.

A Dangerous Descent

The last time we saw such a breakdown was the Asian Contagion episode of 1997, wherein faith in the ability of government to control the ability of currency to act as a reservoir of value was stretched to the breaking point. And that time around, the focal point of the loss of faith was halfway around the world. We were able to comfort ourselves – to find faith – in the idea that Western governments would never engage in such dangerous shenanigans.

View Larger Chart

This time, the focal point is right here in the West. When one peruses such newspapers as the International Herald Tribune, one is treated to multicolored displays reveling in the sheer impossibility of genuinely solving Europe’s Gordian knot of debt.

Stateside, one cannot go a day without reading of the overwhelming weight of debt Washington has taken on. These figures are critical both as facts, and as ascending memes, ideas that are gathering power in the minds of more and more investors. As faith in sovereign debt and currency declines, investors (at least those who are not pondering a new dark age) are looking toward the usual safe harbors of gold and silver.

Critical Memes

As mentioned earlier, I have no particular faith in gold and silver’s inherent values. But I do note with much interest the relative increases in the rate of uptake of the “Gold” and “Silver” memes.

Gold has long been the obsessive’s dream, the stuff they make movies like “Treasure of the Sierra Madre” about. But silver does a heck of a lot more of the heavy lifting. As Nobel Laureate economist Milton Friedman is said to have told Jim Blanchard, “The major monetary metal in history is silver, not gold.” Think about it: Gold is kept in vaults around the world – but most every coin in your pocket right now is covered in silver.

Both gold and silver have been used to hedge against inflation driven crashes like we saw in 2007 (and like we are about to see again in 2010). In October of 2007 the S&P 100 was trading at 714.51, Gold futures were $745 an ounce, and silver was available for $13.89. (That’s a ratio of 53-to-1, an important figure we will come back to in a moment.)

Six months later, the stock market was down 18.32% (on its way to a total loss of 56.79%). Gold futures were up to $1033.9 an ounce (a gain of 38.78%) and silver was up to $18.85, a similar gain of roughly 36%. The relationship between gold and silver was still holding even at about 55-to-1.

A Curious Gap – and 197% Gains

We are approaching a critical moment in the market very similar to the precipice we stepped off in 2007. Oil is skyrocketing again, and is spreading its inflationary poison throughout the system.

But investors are facing an extraordinary problem: Gold’s nonstop rise over the past year has already pushed futures to $1,166 – just a whisker away from its all-time high. Silver has also been rising. But its current price of $17.27 an ounce leaves it 18.46% shy of its March 2008 high of $21.18.

More importantly, there is a unique distortion in the ratio between gold and silver: Right now it takes almost 68 ounces of silver to buy an ounce of gold! This gap cannot last more than a moment or two, as investors looking to hedge against stocks rush in to take advantage of silver’s discount to gold.

With this closing gap in mind, I suggest to you that you expose yourself to silver’s pending upside. Since I retain the view that even silver’s value is in the end just as fictive as any five dollar bill, I suggest instead a vehicle such as iShares’ Silver Trust ETF (SLV:NYSEArca). My charts indicate a pending upside run that could easily add 30% to SLV’s current share price of $17.19.

Taking this idea another step, I have suggested to my WOW readers that they divorce themselves even further from physical silver, and involve themselves primarily in SLV’s upside motion via the purchase of select SLV calls, with the intent of harvesting gains ranging as high as 197%.

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Whilst politicians of all the major parties during the general election campaign continue to ignore the giant debt elephant in the room as the general public continue to prefer to be deluded into thinking that Britain can skip the debt crisis that faces the country as a consequence of Greecesk levels of annual deficits and foreign liabilities that have pushed Britain significantly along the path towards hyperinflation and bankruptcy (debt default to foreigners), as many of the trend projections concerning the looming debt mountain, banking and public sector’s liability expectations made in November 2008 (Bankrupt Britain Trending Towards Hyper-Inflation?) have come to pass, against which NOTHING has been done or stated will be done to prevent ultimate national bankruptcy as warned of in November 2008.

28th November 2008 Conclusion
Britain is Not bankrupt and not likely to go bankrupt in the immediate future, however Britain is on the path towards Bankruptcy if it goes on the projected borrowing spree that lifts real debt to £3.2 trillion and is forced to take on banking system liabilities of £5 trillion, under such a situation the country would be bankrupt as the currency would collapse, and we would not be able to service the debt much of which would be denominated in foreign currencies given Britain’s position in the global financial system. Though the more probable outcome of stagflation for many years (low economic growth, high inflation and interest rates) that erodes the value of domestic debt and savings would in itself be a bad outcome for Britain. The only real solution is to limit the growth of real public debt by cutting back on public spending and bringing public sector pensions inline with the private sector, both of which will be positive signals to the UK debt market and banking system.

Labours Last Budget

Alistair Darling delivered his last budget just prior to the start of the election campaign that contained a few election gifts amounting to a £2 billion giveaway to be clawed back with a few mostly delayed tax hikes. However the key item missing form the budget was how the Government will fulfill its often stated target of halving the budget deficit over the next 4 years.

The chancellor has revised his budget deficit expectations for the financial 2009-10 from £178 billion to £167 billion. The government projects that the annual budget deficit will fall from the last financial years 12% of GDP to under 4% by 2014-15. The forecast annual budget deficits are for 2010-11 £163bn, 2011-12 £131bn, 2012-13 £110bn, 2013-14 £74bn.

The following graph illustrates the revisions in government borrowing expectations since my original analysis and forecast for annual UK budget deficits of November 2008.

Therefore the Labour governments own expectations are for an additional £478 billion of borrowing over the next 4 years that will be ADDED to the existing total debt as of end of the last financial year that is estimated to stand at a total of £870 billion, therefore according to the Labour government total public sector net UK debt by the end of 2013-14 will increase from the current 62% of GDP to 90% of GDP (after allowing for economic growth).

This compares against my November 2008 target that projects an additional £670 billion of net borrowing for the same time period, against Alistair Darlings original projection of £120 billion. I will hold off revising this total lower until later in the year once the the new government has made its true intentions known.

Even if Britain is able to halve the annual budget deficit over the next 4 years it will still mean that the government plans to borrow an ADDITIONAL £478 billion.

Labour Manifesto

With election fever in full swing Labour announced their election manifesto yesterday that in great detail listed a string of promises to increase spending and not to increase income tax.

Key Manifesto Points

• Halve the annual deficit of £167 billion
• NO increase in Income Tax
• An internationally agreed Bank tax
• Sell off nationalised banks
• Health reforms to make the NHS far more accountable to the patients it purports to serve
• A myriad of minor spending promises amounting to at least £2 billion a year.

What’s Missing from the Labour Manifesto

Again the key element missing from the manifesto is how Labour will fill the £167 billion black hole in the countries finances. The promise of halving the deficit from £167 billion to about £75 billion and there in lies Labours credibility gap with the Conservatives not much better as I will elaborate upon later.

Debt Fuelled Economic Growth

Taking an average achievable growth rate of 1.5% per annum for the next 4 years implies that Britain will grow GDP by a total of £213 billion. However to achieve this growth and based on the governments own figures, Britain will borrow an additional £478 billion. So Britain is in effect borrowing more than £2 for every £1 of extra economic growth. If that does not illustrate a country that is on the road towards bankruptcy then nothing will. Labour ignited the debt fuelled boom during mid 2009 which I covered at length in articles such as – 03 Jun 2009 – UK Economy Set for Debt Fuelled Economic Recovery Into 2010 General Election, and analysed at length in the Inflation Mega-Trend Ebook (FREE Download)

Nothing has changed as the Labour government looks set to deliver the forecast scorched earth economy to the next Government, something that Britain will have to suffer the consequences of for at least the next 5 years as the country looks set to enter into a prolonged period of stagflation as the government attempts to inflate some of the debt and interest burden away.

