There are so many headwinds and cross currents in the market today, it is all but impossible to predict what will happen in the short term. There is too much volatility and noise. So, it pays to keep your eyes on the horizon, focused on the long term and the biggest trends – and the biggest of all possible financial trends is the eventual bankruptcy of the United States government – or should I say the existing bankruptcy of the U.S. government? Words: 945

So says Jon Herring (www.InvestorsDailyEdge.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Herring goes on to say:

The United States government is facing an impending fiscal crisis. Former Comptroller General David Walker calls it a “cancer growing from within.” The wheels for this were already set in motion well before the financial crisis. With ongoing wars in Iraq and Afghanistan, a costly stimulus package and falling tax receipts, the U.S. was already neck deep in debt.

Even before the bailouts, the Office of Management and Budget (OMB) projected that the 2009 federal deficit would be nearly $482 billion. Since then however, our government has jacked up spending by the trillions… but, believe it or not, this is just a drop in the bucket compared to the big picture.

The True Scope of America’s Fiscal Problem
Richard Fisher is the CEO of the Dallas Federal Reserve Bank and a member of the Federal Open Market Committee (FOMC), which sets interest rate policy has stated that the total U.S. debt – including Medicare and Social Security – is more than $99 TRILLION! Along the same lines, Laurence Kotlikoff, a Boston University economist, suggests that the “fiscal gap” – which is the difference between the number above and what we could reasonably expect to collect – is $66 trillion.

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That is the definition of bankruptcy. It is just a matter of time. The scope and impact of our liabilities are stunning. Let’s play devil’s advocate here and consider where this kind of money might come from. How can we possibly meet our obligations to retirees… as well as service our debt to foreign governments… and still operate our own government?

It Won’t Come from Cuts in Spending
Let’s listen in on Fisher’s speech and consider what kind of spending cuts we would have to make to close the gap on what we owe:

“To fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. Hold on! That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated—to tackle this problem through discretionary spending.”

Just to meet our current and future obligations, we would have to virtually clear out Washington, D.C. and these changes would have to be made to perpetuity. Now, Ron Paul might have cut government back to its constitutionally mandated functions, but don’t expect anyone else in Washington to even consider the notion. Congress has shown that it has NO moral regard for the long term economic viability of our country.

It Won’t Come from Tax Increases
Even if we did cut the government back to the bare minimum (which we won’t), that still wouldn’t solve the problem. We would also have to raise taxes. By how much? Back to Richard Fisher:

“Similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?”

We already don’t collect enough tax revenues to pay the government’s budget and with a recession taking hold and a depression on the horizon, where are the tax revenues going to come from? Taxation is simply not an option for this kind of money.

We Can’t Borrow it from Ourselves
During World War II, we borrowed the money we needed from ourselves but Americans had a high savings rate then. This is no longer true. Most Americans are upside down, with credit cards, mortgages, cars and other loans… not to mention very high unemployment.

It Won’t Come from Foreigners
For many, many years, the U.S. government has been able to pay for anything and everything we wanted to by borrowing the funds from other countries but other countries are beginning to balk, and for a variety of reasons. For one thing, the countries that do have reserves to lend us are turning their attention inward.

Increases in spending and liabilities along with decreases in foreign lending equals a recipe for disaster. So, where will the money come from? This is a job for the printing press. While we are certainly facing deflation in the near term and a very choppy market, the groundwork has been laid for hyperinflation, soaring interest rates and exploding gold and silver prices.

*http://inflationdata.com/inflation/Inflation_Articles/Is_the_United_States_Bankrupt.asp (This investment news is brought to you by Investor’s Daily Edge, a free daily investment newsletter in which you’ll receive practical strategies for protecting your portfolio and multiplying your money. To view archives or subscribe, visit www.InvestorsDailyEdge.com)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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The greatest fiscal nightmare of all time — a $1.6 trillion deficit for 2010, another $1.3 trillion in red ink for 2011, and continuing massive deficits until 2020 – as presented by the Office of Budget and Management (OMB) is going to be even worse – by $1.2 trillion – according to the nonpartisan Congressional Budget Office (CBO) who maintain that the OMB’s view that federal deficits will fall below 4 percent of GDP by the middle of the decade is wishful thinking. They contend that the deficits will start growing rapidly after 2015, forcing the Treasury to continue borrowing lavishly and sending the national debt soaring to 90 percent of GDP. Words: 1017

