Vigilant Investor

We’ll, we’ve talked about it for years here on Vigilant Investor.   Your chief editor here has referred to it in annual reports to clients in his private consulting practice:  When honestly looked at the U.S. fiscal situation implies inevitable, long-term insolvency.

I don’t come to this conclusion lightly, although I’m reminded of it by reading that President Bush has signed the bill allowing for the Freddie and Fannie bailout to go forward, which includes the debt ceiling being raised to $10.62 trillion.  Yes, with a T.

Now, we’ve pointed out the sleight of hand that goes on with reporting deficits in the United States. This leads most of the sheep to accept at face value that the official federal deficit hovers around $200-300 billion each year.  Granted, that’s no song, but the reality is far higher when you actually account for all the obligations decades of Congressional profligacy has chained to the U.S. taxpayers’ backs.

The whole number is over $54 trillion - some $175,000 per living person in the United States — once you actually stop with the facade that the obligations of Social Security, Medicare and Medicaid are somehow not worthy of being included on the balance sheet.  Broken down to a net present value of future obligations figure, we’re talking an annual deficit number closer to $4.6 trillion, a gargantuan figure that keeps building each year politicians pretend it really does not  exist because doing so will only scare the electorate.  That’s because fixing the problem will require draconian cuts and tax increases; although tax increases of the levels required to make a difference won’t work since they’ll only strangle what little economic growth is going on at the moment, further reducing revenues.

But, alas!  When it comes to politicians, they do have another “out” that can maybe work for another election or two: inflation!  By inflation, I don’t mean rising prices, but rather the cause of the rising prices: increasing money supply.    This is the easiest way for politicians to pay down the promises they and their predecessors have made, and in case you have not yet noticed, it’s been coming to a gas pump and grocery check out near you for a number of years now.  Heck, when you can print money and your official department of statistics filled with lackeys looking to keep the guys controlling their salaries happy, we’ll…  This might explain why Social Security recipients received an unconscionable 2.7% raise for their 2008 payments when the price of eggs, milk, and flour are climbing at well over 10 times that pace!

Now, with our debt clock on the right currently clanking away at $9,544,372,945,703, which is a far cry from the $7.7 trillion it was at when we began this site in 2005, or the $5.7 trillion outstanding when George Bush The Younger took office in 2001, we can’t help but wonder who on earth thinks buying anything Treasury related in an environment where inflation seems to be clearly on the loose?  Why on earth would people dream of lending when their returns are far below the real rise in prices of real things they are buying each day?

That’s a question that is increasingly being asked, and when the tipping point is reached — when that “ah-hah!” point is crossed, well — look out below for those trying to get out via the exits on the most crowded trade in all of finance: the U.S. Treasury Bubble.   While many think they’re participating in a flight to safety, as it is commonly called, we call it a flight to quantity.  Good luck with that trade!

Like all bubble, the deficit and U.S. balance sheet bubble will burst.  It currently slowly leaks, as the dollar demonstrates in its steady decline since 2000.  Meanwhile, just like they’ve assured us there was no problem with housing, subprimes, the credit markets, the stock market, Freddie and Fannie, and so forth, now we have assurances from the authorities that the U.S. credit rating is secure, despite the $800 billion increase in the debt ceiling.    Sure, at the moment it is, but I’d not be betting on that for a whole lot longer given the dollar is backed up by debt, which is backed up by assets formerly levered up at unrealistic prices that are now plummeting.  It is backed up by taxpayers who are so at the margin, loaded to the gills with debt themselves, that absent the now deceased reckless credit that was extended to them over the last five years, are suddenly finding they’re wayyyyyy, way overextended and tucking in their horns massively, if not simply going belly up.  These are all still issues rippling through the economy in their early stages, and which have yet to fully rear their ugly heads.  But they will soon enough, and then the gig will most certainly come to a crashing end.

Once U.S. citizens finally catch on that they’re being fleeced, it’ll get ugly since that is when the foreigners who hold massive dollar reserves will finally blink in their game of chicken, where nobody wants to be the first out the door, but nobody really likes what’s happening to the dollar.  That’s a “gun pointed at your head” trade.  Such are never ones you want to make, but are rather ones you don’t know how to exit without setting off the trigger.

Now, the smaller investors reading this blog ought to be acting accordingly. If you doubt my prognosis, just reread all of our prior predictions of the last three and a half years, or request from me offline our private reports to clients.  You’ll see this is not by chance, but was predicted pretty clearly:  The demise of the dollar, the arrival of inflation, and recession likely sinking into a depression because politicians can never admit to anybody that sometimes the best and only real solution to the problem is to do nothing and just let the dust settle.

Stay vigilant and think it through!

Trackback URI | Comments RSS