Britain Will Eventually Go Bankrupt

Britain will at some point default on its debts to foreigners (as it has done at least twice before), this is INEVITABLE because ALL countries eventually DEFAULT on their debts, it is only a question of when i.e. in the next few years or delay bankruptcy for many decades and therefore results in the relative risks of default which the market prices. INFLATION is a symptom of the trend towards bankruptcy as it is a measure of the continuous COMPOUNDING loss of purchasing power of the currency. The best that governments such as Britain have been able to achieve is the slow stealth trend towards bankruptcy where people don’t realise the loss of purchasing and wage earning power over time. However with government debt heading towards 100% of GDP, Britain looks set to leave the stealth trend towards bankruptcy behind and about to accelerate a few notches higher which risks igniting a wage price spiral that ultimately ends in a hyper-inflationary bust.

Where Britain Stands In Terms of the Global Trend Towards Country’s Going Bankrupt

All countries are on the path towards bankruptcy, to measure where a country stands along this path it is critical to look beyond official statistics that focus primarily on public sector net debt and the annual budget deficit in terms of % of GDP.

The key item missing from most commentary on this subject matter is debt and liabilities that are denominated in foreign currencies as that can mask a stealth trend towards potentially imminent bankruptcy that can suddenly blow up in the face of a countries citizens who had been previously mislead by official statistics into thinking that the debt situation was under control, much as Icelanders experienced during 2008 where one day they enjoyed one of the highest standards of living amongst westerners to next day wake up to be bankrupt and poorer in terms of purchasing power than many third world countries. The key driver for state bankruptcy and currency collapse is the amount a country owes or is liable to foreigners, as debt denominated in foreign currencies cannot be inflated away as governments can do with domestic debt so it is one of the primary driving forces for a country going bankrupt as it is unable to meet the increasing interest payments due in foreign currency as its own currency falls.

The following graph attempts to paint an accurate picture of the current relative state of the trend towards bankruptcy of the worlds major economies which takes into account public and private debt, unfunded liabilities, budget deficits, and debt denominated in foreign currencies, as well as taking into account the historic track record of the countries in dealing with past debt crisis. The results are shown as a % of the countries risk of going bankrupt where Iceland would be at 100% following its defacto debt default.

Whilst the mainstream press these past two months has been obsessed with the Greek debt crisis, the above graph clearly illustrates that a far larger debt crisis looms in Ireland that could soon transplant Greece in the debt crisis headlines over the coming months, similarly a number of other Euro Zone countries head the risk towards bankruptcy league table with Belgium and Portugal not far behind Greece. The price that these countries pay for being stuck in the Euro single currency is that they cannot devalue to try and gain some competitive advantage for their economies and therefore try and grow and inflate their way out of a high debt burden that stifles economic activity.

However they also benefit from the fact that had they not been in the Euro then many of these countries would also be where Iceland is today as they would no longer be able to service the debt denominated in foreign currencies as their own currencies would have crashed as investors rush to the exit to preserve as much of the purchasing power of their investments into alternative currencies. The consequence of this in ability to devalue is deflationary as the economies contract in an attempt to reduce the debt burden and budget deficit as they attempt to move to a new sustainable equilibrium within the Euro block that demand greater competitiveness by means of reduction in costs i.e. by deflating wages, failure to do this results in higher interest rates and therefore a greater debt interest burden which again risks default.

The above graph puts Britain on a current 20% risk of going bankrupt i.e. defaulting on foreign debt, which whilst lower than the likes of Ireland, Greece, Belgium and Portugal, Britain is deemed to be of greater risk of bankruptcy than that of other oft mentioned PIIGS Spain and Italy, and significantly above that of the other large economies such as Germany, Japan and the United States.

Countries at higher risk of default can also be expected to experience relatively higher inflation rates as they attempt to competitively devalue their way out of the debt crisis, which is what Britain has been doing for the past 2 years that has seen the British Pound fall against the U.S. Dollar from £/$2.10 to £/$1.53 today, which is a devaluation of 30% and a devaluation against the Euro of 22%.

This also suggests that Euro block countries such as Ireland, Greece, Portugal and Spain will increasingly demand some sort of mechanism from within the Euro zone to achieve a similar competitive advantage outcome / debt financing other than suffer the ongoing deflation (latest news is that of a £40 billion Greece bailout). This could take the form of investment and subsidies to depressed regions of these countries, much as transpired when these countries originally joined the Eurozone, including the ECB buying PIIGS debt, the bill for all of which will ultimately be paid for by Germany as it is forced to distribute profits / gains from its competitive advantage as a consequence of the single currency that does not allow other countries to devalue and therefore unable to compete against Germany

One of the suggestions is that some of the PIIGS may leave the Euro. However I do not see how these countries can leave the Euro as that would immediately lead to a loss of confidence in the countries debt as investors would rush for the exit knowing full well that the countries currencies were destined to fall sharply under the weight of money that these countries would seek to print to attempt to inflate their way out of the the debt crisis, which would not work given the fact that a large proportion of the debts are denominated in Euro’s against which their new floating currencies would more or less collapse. So, there is no chance of these countries leaving the Euro zone, not unless they are kicked out by the Germans due Germany being sick of bailing them out, which would imply a break up of the E.U., that I do not seek happening.

In terms of overall bankruptcy risk (defaulting on debts to foreigners), many of the smaller euro zone countries stand at the extreme end of the bankruptcy spectrum, with the new emerging giants turning the tables on the western world that puts countries such as China at lower risk of default than even the United States. The graph also shows that much of the doom and gloom commentary in the mainstream press surrounding a debt crisis in the U.S. and Japan is not visible in the overall data, where the actual risk of bankruptcy and default remains low at this point in time. Which is ironic when one considers that Japans public debt stands at 200% of GDP, compared to Irelands of 74%, which is due to the fact that Japan is able to finance its debt domestically due to the high savings rate in Japan which in fact also finances a large portion of U.S. debt, off course in the end Japan will still go bankrupt, even if it is able to continue pumping out more debt all the way up to and beyond 300% GDP.

In conclusion when investing or holding fiat paper such as bonds, investors need to evaluate the risks of a country defaulting as the higher the risk the more likely that countries debt (bonds) will lose value as the market will demand higher interest rates to finance the debt. Whilst countries at a lower risk of defaulting such as the emerging giant of China, represent a better risk for capital appreciation for investments made in that economy, especially for those that are investing from a high risk countries such as Britain i.e. currency advantage as discussed in the Inflation Mega-trend Ebook.

The full implications of the unfolding debt fuelled Inflation Mega-Trend including forecasts trends for major markets for many years are contained within the FREE Inflation Mega-trend Ebook , which includes analysis and precise forecasts for:

• Interest Rates
• Economy
• Inflation
• Gold & Silver
• Emerging Markets
• Stock Markets
• Stock Market Sectors and Stocks, including ETF’s
• Natural Gas
• Agricultural Commodities
• House Prices
• Currencies
• Crude Oil

Over a 50 year time frame, I would imagine that 90% of the worlds countries will default on their debts, which probably would include Britain. That is not to say that it would take 50 years to default as debt default does not occur out of the blue but is the end point of a trend and in that respect Britain is firmly on the path towards default along which lies currency depreciation, high inflation, economic stagnation and finally culminating a hyperinflationary crash. Off course we can delay the inevitable default by taking measures to bring the budget deficit under control or we can ignore the deficit and fasten the pace towards bankruptcy.