In further edited excerpts the original article* Martin Weiss (www.moneyandmarkets.com) goes on to say:

Unfortunately, however, even these new, uglier numbers from the CBO suffer from serious deficiencies in their underlying assumptions. They assume:
1. No double-dip recession in 2010, 2011, or any other time in this decade — a scenario that a growing number economists consider highly unlikely …
2. No significant rise in unemployment benefit costs and no declines in corporate tax revenues — inevitable consequences of a weaker-than-expected economy …
3. No selling — or even reduced buying — of U.S. government debt by foreign creditors, and …
4. No resulting spike in the government’s borrowing costs — a scenario that’s very hard to imagine in the wake of the huge deficits already cited in their reports.

In summary, neither the White House nor the CBO have adequately considered the real impact of the very deficits they themselves are projecting. While they admit the deficits will be off the charts they fail to connect the dots from that admission to its obvious natural consequences — no fewer than FIVE ominous, vicious cycles …

Vicious Cycle #1: Surging Interest Rates
a) Big deficits drive interest rates higher.
b) Rising interest costs create still bigger deficits.
c) These bigger deficits drive rates even higher.

Vicious Cycle #2: Credit Squeeze
a) Government borrowing and higher interest rates literally shove consumers and businesses out of the credit market.
b) Consumer and businesses, unable to borrow, slash spending and gut corporate earnings.
c) The government sees tax revenues collapse, rushes to borrow still more to fill the growing budget gap, and drives interest rates surge even higher.
d) The cycle accelerates.

Vicious Cycle #3: Unemployment
a) Bigger deficits crush the economy, and unemployment rises.
b) Rising unemployment forces the government to spend far more for jobless and other social benefits.
c) These surging costs bloat the deficit even more, squeezing the economy even further … adding to the ranks of the unemployed … and causing still larger federal deficits.

Vicious Cycle #4: Global Selling
a) The dire outlook for the U.S. budget and economy prompt the nation’s creditors — especially those overseas — to reduce their purchases of U.S. government bonds, or worse, our creditors start dumping their existing holdings.
b) Global demand for U.S. debt — issued by the U.S. Treasury and government-run agencies — plunges.
c) The Federal Reserve seeks to replace that demand by buying U.S. government securities for its own account, printing vast amounts of U.S. dollars to finance its purchases.
d) This rampant money printing sends the signal that the U.S. is, in effect, intent on effectively defaulting by paying back creditors with devalued dollars.
e) Fear of the de facto default by the U.S. government drives America’s creditors to dump more of their U.S. bonds … prompting the Fed to print still more money … and pushing creditors into an even greater bond-selling frenzy.

Ultimately, these vicious cycles speed up beyond the threshold of absurdity. The government reaches the end of the line, its final day of reckoning. It cannot borrow without driving interest rates to a level beyond which borrowing becomes virtually impossible. It cannot collect enough tax money without bankrupting the very taxpayers it’s trying to tap. It cannot print enough money fast enough to replace the money its creditors are pulling out for fear of money printing. Its back is against the wall. It has no choice but to do what it should have done from the outset — cut back, and do so massively.

Alas, it’s the above conundrums that lead to:

Vicious Cycle #5: Massive Government Cutbacks!
a) The U.S. government has no choice but to slash spending and to do so aggressively involuntarily depressing the economy with cutbacks.
b) The sinking economy bloats the federal deficit one last time, forcing a final round of Draconian cutbacks.

Summary
In the never-ending yin-yang of history, however, it is out of the worst of times that we have the potential to get the best of outcomes and it is in this disaster — no matter how painful in the near term — that I see the greatest hope for America’s long-term recovery.

