I’ve read my fair share of history. I know that people have been calling for the collapse of our debt structure for a long time yet nothing has happened. The belief that the U.S. can claw its way out of any crisis is embedded in our DNA. We still have the most mature markets and the most advanced weapons, which means we would probably go to war before we ever saw a major collapse of society in America. I understand the variables at play here. I understand that the burden of proof is on people like me to explain why a crisis will arrive soon.
Although the crisis in America will probably come last because of our global status, at the end of the day we are still borrowing whatever we cannot raise in revenue. This makes us no different from Greece. We just announced the largest monthly budget deficit in history, which demonstrates that we still have not attacked the disease. We find ourselves in a very precarious position because it now takes about 4 years to match the national debt it took 224 years (until 2000) to accumulate.
The real serious debt problems are straight ahead. Under the Federal pension system (FERS), pensions are based on: 1) the average of your highest 3 years of pay, and 2) your years of service. A higher proportion of government employees happen to be in higher paid fields such as law. (As a side note, this is why the SEC is so damn incompetent- it is an agency filled with lawyers. Who thought up the genius idea of having lawyers with no experience in finance regulating financial markets? Our government is a lot stupider than you think). Anyway, since public sector workers are well-paid, their pensions will be very generous under the current system.
Now let’s think about the wave of people who are eligible to retire. In 2007, 18% of Federal employees were eligible to retire; by 2016, that number goes to over 60%. Hmm. Is a pension crisis perhaps on the horizon? Don’t worry, your leaders will tackle the crisis head on– in 2016 when it is too late.
This crisis is going to wipe out retirees if the correct actions aren’t taken. Stay the hell out of government bonds and buy stocks. The government only has one option- the printing press- and they are willing to use it. Bernanke has stated in previous papers that he would not raise interest rates to counteract an economic slowdown created by oil shocks. Instead he will inflate, inflate, inflate. This is the reality we face today.
But Stocks Are Rising!
The mainstream media basically has no clue what they are talking about. They are like little children who try to find any data points that corroborate their predetermined conclusions. Stocks are rising so the economy must be recovering. Never does it cross their mind that perhaps we are seeing the beginning stages of severe inflation. At the end of the day, I cannot blame them- their knowledge of history is very small. People always misinterpret the early stages of inflation as a boom. Just take the example of Frau Eisenmenger, an Austrian who lived through their hyperinflation in the 1920′s, who wrote:
“Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights.”
Sound mildly similar to the situation we face today? Eisenmenger wrote this before things got really bad in Austria. People saw stocks as a hedge against inflation, especially because of the composition of stocks back then. If you look at the historical accounts, tangible assets were in demand, not government paper. The Weimar Republic actually had full employment while their economy was imploding. Consumer spending was robust because people were trading in paper they knew was being depreciated for real goods and services. If the mainstream media were analyzing conditions back then, surely they would be calling it a “green shoots” economic recovery. There is a reason the mainstream can never see a crisis coming- their analysis is very flawed.
This is not the time to go 100% short stocks just because you are bearish on the economy- there are other factors at play. Stocks will rise because the big money will be trading their government bonds for stocks. Want proof? Look no further than Bill Gross, manager of over $1 trillion at PIMCO, who says to stay out of government debt. Make no mistake about it, the smart money is getting the hell out of government bonds. You should be doing the same.