Whilst Britain is much further along that path then it was back in November 2008, and given the above facts of an additional £478 billion of borrowing over the next 4 years, the price for which will be paid in terms of higher interest payment debt burden on the economy and thus higher inflation the closer we reach the crunch point of high inflation and ultimately a hyper inflationary collapse.

Four years from now total debt (PSND) will be in the region of £1.4 trillion, the market will demand interest rates several % points premium to that of the U.S. and Germany, which would result in a debt interest burden of over £70 billion a year being sapped out of the economy against today’s debt interest burden of about £32 billion, more than double today’s debt interest burden much of which will be being added to the total debt as well as structural deficit spending which will be pushing the country further along the path towards hyperinflation and bankruptcy.

Unfunded Liabilities.

Whilst the government mainstream press and academic economist focus on the public sector net debt and respond to worthless statements out of discredited ratings agencies that should have been prosecuted for putting phony ratings on junk bonds just as they are putting phony ratings on subprime sovereign debt today. However official net debt still continues to represent just the tip of Britains debt ice-berg, as we also have giant unfunded liabilities that continue to explode ever higher, leaving aside the £1 trillion of bad bank loans, that the government is insuring, we have the unfunded public sector gold plated pension liabilities that even 2 years ago were estimated at over £700 billion. That £700 billion of public sector liabilities has now mushroomed to £1.2 trillion today, which is greater than current public sector net debt total of £870 billion.

The below graph was last updated a year ago which illustrated the total liabilities of £4.7 trillion by 2013-14, if anything given the latest projection for public sector pensions total liabilities look set to be as much as £500 billion higher. All of this is a sitting time bomb that will explode in the government bond markets as illustrated in the Inflation Mega-trend Ebook.

Budget Deficits a Compounding Drain Economy

The larger the deficits and the longer they run for the greater will be the long-term impact on the economy which will continue to sap future growth. This is because the financing of deficits primarily from the government bond market saps investment in industry, technology and innovation i.e. the drivers of future growth OUT of the economy. For instance the government’s net borrowing of £167 billion for 2009-10 means £167 billion of cash sucked out of the financial markets including banks that would have gone to investment in industry. This WILL have a direct impact on future growth for EVERY year for a decade. How much ? £167 billion is approx 12% of annual GDP, which taking account of compounding of future growth is impacted by 0.4% per annum over the next 10 years, that is productive output lost, add another £478 billion over the next 4 years as is highly likely then Britain will be in STAGFLATION. Where does the growth come from if there IS little or no investment because the Government like a giant debt hoover has sucked up a large part of the investment capacity of the country to finance the deficits. That is why there is an urgent necessity to get the deficit under REAL control or less Britain faces a LOST decade of economic output, on par with that of the 1970’s if not WORSE!.

Public Sector Bankrupting Britain

The government is set to spend an estimated £677 billion on the public sector (2009-10), that is currently running an ANNUAL £167 billion deficit, i.e. the government spends £167 billion a YEAR more than it earns in revenue which is contributing towards igniting Britains inflationary debt spiral that is feeding the accelerating trend towards an hyper inflationary bust leaving savers with worthless paper and the economy in ruins, i.e. bankrupt.

The above Government spending graph illustrates the amount Labour has plowed into the public sector annually over the past 13 years over and beyond inflation. For instance when Labour came to power government spending was at £318 billion which allowing for inflation would today stand at £408 billion. However Labour is spending an extra £270 billion over this as Labour continued to run a budget deficit even during the boom years which has today left the country with an annual budget hole of £167 billion. To say that the public sector has become bloated under Labour is an understatement as it is probably 25% larger than it should be i.e. government spending should be in the region of £508 billion instead of the current £677 billion. Out of control public spending by the Labour government is illustrated by Britains sacred cow, the NHS.

NHS Bankrupting Britain

The NHS budget under Labour has grown from £40 billion in 1997 to £121 billion for the current financial year. NHS budgets increasing in line with inflation (CPI) would have seen the budget under a Conservative regime rise to stand at £51.6 billion, and probably nearer £60 billion to allow for an ageing population. So the Labour government is in effect spending an extra £60 billion a year, more than double that which the Conservative would be spending on the NHS.

Against this extra spending instead of Britain’s experiencing the impact from effectively paying for TWO NHS’s, the NHS is experiencing year in year out loss in productivity, i.e. the more the government spends on the NHS the LESS output the NHS delivers as more tax payer funds disappear into the NHS black hole. In theory this suggests that the NHS budget could in-effect be halved to £60 billion and still deliver a functional health service that the the country can afford. Off course that is not going to happen, but still a mere 10% cut in the NHS budget would contribute some £12 billion of annual savings from this out of control spending black hole that like a cancer is pushing the country towards bankruptcy.

The government’s annual budget deficit is running at £167 billion a year or at 25% of the total budget i.e. the the governments total revenues are £510 billion against estimated expenditure of £677 billion, hence a deficit of £167 billion added to the national debt known as the Public Sector Net Debt (PSND) currently standing at about £870 billion, though excluding the hidden tax payer liabilities that extend to several more trillions of pounds. Nevertheless £870 billion of debt would cost about £35 billion in interest per year to service this debt, as the debt grows so does the cost of servicing the debt, more so as the supply of government bonds increases then so will the market demand ever higher interest rates to buy this flood of debt which illustrates why running anywhere near an £167 billion annual budget deficit is NOT sustainable, as it would ignite the earlier mentioned inflationary debt spiral as interest payments soar which therefore requires urgent action to CUT the deficit to BELOW 6% of GDP / £75 billion, with £102 billion necessary to be cut comprising of tax increases, economic growth and spending cuts in the region of £60 billion.

However, both major political parties have announced that they are not only not going to cut spending on the largest spending departments of Education or the NHS but GROW these budgets over the coming years. Similarly both parties have pledged to grow pensions and neither can I see how welfare can be significantly cut as the unemployed will remain unemployed until they get a job. Furthermore debt interest at £35 billion per year is expected to continue to grow inline with each month the government racks up another large deficit (upto £18 billion per month), which therefore suggests that of the total £677 billion spending budget, the maximum that both parties are making available to be cuts from is only £215 billion.

Whilst both parties continue to lie the electorate as to the amount of public spending cuts needed to fill the £167 billion black hole. However maximum measure of a 10% cut of the available budget heads of £215 billion, which even if achievable would only result in a cut of £21.5 billion, which would not make the necessary dent in the annual deficit in order to prevent the inflationary debt spiral from taking hold and all of the consequences of loss of confidence in sterling.

Government spending at approx 25% more than revenue is not only unsustainable but represents out of control spending that is risking severe consequences, including state bankruptcy i.e. debt default. In response to the urgent need to cut spending the politicians repeatedly fail to identify where and how this deficit will be reduced, instead repeatedly stating for purely electioneering purposes that they will ring fence and not cut the big budget spending heads of NHS and education, which is an impossible outcome as I explained in early January (03 Jan 2010 – British Politicians Lying to the Electorate, NHS Budget 4% Cut (Minimum), that this amounts to politicians lying to the electorate.

Whilst both political parties profess to not only not cut the NHS budget but to increase spending over the coming years. The fact is that the NHS budget under the Labour government has grown to a level that risks bankrupting the country. In nominal terms the budget has increased from £37 billion in 1997 to approx £120 billion for 2009, a more than tripling of the budget.

However a more accurate measure of the increase of the budget is as a percentage of Gross Domestic Product (GDP), in this regard the NHS has grown from 6% of GDP in 1997 to 10% of GDP now, therefore Britain is paying 66% more in NHS spending as a proportion of the economy will little improvement in service delivery due to a near continuous fall in productivity. This and other rampant out of control public spending under the Labour government risks bankrupting Britain as the ANNUAL budget deficit now exceeds 14% of GDP (£180 billion) which requires urgent action to prevent igniting an inflationary debt interest spiral i.e. where the interest paid on accrued debt results in a mushrooming of the countries total debt burden that tips the economy towards an hyperinflationary price spiral economic collapse as the following graphic illustrates.