These worst of times will:
a) punish an entire generation of borrowers and spenders but it will also teach a new generation the value of work, savings, and sacrifice.
b) push America to its limits but it will also spur its citizens to rise to the challenge, much as they did in worse wars and deeper financial crises of prior centuries and
c) devastate investors who are complacent.

That may be so, but it could also richly reward those who are well prepared and who can transform the greatest of crises into the greatest of opportunities.

*http://www.moneyandmarkets.com/gravest-dangers-and-greatest-profits-38184 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
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By bailing out bankers, brokers and CEOs, Washington has created the most dangerous bubble so far: the enormous and rapidly growing explosion of federal debt — U.S. treasuries — dumped on investors worldwide. You don’t need a PhD in economics to know what’s next. Like the tech bubble and real estate bubble that preceded it, this new bubble will also burst, wiping out trillions more dollars of invested wealth. Words: 770

In further edited excerpts from the original article* Martin D. Weiss (www.uncommonwisdom.com) goes on to say:

There are 3 compelling reasons long-term bond prices MUST crash:

Reason #1: Exploding Federal Deficits
The 2009 budget deficit of $1.4 trillion was the worst in history — more than three times larger than the previous record and the Congressional Budget Office (CBO) has projected that, rather than shrinking, the 2010 deficit will be $1.4 trillion. Worse, Washington will sink a total of $7.4 TRILLION deeper in debt over the next ten years.

The White House’s Office of Management and Budget (OMB) quickly disagreed, pegging the 2010 deficit at $1.6 trillion and promising an $8.5 trillion gusher of red ink over the next decade.

The New York Times quickly chimed in, pointing out that about 80 percent of the government’s deficit forecasts over the past three decades were too optimistic. In fact, just two years ago, the CBO said the 2010 deficit would be $241 billion. Now it’s likely to be at least $1.6 TRILLION — or over SIX TIMES MORE. Imagine if the government’s current ten-year debt estimates — already over $8 trillion — turn out to be equally far off-target! Of course, that would be impossible. Bond investors would simply stop lending Washington money long before that could happen.

Reason #2: An Explosion in the Supply of U.S. Treasury Bonds
It would be bad enough if Washington only had to borrow enough to equal each year’s budget deficits but Washington also has to borrow enough to replace Treasuries that are maturing — and that means an even greater avalanche of Treasuries need to find buyers each year.

Total issuance of government debt hit a stunning $922 billion in 2008 and then surged even higher to $2.1 trillion in 2009, and it’s on track to top $2.5 trillion this year. The size of just ONE WEEK’s debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.

The laws of supply and demand dictate that when you get a massive increase in the supply of anything, its value plunges — and Treasury bonds are no exception.

Reason #3: Global Investors Starting to Rebel
So far, given the realities above, the U.S. treasury market has proven to be remarkably resilient because, in the global competition for investor funds, U.S. Treasuries are typically viewed as the “least ugly” alternative for many investors. That is why, so far, most foreign investors — now holding about 60 percent of all marketable U.S. Treasuries — have been willing to pay a relatively higher price for them and accept lower yields but now even that is changing! China, the single largest holder of U.S. debt, recently dumped more Treasuries than in ANY month since the government started tracking the data in 2000. The 30-year auction was especially pathetic. Indirect bidders — mostly foreign governments and investors — took down just 28.5 percent of the bonds sold, compared to a ten-auction average of 43.2 percent percent. Prices slumped and yields surged as a result. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy.

Immediately alarm bells began ringing at the Fed. [In mid-February] the U.S. Federal Reserve raised the discount rate on loans made directly to banks by 25-basis-point increase which was the FIRST hike in the discount rate since early 2006.

Secretly, the Fed is in a panic to ward off a bond market collapse! They know that, sooner or later, they MUST send the message that they’re serious about cutting back on their mad money printing. The danger of course, is that foreign investors will get an entirely different message: that Washington’s efforts to fight the most severe recession since the Great Depression are waning. If that happens, you could see turmoil — not just in the bond market, but in every asset class imaginable.

*http://www.uncommonwisdomdaily.com/on-the-brink-of-a-bond-market-apocalypse-3-8479 (Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.