Therefore both major political parties are lying to the electorate when they state that the NHS budget will not only not be cut but increase spending over the coming years. So far only Labour has actually released their NHS spending plans which show an increase of £3.7 billion / 3% per year for the next 3 years, whilst the Conservatives have pledged to match Labour NHS spending plans.

The next government will have NO CHOICE but to cut NHS spending, as the Labour party current plan for cutting the annual budget deficit by £23 billion a year just do not stand up to scrutiny as it would still result in the budget deficit expanding by £510 billion over the next 5 years, i.e. to more than 114% of Public Sector Net Debt which the financial markets would NOT tolerate, i.e. it would result in a series of bond market auction failures, which would be countered with accelerating money printing to monetize the debt which would culminate in an Iceland style currency collapse as foreign investors panic to preserve the value of their capital by selling out of sterling in favour of other currencies.

NHS GP Pay Illustrates Out of Control Spending

British MP’s were humiliated during May and June across all parties as public outrage and indignation oat the abuse of the MP expenses system with MP’s responding with how MP pay has failed to keep pace with that of NHS GP’s which is one of the key reasons as to why they had resorted to what amounts to legalised theft from the electorate.

MP – NHS GP Pay Comparison

When Labour came to power in 1997 average MP pay was £43,722 against average NHS GP pay of £44,000, so both were inline with one another at that time. However as the above graph clearly illustrates in 2003 something started to go seriously wrong with GP Pay which took off into the stratosphere as GP’s decided to award themselves pay hikes of more than 30% per annum at tax payers expense that has lifted average GP pay to £126,000 per annum against £64,000 for MP’s.

How could this happen, unfortunately this was as a consequence of the now infamous GP contracts where to be blunt greedy GP’s hoodwinked gullible incompetent Labour government health ministers into signing upto contracts which were meant to deliver greater value for money for the tax payer but were designed to do the opposite and resulted in GP’s pay doubling whilst at the same time cutting back on hours worked. This was not only a total fiasco for the nations health and finances but also ignited jealousy amongst MP’s that directly led to the adoption of the policy of claiming expenses to the maximum so as to fill the ever widening gap between MP’s and NHS GP’s, as MP’s could NOT get away with awarding themselves pay hikes of 30% per annum without losing their seats at the next general election in response to voter outcry, therefore across the board systematic abuse of expenses started to take place which basically means real average MP pay is currently approx £98,000 per annum.

Cutting the Deficit

Spending Cuts
Labour has already announced £15 billion of efficiency savings instead of cuts. The Conservatives have announced a FURTHER £12 billion of efficiency savings on top of Labours £15 billion. In actual fact there will probably be little if any actual efficiency savings, therefore the word cuts should be exchanged for savings. In plain english Labour proposes to CUT Public Spending by £15 billion and the Conservatives by £27 billion per year. In total Labour cuts of £34 billion over the next 4 years are set against Conservative cuts of £82 billion minus £18 billion NI tax withdrawal for a net of £64 billion.

Whilst Labours cuts of £34 billion might sound like a large amount, however set this against the ADDITIONAL borrowing of £478 billion over the next 4 years. It is just NOT enough. Even the conservatives £64 billion will likely make only a small dent in the exploding debt mountain, what this suggests is that the market WILL force the next government to CUT the deficit and therefore spending by far more than any party is going to even hint at during the election campaign, we are talking along the lines of a £200 billion cut in public spending over the next 4 years, that’s 6X Labours electioneering figure and 3X the Conservatives.

Where the NI debate is concerned, on balance the Conservatives have probably a better policy in that the NI hike will result in less people being employed due to the rise in employer contributions and therefore marginally less economic growth and it is ONLY economic growth that can save Britain from the debt crisis, spending cuts are necessary but they will not solve Britians debt crisis, all spending cuts will do is to DELAY BANKRUPTCY.

Also the NI tax rise sends the wrong message to companies, as it will prompt more UK companies to seek to offshore existing and new jobs to China and India. So it IS a tax on Jobs, the sensible thing for Labour to do would be to abandon part of the tax rise on employers, just as they appear to have done with the cider 10% tax hike that was due to come in on the 6th of April but now has been delayed until 1st June.

Clearly the spending cut totals without any breakdown are not credible. Labours average of £8.5 billion a year and the Conservatives £16 billion a year are just not going to be enough, which suggests to me true spending cuts are probably going to be in the region of at least £30 billion, about double that of the Conservative proposed cuts or about 5% of Government spending, whilst not as far as the £50 billion a year that I would prefer, though probably more politically palatable and implementable.

Economic Growth
My existing forecast for the UK economy is on track for 2%+ growth for 2010, therefore this should imply a 3% tax revenue boost to the Treasury and therefore reduction in the annual deficit of an average of £20 billion a year.

Tax Rises

Scheduled tax rises have already come into force during 2010, with the first on 1st of Jan 2010 when VAT went back up from 15% to 17.5%, a new 50% upper tax band on those earning £150k+ and the hotly debated NI tax hike scheduled to follow in April 2011. Add to this the expected VAT hike to 20% that could raise a further £13 billion per year. In conclusion total tax revenues could increase by a sizeable £30 billion a year and contribute to a significant dent in the annual budget deficit.

Budget Deficit Cut Conclusion

A credible plan could be formulated to cut the annual budget deficit by means of spending cuts of £30 billion, tax hikes of £30 billion and increased revenues from growth of £20 billion to total an approx £80 billion reduction in the annual deficit to £87 billion or about 6.2% of GDP. This would still mean that total debt will grow by £348 billion so would require additional initiatives to boost economic growth as I will touch upon later.

1/2 Million Public Sector Job Losses Coming

The politicians public sector smoke screen on job losses continues during the election campaign with both parties stating that there will be no redundancies instead ‘natural’ job losses in back office jobs. That is another politician lie as 1/2 million public sector jobs or about 8% could go over the next 18 months. That is the only way the spending cuts that have been enumerated above will able to be implemented. In terms of the unemployment forecast, my existing forecast as of October 2008 expires this month that forecast a UK unemployment total of 2.6 million by April 2010, which is set against academic economists and mainstream journoconomists that as little as 6 months ago were forecasting UK Unemployment would hit between 3 and 3.4 million by April 2010.

Public sector job losses of 1/2 million during the next 18 months time will mean a higher unemployment total against where it is today, however as long as the the economy continues to grow as I expect it to do so i.e. add jobs and spreading the public sector job losses out over this time period should mean only a small rise towards a target of 2.75 million.

The Economically Inactive Benefits Culture

Britain spends £106 billion a year on social security on the over 8 million of people of working age who are termed as economically inactive. There exist vast swathes of the country where there exist benefits estates where there is no work ethic and the key strategy is for people to maximise benefits received by producing as many babies as possible. Few of these so called parents intend on performing their parenting duties as children are left to roam feral on the streets, spreading fear and petty crime in neighbourhoods.

The next government needs to seriously get to grip with the benefits culture both in terms of offering incentives for those who have chosen not to work to change their mindset and work for a living rather than rely on the state to pay for everything from cradle to grave, and also to wield a big stick. Labour has failed miserably where there was NO DROP in the number of economically inactive during the boom years as the below graph illustrates. Based on the past trends the Conservatives could bring into force such policies that would change the nature of the perpetual benefits culture as they had succeeded in doing during the past that could turn an estimated 2.5 million of those that could work into productive wage earning, tax payers that would contribute to filling the budget deficit gap, probably to the tune of £40 billion per year.

UK Government Bond Market Ticking Time Bomb being Primed to Explode

The Government have bent over backwards in an attempt to force and keep UK interest rates both at the short-end and the long end as low as possible so as to boost the bankrupt banking sector. This has extended to the unprecedented measure of Quantitative Easing primarily to monetize huge issue of government debt and also forcing the Banks though the raising of capital ratio requirements to buy government bonds again to finance the governments budget deficit.

However the more debt the government issues, regardless of the monetization of debt, the greater is the pressure building up in the bond markets as the price the market demands in terms of interest rate rises. This is reflected in the yield curve where the highly manipulated short-tend allows the government to issue short maturity bonds at low rates at gross redemption yields of 0.65% interest for 1 year debt, whereas the yield charged on 5 year debt is at 2.9%, 10 year at 4.1% and 15 years at about 4.5%, i.e. a steeping in the UK government bond market yield curve that illustrates the real risks that demand a higher rate of interest which is as also reflected in the LIBOR market.

So whilst the government is happily issuing new debt and rolling over maturing debt on short maturity, however this is precisely the mistake that the bankrupt banks made by financing long-term liabilities with short-term borrowings. The Labour Government is making the SAME mistakes, because it sets the country up for a mega-bond crisis where the market baulks under the weight of new and reissued maturing debt at low interest rates, which suggest that the country is heading for a spike higher in short-term interest rates, the trigger for which may be a hung parliament.

We have already seen an example of this happen during the credit crisis where the short-end of interbank market FROZE i.e. instead LIBOR trending close to the base interest rate, it effectively froze where banks would not lend to other banks at ANY price, which resulted in a false interbank market rate that manifested itself in credit crisis spikes of over 1.4% above LIBOR as the below graph illustrates.

When the bond market time bomb explodes, it will hit the short-end and other assets hard. Based on my accumulative analysis of all key trends and fundamentals a bond market collapse is not imminent, however the bond market will show increased volatility as it tries to gauge the difference between the rhetoric from the next government and actual concrete steps to bring the deficit under control.

Artificial Banking System

The bailed out and tax payer supported artificial banking system means that the bill for low interest rates is being paid for by Savers who along with all tax payers are being forced to pay for the bankster’s crimes as tax payer bailed out banks such as HBOS pay a pittance on instant access savings accounts of as little as 0.1% against a requirement of 3.6% just to cover CPI inflation of 3% plus the 20% tax charged on interest earned.

The banks are operating under huge profit margins as money is being sucked out of the pockets of savers and being deposited onto the balance sheet of bailed out banks that have no incentive to pay a decent rate of interest when they can borrow at 0.5% from the Bank of England and marginally higher from other UK banks. The artificial banking system is resulting in unprecedented huge profit margins for the banks as market interest rates charged to retail customers continue to rise regardless of the base rate being held at 0.5% which is inflationary in terms of rising mortgage and other debt interest costs as these rising costs will are showing up to varying degrees in the RPI and CPI inflation indices.

UK Interest Rates

The mainstream press says UK Interest rates will be kept at or near 0.5% for many more years.

The Bank of England has alluded to keeping UK Interest rates at or near 0.5% for over a year.

The Academic economists say UK Interest rates will be kept at or near 0.5% for many more years.

As the Bond market analysis illustrates that UK short-term interest rates will be yanked higher by the market AFTER the next election, as the current interbank rate is not reflective of the true rate of interest being born by the market place.

The budget deficit PLUS total debt + total liabilities + debt denominated in foreign currencies, ensures that not only will UK interest rates rise but that they have ALREADY risen, look at the interest rates charged on mortgages now against a year ago, look at the interest rates charged on loans against a year ago, look at the interest rates that the markets demand for newly issued government debt, ALL are already significantly higher than a year ago.

The base interest rate at 0.5% is ARTIFUIALLY LOW. The current market interest rate should be at least 2%, this is generating a great deal of pressure behind the interest rate dam that when it bursts will lead to a swift rise in interest rates over a short period of time. My forecast (13 Jan 2010 – UK Interest Rate Forecast 2010 and 2011) is for UK interest rates to end 2010 at between 1.75% and 2%, and then continue rising towards a mid 2011 target of 3% as the below graph illustrates.

By the way the politicians are behaving, i.e. going by the chancellors debate on Channel 4, it is not clear if the politicians still understand the ticking time bomb that is the government bond market. A mountain of debt is being accumulated at an unprecedented rate. Just like a pile of sand continuously having grains of sand poured onto it will eventually collapse after just after one more grain of sand so it is where Britain’s bond market is concerned as more debt is piled on top of the debt mountain so will it eventually collapse, unless urgent action is taken to seize control of the budget deficit to prevent economic collapse, and it really could be imminent especially as it could be triggered by an external factor such as Greece, Spain or Ireland . default on their debt that would send a shock wave around the world which would hit Britain’s debt market where what was one day sufferable would next day result in panic as investors head for the exit on fears Britain being next to default.

So it is not a question of so far so good where the bond market is concerned but rather we are literally living on borrowed time where an external credit market event could trigger a collapse in the uK bond market unless it is bolstered by strong and firm ACTION. Even then it may be too late, as the markets have watched the government dither for the past 2 years and seen Osbourne announce an electioneering policy of cutting NI tax instead of reducing the deficit, that’s the wrong message to send to a bond market that is primed for a trigger to crash.

UK Inflation

My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 – Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%). As the below graph shows, today’s inflation rate falling from 3.5% to 3% whilst catching the academic economists off guard, is inline with my forecast trend expectations as UK inflation is expected to trend above 3% for most of the year.

Apart from hitting workers in terms of falling pay in real terms, inflation also eats into the real value of savings deposited at virtually ALL British banks and building societies that even now, are engaged in cutting the rates offered to savers to as little as 0.1%, as my earlier analysis illustrated (23rd Jan 2010 – UK Savers Losing Money on Virtually ALL Instant Access Savings Accounts) That virtually all accounts LOSE savers money in real terms AFTER inflation and AFTER the 20% Savings tax. The situation has continued to deteriorate as inflation remains above the BoE 2% target.

China Economic Doomsday for Britain and Other Western Economies

Today we live in the false belief that whilst we cannot compete with China in terms of mass produced cheap goods we have an advantage in premium brands and the high end of the market. However China is investing hundreds of billions into driving competition up the value production food chain that looks set to knock Britain out of the little manufacturing that it already undertaken.

We face Manufacturing armageddon over the next 5 years unless the next Government follows China’s lead and pumps hundreds of billions into investing into the manufacturing industry, we need to increase manufacturing to a far greater level than 17% of the economy, or kiss goodbye to our prosperity as year in year out the country becomes poorer, to one day wake up to being along the lines of a south american economy. That is where the future lies unless Britain gets a grip with the economic armageddon poised by China.

The FREE Inflation Mega-Trend Ebook contains in depth analysis of which emerging markets present opportunities for investors, including perspective growth rates and projective returns over the next 10 years.

HOPE – Solving Britain’s Economic Crisis Through Micro Business Capital Investments and Credit

Britain had bet its future on the financial sector as the means for delivering economic prosperity and lost. The financial sector over the past 3 decades had mushroomed to an enormous size on terms of over leveraged liabilities extending to more than 5 times UK GDP that has imploded in spectacular style following the start of the Credit Crisis in August 2007 which has now left the country on the brink of bankruptcy under the burden of the liabilities of the banking sector (most denominated in foreign currencies), unsustainable annual budget deficit and the growing public sector debt mountain.

However the future is not all lost as the Government has at it’s means the power to diversify the allocation of capital out of the financial sector and into other areas of the economy in an attempt to ignite a more sustainable growth model from large scale projects such as renewable energy to directly investing in new small business start-ups, and financing small and medium sized companies, not on a small scale of a few hundred million scattered around the country, but on a huge scale of between £50 and £100 billion which might sound like a large amount but is tiny when compared against that which is being flushed down the toilet on public sector consumption which contributes towards the annual £170 billion budget deficit. Also not forgetting that the country has committed far more than that in terms of capital injections, Q.E. and bad debt liabilities to the banking sector in an attempt to get the banks to lend to businesses and consumers, much of the money meant for loans is instead being hoarded by the banks in Government bonds or at the Bank of England.

An active government policy to inject capital investments into one million new micro businesses could revolutionize Britains economy by bypassing traditional (frozen) sources of capital. Not only would this ignite a new sustainable boom but Britain would reap the rewards in terms of capital growth and dividend income from new giants of industry that will emerge from this new pool of businesses i.e. both Google and Microsoft were once tiny startups and are now valued in the hundreds of billions employing many thousands, imagine the return if the U.S. government had a 25% stake in these companies from the outset.

Capital Investment of £50bn to £100bn to generate 1 million new micro businesses today would yield continuous returns over the long-run that would not only boost the countries tax revenues and reduce the state benefits bill and unemployment lines but also provide new capital for future investments from return on investments.

Micro business investments and loans (micro credit) is nothing new, as it first emerged as a means of empowering the poor in the third world countries such as India and Bangladesh which has enabled millions of poor to gain access to capital and loans enabling them to lift themselves out of poverty. Micro credit on a small scale has been around in Britain for many years in the form of credit unions and other regional start-up agencies that collectively provide approx £400 million of funding , and it should not be forgotten that Building Societies were originally set up in the credit union traditional, unfortunately over a 100 years of hard work was systematically dismantled by the previous Conservative Government that allowed Britains largest building societies to become banks and gamble on the global derivatives casino and lose everything after bank officers had banked huge bonuses on the basis of fictitious profits.

Unfortunately new start-ups face many additional problems other than access to capital and financing in the form of the huge amount of red tape as well as rules and regulations associated with running a business. However the red tape can be overcome, as a new large scale micro capital investments and credit programme would need to go hand in hand with reform of small business red tape as well as offer new start-up’s courses and easily comprehensible information to better understand the plethora the rule regulations that exist.

The alternative to state capital injections and loans is continue to rely on the current FAILED UK Business investment and financing model that has in-built mechanisms that push corporations towards minimising costs to maximise profits by off shoring production abroad to China and India which results in high UK unemployment as the corporations both public listed and private are subject to the short-term interests of the over leveraged private equity funds and city Institutions that are focused on maximising short-term profits regardless of the long-term costs which manifests itself in ever higher leverage deployed regardless of the risk it poses that directly resulted in the bankruptcy of the whole banking sector, as ALL banks were technically bankrupt, which was illustrated by Lehman’s bankruptcy where all of the hugely leveraged counter parties were on the verge of a chain reaction spiral of default.

The current banking system is bankrupt, the banks have learned NOTHING from the credit crisis, it is business as usual with most of the politicians firmly in the back pockets of the bankster elite. The banks are still primed to not only gamble on derivatives but increase their exposure and thus set the tax payers up for another financial crisis and subsequent bailout, if anything the banks are BETTING on other banks failing so that they can be bailed out by the tax payers i.e. claiming on the credit default swap insurance. If the government was serious about reforming the banking sector then it would be breaking them up into retail and investment banks and banning them from gambling on derivatives or relying on the interbank market for financing. And also remember this, that given Britains huge debt mountain, we basically do not have the means to survive another financial crisis so it is imperative that the country diversify itself out of the financial sector.

A Government run investment bank would ensure that at the very least new start-ups and small business would no longer fall victim to the banking sector and city of London’s misplaced priorities that are NOT in the long-term interests of Britain.

The idea of the State Investment Bank with branches in every town and city that should also be able to make loans on a large scale to new / small businesses at low or even zero interests, after all that is the facility that the bailed out banks are in receipt of, the profits from which they have funneled into the pockets of bankster’s in the form of outrageous tax payer funded bonuses.

Off course such an capital injections and loan subsidies from a state run institution would put us at odds with the European Union, which we would need to reject as a failed model as we are witnessing in the deflationary implosion of many of the EU countries that are themselves actively breaking EU competition rules.

Politically, the above change would require a government that is small business centric and not in the back pockets of the bankster elite, unfortunately that would exclude the supposedly business friendly conservative party as they would not be ‘allowed’ to take bankster’s out of the credit and capital investment loop, and the Labour party as we have witnessed over the past decade is useless at business, and has been power for far too long, as its ministers have long since been corrupted by absolute power and therefore remain only focused on piling as much tax payer cash into their back pockets before they get booted out of parliament.

Therefore the party I will most likely vote in the forthcoming election is the one that has a policy that could form the genesis of a national state run micro investment and credit bank.

Economic Recovery

Whilst the mainstream press and academic economists worry over a double dip recession, quietly every few weeks Britain’s economic growth keeps getting revised higher, originally Q4 2009 was estimated at just 0.1%, since then a range of revisions has brought it higher to stand at 0.4%.

The first release of Q1 2010 data will follow in just under 2 weeks time, a week or so prior to the UK May 6th General Election which I expect will put a final nail in the double dip recession debates coffin. Far from a double dip recession my forecast (31 Dec 2009 – UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom ) is for a strong economic recovery this year and into 2011 which has long since been signaled by he stocks stealth bull market.

Debt, Deficit and Election 2010

The Labour government has brought Britain to the brink of bankruptcy. The Labour government’s policy is to pander to its public sector voter base and avoid spending cuts which means the Labour party Deficit spending reduction targets are not credible, as after the next election a Labour government would NOT CUT PUBLIC SPENDING. Which means that the deficit over the next 4 years will be much larger than the figures stated earlier, which increases the risk of bankruptcy.

The Conservatives are more likely to actually cut public spending and reduce the deficit. To what degree can only be determined when we find out the nature of a Conservative government beyond the hype, spin and propaganda surrounding the election campaign. Even Conservative proposals for cuts would not dent the budget deficit significantly i.e. the difference between the both parties in terms of deficit reduction is less than £50 billion over the next 4 years, though the Conservatives are more likely to actually follow through on pledged cuts than Labour.

A hung parliament would result in short-term volatility in the financial markets as stocks, bonds and sterling would plunge. The longer term impact would depend on the nature of the government that eventually emerges.

My forecast as of June 2009 and illuminated in the Inflation Mega-trend Ebook is for a small conservative majority, which is contrary to the current strong speculation for a hung parliament.

The UK election will be decided by just 20% of voters that inhabit the 120 marginal constituencies out of a total of 650. The politicians obviously recognise this which is why resources have been plowed into the 120 marginal’s with little effort being put into communicating with the voters of the other 530 seats. So as is usually the case, most voters will be ignored by the politicians as they woo the electorate of marginal constituencies with promises of new hospitals, health centres, schools, nurseries and more over the coming 4 weeks, which goes a long way to explain why government spending and services results in aberrations such as the NHS post code lottery which usually penalise Labour constituencies with strong majorities that repeatedly return jobs for life MP’s.

Conclusion

The bottom line is that Britain over the next 4 years is projected to borrow an ADDITIONAL £300 to £350 billion to be added to Britain’s £870 billion official debt mountain. However this does not mean that Britain will go bankrupt either imminently or during the next 4 years because the bond markets on balance trust Britain’s credit worthiness more than the likes of the PIIGS, which does give the country some breathing space to run higher deficits without Greece and Iceland style panics. But there is a limit, we are NOT the United States that has the benefit of having the worlds reserve currency and never having defaulted on its debts before (Britain has at least twice).

However there is a price to pay for the higher debt levels and that is the bond market will charge a higher interest rate that looks set to see the debt burden double from about £35 billion a year today to £70 billion in 4 years time. This has the effect of feeding the inflationary mega-trend as the government deflates the standard of living of people by means of inflation as the cost of financing the debt, which is a continuation of the stealth theft form the population in terms of loss of purchasing power of accumulated savings and earnings in real terms.

There is nothing that suggests that total debt will be brought under control over the next 4 years, instead it looks set to continue to increase in terms of % of GDP and therefore so will the risk of bankruptcy rise and the consequences of higher inflation until the government is able to start reducing the REAL debt burden in terms of % of GDP, until then Britain will continue on its trend towards eventual bankruptcy.

All depositors in UK Banks are protected to £50k, BUT there is NO protection against the trend towards a government default that manifests itself first in high inflation and eventually in a hyper inflationary bust that destroys the value of hard earned savings. Whilst the worst case scenario remains many years away, however savers and investors do need to protect their wealth against Britain’s stealth trend towards bankruptcy, don’t make the mistake of waking up one morning like the Icelanders did to find out that they had lost everything virtually overnight. The Inflation Mega-Trend ebook that I am sharing for FREE contains 50 pages of how to protect and grow your wealth.

Your wealth protecting, inflation mega-trend investing analyst.

Source: http://www.marketoracle.co.uk/Article18622.html

By Nadeem Walayat

In the event of a full-blown sovereign debt crisis, hard assets will become deeply desirable as one of the few “stores of value” left.

…all too often the size of debts, especially government debts, is hidden from investors until it comes jumping out of the woodwork after a crisis.
– Prof. Ken Rogoff, Financial Times column, “Bubbles lurk in government debt”

Last week, in “How to Protect Against Currency Collapse,” we talked about the mounting debt problem and how Western governments will deal with it.

If the debt is issued in your own currency, you ultimately just print more currency to inflate that debt away. (If the debt is issued in someone else’s currency, you are in deep trouble… as Greece, Latvia, Iceland and others have all found out.)

Right now the global economic recovery has the appearance of being cost-free. This is due to an age-old confidence trick known as “ignoring the bill.” To pull off this trick, you spend huge amounts of money on a high-limit credit card… ignore the mail when the bill comes due… and conveniently forget to reconcile your accounts.

Complacency reigns because the true costs are not being tallied. The Bank for International Settlements – an age-old central banking watchdog based in Switzerland – is having none of it.

The “simmering fiscal problem” of sovereign debt is set to bring industrial economies “to the boiling point,” the BIS reports in a new study. “Bond traders are notoriously short-sighted,” the BIS further scolds, “assuming they can get out before the storm hits… the question is when markets will start putting pressure on governments, not if.”

The Bank of International Settlements further believes that, if we do not turn from this path, inflation will spiral out of control. “Monetary policy may ultimately become impotent to control inflation,” the BIS scowls, “regardless of the fighting credentials of the central bank.”

Not China or Japan

Last week, readers wrote in to ask whether China’s currency might count as a viable hedge against collapse – perhaps through a vehicle like the Dreyfus Chinese Yuan Fund (CYB:NYSE).

The answer there would have to be: “Nope. Too risky.” China’s fortunes are still deeply linked to those of the United States:

• China’s currency is still pegged to the USD.
• China’s economic future is still heavily dependent on exports.
• China still owns massive quantities of U.S. Treasuries.

The above factors make it hard to determine how China will fare in the event of Western currency meltdown. The Japanese yen is also a deeply risky proposition, given its heavy export dependence, major UST holdings and massive internal debts.

This all goes back to a talk your editor gave in Chicago last summer, discussing the shape of the world’s next reserve currency. The gist was that all those who would seek to dethrone “King Dollar” are impostors.

China’s currency regime is not ready for primetime. Japan is struggling with a demographic death spiral. And the euro is crumbling before our very eyes.

In a paper-debased world, that leaves hard assets as the last option standing.

Where Have You Gone, Joe DiMaggio

Try as they might, investors will not be able to ignore the sovereign debt problem forever. When the reckoning comes due, the printing presses will kick into hyperdrive… and faith in the system will crumble (or perhaps shatter like brittle glass).

At this point, investors will turn their lonely eyes to hard assets, looking at precious metals and basic building-block commodities in a new light.

Up till now, hard assets have more or less been treated as a “hot money” play on global economic recovery. Price movements have been linked to speculative appetite and the general degree of optimism.

The onset of a sovereign debt panic could thus lead to a short, sharp and temporary drop in hard asset prices, as the “hot money” beats a hasty retreat. But over time, a post-crisis shift in psychology will occur. In a world where all major currencies are being debased, oil and metal in the ground will stop looking like speculative plays and start looking more like stores of value.

A Pending Rocket Ride

The Reuters/Jefferies CRB index tells the story of commodities’ lackluster performance. While equities have been going gangbusters, the CRB has been more or less flat for half a year.

That is because focus remains on cost-free recovery for now. There is widespread belief that the U.S. economy is in a sweet spot, with a goldilocks-like ability to push profits up while keeping short-term interest rates near zero. The Fed is widely revered at moment for having succeeded in its mission. Some bulls are even musing aloud now whether the “great recession” was even all that “great” – as if it were over and done, finis, all consequences postponed indefinitely.

It is an environment, in other words, that very much favors “paper” (leveraged financial plays) over “stuff” (hard assets).

But when faith in Western governments’ ability to shoulder the sovereign debt load evaporates, that equation will reverse rapidly. (And as the BIS noted in its gloom-and-doom report, it is a question of “when,” not “if.”)

And so, after a period of renewed fiscal panic, in which it is driven home, yet again, that the grossly indebted central bankers of the world do NOT have control – only the illusion of it – a need to take shelter from the ensuing inflationary paper-debasement storm will become paramount.

THAT is when hard assets will become most attractive… not as hot money speculative vehicles, but emergency stores of value. A true rocket ride for commodity prices – the likes of which we haven’t seen yet – could be the result.

A Simple Proxy

Not to beat a dead horse, but the above is further reason to consider the EverBank Ultra Resource Index CD (as mentioned last week).

The countries represented in the Ultra Resource Index CD were selected not just for their attractive cash positions, but their rich abundance of hard assets. Countries with vast quantities of natural resources “in the ground” – like Canada, Australia and Norway for instance – will be seen as sitting on vast treasure chests.

Such resources would have permanent and lasting value even if the entire global financial system melted down completely. (People can go without paper, but they will always need to eat, drive, build, and so on.) As the sovereign debt crisis unfolds, investors may well flock to these “hard” currencies in droves as their home-based scrip turns to confetti.

To find out more about the Ultra Resource Index CD – a product created at Taipan’s request, for which we receive a small commission – follow this link.

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Other Related Topics: Currency , Debt Problems , Justice Litle , Macro Trader

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Lately we’ve been writing about the importance of the bond market. Want a hint if we will have hyperinflation? Follow the bond market. Japan and the US in the 1930s didn’t have hyperinflation because there were enough domestic savings to finance the expansion of the government. Rather than argue about inflation/deflation, people should be talking about the bond market.

Sovereign governments through their bailouts, stimulus packages and support, have basically become the credit markets. Hence, the one market to watch is the Treasury market. Globally, one should watch various sovereign bond markets. As a result of governments absorbing private debts (and soon to be state and local debts), the global bond market (especially US, UK and Japan) will be the next victim of the credit crunch.

It doesn’t take a genius to realize there is not enough capital to meet the growing needs of various governments. They are already running large deficits that will exacerbate as their economies struggle to recover but spending grows. Moreover, the domestic savings that existed in Japan and the US in the 1930s do not exist for any of the big three. As interest rates rise, governments will be forced to monetize debt. As we have explained in previous writings, this is the genesis of severe inflation.

If we are correct about this prognosis, then precious metals should begin to outperform the other asset classes, which have outperformed precious metals in the last twelve months.

Lets take a look at the technicals of various markets to see how this scenario could play out. Note the difference between Gold and the other markets.

Gold has very little overhead resistance while the majority of other markets are nearing strong and sizeable resistance. Gold has been consolidating and holding above support while these markets are in a tired and overbought state.

If sovereign bonds begin to break in the coming months, then Gold should benefit substantially. Obviously there are trillions sitting in bond markets and Gold is hardly a crowded market. Fundamentally, sovereign debt and currency problems are most bullish for Gold. Meanwhile, the technical situation favors Gold. As stocks and commodities struggle at long-term resistance, Gold, once it completes its consolidation, will have virtually no resistance in front of it. It is a potentially explosive situation.

In our Gold & Silver Premium service we are monitoring the day-to-day developments in the precious metals markets to keep our subscribers ahead of what is coming.

Jordan Roy-Byrne, CMT

Jordan@thedailygold.com

U.S. President Barack Obama’s Fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years. That’s $1.2 trillion more than the administration projected, and will be enough to boost federal debt to 90% of U.S. GDP by 2020, the CBO reported last week.

Back in early February, when the White House Office of Management and Budget (OMB) released its Fiscal 2011 budget, the Obama administration projected a 10-year deficit total of $8.53 trillion. The CBO studied that budget and the deficit figures, and concluded they were low – estimating that President Obama’s budget would generate a combined $9.75 trillion in deficits over the next decade.

Granted, the Obama administration came into office amid the worst financial crisis since the Great Depression. U.S. public debt was $6.3 trillion, or $56,000 per household, when President Obama took the oath of office. A little more than a year later, federal debt has reached $8.2 trillion ($72,000 per household). And if the CBO estimates are correct, the nation’s debt burden will reach $20.3 trillion (more than $170,000 per household) in 2020, reports The Washington Times.

At  $20.3 trillion, the nation’s debt would be equal to 90% of the projected U.S. GDP for 2020 – up from 40% of GDP at the end of 2008 and 53% right now.

America’s debt-to-GDP ratio hasn’t been near the 100% level since the end of World War II, when it peaked at 109%. If you want a point of comparison, Greece, the debt-default candidate du jour, saw its debt load hit 115% of GDP last year.

Does this even matter … or is it just a game of numbers?

If it doesn’t matter now, it will later on as the U.S. debt burden continues to increase. In fact, a new research study seems to indicate that the high debt load could crimp future U.S. economic growth. The recent research study – conducted by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland – found that for countries with debt-to-GDP ratios “above 90%, median growth rates fall by 1%, and average growth falls considerably more.”

According to the National Bureau of Economic Research (NBER), public-debt levels that reach or exceed 90% of GDP become highly problematic: The rising debt levels have likely caused interest rates to rise, because worried investors demand greater returns on federal bonds, while the massive interest payments required to service all that debt divert money away from other important government programs and other federal functions.

Says Isabel Sawhill of the Brookings Institution: “The interest can get so burdensome that the country can’t afford to repair its highways or educate its children or provide other essential services. You become a much weaker nation.”

I have a lot of respect for Warren Buffett. As Nilus has noted before, he’s one of the world’s best long-term investors. He has a knack for buying low and selling high. And his Berkshire Hathaway holding company has been a great multi-year performer for investors.

It has amassed stakes in everything from the Geico insurance firm to the manufactured home company Clayton Homes to the Dairy Queen restaurant chain.

But Buffett can’t levy taxes on Americans. He can’t wage war in far corners of the world. He isn’t responsible for your Social Security checks. He doesn’t operate the National Park System or make sure the drugs we take are safe. That’s the job of the federal government.

And yet, a remarkable thing occurred recently in the bond market …

Berkshire’s cost of borrowing fell BELOW Uncle Sam’s! Ditto for Procter & Gamble, the company behind brands like Tide detergent and Charmin toilet paper … Lowe’s, the home improvement retailer … and Johnson & Johnson, the firm that makes Band-Aids, medical devices, and baby shampoo, according to Bloomberg.

Bottom line: Bond investors are now viewing Treasuries as riskier than a vast array of corporate debt. They’d rather own bonds backed by sales of toilet paper than the full faith and credit of the United States. If that’s not a sign of how low we’ve sunk, I don’t know what is!

The Proof Is in the Pudding —
The Daily Verdicts Handed Down
By Investors Worldwide

Treasury Secretary Tim Geithner recently sat in front of ABC News cameras and made a solemn pledge. Asked about whether the U.S.’s credit rating would drop below AAA, he said, “Absolutely not.” For emphasis, he added, “That will never happen to this country.”

You know what though? Talk is cheap. Policymakers can bloviate all they want. But the bond market renders its verdict on the credit quality of everyone from municipalities to corporations to governments each and every trading day.

Buffett’s Berkshire Hathaway can now borrow money for less than the U.S. Treasury can.

The relative behavior of different types of bonds — and the credit default swaps that reference them — tells you everything you need to know about who is really in good shape, and who isn’t. And right now, the trading action proves the U.S. is guilty of running a profligate, debt-ridden operation, one that’s in worse shape than some American corporations.

The evidence? Bloomberg data shows the yield on Berkshire’s notes due in February 2012 dropped to 0.89 percent, 3.5 basis points below comparable-maturity Treasuries, in mid-March. Berkshire is officially rated AA+ by Standard & Poor’s, one notch below AAA.

Procter’s August 2012 notes slipped to 1.12 percent, beating Treasuries by 6 basis points. The consumer products company is rated AA-, three notches below the U.S.

J&J? Its August 2012 notes yielded 3 basis points less than Treasuries as of mid-February. Unlike the other companies, it is rated AAA. But still, you’re talking about an astounding thing here.

The Market Is Speaking.
Will Washington Listen?

Look, corporations don’t have the vast holdings, legal standing, or massive resources of sovereign nations. Their fortunes can rise and fall with the economy. They can go broke. Their bonds almost always trade with a yield “spread” to Treasuries to account for those additional risks.

But that’s starting to change …

U.S. policymakers are scaring investors away from Uncle Sam’s debt.

Because of the crazy “borrow, print, spend” policy here in the U.S., investors are backing away from sovereign debt and gravitating toward corporate securities. The auctions of $42 billion in 5-year Treasury notes and $32 billion in 7-year notes this week were stark examples of Uncle Sam’s fading fortunes. Bidding was weaker than expected and the Treasury was forced to offer generous yields to get the money it desperately needs. The message from the markets is loud and clear: Get your financial house in order … or we’ll FORCE you to do it!

Fortunately as a Money and Markets reader, you’ve been prepared for this day for some time. All the way back in December 2008, I proposed that long-term Treasuries were swept up in the “biggest bubble of all time.” I said that rising deficits, massive bailouts, and the out-of-control Fed would spook investors. Treasuries began plunging in price within days.

In mid-August of last year, I talked about the “never ending waves of debt” issuing forth from Washington. My explicit warning: “We are continuing to borrow and spend, borrow and spend, with no short-term or long-term plan on how to get all that debt under control.”

Then several weeks ago, I highlighted the debt market woes in the U.K. and postulated that the U.S. would soon find itself in the same boat. Sure enough, now our nation’s debt trades more weakly than securities backed by sales of manufactured homes and disposable razors. Fantastic, eh?

My continuing suggestion: Consider avoiding the debt of less credit-worthy entities (i.e. Uncle Sam) and sticking with those who deserve your money. If that means avoiding government debt and buying high-grade corporates instead, so be it.

Until next time,

Mike

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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